​Just in time for Halloween the stock market has pulled back from its all-time highs and volatility has returned in the form of daily changes of more than 1%.  After being up nearly 10% this year, the market- as measured by the S&P 500 index, is flat to slightly down as you read this.

​Accompanied by a spike in the VIX Index

​Pullbacks in the stock market are common with a linear regression best fit of about 7.5% each year.

​Looking back to 1980, even in years where the market has ended down it has rebounded from the lowest point of the year before year end.  With just two months to complete 2018, it is possible that we have already seen the lows for this year. So, despite the recent pullback in stock prices this may well be a lower risk entry point for new investments. If we have in fact seen the intra-year low of -10% (with the market currently down about 1% YTD) downside risk from this point could be minimal.

Investor sentiment is tilted slightly to the bearish side, indicating to contrarians that things may not really be so bad. It is unusual for markets to enter bear market territory when investors are negative.  It is when you find exuberance for stocks that most of the danger lies.
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With that said, the earnings of S&P 500 companies have been rising at a torrid pace that is likely not sustainable. The slope of the earnings curve is steep by historical standards, the impact of lower corporate income tax rates will soon be apparent in year-over-year reporting, and rising interest rates tend to act as a brake on economic expansion.

Look for S&P 500 earnings growth to continue, but for the pace to slow.  

We will likely enter a period when good economic news is interpreted as bad for the stock market-- as unemployment continues to fall, wages finally begin to rise, and federal reserve interest rate increases put pressure on mortgage rates and in turn the housing market.
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Bonds will continue to be a dangerous place to invest your money as rising rates cause bond prices to fall, and marginal borrowers have trouble issuing new debt at sustainable levels.

So, as we enter the final two months of the year there are plenty of reasons to worry, but as usual, the long-term prognosis for US equities remains positive.
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Like a scary movie you have seen before, conditions will look dire for the hero, but ultimately things will work out in the end.

Part of Oak Street Advisors’ 10 Financial Commandments for Millennials series, basic insurance knowledge will help you get the coverage you need and help clarify some misconceptions.
  
Health
Employer group health insurance plans are the most common option for young investors. Often, you don’t have much say in the plan, but the pricing is generally much cheaper for at least the employee, if not their entire family, than paying for private insurance through the Healthcare Marketplace. If you do have a robust menu of options in your healthcare and supplemental plans, it’s best to sit down with your advisor or HR department to discuss how you can optimize these features.
 
If you’re paying for private health insurance, you likely have a high deductible health care plan. Using a Health Savings Account (HSA) you can reduce your taxable income, experience tax-free growth, and make tax-free purchases on qualified medical expenses. Talk with your financial planner to discuss how to set an HSA up and an appropriate strategy if investing inside the account.
 
Auto
Auto insurance coverage can often be boiler-plate, but you should understand these concepts. First, you only need personal collision coverage up to the value of your car; other vehicle collision coverage should be at least $50,000 to cover damage to a more expensive vehicle while at fault.
 
Second, make sure you have enough “under insured motorist coverage. This is different from “uninsured motorist coverage” where you are paying for people who are driving around uninsured all together. Under insured motorist coverage makes up the gap between someone who has the bare minimum auto insurance and the actual money needed to pay for collision damage and medical bills. It is important to remember this is further protection for you, not any other motorist.
 
Life Insurance
The basics of life insurance are broad, but we have shortened it down for you HERE.

You should purchase life insurance to cover your family debts and provide income to survivors, if needed. In your life insurance calculation make sure to insure your home mortgage, kids’ college expenses, any other outstanding debts, and your final burial expenses. Often investors can self-insure some of this with their current retirement savings, but rarely all.

Here’s a quick way to determine how much insurance coverage you’ll need to replace employment income for your family:

Every $1,000,000 can produce $50,000 of income at a safe withdrawal rate of 5%. So add $1 million for every $50,000 of annual income you need to provide, $500,000 for every $25,000 etc.

In general, if you’re not married and do not have any children- there is little reason for you to purchase life insurance. If you do need life insurance, I strongly encourage you to purchase term. Term is much cheaper and does what it’s supposed to do- insure you if you die.

If you like paying an extra premium for no reason just to invest your money, you can purchase a whole life policy. These are expensive and laden with commissions and fees which are a conflict of interest to the salespeople who will try to talk you into purchasing these.
 
Umbrella Policy
An umbrella policy bridges the gap between your standard home and auto coverages and catastrophic costs. If something goes terribly wrong that you are liable for, this policy will usually cover the difference between your policy maximum coverage limits and $1 million- and can cover even more if need be. These policies are typically $150-$300 per year for the $1million coverage. For anyone building or maintaining wealth this coverage is too cheap to pass up. There is a reason on the CFP® students are taught that when in doubt regarding an insurance policy, the answer is always “recommend an umbrella policy”.

I have heard debt defined as work you have yet to do. Thinking of debt in this way highlights the need to be debt free in retirement. If retirement is to be a time when you no longer exchange labor for a paycheck, then you do not want ‘work you haven’t done yet’ to be in the equation.

Carrying consumer debt like credit cards and home equity loans is the biggest no-no. It is important to remember that the safest and easiest way to earn 12% to 18% on your money is to not pay 12% to 18% for your money.

Home mortgages are not as bad as consumer debt since you are financing an asset that will likely appreciate, or at least keep even with inflation. However, if you can eliminate that monthly payment you will find you can sleep better when you reach your retirement years. The two most common objections I have run into when recommending clients pay off a mortgage are:

1) They like the mortgage interest deduction when they file their income tax return
2) They like the security of having a large balance in their savings accounts. 
 
To which I explain:

1) The mortgage interest deduction only reduces the effective interest rate you pay, it does not eliminate it. Plus, your marginal income tax rate is likely to be lower during your retirement years anyway.
 2) You are likely earning less on your savings than you are paying in mortgage interest, and even if you invested the money, you then end up with more assets at risk to market fluctuations during a part of your life when lowering your exposure to risk makes sense.
 
Having a reasonable budget and the discipline to live within it is equally critical to your happiness and peace of mind during both accumulation and retirement phases.  Having no mortgage keeps your monthly expenses low and which makes living within your means during retirement much easier.  If all you really have to worry about is paying taxes, insurance, utilities, and for food you will find less stress in your life.
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So, based on your anticipated retirement date, you should develop a plan to eliminate as much debt and monthly payments as possible. It is much easier to develop and implement a plan in the years leading up to retirement than it is to address these needs after you have retired. If you need help developing a debt elimination plan, then reach out to us here at Oak Street Advisors, we have decades of experience helping pre-retirees fine tune their finances to make retirement less stressful and more enjoyable.

Part of Oak Street Advisors’ 10 Financial Commandments for Millennials series, getting out of credit card debt is a crucial component for younger investors to get ahead. Interest payments can absolutely destroy your personal finances while often draining a debtors’ mental well-being as well.
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When used responsively, credit cards can offer convenience, flexibility, and lucrative rewards. When used inappropriately they can lead to life-changing negative consequences including bankruptcy and divorce. Therefore, getting out of credit card debt is the second step in our 10 Financial Commandments for Millennials series.

Americans topped $1 trillion in credit card debt in 2017. At a 15.5% average interest rate, you don’t need to even run the numbers to know that’s a lot of money paid to the credit card companies. Average credit card debt is around $6,500 and climbing. Needless to say, if you’re in an uncomfortable situation with credit card debt just know you’re certainly not alone.
 
So, how do you start to dig your way out of credit card debt?
First and foremost, move as much debt as you can to a 0% card or account. You may have to open two 0% APR cards to do so, but you want to ensure you pay the least amount of interest on this debt as possible. Preferably you can find a card or transfer offer that doesn’t include a balance transfer fee. However, if you have to pay that fee understand that the money you’ll save on interest payments alone will more than make up for the 3% or so balance transfer fee.

If you’re able to move the debt to a 0% card then calculate how much you need to pay each month to pay off the card by the time the zero interest period ends. If you can’t pay off the card in the allotted time frame, you still may be able to roll that balance onto another 0% card in a year or two when your current card’s 0% introductory rate expires.

If you can’t get everything moved to an interest free credit card, you’ll need to start paying down your debt the old-fashioned way: being disciplined in your spending and allocating as much monthly income to your credit cards as possible. To do so, you can choose from one of the following methods:

1) Avalanche Method
​This method is best mathematically. The Avalanche Method dictates you pay all the minimums on your credit cards. Next, you throw as much extra money as possible at the highest interest rate account. This saves you the most money over time, but often can take a long time to pay off a single account which can be mentally and emotionally taxing. If you’re dedicated to crushing   debt, saving the most on interest payments and will be extremely disciplined in tackling this problem then the avalanche method should be considered.
 
1) Snowball Method
This method suggests that you pay all your credit card minimums just as the previous strategy, only instead of paying everything you can towards the highest balance account you take all extra payments and send them to the smallest account balance. You will pay more interest than the latter method, but eliminating the little accounts first provides debtors with small mental and emotional victories when an account is paid in full. In our experience this leads to a more motivated client who gains momentum with every account that is erased.
 
While mathematically inferior, our advisors recommend clients utilize the Snowball Method. The small mental victories really power people through their debt elimination strategy and generally tend to keep people better on track. 

Of course, you can sit down with an independent advisor at Oak Street Advisors to discuss the best option to achieve your personal financial goals. If you’re tired of dealing with credit card debt on your own you can also check out our Fiscal Checkup which can be focused on restructuring and then eliminating your credit card debt with a financial planner.

Imagine its October of 2007. You have spent the last 30-plus years of your life working and saving for this day, the day you retire. You have watched the S&P 500 Index rise steadily over the past five years, climbing from 837.37 to 1561.80, gaining over 12% a year on average. You have watched your 401k grow steadily and feel your nest egg and social security should provide you with a comfortable if not extravagant lifestyle. You work out the numbers and believe withdrawals of about 5% a year should see you through your lifetime.

Then your November statement arrives, and your stock portfolio has dropped 3%. No biggie, we all know stocks fall from time to time. Now its December and your investments shrink another 3%. Okay, you don’t like it, but you have a long time horizon, and know the markets will recover. The January statement arrives, and your nest egg has shrunk another 10%. You are sweating now; a 20% drop means bear market territory. You know you shouldn’t try to time the market, but jeez! February brings another statement that shows another big drop 12%. OMG! What now?

By the end of the great recession bear market in March of 2009 your stock investments have fallen a whopping 56%. Within 18 months of retiring your nest egg is already depleted by nearly 60% when you factor in distributions.

Welcome to the world of sequence of return risk.

Negative market events that can wreck your retirement happen more often than you might think. August 2000 to September 2002 saw the S&P 500 drop 54% over 25 months. January of 1973 to October of 1974 produced a drop of 52% over a 21 month span. December 1968 to June 1970 set you back 33% in 18 months. The greatest market crash of all began October 29, 1929 and lasted an agonizing 38 months. Stock lost 80% of their value and left the US economy in shambles.

Yes, the markets recovered from all of these setbacks and went on to reach new record highs, but for those unlucky enough to retire at just the wrong moment, recovery could be forever out of their reach. The math of losses works against you. A 25% drop in market value requires a 33% gain to get back to even. A drop of 33% needs a 50% recovery to reach even, and a 50% drop in value means you need a 100% gain to be even.  We all know those kinds of gains take a long time to accumulate.

The risk that big market losses occur at the beginning of a withdrawal strategy is called sequence of return risk.  If you experience a market return sequence of -10%, -25%, +10%, +25% the net result is you have lost over 7%, the communicative rule of multiplication gives you the same result if the returns are reversed. But! Factor in withdrawals and the picture can change dramatically. Your systematic withdrawals work like dollar cost averaging in reverse. You sell more and more shares to fund your spending at low and lower prices.

So how can you protect yourself from such disasters? While there is no strategy that can protect stock investments from going down on occasion, there are some steps you can take to minimize the damage to your long term plan. The first step to avoiding irreparable harm to reaching your long-term goals is to remember that stocks go down, but they don’t stay down.
 
Diversification

Having money invested in different asset classes helps.  Although the equity portion of your portfolio would have dropped precipitously, owning bonds and holding some cash would reduce the severity of sudden market corrections. Having less exposure to equities will also reduce your returns over time. Still, if you can match an asset allocation to your need for long term returns you might find a ratio that allows you to sleep at night, fund your retirement income, and let you avoid the big mistake of selling at the very bottom of the market.
 
A Separate Bucket for Income Withdrawals- the solution to poor sequence returns

Ideally you have planned well for retirement, so instead of having all your retirement nest egg invested for the long term, you have left yourself a cash cushion to fund your anticipated portfolio withdrawal needs for 36 to 48 months, allowing an extra year as a recovery period. Using this strategy your first year withdrawal needs would remain in a money market account and your spending for that first year would come from this account. Your second year of withdrawal needs would invested in one year treasuries or certificates of deposit. So, the second year rolls around and you still don’t have to sweat a bear market, Finally, the third year of anticipated spending is funded with two year treasuries or CDs and the fourth year would be invested in securities maturing in four years. This separate ‘spending bucket’ is what you use for your spending needs.

This strategy would necessitate a cash allocation of 3X or 4X your estimated withdrawal rate. If you believe a 5% withdrawal rate will be safe, then 15% to 20% of your portfolio would be allocated to the ‘spending bucket’. If you believe a 4% withdrawal rate is more appropriate, then that implies a 12% to 16% allocation to the ‘spending bucket’.
Using this strategy, you could have the confidence to withstand most historical bear markets and corrections. Knowing you do not have to sell stocks when markets a low could give you the edge you need to keep the remainder of your investments intact and allow your portfolio time to rebound. It could also allow the remaining portion of your portfolio to be invested more aggressively, improving the likelihood of higher long-term returns.
 
Don’t Wait Until You Retire
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For those nearing retirement you should ideally begin implementing and funding this ‘withdrawal bucket’ well before the day you retire. It would be frustrating to see the stock market drop in the year before you plan to retire. Much better if you would begin shifting some of your investment, 401k, 403b, or IRA investments into a safe ‘spending bucket’ three to four years before your targeted retirement date. Four years before retirement you would move one year’s expected spending into a money market or GIC (guaranteed investment contract). Three years before retirement you move another year’s expected spending, and so forth. Then no matter what happens in the market you should be able to retire when you want and have all your withdrawal needs set aside for the four years following retirement and you could invest the remaining balance of your investment or retirement accounts in equities for long term appreciation. This seems to us a better strategy than selecting a target date fund that arbitrarily moves money out of stocks as you approach retirement age.

Budget Allocation: The First Step in Personal Finance 
Part of Oak Street Advisors’ 10 Financial Commandments for Millennials series, budget building and understanding a general hierarchy of allocating extra income is crucial to getting a head start on retirement planning for millennials. Follow these steps and refer to the Personal Budget Template to begin. 
 
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Make a budget and stick to it- seems obvious and easy right? Except for it’s not- not at all.  
 
Well, it is easy to make a budget. One that clearly has every bill, investment, savings contribution and living need covered. It looks so nice and neat when you’re done with it too! 
 
But…your budget won’t stay nice and neat. 
 
You overspend on a weekend getaway or spontaneous night out with friends and before you know it, that $300 that was supposed to be put into your IRA this month was spent on bar tabs and work lunches.  
 
Budgeting is hard work and life is expensive. Knowing that budgeting is hard is the first step to good budgeting. So, what does a decent budget look like for a young professional just starting out on the road to retirement planning? The answer is different from person to person but let’s start with the basics. 
 
 
5 Steps in Basic Personal Budgeting
 
Step 1: 
Income – Fixed Expenses 
 
Always deduct your bills, insurance premiums, food allowance etc. directly from your paycheck. These are fixed unavoidable costs that cannot go unpaid. Now- how much is left in your checking account after you’ve paid for your next month’s existence? 
 
 
Step 2: 
Emergency Fund Savings 
 
We’re going to get into the Emergency Fund in an upcoming article, but what you need to know now is that after paying your living expenses you need to save an exact $ amount to cover your butt if any surprise expenses arise or you suffer a job loss. 

 
Step 3:  
Retirement Savings 
 
Once you’ve got your Emergency Fund completely funded start working on maxing out a retirement plan. Ideally, you’re participating in an employer sponsored plan like a 401(k) that will allow you to contribute up to $18,500 each year.
 
If you’re not offered this type of plan, make sure to max out an IRA. Generally, a Roth IRA is advantageous for younger investors, however, check with your advisor or tax preparer about the implications in regard to your specific circumstances. 
 
You may consider mixing the tax-deferment of a 401(k) plan with the tax-free characteristics of a Roth IRA to play both sides of the income tax fence, so to speak. 
 *Some young investors may consider college savings an integral part of their financial plan. Step 3 is a great place to include college savings 
 

Step 4: (Could be Step 3) 
Paying Down Debt 
 
Many young investors have student loans, credit cards, auto loans, mortgages etc. that can be mentally and financially draining. Depending on your situation, it may be advantageous to allocate a part of your monthly disposable income to paying down debt.  
 
It may be smart to allocate disposable income to savings, retirement, and paying down debt all at once--it truly depends on your unique circumstances. 
 
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Step 5: 
Treat Yo’Self 
 
While allocating extra income towards improving your financial position both now and in the future is great fun-- spending your hard-earned dollars is fun as well. Ideally, you’d start saving for vacations or another ear-marked goal after the previous steps are taken care of, however, that is often not the case. We need to enjoy our money as much as we need to grow it- so don’t forget to enjoy the fruits of your labor! 

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Free Personal Budget Template 
Now that you have a basic guideline for creating and prioritizing your personal budget, why not take a crack at it yourself?  
 
Would a simplified Personal Budget Template help you organize your budget? Click that link to download the budget template I use personally as a CFP® practitioner and which I’ve customized to follow these budgeting steps. 
 

You’ve inherited an IRA- so what happens next?
 
Before we start, we need to understand some key terms:

Required Minimum Distribution (RMD):
The dollar amount the IRS requires one to distribute from IRAs and defined contribution plans like 401(k)s and 403(b)s. This amount is distributed from your IRA and taxed as normal income unless that distribution comes from your basis or from a Roth IRA.

This dollar amount is determined by the IRS’ Single Life Expectancy Table. You can always distribute more than the Required Minimum Distribution, but never any less. Failure to distribute the required amounts results in a sever 50% penalty. If your RMD was $10,000 and you took nothing, the IRS would penalize you $5,000!
 
IRS’ Single Life Expectancy Table 
The table is created by the IRS to calculate how much of your IRA balance needs to be distributed each year. The table can be seen here. There are rules that govern which life expectancy age an owner or beneficiary must use in this calculation, which we will discuss.

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Starting The Process
When it’s time to start the transfer process, you’ll first setup a Beneficiary IRA to hold the inherited assets. This Beneficiary IRA cannot be co-mingled with any other IRA, retirement plan, brokerage account, etc. Remember, understanding the IRS will require you to distribute some of your inheritance and knowing how that distribution is calculated is crucial in determining how to structure your Beneficiary IRA.

With your Beneficiary IRA established the IRS gives you a few options on how you can distribute the assets:
 
Cash Out Everything
You can take the money- but don’t run. The lump sum distribution will be taxable income and may bump you into a higher tax bracket. When April rolls around you can expect a higher tax bill from the large distribution.

Distribute Everything in 5 Years
You can take withdrawals as you please, so long as the entire IRA balance has been distributed by December 31st of the 5th year after the original IRA owner’s death. Each distribution will be taxed as normal income, so again- tax planning is crucial.

Take RMDs Based on Your Life Expectancy
If the IRA owner has not started taking RMDs or your life expectancy is longer than the IRA owner’s, use your age in the year following the year the original IRA owner died (i.e. owner dies in 2018, you would use your age in 2019 to determine the RMDs for 2019). This is especially useful for heirs who are much younger than the original IRA owner, keeping more tax deferred income and growth in the Beneficiary IRA for a longer time.

Take RMDs Based on IRA Owner’s Life Expectancy
This only applies when your life expectancy is less than that of the IRA owner’s. You use the life expectancy table based on the deceased’s age rather than your own. All distributions are taxed as normal income.

Take RMDs Based on the Oldest Beneficiary’s Life Expectancy
Only applicable with more than one beneficiary and only if no separate Beneficiary IRA accounts are setup for said beneficiaries by December 31st of the year following the IRA owner’s death. Using the oldest beneficiary’s RMD schedule for all other beneficiaries. This could be a major negative for a younger heir. Again, all distributions are taxed as normal income.

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What’s Best for You?
The best thing any IRA beneficiary can do is talk with a fee-only financial adviser who will look at their entire financial picture to determine a customized strategy. Often there are further financial and tax-related issues that should be addressed when considering how to move forward with an Inherited IRA so attention to detail is of the upmost importance.

If you’re not sure what to do with an inherited IRA give us call (843.901.7778 / 843.946-9868) or shoot us an e-mail and we’ll reach out to help you navigate your Beneficiary IRA strategy.

If you're age 70 ½ or older you probably know you must begin taking distributions from your IRA -whether you want to or not.  The IRS life expectancy tables determine your required minimum distribution (RMD) based on the previous years ending balance for your IRA and your attained age for the tax year.

The qualified charitable distribution rules provide those subject to RMDs an option that can help them reduce their income tax liability by having certain charitable contributions made directly to a qualified charity. Given the changes to itemized deductions and the standard deduction in the 2017 tax law update, the qualified charitable distribution rules for your IRA account becomes even more important.

If you make charitable contributions throughout the year, it would be wise to consider making those contributions directly from your IRA. Up to $100,000 of charitable distributions from each IRA owner's accounts can be excluded from your taxable income each year.

Say you plan to give $10,000 to your church or another qualified charity and you are receiving taxable distributions from your IRA. If you make the contribution to the charity directly from your IRA, your $10.000 gift will not be reported as income on your income tax return.
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If you instead receive these funds as income from your IRA distribution and then send the same $10,000 to the charity it is included in your taxable income and could result in higher Medicare premiums and a higher percentage of your social security income being taxable. If you do not have itemized deductions that exceed the new $24,000 per couple or $12,000 per individual standard deduction, you could lose all the tax benefits of your generosity.
By having the distributions sent directly to the qualified charity from your IRA, you will exclude the amount from your taxable income, potentially lowering your Medicare premiums, the taxable portion of your social security benefits, and your overall income tax rate at both the federal and state level.
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If you follow this strategy, be sure to let your income tax preparer know. There is no indicator on the 1099R you receive at the end of the year that shows that part of your distribution is non-taxable, so there is a chance many people using this strategy are over-paying their income taxes each year.

​There’s been a lot of writing about the new Trump Tariffs so I’m not going to delve into any figures, charts, numbers etc. (I started to, but it’s a long way down that rabbit hole). So here’s what you need to know in short form.
 
How this affects US producers of raw materials

• They win
• The price of the goods they sell increases immediately
• They should see higher profits- the intention would be for producers hire more employees, however, this may not be the outcome (see Trump Tax Cuts & Corporate Stock Buybacks)

 
How this affects US manufacturers

• They lose (unless, like Harley Davison, they move production offshore)
• They pay more for the same goods
• They pass this cost on to the consumer

 
How this affects you

• You lose
• You pay more for things like cars, clothes, electronics
• Tariffs are forced inflation on products you buy

 
 
There, that wasn’t so bad was it?  

The Department of Labor’s fiduciary rule has died in the courtroom. The Insured Retirement Institute and the Securities Industry and Financial Markets Association along with the Chamber of Commerce brought suit to protect the financial service companies who would prefer not to act as your fiduciary partner. After a three-judge panel ruled the DOL had exceeded their authority the DOL chose not to appeal the ruling. Despite 17 states and the AARP’s pleas to be allowed to continue the case the 5th circuit court denied their request, leaving investors once again on their own to determine who they can trust with their life savings. 

To make matters worse, the SEC has proposed new rules that provides cover to those not willing to act as a fiduciary. They call it the “Regulation” Best Interest rule. Best interest sounds much like fiduciary to most folks, but as with many things written by attorneys it might not mean what you think it means.
 
While the Regulation Best Interest is an improvement over the suitability standard, the name alone is deceptive. Unlike the fiduciary standard that has a long history of common law and case law definition, ‘best interest’ is undefined and subject to future court rulings to grow the teeth needed to provide needed protections.
 
The SEC proposal also requires both brokers and advisors to provide a four-page disclosure document to help define how they will behave in the client relationship. It seems to me a simple check a box form would be clearer and simpler for all parties. One box would say, “yes, I will always act as a fiduciary in our relationship” and the other would simply say “No, I will not act as a fiduciary at all times”.

A rose is a rose is a rose, unless we are talking about your retirement nest egg, then it’s more “buyer beware”.