Mildly Interesting Notes from the SECURE 2.0 Act

Note: The Advocates are not legal professionals. No part of this post should be construed as legal advice. These points are presented here because of their relevance to financial planning.

SECURE 2.0 is legislation designed to improve upon the SECURE Act of 2019 and it has potential implications for your financial plan and your taxes. Your advisor is the best person to discuss the relevance of this information to your specific situation, but it’s my job to try and turn it into a blog post someone might actually want to read.

Sometimes you can’t make it interesting, but you can make it quick. Here we aim to break what may matter to you into consumable bullet points. This list is not comprehensive as the act itself spans over 4,000 pages of what I can only assume is boss-level legalese.

Required Minimum Distributions (RMDs). 

  • The age is now 73 and will move to age 75 in 2033.
    • That means no one will be required to start taking RMDs in 2023.
  • Penalties for failure to take RMDs have been significantly reduced.

Roth accounts

  • No RMDs for ERISA plan Roth accounts (401(k), 403(b) etc.) starting in 2024. If you’ve already started taking them, you will be able to stop next year.
  • Roth SIMPLE and SEP IRAs will be available this year.
  • Starting in 2024 high income earners age 50+ must make catch up to Roth accounts, NOT pre-tax accounts
  • 529 plans can now potentially be rolled to a Roth IRA, restrictions apply.

Individual 401k Plans: 

  • Self employed individuals can now establish an I401k plan and fund it for the previous year.

Employer 401(k) Plans

  • Mandatory automatic enrollment for eligible plan participants will be required for new 401k and 403b plans after 12/31/2024.

Student Loans:

  • Employers can match payments their plan participants make to their student loans, restrictions apply.  The match applies to the 401k.  i.e. if participant is not getting the match, the loan payment the ex student is making gets matched.

Database for Missing Participants

  • A national, searchable database will be created to help employers locate “missing” plan participants and also the reverse, helping individuals locate old retirement funds.

Want to know if any of this could benefit you? Give us a call, or schedule your free appointment today.

Want more information on SECURE 2.0? A section by section summary can be found here.

A WILD IDEA: ACCOUNTANT TURNS AWARD-WINNING WINEMAKER IN RETIREMENT

Today’s post is part of our series, Retirement Renegades. We aim to highlight real clients who have found purpose and passion later in life.

We found out today that one of our clients is perhaps The Most Interesting Man in the World. His name is Conrad Johnson, and he is the managing member, sales director, and chief winemaker for AWI wines.

AWI is an acronym; it stands for “A Wild Idea”. When asked how to pronounce the name he said, “I don’t care – just try my wine!”

Conrad’s enthusiasm for his second career is contagious. His motivation? It’s fun. No matter what we discussed, it always came back to fun, and he’s having plenty of it.

Conrad, who I assumed was a native Texan, is no such thing. He was born and raised in Venezuela by his parents who moved there in the 1950s, his mother from “deep East Texas” and his father from Boston. Mom eventually won out when Conrad’s father retired, and they made Houston their home. He left Venezuela at 13 to attend prep school in New England. From there he went to Louisiana to study pre-medicine at Tulane University but ended up with a business degree. He moved to Houston and went on to get his MBA  where he started to work in public accounting.

Though Conrad was not what you would call a “natural accountant”, his career was successful and afforded him opportunities to work around the world: from Madrid, Spain, where his youngest daughter was born, to Mexico and other Latin American countries. He even spent five years commuting weekly between Houston and Mexico City.

Jill & Conrad Johnson

Jill, Conrad’s wife, and their three daughters have always been constants in his life, offering love and support despite the itinerant nature of his career. And he needed their support to be able to achieve what he did, having changed employers and locations several times. He’s worked for “nearly the full alphabet” of accounting firms, BDO, PW, PwC (Price Waterhouse Coopers), EY (Ernst & Young) and UHY.

In 2008, he purchased a small vineyard in Argentina with four varietals: Malbec, Merlot, Cabernet Sauvignon, and Viognier. Argentina, he says, is a place easy to fall in love with and not just because of their exceptional soccer team. Having now seen photos of the vineyard I can indeed confirm that it looks like a slice of Heaven.

In this first foray, he adopted what he called a “Blue Bell” mentality: “we’ll make the wine to drink it ourselves and sell the rest”. For those unfamiliar, Blue Bell Ice Cream famously used the slogan “We eat all we can and sell the rest”. He would own the land, make the wine, and use it as a “great thing to talk to his clients about, other than accounting or control issues”.

In 2014, Conrad and his investors looked for a way to commercialize the venture. He established AWI Winery here in Texas which allows him to import his wines and sell directly to consumers and restaurants. You can explore his offerings at awiwines.com.  

His winery has become his man cave, so to speak, where he goes to work, make his annual farming and winemaking plans,  and, of course, do the never-ending accounting. He travels to Argentina once or twice a year, taking investors and friends along for the ride as he can.

One of those annual trips is what he calls a “blending trip”. I learned today that you can call a wine by its grape varietal if it’s 85% or more of that varietal. The blending trip is like a mad science trip. They taste and experiment to see if additional wines should be added to the main varietal.

I also learned that the vintage of a wine is from the year the grapes were harvested, not the release date of the wine. The grapes he is using today will be fermented in steel drums and placed in wooden barrels to age. Eventually the wine is bottled and then it ages more. The wine he makes in 2022 won’t be available to ship to Houston until approximately 2025.

The future of AWI looks bright. In addition to holding regular tastings and events, AWI submits its wines annually into the International Wine Competition at the Houston Livestock Show & Rodeo and other regional wine competitions.

AWI’s 2020 “Mitad | Mitad”, a blend of Viognier and Chardonnay, recently won a gold medal and was Class Champion in the Rodeo’s wine competition. These winnings gain them entry into the “Best Bites” competition at NRG Stadium in February where three to four thousand people come each year to taste award-winning wines, food from local restaurants and have a great time. If you plan to attend the event make sure to look for AWI wines.

Some of AWI’s wine ‘bling’

Conrad thinks of these wines like they are his children. He struggles to name a favorite, but concedes that his red blend, a Bordeaux blend, is exceptional and pairs well with beef tenderloin. I mention that I’m making Beef Wellington for Christmas dinner, and just a few hours later, he’s in my office, dropping off a bottle for the meal.

I admit that I’m a wine novice. For people like me, his advice is simple. Don’t get accustomed to drinking the same wines, over and over. Try things! Everyone loves Cabernet Sauvignon and hates Merlot, but Merlots, he insists, are some of the best wines in the world. For the record, he blames the 2004 film Sideways for the decline in merlot sales around the world.

Conrad doesn’t feel like he’s retired. He does something everyday, like a job, it’s just more fun. Not that he’s expecting a paycheck. “You know how to make a small fortune with a vineyard?”, he quips, “Start with a large one”.

Nevertheless, his advice to those nearing retirements seems solid: “spend as much time thinking about your retirement activities as you do about your money before you retire!”  According to Conrad, you need your own activities. Don’t rely on your spouse, they’ll want their own activities too. In short, “Without activities, your wife will probably suggest you go back to work or kill you!”.

It seems the answer to a meaningful retirement is to have a passion for something. And fun, always have fun.  AWI has given Conrad that in spades. He relishes being able to share his wine, the farming and winemaking experiences, Argentina, and the people.  “The people you meet”, he says, “the places you go are… tremendous”. And Jill is happy to see him working on something that brings him joy.

I hang up the phone with two key thoughts: 1) this guy is NOT bored, and 2) I better hustle to the front and get my wine before someone else takes it.

Get some award-winning wine from AWI! Order online at awiwines.com.

For those who want delivery outside of Texas, please visit https://www.awiwines-os-tx.com/.

Want to visit the warehouse? Or book a tasting? Please call 832-453-6439 for more information.

Cheers!

The Difference Between a Forecast, a Wish, and a Worry

When I was growing up, our local newspaper, the Kansas City Star, was full of news and had one page for opinion. After decades of cable news and nonstop digital postings, I see more opinions these days than news. That’s not a bad thing. But when it comes to investing, it’s crucial to remember the difference between news and opinion, and how they are sometimes used to forecast the future.

Any time the government releases new data on unemployment or inflation or interest rate changes, people start claiming they can forecast the future. That’s not necessarily a bad thing either. But most of what I hear people say isn’t what I would call “forecasting.” Read more…

Rising Rates: Short-Term Pain for Long-Term Gain?

Investors have likely noticed the improved opportunity set in fixed income due to higher yields. And yet some investors may be hesitant to take advantage of higher yields because of concerns about future increases in yields. Some may even be considering reducing their bond exposure after this year’s negative returns for fixed income.1

The good news? If yields do keep rising, investors seeking higher expected returns may still
be better off maintaining the duration of their fixed income allocation. Rising yields impact fixed income portfolios in several ways.

On the one hand, longer duration portfolios may experience larger immediate losses from increased yields relative to shorter-duration portfolios. On the other hand, higher yields may lead to higher expected returns.

Investors can think of this tradeoff as a pit stop in a Formula 1 race. The pit stop immediately causes the driver to fall back. However, fresh tires may help the driver win the race if there are enough laps left to catch the leader.

Exhibit 1 illustrates this using two scenarios for a $100,000 fixed income allocation with a five-year duration. Scenario 1 experiences a constant yield of 1% during the period. Scenario 2 is faced with a sudden spike in yield from 1% to 4% on Day 1 and sees its value immediately drop to a little over $86,000. However, the higher-yield environment accelerates Scenario 2’s recovery: With a 4% yield rather than the previous rate of 1%, Scenario 2’s portfolio value overtakes Scenario 1’s within five years—the time horizon
determined by the duration of Scenario 2.

When faced with uncertainty, investors should focus on the things they can control. Research tells us that trying to outguess the market by holding on to cash, or shortening duration, with the expectation of future yield increases may not help you achieve your long-term goals. 2

Markets quickly incorporate new information about higher interest rates and inflation. 3

Investors who maintain appropriate asset allocations, even after increases in bond yields, may have a more rewarding investment experience in the long run.

Important Disclosures


Fixed income securities are subject to increased loss of principal during periods of rising yields.
Source: Dimensional.

Data presented are based on mathematical principles, are not representative of indices, actual investments, or actual strategies managed by Dimensional, and do not reflect costs and fees associated with an actual investment. Growth of wealth assumes a constant duration and flat yield curve for simplicity.
For Scenario 2, the approximate 15% drop in value seen in year 0 is based on a hypothetical yield increase from 1% to 4%, resulting in an immediate decline in value. The drop in value can be approximated by multiplying the assumed five-year duration by the yield increase.


For illustrative purposes only.

Duration: A measurement of the sensitivity of the price of a fixed income investment to changes in interest rates. Generally, high-duration bonds will have greater sensitivity to changing interest rates than lower-duration bonds.

  1. The Bloomberg Global Aggregate Bond Index (hedged to USD) returned –12.1% from January 1, 2022, through September 30, 2022.
  2. Mingzhe Yi, “All Eyes on the Fed? A Look at Federal Funds Rate, Bond Return, and Term Premium,” Insights (blog), Dimensional Fund Advisors, March 15, 2022.
  3. Wes Crill, “Light at the End of the Inflation Tunnel,” Insights (blog), Dimensional Fund Advisors, June 10, 2022; “Markets Appeared to Be Ahead of the Fed,” Insights (blog), Dimensional, June 16, 2022.

The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable, and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, a recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is appropriate for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmission of this material is strictly prohibited. Dimensional accepts no responsibility for loss
arising from the use of the information contained herein. This material is not directed at any person in any jurisdiction where the availability of this material is prohibited or would subject Dimensional or its products or services to any registration, licensing, or other such legal requirements within the jurisdiction.
“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd. and Dimensional Hong Kong Limited. Dimensional Hong
Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, liquidity, prepayments, call risk, and other factors. There is no guarantee strategies will be successful.

Risks
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.

UNITED STATES
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.


Investment products: • Not FDIC Insured • Not Bank Guaranteed • May Lose Value
Dimensional Fund Advisors does not have any bank affiliates.

Midterm Elections & The Markets

A good reminder from DFA that markets have historically continued to provide returns over the long run irrespective of which party is in power at any given time.

It’s almost Election Day in the US once again. For those who need a brief civics refresher, every two years the full US House of Representatives and one-third of the Senate are up for reelection. While the outcomes of the elections are uncertain, one thing we can count on is that plenty of opinions and prognostications will be floated in the days to come. In financial circles, this will almost assuredly include any potential for perceived impact on markets. But should long-term investors focus on midterm elections? Read on here.

Capturing the Recovery

This week we share some insight from Dimensional Fund Advisors (DFA) on the historical evidence that stock gains can add up after big declines.

Sudden market downturns can be unsettling. But historically, US equity returns following sharp downturns have, on average, been positive. Sticking with your plan helps put you in the best position to capture the recovery.


• A broad market index tracking data since 1926 in the US shows that stocks have tended to deliver positive returns over one-year, three-year, and five-year periods following steep declines.


• Cumulative returns show this to striking effect. Five years after market declines of 10%, 20%, and 30%, the cumulative returns all top 50%.


• Viewed in annualized terms across the longest, five-year period, returns after 10%, 20%, and 30% declines have been close to the historical annualized average over the entire period of 9.8%.1

1.The average annualized returns for the five-year period after 10% declines were 9.54%; after 20% declines, 9.66%; and after 30% declines, 7.18%.

Past performance is no guarantee of future results. Short-term performance results should be considered in connection with longer-term performance results.

Market declines or downturns are defined as periods in which the cumulative return from a peak is –10%, –20%, or –30% or lower. Returns are calculated for the 1-, 3-, and 5-year look-ahead periods beginning the day after the respective downturn thresholds of –10%, –20%, or –30% are exceeded. The bar chart shows the average returns for the 1-, 3-, and 5-year periods following the 10%, 20%, and 30% thresholds. For the 10% threshold, there are 29 observations for 1-year look-ahead, 28 observations for 3-year look-ahead, and 27 observations for 5-year look-ahead. For the 20% threshold, there are 15 observations for 1-year look-ahead, 14 observations for 3-year look-ahead, and 13 observations for 5-year look-ahead. For the 30% threshold, there are 7 observations for 1-year look-ahead, 6 observations for 3-year look-ahead, and 6 observations for 5-year look-ahead. Peak is a new all-time high prior to a downturn. Data provided by Fama/French and available at mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.

Fama/French Total US Market Research Index: July 1926–present: Fama/French Total US Market Research Factor + One-Month US Treasury Bills. Source: Ken French Website.

The Fama/French Indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment.

Results shown during periods prior to each index’s index inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains.

Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful.

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Investment products: • Not FDIC Insured • Not Bank Guaranteed • May Lose Value

Dimensional Fund Advisors does not have any bank affiliates.



The Cure for Market Woes

The Distillery is back! Thank you for your patience while we repaired some site malfunctions. We’re happy to be able to bring you these thoughts on current market conditions.

Stocks are taking a terrible beating these days!  From the way the market is behaving, one might think that some of the world’s largest and most profitable companies are suddenly becoming dramatically less valuable.  Are they all laying off workers, slashing prices, closing factories and declaring imminent bankruptcy?

If this is driving you to anxiously scan the headlines, don’t bother; none of that is happening.  Stock prices have never been a precise indicator of what companies are worth.  They are a very good indicator of what people are willing to pay for their shares, and right now there seems to be more sellers than buyers.

Why?  The reasons for bear markets are seldom rational—which, of course, is why bear markets end and stocks return to (and always, in the past, have surpassed) their original highs.  What’s happening right now is not unlike what happens when one of our children is diagnosed with an illness, and the remedy is a daily dose of some awful-tasting medicine. 

The illness, in this case, is inflation, which absolutely has to be cured if we are to experience a healthy economic life.  Few things are worse than having the money you’ve saved up deteriorate in value at double-digit rates, which is precisely what has been happening this year.

The cure, which any child will tell you is more unpleasant than the illness itself, is the U.S. Federal Reserve raising interest rates, which is its way of reducing the amount of cash sloshing around in the economy.  Rising consumer prices, just like rising stock prices, come about when there are more buyers than sellers.  Reducing the available cash reduces the number of buyers in relation to sellers (ironically, both in the consumer marketplace and on Wall Street), and finally slows down the inflation rate to manageable levels. 

We can already see how this works in the housing market, where, just a few short months ago, multiple would-be buyers were bidding against each other to pay more than the asking prices.  As mortgage rates have risen, the frenzy has completely dissipated.  The process takes longer in the consumer marketplace at large, but you can bet it’s working behind the scenes.

Doesn’t less spending mean less economic activity?  Doesn’t that lead to a recession?  The answers, of course, are yes and maybe.  But at this point, a recession might not be all bad for the economy.  Recessions act like a cleansing mechanism, exposing/eliminating waste and inefficiency, ultimately creating a healthier economy when we come out the other end.

So right now we’re taking our medicine, and boy does it taste awful.  We are also, collectively, suffering an economic illness.  Anybody who has come down with a bug and taken medicine to cure it knows that the former unpleasantness doesn’t last forever, and therefore neither does the latter.

5 Steps to Address Concern About an Aging Parent

As your parents begin to settle into their final phase of life, their health, residence, and finances could become a factor in your retirement planning. This is especially true if you are the person your parents have tasked with settling their estates.

There’s no simple way to tackle all the logistical and emotional challenges associated with caring for an aging parent. But these five steps will help you get the help you’ll need to make sure your parent is safe, cared for, and financially secure.

1. Call a family meeting.

No two families are the same, but in most cases, you’re going to want to gather together all siblings and close family members for an open and honest discussion. If your parent is dealing with a serious and potentially debilitating health issue, don’t sugar-coat the truth. Hiding the facts now will only lead to hurt feelings, resentment, and poor planning.

Depending on the parent’s condition, you might consider dividing up a caregiving or visitation schedule. Even pitching in on small day-to-day tasks like helping mom or dad buy groceries can be a big help.

If you’re contemplating a more serious decision, like assisted living, make sure you give everyone space to voice an opinion. Try to keep the conversation as positive and solution-focused as possible. Employing a mediator or family counselor to facilitate might be a good option if you’re concerned old family issues could boil over and prevent a solid resolution.

2. Don’t try to parent.

Shifting from the role of adult child to caregiver is going to be a difficult transition for both you and your parent. Don’t try to do too much too soon. Seniors who feel like they’re being “babied” are prone to depression or dangerous outbursts of independence, like grabbing the car keys or refusing to take medication.

A better approach is to try to frame your caregiving as a way of being more involved in your parent’s current routine. Take a seat at dad’s weekly card game. Put the grandkids’ sports and performance events on the calendar and offer transportation. Bring an extra dish to a dinner party. Drive mom to the movies … and let a sibling know the house will be unoccupied for a few hours if there are any cleaning or hoarding issues that need attention.

3. Gather the essentials.

If your parent doesn’t keep all important documents in one location, now is the time to collect, copy, and file things like:

  • Identification (driver’s license, passport, birth certificate, marriage certificate, etc.)
  • Bank records
  • Home deeds and vehicle titles
  • Insurance records
  • Investment and retirement account records
  • Wills and trusts
  • Power of attorney
  • End of life directives
  • Login information for important online accounts (banking, subscriptions, social media)

There may be other documents that are unique to your parent’s living or financial situation. We can help you make a comprehensive list.

4. Tag along.

Start attending doctor’s appointments. Don’t be afraid to ask questions that will help you familiarize yourself with your parent’s medical condition and aid with any at-home care like prescription drugs.

Also ask your parent to introduce you to his or her financial advisor and attorney. Make sure the relevant professionals have all important information about changes to your parent’s health, mental capacity, or living situation.

5. Plan for the next steps.

At some point, your aging parent may no longer be self-sufficient. The earlier that you and your close family members decide upon an action plan, the better. Do you or anyone in your family have the room, the time, and the means to take in your parent? How can non-caregiving siblings or other family members chip in on associated costs of living?

In many cases an assisted living facility is a more realistic option. But be aware that your parent’s Medicare plan probably will not cover those costs. If your parent does not have retirement funds earmarked for end-of-life care, you and your close family members may need to hold another meeting to discuss how to pay for a facility.

None of these steps are easy, and none of the associated options your family settles on will be perfect. The sooner you loop us in on how caring for an aging parent might affect your financial picture, the sooner we can get to work on the money side so that you can concentrate on giving your family the love and support it needs during this difficult time.

FAANGs Gone Value

This week's The Distillery is a surprisingly twist on a classic FANG stock, and then highlights a possible misconception about the spirit of value investing. Enjoy! Read More >

The Biggest Life Event That No One Talks About

This week's The Distillery is another piece in a newer movement towards motivating clients to spend more of their hard earned money before the end of their plan. For those nearing retirement or freshly retired, it's an especially good read. Read More >