binoculars looking at future of the SECURE Act

Looking Ahead: SECURE Act Update

The closing weeks of 2019 gave us plenty to celebrate and plan for as investors.  In contrast to 2018, where it was nearly impossible to find growth in stocks, bonds, or any asset for that matter, 2019 provided plenty of opportunity for returns. There was volatility in the mix, however, as trade talks, domestic politics, and geopolitics led recession talk to spike half-way through the year. As we stand now, stocks have rebounded to near all-time highs, interest rates are lower than they were 12 months ago, and economic conditions seem favorable for the rally to continue, at least in the near term.

Recent Market Observations

chart of returns in stocks, bonds, and real estate over the past two years

Sometimes you get two (or more) years of returns in one year, if you can stay invested. In this chart of returns in U.S. Stocks, International Stocks, Bonds, and Global Real Estate, you can see that the place to be for the last two years has been U.S. equities. Since the beginning of 2018, the S&P 500 is up over 25%.  It is notable that in the 18 months before July of 2019, the index only closed 13 times at 12% above its 2018 starting point in 375 trading days. That means that if you panicked and sold at the lows of 2018, you missed returns of over 30% the next year.  If you panicked and sold out of fear of recession in the Summer of 2019, you missed more than 12% of upside before the end of the year. It took patience to stay invested, ignore the noise, and earn market returns. Remember, it is time in the market, not timing the market that leads to long-term success.

Interest rates are back to being lower for longer. This is good for business, presumably, and the stock market has certainly cheered on this development, which could extend the rally.  However, low interest rates can be a burden on savings and a challenge for retirees.  If you are calculating how much income you can earn from your investments, the math is different than it was a year ago.  At times like these, we advocate a total return approach. That is, where income comes from a combination of principal, interest, and dividends.  Be mindful of reaching for yield or being concentrated in places like real estate or utility stocks.  They can serve a purpose. But too much in one place is always a risky proposition.

While some risks seem lower now, the global political situation is worth our attention. The political tensions of the U.S. election and Brexit in Europe are happening simultaneous with unique political pressures in China, South America, and the Middle East. As I write this, there has already been an escalation in the relationship between the U.S. and Iran in the New Year. With disparity between growing and struggling economies, stable and fragile political leaders around the world, the stage is set for more dramatic action and reaction.  It is difficult to invest by trying to predict outcomes in this area. There is always risk to the downside to escalating tension over any number of issues.  Therefore, we can never assume we have the freedom to chase after stocks blindly, because the world situation can always change in a heartbeat.

The 2020 SECURE Act

Looking ahead to financial planning in 2020, the SECURE Act was signed into law and has changed the way we accumulate in and distribute from our 401(k)s, IRAs, and inherited accounts. The thought process behind the Act was to ease some of the restrictions that have kept employees and savers from accumulating a nest egg in a retirement account. Many of the changes affect employers and their ability to offer 401(k) plans, but other changes affect individual investors.  If you have retirement accounts, here are a few changes of which to be aware:

  • Inherited IRA rules have changed. In years past, if you inherited an IRA from someone who is not your spouse, you had the opportunity to take distributions from that account over your lifespan. This meant that you could keep the bulk of that money growing for a longer period. The SECURE Act changes this rule so that in 2020 and beyond, you would be required (in most circumstances) to draw down that IRA over a ten-year period. This could mean higher income taxes and less tax-deferred growth for the inheritor. *It is important to note that IRAs inherited prior to 1/1/2020 are grandfathered in and are NOT subject to these new rules.
  • IRA rules over 70 are more generous: As we age, traditional IRAs and 401(k)s have rules for Required Minimum Distributions (RMDs), annually. It used to be that age 70 1/2 was the time when you were required to draw down your tax qualified accounts. The SECURE Act has now extended the age requirement to age 72.  A little more time to hold off on distributions could mean revisiting your retirement income plan.
  • Annuities more widely available in 401(k)s: A big win for the insurance industry, but the jury is still out on how much this will affect investors.  Annuities provide the opportunity to secure a stream of income from your savings but historically have had limited availability inside of 401(k)s. The SECURE Act makes it easier (legally) for retirement plan sponsors to include annuities in 401(k) plans.  The problem, as is always the case with annuities, is how much money should we set aside with a guarantee and how much should be left with more flexibility.  I continue to believe that more annuities are ‘sold’ than ‘bought’ and will be watching to see if there are any negative traps developing in this market.

With the state of the world and the financial landscape continually changing, this is a good time to revisit assumptions. If we can help you think through how you are invested or whether the changes of the SECURE Act change your retirement plan we would be happy to talk.