Windsor Brief for August 2021
Investing:What are the key issues investors are focused on?
Planning:Retirement account beneficiary options
In this month’s Windsor Brief, we take a look at a few of the key issues investors are currently focused on. As we enter August, the market has plenty of runway to go before closing out the year. Inflation, Covid and stimulus are three of the key issues that investors are focused on and we discuss what this means below.
Our financial planning discussion focuses on revised retirement account beneficiary options. With changes brought on by the Secure Act, some beneficiaries of retirement accounts will see more restrictive options going forward. We discuss these new rules and what this may mean for you below.
If you’d like to talk to us further about these topics or about any of your financial planning or investment goals, please do not hesitate to get in touch.
Investing: What are the key issues investors are focused on?
Year to date, 2021 has proven to be a good year for investors. This performance has come with the typical volatility of the markets driven by a strong economic reopening offset by a myriad of concerns and fears throughout the year. Although the economy continues to deliver strong GDP growth and companies are reporting very good earnings, investors are always concerned on what could potentially slow this growth down the road.
Although any list of investor concerns could be extensive, we are highlighting three concerns that seem to have more near term interest and have received more attention and coverage recently.
Inflation is without a doubt the most top of mind issue with investors. There are many reasons for this, the foremost of which is everybody has noticed higher prices seem more common. But the reason investors have been very focused on inflation is this could lead to higher interest rates and a resulting slowdown in the economy. According to the Federal Reserve, what we are experiencing is transitory inflation, not a permanent rise in inflation. Although we will not know for sure if this is the case or not for another 6-12 months, there is evidence that indeed this inflation may be transitory. To be clear, inflation will be higher than the depressed levels from the past few years, and that is both OK and beneficial. The concern is if inflation were to be sustained above the 3%-4% range into perpetuity.
As of now, the majority of inflation we are experiencing is being driven by the economic reopening as well as supply chain disruptions across nearly all industries. Airfares, rental cars and hotel price increases are examples of inflation due to the economic reopening. These were all very depressed industries that are now regaining their footing. Once this normalizes, inflation in these categories should normalize as well. The bigger issue is the ongoing supply chain disruptions. This is leading to shortages of components, products, food goods, etc., and an overall supply/demand imbalance. Over time, these supply chains will be corrected, which should bring supply and demand back into equilibrium and hopefully alleviate pricing issues.
If you look at the chart below, this chart shows how Core CPI has risen to over 4%. However, if you remove autos, airfare and hotels from the pricing, you see Core CPI has risen, but only to levels experienced in 2016-2018.
Source: Guggenheim Investments, Haver Analytics
In addition, if you look at some of the key commodity charts below you will see how pricing has already begun to normalize from the peaks of just weeks ago, with lumber and corn pricing well off the highs and wholesale used car pricing slowing.
Source: Bloomberg and Windsor Wealth Management
As mentioned, we will not know for another 6-12 months on the ultimate path of inflation, but there appears to be evidence the Fed is correct in classifying the current inflation as transitory. The key questions being how long is “transitory" and what level inflation ultimately settles out.
A second concern investors have been focused on is the acceleration of Covid-19 cases worldwide due to the “Delta” variant after a significant decrease in Covid cases the past several months. The main concern is how high and how long the current rise in new daily cases will last and will it result in a slow down or roll back of the economic reopening taking place worldwide. As shown, cases in the US have begun to rise through the month of July.
US Daily New Cases
Fortunately, this may be only a temporary spike. The UK and India both experienced a ramp up in the Delta variant ahead of the US. It appears that this wave has peaked in those areas, and cases are now rolling over. This Delta wave appears to peak after approximately 45 days, indicating the US may see its peak in the next 10 days or so.
Source: Fundstrat, Johns Hopkins
If the 45-day peak holds in the US, we could soon see a drop in cases and investor concern begin to fade. This clearly would be a positive for the economy and the financial markets, and is something we will be monitoring closely.
A third concern of investors is focused on federal spending. As the unemployment benefits and other stimulus begin to wear off, investors are looking at where the next round of government spending will come from to support growth. On July 28^th, a $548 billion bipartisan infrastructure deal was agreed to, with 70 votes in the Senate cast to begin debate on the legislation. Although this still has a long way to go to formal approval, investors now can begin to get a sense of where the spending from this bill will occur over the next 5-8 years and its economic benefits, as shown below.
There is still uncertainty on this legislation as well as on the much larger $3.5 trillion bill that Congress is looking to approve. It would appear at this time that the larger spending package will have to come down, with estimates closer to $2 trillion or less. But in the meantime, investors are beginning to get a bit more clarity on the size and timing of these spending bills and what tax increases will be needed to offset this spending. This clarity helps to remove unknowns, which ultimately provides investors with more confidence.
Taken together, the three issues discussed are just a subset of the myriad of issues and concerns that investors are watching daily. However, if these bigger concerns can be resolved or at least gain more clarity, it will ultimately provide more confidence to investors and help to pave the road for continued market performance the remainder of the year and into 2022.
Planning: Retirement account beneficiary options
Due to changes brought on by the Secure Act, some IRA and retirement account beneficiaries now have more restrictive distribution options. If you inherited an account prior to 2020, then you are grandfathered under the old rules and can continue with your existing lifetime distribution schedule. (However, your successor beneficiary will be subject to the new 10-year rule upon your death.)
The new rules state that for deaths in 2020 and beyond, only a certain group of named beneficiaries are considered Eligible Designated Beneficiaries (EDB). Only EDB have the option of stretching the IRA by taking annual required minimum distributions over the beneficiary’s life expectancy. EDB include:
- Surviving spouse (can also still roll over the IRA into their own IRA)
- Beneficiary not more than 10 years younger than IRA owner
- Minor child of the IRA owner (until they attain the age of majority or age 26 if still in school, then they are subject to the 10-year rule)
- Disabled or chronically ill beneficiary
All other named beneficiaries are considered Non-Eligible Designated Beneficiaries and are subject to the new 10-year distribution rule. This would include grandchildren at any age and adult children. The 10-year rule states that the inherited IRA must be totally distributed by the end of the 10^th year after the year of death. There is not an annual required minimum distribution amount during this 10-year period. The beneficiary is allowed to structure their distributions during this 10 year period for tax planning purposes or personal preferences.
If no beneficiary is named, the account will be distributed to a Non-Designated Beneficiary based on the rules of the retirement plan, the rules of the IRA custodian or the rules of the state probate law. If inheriting under these circumstances or if the estate is named as beneficiary, then the inherited IRA must be distributed based on the age of the original account owner. If the owner died prior to their Required Beginning Date for RMDs (currently age 72), then the account must be distributed within 5 years. If the owner died after their Required Beginning Date, the distributions will be based over the remaining life expectancy of the owner.
It is important to know the rules and which rule applies to you. Failure to take the mandatory distribution is an IRS penalty tax of 50% of the amount not taken!
Some people with large IRA or retirement plan balances may wish to provide more protection and direction for their beneficiaries. Next month we will look at naming a trust or a charitable trust as the beneficiary of an IRA or retirement plan.
Thank you for allowing the Windsor Wealth Management Team to continue to earn your trust and confidence in the services we offer. We appreciate your loyalty and always welcome your feedback.