Month: January 2024

01.30.2024
Retirement account rules and contribution limits get adjusted in the new year.

By Kerry Hannon-Senior Columnist
Date: Decemeber 27th, 2023

Saving for retirement is getting a little easier in 2024 thanks to the phase-in of a handful of provisions stemming from the Secure 2.0 Act, which became law at the end of last year.

Here’s a roundup of some of the key retirement-related changes to watch out for in the new year and planning-related moves to consider.

New retirement saving reforms and rule changes

Employers will be able to consider student loan payments as qualifying contributions toward retirement-matching programs. That means if your employer provides a match to your 401(k) contributions and you are paying down your student loan, you could count your monthly student loan payments as your “contribution” to your employer-provided retirement account, even though your dough isn’t going in there.

Your employer’s match does, however, go into a retirement savings account. Provisions from the retirement law makes it possible for employers to earn a tax break on that type of match. The precise matching formula and whether the employer offers this depends on the employer.

There will be easier emergency access to retirement savings accounts. Ransacking retirement accounts to pay for unexpected financial shocks spiked in 2023 as inflation and interest rates stretched Americans’ budgets. This might help solve that for some folks. Starting in 2024, you may be able to pull up to $1,000 annually from a retirement account for specific emergency needs without owing the 10% early distribution penalty.

And if you agree to pay it back within three years, you might not face a tax bill on the sum either. That’s providing the withdrawal can be tagged to a personal or family emergency.

Domestic abuse victims under age 59½ can now take up to $10,000 from their IRAs or 401(k)s without paying the 10% penalty tax.

Employers also have the green light to offer their employees the option of putting money into an emergency fund that is paired with their retirement plan. Employees would be able to save up to $2,500 in an emergency fund. While this provision goes into effect on Jan. 1, it may take some time to get going.

“I don’t anticipate that getting much traction until a wide variety of administrative issues are worked out between plan sponsors, record keepers, policymakers, and regulators,” Emerson Sprick, senior economic analyst at the Bipartisan Policy Center, told Yahoo Finance.

Another critical measure effective in the new year authorizes “starter 401(k)s.”

“This is a simplified plan that employers can offer if they’re just getting started as a plan sponsor and that they can use off the shelf,” Sprick said. “These plans could really help expand retirement plan coverage in coming years, as they have the potential to drastically reduce administrative burden, especially on smaller employers.

“This question of access is really gaining momentum, as only around half of US workers have access to an employer-sponsored retirement savings plan,” he added.

And if you’re sitting on unused funds in 529 education accounts, take heart. Starting in 2024, you can roll those savings over tax-free to a Roth IRA. There are restrictions, of course. For instance, there’s a $35,000 lifetime cap, and rollover amounts cannot exceed the annual contribution limit for Roth IRAs. So, if you are under 50 and have $35,000 in unused 529 assets, you could roll over $7,000 per year (this contribution limit may change annually) over a five-year period. And the 529 account must have been open for more than 15 years.

Higher saver contribution limits

“The changes that retirees and those preparing for retirement can expect in 2024 are fairly standard,” Sprick said. “Contribution limits for retirement plans increased modestly.”

Workers who have a 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan can contribute up to $23,000 next year, up from the limit of $22,500 this year.

Those of you who are 50 and over can save an additional $7,500 catch-up contribution.

The contribution limit on individual retirement accounts (IRAs) will increase by $500 in 2024, from $6,500 to $7,000.

The IRA catch‑up contribution limit for individuals aged 50 and over was amended under the Secure 2.0 Act of 2022 to include an annual cost‑of‑living adjustment but remains $1,000 for 2024.

For 2024, IRA deductions for singles covered by a retirement plan at work aren’t allowed after their modified adjusted gross income (MAGI) hits $87,000 versus $83,000 in 2023. The deduction disappears for married couples filing jointly when their MAGI hits $136,000, up from $129,000 in 2022.

More people will be able to contribute to Roth IRA accounts too. In 2024, the income limit range will increase to between $146,000 and $161,000 for single individuals and heads of households, up from between $138,000 and $153,000 in 2023. For married couples filing jointly, the range increases to between $230,000 and $240,000.

Finally, the income limit for the Saver’s Credit, a nonrefundable tax credit worth up to $1,000 ($2,000 if married filing jointly) for taxpayers who contribute to a retirement account is $76,500 for married couples filing jointly, up from $73,000; $57,375 for heads of household, up from $54,750; and $38,250 for singles and married individuals filing separately, up from $36,500.

A key retirement tool gets sweeter

How much you can contribute to your health savings account is getting more generous. The new 2024 annual contribution limit announced by the IRS on health savings accounts, or HSAs, for individuals will be $4,150, a $300 uptick from 2023. For family coverage, the HSA contribution limit rises to $8,300, up $550.

“HSA contribution limit increases for 2024 are higher than what we’ve grown accustomed to in recent history because of above-average inflation in 2022 and 2023,” Jake Spiegel, research associate, health and wealth benefits, at the Employee Benefit Research Institute (EBRI), a nonprofit, nonpartisan organization, told Yahoo Finance.

While these accounts are not a substitute for a traditional retirement account, the larger contribution maximum can help boost retirement savings with the vehicle’s triple tax advantage. It’s the only account that lets you put money in on a tax-free basis, lets it build up tax-free, and lets it come out tax-free for qualified healthcare expenses.

A health savings account option is available if you’re enrolled in a high-deductible health care plan (HDHP). You can also open an account as a self-employed freelancer or business owner if you have a qualified HDHP. The IRS sets the parameters for these accounts annually.

“While an HSA is not explicitly a retirement savings vehicle, it’s a smart move to use it in that way, if possible,” Morningstar’s personal finance director Christine Benz, told Yahoo Finance.

“The idea would be to contribute to the HSA, invest the money, and use non-HSA funds to cover healthcare expenses. It’s pretty much a can’t miss from a tax standpoint.”

01.30.2024

By Jeanne Sahadi, CNN

Published 9:00 AM EST, Thu December 28, 2023

You may think that improving your financial life is simply a matter of taking unpleasant but necessary steps: Curb spending. Cut debt. Make more. Boost savings.

But, in real life, if your money resolutions for 2024 are just a long list of financial chores that you know you “should” have been doing but haven’t, you’re likely to ditch the plan by your third pot of coffee in January.

Here’s why: When it comes to managing our money, regardless of our net worth, there is usually a persistent gap for most of us: We know what we should do, but we struggle to actually do it.

“If you have the key fob to the gym, it doesn’t make you fit,” said Ashley Agnew, president of the Financial Therapy Association and director of relationship development at Centerpoint Advisors.

It’s hard to get motivated to do anything when you’re just doing it because you think you “should.” When it comes to improving your finances, staying motivated is much easier when you’ve honestly assessed what makes you feel content and secure in life and then figured out how to use your money to foster those feelings.

So make just one financial new year’s resolution for 2024: Figure out what financial well-being means for you. It will be a highly personal endeavor. Then pick one or two steps to improve it.

Here are seven ways you might define it and improve upon it in the new year:

1. Create a greater sense of ease

Money helps mitigate uncertainty like emergencies, job loss, illness or premature death. Hence the desire for rainy day funds and insurance.

How much you’ll need for either depends on your circumstance. To help figure out what is right for you, familiarize yourself with what your life today costs, so you know what baseline you’re working with, Agnew suggested.

Beyond reviewing your monthly expenses (food, housing, utilities, health care, debt payments, subscriptions, etc.), map out when those and other anticipated expenses will arise. She recommends drawing a quadrant, and labeling each box with a season. In each season’s box, include your regular expenses plus special ones like birthdays, weddings and vacations, or scheduled expenditures like a roof replacement or tuition bill.

Doing so will make it easier to see how much you’re really spending, what you can cut if need be and where you might be able to free up money to do something you’ve been avoiding but that might give you peace of mind. For instance, if you have young kids, you might make 2024 the year you buy a low-cost life insurance policy so you know you’ll be able to provide for your family when you’re gone.

No one wants to think about their own death, but avoiding the issue just makes things harder on your family. “Avoidance will prevent you from taking a deep breath. You can avoid the action but you can’t bury something completely when it comes to money,” Agnew said.

2. Spend in ways that are true to who you are, not others’ expectations

Beyond creating a greater sense of security, financial well-being is about using your money as you wish.

So look at where your money goes. Does it reflect what you really want? Or do you spend some of it living up to the standards and expectations set by your parents or society? For example, maybe you got a bigger, more expensive home than you feel you need or you feel an unspoken pressure to buy more expensive brands. Or maybe you spend too much on your children in ways that aren’t really that meaningful to either of you, or which your adult children take for granted.

“We live in a world of comparison. It can be difficult to live up to someone else’s financial standards,” Agnew said.

3. Buy yourself time

Financial well-being is also about reallocating the money you have in ways that serve you better.

“Sometimes it isn’t about adding more. It’s about subtracting. Sometimes it can be, ‘How can I spend my money to do less?’” said Meghaan Lurtz, learning and development specialist at Shaping Wealth, which trains financial professionals to help their clients achieve “funded contentment.”

Lurtz is referring to the fact that time is everyone’s most limited resource. You can use money to buy a little time back if it lets you focus on what is most important to you.

Take house chores and cooking. If they eat up most of your free time outside of work and take you away from being fully present with your young kids at key times of the day, you might consider spending money on a meal plan or hiring a house cleaner to help out once in a while.

4. Express your values

Financial well-being also results when you use your money to express your values in the world through charitable donations or providing a meaningful gift for someone in need — e.g., help with tuition or paying off a medical bill or student loan, etc. Or it can simply be having the capacity to volunteer your time.

It’s not necessary to be a multi-millionaire in any of these regards. “People can be wealthy in that they live within their means and live within their values,” Lurtz said.

5. Don’t confuse what you buy with joy

Money is a tool that can free you from the distress of always having to choose between paying for groceries or paying the electric bill. But beyond allowing you to afford life’s basic necessities, it’s not a magic wand that can buy you deep-in-your-bones happiness.

That’s worth remembering the next time you’re thinking about buying something that was marketed to evoke feelings of a beautiful home, a perfect family or a sense of being on top of the world. Ask yourself, “Is it the thing you want or the feeling from the thing you want?” Agnew said.

6. Focus on what brings you contentment

Take time to envision what would make you feel more content in your life overall because ultimately money should serve you in achieving that vision.

“What do you enjoy? What did you like doing as a kid that you don’t do now? Everyone has their own picture of contentment. Get in touch with what you want your picture to be,” Lurtz suggested.

Be specific, she said. Envision what would be happening, where you are, how you are spending your time, who is with you and how you feel.

Compare that vision with where you are today. Then come up with a couple of small, achievable goals to move you closer to that vision. For instance, if you used to love playing the piano or painting when you were younger, it might mean committing time to doing that and maybe even some money for lessons. Or if you miss spending time with old friends who live far away, it may mean setting aside some money to travel to see them.

7. Figure out your relationship with money

There are plenty of other ways to define financial well-being for yourself. And you can help keep your new year’s resolution by simply reading a book that helps you think differently about money and its role in your life.

Among the ones Agnew and Lurtz like best are: Mind over Money by Brad Klontz; The Psychology of Money by Morgan Hounsel; and The Geometry of Wealth by Brian Portnoy.

Ultimately, the goal is to figure out what role you want money to play in your life. “It only does what you tell it to do,” Agnew said.

Source: https://edition.cnn.com/2023/12/28/success/financial-new-years-resolution/index.html

01.16.2024
BY ERIN BROWNE, GERALDINE SUNDSTROM, EMMANUEL S. SHAREF NOVEMBER 14, 2023

The global economic outlook along with market valuations and asset class fundamentals all lead us to favor fixed income. Relative to equities, we believe bonds have rarely been as attractive as they appear today. After a turbulent couple of years of high inflation and rising rates that challenged portfolios, investors may see a return to more conventional behavior in both stock and bond markets in 2024 – even as growth is hindered in many regions.

In this environment, bonds appear poised to perform well, while equities could see lower (though still positive) risk-adjusted returns in a generally overvalued market. Risks still surround the macro and geopolitical outlook, so portfolio flexibility remains key.

Macro outlook suggests a return of the inverse stock/bond relationship

In PIMCO’s recent Cyclical Outlook, “Post Peak,” we shared our baseline outlook for a slowdown in developed markets (DM) growth and, in some regions, the potential for contraction next year as fiscal support ends and monetary policy takes effect (after its typical lag). Our business cycle model indicates a 77% probability that the U.S. is currently in the “late cycle” phase and signals around a 50% probability of a U.S. recession within one year.

Growth has likely peaked, but so has inflation, in our view. As price levels get closer to central bank targets in 2024, bonds and equities should resume their more typical inverse relationship (i.e., negative correlation) – meaning bonds tend to do well when equities struggle, and vice versa. The macro forecast favors bonds in this trade-off: U.S. Treasuries historically have tended to provide attractive risk-adjusted returns in such a “post-peak” environment, while equities have been more challenged.

Valuations and current levels may strongly favor fixed income

Although not always a perfect indicator, the starting levels of bond yields or equity multiples historically have tended to signal future returns. Figure 1 shows that today’s yield levels in high-quality bonds on average have been followed by long-term outperformance (typically an attractive 5%–7.5% over the subsequent five years), while today’s level of the cyclically adjusted price/earnings (CAPE) ratio has tended to be associated with long-term equity underperformance. Additionally, bonds have historically provided these return levels more consistently than equities – see the tighter (more “normal”) distribution of the return outcomes. It’s a compelling statement for fixed income.

Delving deeper into historical data, we find that in the past century there have been only a handful of instances when U.S. equities have been more expensive relative to bonds – such as during the Great Depression and the dot-com crash. One common way to measure relative valuation for bonds versus equities is the equity risk premium or “ERP” (there are several ways to calculate an ERP, but here we use the inverse of the price/earnings ratio of the S&P 500 minus the 10-year U.S. Treasury yield). The ERP is currently at just over 1%, a low not seen since 2007 (see Figure 2). History suggests equities likely won’t stay this expensive relative to bonds; we believe now may be an optimal time to consider overweighting fixed income in asset allocation portfolios.

Price/earnings (P/E) ratios, are another way that equities, especially in the U.S., are screening rich, in our view – not only relative to bonds, but also in absolute.

Over the past 20 years, S&P 500 valuations have averaged 15.4x NTM (next-twelve-month) P/E. Today, that valuation multiple is significantly higher, at 18.1x NTM P/E. This valuation takes into account an estimated increase of 12% in earnings per share (EPS) over the coming year, an estimate we find unusually high in an economy facing a potential slowdown. If we assume, hypothetically, a more normal level of 7% EPS growth in 2024, then the S&P today would be trading even richer at 18.6x NTM P/E, while if we are more conservative and assume 0% EPS growth in 2024, then today’s valuation would rise to 19.2x NTM P/E. Such an extreme level, in our view, would likely drive multiple contraction (when share prices fall even when earnings are flat) if flat EPS came to pass.

We note, however, a crucial differentiation within the equity market: If we exclude the seven largest technology companies from this calculation, then the remainder of the S&P trades close to the long-term average at 15.6x NTM P/E. This differentiation could present compelling opportunities for alpha generation through active management.

Overall, we feel that robust forward earnings expectations might face disappointment in a slowing economy, which, coupled with elevated valuations in substantial parts of the markets, warrants a cautious neutral stance on equities, favoring quality and relative value opportunities.

Equity fundamentals support cautious stance

Our models suggest equity investors appear more optimistic on the economy than corporate credit investors. We use ERP, EPS, and CDX (Credit Default Swap Index) spreads to estimate recession probability implied by different asset classes, calculated by comparing today’s levels with typical recessionary environments. The S&P 500 (via ERP and EPS spreads) is currently reflecting a 14% chance of a recession, which is significantly lower than the estimates implied by high yield credit at 42% (via CDX).

Such optimism is underscored by consensus earnings and sales estimates for the S&P 500, which anticipate a reacceleration rather than a slowdown (see Figure 3). We’re concerned about a potential disconnect between our macro outlook and these equity earnings estimates and valuations. It reinforces our caution on the asset class.

Managing risks to the macro baseline

We recognize risks to our outlook for slowing growth and inflation. Perhaps the resilient U.S. economy will stave off recession, but also drive overheating growth and accelerating inflation that prompts into much more restrictive monetary policy. There’s also potential for a hard landing, where growth and inflation fall quickly.

In light of these risk scenarios, we believe it’s prudent to include hedges and to build optionality – and managing volatility, especially in equities, is attractively inexpensive (see Figure 4). For example, one strategy we favor is a “reverse seagull” – a put spread financed by selling a call option.

Investment themes amid elevated uncertainty

Within multi-asset portfolios, we believe the case for fixed income is compelling, but we look across a wide range of investment opportunities. We are positioned for a range of macroeconomic and market outcomes, and we emphasize diversification, quality, and flexibility.

Duration: high quality opportunities

At today’s starting yields we would favor fixed income on a standalone basis; the comparison with equity valuations simply strengthens our view. Fixed income offers potential for attractive returns and can help cushion portfolios in a downturn. Given macro uncertainties, we actively manage and diversify our duration positions with an eye toward high quality and resilient yields.

Medium-term U.S. duration is particularly appealing. We also see attractive opportunities in Australia, Canada, the U.K., and Europe. The first two tend to be more rate-sensitive as a large portion of homeowners have a floating mortgage rate, while the latter two could be closer to recession than the U.S. given recent macro data. Central bank policies in these regions could diverge, and we will monitor the bond holdings on their balance sheets for potential impact on rates and related positions.

In emerging markets, we hold a duration overweight in countries with high credit quality, high real rates, and attractive valuations and return potential. Brazil and Mexico, where the disinflation process is further along and real rates are distinctly high, stand out to us.

By contrast, we are underweight duration in Japan, where monetary policy may tighten notably as inflation heats up.

While we recognize cash rates today are more attractive than they’ve been in a long time, we favor moving out along the maturity spectrum in an effort to lock in yields and anchor portfolios over the medium term. If history is a guide, duration has significant potential to outperform cash especially at this stage of the monetary policy cycle.

Equities: relative value is key

Although the S&P 500 appears expensive in aggregate, we see potential for differentiation and opportunities for thematic trades. From a macro perspective, there’s also the potential for economic resilience (such as a strong U.S. consumer) to support equity markets more than we currently forecast. Accordingly, we are neutral in equities within multi-asset portfolios. An active approach can help target potential winners.

In uncertain times, we prefer to invest in quality stocks. Historically, the quality factor has offered an attractive option for the late phase of a business cycle (see Figure 5). Within our overall neutral position, we are overweight U.S. equities (S&P 500), which present more quality characteristics than those in other regions, especially emerging markets. Also, European growth could be more challenged than in the U.S., so we are underweight the local equity market despite its more attractive valuation.

We also favor subsectors supported by fiscal measures that may benefit from long-cycle projects and strong secular tailwinds. The U.S. Inflation Reduction Act, for example, supports many clean energy sectors (hydrogen, solar, wind) with meaningful tax credits.

On the short side of an equity allocation, we focus on rate-sensitive industries, particularly consumer cyclical sectors such as homebuilders. Autos could also suffer from higher-for-longer interest rates; as supply normalizes, we think demand will struggle to keep up.

Credit and securitized assets

In the credit space we favor resilience, with an emphasis on relative value opportunities. We remain cautious on corporate credit, though an active focus on individual sectors can help mitigate risks in a downturn. We are underweight lower-quality, floating-rate corporate credit, such as bank loans and certain private assets, which remain the most susceptible to high rates and are already showing signs of strain.

In contrast to corporate credit, attractive spreads can be found in mortgages and securitized bonds. We have a high allocation to U.S. agency mortgage-backed securities (MBS), which are high quality, liquid, and trading at very attractive valuations – see Figure 6. We also see value in senior positions of certain securitized assets such as collateralized loan obligations (CLOs) and collateralized mortgage obligations (CMOs).

Key takeaway

Looking across asset classes, we believe bonds stand out for their strong prospects in the baseline macro outlook as well as for their resilience, diversification, and especially valuation. Given the risks to an expensive equity market, the case for an allocation to high quality fixed income is compelling.