The Changing Longevity Landscape

die young late

Living beyond age 100 may become commonplace.

Now, before I go down this rabbit hole, a disclaimer: Extending lifespan beyond known biological bounds is still sci-fi stuff.

However, also consider modern innovations that were also once considered sci-fi:

  • Airflight (planes/jets/helicopters/jetpacks)
  • Space travel
  • Landing on the moon
  • The International Space Station
  • Driverless cars
  • Mobile phones
  • The internet
  • Lab-grown meat
  • Machine learning
  • Video calls
  • 3D printing
  • Smart homes
  • Underwater exploration
  • Online metaverse
  • Wearable tech
  • DNA sequencing

So with an open mind, let’s dive in.

Aging = A Disease

Research focused on the root causes of human mortality is increasingly pointing towards one common denominator: aging.

Aging? As the cause of mortality? Yes, bear with me.

At it’s most basic level, aging is nothing more than an accumulation of damage: breakages in the machinery of your cells combined with build ups of metabolic waste which lead to the failure of biological systems. With the exception of acute accidents, the most common causes of death (heart disease, cancer, neurological disease/degeneration) all increase as we age.

On June 18, 2018, the World Health Organization even added a new disease code which every country in the world is encouraged to use. The code was MG2A: old age.

Aging From 30,000 Feet:
  • Lifestyle and genetics influence cellular health.
  • Cellular health determines our rate of aging.
  • The process of aging leads to biological misfires, cellular breakdown, and disease/death.

Two Theories of Aging:

While slowing down the process of aging could help in forestalling disease, it’s still unclear to what degree aging can be slowed, paused, or reversed.

As it stands now, there are two basic theories surrounding aging/lifespan:

  1. Biological Limit on Life: According to this theory, humans (along with all other species) have a natural limit to their lifespans that cannot be exceeded. Using mathematical modeling, researchers from the journal Nature Communications predict that after 120 to 150 years of age the human body loses its ability to recover from illness and injury.
  2. Longevity Escape Velocity: Also known as age escape velocity and actuarial escape velocity, this is the situation in which technology extends a person’s life expectancy at a faster rate than they are aging. In other words, the potential for immortality. Some gerontologists believe that the odds of LEV are as high as 50% and that we could learn the answer within the next 15 years.

Regardless of which theory ultimately ends up proving correct, it is quite likely that lifespans will continue to be extended (perhaps dramatically) beyond the averages of today. According to the CDC, the average life expectancy for a female in the US is 80.5, for males it is 75.1.

Odds of living to 100 (with vitality)

Simply making it to the triple digit milestone is currently out of reach for many. Per data from the Social Security Administration, for a married couple where both spouses are 65 years old, there is a 8.7% chance that at least one member of the couple will live to 100.

Now, while the US does have the highest number of centenarians globally (approx. 97,000 people, or 0.03% of the US population), they are a rare bunch.

Getting to 115 is currently a 1-in-100-million proposition. And reaching 130 is a mathematical improbability of the highest order. At least it is right now.

However, for those able to invest in their health and maintain physical and cognitive function over these next 10-15 years, the future is looking bright.

According to Dr. David Sinclair, author of Lifespan and co-director for Biology of Aging Research at Harvard Medical School, “if even a few of the therapies and treatments that are most promising come to fruition, it is not an unreasonable expectation for anyone who is alive and healthy today to reach 100 in good health—active and engaged at levels we’d expect of healthy 50-year-olds today.”

The Science

You may have heard the following:

Genetics load the gun, but lifestyle pulls the trigger.

Studies of family genealogies and identical twins place the genetic influences on longevity at between 10% and 25% which, by any estimation, is surprisingly low. Conversely, your lifestyle accounts for 75%-90%.

In other words: Our DNA is not our destiny, lifestyle plays an outsized role.

With recent advancements in both technology and medicine, our longevity rates may be increasing faster than many realize.

Perhaps the greatest leap forward occurred in 2012 when Shinya Yamanaka discovered what he referred to as the “elixir of life.”

And no, the “elixir” was not a trendy food or supplement. It was the discovery of a process called “reprogramming” – that is, in a crude oversimplified sense: using genome-editing CRIPR technology to revert mature cells into younger cells.

This discovery would earn Yamanaka the Nobel Prize of Medicine.

Following Yamanaka’s discovery, we’ve entered a period of exponential medicine: genome sequencing, RNA transcriptomics, Wnt pathway modifiers, vaccines, liquid biopsies, CAR-T cells, gene therapy, exosomes, and stem cells are just a sampling of the technologies (many of which the world’s billionaires are fast-tracking).

The ability to reprogram cells along with these other interventions could prove revolutionary in delaying biological decline.

For instance, when it comes to cancer, the body is always producing cancer it’s just that our immune system zaps the cancer 99% of the time. Early stage cancers, those in stage 1 and stage 2, are highly curable. It’s when a cancer metastasizes beyond those initial stages that the fight typically becomes more difficult.

In the case of cancer, as opposed to being reactive to the symptoms before it’s too late, there is now proactive screening for 60+ different cancers to catch them in the earlier, more treatable stages.

Proactive care, as opposed to reactive treatment, is the future of healthcare.

Lifespan vs. Healthspan

In a previous blog on the Centenarian Olympics, we discussed the idea of “backcasting” – or reverse engineering – the tasks that you would need to be able to complete at age 100 to maintain independence and how you could begin training for them today. The reason for this is that, for many of us, the goal is not to simply increase the quantity of years lived. Instead, it’s to increase the quality of our years by decreasing the number of years nursing disease.

Between 1950 and 2020 the world population swelled from 2.9B people to 7.8B people. During that same window of time, average (global) life expectancy rose 26 years, from 47 to 73 years of age. While life expectancy has risen, maintaining health, function, and overall quality of life has lagged.

Unlike the average lifespan, which is now 79.3 years in the US, the average healthspan (i.e. period of one’s life that one is healthy) is only 63.1 years old. In other words, roughly 1/5 of an individual’s life is now spent managing end of life morbidity.

With new medical advancements and lifestyle improvements it’s looking more and more likely that there are solutions to close the gap between the quantity of your years (lifespan) and the quality of them (healthspan).

Financial Planning & Playing the Long Game

At wHealth Advisors, we view the traditional definition of “wealth” – your investments, salary, net worth etc. – as a bit limiting and one dimensional. Like the term “success”, true “wealth”… ehmm wHealth… is more nuanced, nebulous, and unique to each of us. What is optimal for me may not be optimal for you.

Therefore, the wHealthy person is the one with a uniquely optimized balance of financial independence, health (mental/physical/emotional/spiritual), rest, and social connection. They are also likely to have sufficient degree of autonomy and purpose in their professional and/or personal life.

All the returns in life – whether in finances, health, knowledge, or relationships – are the product of good decisions being compounded over long periods. Therefore, improving our overall wHealth is not typically something we can change dramatically overnight, it’s incremental.

Final Thoughts

As financial planners, we feel immense responsibility – and gratitude – in applying our technical expertise to empower our clients to be the people, and live the lives, they’ve always dreamed of.

The maxim of “health is wealth” is all too cliché and oftentimes not met with action. Like with finances as is the case with health – the best time to have started investing in it was 10 years ago… the second best time is today.

So, assuming that you could live with vitality to (or beyond!) age 100 – how might that change the way you make decisions today?

Would you make any changes to your current lifestyle?

Would you invest more into (or divest from) certain relationships?

Would you dedicate more attention to any areas of your overall health (mental, physical, emotional, spiritual etc.)?

Would you make different career decisions/transitions?

Would you invest more time, energy, and intention into closing the gap between who you are today and the best version of yourself?

Let us know so we can begin planning for that future today!

The Federal Reserve’s Toolkit + Market Hangover

Federal Reserve

The Federal Reserve’s toolkit consist of two blunt tools: the fed funds rate + quantitative easing. In this month’s contribution we’ll discuss the potential short and long-tail impacts of both.

On Wednesday (5/4/2022), in an effort to bring down rising inflation without disrupting economic activity, the Federal Reserve boosted interest rates by 50 basis points (.50%).

Like downing a Pedialyte following a three-day bender, the markets initially reacted positively. However, nausea quickly set in and the previous day gains were quickly reversed. By the end of the following trading day, ol’ S&P 500 and it’s tech pal Nasdaq were both sitting on the toilet holding trashcans, down 3.6% and 5% respectively. The single worst day for the market since June 2020.

In fact, last week marked the fifth consecutive weekly decline in the S&P 500, it’s longest losing streak since June 2011.

April CPI data released the following Wednesday (5/11/2022) showed another upward inflation surprise (above analyst expectations) and suggests that the deceleration is going to be painstakingly slow.

What’s going on?

In short: A lot.

  • Covid Supply & Demand Constraints: Domestically, although things are beginning to look better, the dust has still not settled from the logjams created by Covid. Internationally, China’s most recent bout of Covid-19 lockdowns has reduced the supply of Chinese exports and dampened demand for imports.
  • Oil Shock: Sanctions against Russia are forcing countries reliant on Russian oil to explore other energy suppliers/solutions which has driven up global oil prices.
  • Inflation: No matter how transitory the Fed believes inflation may be, they’re no longer sitting around and waiting for the situation to rectify itself. They are now deploying their limited arsenal of blunt tools to bring this down.

This last point re: inflation/Fed tools deserves some extra attention.

Federal Reserve: The Bartender

As already mentioned, the primary tools in the Federal Reserve’s toolkit are:

  1. controlling the federal funds rates (which impacts interest rates)
  2. quantitative easing (QE) which introduces new money into the money supply.

In another alcohol analogy, imagine the Fed as our bartender.

Interest rates:

If the bartender wanted to incentivize drinking (helllllllo happy hour!), the bartender could lower the prices which might increase consumption. The drink servers (banks) would let all the patrons (individuals/investors etc.) know that drink prices are down – get ‘em while you can! This is, in effect, what lowering the fed funds rate does for our economy – it lowers the cost of borrowing and incentivizes investment.

Conversely, perhaps the party is really hoppin’ and there’s a line around the corner to get in, the bartender might then increase drink prices (i.e. increase the fed funds rate) to slow down the debauchery (i.e. irrational exuberance).

 Quantitative Easing:

QE is the other strategy that the bartender (Fed) deploys to get a dreadfully boring party (i.e. crashing economy) poppin’ again.

In this scenario, you can only order drinks (i.e. do business) with the drink servers (banks). During happy hour, the bartender notices that the servers (banks) aren’t hawking drinks (lending), they have empty trays. To get them up and active again, the bartender loads up the drink trays (i.e. Fed buys long term securities from the open market) but lowers the amount of alcohol in each cup (i.e. the fed’s asset purchases increase the banks’ reserves which results in lowers yields + more money in circulation).

This action results in the drink servers (banks) being flush with heavy trays of drinks (excess reserves) and incentivized to get back out to doing business (lending).

Ugh, yes – monetary policy is nuanced and there are some obvious holes in these oversimplified analogies but hopefully this is kinda helpful?!

A Recent History of Fed Interventions

While the Fed has deployed it’s influence on interest rates by increasing/decreasing the federal funds rate in the past, this tool had traditionally been reserved to rein in inflation and/or unemployment.

However, beginning with Alan Greenspan following the 1987 stock market crash, Federal Reserve chairs began lowering interest rates for one additional reason besides controlling inflation/unemployment: to proactively halt excessive stock market declines. This “Greenspan Put,” as it became known, acted as a form of insurance against market losses.

Since then, the Fed has intervened with lowering interest rates on a number of occasions to minimize stock market volatility/losses: the savings and loan crisis, the Gulf War, Mexican peso crisis, Asian financial crisis, Long-Term Capital Management (LTCM) crisis, Y2K, dotcom bubble, and 2008 financial crisis.

Quantitative easing (QE), on the other hand, is a more recent monetary policy first deployed by Japan in 2001 to stymie the collapse of their financial market. In the US, QE was deployed following the 2008 crisis in three separate waves: in 2009, 2010, and 2012.

As mentioned earlier, QE is when central banks introduce new money into the money supply. In practice, this is done by central banks purchasing longer-term securities from the open market. This action drives up money supply and encourages institutions to keep lending (and investing!).

While it’s the Treasury that controls the printing of money, it’s the Federal Reserve that effectively decides how much money is created (in the form of actual paper money + credit).

What the Fed is doing now

Most recently, as global financial markets began nosediving due to Covid-19 lockdowns, the Federal Reserve stepped in with a broad array of actions to limit the damage.

First, they reduced the fed funds rate to ground zero (0.0%-0.25%) which brought the cost of borrowing to historic lows. They also pursued quantitative easing (QE) which included large purchases of U.S. government and mortgage-backed securities as well as lending to support households, employers, financial market participants, and state and local governments.

Through quantitative easing (QE), the Fed’s balance sheet has now swelled to nearly $9T (nearly double that following the ’08 financial crisis).

The Hangover

The combination of lower interest rates and $9T of QE is like a shot of adrenaline, or a Red Bull Vodka – it gives an immediate bump but a potentially painful come-down.

At wHealth Advisors, while we’re rationally optimistic that the long-term return potential in the stock market remains strong, there a number of hurdles facing the short/medium term:

  • Increasing National Deficit: The current national debt is approaching $30T. The 2017 Tax Cuts and Jobs Act resulted in record corporate profits and strong stock market performance. However, the cuts essentially 1) borrowed economic growth from the future and 2) are expected to add $2-2.2T to the national deficit over the next six years. The 2017 tax cuts + QE response to Covid-19 have swelled the deficit and put the US on a “fiscally unsustainable” path, to quote the Government Accountability Office (GAO).
  • Tax Hikes Likely: There seems to be little interest in reducing federal expenditures. As such, without extreme austerity, the only other solution to combat rising deficits is increasing taxes (likely impacting both individual/corporate rates).
  • Slower Growth: Economists expect 2.3% GDP growth per year, on average, over the next 10 years, even after accounting for expectations of increased economic activity in the near term. This compares to historical average GDP growth of 3.1% per year since 1948.
  • Muted 10yr Equity Outlook: A lower economic outlook combined with record high equity valuations has many fund companies bracing investors for lower expected returns going forward. Vanguard forecasts US equities to have a 10yr annualized return between 2.0-4.0% and international equities to range between 5.1-7.1%.

 Final Thoughts:

The Fed’s QE actions, creating $9T more or less out of thin air, is somewhat uncharted territory. It will take time to fully understand the ramifications of this. For the time being, we’ve got inflation and a choppy stock market.

In the immediate future, the Fed has made clear that they are willing to increase unemployment to slow down inflation. To do this, the Fed is targeting a 2.25% fed funds rate and aiming to reduce their $9T balance sheet by $1T over next 12 months.

Over the short-medium term, continued stock market volatility will be inescapable. Actively reducing equity allocations in anticipation of, or in reaction to, fed funds rate increases is unlikely to lead to better investment outcomes.

Over the longer-term, investors who maintain a broadly diversified portfolio and use information in market prices to systematically focus on higher expected returns (i.e. exactly what we do for our clients at wHealth Advisors) should be better positioned for long-term investment success.

Resilient financial plans are designed with unpredictable, gloomy outlooks in mind. Please be in touch if you have any questions or concerns regarding your plan’s resiliency for the road ahead.

The SEC Finally Enforces ESG

SEC enforces ESG disclosure

With Earth Month upon us, we’re happy to report one small, incremental bit of progress in finance:

The Securities and Exchange Commission (SEC) will finally enforce ESG disclosure and begin requiring public companies to share their greenhouse gas pollution and climate risks.

Pressure Has Mounted – The SEC Finally Enforces ESG Disclosure

Back in a 2019 blog post we wrote about our key takeaways from three finance-focused climate events we attended.

The events had confirmed our understanding that ESG investing – that is, investing in funds that claim to prioritize environmental, social, and governance (ESG) factors – was subjective and, at best, financial industry greenwashing.” 

Reason: Up until now, the SEC has not required public companies to disclose any ESG metrics. Without metrics, ESG fund managers were forced to make subjective judgement calls about their fund’s holdings (note: unless explicitly stated, ESG funds rarely divested from any specific companies or asset classes). Despite this reality, fund companies marketed these funds as fuzzy, feel-good environmentally-socially-conscious investment solutions.

At the time, the SEC defended it’s position by claiming that ESG metrics were nonmaterial to shareholders/investors.

Since then, and considering that there is now over $40 trillion in assets globally invested in ESG funds, there has been significant pushback from nearly all corners of the investment world. Individual and institutional investors, state pension funds, endowments, and even sovereign wealth funds have all pushed for more ESG disclosure.

Why Do Investors Want More ESG Disclosure?

One possible answer is, for the same reason they want good consistent financial disclosure: They want to be able to understand how companies work, so that they can buy the good ones and avoid the risky ones.

And most of the SEC’s proposal is about that sort of thing: Climate risks can affect a company’s business and financial results, so investors need to understand those risks to understand the business.

In other words, an about-face:

Emissions + climate risks = material information for shareholders/investors

Major Shift

This marks a major shift in how corporations must show they are dealing with climate change.

For the first time ever, the SEC finally enforces ESG and plans to require businesses to outline the risks a warming planet poses to their operations. In fact, some large companies will have to provide information on emissions they don’t make themselves, but come from other firms in their supply chain.

The rules will require companies to:

  • describe what climate-related risks they face and how they manage those risks
  • disclose, if applicable, a “transition plan” to adapt to a warming world, or whether they “use scenario analysis to assess the resilience of their business strategy to climate-related risks,”
  • disclose and quantify the use of carbon offsets
  • disclose how their financials are affected by climate risk

In essence, the SEC is proposing a complex accounting regime for ESG, a legally approved set of Generally Accepted Climate Principles, with its own body of technical standards and its own set of climate attestation professionals.

Takeaway:

While we’re optimistic that these new disclosure requirements will improve ESG investing, do note that it will take time. Implementation will take place between fiscal year 2023 and 2026 (depending on the size of company).

While increased disclosure of public companies is good, the UN’s Intergovernmental Panel on Climate Change’s (IPCC) latest climate report suggested that ESG investing “does not yield meaningful social or environmental outcomes.”

Instead, the report cited, in order to avert the increasingly likely scenario of catastrophic global warming, the world needs stronger government policy and enhanced regulation.

Happy Earth Month. 

How will you do your small part to honor Mother Earth this year?

Let us know!

When Worlds Collide

Micro vs Macro

Investors need to be prepared for when worlds collide. Collisions – whether they be on a macro level (like war, famine, geopolitical strife etc.) or on the micro level (a professional transition, the loss of a loved one, a disability etc.) – can disorient even the most emotionally stable.

In this piece, a contribution from our March 2022 newsletter, we share our thoughts on what we’re seeing from the 30,000ft, global viewpoint. We also narrow our scope and discuss what you – personal finance investors – can do in light of all the noise, volatility, and events that are beyond your control.

The Macro

Russia-Ukraine:

The events in Ukraine are heartbreaking. We’re certainly not qualified to speak about the political implications of this invasion, but anytime there is aggression and loss of life, it is a tragedy.

From a financial perspective, markets had been bracing for a possible Russian invasion for much of February. Leading up to the invasion there was increased market volatility and a drop in the major indexes.

Oil Ban:

Just yesterday, the Biden administration announced an executive order halting all imports of Russian oil.

Roughly 8% of US imports of crude oil and petroleum products came from Russia in 2021, representing just 1% of Russia’s total oil exports globally. However, some US allies have indicated they may follow our lead with similar embargos.

These oil bans will impact global oil supply and inevitably result in gas prices continuing their steady incline (which have already climbed more than 60% this year).

Macro Movers and Market Impact:

Between the growing Russia-Ukraine crisis, continued inflation, rising commodity/metal prices, and the anticipated Federal Reserve interest rate hikes, it’s anyone’s guess just how much corporate profits (and your portfolios) will be impacted.

The image (below) shows how the market has fared during previous global events.

Our advice: Ignore the Macro

As we look ahead, from a personal finance standpoint, we encourage you to not react emotionally (i.e. buying/selling in a panic) based on macro events that are beyond your control. Reacting to events is, in essence, just another form of market timing.

If you flee the market after a major crisis, you are faced with yet another market timing dilemma: when to reenter. In many cases, the decision to reinvest comes after a rebound has already begun, resulting in missed opportunity (think back to March 2020).

Moving in and out of the market can also incur additional costs and have potential tax implications for investors.

The Micro

Instead, we encourage you to focus on the micro – that is, the levers that are within your control:

  • Saving at least 15% (ideally 20%) of income
  • Controlling your household expenses
  • Maximizing tax savings and tax-efficiency
  • Having a globally diversified portfolio for long-term resiliency

Parting Thoughts:

Let us all reflect on how much we do have during these times of crisis. Out of all the hands we could have been dealt, we got ours. We made it through a global pandemic, we have safety/security, and our physiological needs are met (i.e. clean air, food, water, shelter, clothing). Many of us are especially lucky and also have meaningful relationships, connection, and love with friends and family.

To quote Viktor Frankl:

“For the world is in a bad state, but everything will become still worse unless each of us does his best.”

Have gratitude for what you have, ignore what’s beyond your control, and give it your best.

Finances for Fathers: Episode 64 of the Dad.Work Podcast

Dennis McNamara had the opportunity to connect with Curt Storring, the host of the Dad.Work podcast, in a wide ranging conversation focused on finances for fathers.

Some highlights from the finances for fathers discussion:

  • The fundamentals of fiscal fitness and why fathers need to figure this stuff out
  • Finding a balance between time, money and health
  • The return on investment (ROI) of doing men’s work
  • Dennis’ quarantine struggles and doubling down on health protocols to come out the other side stronger
  • Being confident, living with intention and having a more deep and more engaged relationship with those around you
  • The importance of an emergency fund
  • And way more depth than you’d usually find in a conversation about finances for fathers!

Dennis’ Dad.Work Bio:

Dennis McNamara is a dad to a three year old, a husband to his college sweetheart, and a comprehensive financial planner at, and co-founder of, wHealth (pronounced “wealth”) Advisors in Red Bank, NJ.

After graduating university in 2011 Dennis was teetering on a mental and emotional breakdown. With $7,000 to his name, Dennis spent a year exchanging his physical labor for a roof over his head on permaculture farms in Portugal and Costa Rica. After learning more about himself through these experiences he dedicated himself to rigorously pursuing purposeful work instead of job titles.

Since then, he’s been the US Director of Business Development at a social enterprise firm, a financial analyst at the private wealth management arm of Goldman Sachs, and most recently – in 2019 – made the leap to establish his own financial planning firm – wHealth Advisors.

Dennis has been mentioned in Forbes, US News & World Report, and Financial Advisor Magazine. He holds the financial designations of Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC), Accredited Investment Fiduciary (AIF), and is a Certified Student Loan Professional (CSLP).

Outside of wHealth Advisors he is passionate about compounding healthy habits so that he can show up as the best version of himself – whether that be as a parent, a partner, or a professional.

You can follow along his Instagram @thewhealthadvisor or find more about the work he does with wHealth Advisors at whealthfa.com. There, you can also subscribe to his monthly newsletter which is as much about finances as it is about wellness, personal optimization, and taking meaningful steps to upgrading your life.

Streaming:

The podcast streams on Apple, Spotify, or directly from Dad.Work.

The 101 on I Bonds

Before diving into a 101 on I Bonds, let’s first acknowledge that they’re the most boring investment that we’re recommending to… just about everyone*. If inflation is something that’s top of mind, they may be a good addition to your portfolio. For more on our thoughts on inflation, see our piece from a few months back.

What are I bonds?

I Bonds are a type of U.S. savings bond designed to protect the value of your cash from a rise in inflation. They are meant to give investors a return + inflation protection on their purchasing power. An I bond earns interest monthly from the first day of the month in the issue date.

Interest is paid in two components: a fixed rate of return plus a semi-annual variable rate which fluctuates with inflation.

How is interest calculated?

Currently, I bonds provide an interest rate of 7.12%, and this rate is good through April 30, 2022. A portion of this rate is tied to inflation, so the rate adjusts every six months, on May 1 and November 1.

How do I bonds work?

When you purchase an I bond, you pay the full face value of the bond. Bonds can be purchased two ways: paper I Bond certificates or electronically registered I bonds through the TreasuryDirect.gov website.

I bonds earn interest each month, and the interest is compounded every six months. However, you don’t get access to the interest until you cash out the bond. Interest that you earn gets added to the value of the bond twice per year.

How much can I purchase?

Investors can buy up to $10,000 worth of I bonds annually through the TreasuryDirect website. In addition, you can purchase another $5,000 by applying your federal tax refund towards a paper certificate purchase. For instance, a family of four would be able to purchase $40,000 in I bonds annually via TreasuryDirect.gov, and up to an additional $5,000 (per SSN, per year) if they had a federal tax refund in at least that amount.

When do I bonds mature?

I bonds have a maturity of 30 years, so you can earn interest on them for 30 years. NOTE: You cannot cash out of your I bond during the first 12 months of ownership. If the bond is cashed out between years 1 and 5, the most recent three months’ worth of interest is forfeited.

Do I have to pay taxes on I bonds?

I bonds are exempt from both state and local tax, but you do have to pay federal tax on the interest. However, if used to pay for college, the interest is completely tax exempt. For reporting taxes, there are two options: report interest annually or at maturity when the bond is sold.

How do I cash in my I bond?

This will depend on whether you own a paper bond or an electronic bond:

  • Paper Bond
    • Bring physical bond and proof of identity to a bank or financial institution that will cash it in (recommendation: call in advance, not all institutions accept).
  • Electronic Bond
    • Can cash out directly through the TreasuryDirect website.

Should I bonds be a part of my portfolio?

Although purchase amounts are quite limited, there are a few advantages to I bonds that make them a consideration for any portfolio:

  • Inflation protection
  • Less volatile than equities
  • Essentially no default risk, they are backed by the US Treasury
  • Interest is exempt from state and local taxes
  • Interest is exempt from federal tax if bonds are used to pay for college

*Disclosure: Everyone’s situation is unique. Please speak with a financial professional before following any of this advice.

New Year’s Resolutions

For the 50% of your that feel like Michael Scott, this may not be for you.

However, If you’re one of 31% of people planning to make a New Year’s resolution this year, or one of the 19% that are still undecided, now is a great time to reflect on the previous 11 (almost 12) months and begin setting some intentions for the year ahead.

Some New Year’s Resolution stats:

The most popular resolutions for 2021 are exercising more and improving fitness (50% of participants), losing weight (48%), saving money (44%), and improving diet (39%).

  • Of those who make a New Year’s resolution, after 1 week 75% are still successful in keeping it.
    • After two weeks, the number drops to 71%.
    • After 1 month, the number drops again to 64%.
    • After 6 months, 46% of people who make a resolution are still successful in keeping it.
    • After 1 year, 35% kept all their resolutions, 49% kept some of their resolutions, and only 16% failed at keeping any of their resolutions.

So, looking out to 2022, what are the steps you can take to increase the likelihood of being part of the 35% cohort that keeps all of their resolutions?

How to make (and keep!) your New Year’s Resolution

A recent NYT article by Jen Miller provides some helpful guidance on this topic:

“Your goals should be smart — and SMART. That’s an acronym coined in the journal Management Review in 1981 for specific, measurable, achievable, relevant and time-bound. It may work for management, but it can also work in setting your resolutions, too.”

  • Your resolution should be absolutely clear. “Making a concrete goal is really important rather than just vaguely saying ‘I want to lose weight.’ You want to have a goal: How much weight do you want to lose and at what time interval?” said Katherine L. Milkman, an associate professor of operations information and decisions at the Wharton School of the University of Pennsylvania. “Five pounds in the next two months — that’s going to be more effective.”
  • This may seem obvious if your goal is a fitness or weight loss related one, but it’s also important if you’re trying to cut back on something, too. If, for example, you want to stop biting your nails, take pictures of your nails over time so you can track your progress in how those nails grow back out, said Jeffrey Gardere, a psychologist and professor at Touro College of Osteopathic Medicine. Logging progress into a journal or making notes on your phone or in an app designed to help you track behaviors can reinforce the progress, no matter what your resolution may be.
  • Achievable. This doesn’t mean that you can’t have big stretch goals. But trying to take too big a step too fast can leave you frustrated, or affect other areas of your life to the point that your resolution takes over your life — and both you and your friends and family flail. So, for example, resolving to save enough money to retire in five years when you’re 30 years old is probably not realistic, but saving an extra $100 a month may be. (And if that’s easy, you can slide that number up to an extra $200, $300 or $400 a month).
  • Relevant. Is this a goal that really matters to you, and are you making it for the right reasons? “If you do it out of the sense of self-hate or remorse or a strong passion in that moment, it doesn’t usually last long,” said Dr. Michael Bennett, a psychiatrist and co-author of two self-help books. “But if you build up a process where you’re thinking harder about what’s good for you, you’re changing the structure of your life, you’re bringing people into your life who will reinforce that resolution, then I think you have a fighting chance.”
  • Time-bound. Like “achievable,” the timeline toward reaching your goal should be realistic, too. That means giving yourself enough time to do it with lots of smaller intermediate goals set up along the way. “Focus on these small wins so you can make gradual progress,” Charles Duhigg, author of “The Power of Habit” and a former New York Times writer, said. “If you’re building a habit, you’re planning for the next decade, not the next couple of months.”

New Year’s resolutions not for you?

Consider setting some basic intentions.

11 ways to make the most of 2022 (written by Diego Perez, @yung_pueblo):

  1. let yourself change
  2. make rest a high priority
  3. say no without feeling bad
  4. stop jumping to conclusions
  5. do not rush important things
  6. build your own idea of success
  7. make more time for key friends
  8. appreciate the small steps forward
  9. stay aligned with your highest goals
  10. take the risk when your intuition says yes
  11. build with people who are open to growth

Godspeed and good luck.

End of Year Planning

Some end-of-year housekeeping and planning strategies to close out the year on a good note:

Review your portfolio:

  • with upcoming transitions in mind. Are allocation changes needed to begin preparing for an upcoming milestone (i.e. retirement) or transition (i.e. job change, relocation etc.)?
  • for (in)appropriate risk. Has your risk tolerance or risk capacity (i.e. how much risk you can take without interrupting other goals/priorities) changed? Can you now take on more/less risk?
  • for rebalancing opportunities. Is your portfolio properly allocated based on a target model? Or has your overall allocation drifted due to outsized gains/losses?
  • for gain/loss harvesting. If you invest in a taxable brokerage account, and depending on your tax bracket, there may be opportunities to realize additional capital gains (while in a lower tax) bracket or offset capital gains with losses.

Required Minimum Distributions (RMD)

  • What they are: The minimum amount that must be withdrawn from pre-tax retirement accounts annually once reaching age 72. This does not apply to post-tax Roth IRAs.
  • Inherited IRAs: Have their own rules.
  • Deadline: All RMDs must be taken by December 31st.

Contribute to a Roth or Traditional IRA

  • Roth IRAs: Contributions grow tax-free and qualified distributions come out tax free. Income limitations apply.
  • Traditional IRA: Contributions may be fully, partially, or non-deductible, depending on your income and circumstances.
  • Annual contribution limit (per person): For 2020, 2021, and 2022 is $6,000, or $7,000 if you’re age 50 or older. This limit applies to all IRAs. Example: An individual could fund a Roth IRA with $6k, or fund a traditional IRA with $6k, or fund each with $3k. You (or your spouse) must have taxable income in order to make a contribution.
  • Deadline: You can make 2021 IRA contributions until April 15, 2022.
  • Backdoor Roth: Depending on your circumstances, and for those who exceed the contribution/deduction income limits, you may be eligible to make a “backdoor” Roth contribution. Read more about it here and be sure to do it under the guidance of your financial planner and/or tax advisor.
  • Roth Conversions: If you are currently in a low tax bracket and expect your tax bracket to increase in future years, you may consider converting some pre-tax funds to your post-tax Roth. Essentially, paying taxes now so that your retirement funds can grow tax-free into the future. Deadline: 12/31/2021.

Charitable Donations

  • Deadline: All 2021 cash/non-cash donations must be completed by December 31st.
  • Deduction: Those that do not itemize their taxes can still deduct donations: up to $300 for single filers and $600 for joint filers.
  • Donor Advised Funds: Gifting appreciated stock to a Donor Advised Fund avoids recognizing capital gains and potentially pre-funds future year gifting.
  • QCDs: If over age 70.5, you can avoid recognizing IRA RMD income by directing some/all of your distribution to go directly to charity via a Qualified Charitable Distribution.

All advice listed here is for informational purposes. Please consult your financial planner or tax advisor before implementing.

The Role of Alternative Investments in Your Portfolio

Alternative Investments

For decades, pundits have taken a stab at writing the obituary for the traditional 60/40 portfolio (i.e. 60% stocks/40% bonds).

At first glance, this seems laughable. Over the last 90 years, a traditional 60/40 portfolio returned over 8% per year – like the S&P 500 which returned 9.5% over that period – but… with 40% less volatility!

However, these days, when accounting for historically low interest rates and rising inflation (which may or may not be transitory), the 60/40 bears may have their strongest case in recent memory.

This then begs the question: what now?

For a variety of reasons, there is still plenty of merit to 60/40 portfolios. However, we do appreciate the potential of certain investments to increase portfolio diversification. For investment opportunities beyond that of traditional stocks and bonds, we classify these in the portfolio as Alternative Investments (or, alts).

What are alternative investments?

Alts are essentially a catchall for any investment besides stocks, bonds, and cash (or cash equivalents). They provide an opportunity to gain exposure to areas not traditionally captured in a stock/bond portfolio that may or may not offer above market returns. Some of the more common types of alternative investments include:

  • Real Estate – crowdsourced or private commercial/residential property ownership, private/public Real Estate Investment Trusts (REITs)
  • Commodities – such as crude oil, corn, soy, wheat, and coffee
  • Precious metals – such as gold, silver, and lithium
  • Cryptocurrency – purchasing coins, NFTs, or investing in public companies at the fore of crypto/blockchain/web3
  • Private Equity – locking up funds with a private equity firm to invest in non-public, private companies often via leveraged buyouts and/or venture capital
  • Collectibles – tangible assets such as art, fine wine, and vehicles

What are the benefits of alternative investments?

  • Diversification. This is the primary benefit. Alternative investments are typically a counterweight to conventional stock/bond assets and may perform well even if stock/bond returns are poor due to low correlations.
  • May have greater upside. Alternative investments, often due to their concentrated positions, can potentially offer outsized returns compared to traditional mutual fund/ETF investments.
  • Expertise can be an edge. An example of this would be an experienced real estate fix-and-flipper who can spot an opportunity and has the team/know-how to carry out the vision. Another example might be an art collector that knows how to spot undervalued works of art. All this to say, unique skills/interests in niche areas can set you apart.

What are the drawback of alternative investments?

  • Illiquidity. Many alternative investments may be illiquid and difficult to exit. In the case of most non-tradable private REITs, your investment might be tied up for 7+ years before you can access the funds.
  • Lack of regulation. Reporting requirements for many alternative investments are minimal compared to those of public companies in the stock market. This can create difficulty when valuing the alt’s underlying assets, which can make pricing and price transparency less straightforward.
  • Investment platforms can fail. Many online platforms for alternative investing are start-ups that may or may not succeed. You need to understand how your funds will be handled should the company fail or be acquired.
  • Investment minimums may apply. High investments minimums are common and may make certain alts impractical/inaccessible for smaller investors.
  • High fees. Alternatives can have many fees that are unique to the investment. Private equity typically charges large asset management fees. Real estate can have many unplanned repair/maintenance/legal expenses. Wine collecting through Vinovest charges 2.5%-2.85% for climate-controlled and insured wine storage! Compare those fees to traditional index funds which have small expense ratios, no purchase fees, no redemption fees, and no 12b-1 fees.
  • Complexity. Alternative investments are often complex instruments and may require a higher level of due diligence. If you are considering alternative investments, you also want to be sure that you research and understand the potential tax implications associated with them.

Takeaway

Ultimately, investors need to be aware of both the upside and downside potential of any investment. The suitability of any given alternative investment should be considered against an individual investor’s:

  1. time horizon
  2. appetite for risk
  3. ability/capacity to take on outsized risk, and
  4. any unique skills/interests that strengthen the odds of making a profitable investment.

 Federal Tax Proposal – A Summary

TAX

The Biden administration recently announced a number of tax proposals to fund new government investments. The current version may not be the final form, but many of its features are likely to become law. Below is a summary of what is most likely to impact families.

Income Tax Rates

  • Increase in the marginal tax rate: The top marginal tax rate would increase from 37% to 39.6% for income greater than $400,000 if you file as single and $450,000 if filed as married filing jointly (MFJ). These changes would go into effect for the 2022 tax year.

 

  • Increase in the top long-term capital gains rate: The highest marginal long-term capital gains rate would increase from 20% to 25% for incomes higher than $400,000 (single) or $450,000 (married filing jointly). The change in rate to 25% would be effective as of September 13, 2021 unless a sale was already under contract prior to that date.

 

  • S Corporations: Business profits from S corporations will be subject to a 3.8% surtax for taxpayers with Modified Adjusted Gross Income (MAGI) above $400,000 (single) and $500,000 (MFJ).

 

  • Section 199A QBI Deduction: To be phased out for those earning over $400,000 (single) or $500,000 (MFJ).

 

  • Additional 3% surtax on ultra-high income: An additional flat tax of 3% would be applied on any MAGI above $2,500,000 for individuals filing as married filing separately or above $5,000,000 for MFJ or single.

Retirement Strategies and Plans

  • Roth conversions will no longer be allowed for high income individuals:
    • New rules would prohibit all Roth conversions for taxpayers in the highest ordinary income tax bracket (39.6%) beginning January 1, 2032.
    • Roth conversions of after-tax funds will be prohibited for ALL taxpayers beginning January 1, 2022. This would eliminate backdoor Roth as a planning strategy.

 

  • Restricts contributions to IRAs or Roth IRAs for high net worth individuals if:
    • Taxable income is greater than $400,000 (single) or $450,000 (MFJ) AND the total value of IRA and defined contribution plans exceed $10,000,000.
    • The limitation does not apply to contributions of employer plans such as a 401(k), SEP IRA, or pension plan.

 

  • Change in Required Minimum Distributions (RMD) for individuals whose aggregate retirement account size exceeds $10,000,000:
    • Imposes RMDs on large retirement account balances if:
      • Taxable income is greater than $400,000 (single) or $450,000 (MFJ), AND
      • The total value of IRA and defined contribution plans exceed $10,000,000

 

  • If combined balance is between $10,000,000 and $20,000,000, the owner must distribute 50% of the amount of the account balances in excess of $10,000,000.
  • If the balance is greater than $20,000,000, the RMD would be 100% in excess of $20,000,000, plus 50% of any amount over $10,000,000.

Additional Changes

  • Wash Sale rule: This will be expanded to include cryptocurrency and other digital assets, commodities, and foreign currencies.

 

  • Estate Tax Exemption would be reduced: Would revert back to $5,850,000 per person and $11,700,000 per couple. This was scheduled to happen in 2026, but under the new proposal, it would get accelerated to 2022.

 

  • Increased child tax credit and monthly advance payment extended until 2025: Monthly advance payments of $250 per qualifying child aged 6-17 and $300 per child below the age of 6 would continue.

 

  • Assets held within grantor trusts may become part of taxable estate: This would potentially eliminate the benefit of certain estate planning techniques, namely Irrevocable Life Insurance Trusts (ILITs).

S&P Gains 100% from March 2020 Low: Now what?

S&P 500 marks 100% gain since March 2020

After hitting “rock bottom” following global shutdowns related to the coronavirus in March 2020, the S&P 500 has roared ever since delivering a 100% return. You read that right: 100%.

SIDEBAR: Someone out there is highlighting this past 18 month window in their investing masterclass, illustrating that in times of financial crisis, the best action for your portfolio is inaction. Don’t sell. Be patient. Ride it out. But we digress…

What now?

After living through the shortest bear market in history, we’re now witnessing company valuations being pushed to new heights only surpassed by the dot-com bubble of the late 1990s. While this may sound unsettling, also consider that with interest rates so low, it would be equally worrying if equities weren’t expensive (reason: low interest rate yields push investors to equities).

So, at this juncture and with cash to invest, should you a) lean towards low interest fixed income that’s not (or barely) keeping up with inflation, or b) buy potentially overvalued equities? Pick your poison.

From our vantage point, choosing low interest debt or expensive equities is not an either/or proposition – everything comes back to diversification. Instead of chasing returns, we prefer the approach of aligning portfolio decisions to your unique life: your upcoming cash needs (and/or life transitions), your tax bracket, and your tolerance + ability to take risk.

While we’re not ones for reading the tea leaves, we did appreciate reviewing the latest JP Morgan Long-Term Capital Market Assumptions report. In it, they had a stark quote that stuck out:

“The price for dealing with the pandemic today comes at the cost of tomorrow’s returns in many conventional asset markets.”

Not exactly a glass half-full outlook for the road ahead.

The biggest challenges outlined by the report included:

  • Whether governments/business can rise to the climate challenge
  • Increased sovereign debt balances and an expectation for fiscal stimulus to continue
  • Stagnating globalization, companies shortening their supply chains
  • Era of US “exceptionalism” possibly coming to an end, leading to a weaker dollar

While we certainly believe that all challenges present opportunities, we feel equally strong that investors should prepare for muted annual returns over the next decade. We touched on this topic not long ago.

According to the same JP Morgan LTCMA report, over the next 10-15 years, inflation is anticipated to flatten at an overall rate of 2.0%. This is a tough pill to swallow when the same report projects compound return rates for the same period to be 1.10% for cash, 1.50% for intermediate Treasuries, and 2.50% for US investment grade corporate bonds.

For equities, the LTCMA report outlined the following predictions for the next 10-15 year investment time horizon:

  • 4.10% for US Large Cap
  • 4.60% for US Small Cap
  • 6.20% for US Value
  • 6.50% for US REITS
  • 5.20% for Euro equities
  • 6.10% for UK equities
  • 5.10% for Japanese equities
  • 6.80% for emerging market equity

Compare these expected returns to the 10% average annual return that the stock market has delivered over the last century. Not ideal.

Instead of guessing which asset class will perform best, or searching for the next Amazon to invest in, legendary investor and founder of Vanguard, John Bogle (who’s 3-fund “boring” portfolio outperformed the largest endowments in 2020, yet again), said it best:

“Don’t look for the needle in the haystack. Just buy the haystack.”

As evidence-based investors, we wholeheartedly agree with this approach.

Beware of Financial Scams

Scam Alert

A personal contact shared a story with us regarding their friend who recently fell victim to an online gift card scam.

The friend received an email from “Target” and was prompted to provide certain information to “verify their gift cards.” Unfortunately, the friend fell for the scam and within a few days had money withdrawn directly from their bank account. The impacted individual is now in the process of working with their bank to recover the stolen funds.

The State of Fraud

Scamming shows no signs of letting up. In its most recent report from the Internet Crime Complaint Center, the FBI saw the largest number of complaints, and the highest dollar losses, since the center was established 20 years ago. According to the FBI, the costliest scams involved business email compromise, romance or confidence fraud, and mimicking the account of a person or vendor known to the victim to gather personal or financial information.

How to avoid

  1. Beware of suspicious email address and fake invoices/attachments: Fraudsters are masters of deception. It’s not uncommon for them to send emails from addresses that might look familiar to you but which contain one spelling difference, or end in .net instead of .com. Never open links or attachments from email addresses that are unfamiliar. Additionally, if you receive a link or attachment that you weren’t expecting from what appears to be recognizable/legitimate email address, it never hurts to send a quick call or text to the sender to confirm.
  2. Ignore scammers pretending to be from the government: Most of us have probably received one of these phone calls. Someone reaches out on a phone call claiming to be from the IRS. In some cases, most recently, the caller will claim you are eligible for an “additional stimulus check.” In others, they’ll say you owe money and will warn that non-payment will result in legal recourse and penalties. Take note: the IRS will never make first contact via a phone call or request payment details for money-owed over the phone. If you receive a call, simply hang up the phone. The same goes for calls from the Social Security Administration and other government organizations.
  3. Be aware of the Social Security scam: Also done via phone call, the caller says your Social Security number has been linked to a crime involving drugs and/or sending money out of the country illegally. They inform you that your Social Security number is blocked and that by simply confirming your SSN and paying a small fee, it can be reactivated. Again: Hang up! The Social Security Administration will never call you on the phone and ask for your Social Security number.
  4. Scammers will tell you how to pay: All successful scams entail coercing the victim to part with sensitive information or to pay the scammer. Scammers may insist that you pay by sending money through a money transfer company. Others may suggest putting money on a gift card and then giving them the number on the back. Some will send you a check (that will later turn out to be fake), tell you to deposit it, and then send them money.
  5. Don’t fall for online pop-up warnings: Tech support scammers may try to lure you with a pop-up window that appears on your computer screen. It might look like an error message from your operating system or antivirus software. It may also use logos from trusted companies or websites. The message in the window warns of a security issue on your computer and directs you to call a phone number to get help. Simply ignore. If you are unsure of whether the message was legitimate, you can use your antivirus software to run a scan or contact the soliciting organization directly.

What to do if you are scammed

Anyone can fall victim to these scams. If you have paid someone, call your bank, money transfer app, or credit card company and see if they can reverse the charges. The Federal Reserve Board notes that if you report the fraud within two business days, liability is limited to $50. If you report it after that, you could face liability of up to $500, and if you report it after the 60-day window, subsequent fraudulent charges can wipe out your account entirely.

Final thoughts

Whether online or via phone, stay vigilant. Avoid clicking on suspicious links, and never give out personal information to a stranger over the phone. For online accounts, steer away from using short passwords which can be easily hacked by password cracker software. Instead, use strong passwords that are at least 12 digits long and contain numbers, letters, special characters, and a mix of lowercase and uppercase letters.

If you know someone who has been impacted, Identitytheft.gov is a great resource for mapping out a recovery plan.