Dickmeyer Boyce Financial Management - Wisconsin

Seeking investment diversity? Be mindful of today's S&P 500 (and associated index funds).......

This past Monday (July 8th), the published a revealing article regarding today's S&P 500: "The S&P 500 Isn’t as Diverse as It Used to Be. Here’s Why that Matters".

The article highlights and compares several important facets of 2024’s S&P 500 index to that of the 1970s 🕺: concentration, interest rate sensitivity, dividend yield, valuation and global correlation.

Consider these findings…..

1970s S&P 500

➡️ Concentration: Industrials & Materials sector made up 26% of the index.

➡️ Dividend yield: 4.11%

➡️ Global correlation: 0.24

➡️ Shiller CAPE: 13.5 (CAPE = Stock price divided by 10-yr average inflation adjusted earnings)

2024 S&P 500

➡️ Concentration: Information Technology & Financials make up 42% of the index w/ tech representing 29 percentage points of that figure.

➡️ Dividend yield: 1.45%

➡️ Global correlation: 0.70(ie, much higher correlation to global indices)

➡️ Shiller CAPE: 30+

THE MESSAGE?

⚠️ The S&P 500 isn’t providing the same amount and type of diversification it once did (re: global correlation, concentration).

⚠️ The S&P 500 is much more interest rate sensitive than it used to be (Financials and Information Technology are interest rate sensitive sectors).

⚠️ Investors are paying a steep price to buy the S&P 500 index (re: Shiller CAPE) at a time the index is much more sensitive to rates.

⚠️ The index has lost a significant amount of its buffer to market volatility with its much lower dividend yield (dividends lower the volatility of stocks by mitigating capital losses).

How well is your portfolio mitigating these risks?

Can you “spot” 🔎 the differences?……..

It can be difficult to distinguish between financial advisory compensation models, and we don’t always make it easy to do so. Certainly, each model has its own set of advantages & disadvantages to consider.

Understanding these considerations and their impact can make a BIG difference in the management of your wealth.

How well do you understand these differences and how they might affect your financial outcomes?

Not all business posts should be “all business”, but all business should start with the proper greeting……
.......Come and get yourself properly greeted at Dickmeyer Boyce Financial Management.

Paradigm Shift……

A concept in the philosophy of science introduced by Thomas Kuhn; American physicist and philosopher. Kuhn used the famous duck 🦆- rabbit 🐇 optical illusion to show how a shift in perspective could result in seeing things in a new, different way.

Among the many challenges the transition to preferment (aka, retirement) presents, is the likely need to change the way we view 🔎 our retirement investments and the role they play.

It seems simple enough……I’ve retired and now I need to replace my work income with some combination of investment income and secure income (Social Security, pension, supplemental income, etc).

Here’s one ideal outcome for you:

Investment Income + Social Security + Pension + etc > retirement living expenses.

If so, no need to touch investment principal until the government says so: Required Minimum Distributions (RMDs).

WHY THE CHALLENGE?

We’ve been conditioned our entire working 💼 life (40+ years for some) to focus primarily on growing our wealth. Our benchmarks for evaluating results? The S&P 500, Nasdaq, current out-performers like Nvidia (up 219% YTD), Meta (+170%), Amazon (+64%), and of course the neighbors, co-workers and other peers.

We’ve also lived a life that has conditioned many of us to strive for more, better, bigger, greater, etc.

Once we retire though??

For most of us though, the game changes and a PARADIGM SHIFT is necessary. We’re now relying on all that we saved and grew over our working life to fund our retirement life.

Generally, we need to generate income & protect principal. And in years like 2023 where we’ve seen strong investment returns concentrated among a relatively small number of stocks, that paradigm shift is even more challenging.

So, what do you see……..a rabbit or a duck?

It’s one of the most commonly asked questions at this most wonderful time 🎅🏼 of the year……..

Should I do a Roth conversion?

With 23 trading days left in 🗓️ 2023, time is wearing thin to get a Roth conversion completed.

What is a Roth conversion?

In a simple sense, it is converting money that you have saved on a pre-tax basis (i.e., Rollover IRA, traditional IRA, 401k) to an after-tax Roth-IRA account. You pay ordinary income taxes on the converted amount for the benefit of those converted funds becoming tax exempt (no taxes paid for qualified distributions).

What are the factors to consider? There are many and they vary for each individual…….

🎁 What are your legacy objectives? Roth-IRA’s are among the most efficient
and effective ways to leave an inheritance.

🎁 What is your expected income? Lean income years can be a great time to
convert as the cost to do so (income taxes) is lower.

🎁 Where are you in your career? Younger professionals who anticipate a
growing income (and therefore, taxes) might be well served taking advantage
of these conversions now.

🎁 Payback. You might be surprised at the payback period for a Roth
conversion. This payback may or may not justify your decision.

🎁 Retirement income flexibility. How much diversification do you have in
account type (i.e., brokerage, 401k, IRA) and could more tax-exempt savings
(Roth) help to lower expenses in retirement (Medicare premiums, income tax,
Social Security taxes).

Before you take advantage of this potential stocking stuffer 🧦 strategy, please do your homework to assure that it makes sense for you!

To which mentality do you subscribe........

Your lifestyle 👨‍👩‍👧 objectives drive your financial needs.

OR

Your financial means 💰 dictate your lifestyle.

Feel like you’re missing out on 2023 market returns? You might need to peel back the onion…….

One of the most watched stock indices is the S&P 500. This market-cap weighted index tracks the price performance of the 500 largest publicly traded companies. Through Friday October 20th, it is up 11.47% 📈 on a total return basis (factoring in dividend payouts). That’s a great return!

BUT, if you peel the onion back, specifically 7 layers, a different story unfolds. If we were to remove “The Magnificent 7” from the S&P 500’s total return calculation, it would be up just 0.6%. Who are these “Magnificent 7” stocks:

Google’s parent company, Alphabet

Amazon

🍎

Facebook parent, Meta

Microsoft

NVIDIA

Tesla 🚗

Together these 7 companies make up 30% of the S&P 500 and an ever more outsized portion of its return so far.

These concentrated returns tell a much deeper story. If you’re an investor who values broad diversification, you might not be missing out as bad as headline indices like the S&P 500 would have you believe.

We are already in the 4th Quarter 🗓️ of 2023……

This is a very important time of the year, and for more reasons than needing to figure out your Halloween 🧛🏿 costume and Holiday travel plans. But, please work on those too.

October is a great month to get started on taking advantage of key year-end tax planning strategies, like:

🎃 Maximizing your contribution to a 529 College Savings Plan and taking advantage of any state tax deductions or credits in doing so.

🎃 Deferring income by maximizing your tax deferred contributions to a 401(k), 457(b) or 403(b) plan.

🎃 Completing Roth Conversions (by 12/31/2023) and planning for the funding of any Roth-IRA, Traditional-IRA and Health Savings Account (HSA) contributions (by 4/15/2024).

🎃 Taking advantage having met your health insurance deductible by scheduling any medical appointments or procedures

🎃 Using all of your Flexible Spending Account funds. Remember, these funds expire at the end of the year

🎃 Tax loss harvesting. Take advantage of any losses in your taxable investment accounts (i.e., brokerage) by using them to offset any large capital gains.

Get a jump start on your year-end tax planning! Message me for a checklist.

“The only value of market forecasters is to make fortune-tellers 🔮 look good” (Warren Buffet).

The temptation to time ⏲️ your investments in the stock market is very real, and at the same time, very dangerous. If we’re honest, us Financial Advisors, with all of our supposed knowledge and experience, are tempted by it as well.

There has been talk of recession since the Fed began increasing rates back in March of 2022. Most economists got the timing of that wrong. While we are absolutely one day closer to the next recession, some macroeconomic indicators show that it does not appear to be imminent. Fear of recession often fans the flames 🔥 of market timing.

But consider these stats for the 10-year S&P 500 bull market run from 03/10/2009 to 03/08/2019 (MFS.com):

🤔 16.5%: Average annual rate of return

🤔 2,517: Number of trading days over those 10 years

🤔 8.6%: Average annual rate of return if you missed the 20 best days on a basis
of % gain

🤔 0.80%: The percentage (20 divided by 2,517) of trading days over this period
which, if missed, would reduce your return by almost 50%

Could you have timed those 20 trading days? If so, you’re in the wrong profession……you should be a Fortune Teller .

40% of Americans 65 and older rely on this source for 50% or more of their income……..

What is Social Security.

Why is Social Security so important and why should we be paying attention?

For many of us, Social Security will be the only source of retirement income designed to keep pace with inflation 📈. This year beneficiaries received an 8.7% increase. In 2024, this increase is expected to be around 3%.

It has an estimated INSOLVENCY date of 2034.

Should congress 🏛️ not act to shore us this entitlement program, beneficiaries could expect to receive 80% of their scheduled benefits at that point.

That would potentially have a major impact for many of us.

Are you factoring this potential change into your retirement income plan? How?

What’s the best advice 🗣️ you have ever given and received?

Me……..

Given: Have some patience.

Received: Have some patience.

I’ve received that advice much more than I’ve given it. And as a Financial Advisor, we’re often emphasizing patience.

What about you?

And that's clearly a Rolex with a Hermès band.

Avoiding marital strife…….

Today’s has an article that highlights how household Spending Caps can help couples manage through otherwise contentious 🗣️ money issues.

How?

By reviewing existing household spending and then having each partner developing a number, a cap, below which either partner can buy 🛒 whatever he or she wants - no questions, no challenges, no drama.

I’m not sure I completely agree. There may need to be a cap on the number of times the “purchase cap” is used in a given month. BUT, if it helps to generate some dialogue and collaboration on managing household wealth, why not give it a try?

Would this work for you?

Where’s the…………Recession?

Up until this month, the had raised rates at 10 consecutive meetings driving 🚀 its benchmark rate to between 5 and 5.25%......BUT, economic growth and pricing pressure remains fairly resilient.

So, what gives?

Consider the following factors and their impact:

🤔 Federal Stimulus🏦 + Household Saving → The U.S. government pumped nearly $2 trillion in stimulus to individuals and families who were also saving money during the Covid pandemic. That’s a mountain of savings.

🤔 Wages → Real wages grew 4% in 2020 after years of barely keeping up with inflation. Real disposable income has subsequently averaged almost $2.5 trillion more per month over the last 3 years versus the 10 year period ending in 2019. Couple that growth with the Covid stimulus and savings, and you have very well funded U.S. households.

🤔 Fiscal Policy → Over the past three years Washington has passed spending legislation ($1 trillion infrastructure package, CHIPS & Science Act) that has helped bolster the economy.

🤔 Delayed Rate Impact → It can take 12-18 months for rate increases to have broad economic impact. Some estimate that the first 2/3rds of Fed rate increases merely reset rates to a level that was no longer fueling growth. Meaning? It’s possible rate policy has only been restrictive for 8 or 9 months…….the increases haven’t fully filtered through the real economy.

The next is undoubtedly 1 day📅 closer. The impact of the Fed’s tightening monetary policy will be felt.

But, given all the above, should we be surprised that, for the time being, our economy has remained so resilient?
Bryan LeMonds Jocelyn Getsy Megan Relue John Clarida

New Year’s Resolutions are for the birds 🐦 …..

Does any of this sound familiar? You show up to the gym for your first workout of the new year and it’s absolutely packed. You scroll through your social media feeds and it reads like a self-help book on how to be a better you in 2023. Many of your friends, family and co-works are touting their brand new commitments to be a better version of themselves this year.

The 🗞️ shared a study in January 2020 that indicated the average person gives up on their resolution by February 1st 📅 , with 68% giving up even sooner.

What are the top reasons why?

✅ Lack of discipline & accountability

✅ Busy schedules

✅ Small and immediate set-backs

✅ Too many resolutions

✅ Grandiose changes

What are the study’s recommendations?

🤔 Focus on a small and achievable, yet impactful, change

🤔 Create some accountability

🤔 Keep score

🤔 DON’T necessarily wait for the beginning of a new year

🤔 Make your resolution meaningful and impactful

🤔 Pick something that is foundational for other beneficial habits

What are you working on changing and how will you make it past February 1st

The Roth IRA Conversion…….Are They Worth of the Hype 🗣️?

We’re in a historically low tax rate environment making Roth IRA conversions a popular consideration for building tax-exempt retirement savings. But should you be considering it; why or why not? The answer to this question is not as clear-cut as many of us would like to believe.

This article looks at the pros👍🏽 and cons 👎🏽 of the Roth IRA conversion by taking into consideration:

✅ Your cost (income taxes) to convert pre-tax funds to a Roth IRA

✅ Conversion cost payback period

✅ Legacy planning desires

✅ Diversity of assets for funding your retirement

✅ Your projected income tax burden throughout retirement

…..And more.

If you’re considering a Roth IRA conversion, please make sure you’ve considered everything before moving forward. These can make great sense in certain situations and not-so-much in others!

https://dickmeyerboyce.com/roth-ira-conversion-pros-and-cons/

Let’s demystify 🔍the mega backdoor Roth, a mega savings opportunity…….

One of the best kept secrets for investing sizable sums of money into a tax-exempt (i.e., tax free distributions for qualified withdrawals) account is the Mega Backdoor Roth conversion. If you’re not familiar with this strategy, you may want to learn more 🤔.

Does your employer’s retirement plan offer the following?:

✅A Roth-401(k) - almost 75% of 401(k) plans offer this option today

✅An after-tax 401(k) - approximately 20% (and growing) of company plans offer this savings option

✅The ability to perform ‘in-service’ conversions (i.e., after-tax 401(k) → Roth-401k)

If so, the mega backdoor Roth is a savings strategy you could be using to aggressively fund your ‘tax exempt’ retirement income bucket 🪣(Roth-401k).

Please look into this with your employer’s benefits group. If you have the funds, this could be a retirement savings game changer (while it’s available).

Stock market volatility will test the patience (and stomach) of any investor. Imagine being a recent or soon-to-be retiree……

With the average retirement lasting close to 20 years, higher levels of inflation and a less predictable post-covid world 🌎, we need to be better prepared than ever to take on stock market volatility.

The good news……..through some preparation and planning, bouts of volatility can be managed in a way that gives your investment accounts time to recover and in doing so, minimize the damage.

Consider these 5 methods outlined in our most recent article for limiting volatility risks:

➡️ Build an appropriate level of cash reserves

➡️ Establish a healthy income floor

➡️ Budget: be prepared to reduce spending

➡️ Investment balance & diversification

➡️ Retire slowly

Stock market volatility doesn’t have to be the emotional roller coaster🎢 it so often is. Taking these 5 steps can help buffer your investments from the potentially damaging effects of making withdrawals at a time when volatility has your accounts down in value.

https://dickmeyerboyce.com/market-volatility-for-retirees-5-ways-to-prepare/

Dickmeyer Boyce Financial Management - Independent Fee Only Dickmeyer Boyce Financial Management is an independent, Fee-Only Financial Planning and Wealth Management in Fort Wayne, IN and Milwaukee, WI.

Recessions are “called” by the National Bureau of Economic Research (NBER).......not you, I or the media 📺.

Expectations for, and predictions of a recession are dominating the headlines and chat rooms. While we love to pretend to know what’s next, the only thing we can say with any certainty is that we’re one day closer 🗓️ to the next economic downturn than we were yesterday.

The NBER determines the beginning and end of recessions……and they usually make this determination AFTER the beginning and end of recessions. Even they don’t know with certainty. And think about the mixed signals they’re getting right now……

The recessionary signs 🚩:

→ Most economists expect a 2nd consecutive quarter-over-quarter decline in Gross Domestic Product (the most commonly referenced indicator of a recession).

→ 10-year low in consumer sentiment (University of Michigan).

→ 40-year high inflation readings

→ Declining confidence in future manufacturing activity (ISM Purchase Managers Index).

The mixed signals 🤔:

→ The median increase in the unemployment rate for all 12 recessions since WWII has been 3.5%. The current unemployment rate has held steady at 3.6% for the past three months (source: Bureau of Labor Statistics).

→ Monthly business payrolls have declined on average by 3% over each of these 12 post WWII recessions. Between December 2021 and May 2022 payrolls rose by 1.2%

→ Households are still flush with cash to the tune of $18.5 trillion (vs. $13.3 trillion prior to the pandemic)

→ Corporations continue to be highly profitable on a historical basis with after-tax profit margins hovering around 18%. These margins were in the single digits heading into the 1991 and 2001 recessions.

So which is it…..”hard landing”, “soft landing” or other? Are you confident that your plan gets you through “it” regardless?

Should I be taking advantage of the Roth conversion during my early years of retirement?

This is one of the most common questions❓we get when helping people prep for retirement. Your early years of retirement are often ‘lower income’ years making them an opportune time (i.e., lower income taxes) to consider a Roth conversion.

So, is doing so a ‘no-brainer’ 🤔? Not always, and here are some things to consider:

✅Do you already have sizable tax-exempt retirement savings? If you regularly contributed to a Roth-401(k) or Roth-IRA, you likely have a decent source of tax-exempt income for your retirement.

✅ What are your expected marginal tax rates in and throughout retirement? This will, in part, determine the amount of benefit received from a Roth conversion.

✅ What are your legacy planning objectives? If you have a strong desire to leave a legacy to the ‘next generation’, then Roth-IRA funds can be a great asset for doing so. If not, this may not be as much of a consideration for you.

✅ What are your expected living expenses in retirement and subsequent income needs? Your need for income will of course affect your marginal tax rates. If you’re drawing less income and living frugally in retirement, this should factor into your decision.

Roth conversions are not always a ‘slam dunk’ 🏀 decision. Be sure to model and review your conversion before making this important decision.

Our newest team member finally found a suitable office chair. Needless to say, she’s a little high maintenance.

Retire Slowly 🐌…….

Just over a month ago (May 10th), I posted regarding the importance of managing “sequence risk”, that is, the risk that retirees face in funding retirement living expenses by drawing from their investment accounts during times when market volatility has reduced 📉account values.

Let’s look at what a portfolio allocated to 60% equities & 40% fixed income (short duration fixed w/o dividends reinvested) has done in just over one month since this post:

May 10th: down ⬇️11.3% YTD

June 16th: down ⬇️15.2% YTD

This 60/40 portfolio with a $1M value on 01/01/2022 would have been worth $887k on May 10th and down another $39k to $848k by June 16th (assuming no withdrawals of course).

Saturday’s (June 19th) Wall Street Journal 📰highlighted the benefit of retiring slowly - the ability to generate some income, doing something you (hopefully) enjoy on a part-time basis, to buffer against this “sequence-of-return risk”. Couple this approach with a solid income floor, adequate cash reserves, a household budget, and you’re in a much better position to weather this storm.

5 Things You Need to Know 🤔 About Restricted Stock Units (RSUs).

have grown in popularity. Many manufacturing 🏭 & technology 🖥️ companies now prefer over issuing stock options. This form of equity-based compensation can offer some compelling benefits to employees. However, we advisors and employers do a poor job of educating recipients on how best to take advantage.

What are the differences vs. ?

What should I do with my RSUs as the vest?

What are the considerations for keeping vested shares vs. selling?

How do I maximize 📈the benefit for me?

The article below takes on these questions by providing the 5 things you should know to make the most of your RSUs. Read and take advantage.....


https://dickmeyerboyce.com/what-you-need-to-know-about-rsus/

What You Need to know About RSUs Have you ever heard about restricted stock units? Today's your lucky day. Here are 5 things you need to know about RSUs.

Our team has grown………

We’re not complete without a four-legged 🐕 friend in the office. That’s why we’re so happy to introduce Kate. Kate does not know the first thing about:

✅ Building or balancing a portfolio

✅ Developing a sound retirement income strategy

✅ Backdoor Roth-IRAs

✅ Tax efficiency

✅ Managing risk

She does know treats though, and if we don't win you over, she will. Her mere presence serves as a reminder......the Aim of Life is Living It, and that’s pretty important these days.

Welcome to the squad Kate.

Roth-401(k) for Higher Earners: Yes or No and How to Know?........

As Financial Advisors we generally work with clients to reduce ⬇️ current year income tax obligations. The traditional 401(k) offers an opportunity to defer income on a pre-tax basis and in doing so, also reduce what could otherwise be a much higher tax bill. But does this approach always make sense 🤔?

As of 2020 the share of employer-sponsored retirement plans offering a Roth-401(k) alternative had grown to 86%. This number continues to increase. But what are the advantages and considerations for electing to make after-tax Roth-401(k) contributions instead of deferring to a traditional 401(k)? How do you decide?

In the linked article, we have provided a framework for helping high-earners make this decision to demystify the debate of 401(k) versus Roth-401(k). While each person’s situation is unique, educating yourself on this after-tax retirement savings could provide great benefit to you and your retirement plan.

Supplemental Retirement Accounts......

What should you know? Supplemental Retirement Accounts provide an opportunity to increase retirement savings beyond traditional methods like the 401(k), 403(b), or Roth Accounts.

https://dickmeyerboyce.com/supplemental-retirement-account/

Supplemental Retirement Account