market volatility – Retirement Risk Advisors

28Jun

After Taxes Now, Tax-Free Later: Roth 401(k)

BlogJune 28, 2022

Tax-advantaged has quite the ring to it, doesn’t it? Unlike the tax-advantages a traditional 401(k) offers—funded with pretax wages—a Roth 401(k) is funded with after tax wages. Income tax has already been paid so when it comes to withdrawing in retirement, your money is withdrawn tax-free.

What exactly is a Roth 401(k)? Created in 2006, Roth 401(k)s are employer-sponsored retirement savings accounts that use after-tax money.

How They Work

While employer-sponsored, enrollment and participation in Roth 401(k)s is entirely voluntary. Payroll deducts the special funds after taxes have been taken out each paycheck. Some employers may offer matches for Roth 401(k)s.

In comparison, a traditional 401(k) and a Roth 401(k) have different tax-advantages. A traditional 401(k) reduces an employee’s gross annual income, providing a tax break now. However, regular income taxes will be due upon withdrawal during retirement. A Roth 401(k) requires income tax be paid but reduces an individual’s annual net income. But after the money is placed into the Roth account, no further taxes are owed when taken during retirement—this includes profits earned.

Much like the traditional 401(k), a Roth 4010(k) is subject to contribution limits and is based off the investor’s age per guidelines of the IRS. For 2022, an individual may contribute up to $20,5000. Those over 50 are permitted a catch-up contribution of $6500. Another perk Roth 401(k)s offer is no income limit.

Withdrawal Special Considerations

Certain criteria must be met for withdrawals to be tax-free.

The Roth 401(k) must be at least 5 years old.
Withdrawals must occur when the account holder is at least 59 ½. If before, account holder must has passed or experiencing qualifying disability.

Roth 401(k)s do require required minimum distributions. Once you are 72 the first RMD from your Roth 401(k) must be taken by the first April after you turn 72. If you are still working for the company who sponsors the retirement account, you may hold off taking a distribution.

Advantages and Disadvantages Summary

Pros:

Helps those who may be in a higher tax bracket during retirement (which is commonly seen)
Distributions are tax-free.
Earnings grow tax-free.

Cons:

Uses after-tax dollars, meaning during working years you are out that money
Contributions do not limit taxable income

Roth 401(k)s and Market Volatility

Sadly, you can lose money since a 401(k) is an investment into the market. However, most employers offer low-risk options like government bonds. You are always welcome to work with the plan sponsor and stir up your investment yield and risk.

21May

What You Need to Know About Cryptocurrency and Your Retirement

Podcast BlogMay 21, 2022

Started as a small project, cryptocurrency has become a large and continuously growing part of the finance industry. These blockchain tokens are making way into retirement planning slowly. Recently, some major companies have opened their doors to cryptocurrency as an investment option. If you are considering cryptocurrency for your retirement planning, you need to know the risks that come with crypto assets.

It is no secret that the crypto ecosystem is fickle, and in retirement planning it is important to monitor and reduce risk so your assets last 20-40 years. However, cryptocurrency may offer retirees a solid diversification option.

The Newest of New Paradigm

While trends have been observed, analysists are still studying the ups and downs of the cryptocurrency ecosystem. Some experts will say that it is too risky to invest while others will say by not investing you are losing out even with the rules still being written and changing often. Cryptocurrency may offer diversification to your retirement portfolio. The risk lies within your decision to invest or not.

Market Volatility

You are likely very familiar with the success story of Bitcoin and Ethereum. Just this year alone cryptocurrencies have fluctuated significantly. In 2021, Bitcoin dropped $30,000 in value within 3-months.

New Cryptos Launched Often

There are over 13,5000 cryptocurrencies in existence. Some are considered overvalued, others undervalued, and others are predicted to be “just right” for long-term investments. But there are new cryptocurrencies added on the market daily, so when investing choose wisely.

Traditional Accounts & Crypto

Only a few plan sponsors allow for cryptocurrency to be invested in for retirement. There are options under cryptocurrency such as Bitcoin IRA or Bitcoin 401(k). You may rollover funds into a self-directed IRA that allows crypto investments if you qualify. Please note, a lot of the cryptocurrency ecosystem is not government regulated and poses greater risk than typical market stocks and investments.

Taxes & Recording

Record keeping is very important within cryptocurrency gains and losses. Within the USA, cryptocurrency is taxed the same as any other gain or losses on stock for long-term and short-term. However, the recordkeeping and reporting are not as established as with regular trade assets. It is primarily on you to keep accurate records.

The Exchanges & Brokerages

Cryptocurrency is traded on a crypto exchange mostly, but you can trade through a broker. While more expensive, brokers are often much less confusing. Purchasing directly on the exchange can get complicated fast.

At-Risk for Hacking & Theft

Unfortunately, being unregulated means cryptocurrencies are not as protected. There is a greater risk for theft and hacking. Heedless of your storage method—keep investment in the exchange, use external storage device, or store offline—there is a need to have extra precautions in place.

25Feb

The Importance of Stock Bubble Stages

Podcast BlogFebruary 25, 2022

In context, a financial bubble is observed disbelief when prices increase, and stocks become overvalued. A bubble can pertain to individual stocks, an entire sector, market, or asset class. When the bubble ‘bursts’ stocks or assets are sold off and prices rapidly decline. The burst leads to a crash. While the collateral of the burst depends, it may spill over into other areas. For example, the U.S. dotcom bubble in 2000 and the 2008 real estate bubble bursts lead to severe recessions.

Stages of a Bubble

Displacement begins when investors obsess over new ideas or opportunities such as technology. During these periods prices will steadily, but slowly, rise.
Boom follows as the momentum from the displacement catches. While more people invest in the specific asset, widespread attention is brought upon it. The bigger the audience, the more people decide to invest because they want in on the success. As more investors invest even more follow.
With prices still going up, euphoria reaches extremes that keeps a steep rise on prices. What plays out next is that people are fooled into still buying more.
Fourthly, profit-taking begins when institutional investors take advantage of the warnings sign that the bubble is just before its bursting point. These investors begin selling first and take profit. However, predicting the exact moment of popping is difficult.
Popping the bubble could be a major event or a minor jab at the bubble’s edge. Inducing panic, investors want to liquidate assets immediately at any price. This creates a supply that overcomes demand. Prices drop drastically quickly.

Causes of Bubbles

There are limitless ways bubbles can begin, especially in our global economy. The following are major historical influencers:

New products or technologies create demand which increases prices.
Supply shortages of an asset/item creating a climb in price.
Interest rates hit a low, encouraging borrowers to establish lines of credit or take out loans. This leads to increased spending and investing.
An uptake of foreign investors come in due to favorable opportunities.

When the Bubble Bursts

Bubble bursts can be triggers by major or minor events. Ultimately, inevitably, bubble must pop. The aftermath can be short-lived where little loss is experienced.

However, the worst-case scenario is a stock market crash leading to a recession (which could lead to a depression). What matters most is the size of the bubble—meaning small or specialized assets classes or bigger sectors such as real estate or tech. After size what matters most for impact is how much investment money is involved.

Debt-fueled bubbles can lead to long-lasting recessions. Our most recent example of this is the housing bubble pop in 2006-07 that jumpstarted the Great Recession.

How will this impact your retirement assets? Listen to The Retirement Risk Show episode “Cause and Effect: Stock Market Edition” where Dave Hall provides an in-depth analysis of the current market, discusses historic crashes and corrections, and speaks about what a market crash in the foreseeable future would mean for you retirement and how to protect your retirement assets before that crash does happen.

04Feb

Past, Present, & Future of Market Volatility

Podcast BlogFebruary 4, 2022

Every up has a down, every down has an up. Lulls and downturns in trade are cyclic norms—something our stock market is no stranger to. Historically speaking, the global market sees a downturn approximately every 10 years. Since retirement has been left to individuals to figure out, a lot of options to build a retirement savings are invested.

How can you protect your retirement assets from a market crash? The best way to begin doing so is understanding major market corrections within the last century.

Market Crash of 1929

As a catalyst to the Great Depression, this crash ending the market up known as the Roaring Twenties. The market was booming in the 1920s. Over almost a 2-month period, the market slowly descended into a 13% decline on Black Monday and followed on Black Tuesday with a 12% decline.

The bear market immerged by mid-November with the Dow having lost more than 20% of its pre-crash value. Losing value until it bottomed in the summer of 1932, the Dow took until 1954 to reach the 1929 pre-crash value.

The cause? Investors and investment trusts bulk-purchased stocks on margin—paying a tenth of a stock’s value under a loan. At this time, too, consumers began to acquire credit, purchasing items left and right. The debt bubble burst causing the catalyst of the Great Depression.

Crash of 1987

The Black Monday of 1987, this crash began when the Dow dropped over 20% in a single day. That November is when all the market indexes had lost 20% of their value. The rebound took almost two years, much faster compared to the Black Monday and Black Tuesday set off in 1929. By September of 1989 the market indexes reflected a complete bounce back of the 1987 losses.

The cause? A series of events: a growing U.S. trade deficit and worldly tensions, especially those in the Middle East, contributed to the market. The biggest factor was the computerized trading programs that had been launched. Computers would automate large buys when prices raised and sell orders when prices tumbled. When the trading-verse was floored by these automation, other investors would panic-sell and panic-buy.

1999-2000 Dot-Com Bubble Crash

In the late 1990s, internet-based stocks drastically skyrocketed. Resulting in the tech-dominated Nasdaq index to surge. The surge met its maker with a 77% drop over 2000-2001, reaching its lowest point in October 2002. Nasdaq did not see a pre-crash value for almost 15 years.

The cause? The Dot-Com Crash is a serial offender. The foremost cause was overvalued internet stock. Investors predicted that online companies would become profitable, so they poured their money into the ‘dot com’ sector. Secondly, the Federal Reserve restricted their monetary policy, straining capital flow.

Crisis of 2008

About ten years prior, the Federal National Mortgage Association made home loans more accessible to higher-risk individuals—those with less money for down payments and low credit scores. Payments for these people came with the reflection of their high-risk profiles: above average interest rates and variable, pricy payment schedules.

With mortgage debt availability increased, investors and previously ineligible borrowers ate up the opportunity. However, consumers during this were racking up additional debt. Companies saw an increase in debt, too, because they wanted to take advantage of the economic boom.

The collapse happened by September that year. Stock indexes had lost over 20% of their value because investing banks could not cover their loss from taking on the high-risk mortgages. It took four years for the market to reach its pre-crash value.

The cause? The American economy was debt-fueled. Banks and real estate were drowning.

Coronavirus Induced Crash

As the most recent, this crash occurred worldwide. During the last week of February several of the market indexes dropped 11.5%, marking the biggest loss since the crisis of 2008. The Dow set a record on March 12 when it fell by 10%. Sadly, four days later, it dropped another 13%. These were the largest day-drops the Dow saw since Black Monday of 1987.

This crash bounced back by May because of stimulus money, the Federal Reserve cut interest rates and pumped trillions into markets. Congress passed a massive aid package to stimulate the economy, too.

The cause? Covid-19 infections shutting down economies worldwide that domino-effected supply chains and workflow.

How can I use this information to help my retirement?

It shows that market crashes and corrections can happen whenever. The best course of action now is to lower retirement risk and diversify your retirement assets, so you are protected when a market crash does happen.

Retirement planning is the most important step in reducing the market volatility risk. Have six months of living expenses saved in a rainy-day fund. This way you are prepared if your retirement assets take a hit. Consider long-term: a life insurance policy or an annuity that can protect against market loss, offer that lifetime income needed, and overall decrease your retirement risk.

For more information on the market and how to think long-term to reduce your risk of market volatility, please listen to episode 5 of The Retirement Risk Show, “In This Current Market Flux, Think Long-Term” at https://www.buzzsprout.com/1844811/9998926.