Insights

Commentary, insights and analysis from Cahaba Wealth Management

Tag Archives: Financial Advisor

Here We Are Again

By Brian O’Neill, CFP®

Here we are again. By here, I mean in the midst of a market correction (defined as a more than 10% decline from the recent peak), and by again, I mean one of the now 39 different market corrections we have experienced since the 1950s according to Kiplinger’s¹. To borrow the most recent cliché, market corrections are a feature of the investment system, not a bug. Effectively, I’m stating the obvious, but even the obvious can need some explanation from time to time.

To be clear, we are not cavalier about our clients’ portfolio performance. Rather, we try to remind everyone that successful investing is hard – stocks don’t always go up (and 2022 showed us neither do bonds), but the overall long term trend still remains a very positive one. Let’s take a minute or two to dissect the current environment, and remind ourselves why we invest in the first place.

The S&P 500 reached its 2023 highs on July 31, when it closed up 20.65% (data per YCharts²). Since that yearly high, we have been hit with a litany of news and events that the markets have worked to digest:

Mostly good economic news, with inflation continuing to moderate, and employment actually growing solidly per the September BLS jobs report
Consequently from the economic news, the 10-Year Treasury rate surging from 3.97% on July 31, to today’s yield of 4.84% (down from last week’s 16-year high of 4.98%)
The latest conflict in the Middle East and the ongoing Ukraine/Russia conflagration
Congressional dysfunction in the US House of Representatives with the House leader’s removal/resignation and subsequent meandering by House Republicans to elect a new Speaker

This by no means covers everything, but let’s tackle these bullets with some commentary:

Good economic news really does not need much commentary. While we may still experience a recession in the future, the fact that most economists predicted (this time last year) we would already be in a recession tells us all we need to know about predictions. Adding insult to injury, the data does not remotely back up the predictions. In fact, the tried and true economic indicator of recession, the inverted yield curve (higher yields on short-term securities than long-term securities), may well be flashing signs that a recession is no longer likely. The inversion of the yield curve hit its peak on July 4, 2023, when the 2-Year Treasury yield was 109 basis points (1.09%) higher than the 10-Year, and has now significantly narrowed to 22 basis points³. We can watch, but the curve is “un-inverting” all on its own. Even if we have a recession, it is unlikely to be deep or long.

Fighting inflation does not come without consequences, the 10-Year yield rise has resulted in higher borrowing costs for both consumers and businesses. We cannot ignore this. However, we can accept that we have previously had interest rates near this 5% level many times in the past and the markets have continued higher. Again, using data, Black Rock suggests that rising rates actually help stock prices over time⁴. While we cannot know until some point in the future, historical precedence says that higher rates don’t necessarily lead to negative equity returns.

In terms of geopolitics, nobody likes to see the outcomes for those on the ground. The conflicts in the Middle East and Ukraine are horrific to witness, and we certainly feel for everyone negatively impacted. However, looking at the data, we have lived through conflicts before and we will weather these too.

Even with all the above, the old euphemism that stocks “climb a wall of worry” exists for a reason. The best take away from the above notes is that the economy in the US remains solid, and that’s the foundation for corporate profits and stock price growth. It has never been a good idea to bet against the markets (see Ben Carlson’s fine article here: https://awealthofcommonsense.com/2023/10/the-crash-callers-wont-save-you/ ). Without re-hashing this article in total, when rolling 10-Year returns are positive 96.9% of the time, it won’t pay to say this time is different. If it were, we would open a casino and take those odds!

I know hearing the news and watching the markets is not easy. Hopefully this note is a simple reminder that we always face challenges when it comes to markets, the economy, and investing. Again, it’s hard! Our job at Cahaba Wealth Management is to help clients navigate difficult times, and build optionality into portfolios so we are never forced to sell something that has performed poorly. This is the foundation of the financial planning process, and our view of long-term cash flow. We cannot predict tomorrow, but we can use reams of data and history to say the next 10 years will likely look very good. In the meantime, turn off CNBC, read a great book, and know that this too shall pass.

Brian O’Neill, CFP® is a financial advisor in the Atlanta office of Cahaba Wealth Management, www.cahabawealth.com.

Sources:

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.

Why Are My Medicare Premiums So High?

By Charlotte Disley

The world of Medicare can often times bring on feelings of confusion, and not to mention, high premiums! It is important that those enrolling in Medicare Part B (Medical Insurance) and Part D (Drug Coverage) have a solid understanding of how their premiums are being calculated.

Income-Related Monthly Adjustment Amount (“IRMAA”) is a surcharge added on top of original Part B and Part D premiums, and is based on different income thresholds which are determined by Modified Adjustment Gross Income (MAGI) from two years prior. For example, premiums in 2023 would be assessed by MAGI taken from a 2021 tax return. 2023 IRMAA premiums for Part B is shown in the tables below. Note that the monthly premium amounts listed are per person.

_{^{Source: https://www.cms.gov/newsroom/fact-sheets/2023-medicare-parts-b-premiums-and-deductibles-2023-medicare-part-d-income-related-monthly}}

Certain individuals may be eligible to appeal IRMAA if they have experienced a life changing event that reduced household income and moved them into a threshold with a lower premium. If income is significantly different in the current year than two years prior, then there are a few steps to take to appeal the premium amount. The SSA will not automatically adjust your premium amount, so it is important to pay attention to your income each year and ensure you are placed into the accurate IRMAA bracket.

Let’s take a look at a hypothetical, yet realistic, example of how this might play out for a couple on Medicare in 2023 looking solely at their Part B premiums.

John and Jane Doe are both age 70 and are married filing jointly. Jane retired at age 50 from company X, but her only source of retirement income is in the form of an IRA. John spent his life working at company Y where they offered a 401(k), a qualified pension (monthly annuity payment), and a non-qualified pension paid in annual installments over a 10 year-period. John retired at the end of the year in which he turned 58. They are not yet at the age of needing to take RMDs from their retirement accounts. John had been consulting since his retirement, bringing in annual earnings of $200k, but stopped at the end of 2021. On top of this, his last non-qualified pension payment of $150k paid at the end of 2021. As a couple, they have consistent streams of taxable income in the form of his qualified pension ($75k/year) and the taxable portion of their social security payments ($80k/year).

Given this information and assuming they have no other taxable income streams, in 2021, John and Jane had a MAGI of $505k. Looking back at the premium threshold, this would set them comfortably into the bracket with a $527.50 monthly premium each for 2023. Comparatively, today (assuming no additional income other than qualified pension and social security), the reality of their MAGI is $155k. This places the Doe’s into the lowest IRMAA bracket with a monthly premium of $164.90 each. This produces a whopping ~$8,700 of savings on Medicare Part B premiums if they take the time and effort to appeal IRMAA.

So, how do you actually appeal IRMAA?

You will need to fill out the following form (https://www.ssa.gov/forms/ssa-44.pdf) and provide supporting documents that show a more accurate depiction of current income. This is where Cahaba comes in to assist our clients with the process! Knowing our clients’ financial situations inside and out allows us to help prepare supporting documents, as well as cover letters detailing the request for adjustment. This takes much of the burden for preparation off of our clients, and usually results in a successful appeal!

Charlotte Disley is a financial planning analyst in the Atlanta office of Cahaba Wealth Management, www.cahabawealth.com.

Secure Act 2.0

By Louis Williams, CPA, CFP®

Secure Act 2.0 has become a hot topic of discussion in recent months, as this piece of legislation includes several law changes that have the potential to impact our clients’ financial circumstances and opportunities. After spending some time reviewing the subject matter of Secure Act 2.0, we wanted to highlight some of the changes that we feel are most relevant.¹

Delay of Required Minimum Distributions from Retirement Accounts

Congress passed a law in 2022 that pushed back the age for required minimum distributions (RMDs) from 70.5 to 72 as long as you turned 70.5 after January 1^st, 2020. Secure Act 2.0 has delayed RMDs even further for those born in 1951 and later. Depending on one’s date of birth, the age at which RMDs are mandatory could be anywhere from 70.5 to 75. In an effort to simplify this topic, we have included a summary table below.

Date of Birth	RMD Age
Before July 1^st, 1949	70.5
July 1^st,1949-December 31^st, 1950	72
1951-1959	73
1960 or later	75

Changes to the Catch-Up Contribution

The ‘catch-up’ contribution within employer 401(k) retirement plans refers to a contribution that is allowed for individuals nearing retirement, and it is allowed in addition to normal retirement plan contribution limits. For 2023, the catch-up contribution limit is $7,500 and applies to those who are at least 50 years of age at the end of calendar year. Beginning in 2025, individuals who are ages 60-63 at the end of the calendar year will have the option to contribute $10,000 (or 150% of the standard catch-up, whichever is greater) in an expanded catch-up contribution.²

An additional change to the catch-up contribution will only apply to those whose annual income exceeds $145,000. Currently, most employer plans offer the capacity to make catch-up contributions on either a pre-tax or Roth basis. Beginning in 2024, however, those who exceed $145,000 in annual income will only have the Roth option.²Roth contributions are made on an after-tax basis, and thus this move will increase current tax revenues from a government perspective.

Other Retirement Plan Roth Opportunities

As the Roth tax designation continues to become more prevalent, Secure Act 2.0 provides additional Roth opportunities relating to retirement accounts.

Among these opportunities is the option to make Roth contributions within Simple IRAs and SEP IRAs, which are retirement plans that are generally reserved for small employers and self-employed persons, respectively. Historically, contributions made to plans of this nature have only been treated as pre-tax.

Employer contributions within 401(k) plans have also historically been treated as pre-tax and therefore are not immediately taxable to the participant. Secure Act 2.0 allows for employer plans to offer the option for employer contributions to be treated as Roth. This would trigger the taxability to the participant in the year the contribution is made. The benefit of Roth contributions of any kind is to promote tax-free growth rather than tax-deferred, and this option would need to be carefully considered within the context of an individual’s financial plan.

529 to Roth Conversions

529 education accounts have long been considered to be the most tax-efficient savings vehicle for future education costs. One of the drawbacks of 529 accounts is that there is generally a penalty applied to earnings withdrawn from an account when funds are not used for qualified education expenses. As a result, most are careful not to ‘overfund’ these accounts out of fear of being subjected to this penalty. Beginning in 2024, Secure Act 2.0 provides a potential solution to this risk.² 529 account holders who meet a specific set of requirements will have the opportunity to transfer 529 funds directly to a Roth IRA. Eligibility for this type of transfer will need to be carefully determined, but it is certainly an option that should be considered for those with 529 assets that exceed education needs.

This summary is in no way meant to be a comprehensive analysis of the entirety of Secure Act 2.0, but we hope that the detail in this article can identify areas by which one’s financial plan can be enhanced. As with any law changes, it will be important to consult a financial professional before implementing any changes in response to this legislation.

Louis Williams, CPA, CFP® is a financial advisor in the Birmingham office of Cahaba Wealth Management, www.cahabawealth.com.

¹For a complete Section by Section Summary of Secure Act 2.0, please visit https://www.finance.senate.gov/

²Secure Act 2.0 contains a number of important provisions that become effective in future years. We will continue to monitor these provisions for any new or clarifying legislation. The information in this article is as of March, 2023.