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Tag: retirement planning

  • The rising cost of living isn’t the only reason many in Asia are putting off retirement, Randstad says

    The rising cost of living isn’t the only reason many in Asia are putting off retirement, Randstad says

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    Workers surveyed in China are the least likely to retire as soon as possible — even “in an ideal world,” Randstad said. And 3% of workers in Asia-Pacific never want to retire at all, which is the highest percentage out of all regions.

    Edwin Tan | E+ | Getty Images

    The cost of living crisis is delaying the retirement plans of working professionals worldwide, said recruitment agency Randstad.

    But those in Asia will continue to work because for reasons beyond a paycheck, according its new report.

    Its latest Workmonitor report found that only half of surveyed workers believe they can permanently leave the workforce before they turn 65, down from 61% last year.

    “A faltering global economy, high inflation and diminishing government aid have many people reconsidering such a move,” Randstad said. 

    The annual report surveyed 35,000 people across 34 markets for their sentiments on the world of work. 

    While 70% of workers surveyed said that money worries are preventing them from enjoying their golden years, workers in Asia-Pacific are more likely to feel that work is a necessity in their lives.

    For example, 66% of those from India and 61% from China saw work as a “need” — almost twice the global average of 32%.

    % who say they “need work” in their lives

    Country % of respondents
    India 66
    China 61
    Malaysia 45
    Singapore 43
    Japan 34

    Source: Randstad

    “Whether for meaning and purpose, social interaction or to experience the challenges that come with a job, employment for many is more than just a paycheck,” Randstad said. 

    “It keeps them connected and gives them a sense of belonging.”

    Feeling valued and respected 

    Workers also stay at their jobs because they “feel a sense of obligation to their employer,” said Randstad. 

    The report found that about one fifth, or 21%, of Asia-Pacific workers felt that their employer needing them would deter them from retiring, compared with 12% of the global population.

    “There are cultural factors at play here with the role of work and education in people’s lives,” Sander van ‘t Noordende, the CEO of Randstad, told CNBC. 

    Workers feel they “need” work in their lives because having a stable job allows them to “feel valued and respected” by their peers, he added. 

    % who feel their employer “needs” them

    Region %
    Asia-Pacific 21
    North America 12
    Latin America 7
    Northwestern Europe 10
    Eastern Europe 10
    Southern Europe 8

    Source: Randstad

    “However, the countries’ booming economies and an exponential increase in demand for talent, both domestically and internationally, are also likely to contribute to this disparity compared to global counterparts.” 

    Asia is home to three out of five of the world’s largest economies, which include China, Japan and India.

    Workers in some Asian countries were also more likely to say that they consider work an “important part of their lives,” van ‘t Noordende added. 

    For example, 89% of workers in China consider this to be true and 90% of Indians agree — which is almost 20% higher than the global average, according to the report.

    What it means for employers 

    Regardless of where workers are located, they want “the whole package” from their employers, said van ‘t Noordende, which is secure, flexible, inclusive and financially stable work. 

    “People want to feel like they belong at work and demand that their organization mirrors their own priorities in terms of things such as flexibility and good work-life balance,” he added. 

    “This is particularly true of the younger generations, who are seeking more satisfaction from work than a pay cheque alone provides.” 

    That’s also crucial in Asia, where labor markets continue to be tight. Employers should therefore focus on how to attract and retain talent, said van ‘t Noordende. 

    “It’s becoming increasingly evident that workers are prepared to quit their jobs if they do not meet their demands. For example, over half of Asia-Pacific workers would quit a job if they felt like they didn’t belong there.” 

    On top of that, talent scarcity will grow in the coming years in light of shifting demographics, added Randstad. 

    “Companies should develop flexible roles that allow those near retirement age to slowly transition from full time to part time and then completely retire.” 

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  • This dividend-stock ETF has a 12% yield and is beating the S&P 500 by a substantial amount

    This dividend-stock ETF has a 12% yield and is beating the S&P 500 by a substantial amount

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    Most investors want to keep things simple, but digging a bit into details can be lucrative — it can help you match your choices to your objectives.

    The JPMorgan Equity Premium Income ETF
    JEPI,
    +0.20%
    has been able to take advantage of rising volatility in the stock market to beat the total return of its benchmark, the S&P 500
    SPX,
    +1.19%    ,
    while providing a rising stream of monthly income.

    The objective of the fund is “to deliver a significant portion of the returns associated with the S&P 500 Index with less volatility,” while paying monthly dividends, according to JPMorgan Asset Management. It does this by maintaining a portfolio of about 100 stocks selected for high quality, value and low price volatility, while also employing a covered-call strategy (described below) to increase income.

    This strategy might underperform the index during a bull market, but it is designed to be less volatile while providing high monthly dividends. This might make it easier for you to remain invested through the type of downturn we saw last year.

    JEPI was launched on May 20, 2020, and has grown quickly to $18.7 billion in assets under management. Hamilton Reiner, who co-manages the fund with Raffaele Zingone, described the fund’s strategy, and its success during the 2022 bear market and shared thoughts on what may lie ahead.

    Outperformance with a smoother ride

    First, here’s a chart showing how the fund has performed from when it was established through Jan. 20, against the SPDR S&P 500 ETF Trust
    SPY,
    +1.20%    ,
    both with dividends reinvested:

    JEPI has been less volatile than SPY, which tracks the S&P 500.


    FactSet

    Total returns for the two funds since May 2020 pretty much match, however, JEPI has been far less volatile than SPY and the S&P 500. Now take a look at a performance comparison for the period of rising interest rates since the end of 2021:

    Rising stock-price volatility during 2022 helped JEPI earn more income through its covered call option strategy.


    FactSet

    Those total returns are after annualized expenses of 0.35% of assets under management for JEPI and 0.09% for SPY. Both funds have had negative returns since the end of 2021, but JEPI has been a much better performer.

    ““Income is the outcome.””


    — Hamilton Reiner

    The income component

    Which investors JEPI is designed for? “Income is the outcome,” Reiner responded. “We are seeing a lot of people using this as an anchor tenant for income-oriented portfolios.”

    The fund quotes a 30-day SEC yield of 11.77%. There are various ways to look at dividend yields for mutual funds or exchange-traded funds and the 30-day yield is meant to be used for comparison. It is based on a fund’s current income distribution profile relative to its price, but the income distributions that investors actually receive will vary.

    It turns out that over the past 12 months, JEPI’s monthly distributions have ranged between 38 cents a share and 62 cents a share, with a rising trend over the past six months. The sum of the past 12 distributions has been $5.79 a share, for a distribution yield of 10.53%, based on the ETF’s closing price of $55.01 on Jan. 20.

    JEPI invests at least 80% of assets in stocks, mainly selected from those in the S&P 500, while also investing in equity-linked notes to employ a covered call option strategy which enhances income and lowers volatility. Covered calls are described below.

    Reiner said that during a typical year, investors in JEPI should expect monthly distributions to come to an annualized yield in the “high single digits.”

    He expects that level of income even if we return to the low-interest rate environment that preceded the Federal Reserve’s cycle of rate increases that it started early last year to push down inflation.

    JEPI’s approach may be attractive to investors who don’t need the income now. “We also see people using it as a conservative equity approach,” Reiner expects the fund to have 35% less price volatility than the S&P 500.

    Getting back to income, Reiner said JEPI was a good alternative even for investors who were willing to take credit risk with high-yield bond funds. Those have higher price volatility than investment-grade bond funds and face a higher risk of losses when bonds default. “But with JEPI you don’t have credit risk or duration risk,” he said.

    An example of a high-yield bond fund is the iShares 0-5 Year High Yield Corporate Bond ETF
    SHYG,
    -0.10%    .
    It has a 30-day yield of 7.95%.

    When discussing JEPI’s stock selection, Reiner said “there is a significant active component to the 90 to 120 names we invest in.” Stock selections are based on recommendations of JPM’s analyst team for those that are “most attractively priced today for the medium to long term,” he said.

    Individual stock selections don’t factor in dividend yields.

    Covered call strategies and an example of a covered-call trade

    JEPI’s high income is an important part of its low-volatility total-return strategy.

    A call option is a contract that allows an investor to buy a security at a particular price (called the strike price) until the option expires. A put option is the opposite, allowing the purchaser to sell a security at a specified price until the option expires.

    A covered call option is one an investor can write when they already own a security. The strike price is “out of the money,” which means it is higher than the stock’s current price.

    Here’s an example of a covered call option provided by Ken Roberts, an investment adviser with Four Star Wealth Management in Reno, Nev.

    • You bought shares of 3M Co.
      MMM,
      +1.63%
      on Jan. 20 for $118.75.

    • You sold a $130 call option with an expiration date of Jan. 19, 2024.

    • The premium for the Jan. 24, $130 call was $7.60 at the time that MMM was selling for $118.75.

    • The current dividend yield for MMM is 5.03%.

    • “So the maximum gain for this trade before the dividend is $18.85 or 15.87%. Add the divided income and you’ll get 20.90% maximum return,” Roberts wrote in an email exchange on Jan. 20.

    If you had made this trade and 3M’s shares didn’t rise above $130 by Jan. 19, 2024, the option would expire and you would be free to write another option. The option alone would provide income equivalent to 6.40% of the Jan. 20 purchase price in the period of a year.

    If the stock rose above $130 and the option were exercised, you would have ended up with the maximum gain as described by Roberts. Then you would need to find another stock to invest in. What did you risk? Further upside beyond $130. So you would have written the option only if you had decided you would be willing to part with your shares of MMM for $130.

    The bottom line is that the call option strategy lowers volatility with no additional downside risk. The risk is to the upside. If 3M’s shares had doubled in price before the option expired, you would still wind up selling them for $130.

    JEPI pursues the covered call options strategy by purchasing equity-linked notes (ELNs) which “combine equity exposure with call options,” Reiner said. The fund invests in ELNs rather than writing its own options, because “unfortunately option premium income is not considered bona fide income. It is considered a gain or a return of capital,” he said.

    In other words, the fund’s distributions can be better reflected in its 30-day yield, because option income probably wouldn’t be included.

    One obvious question for a fund manager whose portfolio has increased quickly to almost $19 billion is whether or not the fund’s size might make it difficult to manage. Some smaller funds pursuing narrow strategies have been forced to close themselves to new investors. Reiner said JEPI’s 2% weighting limitation for its portfolio of about 100 stocks mitigates size concerns. He also said that “S&P 500 index options are the most liquid equity products in the world,” with over $1 trillion in daily trades.

    Summing up the 2022 action, Reiner said “investing is about balance.” The rising level of price volatility increased options premiums. But to further protect investors, he and JEPI co-manager Raffaele Zingone also “gave them more potential upside by selling calls that were a bit further out of the money.”

    Don’t miss: These 15 Dividend Aristocrat stocks have been the best income builders

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  • I ruined my family’s finances by withdrawing from my 401(k) to buy a house – I regret it

    I ruined my family’s finances by withdrawing from my 401(k) to buy a house – I regret it

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    I recently made a panic decision to withdraw all my money from one retirement account and I am now closing on a house in February (about $200,000). I am 36 years old, married and have a 1-year-old. Half of me is regretting it, and I’m worried about next year’s taxes due to the withdrawal and the 10% penalty I paid.

    I have been saving up money with my family in order to buy our first home. Recently, however, interest rates have risen, making me worry that this window to get an affordable house was closing. In a fit of panic, I withdrew all of our $26,000 saved money from my 401(k), putting it in a high-yield savings account (3.75%). We have now chosen a home and will be using around $18,000 of this money for the down payment. 

    I am now worried that I might have to pay income taxes and a penalty for the withdrawal itself. I am extremely anxious over this situation as I feel I have destroyed our family’s financial future and that we cannot afford to pay taxes on the money I withdrew. 

    My main concern or question is, is there a way to tell the IRS that this money is being used toward a house? Retroactively? 

    See: I’m a single dad maxing out my retirement accounts and earning $100,000 – how do I make the most of my retirement dollars?

    Dear reader, 

    The first thing you need to do: Take a breath. Most decisions should not be made in a panic, especially when involving money. 

    Because you withdrew from your 401(k), yes, you will have to pay taxes and a penalty. Had it been a loan, you’d have to pay interest on what you borrowed, but it would be to your own account. Keep in mind however that loans from your employer-based retirement plans are also risky – if you were to separate from your job, for whatever reason, you’d be responsible to pay it back or it would be treated as a distribution.

    I understand your sense of urgency in wanting to buy a home during a more favorable market, but your time now should be spent on getting yourself financially situated and saving for the future. 

    “I wouldn’t advise this or done it this way, but he’s not stuck and it’s not detrimental – it’s just a tough lesson to learn,” said Jordan Benold, a certified financial planner at Benold Financial Planning.  

    Get very serious about your current finances and find a way to earmark a portion of your income to savings if at all possible. There are a few things you should be doing. 

    First, assess how much you will be paying in taxes and penalties. I’m not sure what your tax bracket is, but did this distribution push you into a higher tax bracket? You can use a calculator or talk to an accountant to see what that withdrawal will incur in taxes – then make sure you can pay it, or talk to the Internal Revenue Service about an extension. There are penalties for failing to file your taxes or pay them, and you don’t want to add that on top of your stress. 

    Also see: We have 25 years until retirement and are saving 25% of our income – are we doing it right? And are we saving too much?

    The IRS may not be able to do anything for you in terms of waiving those penalties – though it doesn’t hurt to ask, even if you have to wait on the phone for a while to talk to someone – but communication and attention to detail are key when it comes to your taxes. Getting an IRS agent on the phone and talking through your situation won’t be time wasted. There are so many rules, and an agent can help make sense of your options.

    Read: The days of IRS forgiveness for RMD mistakes may soon be over

    Once you get that sorted, look extremely carefully at whatever money you have coming in and what’s going out. You’re about to close on a home, and that costs money – not just the home itself, but all of the extras associated with closing. You may also need money for insurance, furniture, any repairs and so on if you haven’t factored that in yet, so fit that into your budget for when you sign the papers. Beyond that, list every expense you expect to have for the next 12 months – home insurance and taxes, a mortgage or utilities, groceries, medicine, any other nonnegotiable costs and add it all up. Don’t forget anything – ask your partner if there’s anything you may have forgotten. 

    Then compare it to your income. Are you under? Are you over? What changes can you make without totally draining your happiness? I always advocate for a balance…yes, in some cases you have to omit a few expenses for the time being when building up an emergency savings account or paying down debt, but don’t completely rob yourself of joy or all of your hard work may backfire. If you really need to buckle down, make a separate list of activities and entertainment you can get for free (or as close to free as possible)—walks in the park or on the beach with your partner and child, museums on free days, pot lucks and at-home movie nights with family and friends and so on. 

    Want more actionable tips for your retirement savings journey? Read MarketWatch’s “Retirement Hacks” column

    Earmark a portion of your income to replenish your retirement savings before you try saving for any other goals. (This is separate from an emergency savings account, however – you should have one of those.) You may do that with payroll deductions in your 401(k), or also by allocating some of your savings to an IRA outside of the 401(k). 

    Take some time to learn the rules of your retirement plans. For example, an IRA allows an investor to take $10,000 out of the account penalty-free if it’s for a first-time home purchase (whereas a 401(k) does not have that exception). It may be too late for that, but there are other perks with various retirement accounts. 

    The 401(k) has a higher contribution limit and also comes with the possibility of employer matches (if your company offers it), whereas an IRA allows for penalty-free withdrawals for college. With a traditional IRA, you’d have to pay taxes on the withdrawal, whereas with a Roth IRA you’ve already paid the taxes and won’t have to pay any more for withdrawing from your contributions (you may have to pay taxes on the earnings portion, so follow distribution rules closely).

    Remember – you don’t want to make distributions from your retirement savings for just anything. You can borrow money for a home or college, but you can’t borrow money for retirement, so it’s important to protect those accounts. Familiarize yourself with the pros and cons of all accounts so that you can maximize your savings and diversify your withdrawal options when you finally get to retirement. 

    So just buckle down, get yourself in order and think of the future. “He’s got plenty of time – 30 to 40 years to work,” Benold said. “This might be a distant memory that he hopes he can forget.” 

    Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com

    Readers: Do you have suggestions for this reader? Add them in the comments below.

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  • 10 simple investments that can turn your portfolio into an income dynamo

    10 simple investments that can turn your portfolio into an income dynamo

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    Many people are good at saving up money for retirement. They manage expenses and build up their nest eggs steadily. But when it comes time to begin drawing income from an investment portfolio, they might feel overwhelmed with so many choices.

    Some income-seeking investors might want to dig deeply into individual bonds or dividend stocks. But others will want to keep things simple. One of the easiest ways to begin switching to an income focus is to use exchange-traded funds. Below are examples of income-oriented exchange-traded funds (ETFs) with related definitions further down.

    First, the inverse relationship

    Before looking at income-producing ETFs, there is one concept we will have to get out of the way — the relationship between interest rates and bond prices.

    Stocks represent ownership units in companies. Bonds are debt instruments. A government, company or other entity borrows money from investors and issues bonds that mature on a certain date, when the issuer redeems them for the face amount. Most bonds issued in the U.S. have fixed interest rates and pay interest every six months.

    Investors can sell their bonds to other investors at any time. But if interest rates in the market have changed, the market value of the bonds will move in the opposite direction. Last year, when interest rates rose, the value of bonds declined, so that their yields would match the interest rates of newly issued bonds of the same credit quality.

    It was difficult to watch bond values decline last year, but investors who didn’t sell their bonds continued to receive their interest. The same could be said for stocks. The benchmark S&P 500
    SPX,
    -0.20%
    fell 19.4% during 2022, with 72% of its stocks declining. But few companies cut dividends, just as few companies defaulted on their bond payments.

    One retired couple that I know saw their income-oriented brokerage account value decline by about 20% last year, but their investment income increased — not only did the dividend income continue to flow, they were able to invest a bit more because their income exceeded their expenses. They “bought more income.”

    The longer the maturity of a bond, the greater its price volatility. Depending on the economic environment, you might find that a shorter-term bond portfolio offers a “sweet spot” factoring in price volatility and income.

    And here’s a silver lining — if you are thinking of switching your portfolio to an income orientation now, the decline in bond prices means yields are much more attractive than they were a year ago. The same can be said for many stocks’ dividend yields.

    Downside protection

    What lies ahead for interest rates? With the Federal Reserve continuing its efforts to fight inflation, interest rates may continue to rise through 2023. This can put more pressure on bond and stock prices.

    Ken Roberts, an investment adviser with Four Star Wealth Management in Reno, Nev., emphasizes the “downside protection” provided by dividend income in his discussions with clients.

    “Diversification is the best risk-management tool there is,” he said during an interview. He also advised novice investors — even those seeking income rather than growth — to consider total returns, which combine the income and price appreciation over the long term.

    An ETF that holds bonds is designed to provide income in a steady stream. Some pay dividends quarterly and some pay monthly. An ETF that holds dividend-paying stocks is also an income vehicle; it may pay dividends that are lower than bond-fund payouts and it will also take greater risk of stock-market price fluctuation. But investors taking this approach are hoping for higher total returns over the long term as the stock market rises.

    “With an ETF, your funds are diversified. And when the market goes through periods of volatility, you continue to enjoy the income, even if your principal balance declines temporarily,” Roberts said.

    If you sell your investments into a declining market, you know you will lose money — that is, you will sell for less than your investments were worth previously. If you are enjoying a stream of income from your portfolio, it might be easier for you to wait through a down market. If we look back over the past 20 calendar years — arbitrary periods — the S&P 500 increased during 15 of those years. But its average annual price increase was 9.1% and its average annual total return, with dividends reinvested, was 9.8%, according to FactSet.

    Also see: When can I sell my I-bonds? Are I-bonds taxed? Answers to your questions about Series I bonds.

    In any given year, there can be tremendous price swings. For example, during 2020, the early phase of the Covid-19 pandemic pushed the S&P 500 down 31% through March 23, but the index ended the year with a 16% gain.

    Two ETFs with broad approaches to dividend stocks

    Invesco Head of Factor and Core Strategies Nick Kalivas believes investors should “explore higher-yielding stocks as a way to generate income and hedge against inflation.”

    He cautioned during an interview that selecting a stock based only on a high dividend yield could place an investor in “a dividend trap.” That is, a high yield might indicate that professional investors in the stock market believe a company might be forced to cut its dividend. The stock price has probably already declined, to send the dividend yield down further. And if the company cuts the dividend, the shares will probably fall even further.

    Here are two ways Invesco filters broad groups of stocks to those with higher yields and some degree of safety:

    • The Invesco S&P 500 High Dividend Low Volatility ETF
      SPHD,
      -0.33%
      holds shares of 50 companies with high dividend yields that have also shown low price volatility over the previous 12 months. The portfolio is weighted toward the highest-yielding stocks that meet the criteria, with limits on exposure to individual stocks or sectors. It is reconstituted twice a year in January and July. Its 30-day SEC yield is 4.92%.

    • The Invesco High Yield Equity Dividend Achievers ETF
      PEY,
      -0.70%
      follows a different screening approach for quality. It begins with the components of the Nasdaq Composite Index
      COMP,
      +1.39%      ,
      then narrows the list to 50 companies that have raised dividend payouts for at least 10 consecutive years, whose stocks have the highest dividend yields. It excludes real-estate investment trusts and is weighted toward higher-yielding stocks meeting the criteria. Its 30-day yield is 4.08%.

    The 30-day yields give you an idea of how much income to expect. Both of these ETFs pay monthly. Now see how they performed in 2022, compared with the S&P 500 and the Nasdaq, all with dividends reinvested:


    Both ETFs had positive returns during 2022, when rising interest rates pressured the broad indexes.

    8 more ETFs for income (and some for growth too)

    A mutual fund is a pooling of many investors’ money to pursue a particular goal or set of goals. You can buy or sell shares of most mutual funds once a day, at the market close. An ETF can be bought or sold at any time during stock-market trading hours. ETFs can have lower expenses than mutual funds, especially ETFs that are passively managed to track indexes.

    You should learn about the expenses before making a purchase. If you are working with an investment adviser, ask about fees — depending on the relationship between the adviser and a fund manager, you might get a discount on combined fees. You should also discuss volatility risk with your adviser, to establish a comfort level and to try to match your income investment choices to your risk tolerance.

    Here are eight more ETFs designed to provide income or a combination of income and growth:

    Company

    		 Ticker

    		 30-day SEC yield

    		 Concentration

    		 2022 total return
    iShares iBoxx $ Investment Grade Corporate Bond ETF

    		 LQD,
    -0.36%         		4.98%

    		 Corporate bonds with investment-grade ratings.

    		 -17.9%
    iShares iBoxx $ High Yield Corporate Bond ETF

    		 HYG,
    -0.34%         		7.96%

    		 Corporate bonds with lower credit ratings.

    		 -11.0%
    iShares 0-5 Year High Yield Corporate Bond ETF

    		 SHYG,
    -0.26%         		8.02%

    		 Similar to HYG but with shorter maturities for lower price volatility.

    		 -4.7%
    SPDR Nuveen Municipal Bond ETF

    		 MBND,
    +0.04%         		2.94%

    		 Investment-grade municipal bonds for income exempt from federal taxes.

    		 -8.6%
    GraniteShares HIPS US High Income ETF

    		 HIPS,
    +0.82%         		9.08%

    		 An aggressive equity income approach that includes REITs, business development companies and pipeline partnerships.

    		 -13.5%
    JPMorgan Equity Premium Income ETF

    		 JEPI,
    -0.25%         		11.77%

    		 A covered-call strategy with equity-linked notes for extra income.

    		 -3.5%
    Amplify CWP Enhanced Dividend Income ETF

    		 DIVO,
    -0.55%         		1.82%

    		 Bue chip dividend stocks with some covered-call writing to enhance income.

    		 -1.5%
    First Trust Institutional Preferred Securities & Income ETF

    		 FPEI,
    +0.05%         		5.62%

    		 Preferred stocks, mainly in the financial sector

    		 -8.2%
    Sources: Issuer websites (for 30-day yields), FactSet

    Click the tickers for more about each ETF.

    Read: Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

    Definitions

    The following definitions can help you gain a better understanding of how the ETFs listed above work:

    30-day SEC yield — A standardized calculation that factors in a fund’s income and expenses. For most funds, this yield gives a good indication of how much income a new investor can be expected to receive on an annualized basis. But the 30-day yields don’t always tell the whole story. For example, a covered-call ETF with a low 30-day yield may be making regular dividend distributions (quarterly or monthly) that are considerably higher, since the 30-day yield can exclude covered-call option income. See the issuer’s website for more information about any ETF that may be of interest.

    Taxable-equivalent yield — A taxable yield that would compare with interest earned from municipal bonds that are exempt from federal income taxes. Leaving state or local income taxes aside, you can calculate the taxable-equivalent yield by dividing your tax exempt yield by 1 less your highest graduated federal income tax bracket.

    Bond ratings — Grades for credit risk, as determined by ratings agencies. Bonds are generally considered Investment-grade if they are rated BBB- or higher by Standard & Poor’s and Fitch, and Baa3 or higher by Moody’s. Fidelity breaks down the credit agencies’ ratings hierarchy. Bonds with below-investment-grade ratings have higher risk of default and higher interest rates than investment-grade bonds. They are known as high-yield or “junk” bonds.

    Call option — A contract that allows an investor to buy a security at a particular price (called the strike price) until the option expires. A put option is the opposite, allowing the purchaser to sell a security at a specified price until the option expires.

    Covered call option — A call option an investor writes when they already own a security. The strategy is used by stock investors to increase income and provide some downside protection.

    Preferred stock — A stock issued with a stated dividend yield. This type of stock has preference in the event a company is liquidated. Unlike common shareholders, preferred shareholders don’t have voting rights.

    These articles dig deeper into the types of securities mentioned above and related definitions:

    Don’t miss: These 15 Dividend Aristocrat stocks have been the best income builders

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  • The days of IRS forgiveness for RMD mistakes may soon be over

    The days of IRS forgiveness for RMD mistakes may soon be over

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    Katie St. Ores has a 100% track record of getting her tax clients out of paying the steep penalty for missing a required minimum distribution from their retirement funds. That amounts to only two households getting forgiveness, but it represents a lot of dollars, because the fee for any sort of mistake with RMDs is 50% of what’s missing, which could be tens of thousands of dollars.   

    Now’s the time to make things right if you forgot to make your RMD payment by Dec. 31 for 2022, paid the wrong amount or realized you got it wrong in a past year. The faster you correct it, the more likely the IRS is likely to waive the fines — and your chances are good overall, despite the agency’s stern reputation. 

    Beware, though, that new rules are going into effect in 2023 that could make the IRS less accommodating. For one thing, the age to start RMDs is going to 73 this year, and then 75 in 2033, which means the government is going to be hungry for the missing revenue. Even more important, the penalty will be reduced to 25% — or 10% if you’re really quick about reporting it. 

    The IRS doesn’t publicly track how many people miss or make mistakes with their RMDs, but financial advisers and tax professionals say it happens often enough, and they consider the IRS to be quite liberal about granting waivers. 

    St. Ores, who is a financial adviser and tax preparer based in McMinnville, Ore., thinks the IRS has responded generously so far because they know the rules are complex and mistakes happen.

    “They know people are getting up there in age, and so they’ve probably said up to now, let’s just grant it,” says St. Ores. 

    But the new penalties seem worded to avoid waivers in the future, especially because of the extra reduction to 10% if you act to quickly correct mistakes. Up to now, the IRS has taken pains to point out how to ask for a forgiveness on its website, but now there will be new emphasis on the lower penalties. 

    “The 50% penalty effectively ‘scared’ taxpayers to withdraw RMDs, so reducing the penalty could reduce the fear of additional tax, leading to more taxpayers missing their RMDs,” says St. Ores. “Between more taxpayers that potentially neglect to take their RMDs because of a not-as-high penalty and confusion over the current required age, the IRS will probably collect more taxes overall.”

    What to do about past mistakes

    There are a lot of different ways to mess up your required minimum distributions. The amount you’re supposed to pay is calculated according to a formula that takes your account balance of all your qualified tax-deferred accounts and multiplies it by a factor related to your age. 

    When you get started taking the money out, it works out generally to about 4% of the account value. You keep taking RMDs every year from your designated start time until the accounts are empty (or you die). The beginning age in the past was 70½, then it moved to 72, and now it’s changing to 73. 

    “These things can get complicated,” says Isaac Bradley, director of financial planning at Homrich Berg, an investment firm based in Atlanta. He advised one couple that accidentally took the distribution from the wrong spouse. 

    Another easy mistake is taking the wrong amount because of a math error. Sometimes, the problem is just about communication, because people tend to have multiple 401(k)s at old employers or several rollover IRAs that aren’t consolidated. The adviser helping make the calculations might not know of an account held at a different custodian, and that could throw off the whole equation.

    David Haas, a financial adviser and president of Cereus Financial Advisors, based in Franklin Lakes, N.J., has had to help family members correct RMDs, mostly having to do with inherited IRA accounts. 

    “You’re supposed to take RMD for the person who died, if they didn’t already take it,” he says, but a lot of people miss those in the confusion of grief. 

    Then once you inherit the account, you have to take RMDs over a 10 year period to empty the account. 

    “With one relative, she just kept on missing it and that was her fault. She didn’t realize what she was supposed to do. People don’t know the law, and it’s very confusing,” Haas says. 

    The first step is realizing you made a mistake, and then once you know that, pay the amount that’s missing. You need to file a special form with the IRS for the tax year in question (Form 5329), which you can send in at any point — you don’t have to wait until you file your next tax return. 

    If you want to ask for a waiver, you need to attach a letter explaining the mistake. If your request is not granted, then you pay the penalty.   

    While the process isn’t excessively complicated, you might want to consult with a tax professional to make sure you’re not making more mistakes in calculating the amount that’s missing. It could turn out to be a lot of paperwork if you have missed multiple years. 

    Kenneth Waltzer, a financial planner based in Los Angeles, had a client who did not realize he had inherited an IRA and missed the RMDs on it for five years. “He ignored emails about it,” says Waltzer. “When he came to us, it added up to over $100,000.” 

    For Katie St. Ores, the message going forward is going to be: Get it right the first time. Forgiveness may not be so easy to come by in the future. “I’m trying to stay on top of my clients taking their RMDs on time,” she says.  

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  • I am 60 and plan to retire in March. I have $113K in my 401(k) and no other savings, but I will get an early retirement package of 9 months salary. Should I get a pro to help me? 

    I am 60 and plan to retire in March. I have $113K in my 401(k) and no other savings, but I will get an early retirement package of 9 months salary. Should I get a pro to help me? 

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    Question: I am accepting an early retirement offer from my long-term employer of 24 years. In March of 2023, I will retire and receive nine months of salary as well as my benefits. During this time I will be looking for another job that’s 30 or 40 hours per week. I would like to do this in order to invest some of the stipend I will be receiving. I have approximately $113,000 in a 401(k) that I will also be looking to invest. I have no other savings or checking, and I am 60 years old. I need advice as to whether it would benefit me to hire a financial advisor outside of the one I have with a large investment company through my current employer. (Looking for a financial adviser too? This tool can help match you with an adviser who might meet your needs.)

    Answer:  While it may benefit you to work with a financial adviser outside of your employer, that’s not always the case. “It really depends on what the employer-adviser costs, what their fiduciary obligations may or may not be and how well-credentialed they are. If they’re low cost, act as a fiduciary, have a preeminent planning designation, then it may be a great fit, but if not, you may wish to find an adviser elsewhere,” says certified financial planner Philip Mock at 1522 Financial. 

    Have an issue with your financial adviser or looking for a new one? Email picks@marketwatch.com.

    For his part, certified financial planner Joe Favorito at Landmark Wealth Management says he recommends meeting with the current adviser and going over your situation along with your longer term goals to see if they’re competent and have done a good job up to this point. “If they aren’t, and you’re looking elsewhere, then I would suggest using whoever you choose exclusively because you want your financial plans to be one cohesive strategy and having two competing advisers can sometimes create more problems than you can solve,” says Favorito. (Looking for a financial adviser? This tool can help match you with an adviser who might meet your needs.)

    No matter which adviser you choose — or if you go it alone — you have a number of things you will want to consider here. “I’d want to know what your net monthly expenses will be in retirement in today’s dollars, whether you have any pensions expected in the future, and if not, what Social Security will look like at 67 and 70. I’d also want to know when you’d like to have the choice to quit working, but all of these questions come with assumptions, and my biggest concern is that you haven’t saved enough to quit working when you’d like,” says certified financial planner Adam Koos at Libertas Wealth Management. 

    Indeed, Koos says there are two possible scenarios here. “My guess is that either you’re going to need to save as much as you can between now and full retirement, or I would hope that you’re a relatively frugal individual. Case in point, if your Social Security comes out to $3,500 per month and your total retirement savings grows to $150,000 between now and retirement at 65, you can only expect a $500 per month gross check from your retirement portfolio, which puts your monthly gross retirement income at around $4,000 per month,” says Koos.

    The good news here is that that may be enough for you, and you plan to keep working and earning money that you can use to boost your retirement funds. And if you decide to go the financial adviser route, that person can help you invest your earnings and come up with a solid plan to ensure a smooth retirement. Make sure that whoever you work with has the ability to handle — or knows someone they can recommend — not just the investment advice, but all the other issues that become paramount as you get closer to your senior years. “This means estate planning, insurance planning and tax planning,” says Favorito.

    Something else to consider: Advisers say you should plan to have some liquid emergency savings on hand. “Your question about not having any other savings means you’re definitely in need of an emergency fund,” says Mock. Pros advise having between 3 and 6 months of living expenses in an emergency fund, regardless of whether you’re approaching retirement.

    You should also think about when you will take Social Security. If you retire at full retirement age (66 if you’re born between 1943 and 1954 and 67 if you’re born between 1955 and 1960), you’ll receive the maximum benefit. It’s best to delay taking Social Security as long as possible because benefits are increased by a percentage each month you delay starting after your full retirement age.

    If you can’t find a job you like because of a looming recession, it may make sense to enter the gig economy and work wherever you can to earn extra money. 

    Looking for a new adviser? Consider checking out professional planners using the National Association of Professional Financial Advisors (NAPFA) online tool since hiring a personal financial planner is highly recommended in your case, as the individual helping with your retirement plan at work likely doesn’t have the capabilities, license or legal ability to provide the kind of advice you’re going to need. (Looking for a financial adviser? This tool can help match you with an adviser who might meet your needs.)

    Questions edited for brevity and clarity.

    Have an issue with your financial adviser or looking for a new one? Email picks@marketwatch.com.

    The advice, recommendations or rankings expressed in this article are those of MarketWatch Picks, and have not been reviewed or endorsed by our commercial partners.

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  • Why Is Gen Z Saving More for Retirement than Millennials and Boomers?

    Why Is Gen Z Saving More for Retirement than Millennials and Boomers?

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    With inflation and the possibility of a recession on everyone’s mind, many are eager to safeguard their personal finances, especially retirement accounts.

    It turns out that Generation Z workers are taking those retirement savings particularly seriously — more so even than older generations, including millennials, Gen Xers, and baby boomers, per new research from BlackRock, and there are likely several contributing factors.

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  • I retired at 50, went back to work at 53, and then a medical issue left me jobless: ‘There’s no such thing as a safe amount of money’

    I retired at 50, went back to work at 53, and then a medical issue left me jobless: ‘There’s no such thing as a safe amount of money’

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    I had always said I was going to retire when I was 50. I had worked and saved since I was 16. Retiring without Medicare and Social Security is a scary thing. I wound up retiring then going back to work. At 53, I took a part-time job with a decent salary for the hours but I was sooooo bored. And then life rang my bell. 

    I had major medical problems. So major that when I was able to return to work they let me go because they didn’t think I could keep up with the workflow. They were probably right. Nobody else felt comfortable enough with my health issues to hire me. I applied for disability but was denied. I appealed and got my rejection to the appeal while I was in ICU. I appealed again and I was denied because they didn’t think anything changed from my original application.

    I am assuming you can imagine what my savings is now. I took early retirement, with the penalty, because I needed income. $4,000 a month wouldn’t have put a dent in my prescriptions.

    Everybody needs to know there’s no such thing as a safe amount of money set aside for retirement. Life happens and in the blink of an eye your whole life and everything you worked for can be gone. 

    See: I’m 68, my husband is terminally ill, and his $3 million estate will go to his son. I want to spend the rest of my days traveling – will I have enough money?

    Dear reader, 

    I normally only feature letters with questions for this column, but your note was just so important for other readers that I had to respond — and let others see what you’ve shared. 

    I’m so very sorry that you experienced this. Wanting to retire early isn’t inherently wrong — so many people wish to do it, especially after decades of working. But without the proper planning, it could lead to despair, especially if an emergency occurs.

    “Retiring early is a dream for many people,” said Landon Tan, a certified financial planner. “But those years of not working diminish your chance of a successful retirement more than almost any other metric we toggle when making financial plans.” 

    Retiring early means there are more years you need to be able to financially cover, and that requires money — a lot of it. When planning to retire early, those extra years need to be considered — at the forefront of retirement, but also in the back end if you live longer than anticipated. 

    “Today’s retirees are expecting their accumulated assets to work for them for 10-20 years longer than before,” said Glenn Downing, a certified financial planner and founder of CameronDowning. “Centenarians are no longer uncommon. For that to happen successfully, there needs to be more assets — simple as that.” Anyone should prepare to live longer than expected so their money does not outlast them, which can feel daunting. 

    Those missing years may also affect your Social Security benefits, which so many elderly Americans rely on for most of their retirement income. People retiring early should have a clear picture of what to expect from Social Security in the future, and how their plans may impact those expectations.  

    Leaving the workforce also means possibly losing out on participating in a group health plan, and I think we can say with certainty the pandemic has shown just how crucial health insurance can be in dire times. 

    You’re absolutely right: Retiring before Medicare is scary. Healthcare is expensive even without an emergency. Not everyone considers this expense when they’re dreaming about calling it quits in their 50s, but if they don’t have proper insurance lined up when they retire they could be blowing through their retirement budget quickly — or putting themselves in a very dangerous situation. Those years can feel long when Medicare eligibility only begins at age 65 for most Americans. And it also doesn’t take into consideration long-term care, which is an entirely other expense. Think nursing homes, home health aides and necessary medical equipment for daily activities.  

    Don’t miss: Retiring early this year? Look through Affordable Care Act plans now before the deadline Saturday

    Knowing how much is enough to have saved for retirement is very difficult. There is no such thing as one “safe” number before you retire, but there are a few guidelines one can follow to find security in old age. 

    Part of that equation comes down to personal circumstance: how much you typically spent in your pre-retirement life, how much you anticipate spending in retirement, various financial factors like taxes and cost of housing and utilities, and so on. And as you have experienced — and considerately reminding others — major unexpected emergencies can absolutely derail any sort of financial security. 

    Another factor is what is available to you in your older years. I’ll get to that in a moment in hopes it may help you or others in similar situations. 

    Retirees tend to focus on short-term changes, which can cause them to be unprepared for what the future holds, a recent survey found. Many retirees just deal with these emergencies as they come, according to research from the Society of Actuaries. The organization found more than seven in 10 retirees have thought about how their lives will change in the following decades, but only 27% feel financially prepared for it. 

    More than half of the retirees in the survey said they could not afford more than $25,000 for an unexpected emergency without jeopardizing their retirement security. More than half of Black respondents and Latino respondents said they couldn’t afford to spend $10,000 for a financial shock. 

    “The world can change around you really quickly, and you need to be prepared for the change and to deal with change,” said Anna Rappaport, a member of the Society of Actuaries Research Institute’s Aging and Retirement Program. Americans didn’t often plan for the shocks life could bring before the pandemic, and that hasn’t necessarily changed since, she said.  “The shocks were there before and the landscape just changed a little.” 

    Check out MarketWatch’s column “Retirement Hacks” for actionable pieces of advice for your own retirement savings journey 

    But you’re not alone. Many people have fallen into hard times before and during retirement, pandemic or no pandemic. You may already be exhausting all avenues, but this one retiree shared the steps he took when he lost his job at 58. He searched for another job for 18 months before taking one with a 40% pay cut, and had to live a lot leaner until he officially retired at age 64. That lifestyle included taking in a roommate, buying some household items at the dollar store and extreme meal planning. Here’s what he says about his retirement now. 

    If your medical condition allows, could you take on some part-time work, or find some ways to make money while working from home? Or could you possibly downsize where you live or take in a roommate? 

    I know you didn’t ask for any suggestions and I’m sure you’re already doing as much as you can to live comfortably, but there are plenty of resources you might want to consider if you haven’t already. 

    Have you explored any government benefits, such as assistance in costs for housing, heating or groceries? There are many federal and state programs available for seniors with needs for financial assistance — not just Supplemental Security Insurance and Medicaid, though of course those are the most prominently known. 

    AARP created a list of resources, broken up by state, and has its own services, such as helping people get back to work in their 50s and beyond. GoFundMe also has a list for financial assistance for older Americans. It includes options for housing, food, medicine and getting back into the workforce. States, and sometimes even individual cities, have departments and offices dedicated to aging issues, which you may want to try calling as well. There is help out there, even if it may not feel easy to find.  

    I wish you the best. 

    Readers: Do you have suggestions for this reader? Add them in the comments below.

    Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com

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  • The limit for 401(k) contributions will jump nearly 10% in 2023, but it’s not always a good idea to max out your retirement investments

    The limit for 401(k) contributions will jump nearly 10% in 2023, but it’s not always a good idea to max out your retirement investments

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    The federal government will allow you to save nearly 10% more for retirement in 2023. But it’s not likely that many will take advantage of the tax break. The simple reason: Most people don’t make enough money to save more from their paychecks. 

    The average amount that participants contribute is 7.3% of their salary, according to Vanguard’s How America Saves 2022 report. At that rate, you’d have to make more than $300,000 to hit the $22,500 maximum amount an employee can save in a workplace plan for 2023, up from $20,500 in 2022. To put it another way, to save the max, you’d have to put aside $1,875 per month, or $865 per paycheck if you’re paid biweekly.

    Only 14% of participants saved the maximum amount in 2020. 

    Few people will also likely take advantage of the increase in the catch-up contribution limit, which will allow those 50 and older to contribute an extra $7,500, up by $1,000 from 2022, for a total of $30,000. Vanguard’s report found that only 16% of those eligible participate, even though 98% of plans allow for catch-up contributions. 

    “The max numbers are very high. A lot of people don’t make that kind of money,” says Anqi Chen, assistant director of savings research at the Center for Retirement Research at Boston College. 

    You might not need to max out

    Not everyone needs that kind of money put away for retirement. The key is to save over time to eventually be able to replace your current income in the future, supplemented by Social Security. If you’re making $60,000 now, it wouldn’t make sense to try to save more than a third of your yearly income just because the government says you can.

    “You don’t want to deprive yourself today or later on. You want to balance that over time, to be able to maintain the same standard of living in retirement,” says Chen. 

    The tried-and-true method to get people to contribute to retirement savings is a monetary incentive: matching funds. That “free money” on the table is at the base of every recommendation for how much workers should contribute. Give at least up to the match, everyone says. But almost all company retirement plans offer matching funds, and it hasn’t yet solved the retirement crisis facing most Americans who haven’t saved enough. 

    Trend in deferral rate changes

    Vanguard 2022

    If there’s a takeaway from the new IRS limits, it’s that pushing up the limits every year does help. Retirement contributions have been indexed for inflation since 2001 for good reason, because legislators recognized that the amount you need in the future is constantly going up.

    Ten years ago, the maximum for 401(k) contributions was $17,000 and going back 30 years to 1992, it was $8,728. In today’s dollars, that certainly wouldn’t be enough.

    At the same time, the government has to cap it somewhere to put a limit on tax deferral, so you can’t just shelter all your income from the IRS. 

    “These annual step-ups matter over time, because saving for retirement is a multidecade thing,” says David Stinnett, head of strategic retirement consulting for Vanguard.

    His advice for those who can’t max out, particularly younger workers, is to at least contribute up to the company match and then automatically escalate your savings rate over time to something in the rage of 12% to 15%. 

    It can be helpful to think of the amounts in dollar terms, rather than percentages.

    “By starting small and thinking of it as just ‘3 pennies per dollar’ earned and then adding ‘2 pennies per dollar’ each year going forward, you’ll get on track to those recommended savings rates in no time,” says Tom Armstrong, vice president of customer analytics and insight at Voya Financial.

    Escalating over time does seem to move the needle, according to Vanguard’s study, at least if you look at the rate of people coming to the table. The voluntary participation rate was only 66%, but the participation rate for automatic enrollment was 93%. 

    “What that does is make it easy to save more,” says Stinnett. 

    Related: This easy, free iPhone hack could be the most important estate planning move you make

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  • Here are some key things to consider before tapping your retirement savings to pay off credit card debt

    Here are some key things to consider before tapping your retirement savings to pay off credit card debt

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    Malerapaso | Istock | Getty Images

    1. Most people should avoid 401(k) withdrawals

    Withdrawals from 401(k) accounts before age 59½ are subject to a 10% penalty and taxes. That means if you needed $15,000, you’d have to take out close to $24,000, after accounting for those charges, according to Fidelity.

    Of course, any cash you pull from the account will also miss out on market gains. Stocks have produced an average annual return of more than 10% over the last 100 or so years.

    All that “should combine to far outweigh the average credit card rate,” said Ted Rossman, a senior industry analyst at CreditCards.com.

    There may be exceptions, however.

    Stopping your 401(k) contributions for a while — or at least cutting back — and redirecting those funds to debt payoff might make sense.

    Ted Rossman

    industry analyst at CreditCards.com

    For people over 59½ and in a low tax bracket, a 401(k) withdrawal to pay off credit card debt may make sense because they’d avoid the 10% penalty and not be subject to a huge levy, explains Allan Roth, a certified financial planner and the founder of Wealth Logic in Colorado Springs, Colorado.

    “Certainly, the math can make it worth it,” Roth said.

    For most others, though, there are more appealing options than a withdrawal, Rossman said.

    2. Suspending contributions means you’ll miss out on your company match

    “Stopping your 401(k) contributions for a while — or at least cutting back — and redirecting those funds to debt payoff might make sense,” he said.

    Still, that advice comes with an asterisk.

    If your employer offers a company match, experts recommend you try to at least save up to whatever point that is, be it 3% or 5% of your paychecks.

    “That’s free money that often doubles your return right there,” Rossman said.

    A loan from your 401(k) plan is also usually preferable to a withdrawal, experts say.

    3. 401(k) loans come with caveats, too

    The interest rate on 401(k) loans is typically less than 5%, far less than the annual charge on most credit cards. The interest paid on the loan also goes back into your savings rather than to a bank.

    “Using a 401(k) loan to pay off high-interest debt, like credit cards, could reduce the amount you pay in interest to lenders,” said Jessica Macdonald, head of editorial content at Fidelity Institutional.

    Other benefits to a 401(k) loan, Macdonald said, are that they don’t require a credit check and they don’t show up as debt on your credit report.

    Brand X Pictures | Stockbyte | Getty Images

    But there are other factors to consider here, as well.

    For one, you’ll have to be able to repay the loan within five years. You could also face consequences if you leave your job and fail to pay the loan back. In such cases, your loan would be deemed in default, and you’d be hit with taxes and that 10% withdrawal penalty on whatever you still owe. And, again, your money will miss out on market returns.

    Anyone considering turning to their 401(k) to address credit card balances would also be wise to think about the behavioral reasons why they got into the debt in the first place, some experts say.

    “If one takes out money to pay off their credit card debt and then buys more to build the debt back up again, it backfired,” Roth said.

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  • What Is a Roth IRA? How It Works and How to Get One Started

    What Is a Roth IRA? How It Works and How to Get One Started

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    When it comes to retirement, saving sooner is better than saving later. But if you’ve already maxed out your 401(k) or don’t have the option to use a 401(k), you’ll have to turn to an IRA or individual retirement account.

    Traditional IRAs are just one of your options, however. You can instead put money into a Roth IRA. Financial advisors can help you navigate the ins and outs; however, knowing about Roth IRA withdrawal restrictions and annual contribution limits is essential before investing in this type of account.

    This article will explain a Roth IRA, how it works and how you can start one at the earliest opportunity.

    Related: When converting from an IRA to a Roth, do I have to file self-employment tax?

    What is a Roth IRA?

    A Roth IRA is a type of individual retirement account. As a tax-advantaged individual retirement account, Roth IRAs allow you to contribute after-tax dollars. The best way to understand a Roth IRA is to compare it to a traditional IRA.

    A traditional IRA is a tax-deferred account. You contribute money to a regular IRA pre-tax, so you don’t have to pay income taxes on any of those contributions (lowering your gross income).

    You can deduct contributions from your IRA each tax year. However, when you withdraw money from your regular IRA, you must pay taxes on those withdrawals since they are no longer tax-deductible.

    A Roth IRA is the opposite. You contribute money to the Roth IRA and are taxed on those contributions, just like the rest of your regular income.

    However, since that money is taxable income, you don’t owe any taxes when you withdraw money from your Roth IRA. You walk away with more money in Roth IRA income than traditional IRAs.

    You can still only take penalty-free withdrawals (or qualified distributions) after you are 59 1/2 years old, according to the SIPC. Still, Roth IRAs are excellent for securing tax-free income when you’re older, regardless of filing status. Roth IRAs are also FDIC-insured in most cases, usually up to $250,000.

    Roth IRAs are primarily advantageous if you think you’ll be in a higher tax bracket when you withdraw your money (which is true for many Americans). For instance, if you don’t have much money in your 20s and 30s but earn much more in your 60s, you’ll have to pay more taxes on your withdrawals if you use a traditional IRA.

    A Roth IRA allows you to circumvent this downside and have more retirement savings for your golden years. Thus, opening a Roth IRA at a trusted brokerage could be a great way to enjoy tax-free growth of your savings.

    How does a Roth IRA work?

    A Roth IRA works very similarly to a traditional IRA. You sign up for a Roth IRA account at a financing institution, like Fidelity or Vanguard, and regularly contribute to the account.

    Depending on your preferences, you can select your investments individually or have a fund manager take care of them. You can find a Roth IRA from many different financial sources, including:

    You have access to many different investment options through a Roth IRA, even if you do a Roth IRA conversion from another account.

    Note that all standard Roth IRA contributions have to be made in cash. Therefore, you can’t contribute money to your Roth IRA in the form of property or securities; you have to report those contributions, so they’re taxed according to your tax rate.

    Just like regular IRAs, Roth IRA investments grow tax-free. Notably, Roth IRAs are much less restrictive compared to other retirement accounts. You can maintain your Roth IRA indefinitely, and unlike traditional IRAs, there aren’t any required minimum distributions (RMDs).

    The early withdrawal penalty for this type of IRA is the same as with a standard IRA, even if you have a brokerage account handle it.

    Related: Do You Know the Difference Between a Traditional IRA, a Roth IRA, and a 401k?

    Are Roth IRAs insured?

    It depends. If your Roth IRA is at a bank, it may be classified under a separate insurance category compared to regular deposit accounts. Because of this, insurance coverage for most IRA accounts isn’t as comprehensive or robust.

    That said, the Federal Deposit Insurance Corp. (or FDIC) does provide insurance protection worth up to $250,000 for both traditional and Roth IRAs. Note that account balances are combined instead of protected individually, however.

    Contribution rules for Roth IRAs

    Roth IRAs, like other IRAs and retirement accounts like 401(k)s, have contribution limits. Roth IRA contribution limits prevent account holders from investing too much money into their accounts at once.

    For instance, in 2023, the total yearly contribution you can make to a Roth IRA is $6500 if you are under 50. If you are 50 or older, you can contribute another $1500 to your account as a catch-up contribution.

    Withdrawing from a Roth IRA

    Just like a traditional IRA, Roth IRAs have specific rules around withdrawals. Specifically, you cannot withdraw any earnings from your Roth IRA without incurring fees unless you are 59 ½ or older.

    Note that that’s not the same thing as contributions; you can withdraw contributions (such as the original amount of money you put into the account) at any point. This earnings withdrawal limit prevents people from using their Roth IRA as a traditional investment or stock trading account.

    Since most people retire around 59 ½, the government charges a 10% penalty and other taxation fees if you withdraw any earnings or gain money from your Roth IRA early.

    In addition, there’s a “five-year rule” to keep in mind. If you start your Roth IRA late in life, you can withdraw your earnings tax-free only if you withdraw that money five years after your first contribution to any Roth IRA under your name.

    The five-year time clock begins with your first contribution to any Roth IRA, not just the one from which you want to withdraw funds.

    Of course, there are some exceptions to these rules. You could avoid the 10% taxation and penalty rate if you use the earnings from your Roth IRA to buy a home for the first time. But in this case, you can only take out $10,000.

    Furthermore, if you have a permanent disability or pass away, you or your beneficiary can take money out of your Roth IRA.

    Bottom line: Try to plan that won’t be withdrawing money from your Roth IRA until you retire.

    Related: Should I Use a Roth IRA to Pay for College?

    What can you invest in with a Roth IRA?

    Once you open a Roth IRA, you can invest in a wide range of funds, stocks, assets and other investments. You can invest in the following:

    • Stocks

    • Mutual funds

    • Bonds

    • Exchange-traded funds or ETFs

    • Certificates of deposit or CDs

    • Money market funds

    • Cryptocurrencies, but remember that the IRS does not let you contribute cryptocurrency directly to your Roth IRA (unless you use a new type of Bitcoin IRA)

    Related: Best Retirement Plans – Broken Down By Rankings

    What are the benefits of Roth IRAs?

    Many people open Roth IRAs in conjunction with a 401(k) or instead of traditional IRAs, as Roth accounts offer particular advantages. Some of these include:

    • No minimum distributions are required: You don’t have to contribute a certain amount each year when you have a Roth IRA.

    • No income tax for inherited Roth IRAs: Therefore, if you pass your Roth IRA to an error or beneficiary, they can also get tax-free withdrawals (provided that you meet the five-year rule).

    • Easier withdrawals: With a Roth IRA, you can withdraw any contribution money without taxes or penalties (though you may face penalties if you withdraw investment earnings before the age of 59 ½).

    • Flexible contribution schedules: You can decide how much you contribute to a Roth IRA and when.

    • Plenty of time to add contributions: You have until the tax deadline each year to contribute more money into your Roth IRA to reach the $6500 limit.

    • Extra savings for retirement: You can combine your Roth IRA contributions with a 401(k) retirement plan.

    • Tax-free distributions: After you’ve held your Roth IRA for five years and are 59 ½ years old, you can take any distributions, including investment earnings, from your Roth IRA without paying federal taxes.

    • Open at any age: Anyone can open a Roth IRA at any age, provided they have earned income.

    How can you start a Roth IRA?

    Knowing how to start one for yourself and your retirement future is essential, given the benefits and importance of a Roth IRA.

    Check eligibility

    Your first step is ensuring you are eligible to open a Roth IRA account. Note that you must have earned some income for the current tax year — this does not include any inheritance money you may have received from others.

    Furthermore, income limits may prevent you from opening a Roth IRA. For instance, in the 2023 tax year, the income “phase-out” range (the income bracket allowed to make reduced contributions) is $138,000 and $153,000 as an individual or $218,000-$228,000 as a couple filing jointly.

    Remember, too, that there are limits on how much you can invest into your Roth IRA each year.

    Related: Learn How to Invest Beyond Stocks, FDs, Property And Gold

    Find an investment platform

    Your next step is finding the right investment platform to open a Roth IRA. Practically every stock investment company offers Roth IRA accounts. If you already have a 401(k) or traditional IRA account, you can open a Roth IRA at the same organization, which may be easier than finding another organization.

    Regardless, if you find a good platform or financial institution, ask questions like:

    • Whether there are fees to open or maintain your account (such as annual fees).

    • What kind of customer service the company provides.

    • What types of investments the company offers for your Roth IRA.

    • Whether it costs money to trade with your IRA, which could be important if you plan to buy and sell stocks or securities with your account.

    Examples of institutions that offer Roth IRAs include Fidelity Investments, Vanguard and Charles Schwab.

    Apply for a Roth IRA

    Now it’s time to complete the necessary paperwork and apply for a Roth IRA. You can usually do this online or in person if there’s a local branch of your financial institution nearby.

    In any case, you’ll need a few pieces of key information to complete the process:

    • Your Social Security number or SSN.

    • Your driver’s license or some other type of photo ID.

    • The bank routing number and checking or savings account number that you want to use to contribute money to your account.

    • The name and address of your employer.

    • The name, address and Social Security number for your plan beneficiary; this is the person who can receive money in your Roth IRA if you die.

    Choose your investments

    After opening your Roth IRA, you get to pick your investments. Most financial institutions have advisors to help you choose suitable investments for your portfolio based on your goals.

    For instance, if you want to grow your Roth IRA slowly but surely, your investment advisor may recommend that you choose safe investments.

    If, on the other hand, you are young and looking to save aggressively, they may recommend more aggressive, risky investments since you have time to make up for any lost income.

    Because many people live longer than before, it may be wise to keep many stocks in your portfolio as you age. Since you live longer, it could be wise to continue holding assets in your Roth IRA even after you retire so you can continue making money to pull from.

    Related: Roth IRA – Entrepreneur Small Business Encyclopedia

    Make contributions

    Now, you have to make regular contributions to your Roth IRA. Remember, there are no limits on when you can make contributions; you just have to contribute up to the limit to maximize your portfolio’s growth.

    As you can see, there’s a lot to like about Roth IRAs, and getting one started is just as easy as starting a traditional IRA. Consider your options carefully before contributing to any retirement account, as the penalty for withdrawing ahead of retirement can make switching your plans more costly than you think.

    Looking for more? Explore Entrepreneur’s vast library of professional and business resources here.

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  • Here are MarketWatch’s most popular Moneyist advice columns of 2022

    Here are MarketWatch’s most popular Moneyist advice columns of 2022

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    What fresh shenanigans and money dilemmas enthralled readers in 2022?

    Another year of broken promises, dodgy dealings and moving letters about how to get back on one’s feet after divorce, unemployment and even a 15-year abusive relationship. 

    The most widely-read Moneyist of 2022, however, was actually one of the shortest letters from someone called ‘Surprised Sister.” The answer, as is often the case, was not so simple, nor so short.

    Here is the No. 1 Moneyist column of the year: ‘We are surprised and bewildered’: My brother passed away and left his house, cash and possessions to charity. Can his siblings contest his will?

    My response: There are times to contest a will: a parent who was being controlled by a new friend or greedy child, and/or someone who was forced to change their will when they were not of sound mind.

    But her own legal advice notwithstanding, I suggested she should accept your brother’s wishes. Feeling aggrieved that she did not inherit his estate is not enough to break his will. 

    Separate the emotions from the finance, and the answer often reveals itself. But there were others that ran the gamut from romance to stocks. They other most-read columns are an eclectic bunch:

    Here are the 5 runner-ups:

    1. I had a date with a great guy. I didn’t drink, but his wine added $36 to our bill. We split the check evenly. Should I have spoken up?

    It would be nice to offer to take the booze off the check, you were a non-drinker, would you speak up at one drink or two or three, if your date split the entire bill 50/50? 

    The financial intricacies of dating are like an onion that can be peeled ad infinitum. We’ve had plenty to chew over. Paying for one of your date’s drinks is OK, paying for two is pushing it.

    1. My father offered his 3 kids equal monetary gifts. My siblings took cash. I took stock. It’s soared in value — now they’re crying foul

    “The Other Brother” wrote that his father offered three children a choice: stocks or cash. The other two siblings took the cash. He took the cash. The stock soared. Dems are the breaks.

    Her siblings could have chosen stocks over cash, but they wanted immediate gratification. That was their decision, and they are going to have to take ownership of their choice and live with it.

    1. I’m an unmarried stay-at-home mother in a 20-year relationship, but my boyfriend won’t put my name on the deed of our house. Am I unreasonable?

    They have been in a 20-year relationship and have a 10-year-old child. “Not on the Deed” said she and her partner have had several tense “discussions” about adding me to the deed.

    I told her that her contribution to your partnership is valuable, her sense of worth is valuable, and her role as a homemaker and a mother is also valuable. Yes, he should add her.

    1. My friend got us free theater tickets. When I got home, she texted me, ‘Can you get our next meal or activity?’ Am I obliged to treat her?

    Even amidst the fights over inheritances, some breaches of social and financial etiquette seem so bizarre some people might think, ‘That behavior is too outrageous to be believable.” 

    The letter writer received free theater tickets, they split the bill 50/50 even though her friend had a cocktail, and she paid $10 for parking. Is he obliged to take her out again? No-can-do.

    1. My date chose an exclusive L.A. restaurant. After dinner, he accepted my credit card — and we split a $600 bill. Shouldn’t he have paid?

    Another dating story, this time where the guy chose a fancy restaurant and, as the date wore on, things took a turn for the worst, at least in the letter writer’s eyes: She was asked to split the bill.

    What if they didn’t get along? What if he was an abortion-rights supporter and she was anti-abortion? What if he was a Republican and she was a Democrat? Or vice-versa?  Always be prepared to pay.

    Follow Quentin Fottrell on Twitter.

    You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com.

    Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Readers write to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

    The Moneyist regrets he cannot reply to questions individually.

    More from Quentin Fottrell:

    ‘I’m left with a $100 Bûche de Noël for 10 people — and no place to go’: My friends canceled Christmas dinner. Should I end the 30-year friendship?

    I met my wife in 2019 and we married in 2020. I put her name on the deed of my $998,000 California home. Now I want a divorce. What can I do?

    I want to meet someone rich. Is that so wrong?’ I’m 46, earn $210,000, and own a $700,000 home. I’m tired of dating ‘losers.’

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  • As the cost of living skyrockets, nearly 1 in 3 adults rely on their parents for financial support

    As the cost of living skyrockets, nearly 1 in 3 adults rely on their parents for financial support

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    As the cost of living skyrockets, many adults are turning to a familiar safety net: mom and dad.

    Nearly a third of millennials and Gen Zers, over the age of 18, get financial support from their parents, according to a new survey by personal finance site Credit Karma. The site polled more than 1,000 adults in October.

    More than half of parents with adult children said their kids are living with them. Another 48% said they pay for their kids’ cell phone plan, car payments or other monthly bills. Nearly a quarter also said they provide their adult children with a regular allowance, pay some or all of their rent or have them as an authorized user on their credit card, the report found. 

    “What used to be paying your kid’s cell phone bill every few months has now turned into a much more extensive set of expenses for many parents,” said Courtney Alev, Credit Karma’s consumer financial advocate.

    More from Personal Finance:
    1 in 5 young adults have debt in collections, report finds
    Gen Zers are home for the holidays on mom and dad’s dime
    63% of Americans are living paycheck to paycheck

    Multigenerational households can be a way to save

    During the pandemic, the number of adults moving back in with their parents — often referred to as “boomerang kids” — temporarily spiked to a historic high.

    Most said they initially moved in with their parents out of necessity or to save money. Hefty student loan bills from college and soaring housing costs have put a financial stranglehold on those just starting out. The surging cost of living and sky-high rents are making it harder to move on.

    The number of households with two or more adult generations has quadrupled over the past five decades, according to a separate report by the Pew Research Center based on census data from 1971 to 2021. Such households now represent 18% of the U.S. population, it estimates.

    Finances are the No. 1 reason families are doubling up, Pew found, due in part to ballooning student debt and housing costs.

    Now, 25% of young adults live in a multigenerational household, up from just 9% five decades ago.  

    In most cases, 25- to 34-year-olds are living in the home of one or both of their parents. A smaller share live in their own home and have a parent or other older relative staying with them.

    Not surprisingly, older parents are also more likely to pay for most of the expenses when two or more generations share a home. The typical 25- to 34-year-old in a multigenerational household contributes 22% of the total household income, Pew found. 

    How to achieve financial freedom

    For parents, however, supporting grown children can be a substantial drain at a time when their own financial security is at risk.

    In an economy that has produced the highest inflation rate since the early 1980s, the cost of providing support has risen sharply. According to Credit Karma, 69% of the parents who help their adult children said it causes them financial stress.

    “It’s essential that parents do what they can to first take care of themselves financially, before offering financial support to their adult children,” Alev said.

    “Like with anything, make a budget for your income and expenses, factoring in savings, debt repayment and, if possible, contributions to a retirement fund,” she advised.

    “Once you’ve done that work, see how much you have left over to feasibly help your adult kids and set that expectation with them. You might even consider setting an expiration date to give your adult children a timeline for when they need to be back on their feet.” 

    Subscribe to CNBC on YouTube.

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  • Home Page – MarketWatch

    Home Page – MarketWatch

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    Twitter voters favor Elon Musk stepping down, as Tesla shares rise

    Nearly 58% or about 17.5 million Twitters votes were cast in favor of Elon Musk stepping down from the company, Musk’s Twitter account said Monday. Meanwhile shares of Tesla Inc. , the electric car company that Musk also runs, saw its stock rise by 4.7% in premarket trades. Musk has been running Twitter for 53 days, during which time he’s laid off a large percentage of the company’s work force and drawn criticism recently for suspending accounts of four journalists. The latest controversy revolved around whether Twitter would ban accounts that post links or usernames for certain “prohibited” third-party social media platforms. The social media platform announced the ban and then seemingly rescinded the rule about 12 hours later. During that issue, Musk then asked Twitter users to vote on whether he should continue to run the company.

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  • Home Page – MarketWatch

    Home Page – MarketWatch

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    Retail sales drop 0.6% in November, weakest data of the year

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  • These are the top 10 mistakes people make when planning for retirement

    These are the top 10 mistakes people make when planning for retirement

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    We all make mistakes in planning for our golden years. But which are the worst, which are the most common, and which ones do we all need to watch out for?

    Financial planners have weighed in with the top 10 they see among clients. It’s emerged in a survey conducted by money managers Natixis and just released. And it’s a terrific checklist for anyone who wants to see how they’re doing, and what they need to change.

    The…

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  • Offering This Benefit Can Help You Attract and Retain Key Talent — But Here’s What You Should Know First

    Offering This Benefit Can Help You Attract and Retain Key Talent — But Here’s What You Should Know First

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    Opinions expressed by Entrepreneur contributors are their own.

    A nonqualified deferred compensation (NQDC) plan is a great way for employers to attract and retain key talent. It also represents a potentially massive tax savings opportunity for highly compensated employees. There is a lot that you need to know about these plans before deciding to participate in one, however. So, let’s get into the basics.

    A nonqualified deferred compensation (NQDC) plan allows employees to earn their pay, potential bonuses and other forms of compensation in one year but receive those earnings in a future year. This also defers the income tax on the compensation. It helps provide income for the future, and there’s a possibility for a reduced amount of income tax payable if the employee is in a lower tax bracket at the time of the deferred payment.

    It’s worth noting that tax law requires these NQDC plans to be in writing. There needs to be documentation about the amount being paid, the payment schedule and what the future triggering event will be for compensation to be paid out. There also needs to be an assertion from the employee of their intent to defer the compensation beyond the year.

    Related: Is Your Business Approaching 409A Valuations the Right Way?

    Retirement planning

    A NQDC plan is a contractual fringe benefit often included as part of an overall compensation package for key executives. It can serve as an important supplement to traditional retirement savings tools, such as individual retirement accounts — IRA and 401(k) plans.

    Like a 401(k), you can defer compensation into the plan, defer taxes on any earnings until you make withdrawals in the future and designate beneficiaries. Unlike a 401(k) plan or traditional IRA, there are no contribution limits for an NQDC — although your employer can set its own limits. Therefore, you can potentially defer up to all your annual bonuses to supplement your retirement. We have seen companies allow you to defer as much as 25-50% of your base salary as well.

    Employers: Take note

    NQDC plans carry some benefits for employers as well. The plans are a low-cost endeavor. After initial legal and accounting fees, there are no annual payments required. There are no unnecessary filings with government agencies like the Internal Revenue Service.

    Since the plans are not qualified, they are not covered under the Employee Retirement Income Security Act (ERISA). This provides a greater amount of flexibility for both employers and employees. Employers can offer NQDC plans to select executives and employees who would benefit the most from them.

    Companies can customize plans toward valued members of their workforce, creating incentives for these employees to remain with the company. For example, an employee’s deferred benefits could be rendered forfeit if said employee decides to leave the company before retirement. We call this strategy a “golden handcuffs” approach.

    Related: Why Good Employees Leave — and What You Can do About It

    Employees: Take note

    For highly compensated employees, social security and 401(k) can only replace so much of your income in retirement. You could potentially build up the bulk of your retirement savings with your NQDC plan. There’s also the bonus of reducing your annual taxable income by deferring your compensation. This brings into play the idea of being in a lower tax bracket, decreasing the amount of taxes you would need to pay. Many employers even incentivize this, offering a match of some kind.

    Timing of payment

    The timing of when you take NQDC distributions is important since you’ll need to project your potential cash flow needs and tax liabilities far into the future.

    Deferred compensation plans require you to make an upfront election of when you will receive the funds. For example, you might time the payments to come at retirement or when a child is entering college. In addition, the funds could come all at once or in a series of payments. There is tremendous flexibility often in these plans.

    Taking a lump-sum payment gives you immediate access to your money upon the distributable event (often retirement or separation of service). While you will be free to invest or spend the money as you wish, you will owe regular income taxes on the entire lump sum and lose the benefit of tax-deferred compounding. If you elect to take the money in installments, the remainder can continue to grow tax-deferred, and you’ll spread out your tax bill over several years.

    Related: Best Retirement Plans – Broken Down By Rankings

    Risks

    An NQDC plan does come with some risks. When you participate in a qualified plan, your assets are segregated from company assets, and 100% of your contributions belong to you. Because a Section 409A plan is nonqualified, your assets are tied to your employer’s general assets. In case of bankruptcy, employees with deferrals become unsecured creditors of the company and must line up behind secured creditors in the hopes of getting paid.

    Thus, you should consider how much of your wealth — including salary, bonus, stock options and restricted stock — is already tied to the future health and success of one company. Adding deferred compensation exposure may cause you to take on more risk than is appropriate for your personal situation.

    Before you choose to participate in an NQDC plan, you should speak with both your financial advisor and your tax professional. You really want to model out how and when you will receive these disbursements. Ideally, you are planning with enough foresight that you will offset this income tax event in retirement with withdrawals from a brokerage account or a Roth IRA or 401(k). You will also want to pay attention to the impact of high income with the taxation of Medicare Part B — if you think there are a lot of moving parts here, you are right! When executed properly, you can truly develop a unique plan that is customized to your exact living situation and future goals.

    Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate.

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    Chris Kampitsis

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  • Vanguard sees a recession in 2023 — and one ‘silver lining’ for investors

    Vanguard sees a recession in 2023 — and one ‘silver lining’ for investors

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    The last 12 months was a year of fast-rising inflation, fast-rising interest rates and fast-rising questions about a future recession.

    Prices went up while stock markets and savings account balances went down, leaving consumers and investors dizzy and their wallets hurting.

    There may be more financial pain, that’s pretty sure — but it might not be as bad as feared, according to Vanguard’s look ahead to 2023.

    The likely recession will not send jobless rates charging sharply higher, sticker shock will fade for the price of goods, and the rise in rent and mortgages will also ease, Vanguard said.

    “On Tuesday, inflation data for November showed prices are continuing to cool. Analysts say that makes a 50-basis point increase, rather than a 75-basis-point increase, more likely.”

    The good news: This opens up chances for stocks to rebound, the asset-manager added.

    The outlook, released this week, comes as Americans are trying to guess what 2023 holds for their finances while they manage their holiday shopping budgets, and 2022 investments.

    On Tuesday, inflation data for November showed prices are continuing to cool. From October to November, the cost of living nudged up 0.1%, lower than the 0.3% forecast, the Consumer Price Index showed. Year over year, the inflation rate receded to 7.1% from 7.7% in October, according to the CPI data.

    On Wednesday, the Federal Reserve will announce its latest decision on interest rate increases. A 50-basis point increase is widely expected after four jumbo-sized 75-basis point hikes from the central bank.

    Here’s one roadmap for what’s next, as far as Vanguard’s researchers and experts can see.

    Hot inflation will cool

    Inflation rates during 2022 climbed to four-decade highs. There have been signs of easing, such as smaller-than-expected price increases in October.

    “As we step into 2023, early signs of a recovery in goods supply and softening demand could help balance supply and demand for consumption goods and bring prices lower,” the authors noted ahead of Tuesday’s CPI numbers.

    But the cost and demand of services are going to prevent a quick fall, they noted. Signs of slowing price increases are already emerging in rents and mortgages, but they will take longer to ease than prices of consumer goods, the authors said.

    That echoes the view from Treasury Secretary Janet Yellen, who said Sunday there will be “much lower inflation,” absent any unanticipated shocks to the economy.

    But while hot inflation will cool, it will still be warm to the touch. The Fed says 2% inflation is its target goal; Vanguard sees 3% inflation by the end of 2023.

    A recession is very much on the cards

    As “generationally high inflation” slowed economies across the world, the Fed and other central banks have countered with interest-rate increases to tame price increases. That “will ultimately succeed, but at a cost of a global recession in 2023,” according to Vanguard’s report. Vanguard sees a 90% chance of a recession in the United States by the end of next year.

    Vanguard is hardly alone in the recession call, so the question is how bad could the big picture look?

    In Vanguard’s view, it’s not so bad. “Households, businesses, and financial institutions are in a much better position to handle the eventual downturn, such that drawing parallels with the 1970s, 1980s, 2008, or 2020 seems misplaced,” the authors wrote.

    Job losses may be clustered

    For now, the jobless rate in a tight labor market is 3.7%, which is just a little above the lowest levels in five decades. That stands against the headline-grabbing list of companies where layoffs are mounting, notably in the tech sector.

    When a recession, in all likelihood, lands next year, “unemployment may peak around 5%, a historically low rate for a recession,” the Vanguard outlook said. As interest rates climb, the job losses “should be most concentrated in the technology and real estate sectors, which were among the strongest beneficiaries of the zero-rate environment.”

    The unemployment rate going from 3.7% to the 5% vicinity is “a sizable move,” Roger Aliaga-Díaz, Americas chief economist for Vanguard, said in a Monday press conference on the report. “But it is less dramatic of a rise than compared to past recessions perhaps.”

    Spotting the opportunities

    When interest rates go up, bond prices go down. So it’s been difficult for bonds with lower returns and “near-term pain” for investors this year, the Vanguard outlook said.

    “However the bright side of higher rates is higher interest payments. These have led our return expectations for U.S. and international bonds to increase by more than twofold,” the report said.

    Vanguard said U.S. bond return projections could be 4.1% – 5.1% annually over the next year versus its 1.4% – 2.4% return estimate last year. For U.S. stocks, the forecast could be 4.7% – 6.7% annually, while returns in emerging market equities could be between 7% and 9%.

    On Tuesday morning, stock markets are soaring higher on the cooler than expected inflation data, igniting hopes of an end of year Santa Claus rally.

    “‘There’s one silver lining of our outlook for a modest global recession. And it’s the clear silver lining of higher expected returns for investors.’”


    — Joseph Davis, Vanguard’s chief global economist

    Still, the Dow Jones Industrial Average
    DJIA,
    +0.30%
    is down nearly 5% year to date. The S&P 500
    SPX,
    +0.73%
    is off 14% in that time and for the Nasdaq Composite
    COMP,
    +0.38%
    is down more than 26%.

    When the market hits bottom is impossible to know, the outlook said — but it noted “valuations and yields are clearly more attractive than they were a year ago.”

    “There’s one silver lining of our outlook for a modest global recession. And it’s the clear silver lining of higher expected returns for investors,” said Joseph Davis, Vanguard’s chief global economist.

    “We’re long concerned that the low rate environment was both unsustainable and ultimately a tax and a headwind for savers and long term investors,” Davis said.

    But even with all the turbulence this year, “we certainly are starting to see the dividends to higher real interest rates around the world in the higher projected returns that we anticipate for investors over the coming decade.”

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  • ‘It’s possible the market can rally’: Financial advisors say a recession isn’t inevitable

    ‘It’s possible the market can rally’: Financial advisors say a recession isn’t inevitable

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    Ascentxmedia | E+ | Getty Images

    ‘It’s possible that the market can rally’

    There’s a difference between what CEOs forecast for the economy and how the market will perform, Karen Firestone, chairman and CEO of Aureus Asset Management, said Tuesday during the CNBC Financial Advisor Summit.

    That’s because investors try to get ahead of what’s coming and price those expectations into stocks, Firestone said.

    “The market always anticipates slowdowns and recoveries,” she said, adding that people inevitably resume their buying when they believe stocks are sufficiently discounted.

    She reminded investors that the market bottomed in March 23, 2020 “after it had fallen 34% and we hadn’t even locked down for more than a week. That was the beginning of Covid, but it was the beginning of a bull market.”

    “And so yes,” she said, “I think it’s possible that the market can rally.”

    ‘I think we need to…be very, very granular’

    Another problem with sweeping generalizations and predictions for stocks is that “everything in this market right now is moving asynchronously,” said Jenny Harrington, CEO and portfolio manager at Gilman Hill Asset Management, in New Canaan, Connecticut.

    Although there’s been a slowdown in the housing market, Harrington pointed out, airline and hotel companies are seeing an uptick in profits.

    “I think we need to right now be very, very granular,” she said.

    More from Personal Finance:
    Robinhood to pay 1% ‘match on consumer contributions to IRAs
    4 key year-end moves to ‘control your tax reporting destiny’
    Why more workers need access to retirement savings

    For her clients, Firestone is on the lookout for discounts in the market.

    ‘There are opportunities in sectors and in stocks that have had their own internal recession because of what’s happened with the pandemic, or coming out of it,” Firestone said. For example, stocks in the advertising sector are trading at lower prices than usual.

    “We can say, ‘At these prices, there’s something to look forward to,’” she said.

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  • This 82-year-old retiree makes makes moose calls

    This 82-year-old retiree makes makes moose calls

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    Butch Phillips, an 82-year-old member of the Penobscot Nation, etches 18-inch long moose call horns from birch bark he harvests off tribal land. While some moose calls he gives away to local hunters, others have sold at auction for as much as $3,200 and some sit in museums.

    “It’s very exciting calling a moose. You can hear them coming. Snuffing and grunting,” said Phillips, who hunts a moose each year on tribal land, the largest being 940 pounds. He also sometimes calls moose just to watch them and study them.

    Based in Milford, Maine, Phillips has been making the moose calls, which are hornlike devices used to attract moose when hunting, for about 30 years with a wooden-handled knife his late wife bought him. He has more orders than he can keep up with, due in part to some local media coverage and word-of-mouth. He hopes to pass down his skills to his grown sons.

    Phillips retired 31 years ago from telecommunications jobs with NYMEX and AT&T
    T,
    -0.49%    ,
    and he’s been filling his time with his etching talents ever since.

    “I just can’t imagine being retired with nothing to do. I think I’d go crazy,” Phillips said.

    Plus, in the winter, etching gives him something productive to do to pass time.

    “There’s not a lot you can do outdoors. It gives me something to do rather than just sitting around. Can you imagine doing that for 31 years?” Phillips said.

    Phillips used to make moose calls by peeling a piece of bark off a tree and using it for the day and tossing it aside. Then he started tying spruce roots around the bark to help keep the shape and use it again and again. Hunters started asking for his moose calls and his work spread by word-of-mouth.

    Phillips in a 14-foot birch bark canoe that he built.


    Credit: Butch Phillips

    “Some hunters will use a roadside cone to call a moose. I wanted to do it the traditional way. A large majority of native hunters use a birch bark call,” Phillips said.

    He uses a variety of tools, but the knife given to him by his late wife is his most treasured tool.

    “The blade’s pretty much worn down. But I treasure it. It’s very special,” Phillips said.

    As he became more adept at making moose calls, Phillips started making more permanent models, refining the workmanship and using thicker bark that was suitable for etching.

    “I decided to do etching like they did in the old days. Everything they used to make, they carved. My artwork evolved. I try to keep the older designs alive. I’ve taken symbols like the Wabanaki symbol and incorporated them into the art to keep them alive. I use plants and trees as fillers,” Phillips said.

    “In most of my art work, I try to combine people, plants and animals. We always memorialize our ancestors. And plants and animals are what we owe gratitude to for keeping us alive,” Phillips said. “In our prayers, we always give thanks to ancestors, plants and animals. There’s a theme.”

    Phillips said he writes up explanations of the symbols so each buyer knows what the designs mean. Diamond shapes, for example, represent wigwams, he said. More often these days his buyers are collectors rather than moose hunters.

    Phillips is an expert in his materials.

    “All bark is not created equal. There’s curly bark, thick, thin, white, dark, gray. I use bark that is thick and pliable and doesn’t separate into layers,” Phillips said.

    With winter bark, it’s brown with a thick rind on the inside. He has to take it off the tree carefully and scrape away the rind to make designs. He can approach the etching in two ways – either scraping away the entire background and leaving just a thin image, or carve images onto rind. Summer bark has no rind and is just yellow.

    His museum-quality pieces have used winter bark with an elaborate scraping process that leaves thin details for designs. Those are the toughest to do, he said.

    Phillips approaches each moose call with an open mind and has no preconceived idea of what the designs will be. The bark just speaks to him.

    “I never plan on paper what it’s going to look like. Most of the time I have no idea until it evolves,” Phillips said.

    In the center of the device, he often puts an image of a moose or a moose head. For special orders, he might be asked to incorporate an image of a hawk or favorite dog or even a woodpecker, in one case. He adds touches like a flower, acorns or moose tracks to fill in blank areas.

    “Each side is balanced because nature is balanced,” Phillips said. “Every design is unique.”

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