Fresh starts are nice. That largely explains our natural drive to celebrate the New Year with such hope and joy. After a year like 2022, and especially for retired investors, I’d say a fresh start is well deserved!

Before looking forward, let’s first run the numbers for 2022. With stocks declining about 20% and with bonds dropping about 13% for the year, there were very few places to hide. Given the dual decline in both stocks and bonds, the primary risk management tool of asset allocation failed to deliver. The end result? Last year was one of the worst on record for conservative investors with balanced portfolios.

Today, on the other hand, a broadly diversified bond portfolio made up of a combination of US Treasuries, mortgages and corporate bonds now sports a yield-to-maturity of about 5%. From an income perspective, bonds are now putting up a real fight against stocks. With interest rates having been pinned down by the Federal Reserve for much of the last 15 years, this hasn’t been the case in a long, long time. 

For those sitting with a lot of cash in the bank or parked in a money market fund, it might be enticing to just do nothing and keep that money safe. That’s especially true with short-term cash now earning around 4%. But, remember, if the economy slows next year as expected, short-term rates could just as easily decline once again. In other words, that 4% yield on cash could be short-lived. Looking at following a careful process of investing some of your excess cash in bonds is worthy of consideration.

The last two months of inflation reports are showing a breaking of the inflation fever. While inflation will be slow to fully recede, a careful reading of the tea leaves points to the Fed now starting to shift their focus to the economy. It’s about time, because many investors worry that the Fed has already raised interest rates too high and too fast. Their big fear? A recession. In fact, this might be the most widely-anticipated recession ever. 

Nothing in financial markets is certain, of course. Even with bonds finally showing promise, the Fed has not yet fully vanquished inflation. If inflation so much as ticks higher, expect talk of more rate hikes than currently anticipated. And, even with so many investors openly predicting a recession, stock prices haven’t fully baked in that scenario. We’re not yet out of the woods.

Without sounding too mealy-mouthed, we’re still in a moment that calls for careful, but not crazy, risk taking. The ironic solution? Do what most absolutely didn’t work last year; try to embrace a balanced portfolio in 2023!

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

It simply wouldn’t be Christmas without a legislative gift from Congress. As I write this, one such bill is grinding its way through the House and Senate and is expected to land on the President’s desk for his signature before we ring in the new year. Weighing in at over 4,000 pages, it will most certainly land with an audible thud.

Professionally, my focus is on the key elements that affect near-term and current retirees. Starting on page 2,047 of this “all, but the kitchen sink” omnibus bill are the provisions known as the SECURE Act 2.0.

Similar to the original SECURE Act that became law a few years ago, SECURE Act 2.0 contains about a hundred provisions designed to enhance retirement saving. Key changes range from increasing the required minimum distribution age for IRA owners, to boosting the “catch-up” retirement plan contributions for near-term retirees, and requiring employers to automatically enroll employees into their retirement plans.

Beginning next year, the new age that triggers a required minimum distribution (RMD) from IRAs or other tax-deferred retirement accounts is increasing. It’s moving up in two stages. The new RMD age is increasing from age 72 to the magic age of 73. This new age milestone will stay in place for a decade. Eventually, starting in 2033, it’ll jump up again to age 75.

In addition, the penalty for failing to take out your RMD will finally be reduced from its currently massive level of 50% of your missed amount. Starting in 2023, the new penalty is set at a still very painful level of 25%. But, if you are able to fix your mistake quickly enough, the penalty could be further reduced to 10%. This is a welcome change.

Further, if you are fortunate enough to be able to support yourself for at least a little while with your non-Social Security and non-IRA income sources, this new RMD age of 73 now adds another year to your retirement “gap years” planning toolbox. The retirement “gap years” is the period of time between the end of your work life and the start of your Social Security and drawing from your IRAs. With SECURE Act 2.0, Congress has now added one additional planning year to analyze the possible tax benefits of both Roth conversions and realizing long-term capital gains at no federal tax.

As a wealth manager, I have to admit that Congress is truly the gift that keeps on giving in the form of job security!

Life is complex enough. With so many demands on your time and attention, finding ways to simplify things is both a goal and a never-ending struggle. To help, let me give you two ways to make your financial life just a little bit easier.

For retirees who have reached age 72 – the age where required minimum distributions or RMDs enter the scene – there’s a little known trick that will help eliminate the need for having to make administratively burdensome estimated tax payments each quarter.

Just like when taxes were withheld from your paycheck during your working years, any taxes withheld directly from your IRA distribution are considered by the IRS as if they were paid evenly throughout the year. That’s the case, even if they were withheld on the very last day of the year.

This treatment turns your IRA into a convenient tax planning tool at the end of each year. In other words, if you are able to target the right tax withholding percentage for the US Treasury and State of Michigan, you can safely forget about estimated tax payments. That means you can forget writing out eight checks, rummaging through your files for eight tax vouchers, addressing eight envelopes, licking eight stamps and stop worrying about the deadlines of April 15, June 15, September 15 and January 15.

Speaking of required minimum distributions, or RMDs, another simplification move you might consider is to finally consolidate your IRAs. I’m always surprised by the number of people who have multiple IRA accounts spread across multiple brokerage firms.

While it’s a natural instinct to not put all of your proverbial eggs in one basket, the most common reason for having too many accounts in too many places is purely administrative inertia. However, that inertia results in wasteful, extra effort and risk in the long run. If you ever fail to take out your annual RMD, there is an unbelievably onerous 50% excise tax waiting in the wings.

Beyond that worry, having too many separate IRA accounts complicates your tax preparation, too. For every additional IRA you have, there is one more Form 1099-R to remember, to gather and to report to your tax preparer. And, if you use your IRA as a charitable tool, as you should, you’ll also need to track and tally up your donations from each separate IRA. Why? Because your brokerage firms won’t automatically subtract them from your Form 1099-R. That bookkeeping duty is yours.

From my experience, each added element of complexity creates the possibility of making costly mistakes. The longer I’ve been in this business, the more I seem to embrace simplicity.

We’re now barreling into the end of 2022. After obsessing about your long list of things to buy for the upcoming holiday season, take a little bit of time to check-off entries on your financial planning to-do list! Here are some simple ones.

IRA Donations: The holidays are a natural time to think about your charitable giving. Consider donating directly from your IRA rather than from your regular checkbook. As long as you’ve reached age 70.5, this tax management tool is in your toolbox.

When you give from your IRA it won’t count as taxable income. Yes, those IRA donations will show up on your tax return as a distribution, but if done correctly they will then immediately get subtracted. Since you’ve never paid any tax on your IRA balance to begin with, your IRA donations are just like getting a tax deduction. If you’re like most people today who use the standard deduction, donations made out of your regular bank account won’t result in any tax benefits.

Additionally, if you are age 72 and subject to required minimum distributions (RMDs), it’s possible your IRA donations will help to lower the taxation of your Social Security benefit. This double tax benefit of IRA donations counting toward your RMD and possibly also reducing the taxation of your Social Security benefits could add up to some nice tax savings.

Check Beneficiaries: Given that this is a time for family, it’s an obvious moment to review all of your beneficiary designations on your retirement accounts and life insurance policies.

This is especially important if you’ve moved any of your accounts in 2022. Too often when people are filling out account paperwork, they’re simply unable to recall all of their beneficiaries’ information on the fly. To move things forward, they send in the paperwork anyway and swear they’ll later go back to fix it. Unfortunately, as we all know, later never arrives. Doing a routine beneficiary review will catch these long-overdue tasks.

Tax Gathering: Speaking of moving money around, if you transferred any accounts or insurance policies in 2022, you should immediately pull out your tax file and jot down that old account information. When tax time arrives in a few short months, you might need to reach out to that brokerage firm or insurance company to gather your 2022 tax information.

There is nothing fun about failing to include something easy on your tax return and getting a love letter from the IRS when their computers finally notice your oversight. Worse yet, this IRS notice will arrive well past your ability to remember any details. Avoid the stress now and make a log of your closed account information.  

One of my favorite lines came from the movie, A League of Their Own. In the film, Tom Hanks plays the role of a reluctant manager of a women’s baseball team during WWII. In a totally sexist scene, one of his players expressed emotional vulnerability on the field. Dumbfounded, Hanks popped out of the dugout declaring that “There’s no crying in baseball! There’s no crying in baseball!” 

Having worked with retirees for over two decades now, I feel similarly about retirement. While I’m hopefully more empathetic in my delivery, there really is no failure in retirement, either. It’s just not how it works in reality. 

Over the years, financial planners have been given some pretty good retirement modeling software to help clients map out their future. While the mathematical basis of a client’s future income and investment returns has been pretty solid, the modeling of how they actually spend money in retirement has always left something to be desired. 

For anyone who has ever had the pleasure of reviewing a typical retirement model produced by financial planning software, the language of “success” and “failure” has likely struck you as both alarming and silly. When most retirees face particularly difficult future scenarios, such as a deep bear market or an unfortunate stretch of lower-than-expected investment returns, they don’t just blindly spend themselves off a cliff. They actually talk, think, prioritize and adjust. 

Worse yet, the sophisticated modeling of thousands of future outcomes of your retirement years, known as a Monte Carlo simulation, often shows an absurdly wide variation of possible outcomes. These outcomes range from you running out of money to watching your portfolio grow into the stratosphere! At both extremes, you are assumed to spend more and more each year in retirement, as if you are an unthinking robot. 

Then, in an unhelpful summary, the final report shows that your retirement dreams have a 75% chance of “success” along with a heart-stopping 25% chance of “failure.” Ready to hang it up, and with the odds seemingly in your favor, you cross your fingers and decide to retire.

Of course, it’s a known fact that real retirees aren’t robots at all. I’m pretty sure I haven’t met one! In reality, the description of success and failure in retirement is more accurately about accepting the possibility of needing to make some spending adjustments as your future actually unfolds. 

So, rather than modeling the impossibility of blindly driving off the cliff, the more helpful plan is to establish and monitor portfolio-level guardrails and then use them to proactively nudge things safely back on the road to the goal. Based on my experience working with living, breathing human beings, that’s exactly how retirement looks in the real world.