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Notes Along the Path - September 2019

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Dear Friends,

I hope you may benefit from this edition of Notes Along the Path. Our topics are:
* In the Media
* What to Do With a Windfall
* The Bond Market Turns Upside-down

Gordon Achtermann In the Media

Periodically, reporters reach out to Garrett Planning Network members for input for a story they are working on. Recently I, along with a few other Garrett colleagues, was quoted on Forbes.com: https://bit.ly/2lJZKKc. It's always interesting to me when I see how little of my work actually ends up on the page, but it is understandable given the overlap in what thier sources say.

The Forbes article presents tips for couples who are managing 401(k) or similar plans.
my input they take. The next section was written for a similar inquiry. Let's see how much makes it into any actual publication and what other ideas they come up with that did not make my cut.

What to Do With a Windfall

A reporter recently asked me for ideas about what to do with a sudden windfall such as an inheritance.  So here are my top 7 possibilities.

1. Pay off all non-mortgage debts you have.  Pay down the highest interest rate first.  For example, credit cards first, then student loans.  Do not consider any other options until this is accomplished.

2. Bolster your emergency fund. Even married couples with with 2 stable jobs need at least 3 months of living expenses set aside in savings. If one job is less secure, or one half of a couple does not work, or you are single, then you should have 6 months of living expenses set aside. Remember, living expenses does not include vacations and other luxuries. Add up your rent/mortgage, out-of pocket healthcare, insurance premiums, food, childcare expenses internet, utilities, and other essentials for the month. Then multply by 3 or 6 to get your minimum emergency fund.

3. If you have a mortgage and no other debt, consider paying that down as well. Here's how to decide - pay it down (or eliminate it entirely if possible) if you typically pay $10,000 or more in state and local taxes. Why? because in that case, you are no longer getting the full tax break that used to be afforded to mortgage holders.

4. You could fund or add to a Roth IRA. Usually funding a Roth is difficult because you do not get a tax deduction. But this is tax-free money! If your income is below $122,000 (or $193,000 for couples), you can fully fund a Roth IRA - up to $6,000 each ($7,000 if over 50).

4.b. If you are over the income limits and don't have any traditional IRAs, use the slightly more complicated "backdoor" strategy. First, open a traditional non-deductable IRA, then fund it up to $6,000 ($7,000 if over 50). You can then convert it to a Roth IRA right away or later, but if you wait you will have to pay taxes on any growth that happened while you were waiting.

4.b part 2: If you are over the Roth income limit and you already do have traditional IRAs, the "backdoor" strategy is more complicated because your will be subjected to aggregation and pro rata rules. You have to divide the total after-tax IRA value (at contribution) by the total value of all IRA assets (at the start of the year). Multiply this percentage by the conversion amount to find the tax-free portion. Please see a qualified tax advisor to assist with the calculation before you pursue this strategy.

5. If you have a 401(k) or similar plan at work, you could increase your contributions and use the inheritance to fill your income shortfall. The 2019 maximum contribution is $19,000 plus $6,000 if you are over 50.

6. If the sum is big enough and you are unhappy with your career, consider taking time off and going back to school. A graduate degree or certificate, or a major certification may be just what you need to take a big step up or change careers entirely.

7. Fund your kids' education. Maybe you knew that each parent can put up to $15,000 in each child's 529 account per year. It's less well known that you can do a 5-year lump sum and treat it as if it happened each year over that period.

If you are married each spouse could put up $75,000 ($15,000 x 3) in each child's 529. It does not matter that the inheritance only came to one spouse. You will have to report the contributions on tax form 709 for each of the five years, but it will not add to taxes owed now or in the future under today's tax
accountcode, unless your estate winds up exceeding $11.4 million.

Putting it all together, if you and your spouse have 3 children you could put away a lot at once: $15,000 x 5 x 2 x 3 = up to $450,000 toward future education expenses. If the kids don't use it up you just pay regular income tax when you spend it yourself, so you have deferred taxation during the intervening time.
The bond market turns upside down

When I was younger–much younger–I remember going to the Binghampton Savings Bank and putting a fraction of my allowance money and virtually all of any Chritmas or Birthday gift monies from my grandparents into a passbook savings account.

Besides setting a great example on savings, my parents provided a simple explanation of bank savings accounts and monthly interest. If I remember correctly, my FDIC-insured savings earned 5%.

How times have changed! Rates are much lower today. But it’s a much more difficult situation for savers in many developed nations. It’s called “negative interest rates.”

You no longer earn any money by lending cash to the government, i.e., buying government bonds. Instead, you’ll pay the government to hold your cash.

Currently, all German government bonds offer yields below zero, while financial service providers UBS and Credit Suisse are planning to charge a small fee for clients that hold large cash balances (Bloomberg News).

We have not seen negative rates in the U.S., but in much of Europe and Japan, below-zero rates on government bonds are common, with over $15 trillion (yes, trillion, that’s not a misprint) in government debt sporting yields less than zero percent, according to Bloomberg News.

Table 1: Below Zero
10-Year Govt Bond Yield
Swiss 10-year -1.02%
Germany -0.70%
Denmark -0.68%
France -0.40%
Sweden -0.35%
Japan -0.28%
Ireland -0.09%
Spain +0.11%
Portugal +0.13%
U.K. +0.48%
Italy +1.00%
U.S. +1.50%
Greece +1.63%
Source: MktWatch, Bloomberg 8/30/19

How can you buy a bond with a rate that’s below zero?
Well, let’s say Germany issues a 10-year bond with a par value of 1,000 euros (German currency is denominated in euros). You won’t pay Germany an annual coupon. Instead, you’ll buy that bond at a price that’s greater than 1,000 euros. At maturity, you’ll receive 1,000 euros.

It’s a great deal for Germany but it doesn’t seem to make much sense for an investor. But that’s today’s new global reality.

What’s going on?
Today, several factors are contributing to below-zero yields.
1. Inflation in Europe is very low.

2. Growth has been substandard in Europe for much of the decade. Global trade tensions are adding to the uncertainty, and Europe may be headed toward another recession.

3. The European Central Bank has been much more accommodative than the Federal Reserve and appears set to ease again this month.

4. There’s too much cash sloshing around the globe that can’t find a home in viable industrial projects. So, it finds a home in creditworthy government bonds.


The next question that usually surfaces: “Why should I care? I’m in the U.S.” Well, what happens around the globe can affect investors at home.

Below-zero yields in major countries can encourage foreign investors to seek out positive returns in other nations, including in U.S. Treasuries. Since yields and bond prices move in opposite directions, an influx of foreign cash pushes up U.S. bond prices and knocks down yields.

It’s one reason why the yield on the 30-year Treasury fell to a record low of 1.94% on August 28 (U.S. Treasury Dept.), and the benchmark 10-year Treasury sported a yield of less than 1.50% on the same day. Clearly, it’s a far cry from the risk-free savings account I received on Christmas morning many years ago.

MTD% YTD %
Dow Jones Industrial Average -1.72 13.19
NASDAQ Composite -2.60 20.01
S&P 500 Index -1.81 16.74
Russell 2000 Index -5.07 10.85
MSCI World ex-USA* -2.73 8.00
MSCI Emerging Markets* -5.08 1.92
Bloomberg Barclays US
Aggregate Bond TR 2.59 9.10
Source: Wall Street Journal, MSCI.com, Morningstar, MarketWatch
MTD: returns: Jul 31-Aug 30, 2019
YTD returns: Dec 31, 2018-Aug 30, 2019
*in US dollars


Your plan should consider your time horizon, risk tolerance, and financial goals. There is always a risk factor when investing, but we tailor our recommendations with your financial goals and preferences in mind.

As I’ve recently emphasized, you must control what you can control. You can’t control the stock market, you can’t control headlines, and timing the market isn’t a realistic tool. But, you can control the portfolio how much risk you take on.

If you're feeling unsure these days or have questions, let's have a conversation. That's why we're here.

If you like it this newsletter- you have my permission to pass it on to any contacts you have that might benefit.
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I remain honored and humbled that my clients have allowed me to serve as their financial advisor. Thank you for your support.

All the Best!

Gordon Achtermann


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