Asking for a Friend - Are we headed for a recession? I’ve heard that the yield curve recently inverted and is that a signal that we are headed for a recession?

April 25, 2022

Q. Are we headed for a recession?  I’ve heard that the yield curve recently inverted and is that a signal that we are headed for a recession?

Before that question is answered, I’d like to explain what an inverted yield curve is.  

A bond is debt, plain and simple.  It’s like your mortgage in a way.  The longer you hold the mortgage, generally, the higher the interest rate.  This is true of Corporate and Government debt as well.  

• There are a couple of terms that get confusing when we talk about bonds:

  • Rate (Coupon) - This is the stated rate of interest.  Let’s say you buy a bond ($1,000) at 4%.  You can expect to receive $40 per year until the bond matures.

  • Price - Bonds fluctuate in price. If you are holding that 4% bond and interest rates go up, and you want to sell that bond, you will have to offer a “discount” to attract a buyer.  If someone can get a 4.5% bond, they wouldn’t offer you full price for a 4% bond.

  • Yield - this is where it gets confusing.  If, as mentioned above, someone buys your 4% bond, at a discount (say $900 for easy math), then their yield is 4.44% ($40/$900).  So they got it cheaper than the original price, but still not as attractive as the “new” bonds being issued.

  • Spread - the difference between short-term and long-term yields.

• In a “normal” yield curve, long-term interest rates are larger than short term interest rates.

• In an inverted yield curve, short term interest rates are larger than long term. 

• This chart found on Inverted Yield Curve: Definition, History & Impact | Seeking Alpha does a good job of showing how this all interacts:

So now to your question: Yes, an inverted yield curve can be one of the signals that we are headed for a recession.  But it rarely happens immediately, and there are other factors that should be considered.  

We follow a number of economic factors.  This chart, produced by Franklin Templeton shows multiple factors and various historically economic recessions.  We believe it is important to look at all the facts, not just the “breaking news.”

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Asking for a Friend - What is a fiduciary and why is that important?

April 18, 2022

Q: What is a fiduciary and why is that important?

A: Over the past few years, more and more prospective clients have asked us if we are a “fiduciary.”  The answer to this question is yes, but when this question came in, it made us pause and was a good reminder that we toss terms around in our profession as if “everyone” knows what we are talking about.  Use of jargon is something we try very hard to avoid, but we’ve fallen victim to in this case.  

So, what is a fiduciary?  The Investment Advisory Association states, “According to the SEC (Securities Exchange Commission) - As fiduciaries, investment advisers are required to act in the best interest of their clients and not place their own interests ahead of their clients.” 

Let’s break this down.  There are two standards that financial professionals can work under:

• Suitable

• Fiduciary Duty

The best explanation I’ve read that really explains this was given by Michael Kitces.  He stated, “Suitability means selling a suit that fits you.  Fiduciary Duty means it actually has to look good on you, too.”  We’ve all seen this and joke about it - you know, “that” person in the big chain store that is wearing something that “fits” them, but perhaps they shouldn’t be.  Sorry to put that image in your head, but we all have different body styles and clothes can fit, but not always in a complimentary manner.  That’s true of financial products too.  Not every product is for every person.

Generally speaking, it also comes down to how compensation is earned:

There are three basic ways in which financial professionals can be compensated:

• Commission-Based Models: required to follow the suitability standard, but may follow the fiduciary standard in practice

• Commission and Fee-Based Models: required to follow the suitability standard, but may follow the fiduciary standard in practice

• Fee-Only Model: required to follow the fiduciary standard.

The potential conflict exists with the first two models because the financial professional compensation is based on the products they sell.  Whereas, with a fee-only model, the conflict is minimized.  That is one of the reasons we wanted to build a set flat fee model at Rooted Planning Group - we didn’t want to charge you a percentage of your assets because we wanted to make sure that our recommendations weren’t tied to our compensation.

Understand, we need folks that get paid based on the products they sell.  Any insurance product is a commission based product, it’s just the way it is, and we certainly want to make sure our clients are protected with such products - BUT, the right product. 

We believe a fiduciary relationship is similar to a medical General Practitioner's role - Identify and help diagnosis, then be by your side to assist with the care and implementations of the solutions adopted.

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Asking for a Friend - What should I look for when I'm reviewing my credit report?

April 11, 2022

Q: What should I look for when I’m reviewing my credit report?

Amy: We think this is a great question! Before we answer this question, did you know that different credit reports might have different creditors listed?  There are three main credit reporting agencies: TransUnion, Experian, and Equifax.  Here are some things we look for:

• Do you recognize all creditors listed?

• What is the status?

• Does the amount owed look correct?

• At the bottom of the report, do you see any addresses that aren’t yours?  Did you know that could be a big warning sign!

• This summer, if you owe any medical debt, it should fall off your credit report, so keep an eye out for that.

Kate:  Also, if you find a discrepancy you should reach out to the credit agency. Many now have an option online where you can report or dispute an item.

• How to get organized before reviewing your report

  • Pull out your (or up) your current creditors and financial websites, compare each one to your credit report.

• How is my credit score determined?

  • This depends on who is generating the credit score. If you are a CreditKarma user, you will notice that TransUnion and Equifax both have a different credit score for you; and if you compare that to FICO, that will be different too. However, they all have the following sections in common:

    • Payment history (timely payments)

    • Credit Utilization (the higher the credit limits but lower the utilization of those limits, the better)

    • Age of credit (the longer average age, the better)

    • Types of accounts (diversity of your credit mix)

    • Hard credit pulls (the fewer the better your score) - side note, they often bunch “like” pulls, so if you are looking for a house, they might view multiple credit checks from banks less negatively.

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Asking for a Friend - Can I contribute to an HSA even if my employer doesn't offer that as a benefit?

April 4, 2022

Q: Can I contribute to an HSA even if my employer doesn’t offer that as a benefit?

• Ann:

  Before we answer that, let's explain why you might want to contribute in the first place. An HSA is a Health Savings Account that offers a triple tax benefit. You contribute pre-tax money, it grows tax free, and as long as you use it to pay qualified medical expenses, withdrawals are tax free. It can also be another savings account to pay for medical costs in the future.

• Amy:

  Maybe.

  • The first requirement is having a high deductible health care plan that is “HSA eligible.” If you are not sure about this, then you can ask the insurance company you have.

  • If you meet the first requirement, then you can indeed have an HSA, even if your company doesn’t offer the benefit specifically. You can go online or ask your local bank/credit union if they offer that type of account. We personally use HSABank.com, but other providers include HealthEquity, Lively, The HSA Authority, and Future (I’m sure there are others, but those are some well known companies).

  • If you are self-employed and have an HSA eligible HDHP, then you can also contribute.

  • If you are retired and not yet on Medicare on an HSA eligible HDHP, you can also contribute.

  • The maximum for 2022 is $3,650 for single and $7,300 for family coverage. If you are over 55, you can contribute an additional $1,000.

  • Just a reminder, this is not a use it or lose it account, what you don’t use, you can rollover to next year.

• Kate:

  Don’t forget, you can contribute to an HSA (just like an IRA) up to the tax filing deadline of the prior year (this year you can contribute your 2021 contribution up to April 18, 2022).

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Asking for a Friend - Do you think there is going to be a tax deadline extension again this year?

March 28, 2022

Q.  Do you think there is going to be a tax deadline extension again this year?

A. We certainly hope not! The past two, due to COVID-19 restrictions, the tax filing deadline has been pushed out.

Although the IRS is extremely short staffed, we are starting to see long-standing issues be resolved slowly and processing time for 2021 returns filed electronically have been 7 - 14 days.  However, we expect the closer we get to the deadline, the longer the processing times will be.

There also were no new law changes at the end of 2021, nor retro-law changes in 2022.  This certainly allows for the IRS to do their job without having to shift like Roadrunner being chased by Wile E Coyote.

Based on this, we recommend that you do one of your least favorite tasks (if you haven’t already) and get all the documents gathered and to your tax preparer this week.  
 

Refer to these checklists for some guidance when reviewing your tax return:

• As Someone Who is Working, What Issues Should I Consider When Reviewing my 2021 Tax Return?

• As a Retiree, What Issues Should I Consider When Reviewing my 2021 Tax Return?

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Asking for a Friend - I keep hearing so much about Inflation being higher than it has been in the past three decades. Is that true and what does it actually mean to me?

March 21, 2022

Q.  I keep hearing so much about Inflation being higher than it has been in the past three decades. Is that true and what does it actually mean to me?

A. Yes, 2021, and so far, 2022, the inflation rate is certainly higher than the “average” inflation rate we use in our plans. But if you average the past 22 years together, inflation is around 2.23% per year, and if you average the past three years it is 2.57% because 2019 and 2020 (especially) had low inflation rate years. If you look at the chart below, you can see that both 2019 and 2020 were years of lower-than-normal inflation. We believe that this is a result of an extremely low interest rate environment, pent up consumer spending post 2020 - 2021 lockdowns and continued supply chain struggles.

We understand that everyone is seeing higher prices at the grocery store, certainly at the gas station, and absolutely on travel; we also believe some of this isn’t tied to actual inflation from consumer demand, but instead on a spike in oil prices that trickles down.  The last time gas prices were as high as they are right now was July of 2008.  Back then the average was $4.10 per gallon, if you adjust that for inflation, it would equate to $5.44 per gallon.  We are not trying to downplay how this is affecting everyone; we feel the pain too, but we want people to understand how important it is to look at all the facts.  Averages are formed by highs, lows, and the numbers in the middle, and, we believe, need to be inflation adjusted to tell the whole story. 

In an attempt to reduce a continued high inflation rate, on Wednesday, the FOMC (Federal Open Market Committee) raised the target rate for the first time since September of 2018; it is now 0.25 - 0.50.  For a history of the Fed Funds Rate, we recommend reading this Bankrate article.  

The Central bank has a target inflation rate of 2% and since we are currently trending at a much higher rate, the goal is to move the economy more towards the target.  How is this supposed to help?  The two biggest impacts are:

• Believe it or not, raising rates could lower imported consumer goods, since the dollar exchange rate may increase.  In other words, the dollar could continue to strengthen with rate increases.

• It will encourage more savings (higher earnings on the savings) and less borrowing (higher interest rates), slowing down the demand for goods and services, thus cooling off prices (remember the fun economic classes - there is a price point where demand starts to fall).

So why not raise rates more if there are these positive benefits?  The dance steps aren’t that easy.  Rate increases are meant to slow down the economy, raising them too quickly could cause too much slow down and put us into a recession.

Source: Current US Inflation Rates: 2000-2022 | US Inflation Calculator

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Asking for a Friend - I'm considering a divorce - what things should I be thinking of?

March 14, 2022

Q.  I'm considering a divorce - what things should I be thinking of?

A. We understand that this is one of the most stressful situations you can find yourself in - it is a loss in your life, and we believe you need to take time to grieve that loss. There are a number of professionals you might want to reach out to for advice:

• Interview at least three attorney’s - pick the one you feel most comfortable sharing information with.

• Consider the type of divorce process you might want to explore.  Do you need to find a mediator, or will collaborative law be a better direction for you?

• Potentially work with a Certified Divorce Financial Analysis.  The role of a CDFA is to help clients and their attorney understand how the financial decisions will impact the client’s financial future.  On our team, that would be Amy Irvine.

• Perhaps a therapist should be part of your team as well.  Divorce is not easy, and it can be helpful to have someone to talk to.

It’s also important to get your documentation organized.  Put together a net worth statement and a cash flow statement.  This may help determine if you will be eligible for spousal or child support.

Understand that divorce is unique for everyone in some ways, so these are just a few tips to get your mind thinking.  We’ve also included a checklist on “What Issues Should I Consider During My Divorce” for your review.

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Asking for a Friend - I’ve heard a lot about Russian Cyber Attacks - should I be pulling money out of the bank just in case?

March 7, 2022

Q. I’ve heard a lot about Russian Cyber Attacks - should I be pulling money out of the bank just in case?

A. We think it is always good to have a little cash on hand in case of an emergency, but we don’t think you should be pulling any more than normal out of the bank. We understand that this may be a concern given the news.

Banks and credit unions have to have business continuity plans (just like our firm does) and they have to know how to react should their institution have an incident. This includes a plan to get their customers their money. If you are concerned about your bank, ask them about their contingency and continuity plan and how you would access your money if their systems were indeed a victim. By the way, we ask all our vendors to provide us with their business contingency and continuity plan.

We think it is more important to be vigilant on your end with cybersecurity - our vendor, TrueNorth, has provided “18 Things to make your remote work secure, convenient, and stress free.” We think these are great tips for everyone to follow at any time.

Asking for a Friend - Should I buy a house?

February 28, 2022

Q.  Should I buy a house?

• Amy's Take: Does it always seem like I answer these questions with “it depends?” Home ownership isn’t for everyone and in some areas of the country it will ultimately mean that 50% of your income will go towards the cost of owning that home. It also depends on how long you are going to live in a certain area and if you can recapture those purchasing costs. Some of this decision is based on math (i.e., comparing the costs you will never recapture such as insurance and taxes), and some of this is based on emotion (I want to put down roots, and I feel safer if I own my home).

• Becky's Take: Think about what maintenance will need to be done, who will do the maintenance, and how much it will cost to outsource. This can be anything from mowing the lawn to fixing an appliance.

• Kate's Take: When comparing the cost of renting versus buying you need to compare more than the mortgage payment versus rent. Include the additional costs of ownership such as property taxes, insurance, utilities (including water, sewer, and disposal), ongoing maintenance, and larger repairs.

  Every person is different, as are their goals, so we have a checklist on “What Issues Should I Consider When Buying a Home?”

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Asking for a Friend - Should my parents put all their assets in my name and/or should I be on all their accounts?

February 21, 2022

Q.  Should my parents put all their assets in my name and/or should I be on all their accounts?

A. This is a sticky question.  Before I provide some thoughts on this, let me first say that we believe it is CRITICAL to work with an Attorney that specializes in Estate & Elder Law.  Second, I’ll give the disclosure that we are not offering legal advice here but offering up some things to think about.

• Ask yourself why you would want to do this. What’s the end goal? If they put all the assets in your name, they've just gifted everything, so what do they now live off of?

• Are your parents in a more favorable tax environment or will this end up costing more by doing this - especially if the funds would be subject to a stepped-up basis if they could be inherited property.  If you are given the property, the basis carries forward; if you inherit the property, under today’s laws, the basis gets “refreshed.”  that could save thousands in capital gains tax.

• Consider the liability you may be taking on if you jointly own the property.  For example, if you jointly own a vehicle with one of your parents, and they get into an accident, there could be liability issues that you are subjecting yourself to without knowing it.  

• If one of the goals is to allow you to help them with the bills, consider a power of attorney - this will let you help your parents without them putting your name on the account.

• If you are trying to avoid probate, then you can add beneficiaries to most accounts (i.e. for bank accounts, consider a Totten Trust, for brokerage accounts, consider a Transfer on Death arrangement). 

• We know many clients that have set up life estate (use) on their home, whereby the kids own the property, but they have life use.  A downside to this is if your parents ever want to take out a home equity or mortgage on the house, then you will need to sign-off on the loan.  Additionally, if your parents ever want to sell the house, you will be subject to the capital gain (unless it’s transferred back to the parents); there won’t be the exclusion that is normally offered when it has been your primary residence.

• Although it is common for parents to predecease their children, we all know families where the parents outlive their children.  If your parents transfer their assets to you and you predecease them, the assets may not go in the desired direction; this could certainly cause family conflict.

• If you have high school or college age students, receiving assets could affect your financial aid - even if you aren’t getting Federal Aid, you might be eligible for Institutional Aid and receiving a significant amount of assets could affect the Expected Family Contribution (EFC).

• As you can see, this is not a one size fits all response and I’ll reiterate that we feel it is a great investment to work with an attorney on this type of planning.  We also encourage you to talk to an attorney in both your State and the State that your parents live in - not all State Laws are the same.

For more information see What Issues Should I Consider for My Aging Parents and Step-by-Step Guide to Receiving Long-Term Care on the Resource page of our website.

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