MARKET OUTLOOK

Each issue of our newsletter includes this article, titled “Market Outlook”. The purpose of the article is to share our thoughts regarding the outlook for the economy and the investment markets. We often point out current events that are influencing the economy and markets. Our intent is not to suggest that clients focus on a short-term time horizon. Instead, our goal is to help clients sort through all the news headlines to keep a healthy, long-term perspective.

Late last year, we experienced a significant downturn in stocks. The S&P 500 declined nearly 20% from its peak in September until late December in reaction to the three interest rate hikes in 2018 and the fears of a potential trade war with China. But, at the beginning of 2019, the Federal Reserve decided to pause on further rates hikes. The change in U.S. monetary policy set up the potential for extending the current bull market. As a result, U.S. and international stocks gained for the first half of this year, helping to recover from the losses experienced at the end of last year.

Going into the second half of 2019, not much has changed in terms of our outlook of the markets and economy. We continue to focus on the same three issues – interest rates, the economy, and trade with China. Additionally, global growth is expected to continue slowing. Europe continues to have their issues with Brexit not being settled. Germany’s economy, which is largely dependent on Chinese growth, will be impacted by China’s slowdown, and a battle in Italy over finding a solution to their debt problems is taking place. At this point, however, our biggest concern is the unresolved trade disputes with China. If trade disputes with China escalate, this could put pressure on our economy and could lead to a recession.

What is a recession, and how might a recession impact us as investors? The National Bureau of Economic Research formally defines a recession as “a significant decline in economic activity spread across the economy and lasting for more than a few months”. During a recession unemployment can rise, causing consumers to spend less, which all put pressure on the economy. As a result, corporate profitability suffers, thereby causing stock prices to fall. Recessions can then often trigger “bear markets”, defined as a drop in stock prices of at least 20% or more. Fortunately, bear markets are relatively short-lived. Research by American Funds shows that since 1950 recessions averaged only 11 months in duration with the S&P 500 earning an average return of 3%. Though recessions are painful, they have often brought about powerful expansions. Since 1950, the average length of an expansion following a recession was 67 months with the S&P 500 earning an average return of 117%.

Despite the slowdown in economies around the world, many economists do not yet anticipate a recession in the U.S., at least not in 2019. Recessions are hard to predict, but they usually begin with an economy that is overheated or growing too fast and occur as a result of imbalances in the economy that need to be corrected. Without a boom, there usually isn’t a bust. In fact, the current expansion’s slow recovery has delayed the onset of imbalances for years. With the reversal in monetary policy by the Federal Reserve earlier this year, they are now forecasting interest rate reductions in 2019 and into 2020. But all eyes will continue to be on trade with China.

Taking all of this into consideration, we continue to employ many of the basic investment principles. Diversification, as always, is important. But it goes beyond just holding a mix of both stocks and bonds. Holding the right style of stocks and the right style of bonds makes a difference. In this phase of the market cycle, higher quality bonds, dividend paying stocks, and defensive stocks can help to reduce volatility, especially if we enter into a recession. For those in a higher tax bracket, municipal bonds are relatively attractive right now. Lastly, even though U.S. stocks have outperformed their international counterparts, opportunities still exist all around the world. They can also exist in all market cycles. Even during recessions, many companies remain profitable. In the end what is most important is that your portfolio is invested according to your goals, risk tolerance, and investment time horizon.

Sources: American Funds; National Bureau of Economic Research.

WHEN IS THE BEST TIME TO START COLLECTING SOCIAL SECURITY?

Preparing for retirement raises many questions such as, “at what age should I begin collecting my Social Security benefit?”, “which accounts do I draw from first?”, “when and how do I begin mandatory distributions from my IRAs at age 70-1/2?”, “how much money do I need to retire?”. We will begin by addressing the most commonly asked question of us as financial advisors - “at what age should I begin collecting Social Security retirement benefits”?

For those born between 1945 and 1954, full retirement age (referred to as “FRA” by Social Security) is 66. For those born later, the FRA gradually increases until it reaches age 67 (for those born in 1960 and later). The earliest anyone can begin collecting retirement Social Security is age 62. The first issue to consider in determining when to begin collecting is NEED. If you retire before your full retirement age, have no pension or other guaranteed source of income, and savings are limited, then collecting at age 62 may be your best option. Otherwise, consider other issues such as life expectancy, taxes, and the availability of other assets and income.

Consider life expectancy. The earlier you begin collecting, the more your lifetime benefit is reduced. For those who choose to begin collecting at age 62, the benefit is reduced to between 70% and 72.5% of the full benefit (depending on your age). Therefore, the longer you expect to live, the more it behooves you to wait until FRA, or later, in order to maximize your lifetime benefit. When considering collecting at age 62 versus 66, the break even age is between 77 and 78. In other words, if you expect to live longer than 77 or 78, you could collect more in benefits over your lifetime by postponing commencement until age 66 versus starting early at age 62.

Also consider the taxation of benefits. Social Security alone is not subject to Federal income taxes. However, once your other income plus one-half of your benefits exceeds $25,000 as a single filer or $32,000 as a married filer, Social Security starts to become taxable. Therefore, if you are still working and choose to begin collecting benefits, not only might the Social Security benefit be reduced, but as much as 85% of your benefit could be subject to Federal income taxes.

Lastly, consider other income sources you will receive or investments you own. Those who are entitled to receive a pension or who have money invested are more likely to want to postpone collecting benefits until FRA to maximize lifetime benefits. With each year you postpone benefits beyond age 62, the benefit increases by 8% per year that you wait. If this is higher than the rate you are receiving on your investment portfolio, it may be better to draw on investments and postpone Social Security benefits. Delayed benefits, however, cease to increase after age 70 (unless you are working), so there is no benefit to waiting beyond that point.

It is also important to point out that for those who choose to begin collecting benefits early (before FRA) and continue to work, Social Security benefits may be further reduced. For 2019 those between the ages of 62 and 66 who are collecting Social Security and earning more than $17,640 in W-2 or Schedule C income will begin to lose a portion of their Social Security benefit. Once you reach FRA, however, you can earn an unlimited amount without losing benefits.

In the long run, the best strategy for when to begin collecting Social Security depends on the client’s needs, circumstances, and comfort level. We understand it is difficult to fully cover this topic within the confines of this article. Therefore, feel free to call our office if you have questions regarding when to collect benefits and the other filing strategies that might work for you.

Sources: Social Security Administration; National Association of Tax Professionals.

CONSIDERING LIFE INSURANCE AS AN INVESTMENT

There are many types of life insurance policies, such as term, universal, or whole life. Term provides coverage for a fixed period of time and is, therefore, temporary coverage. Typically, it does not build a cash value to be withdrawn at a later time. But it often provides the biggest death benefit for the lowest premium. Whole life is the opposite. It provides permanent coverage and builds cash value, but is also more expensive. Universal is a hybrid of both term and whole life.

The best type of policy to use largely depends on its intended purpose, and there are many different ways that life insurance can be used. The most traditional use is to replace lost income due to the death of a family wage earner. Another traditional use is to pay off a mortgage or other debts so as not to burden those left behind. It can also be used to pay final (burial) expenses. Additionally, a life insurance death benefit can be used to fund future needs such as college education for a young child or a future inheritance for a loved one. Lastly, certain life insurance policies can be used to pay benefits for a long-term illness prior to death. In any case, regular premiums are paid by the policy owner in exchange for the financial organization to pay a death benefit to a beneficiary or trust upon the death of the insured individual.

But life insurance can also be used as an investment. Because the death benefit payout from a life insurance policy is tax-free (not subject to income or inheritance taxes), life insurance policies can be an attractive alternative, on an after-tax basis, when compared to other investment vehicles. Premiums/deposits can be made annually or as a lump sum. Then, like any life insurance policy, a payout is made at the death of the insured. Though some policies offer the ability to withdraw cash value prior to death, there could be consequences in doing so. Consider the following example of how life insurance was used in lieu of other traditional investments.

A female client, age 72, received an inheritance from her mother. She and her husband had sufficient income and assets to cover their own needs. So she wanted to set aside $50,000 of her inheritance so that it would pass on to her grandchildren (instead of to her husband or her children) when she ultimately passed away. Instead of investing into a more traditional investment vehicle, such as a mutual fund or annuity, she purchased a “single premium” life insurance policy for $50,000. Because she was in good health and didn’t smoke, the life insurance company issued her a policy with a death benefit of $100,000. Upon her death, her grandchildren will receive $100,000 free of all taxes for her $50,000 investment. Depending on how long she lives, this could prove to be an attractive investment (in terms of an overall rate of return) to provide an inheritance for her grandchildren.

Keep in mind, there are costs and fees involved with every type of insurance policy. Additionally, the death benefit (payout) is based on the premium(s) paid, the age and health condition of the insured at the time the policy is issued, and whether or not the policy will build cash value. Therefore, this strategy may not be suitable for every client. If you would like to discuss whether or not life insurance would benefit you and your family or to receive an illustration, please call our office.

IMPORTANT REMINDER— PROTECTING YOUR CONFIDENTIAL INFORMATION

In this day and age, so much of our lives happens online. We shop online, communicate online, and conduct business online. This makes “cybersecurity” more important than ever before.

Help us to protect your confidential information. PLEASE DO NOT SEND US EMAILS THAT CONTAIN CONFIDENTIAL INFORMATION (such as account numbers or Social Security numbers) UNLESS IT COMES THROUGH OUR SECURE EMAIL SERVER. We often have clients sending us copies of their tax returns, pay stubs, or account statements through normal email channels. Email is a convenient and cost-effective method of communicating, but it needs to be safe, as well. Therefore, before sending us an email that contains confidential information, first call our office. We will help you submit the information through our secure server.

Disclaimer: The opinions expressed herein do not necessarily reflect those of Trustmont Financial Group/Trustmont Advisory Group. Additionally, the information contained herein has been obtained from sources believed to be reliable but the accuracy of the information cannot be guaranteed. Lastly, reference to any product, service or concept in no way implies that it is suitable for everyone. There may also be risks and costs associated with any product, service or concept mentioned herein. Where applicable, a prospectus should be read for complete details. The material presented here is neither an offer to sell nor a solicitation of an offer to buy any securities.