MARKET OUTLOOK

With half of 2021 already behind us, we are providing our "midyear" market outlook. As we continue to recover from the impact of the global pandemic that struck roughly 18 months ago, several questions come to mind. Where are we on the road to recovery? What is driving the stock markets higher, and how long can it continue? What is causing the recent surge in inflation, and is it a sign of bad news to come? Where are the investment opportunities moving forward? In this article, we will attempt to answer those questions.

Where are we on the road to recovery? Most economies around the world are roaring back from 2020 levels. With unprecedented government stimulus, vaccines rising, and restrictions lifting, American consumers are sitting on cash and starting to spend it. Growth is occurring all over the world and is expected to continue into 2022. According to the IMF (International Monetary Fund), real GDP (gross domestic product) growth in the U.S. is expected to be 6.4% in 2021 versus –3.5% in 2020. If GDP reaches this level, 2021 will be the strongest year since 1984. Growth in the Eurozone is expected to be 4.4% in 2021 versus -6.6% in 2020 and 6.7% in 2021 versus -2.2% last year for the Emerging Markets.

What is driving the stock markets higher, and how long can it continue? There is no doubt that the euphoria of our lives returning to normal and a strengthening economy have helped drive markets up. It is important to remember that the economy and stock market are not one and the same. They can work in opposite directions. The real driver of the stock markets is healthy corporate earnings. Corporate earnings and earnings growth expectations both surged in the first quarter of 2021, particularly in the U.S. However, we are now facing several headwinds. First, stock valuations are high for many companies. Second, a proposed corporate tax hike by the new Administration could negatively impact corporate margins. Third, higher labor and materials costs, if they continue to increase, would also be a hit to earnings. Lastly, higher interest rates would increase expenses for corporations and make it more difficult to borrow for capital improvements, etc. The financial markets are forward thinking and focus on the long-term outlook. For now, healthy corporate earnings and the innovation of many businesses accelerated by the pandemic continue to drive markets upward.

What is causing the recent surge in inflation, and is it a sign of bad news to come? What is inflation? Simply put, it is the rise in prices of goods and services. The downside to inflation is that it means a decrease in purchasing power or that your money buys you less. However, a certain amount of inflation is good because it is a sign of a healthy economy. What is causing the recent surge in inflation? As noted above, businesses are re-opening, consumers are once again spending, and the pent-up demand is outweighing the supply of many goods and services. Supply chain issues for many goods and services have not yet returned to normal. Though unemployment continues to fall, there still exists a shortage in the labor workforce in many sectors of the economy. Recent cyber-attacks have caused business shutdowns, which have only exacerbated the supply chain problems. Many economists, however, feel the surge in inflation is temporary. According to Darrel Spence, an economist with Capital Group, "Inflation should spike in coming months as stimulus-induced demand meets COVID-restricted supply. This is the process of the U.S. economy trying to find a new equilibrium. As stimulus wanes and the economy fully reopens, inflation should return to pre-pandemic levels of around 2% annualized." The Federal Reserve, who controls monetary policy, wants a certain amount of inflation. If it gets too high, they will begin to raise interest rates, which is not expected to happen until 2023.

Where are the investment opportunities moving forward? Though there has been a real disconnect in terms of the companies that have been the winners versus losers during the pandemic, there are investment opportunities in every industry (in both stocks and bonds) moving forward. Stock prices of some companies hard hit by the pandemic may hold more value than the tech companies that prospered. Some now feel there may be a "bubble" in tech stocks. But there are still long runways for growth in cloud services, digital payments, streaming entertainment and more — all powered by semiconductors. In the end there should be room for growth for companies who used the pandemic to innovate and improve operations.

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?", "from which accounts do I begin withdrawals first?", "when and how do I begin mandatory distributions from my IRAs?", and "how much money do I need to retire?". We will begin by addressing one of the most commonly asked questions - "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 the Social Security Administration) is 66. For those born later, the FRA gradually increases until one 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 sources 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 sooner you begin collecting before your FRA, 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 your FRA, 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 your full retirement age 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, as much as 85% of your benefit could be subject to Federal income taxes. Therefore, it’s often not wise to begin collecting if you’re still working.

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 2021 those between the ages of 62 and 66 and 2 months (not yet reached FRA) who are collecting Social Security and earning more than $18,960 in W-2 or Schedule C income will begin to lose a portion of their Social Security benefit. You would lose $1 in benefit for every $2 earned over the earnings cap. Once you reach FRA, however, you can earn an unlimited amount without losing benefits.

Lastly, consider other income sources you will receive or investments you own. Those who will receive a pension or 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 likely no benefit to waiting beyond age 70.

For widows/widowers, there is an additional strategy for collecting that may be beneficial. Widows and widowers are entitled to begin collecting (based on their deceased spouse’s earnings record) as soon as age 60. Of course, also consider the other points mentioned above. For some, it can be advantageous to begin collecting a widow’s/widower’s benefit then switch to their own benefit at a later date (either FRA or age 70). This may result in not only collecting benefits sooner but collecting more benefits over their lifetime.

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. You can also contact the Social Security Administration at (800) 772-1213 or online at www.ssa.gov.

ESTATE PLANNING – What is Probate and Should It be Avoided?

Estate planning is a commonly discussed topic with our clients, especially as they age. There are many different facets of estate planning which we will begin addressing in upcoming issues of our newsletter. The first is where it all begins when someone passes away – probate.

What is probate? Probate is the legal process which involves paying any debts and taxes owed by the decedent then distributing their remaining assets according to the terms of their Will. The person named in the Will as the Executor/Executrix is responsible for carrying out the provisions of the Will.

Why is probate often referred to as something that should be avoided? Because probate CAN BE a costly and timely process. It is important to clarify that probate has nothing to do with inheritance taxes (which will be discussed in an upcoming article). The bulk of the probate costs is the attorney’s fee, which should be discussed with the attorney in advance. A fee that is based on a percentage of the estate usually results in a more expensive outcome. Therefore, the Executor/ Executrix could request a fixed fee or a fee based on hours of service instead. The Executor/ Executrix might also be compensated for their services, which is optional and would be written in the Will. Of course, the larger or more complicated the estate, the greater the probate fees can be. In Pennsylvania, the probate process generally takes 9 to 18 months to settle an estate, but could be longer for more complex estates or those involving litigation. Since probate is a court-supervised process, it could be an added layer of protection for the decedent to insure their assets are properly distributed and according to their wishes.

There are circumstances, however, when reducing or minimizing probate could be beneficial. For example, assets that have beneficiary designations will avoid probate and be paid out directly to those beneficiaries after death outside of the estate. This is especially beneficial on retirement accounts and annuities that allow a beneficiary to spread out distributions and the income tax liability over many years. Assets titled with a joint owner also avoid probate and are paid directly to the surviving owner.

Naming beneficiaries and/or using joint ownership are not always recommended for all of one’s assets and not always appropriate for all types of assets. Contrary to advice provided by the banks, it is usually NOT recommended to have someone other than a spouse named as a joint owner on checking and savings accounts. (If you want someone to access your accounts to help with paying bills, consider naming them as the Power of Attorney instead.) Bank accounts are ideal accounts to funnel into the estate after death so they can be used to pay final expenses, bills, and taxes. If someone is on the account as joint owner, those accounts will pass to them directly instead of being available to the estate. Another type of asset that should not be titled jointly is an appreciated (capital gain) asset such as stocks, real estate, or brokerage accounts. Under the current law, an appreciated (capital gain) asset that passes in death is given a step up in basis. In other words, the capital gains tax for the beneficiary is forgiven if the asset is inherited. Lastly, it is not advisable to name someone as a beneficiary who is not able to manage their own financial affairs. That’s when a trust could be beneficial. We will discuss the types and uses of trusts in a later issue.

As always, please consult with an attorney to discuss your needs and circumstances to determine what estate planning strategy is best for you, your family, and your heirs. This article is not intended to be legal advice but to provide general educational information.

All Sources: Capital Group/American Funds, T. Rowe Price, Financial Advisor magazine, Social Security Administration, National Association of Tax Professionals.

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.