Financial Planning

For most of us, when markets go down, anxiety goes up.

And since markets haven’t gone down substantially for some time, it’s possible that angst is waiting in the wings for a lot of us and could be set loose by the next downturn.

I am not anticipating an imminent demise of the bull run in stocks. But after two great years of returns, it’s important to remember that corrections are normal occurrences.

On average, we can expect stocks to drop 14% from recent peaks in any given year, according to research from JP Morgan Asset Management (recoveries typically follow closely on the heels of these declines).

And it’s important to remember that we as humans are hard wired to disproportionately fear financial losses relative to appreciating similarly sized gains.

We obviously can’t control what happens in the financial markets. But we can control how we respond to financial market developments.

The goal of this article is to provide more information about the concept of loss aversion; explain how it affects investors; and share strategies to overcome it.

Learning to become averse to loss aversion is a strategy that should yield positive results over the long term for your portfolio.

What is Loss Aversion?

Loss aversion is a key principle in behavioral finance introduced by Daniel Kahneman and Amos Tversky in Prospect Theory. Our friends at research outfit DataTrek have this to say about Loss Aversion:

• Classical economics has it that the gain or loss of $1 has the same “utility”, both on the upside and downside.
• Daniel Kahneman and Amos Tversky proved this was not the case with their work on Prospect Theory, published in 1979, with Kahneman winning the Nobel Prize in 2002.
• The possibility (or “prospect”) of losing a particular amount of money weighs about twice as heavily on the human psyche as the prospect of gaining that same amount of money is welcoming.
• Simply put, we are hard coded to be risk-averse, which is probably biologically optimal but not when it comes to investing.

This asymmetry – that people experience the pain of losses about twice as intensely as they experience the pleasure of equivalent gains – can lead investors to behave irrationally, often making suboptimal decisions due to an emotional response rather than a rational evaluation of risk and return.

How Loss Aversion Affects Investors

• Excessive Conservatism: Investors may hold too much cash or invest heavily in low-risk assets, such as bonds, due to an outsized fear of losses. This risk aversion can cause them to miss out on long-term market growth.
• Holding onto Losing Investments Too Long: Investors often refuse to sell losing stocks because doing so would “lock in” a loss. This can lead to further declines in portfolio value if the asset continues to underperform.
• Selling Winners Too Soon: The fear of losing unrealized gains can prompt investors to sell winning stocks too early, limiting their upside potential while holding onto losing positions in the hope of a rebound.
• Panic Selling in Downturns: During market downturns, loss-averse investors may sell off assets at a loss to avoid further perceived pain. This often results in missing out on the subsequent recovery.

Strategies to Overcome Loss Aversion

Investors can take several steps to mitigate the negative effects of loss aversion.

1. Maintain a Long-Term Perspective

• Historical Context:Market downturns are normal and historically temporary. The S&P 500, for instance, has endured numerous recessions, bear markets, and crashes but has always recovered over time.
• Review Past Recoveries: Looking at previous downturns (e.g., 2008 financial crisis, 2020 COVID-19 crash) can provide reassurance that patient investors tend to be rewarded.

2. Avoid Emotional Decision-Making

• Recognize Emotional Triggers: Fear and anxiety can drive investors to sell at the worst possible time. Understanding that these emotions are natural but not always rational can help maintain discipline.
• Pause Before Making Major Moves: Implement a 24- or 48-hour rule before making significant financial decisions to avoid impulsive reactions.

3. Stick to a Predefined Investment Plan

• Set Portfolio Rules in Advance: Establish clear rules for buying, selling, and rebalancing to avoid making decisions based on market noise.

4. Use Mental Accounting to Categorize Risk

• Investors can separate their portfolios into different “buckets,”such as:
  • A short-term stability bucket (cash, bonds) for near-term needs.
  • A growth bucket (stocks, real estate) for long-term wealth building.
• This mental separation reduces the fear of short-term lossesaffecting immediate financial security.

5. Rebalance Rather Than Panic-Sell

• Automatic Rebalancing:If stock prices fall, rebalancing forces investors to sell overperforming assets (like bonds) and buy underperforming assets (stocks) at a discount.
• Stay within Target Allocations:Keeping the portfolio’s stock-to-bond ratio aligned with the original strategy ensures disciplined investing.

6. Use Dollar-Cost Averaging (DCA)

• Invest Regularly Regardless of Market Conditions: Investing a fixed amount regularly reduces the emotional burden of market timing.
• Buy More Shares at Lower Prices:Instead of fearing lower prices, DCA allows investors to accumulate more shares when prices are low, boosting returns when markets recover.

7. Maintain Cash Reserves

• Emergency Fund:Having 6–12 months of living expenses in cash reduces the need to liquidate investments during downturns.
• Dry Powder Strategy:Investors who keep some cash on hand can take advantage of market downturns by buying assets at depressed prices.

8. Diversify to Reduce Portfolio Volatility

• Asset Allocation: Spreading investments across stocks, bonds, real estate, and alternative assets helps mitigate losses.
• Low-Correlation Assets:Investments like Treasury Bills and Treasury bonds can provide balance when equities decline.

9. Avoid Market Timing

• Missing the Best Days Hurts Returns:Data shows that missing just a few of the best market days (which often occur after the worst days) significantly lowers long-term returns.
• Stay Invested:Rather than guessing market bottoms, staying in the market increases the likelihood of benefiting from recovery.

10. Turn Market Declines into Tax-Saving Opportunities

• Tax-Loss Harvesting: Selling losing investments to offset capital gains taxes can improve after-tax returns.
• Roth Conversions:Converting traditional IRA funds to a Roth IRA during downturns allows investors to pay taxes at lower asset values, leading to greater tax-free growth.

The key to overcoming loss aversion during a market downturn is sticking to a well-thought-out plan, staying diversified, and avoiding knee-jerk reactions.

Implementing these strategies can help you manage their emotions, take advantage of market opportunities, and build long-term wealth.

-RK

On January 5, 2025 the Social Security Fairness Act became law. It will provide new or additional Social Security benefits for about three million individuals who receive government pensions from jobs not covered by Social Security.

Two parts of the law governing Social Security payments have been eliminated: the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). The new law eliminates the reduction of Social Security benefits that resulted from WEP and GPO.

Upon signing the legislation into law, President Biden said those affected will receive lump sum payments from 2024 in 2025. President-elect Trump also supported the legislation.

Additional details of the Social Security Fairness Act relating to WEP and GPO are:

• The new law repeals the Windfall Elimination Provision (WEP) which reduced Social Security or disability benefits for certain public sector workers such as teachers, nurses, police officers, and firefighters who receive pensions from jobs where they didn’t pay Social Security payroll taxes.
• WEP applied to 2.1 million beneficiaries, or 3.1% of the total in 2022, according to the Social Security Administration. Most retirees affected by the WEP have pensions that are higher than average Social Security benefits, the Center on Budget and Policy Priorities said.
• The law also eliminates the Government Pension Offset (GPO) which reduces Social Security benefits for about 750,000 spouses, widows, and widowers who receive pensions from jobs not covered by Social Security taxes.

Most state and local government workers (and all federal workers hired in 1984 or later) are in jobs covered by Social Security. Pensioners who worked in Social Security-covered employment in their government jobs will not receive increased Social Security benefits from the law.

According to the non-partisan news source TheHill.com, which focuses on US politics and government policy, actually making the new benefit structure a reality will be a challenge for the Social Security Administration (SSA).

An example of the additional administrative burden on the SSA: prior to the new law, individuals affected by the Government Pension Offset may not have been eligible to receive any Social Security spouse or survivor payments, so a number of these individuals likely did not file for Social Security and, as a result, are not in the SSA’s computer systems.

The Congression Budget Office expects the SSA will have to process new applications as a result of the legislation, and the new applications will lead to an extra 70,000 people coming onto the rolls for payments.

The Hill comments that SSA’s administrative budget has been in sharp decline over several years, and the SSA recently testified that it now has “one of the lowest staffing levels in 50 years.”

In their most recent communication from January 6, the SSA said: “The Social Security Administration is evaluating how to implement the Act. We will provide more information as soon as available.”

Keep in mind that the Social Security Fairness Act is retroactive to January 2024, so beneficiaries affected by the repealed provisions should receive lump-sum payments for benefits lost during 2024.

If you have been affected by WEP and GPO, what can you do to ensure that you receive your benefits?

1. If you previously have filed for Social Security, the SSA is not recommending that you take action at this time (though you may wish to verify that your contact and banking information with the SSA are up-to-date)
2. If you are receiving a public pension and are interested in filing for Social Security benefits, you may file online at ssa.gov/apply
3. Keep an eye on the SSA website for further announcements at: ssa.gov/benefits/retirement/social-security-fairness.act
4. Watch your email for communication from your former employer on this topic
5. Check your bank statements closely on a regular basis during 2025 to see if / when your payment has been adjusted and to verify that you’ve received a lump sum payment related to 2024

Savers age 50 and older who are participants in retirement plans are permitted to do “catch-up” contributions of $7,500 in 2025. Add this to the annual elective deferral limit of $23,500, and over-50s can put up to $31,000 into their retirement plans.

This applies to most 401(k) participants, as well as those with 403(b)s, governmental 457 plans, and the federal government’s Thrift Savings Plan.

A subset of older 401(k) plan participants can make even higher catch-up contributions, starting in 2025. SECURE Act 2.0 increases the catch-up contribution limit for those participants who are age 60, 61, 62, or 63.

For these savers, the deferral limit is the greater of $5,000 or 150% of the normal “age 50” catch-up contribution limit ($7,500 in 2025). The 2025 super catch up equals $11,250, which means the total eligible for deferral for this subset is $34,750. This limit will be indexed for inflation starting in 2026.

Workplace plans need to offer this “super catch up” option for workers to be able to make a super catch-up contribution. Not all plans have this feature. Plan participants age 60-63 should check with their retirement plan administrator to see if this option is available.

Once a retirement plan participant reaches age 64, they revert to the age 50 catch-up contribution in effect for that year.

Altogether, the availability of “super catch-up” contributions could be attractive for many folks within the applicable age range and who have the funds available to do so. Consider that a couple where each partner is eligible would be able to contribute nearly $70,000 in total!

-RK

Given the importance of the new federal law to business owners, we’re re-publishing this article, which appeared in the October newsletter.

The Corporate Transparency Act (CTA) is a new federal law that aims to curtail money laundering and other illegal activities by making it clear who the individuals behind a particular business entity are.

The CTA was enacted in early 2021 and requires “reporting companies” to file information by January 1, 2025.

If you are a small business owner or own a corporate entity, such as an LLC, you likely will be required to report your company’s beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN) bureau, which is a division of the US Department of the Treasury.

We encourage all our clients who think that they might be subject to the CTA to contact their CPA or attorney to determine if they are subject to CTA reporting and to assist in handling the filing.

Below are links to resources so that you can learn more about the CTA if you think you might be required to file.

Key CTA Resources:

• FinCEN Landing Page
• BOI Frequently Asked Questions

Moore Financial Advisors cannot give specific CTA advice or assist with actual filing.

-RK

Our colleague and MFA founder Susan Moore contributed the following update on Medicare.

Medicare open enrollment period starts October 15 and continues through December 7.

During the open enrollment period, Medicare enrollees can make certain changes in their coverage. Here are some of the changes you might consider during this enrollment period:

• If you’re enrolled in original (traditional) Medicare, change your Part D drug plan
• If you’re enrolled in Medicare Advantage, switch to a different Advantage plan
• Switch from original Medicare to Medicare Advantage
• Switch from Medicare Advantage to original Medicare – but note below that limitations apply in some states

This year’s enrollment period may be one of the more significant in Medicare’s 59-year history due to some of the changes that are coming. Here is what we know about Medicare changes and costs for 2025.

Medicare Part D

Most Advantage plans include drug coverage at no extra cost, but many people on original Medicare buy a stand-alone Part D plan for drug coverage. While the average projected monthly Part D premium will decrease to $46.50 from $53.95 in 2024, some plans have announced significant increases in premiums.

For this reason, it’s especially important this year to shop for your Plan D coverage. You may be able to lower your annual drug costs by switching to a different Plan D.

To compare plans, go to the Medicare.gov site and set up your account. In the “What do you want to do?” section, select “Open all options”, then “Find health & drug plans.”

One of the bigger developments for 2025 is a new, $2,000 cap on out-of-pocket drug costs. It applies to drug coverage through both stand-alone Part D and Advantage plans.

But it only applies to covered drugs, so it’s really important to make sure your plan covers the specific medications you take. Approximately 1.5 million Medicare beneficiaries have drug costs that exceed that amount, so this change will be a big help to them.

Switching to a Different Medicare Advantage Plan

Medicare Advantage plans are also seeing big changes. Insurers are facing increasing cost pressures, and many will push higher expenses onto members.

Enrollees may see changes in out of pocket costs. Although the average monthly premium for all Advantage plans is likely to drop slightly, it’s important to pay attention to changes in copays, deductibles, and other benefits (e.g., dental, vision, health clubs, etc.)

Switching from Medicare Advantage to Original Medicare

Some Advantage plans may even exit the market next year. If your Medicare Advantage plan is being eliminated, you must actively enroll in a new plan to stay in the Advantage program.

If you don’t make a choice, you will automatically be placed in traditional Medicare for 2025 and have the chance to buy a Medigap supplement plan without going through an underwriting process.

Normally in most states (except during a narrow period when you first enroll in Medicare,) when someone switches from Advantage to original Medicare, they must pass underwriting to buy a Medigap supplement plan. (MA, CT, ME and NY do not allow Medigap insurers to require underwriting for those who switch.)

If you switch from Medicare Advantage to original Medicare because your insurer exited the market, you will not have to undergo underwriting in order to obtain a Medigap plan.

Some people switch from Medicare Advantage to original Medicare because they don’t like the restricted network of an Advantage plan, or because frequent copays for services have become expensive.

If you make this change and you want drug coverage, be sure to sign up for a Medicare stand-alone prescription drug plan (Plan D), unless you have creditable drug coverage from another source. If you do not, and you decide to sign up for Part D coverage later, you may face a penalty for late enrollment.

And if you want a Medicare Supplement Plan (or Medigap Plan, which covers most out of pocket costs) you’ll need to sign up for that then, too.

In most states (except MA, CT, ME, and NY) Medigap insurers are not required to sell you a policy after your first year on Medicare if you don’t meet the medical underwriting requirements. In that situation, they can deny coverage or charge higher premiums.

Medicare Part B

Everyone who has Medicare coverage (original Medicare or Medicare Advantage) gets Medicare Part A free, but pays for Medicare Part B.

The Centers for Medicare & Medicaid Services (CMS) hasn’t said yet how much the base cost of Part B will be in 2024, but the annual Medicare Trustees report in March forecast the monthly price to rise from $174.70 to $185.00, a 6% increase, in 2025.

Income-Related Monthly Adjustment Amount (IRMAA)

Some people pay more in IRMAA charges for Medicare Part B and Part D based on income.

Your tax return for 2023 will be used to determine whether you will be subject to an IRMAA charge for 2025. If you retired in or after 2023, or had another life-changing event (e.g., marriage, divorce, death of spouse, etc.) you can file form SSA-44 to request that your IRMAA amount be reduced or eliminated.

IRMAA charges have not been released yet for 2025 but are expected to be about 6% higher than in 2023.

If you have questions or would like help evaluating your Medicare options, please let us know.

-SM

Most people who have inherited a retirement account since 2020 must take minimum distributions every year if the original owner was already old enough to be taking Required Minimum Distributions (RMDs). And beneficiaries must withdraw whatever is left over by the tenth year.

The original SECURE Act, which took effect in 2020, included rule changes for retirement account withdrawals, including a requirement to empty an Inherited IRA within ten years, if you inherited it after 2019 (the “10-Year Rule”).

But since passage of the Act, there has been confusion regarding how beneficiaries who are not surviving spouses must handle their inherited retirement account withdrawals.

We’ve written on this topic previously in April 2024 and August 2023, and now we have clarity through Final Regulations issued by the IRS on July 18, 2024.

Non-Eligible Designated Beneficiaries (essentially anyone who is not a surviving spouse) must take RMDs annually from Inherited IRAs.

The RMD is a minimum amount that’s calculated by dividing the account’s balance at the end of the previous year by the owner’s remaining life expectancy, using the IRS’s actuarial data. Account owners can take larger distributions, which may be advantageous in lower-tax years.

If you inherited an IRA after 2019 and have not taken a distribution or have missed a year, that’s OK.

The IRS has confirmed that there will be no penalty and no requirement to make up a missed distribution – which means the new regulation effectively starts with RMDs required to be taken in 2025.

In addition to this, there is other regulatory guidance for specific circumstances where the new rules for Eligible and Non-Eligible Designated Beneficiaries apply.

These regulations introduce more complexity to the process of tax planning around retirement accounts, particularly after the death of the account’s original owner.

If you’ve inherited an IRA after 2019 and have questions regarding your withdrawals, please reach out to us.

-RK

Our colleague and MFA founder Susan Moore contributed the following update on Social Security

As financial advisors, a frequent concern we hear from clients revolves around the future of Social Security benefits. Many are understandably worried about whether these benefits will be available when they retire, especially amidst reports of potential funding shortfalls.

We’ll share below the latest projections for Social Security funding and then explore the measures being proposed to ensure its long-term viability.

Current Projections for Social Security

The Social Security program is primarily funded through payroll taxes collected under the Federal Insurance Contributions Act (FICA). However, demographic shifts such as declining birth rates and increasing longevity are leading to fewer workers supporting more retirees, which puts a strain on the system.

According to the most recent Social Security Trustees Report, the Social Security trust funds are projected to be depleted by 2035, one year later than projected in last year’s report, if no changes are made.

At that point, incoming payroll taxes will be sufficient to pay 83% of scheduled benefits. This projection highlights the need for reform to ensure that full benefits continue to be paid.

Proposed Measures to Strengthen Social Security

Several measures have been proposed by policymakers to address the funding challenges faced by Social Security. These proposals typically fall into three categories: increasing revenue, reducing promised future benefits, or a combination of both. Here are some of the most discussed options:

Increasing Revenue

• Raise the payroll tax rate: One proposal is to increase the payroll tax rate, which is currently 12.4% (split between employers and employees), to bring more funds into the system.
• Lift the payroll tax cap: Currently, payroll taxes are not collected on incomes above a certain threshold ($168,600 in 2024). Removing or increasing this cap could significantly boost Social Security’s funding.
• Introduce new revenue streams: Some have suggested introducing new sources of income for the trust fund, such as taxes on certain types of unearned income.

Reducing Benefits

• Increase the full retirement age: Gradually raising the age at which retirees qualify for full benefits could reduce the system’s expenditures.
• Modify the cost-of-living adjustments (COLA): Tying COLA to a different index that grows more slowly could decrease the annual increase in benefits, thus saving money over time.

Combination Approaches

• Means testing: Reducing benefits for high-income retirees could help focus resources on those most in need.
• Balanced approaches: Some proposals suggest a balanced approach that includes both modest tax increases and benefit reductions, aiming to spread the impact across different demographics and income groups.

One thing that’s important to note: all of the proposed measures described above would impact future Social Security recipients.

None of the measures that we have seen (except for the possible limit on the annual COLA) propose changes to benefits for those who are already receiving Social Security benefits.

What This Means for You

For individuals planning for retirement, the uncertainty surrounding Social Security underscores the importance of retirement planning. Depending on Social Security alone for retirement income is increasingly risky.

Here are a few strategies to consider:

• Increase Personal Savings: Boost your personal savings rate and maximize contributions to retirement accounts like IRAs and 401(k)s.
• Maintain a financial plan: We work with our clients to develop their financial plans and to update those plans to ensure that they’ll be able to reach their goals and can look forward to a sound financial future.
• Stay Informed: Keep abreast of changes to Social Security legislation and consider how these might impact your retirement planning. And don’t hesitate to let your congressional representatives know what you think!

Conclusion

While the challenges facing Social Security are concerning, especially for those who have not yet retired, remedies are being considered.

With comprehensive financial planning, we can help you prepare for a variety of future scenarios. As your financial advisors, we are here to help you navigate these uncertainties and develop a retirement strategy that ensures your financial security, regardless of what the future holds for Social Security.

SM 

Spring cleaning season is upon us. As the weather warms and the days lengthen, we typically have a higher level of motivation to clean and refresh our living spaces.

This is also a good time to consider an Estate Plan refresh.

As situations in life change our estate plans should be updated. For example, my oldest and middle sons are now in their mid-20s, and we’ve used this as a trigger to review our estate plan and revise certain elements of it.

It’s advisable for every estate plan to contain the following four legal documents:

1. Will: specifies how a person’s assets should be distributed after their death, and includes an executor who will manage the estate and ensure the will is carried out as written.
2. Durable Power of Attorney: grants another person the authority to make financial decisions on behalf of the individual if they become incapacitated.
3. Medical Power of Attorney(aka Health Care Proxy): grants another person the authority to make medical decisions if the individual is unable to do so themselves.
4. Advance Directive(aka Living Will): specifies an individual’s preferences regarding medical treatments they want to receive or refuse, particularly concerning end-of-life care.

Other elements of estate planning include:

• Trusts, which can be used for various purposes, such as minimizing estate taxes, protecting assets from creditors, or managing assets for minor children.
• Beneficiary Designations, which allow an account owner or policy holder to specify who will receive the assets in those accounts directly upon the holder’s death, bypassing the probate process.
• Guardianship Designations, which allow parents to name a guardian to care for minor children or dependent adults if the parents or current guardians are no longer able to do so.
• Letter of Intent, which is a non-binding document intended to guide the executor or beneficiaries on the personal wishes regarding the distribution of assets or funeral arrangements.

If you need help with sorting through estate planning issues, or thinking about how to go about a refresh if you haven’t updated your plan in some time, the two guides provided below are a good place to start (click on the images to download a pdf).

RK

Issues to Consider When Creating an Estate Plan

Issues to Consider When Reviewing an Estate Plan