Page 17 – Moore Advisors

Federal Student Loan Repayments Resume

The US Department of Education’s COVID 19 relief for Federal Student Loans is ending soon and roughly 1 in 8 Americans will have to restart their loan payments as soon as October.

Interest resumes on September 1, 2023, and payments will be due starting in October 2023.

If you are a parent of a young adult who graduated during the past three years of the COVID 19 loan repayment pause, these students may have never been required to make a payment on their Federal Student Loans until now.

If you have a Federal Student or Parent Plus Loan, or if you are the parent of a recent college graduate, here are ways to prepare for the loan repayment start up:

This is a good time to check in with young adults and discuss their loans. Don’t assume they are aware of the repayment start and what to do.

Be sure to let them know that they must watch for communications from their servicer for a bill. You can be a resource to help them remain in good standing and on track to pay off their loans on time.

Anyone with outstanding Federal Student loans, which include Federal Direct Stafford Student Loans, Federal Direct Graduate Student Loans, Graduate Plus Loans, and Federal Parent Plus Loans, should prepare for repayment (unless you kept up payments during the pause).

Below are steps you should take in August and September.

By logging in to your FSA (Federal Student Aid) dashboard with your FSA ID and password, you will have access to the information you need.

Here are some specifics:

Log on to Federal Student Aid, and update your contact information, including mailing address, email, phone; you can also update your information with you loan servicer using this link
Confirm the status of your loans, total amount you owe, and the current servicer (government agency handling your repayment)
If you are repaying Student Loans for the first time, here is a step-by-step plan with links to be sure you are set up for your first payment: FSA: Repaying Student Loans for the First Time

Watch for communications regarding your loan: your bill, payment amount, and due date should arrive at least 21 days before your due date.

A smart way to save on interest is if you set up auto-pay so you will save 0.25% on your interest rate.

If you were on an income-based repayment plan, or want to explore more affordable plans information is here: FSA Income-Driven Repayment Plans

Important Note: If you choose an income-driven repayment plan, this will extend your repayment time, and interest and total amount to be repaid.

More information on the repayment start can be found at: Federal Student Aid-Managing Loan Repayment

Here you can find more information on:

If you have questions about the Federal Student Loan repayment restart, or would like to discuss your situation with regard to paying for college, Donna is available to help.

Donna Cournoyer In Financial Planning

Heir Drama: Inherited IRA Update

For high drama, summer is high season for moviegoers, thanks to Hollywood blockbuster film releases. Those with Inherited Retirement Accounts have been experiencing heir drama since 2020 thanks to Congress and the IRS – and the spectacle continues.

Congress passed the Secure Act in 2019 which changed many of the long-standing rules governing IRAs and other retirement accounts.

One of the more impactful changes was to the post-death distribution rules for retirement accounts held by “Non-Eligible Designated Beneficiaries” (essentially beneficiaries who are not surviving spouses).

The new rules applied to IRAs whose original owner died after January 1, 2020 did away with favorable tax treatment called the “Stretch IRA” for most Non-Eligible Designated Beneficiaries.

According to the new rules, rather than being able to take IRA distributions based on their own life expectancy, Non-Eligible Designated Beneficiaries were required to empty their inherited accounts within ten years of the death of the original owner.

The drama results from the interpretation of the requirements for timing of the distributions for Non-Eligible Designated Beneficiaries. The wording of the Secure Act was somewhat vague and therefore caused confusion about how heirs needed to take distributions.

Many observers expected that Non-Eligible Designated Beneficiaries would not be required to take annual distributions during this 10-year period as long as the account was fully distributed by the end of the 10^th year.

In February 2022, the IRS issued Proposed Regulations that would make a subset of these beneficiaries (those who inherit accounts from decedents who died on or after the date whereby they were required to begin taking distributions) subject to both the 10-Year Rule and annual Required Minimum Distributions (RMDs).

The source of the drama was that these were merely proposed regulations, so beneficiaries remained in limbo regarding whether they would need to take distributions in 2022 (or should have taken them in 2021) to avoid potential tax penalties.

Then in October 2022 the IRS issued a notice waiving any potential penalties for Non-Eligible Designated Beneficiaries for 2021 and 2022 for missing RMDs from their inherited retirement accounts, which effectively eliminated RMDs for those years.

The tax saga continued to play out, because the IRS remained silent about the requirements for 2023 and onward.

Heirs who’ve been enjoying the tax-related theatrics were treated to a new release from the IRS in July 2023. Notice 2023-54 eliminates penalties for Non-Eligible Designated Beneficiaries for failing to take RMDs for 2023 and pushes forward RMDs yet again until at least 2024.

But the drama rolls on, because the IRS has yet to provide information as to when final regulations might be expected that could clarify RMD requirements for future years.

From a tax planning perspective, although Non-Eligible Designated Beneficiaries do not have to take distributions from their inherited accounts, they can still make voluntary distributions.

If you fall into the category of Non-Eligible Designated Beneficiary, you may want to consider the impact to your income tax situation over time by delaying distributions. Holding off could mean future spikes in taxable income, and ultimately paying more in tax over time.

If you have questions, Susan and I can help you look more closely at your tax situation. We can recommend tax-related strategies, including retirement account distribution strategies, with the goal of reducing the amount of tax you’ll pay over the long term.

If you’re an existing client, we encourage you to send us a copy of your 2022 tax return so we can review it and help minimize any potential drama related to your future tax situation.

Donna Cournoyer In Investment Strategy

Measuring the Market

By any measure, stock market performance has been pleasing so far in 2023. Large company US stocks have gained about 17.5% as of August 10.

Is 2023 performance too good to be true? Should you be making moves in your portfolio, to prepare for the next, inevitable downturn? After all, some prognosticators claim we’re now “due for a correction” (or worse).

Rather than trying to figure out what will happen next week, next month, or next year, I believe it’s more constructive to view financial markets through a longer-term lens.

Consider the past five years of returns: 2022, when stocks fell 18%, was terrible. Which was preceded by three wonderful performance years: 2021, 2020 (despite the pandemic), and 2019 (+29%, +18%, and +31%, respectively). But stocks struggled in 2018, falling by 4.5%.

The five-year look back on large company US stocks (average annual return) as of August 10, was 11.2%. And the very long term? Large company US stocks returned 11.5% per year, on average, over the previous 94 years.

Bonds, as you might expect, have not only failed to keep pace with stocks (as is usually the case) but have experienced a protracted slump after a period of very low yields, followed by a big jump in interest rates.

The 5-year average annual return for US investment-grade bonds as of August 10 was a paltry 0.6%. Longer term, bonds have returned about 5% on average per year since 1928.

While you’re unlikely to get the long-term average annual return over any one specific 12-month period, the odds of receiving a positive outcome by holding a well-diversified portfolio are stacked in your favor.

The chart below depicts annual returns of a portfolio allocated 60% to stocks and 40% to bonds, going back to 1926 (courtesy of Vanguard). Annual returns are slotted into one of seven buckets, ranging from -20% or worse to +30% or better.

The key take-aways from the chart, regarding 60% stock / 40% bond portfolios are:

Annual returns have landed most frequently in the +10% to +20% bucket
More than half the time annual returns have exceeded 10%
It is rare for a balanced portfolio to experience a year like 2022 (black block) and land in the -10% to -20% bucket
If you set your expectations for the long-term annual return from a well-diversified portfolio somewhere in the mid-single digits, you’re unlikely to be disappointed

Donna Cournoyer In Market Updates

July 2023 Market Recap: Stocks Heat Up

Stock market heat stayed high in July. Better-than-expected economic growth, declining inflation, and receding recession fears were supportive of the “new bull” which began last month.

For the month of July, the S&P 500 index of large company US stocks rose by 3.3%. Foreign stocks climbed by 2.7%. Year-to-date as of July 31, US stocks gained 20.6% and foreign stocks were up by 12.6%

However, stronger-than-expected economic growth, along with the possibility of interest rates needing to stay higher for longer to cool inflation, put downward pressure on the bond markets.

The Bloomberg US Aggregate Bond Index fell slightly last month (less than 0.1%). Through the end of July, the bond market return year-to-date was 2.25%.

Below is a summary of July returns.

Donna Cournoyer In Reading Recommendations

The American Spirit

David McCullough thought expansively about and cared deeply for America. The Pulitzer Prize-winning author and historian passed away last summer in Hingham, MA.

Best known for his biographies presidential (Adams, Truman) and structural (Brooklyn Bridge, Panama Canal), McCullough also lectured and presented extensively on a range of topics for more than a half century and gave addresses in all fifty US states.

In The American Spirit: Who We Are and What We Stand For, McCullough presents fifteen speeches he delivered in between 1989 and 2016.

In the introduction, Mccullough says: “Yes, we have much to be seriously concerned about, much that needs to be corrected, improved, or dispensed with…

But the vitality and creative energy, the fundamental decency, the tolerance and insistence on truth, and the good-heartedness of the American people are there still plainly.”

On this Independence Day, may you and your family see and feel good-heartedness and find ways to celebrate the best parts of the American spirit.

-RK

Donna Cournoyer In College Planning

Preparing to Pay the First Tuition Bill

If you are a parent of a young adult who will soon head off to college for the first time, you have likely had an emotional and hectic year. Making a commitment to a school for your student’s education is a big step.

Congratulations on navigating a complex process and reaching one of life’s major milestones!

One of the more important communications from your student’s school, arriving soon, will be the first semester bill for tuition, and room and board. Any merit scholarships or aid awarded to your student should show as a pending credit on the bill.

Schools generally send two bills per year, and payment due dates are usually around the beginning of August for fall semester and December for spring semester.

Early summer is an appropriate time to review your college financial plan, and a good place to start is by considering all available resources, including:

529 plan balances and other savings
Gifts from relatives
Private scholarships awarded to your student
Flexibility in your budget for making monthly cash payments
Loans, including Federal student loans and private loans

If loans will be part of your family’s financing picture, it’s wise to consider using the Federal Direct Stafford Loan – all students are eligible.

Loans maximums are set by the U.S. Department of Education, and they range from $5,500 for the freshman year, to $7,500 for the senior year.

The federal student loan benefits include:

fixed interest rate (and likely lower than a private loan)
no credit and no co-signer needed
multiple repayment and forbearance options during repayment
six-month grace period after graduation (or continued deferment if the student is in a qualifying, half-time graduate program)
Public Service Loan Forgiveness programs

Of course, it is a personal and family decision whether or not your student will borrow to help pay for college.

For access to Federal loans, you and your student must complete the Free Application for Federal Student Aid (FAFSA).

Even if you don’t want your student to have debt after graduation, Federal student loans are still worth considering, because:

taking the federal loan will help your student establish a payment history and a credit score
you’ll have the option to pay off the loan at graduation, or sooner
if you have the need to appeal for financial aid while your student is an undergraduate (due to a job loss or other unfortunate circumstance), the college’s financial aid officers are likely to look more favorably on your situation if your student has previously accepted the ‘self-help’ loan

For more information on Federal student loans, yearly loan limits, interest and payment calculators, and Public Service Loan Forgiveness, check out:

Donna Cournoyer In Investment Strategy

Americans Love American Stocks

American investors seem to prefer to hold stocks of American companies over shares of companies that are based elsewhere in the world.

According to a recent article in The Economist magazine, American fund investors hold just a sixth of their equity allocation in funds that invest in non-US companies.

Compare this to the composition of the global stock market, where nearly 40% of the total value of the global stocks reside in companies that are headquartered outside of the United States.

Are investors who eschew foreign stocks on to something?

During the past fifteen years, stock allocations heavily weighted to US shares have outperformed more balanced US / foreign stock allocations.

In the chart below, from JP Morgan Asset Management, the grey areas indicate US stock market outperformance.

But US-only stock fans should beware the purple!

Shares from non-US companies (EAFE stands for Europe, Australasia, and the Far East) have outperformed US shares for meaningful stretches in the past, as the purple sections of the chart above shows.

Researchers at AQR, a US-based investment firm, published an article in the June edition of the Journal of Portfolio Management which argues that, despite the current lengthy period of lagging US stocks, the case for international diversification remains strong.

A key point in the AQR article is that US stocks have gotten much pricier than shares of foreign companies (using time-tested means of valuing stocks), so investors are likely to be rewarded in the future by ensuring that their stock allocation contains shares of foreign companies.

Picking the ‘right time’ to buy or add exposure to any asset class is a difficult game.

But JP Morgan’s and AQR’s research make a strong case that a stock allocation incorporating a healthy portion of non-US stocks is likely to be good for your portfolio in the years ahead.

Donna Cournoyer In Economy

American Banks Ace the Test

In my April letter, I discussed the turmoil in the banking sector resulting from risk management shortcomings that led to failures of several sizable US deposit-taking institutions.

I concluded with the following statement: “if summer arrives without additional failures, I’ll feel comfortable calling “all clear”. Summer has arrived, and I’ll stand by that “all clear” claim.

As part of their regulatory responsibilities, officials at the Federal Reserve conduct an annual stress test for the largest US banks, designed to evaluate the resiliency of the banking system under challenging economic conditions.

The process is similar to an exercise stress test for humans. The regulators’ treadmill for banks include the following assumptions:

severe global recession
US unemployment rate rising to 10%
commercial real estate prices declining by 40%
house prices declining by 38%

The bank stress test was developed after the global financial crisis and was first applied in 2011. The assumptions are severe. For some time after 2011, large lenders struggled to earn passing grades.

But good news: all twenty-three large US banks that were recently evaluated passed their stress tests. This means balance sheets remain strong enough for the banks to continue to lend to households and businesses for the duration of a downturn.

You can read the details of the test on the Federal Reserve’s website at: Dodd-Frank Act Stress Tests 2023.

Although this news is unlikely to translate to large stock price gains, it does indicate that the financial market plumbing is in good working order and that the bank problems from earlier this year likely have been contained.

Donna Cournoyer In Market Updates

June 2023 Market Recap: Sheepish Bull

Sheepishly, a bull emerged in June.

While investors’ worrying about the next economic downturn may give the National Pastime a run for its money, so far this year falling stock markets have proven to be “so 2022”.

A bull market occurs when a stock index rises more than 20% from its most recent low. For US stocks, the recent low point occurred in October. The recovery, which continued during the second quarter of 2023, means US large-company stocks have attained bull status.

For many investors, the mood may feel more cautiously optimistic than wildly celebratory.

Significant ground has been regained, with US large-company stocks up nearly 17% this year. Even so, stocks are still lower today than when compared to the all-time peak in early January 2022, due to the 18% downdraft experienced last year.

Bonds are also in the black in 2023, but the previous three months proved more challenging, as interest rates moved higher (and bond prices declined). The Bloomberg US Aggregate Bond Index fell by 0.94% in the quarter ended June 30. Year-to-date, bonds returned 2.25%.

Here’s a quarterly stock and bond returns recap, going back to the beginning of 2022.

Donna Cournoyer In Reading Recommendations

The Science and Art of Longevity

Peter Attia is a physician who focuses on longevity. In his recent book, Outlive: The Science and Art of Longevity, he explains that longevity has two components: how long you live, which is your chronological lifespan, and how well you live (the quality of your years), which is called healthspan.

His goal is to create an operating manual for the practice of longevity. His belief is that, with time and effort, individuals potentially can extend their lifespan by a decade and their healthspan possibly by two decades.

Specifically, Attia’s research focuses on actions that individuals can take to mitigate risk associated with four chronic diseases of ageing: heart disease, cancer, neurodegenerative disease, and type 2 diabetes.

Attia was recently profiled in a New York Times Magazine article: Want to Live Longer and Healthier? Peter Attia Has a Plan. He also hosts a podcast entitled The Drive, which addresses personal health and longevity topics.

As a complement to this reading, I recently came across the map below in The Daily Shot, an economics newsletter.

I was surprised to see such a wide dispersion of life expectancies across regions of the US.

In its most recent report on life expectancy in the US, the Centers for Disease Control and Prevention (CDC) pegged life expectancy for a newborn at 76 years.

The CDC report, released in August 2022, states that US life expectancy experienced a 2.7-year decline during the 2020 – 2021 period due to the pandemic.

JP Morgan has also published additional longevity-related data that you might find interesting:

65-year-old females today have an average life expectancy of 84.5 years
Non-smoking females in excellent health have a 1-in-3 chance of living to age 95
65-year-old males today have an average life expectance of 81.9 years
Non-smoking males in excellent health have a 1-in-5 chance of living to age 95

Longevity is a key input to the process that we use when we build financial plans for clients, and understanding longevity trends in the US is a good starting point.

In the end, though, individual factors such as family history and lifestyle choices are likely to be more informative when responding the question: “how long do you expect to live?”

If you are interested in extending your lifespan and healthspan, it’s encouraging to know that there are concrete steps, such as the ones Attia suggests, which you can take that are likely to ‘bend the curve’ in your favor and advance the goal of a long, healthy life.

-RK