A preview of the SECURE Act, a new retirement bill out of the House of Representatives.

Earlier this year, the House of Representatives passed a new bill called the Setting Every Community Up for Retirement Enhancement Act, aka the SECURE Act. (Acronyms are kind of a thing in Congress.) As the name implies, the bill has important ramifications for people’s retirement savings. In this letter, we want to give you a preview of what the bill is designed to do.

Now, before we do that, it’s important to note that the SECURE Act must first be passed by the Senate and then signed by the president before it actually goes into effect. Many things in the bill could change before that happens, though, so it’s impossible to know exactly what the final law will look like. And of course, it’s always possible the Senate could choose not to pass the bill, or make so many changes that the House decides to rework their version.

That said, the SECURE Act enjoys bipartisan support. In fact, only three members of the House voted against it, with 417 members voting for.¹ So it’s expected the Act will become law sometime soon. As your financial advisors, it’s our job to get familiar with the bill now so we can help you prepare for the changes it will bring.

What is the SECURE Act?
The SECURE Act does many things, but at its core, it’s designed to help more Americans save for retirement. Many of the bill’s provisions are designed specifically for businesses, which we won’t get into at this time.  But there are also provisions that impact regular individuals, including pre-retirees, the recently retired, and even their children. None of these changes are particularly dramatic, but they are important nonetheless.

Changes to IRAs and 401Ks²
One of the changes the bill makes is lengthening the time people can contribute to their IRAs. Currently, retirees can only contribute to an IRA up to age 70½. Once they hit this milestone, they are required to begin making withdrawals, called required minimum distributions. Under the SECURE Act, that age would increase to 72. That means retirees have an additional 18 months to benefit from the tax advantages that come with IRAs.

Another change the bill makes is for new parents. Under current law, you must be 59½ years old to make withdrawals from a traditional IRA or 401k. If you withdraw money earlier than that, you would have to pay a penalty of 10% on the amount you took out. There are a few exceptions, such as if you need the money to pay large medical bills, buy a home, or manage a disability. But, generally speaking, the government wants the money you contribute to your retirement accounts to be saved for retirement.

Under the SECURE Act, new parents will also be able to withdraw funds penalty-free. This is to help cover birth and adoption expenses, and it’s especially helpful for younger parents who have high deductible insurance plans. There is a $5,000 cap on withdrawals, though, and they would need to be made within one year of the birth or adoption.

Changes to inherited IRAs²
Another important change – especially from an estate planning perspective – regards inherited IRAs. For years, one of the more popular estate planning strategies has involved the use of Stretch IRAs. When a parent or grandparent dies, they can leave their IRA to their children, grandchildren, or other heirs. Under current law, the beneficiary can take distributions from their inherited IRA based on their official life expectancy. This allows them to “stretch out” the value of the IRA – and the tax advantages that come with it – for a longer period of time. For example, if a 50-year old with a life expectancy of 85 inherited her mother’s IRA, she could stretch out her distributions over the next 35 years.

If the SECURE Act goes into law, this will no longer be possible. Instead, the beneficiary must take out 100% of the IRA’s assets within 10 years of the original owner’s death. As distributions are taxable income, this could have a major impact on the beneficiary’s tax situation.

Planning ahead
As you’ve probably guessed, this topic is important to all of our clients. Some are older, some younger; some nearing retirement, some far away; and some already there. That’s because, while no single provision will affect everyone, almost everyone will be affected in some way.

As mentioned earlier, the SECURE Act has not yet become law, and it’s uncertain when the Senate will vote on it. That said, it’s important that we start planning ahead. If you have any questions about the SECURE Act, please let us know. Otherwise, we’ll make a point to go over any provisions that affect you the next time we have an account review.

If any of the changes you just read about don’t affect you, but could affect someone you know, please share this letter with them. Or, please let us know so we can reach out to them if and when the bill becomes law. As your financial advisors, we want to ensure you’re prepared for any changes coming down the pike – and we want to ensure your family is prepared, too.

We will keep a close eye on Washington as this bill makes its way through Congress. As soon as the situation is clearer, we will let you know. As always, please let us know if there is ever anything we can do for you.
Have a great month!

¹ “Congressional Leaders Want SECURE Act Passage in 2019,” Plan Sponsor, October 7, 2019. https://www.plansponsor.com/congressional-leaders-want-secure-act-passage-2019/
² “Text of H.R. 1994,” Congress.gov, 6/3/2019. https://www.congress.gov/bill/116th-congress/house-bill/1994/text

The simple answer is probably.  
Historically, the American economy has grown in fits and starts, otherwise known as recessions and expansions. As a result, it is likely there will be another recession in the United States.

What are recessions? When gross domestic product (GDP), which is the value of all goods and services produced in the United States, declines for two consecutive quarters, many people will say the economy is in a recession.¹

Typically, during recessions, unemployment rises, consumer income declines, consumer spending falls, and industrial production and manufacturing slow down.²

The last recession began in 2007 and ended in 2009. It lasted for 18 months, and was the longest recession since World War II.³

What are expansions? An expansion begins when GDP begins to grow again. Usually, during expansions, unemployment declines, consumer income increases, consumer spending grows, and industrial production and manufacturing accelerate.²

The current expansion began in June 2009. It is the longest expansion in the history of the United States.^{3, 4}

 It’s important to note that during recessions and expansions, there may be brief reversals. For example, a recession may include a period of growth before the economy declines further, and an expansion may include a period of decline before the economy grows more. Usually the beginning of a recession or an expansion isn’t identified until well after it has occurred.¹

When will there be a recession?
There is no simple answer to this question.

The causes of recessions are not always easily recognized, reported Robin Harding of Financial Times. When a threat to economic growth is observed, policy makers or central bankers often take action to minimize it.⁵

Recent recessions have been caused by unanticipated financial crises. In 2001, the bursting dotcom bubble sparked recession. In 2007, mortgage loan defaults and the housing crisis were the catalyst.⁵

The longevity of the current expansion has many investors worried about the chances of recession. However, as previous Federal Reserve Chair Janet Yellen commented, “I don’t think expansions just die of old age.”⁶

Despite the inverted yield curve*, which can be a recession signal, Harding wrote:⁵  “There are some signs we are late in the current cycle. Asset valuations are high by historic standards. Private debt has risen a lot in China and some peripheral economies. The Trump administration is rolling back financial regulation. It all increases risk. But the signs of stress that often precede a crisis – wild ebullience or rising defaults – are not obvious.”

In July 2019, the Federal Reserve Bank of New York estimated the probability of a recession in the United States by July 2020 at 31.5 percent.⁷

Fortunately, recessions tend to be far shorter than expansions. The United States has experienced 11 economic cycles – contractions followed by expansions – since 1945. The average length of recessions has been about 11 months. The average length of expansions has been 4.8 years.³

What will the stock market do?
Stock markets reflect investors’ expectations for the future. As a result, they tend to fall before a recession begins and rise before a recession ends. It’s not a very useful pattern because market volatility makes it very difficult to recognize when a market decline signals recession ahead and a market gain signals recovery.

No matter what the stock market does, it’s important for investors to implement strategies that will help them remain calm when markets are volatile. Here are four tips to help you stay focused on your goals when markets are turbulent:

1. Keep your perspective. They may be uncomfortable, but stock market downturns are normal. Historically, markets have regained losses suffered during downturns and moved higher.⁸
2. Choose the right amount of risk. When stock markets deliver strong returns, it can be tempting to invest in stocks more heavily. Before you do, remember more stocks means higher volatility. Choose a portfolio allocation that will let you stay calm during periods of volatility and market downturns.
3. Take time to rebalance. The performance of markets can affect your portfolio allocation. If the stock market does well and the bond market poorly, you may end up with more risk than intended. Rebalancing preserves your allocation.
4. Downturns may create buying opportunities. The silver lining behind the dark cloud of recession is you may be able to invest in strong companies at low share prices.
5. Remember your goals. We spend a lot of time helping clients identify life and financial goals and then designing portfolios to help pursue those goals. The stock market may head south, but that doesn’t mean your goals have changed. Remember why you’re investing.

If you’re nervous about financial markets and would like to discuss what’s happening or just be reassured, give us a call. We’re happy to talk with you.

*An inverted yield curve is where long-term debt has a lower yield than short-term debt.
Sources:
¹ https://www.nber.org/cycles/recessions.html
² https://www.investopedia.com/articles/economics/08/recession-affecting-business.asp
³ http://www.nber.org/cycles/cyclesmain.html
⁴ https://www.cnbc.com/2019/07/02/this-is-now-the-longest-us-economic-expansion-in-history.html
⁵ https://www.ft.com/content/8a9d12a8-ce31-11e9-99a4-b5ded7a7fe3f (or go to https://peakcontent.s3-us-west-2.amazonaws.com/Peak+Documents/Oct_2019_FinancialTimes-Recessions_Have_Become_Rarer_and_More_Scary-Footnote_5.pdf)
⁶ https://www.bloomberg.com/news/articles/2019-01-10/do-economic-booms-die-of-old-age
⁷ https://www.newyorkfed.org/research/capital_markets/ycfaq.html
⁸ https://finance.yahoo.com (Click on to S&P 500, click on Chart, click on Max)