Mark on the Markets
September 2024

August Quirks

Last month, we cautioned you about a calendar quirk that sometimes surfaces in August and September.

Briefly, “Since 1970, the average monthly return for the S&P 500 Index (excluding dividends) has been +0.09% during August and -0.96% in September, according to S&P 500 data provided by the St. Louis Federal Reserve.”

On the first day of August, investors began to fret about the economic outlook, and stocks began to slide. At the close on Monday the 5th, the S&P 500 Index hit a near-term bottom, shedding 6.1% in three days of trading, according to S&P 500 data from the St. Louis Federal Reserve.

Almost half of the selloff occurred on Monday after what can only be described as a washout in Japan. According to Reuters, Japan’s best-known market gauge fell 12% that day, the worst one-day selloff since 1987.

We won’t blame the month of August for the brief bout of volatility. Markets may react to various events in any season. Notably, from its peak on July 16, the S&P 500 Index gave up 8.5% through August 5.

According to LPL Research, the S&P 500 averages a 10% correction or more every 12 months. The last such 10% pullback occurred almost a year ago.

What happened in the three weeks between July 16 and August 5 is not unusual. Although they are difficult to predict, market pullbacks are to be expected. What would be unusual? A calendar year in which we experience very little volatility.

Intuitively, investors understand that market corrections are a part of the investing landscape. However, when a pullback occurs, it can lead to anxiety.

As we rolled through August, negative sentiment surrounding the economy began to fade, stocks began to recover, and the Dow Jones Industrials notched several all-time highs, including the final day of August, according to MarketWatch.

Additionally, Fed Chief Powell offered up his clearest signal yet that the Federal Reserve is gearing up to cut interest rates this month when he said in a speech near the end of August.

“The time has come,” he said, “for (monetary) policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

There’s no wiggle room in his remarks. The Fed is aiming for a rate cut at its September meeting.

Beyond that, the economic data will likely determine if rate cuts are aggressive or modest.

Market Action & Rate Cuts

Conventional wisdom suggests that lower rates benefit investors. But we believe it’s essential to add one caveat, that is, when modest rate cuts are accompanied by economic growth, which underpins corporate profit growth.

Conventional wisdom suggests that lower rates benefit investors. But we believe it’s essential to add one caveat, that is, when modest rate cuts are accompanied by economic growth, which underpins corporate profit growth.

However, rate cuts in response to economic weakness—2001 and 2008—did little to support equities. Despite the fact that rate cuts during the respective recessions were aggressive, the S&P 500 Index slid into a bear market.

Please note that these are historical patterns. Past performance is not a guarantee of future outcomes. The data above is simply a historical record.

Final Thoughts

As we stressed last month, your strategy should align with your financial goals, investment timeline, and risk tolerance. We would never discount the possibility of volatility as we enter the fall (for that matter, we’d never dismiss the possibility of a pullback in any season), and we encourage you to keep your focus on your long-term financial goals.

A recent remark by Liz Ann Sonders, Chief Investment Strategist for Charles Schwab, sums up our views. “One of the beliefs I share with Chuck is the inability to time markets with any precision. Too many investors believe the key to success is knowing what's going to happen in the market and then positioning accordingly. But the reality is that it’s not what we know that makes us successful investors; it’s what we do.

“In his memoir, Invested, Charles Schwab wrote: ‘If I had learned anything after years in the business, it was how little I could ever know about what the market would do tomorrow.’”

I often refer to what the old market sages say, “There are old traders, and there are bold traders, but there are no old, bold traders”. I have been in this business long enough to know that I do not have an interest in making “bold calls” or calling tops and bottoms. I will leave that to others. What I do care about is making prudent, consistent, probability-based (and of course, faith-based) decisions that can help keep the odds of success in our favor.

Mark on the Charts

The S&P 500 recovered from the July pullback, but volatility remained. We’ll likely see more of this as we get nearer to the US presidential election. Investors across the globe will attempt to discern what the next leader of the free world will do. Will the US embrace a policy of free-market economics, or will it drift into domestic socialism and international intervention? Voters will decide, and markets will display the answer.

The Value Line Geometric Index is holding just above the 600 area. As I mentioned last month, this is showing strength in the broader market, but again, like the S&P 500, we should expect to see the same volatility, and for the same reasons. (The Value Line Geometric Index is a broad index of around 1,700 stocks, where each stock is given an equal weight of the index.)

The Challenge

Most couples use and benefit from filing their taxes using the bracket “Married Filing Jointly”. Except for those taxed as the highest levels, this status offers favorable tax rates. Unfortunately, this changes after the death of the first spouse. The surviving spouse must file as “Single,” which uses tax rates that are roughly half the taxable income of the “Married Filing Joint” bracket. Furthermore, the change in filing status to “Single” reduces the standard deduction in half (from $29,200 to $14,600) and also cuts key income thresholds.

Any of these changes alone is damaging, but taken together, these tax adjustments typically push the surviving spouse into a higher tax bracket or at least significantly higher in the current tax bracket. Consequently, the surviving partner ends up with about a 10% increase in the annual tax rate and higher Medicare premiums.

1. The Two Biggest Changes

There are two major changes that happen when a person’s spouse passes away. The first is losing the tax benefits that come with filing jointly with a spouse. This means that the spouse is left with less tax-free income.

Additionally, the tax brackets are much smaller. For example, if you have $85,000 of taxable income, are married, and are filing jointly, then you are in the 12% tax bracket. But, if you file as Single with $85,000 of taxable income, then you will jump into the 22% tax bracket.

This is a dramatic change, almost doubling the tax burden on the survivor very quickly. In dollar terms, this amounts to paying $10,200 in taxes when filing jointly, increasing to $18,700 in taxes when filing Single.

I’ve included the 2024 tax brackets below to help visualize the difference in the tax bracket structure for Single versus Married Filing Jointly.

Remember the “Widow’s Penalty” also affects IRMA Medicare surcharges, often causing the widow to pay more in IRMAA surcharges as a single person than you did when you both were alive. Consider income of $225,000 as a reference point, where the couple would pay $6,000 in IRMAA surcharges versus $7,380 for the surviving spouse.

This can be a big issue as not only will the surviving spouse possibly have slightly less income (at least in the first few years of widowhood), but they will have to pay more in taxes, leaving them with less dollars when they need it most. The widow’s penalty takes a large chunk out of your retirement income for this reason.

2. Take Advantage of Low Tax Rates

So how do we plan for this? By using the married filing joint tax brackets while you can.

As I mentioned before, one spouse is likely to pass away first. The surviving spouse will generally retain about 90% of the income since they inherit the IRAs and can the Social Security benefits of the deceased spouse if higher than their own.

Paying taxes now, before the death of one spouse, may be the best time to pay taxes on those tax-deferred vehicles like IRA accounts and 401(k)’s while you are in the more generous married filing jointly tax bracket.

Additionally, if you are going to be drawing larger RMDs in the future on those large retirement account balances, now is the time to start reducing that potential liability!

You should consider tax distribution planning while you are in your 50s and 60s, and particularly before Social Security and RMDs begin. Distribution planning can look like a lot of things, but it encompasses asset location, strategic withdrawals from accounts, tax loss and capital gain harvesting and Roth conversions to maximize these types of opportunities and reduce liabilities.

Keep in mind that current tax rates are historically low, and many experts anticipate increases due to the nation’s debt crisis and overspending. With the Tax Cuts and Jobs Act of 2017 set to expire at the end of 2025 (without changes from Congress), now is the ideal time to capitalize on this “tax sale.”

3. Leverage the Last Joint Tax Return

The year the spouse passes is the last opportunity to file a joint return, so you may want to accelerate income before you, the surviving spouse, begins filing Single in the following year.

For instance, if you have deferred interest on a portfolio, such as I Bonds, the final tax return is an ideal time to recognize that. Of course, also consider Roth conversions, capital gain harvesting and anything else that generates income and determine when you desire the timing of that income.

We Believe in Tax Planning 

If your tax rate in retirement is likely to be higher once factoring in Social Security and RMDs, engage in tax planning now. 

Fidelity confirmed the findings by the Employee Benefit Research Institute. On average, according to the 2024 Fidelity Retiree Health Care Cost Estimate, a 65-year-old individual may need $165,000 in after-tax savings to cover health care expenses.

While such numbers sound daunting, it’s not as simple as the headline suggests. Let’s dig a little deeper.

According to Fidelity, Medicare Part B (doctors) and Part D (prescription) premiums will account for about 43% of the dollars you spend on health care in retirement.

In other words, almost half of your annual health care expenses are planned expenses. They are budgeted and paid from monthly income.

When we share this with clients, we find that it eases some of their financial trepidations.

Of the remaining 57%, 47% will flow into co-payments, co-insurance, and other deductibles used to pay your doctor and for hospital visits. The remaining 10% will be spent on prescription drugs.

Be that as it may, we want to stress that health care costs tend to rise in retirement. As we get older, our use of health care typically rises.

Medicare Primer

If you are approaching retirement, here are the basics.

Did you know that there is a penalty if you miss Medicare’s initial enrollment period (IEP)? And it's not just a one-time penalty. It’s permanent, and it's tacked on to your monthly premium.

Let’s explain…

Your IEP is a seven-month window—three months prior and three months after your 65th birthday. Miss the window for Medicare Part B, and your monthly Part B premiums could go up 10% for every 12-month period you go without coverage.

There's also a 1% penalty per month for each month you delay enrolling in Part D prescription drug coverage. Now that we’ve explained the penalty, what is Medicare Part B?

Medicare Part B helps cover:

• Services from doctors and other healthcare providers
• Outpatient care
• Home health care
• Durable medical equipment
• Many preventive services

But what if you are 65 and insured by your employer?

That’s great! You'll have the opportunity to enroll in Medicare penalty-free when you leave your employer through a Special Enrollment Period. Starting this year, your chance to join lasts for two months after the month your coverage ends.

We’ve touched on Part B, so let’s review Part A. Part A helps cover inpatient care in hospitals, skilled nursing facility care (SNF), hospice care, and home health care.

It’s free for most folks as you or a spouse paid Medicare taxes long enough while working—generally at least 10 years.

Medicare doesn't generally cover long-term care in a nursing home.

Your liability:

• Days 1-20: $0.
• Days 21-100: $204 each day.
• Days 101 and beyond: You pay all costs.

Medicare Part A may provide coverage for SNF care that’s medically necessary.

Medicare Part C, or Medicare Advantage, provides for Part A, Part B, and most include Part D. Medicare Advantage Plans may offer extra coverage, such as vision, hearing, dental, and/or health and wellness programs.

It is like a PPO or HMO, so check that your doctors are a part of your network before you purchase a Part C plan. If you use in-network facilities, you will have a maximum out-of-pocket of $8,850 for approved in-network services this year.

Traditional Medicare does not have an out-of-pocket limit for covered services, and a Medigap policy is needed to limit your out-of-pocket liability.

Paying for Health Care—Be Proactive

1. Consider various retirement accounts, such as IRAs and Roth IRAs. The IRA catch-up contribution limit for individuals aged 50 and over was amended under the SECURE 2.0 Act of 2022 to include an annual cost-of-living adjustment. It remains $1,000 for 2024, according to the IRS.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), and most 457 plans is $7,500 for 2024. Therefore, participants in 401(k), 403(b), and most 457 plans who are 50 and older can contribute up to $30,500 starting in 2024.

Take advantage of these catch-up provisions.

2. If you are enrolled in a high-deductible health plan and it offers a health savings account (HSA), you have an excellent vehicle to accumulate and save for eligible health-related expenses. These accounts are not subject to income tax, and you may use them for eligible health-related expenses. Funds roll over year after year.
3. Should I buy long-term care insurance? Medicare Part A (Hospital Insurance) may cover care in a certified SNF. But it must be medically necessary for you to have skilled care. Medicare doesn’t cover custodial care (such as nursing homes) if that’s the only care you need.

Medicare.gov defines custodial care as activities of daily living (like bathing, dressing, using the bathroom, and eating) or personal needs that could be done safely and reasonably without professional skills or training.

One option that may help absorb long-term care costs, such as assisted living or a nursing home, is a long-term care policy. But it won’t come cheap.

Long-term care insurance policies reimburse policyholders a daily amount (up to a pre-selected limit) for services to assist them with activities of daily living. You can select a range of care options.

According to LongTermCare.gov, the cost of a policy is based on:

• How old you are when you buy the policy
• The maximum amount that a policy will pay per day, and
• The maximum number of days a policy will pay.

The maximum amount per day times the number of days determines the lifetime maximum you will receive. You may not qualify for long-term care insurance if you are in poor health.

Before you purchase a policy, please be aware that the insurance company may raise the premium on your policy. Therefore, we encourage you to contact your insurance professional for additional information and request data on the company's premium rate history.

We know that options may feel overwhelming. Please let us know if you have any questions, and we’d be happy to assist in any way we can.

Faith-Focused Investing

We’re committed to helping you experience financial contentment and peace through a plan that’s right for you. Part of planning, however, is understanding how you want to live and what you want to do. Whether you want to spend time with family, or volunteer to make the world a better place, we help you prepare to spend your time, talents, and resources on what matters most to you.

Implementing faith-based investing begins just like any other investment management process – we’re looking for great investments!

I hope you’ve found this review to be educational and helpful. Our goal is to be a guide to you as you run the race and keep the faith. 

"Entrust your works to the Lord, and your plans will succeed." Proverbs 16:3

Contact Us for a Free Consultation