Author: Minich MacGregor Wealth Management

Simple question: How’s the economy doing?

Answer: It’s complicated.

After the Federal Reserve hiked interest rates again (but less than last time) and all the market volatility, it’s a good time to talk about the economy.¹

Inflation has been falling since summer

Inflation fell for the sixth straight month in December, bolstering evidence that it may have peaked last June at 9.1%.²

However, inflation is still very high, and its impact is being felt across the economy.

The jobs market is still very strong

The latest January jobs report was a blowout, coming in ahead of the data that Fed economists expected. The economy added over 500,000 new jobs and the unemployment rate fell to the lowest level since 1969.³

You can see in the chart above that most industries are still actively hiring, suggesting that Fed actions still haven’t slowed the desire for workers.⁴

The economy shrugged off recession worries in Q4

Despite all the recession doom and gloom, the economy grew 2.9% in the last three months of 2022.⁵

However, consumer spending weakened slightly, indicating that Americans might be trimming expenses. Since consumer spending accounts for 70% of economic growth in the U.S., it’s a potential warning sign we’re keeping tabs on.

I see a few takeaways about the current state of the economy

But, before we dive into them, we want to point out two important caveats about economic data:

1. Much of the initial data we see in the headlines is based on incomplete estimates that get revised later as more data is processed. These big data bureaus try to balance releasing data quickly enough to be useful and getting the complete picture.
2. Data is often impacted by seasonal trends that can cause spikes or “noise” in the data. That’s why we look for trends rather than single data points.

Here’s what we see:

Despite tech layoffs and gloomy headlines, many sectors seem to still be going strong, job-wise.

Interest rate hikes aren’t slowing down growth as much as the Fed hoped, though inflation is definitely showing a downward trend.

While recession fears are definitely real and based on solid concerns, it doesn’t look like the economy has hit the skids yet.

What does all this mean for future Fed interest rate moves?

That’s the trillion-dollar question, isn’t it?

We don’t have a crystal ball, but we’ll give it a shot.

It’s possible that more interest rate hikes are coming.

We think folks expecting a quick pivot away from increases are going to be disappointed.

But any future rate hikes may be smaller and slower paced as the Fed takes stock of what the data is showing and works to keep us out of a recession.

Federal Reserve chair Jerome Powell has admitted that inflation has begun to fall but he wants to see “substantially more evidence” of a declining trend before changing policy.¹

With inflation still three times above the Fed’s 2% target, there’s still a long way to go before we’re out of the woods and back on the path.²

What could happen with markets?

We expect a lot of volatility ahead as markets digest every shred of information about the economy and the direction of interest rate policy.

We don’t have a crystal ball here, either, but we think it’ll be a rocky spring. So, we’re watching markets, we’re reading analyses and reports, and we’re looking for opportunities.

Do you have any questions? Would you like to talk anything over? Contact us and we’ll find a time to talk.

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Sources

1. https://www.cnbc.com/2023/02/01/fed-rate-decision-february-2023-quarter-point-hike.html
2. https://tradingeconomics.com/united-states/inflation-cpi
3. https://www.reuters.com/markets/rates-bonds/feds-kashkari-says-hes-sticking-54-rate-hike-view-after-surprising-jobs-report-2023-02-07/
4. https://www.bls.gov/charts/employment-situation/employment-by-industry-monthly-changes.htm
5. https://www.cnbc.com/2023/01/26/gdp-q4-2022-us-gdp-rose-2point9percent-in-the-fourth-quarter-more-than-expected-even-as-recession-fears-loom.html

Happy Presidents’ Day! 

As you know, this holiday was originally set aside to honor George Washington’s birthday. But as Abraham Lincoln’s birthday is also around this time of year, many states began celebrating the two dates together. More recently, the day has become dedicated to all presidents.

Recently, we came across a speech about Abraham Lincoln given by a man named Phillips Brooks. But this was no ordinary address. It was, in fact, a eulogy for our sixteenth president.

Lincoln was assassinated on April 14, 1865. Most people don’t realize this was Good Friday – an important holiday for many people. It was also the start of the Easter weekend, a time when churches around the country would fill to capacity. But on that weekend, religious leaders were suddenly faced with a dilemma: How to comfort thousands of grieving, bewildered people. People mourning the sudden, unthinkable death of their president.

Phillips Brooks was one of these leaders. As the rector of one of the largest churches in Philadelphia, he wrote down his thoughts about Lincoln for a eulogy that he delivered the following weekend. The same weekend when Lincoln’s body passed through Philadelphia on its way back to Illinois.

In honor of the holiday, we thought we would share a few excerpts with you. While Presidents’ Day is not as celebrated as, say, July 4 or Memorial Day, we think Brooks’ words perfectly illustrate why it still matters. They also illustrate why we were so lucky to have a man like Abraham Lincoln as president of the United States.

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The Life and Death of Abraham Lincoln
by the Reverend Phillips Brooks¹

While I speak to you today, the body of the President who ruled this people is lying honored and loved in our City.  It is impossible for me to stand and speak of the ordinary topics which occupy the pulpit.  I must speak of him today; and I therefore…invite you to study with me the character of Abraham Lincoln, the impulses of his life, and the causes of his death.  I know how hard it is to do it rightly, how impossible it is to do it worthily.  But I shall speak with confidence because I speak to those who love him.

We take it for granted, first of all, that there is an essential connection between Mr. Lincoln’s character and his death.  It is no accident, no arbitrary decree of Providence.  He lived as he did, and he died as he did, because he was what he was. 

In him was vindicated the greatness of real goodness and the goodness of real greatness.  The twain were one flesh.  Not one of all the multitudes who stood and looked up to him for direction with such a loving and implicit trust can tell you today whether the wise judgements that he gave came most from a strong head or a sound heart.  If you ask them they are puzzled.  There are men as good as he, but they do bad things. There are men as intelligent as he, but they do foolish things.  In him goodness and intelligence combined and made their best result of wisdom. 

Mr. Lincoln’s character [was] the true result of our free life and institutions.  Nowhere else could have come forth that genuine love of people, which in him no one could suspect of being either the cheap flattery of the demagogue or the abstract philanthropy of the philosopher, which made our President, while he lived, the center of a great land, and when he died so cruelly, made every humblest household thrill with a sense of personal bereavement which the death of rulers is not apt to bring.  Nowhere else than out of the life of freedom could have come that personal unselfishness and generosity which made so gracious a part of this good man’s character. 

How many soldiers feel yet the pressure of a strong hand that clasped theirs once as they lay sick and weak in the dreary hospital.  How many ears will never lose the thrill of some kind word he spoke – he who could speak so kindly to promise a kindness that always matched his word.  How often he surprised the land with a clemency which made even those who questioned his policy love him the more; seeing how the man in whom most embodied the discipline of Freedom not only could not be a slave, but could not be a tyrant.  In all, it was a character such as only Freedom knows how to make. 

[Now], the new American nature must supplant the old.  We must grow like our President in his truth, his independence, his wide humanity.  Then the character by which he died shall be in us, and by it we shall live.  Then Peace shall come that knows no War, and Law that knows no Treason, and full of his spirit, a grateful land shall gather round his grave and give thanks for his Life and Death. 

He stood once on the battlefield of our own State, and said of the brave men who had saved it words as noble as any countryman of ours ever spoke.  Let us stand in the country he has saved, and which is to be his grave and monument, and say of Abraham Lincoln what he said of the soldiers who had died at Gettysburg: ‘That we here highly resolve that these dead shall not have died in vain; that this nation, under God, shall have a new birth of freedom, and that Government of the people, by the people, and for the people, shall not perish from the earth.’ 

May God make us worthy of the memory of Abraham Lincoln. 

We hope you enjoyed reading these words as much as we did. We wish you a very happy Presidents’ Day! 

¹ “The Life and Death of Abraham Lincoln,” by the Rev. Phillips Brooks, April 23, 1865.  http://name.umdl.umich.edu/ACK8574.0001.001

On December 23, Congress passed the Consolidated Appropriations Act of 2023.  This is what’s known as an “omnibus spending bill”.  (The word omnibus means that multiple measures were packaged into a single document.)  The bill authorizes $1.7 trillion in government spending on everything from disaster relief to supporting Ukraine to workplace protections for pregnant mothers.¹  On December 29, President Biden signed the bill into law.¹

As you can imagine, this was a massive bill.  In fact, it contained over four thousand pages.  That’s because, as an omnibus, it’s multiple bills combined into one.  Among those many bills is one that will have a profound impact on retirement called SECURE Act 2.0.    

Back in 2019, Congress passed a law known as the Setting Every Community Up for Retirement Act.  This was the original SECURE Act.  The law made important changes to IRAs and 401(k)s, among other things, and was designed to help more Americans save for retirement. 

SECURE Act 2.0 widens the scope of several provisions from the original law.  It also comes with a variety of new ones.  To help you understand this law and how it may affect your finances, we’ve written this special letter.  Now, as you’ve probably guessed, we’ve sent the following information to all our clients.  So, while some of the information you’re about to read may not apply to you right now, it could apply to members of your family.  If so, feel free to share this letter with them!

There’s a lot to unpack here, so please take a few minutes to read about these new provisions.  Most are simple, and we’ve done our best to explain them all in plain English.  But if you have any questions or concerns, please let us know.   

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Important Provisions of the SECURE Act

Before we dive in, understand that SECURE Act 2.0 is over 20,000 words long.  That means there isn’t room to cover every aspect of the law, and many won’t apply to you anyway.  So, what follows is a brief overview of the provisions that could affect your finances.

Are you ready?  Then take a deep breath as we go over…    

Changes to RMDs²

One of the most notable changes from the original SECURE Act was raising the age at which retirees need to take required minimum distributions or RMDs.  SECURE Act 2.0 raises the age again.  Beginning on January 1 of this year, retirees may now wait until age 73 (up from age 72).  This is important because it gives retirees an additional year to benefit from the tax advantages that come with IRAs before making mandatory withdrawals.  (Note that anyone who turned 72 last year will still need to continue taking RMDs as previously scheduled.)

Finally, the law eliminates the need to take RMDs for Roth IRAs that are inside qualified employer plans.  What does that mean in English?  It means that if a retiree owns a Roth IRA through their old employer, they need never make mandatory withdrawals during their lifetime.  This change begins in 2024. 

Note, of course, that regular Roth IRAs that are not part of an employer plan were never subject to RMDs to begin with, so this change does not apply.)   

Changes to Catch-Up Contributions²

Under current law, employees aged fifty or older can make extra “catch-up” contributions of up to $7,500 per year to their 401(k) or 403(b).  Beginning in 2025, individuals aged 60 through 63 will be able to contribute up to $10,000 annually.  Furthermore, that amount will be indexed to inflation, meaning it will go up as inflation does. 

For people who are 50 or older – but not between the ages of 60-63 – the catch-up limit will remain $7,500 per year. 

People aged 50 and older who own IRAs can also make catch-up contributions, albeit at a smaller amount.  Currently, the catch-up contribution limit for IRAs is $1,000 per year.  In 2024, that number will be indexed to inflation, too.  Again, that means the limit could increase each year as cost-of-living expenses rise. 

Changes for Businesses²

Beginning in 2025, the law requires businesses to automatically enroll employees in any new 401(k) or 403(b).  Furthermore, unless the employee opts out or elects to contribute a different amount, they would automatically contribute 3% of their pay. 

Another change: Starting in 2024, employers can help workers with their student loan payments!  Because it can be so difficult to both save for retirement and pay off college debt at the same time, employers can “match” an employee’s loan payment with an equal contribution to their retirement account.  This is a great option for younger investors, so if this provision applies to you or a loved one, make sure to inquire whether your employer plans to take advantage of it! And business owners around the country will be looking to use this provision to compete and retain top talent.

Other Provisions to Note²

Here’s an interesting provision: Starting in 2024, individuals may transfer money from a 529 plan into a Roth IRA.  This could be useful if you own a 529 plan that has more funds than you or your loved one needs to pay for an education.  Think of it as a way to add more flexibility to your long-term finances. 

It’s important to note, however, that this provision comes with a lot of terms and conditions.  For example, the Roth IRA must be in the same name as the beneficiary of the 529 plan.  Furthermore, no transfers can be made until the 529 plan has been maintained for at least fifteen years.  There are also very specific limits on how much money can be rolled over.  So, if you ever intend to make use of this provision, my advice is to talk to me first so my team can help you through the process.  

Let’s move on to another interesting provision.  As financial advisors, we’ve long recommended that all investors have a Rainy-Day Fund.  But sometimes, even this isn’t enough to handle unexpected expenses, like a health crisis or loss of income.  Under SECURE Act 2.0, it’s now easier to make use of your retirement savings in an emergency.  Previously, there was a 10% penalty for withdrawing money from a retirement account prior to reaching age 59½.  (This was to prevent people from using their retirement savings for something other than retirement.)  However, there are some exceptions, such as when you need the money to pay for certain medical expenses.  The new law has expanded the list of exceptions.  Here are some examples where the 10% penalty no longer applies:

• Recovering from a natural disaster, like an earthquake or hurricane
• Dealing with a terminal illness
• Being the victim of domestic abuse

The law also allows for emergency withdrawals for any taxpayer who needs to meet “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.”²  Now, what the law does not do is specify what situations qualify as an emergency.  Instead, the law states that “the administrator of an…eligible retirement plan may rely on an employee’s written certification that the employee satisfies the conditions of the preceding sentence in determining whether any distribution is an emergency personal expense distribution.”² 

We know – that sentence is Washington legalese at its finest.  Basically, this means people just need to be reasonable at determining for themselves what qualifies as an emergency.  For example, if a loved one has been injured in an accident?  That’s an emergency.  Desperately want to buy the newest PlayStation before it goes out of stock?  Not an emergency. 

Hopefully, you will never have to make use of this provision.  But it’s nice to know that it’s there in case you ever do!

The final provision we want to address in this letter involves qualified charitable distributions or QCDs.  A QCD is a direct transfer of funds from your IRA to a qualified charity.  They are a popular tool for retirees who want to contribute to a worthy cause because QCDs also double as RMDs in most situations. 

Under SECURE Act 2.0, people age 70½ and older may use a QCD to gift up to $50,000 to a beneficiary.  This is a one-time deal, and several conditions must be met.  So, again, if you want to take advantage of this provision, talk to me and my team first so we can help you navigate the rules and restrictions. 

Lastly, the law also links the maximum annual QCD amount to inflation rather than capping it at $100,000 like before.

Conclusion

As you can see, SECURE Act 2.0 is loaded with provisions for those saving for retirement.  So, again, if you have any questions or concerns, please don’t hesitate to contact us! 

Of course, our team will continue pouring over these changes.  If there is anything else we feel you need to know, we’ll reach out to you, or go over them with you during our next review. 

In the meantime, remember that we’re here to help you work toward your financial goals.  Please let us know if there’s ever anything we can do – in 2023 and beyond.

Sources

¹ “Here’s what’s in the $1.7 trillion spending law,” CNN, December 29, 2022.
² Text of “Consolidated Appropriations Act of 2023,” (beginning page 817), Congress.gov.  https://www.congress.gov/117/bills/hr2617/BILLS-117hr2617enr.pdf