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Finance 101: December 2022 Thumbnail

Finance 101: December 2022

In December the financial advisors at Ruedi Wealth Management wrapped up the year with four more columns for The News-Gazette’s business extra section. Make sure to look for them every Sunday, but in case you missed any in December all four are below.


Lessons from 2022

Paul Ruedi

Every year I like to look back on what happened in the stock and bond markets to see what lessons that year taught us. In a year dominated by headlines about inflation, interest rate rises, and a potential recession, there was certainly no shortage of lessons or reminders of the deal we make as investors in both stocks and bonds.

Though the market has recovered from its lows, the S&P 500, for example, is still down by double digits as I write this. Though I can’t predict what the rest of this month will hold, it sure does seem like we are heading for a calendar year of negative returns. The mere fact that calendar years of negative returns will happen is something investors should always be aware of, but for some reason they always startle investors when they happen. This year should serve as a reminder that a year of negative returns can happen. Lifetime investors will experience many.

The second lesson was taught by the bond portion of investor portfolios. Investors look to bonds to provide stability in their portfolio. In a “typical” recession or economic crisis, the stock market drops, the Federal Reserve drops interest rates to stimulate the economy which increases bond prices. But this time was different, as the Fed was fighting a slightly different beast with respect to inflation. Instead of dropping interest rates the Fed raised them aggressively. This crushed the price of bond prices, so balanced investors saw both the stock portion and bond portion of their portfolio drop significantly at the same time. In yet another painful lesson from 2022, investors were reminded that the bond portion of their portfolio can drop at the same time as the stock market.

Last but not least, 2022 reminded us you can’t time the market. Though we may be heading for a year of negative returns, the stock market is significantly off its lows. Investors who abandoned their investments during the worst of the decline have already paid a heavy price. There were also so many days the market jumped several percent, even missing a single day would have been harmful. For example, on November 10 the S&P 500 jumped over 5% in a single day! Though it is tempting to time the market, the only way to ensure you will reap the returns that are driven by these big days is by staying committed to your investments all the time.

Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.


How is Social Security Taxed?

Paul Ruedi

Though people who are collecting Social Security are excited for next year’s cost of living adjustment of 8.7% to kick in, many may be wondering what impact it will have on their taxes. Though the Center for Retirement Research at Boston College estimated that 56% of Social Security recipients paid taxes on their benefits in 2021, in my experience very few people know how the taxes on their benefits are determined.

Social Security is taxed according to a formula and income thresholds that determine how much of a person’s or couple’s Social Security benefit will ultimately be subject to taxes. To determine how much of your Social Security will be taxed, you must first calculate your “provisional income” which is the sum of your adjusted gross income, half of your Social Security benefit, and nontaxable interest income.

This lumps people into several brackets. Single filers with less than $25,000 in income and married taxpayers with less than $32,000 in combined income pay no taxes on their benefits. Single filers with income between $25,000 and $34,000, or couples with income between $32,000 and $44,000 pay taxes on up to 50% of their benefits. Single filers with greater than $34,000 in income and married filers with greater than $44,000 in income will owe taxes on up to 85% of their Social Security benefits.

I know just being aware of the brackets and how much you could pay will not feel precise enough for some people. If you do some digging online there are some formulas out there but they are very difficult to find and understand. Fortunately, the IRS has some worksheets and an online tool available to help on their website for those who want to be more precise.

When tax time comes, the amount of Social Security benefits you owe taxes on will be added to your taxable income, and taxed at your ordinary income rate. You can pay the tax bill on your Social Security benefits in a lump sum when you pay your taxes, or you can ask the government to withhold those taxes from your monthly benefit.

The taxation of Social Security is something retirees need to be aware of and incorporate into a comprehensive plan that considers the tax impact of not just Social Security, but also withdrawals from retirement accounts and other income sources as well. If you aren’t able to do that yourself, you may want to talk to a financial professional.

Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.


A Year in the Red

Paul Ruedi

The S&P 500 is down almost 20% this year, and a calendar year of such negative returns may be alarming to some. Temporary declines happen all the time and often take longer than a year to sort themselves out. But this one was almost perfectly timed with the calendar year, which can make it feel more pronounced to investors.

The last time we saw a calendar year of negative returns was in 2018, when the S&P 500 dropped just over 6% to close the year at 2,531.94. It would have been easy for investors to get impatient and think their stock portfolio was no longer working at that time. Just under four years later the S&P 500 is hovering around 3,820 as I write this, over 50% higher from its 2018 close despite the decline we have seen this year.

If I could have gone back to the end of 2018 and told everyone the S&P 500 would rise by over 50% over the next 4 years, the vast majority of investors would have been happy. If I would have told them all the adversity stocks would face over that time, they would have found it unbelievable stocks could produce those returns. Of course I must mention that past performance is not an indication of future results. I am by no means implying that we will have strong returns going forward just because that is what happened after the last calendar year of negative returns.

Nobody would have preferred that stocks would take such wild path to create the gains we have seen over the last 4 years. But that is simply the deal we make when we invest in stocks. We have to sit through the crazy swings in order to reap the long-term rewards of investing. It is very easy to lose sight of the long-term upward march of the stock market when all the short-term swings seem so significant, or when a temporary decline stretches an entire year. But those swings become less significant as time goes on and the long-term upward trend becomes more obvious.

So once again, the antidote to anxiety over short-term returns is a healthy dose of long-term perspective. The stock market will outrun itself to the upside and downside, but patient investors who stay the course will see their wealth increase over time. If you do not have the patience and discipline to do that yourself, you may want to talk to a financial advisor.

Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.


Baking the Perfect Retirement

Paul R. Ruedi, CFP®

As a financial advisor whose advice doesn’t change with the investment fads of the day, thinking up original content for these columns can be quite difficult. So to deal with my most recent case of writer’s block I decided to take a break to bake some delicious banana bread. I hadn’t even mashed the bananas before an idea came to me: planning a retirement correctly is actually a lot like baking.

Anyone who has spent time baking knows it can be an exasperating process because if every single thing is not done correctly, the end result is ruined. If you even slightly mismeasure the ingredients, you won’t get the end result you wanted. Leave something out or make an incorrect substitution, the taste or texture will be off. Bake something for too long, it burns. If you don’t bake it long enough, you get a runny mess. Even environmental variables like humidity and altitude have an impact.

Retirement planning requires a similar level of precision to be done correctly. Leading up to retirement you must save enough, make sure you invest correctly, and in the right accounts. Click one wrong button when choosing how your 401(k) contributions are invested and you may have done the baking equivalent of adding a cup of salt to your recipe that calls for a cup of sugar. When it is time retire and withdraw from your investment accounts, it is critical that the details of your investment portfolio and how you are going to withdraw from your accounts are all correct.

Even if you get everything right to begin with, you will have to make sure you don’t tinker with something that is going perfectly fine and derail things. Bear markets like we have experienced this year tempt a lot of people to open the oven and mess with their investments and financial plans while they are still cooking. You must avoid that temptation and patiently wait for things to play out.

If my banana bread doesn’t turn out, I will throw it in the trash and try again. But people planning for retirement or living through retirement do not have the luxury of a second chance. Everything needs to be done right the first time. You definitely don’t want to just throw some ingredients together and hope everything works out. If you aren’t sure if you are able to manage the financial details of retirement planning in order to “bake” the perfect retirement for yourself, you may want to consult a retirement planner.

Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.


Disclaimer: Past performance is no indication of future results. You should not make any investment decisions without first performing your own due diligence and consulting your financial advisor.