End of Year Planning Tips to Take Advantage of a Bear Market — EP 018

Matthew Peck: Welcome everyone to another edition of the SHP Retirement Road Map podcast. I’ll be your host today, Matthew Peck. And I’m joined today by Keith Ellis, also of SHP fam, all 20 years, close to 20 years now that we’ve been doing this now together, which is amazing, and a whole topic all to itself, to say the least.

But just so everyone knows, today, we’ll be talking about sort of end-of-year planning. We all know how difficult of a year 2022 has been, but Keith and I wanted to sit down and take you through what we are advising our clients to do, some of the strategies that you can employ at the end of the year to make sort of lemonade out of all the lemons that we’ve received for 2022. What are some of the things that you can still do, even though the markets are obviously in a very difficult position?

And so, it’s like, okay, we still want to make sure that we’re taking advantage of every opportunity that gets presented to us. We still don’t want to sort of put our heads in the sand and just say, okay, bad year, wait till next year. It’s like, well, not necessarily. There may be things that you can do prior to December 31^st that can at least improve on a difficult situation. And if we weren’t doing this on the podcast and if we weren’t doing this on behalf of our clients, then frankly, we wouldn’t be doing our job.

So, let’s sort of talk about that today. But without much further ado, Keith, I’ll bring you on. And so, tell me again, how has 2022 been for you? And how’s everything been, in general?

Keith Ellis, Jr.: Matt, you said it best. It’s been a pretty tough year for the market. But I think as advisors and as planners and each of the families that we work with has a specific plan that is tailored to them and their situation, their goals, it’s up to us. And I like what you said, it’s up to us to look for opportunities to turn lemons into lemonade and really try to maximize the plan even down the years.

We did a lot of this planning during the COVID year as well, the early parts of 2020 when that was a really difficult time. We took advantage of some of those difficult times and really put what we believe clients in a better position long term. So, looking forward to kind of talking about some things that we’re doing, like you said.

Matthew Peck: Well, and I think too, I mean, certainly this year has been, well, unique, or at least maybe not unique, but it’s been a long time coming, meaning that the…

Keith Ellis, Jr.: Market can’t go on forever.

Matthew Peck: Market can’t go on forever. Correct. And it’s the length of it, too. I mean, if you remember, you talked about COVID, right? COVID, obviously, was an extremely scary March and April. But soon after like the fiscal response and all the stimulus, which is kind of where we are now paying for all that stimulus right now. But that being said, the clinical bear market of 2022 lasted three or four months. And then, officially beyond then was 2018, which was a three-month situation at the end of the year.

Keith Ellis, Jr.: October through December.

Matthew Peck: Exactly. It was a very short event. Now, we have said like the bill has come due from all that stimulus. So, now, we’re kind of entering detox, which is why 2022, obviously, is so difficult. But as I mentioned, it just reminds everybody about the length of this. I mean, we are now officially nine months into it. And interestingly enough, the average bear market is 18 months. So, we’re still below average in the sense that if the market does somehow start to turn, which we don’t necessarily expect, it would be on the shorter end of it.

So, it’s reminding people that bear markets, I just said markets don’t go up all the time, and also, bear markets do strike and they do take time. It does take time for the wash to kind of rinse out and for things to finally kind of stabilize. So, it’s just a reminder that, gosh, it’s been since 2008. So, we are talking close to 14 years before, since we have dealt with an extended bear market.

Keith Ellis, Jr.: And that’s just it. You got to remind folks of the run that we’ve had, right? I mean, it’s been a really nice run. There have been some hiccups along the way, but those hiccups, like you said, have been pretty quick and pretty– and what I mean by this, quick to return back to the “norm.” So, you got to remind yourself and I always say to folks, think about the bull market run we’ve had, the market in a weird way kind of needed a breather. It can’t go up every single year all the time. And this is the time when, in our opinion, is the time to take advantage of a bad situation, but also to be investing to take advantage of the down market and get assets at a cheaper price. I think it makes a lot of sense.

Matthew Peck: Well, that’s the thing, too. How have your clients been in general? I mean, our most understanding of everything you just mentioned, and certainly, the advice that you’re giving them, I guess, what is the overall sense of alarm in the book? Is it relatively low? Or is it high? I mean, I guess, when you try to read the tea leaves or put your pulse on how Joe Sixpack is feeling nowadays, well, I guess, what’s your reading right now?

Keith Ellis, Jr.: I mean, I think a lot of folks, once we sit down with them and we go through their plan and revisit their plan in a down market, a lot of them come out confident, confident to know that this was something that they knew was going to happen at some point.

Matthew Peck: Right.

Keith Ellis, Jr.: Like I said, and I keep saying, the market can go up forever, but to have it, for some folks, 12 to 24 months after we’ve built the plan, implemented the plan, and does see the plan hold up, I think it’s more, I would say, 90% to even higher than that leave the office or leave the phone call or leave the Zoom meeting with more confidence. It’s just looking at the headlines every day, the uncertainty every day, that can weigh on people. And until you actually have a conversation to know where you’re at and be able to see where you’re at, again, having a plan in place to us is one of the most important things that you can do as you exit your working years and enter your retirement years because it gives you confidence, confidence to spend, confidence to withstand times like this, confidence to give, confidence to just enjoy what is supposed to be some of the best years of your life.

Matthew Peck: And I think, too, and I know we see a lot of it during our market updates and whatnot, but just the power of diversification, too. I mean, if you had planning with diversification, I know that’s kind of old hat in regards to diversification side where you kind of take the edge off and different things along those lines. But I remind people because, obviously, Keith did a great job mentioning the planning aspect and giving people those long-term perspectives. But sort of behind the scenes and certainly in front stage too at times, but just being diversified because I think people here, or as you mentioned, both those headlines, they’ll say like, oh, Mark has done this and this is down and that’s down.

And sometimes, they automatically think that, oh my portfolio or whatnot must be just as much down as what that headline says or the Dow drops this and the Nasdaq drops that. And it’s like, okay, well, yes, the markets did that, but maybe not necessarily your portfolio. When we use risk hedges, like those fixed annuities or bonds or any other proxies or ones that will kind of take the edge off, you realize, especially when you do these reviews, it is said, when you are sitting down with people, you’re able to just to say, look, yes, this is what happened in the overall market, but here’s how you and your mix actually performed. And more often than not, I think that also gives them a good feeling to know that they’re not necessarily falling as much as the general market.

Keith Ellis, Jr.: Yeah, again, it just comes back to that word confidence, revisiting that plan and instituting that plan. And then doing what we’re here to discuss today is starting to look at opportunities as we exit 2022 and enter 2023. What could people be doing?

And one of the things that we’re doing internally as the year goes on is looking at money that is after tax and harvesting losses. And what that means is you’re purposely selling losses and some people will shake their head and be like, why would you ever do that? It’s more on positions that you don’t feel confident or maybe aren’t confident in over the next 30 days because there is a rule that is in place that you cannot enter that same position for 30 days. It’s called the wash rule.

And if you’re confident or you have a feeling that the market isn’t going to do well or that position is not going to do well over 30 days, but overall, you do like that position, you can buy it back in 31 days and take that loss. And what that means is you can use that loss against any future capital gains, sale of property. I’m dealing right now with a family that sold the property up north and they have a pretty sizable capital gain. So, what we’ve been doing since we’ve been working together in July is every time there’s a loss, we’re taking that loss because it actually helps them, and then repositioning the asset.

So, it’s a really nice way to bank some losses, to potentially use that against future gains. And then in the future, as you need distributions, there might be the ability to get that money tax-free if you do it right. So, there are some really unique ways, and we believe wholeheartedly in tax loss harvesting. Again, it’s a position-by-position outlook. It’s something that you want the client on board with to educate them first and say, look, this is why we’re doing this and this is what we’re thinking of doing. Do you agree? Yes. And then you execute.

Matthew Peck: So, let me kind of unpack that a little bit for our audiences because I think you did a great job, Keith, of explaining it, but that’s also kind of, as I said, put it in perspective, whereas the whole idea of tax loss harvest, I kind of get a kick out of it because it’s harvesting and it’s like, okay, all right, you kind of explain that. So, imagine, you have all the wheat or whatever and you’re kind of just gathering it in. And so, at first, it’s like, okay, that sounds like a positive thing, but wait a second, we’re harvesting losses. Like, oh, gosh, that sounds– I’m supposed to stay in the market. I thought I’m not supposed to realize any type of gains or losses in that situation.

But no, no, no, no, not necessarily because when a bear market strikes, like it is right now, you can harvest the losses. But I think what’s great about it and what Keith explained, is the fact that you can stay invested. It’s not like you have to sell, position a stock fund A, and then just sit in cash and wait for 30 days, you can stay in similar sectors. I mean, very often, well, let’s just say, for example, you’re in also the consumer staples area or let’s say you have Procter & Gamble as a stock, okay, well, you can sell Procter & Gamble, and then invest in Walmart or in Kellogg or whatever that may be as an example.

And so, the individual now, any losses that they had in Procter & Gamble in that stock, they’re now able to use against, as Keith mentioned, it maybe was a sale of a property, maybe they had sold a second home or a rental home that they had given in that in this particular year. But also, what I love about it is the fact that you can carry it forward. So, it’s not like, oh, okay, let’s do it because you did have that sale of a property, not necessarily because if you harvest $20,000, $30,000, $40,000, $50,000, $60,000 worth of losses, you can take that year over year and whether it’s using against your taxes at roughly about $3,000 per year or whether it’s a future sale of a property.

As you mentioned about a client that sold their home in 2022, but they might sell their home in 2025. And you can carry those losses for, what you harvest, what you’ve brought forward, or what you actually kind of put in your piggy bank, if you will, you can use both this year and ongoing, every year ongoing.

Keith Ellis, Jr.: Yeah, it’s an important strategy and something that you should be addressing, whether it’s someone that’s doing it themselves or you’re working with an advisor, you shouldn’t be bringing it up to that advisor. That advisor should be bringing that strategy to you. But nonetheless, the strategy should be executed if it makes sense for the investor.

And then, another strategy we’re looking at right now is the ability to convert IRA assets to Roth IRA assets. So, this is something that needs to be done before the end of the year. If you want to take advantage of it for 2022, it has to be executed before December 31^st in order to be able to complete that strategy. And the idea is, I actually love this strategy right now. Again, it’s very specific to the individual. Just don’t go out and haphazardly do it. You really want to take into account tax impacts, tax ramifications, portfolio impacts, allocation. There’s a lot that goes into this decision.

But the idea where the market is down, again, think about what we did during the COVID years, reaching out to clients proactively, saying, look, the market’s down 15%, 20%, let’s convert IRA assets to Roth IRA assets in your case, one, because it makes sense, but two, the market’s down. So, you’re buying, you’re taking taxable dollars, taking them out, and buying tax-free dollars at a discount. So, as the market recovers, which side of the ledger do you want to recover on?

Matthew Peck: Absolutely. You want that recovery to happen on your tax-free funds to say the least.

Keith Ellis, Jr.: And that’s kind of the thought process behind this is, again, lemons into lemonade. I mean, there’s nothing better long term, in my opinion, than growing money tax-free. And if we can take advantage of a down market by assets that we like at a 10%, 15%, 20%, 30% discount, and then see those assets recover over three, five, seven, in some cases, 10 years because clients don’t need that money, that’s a nice win.

Matthew Peck: Well, I mean, that’s the thing. Two points I want to bring up. I mean, the first is the fact that, as I said earlier, about how the bear market, this is like our first extended bear market in at least 14, 15 years, right? So, I was kind of joking around the clients about, okay, when this happens, like 2022 and end of year planning, you kind of have to dust off your bear market playbook, like, ooh, ooh. I haven’t had to use this in years. So, then you open it up, and the first thing you see that we’re talking about is tax loss harvesting, looking at your positions, finding out which ones you can swap around, stay invested, but at the same time, harvest those losses to use both against future sales or against any type of current sales of property that you do.

Line number two is Roth conversions. Taking advantage, as you were saying, and buying sort of funds or money at a discount, and having that recovery occurs in your tax-free dollars, or when the market eventually does recover, it’s happening in your Roth side of the ledger, as Keith was mentioning, then on your IRA or your pretax dollars because basically, if you leave in the pretax dollars or if you miss opportunities like this, then all you’re doing is really enriching Uncle Sam because now you just have more IRA dollars that are going to be subject to RMDs and everything else.

Keith Ellis, Jr.: Yeah. And again, this is a strategy that should be looked at by your advisor. Or if you’re someone that likes to handle themselves, it’s important to visit these strategies because these opportunities don’t come along that often. Again, we’ve seen two in the last 18 months, with COVID, sadly, and then with this. But after this bear market, let’s hope we have another nice, decent market run. And we aren’t talking about this type of stuff.

Matthew Peck: Well, and I think too, also, because you mentioned earlier about the planning nature of what we do, I just love how, here we are sharing the podcast and we have a couple of other strategies and tips for folks and the bear planning, but here we are talking about tax planning. Yeah, we can certainly talk about investments, we can get into the market and where we see the market going in 2023 and whatnot. And certainly, it’s a whole other subject for another day.

The point being is that, as you were sort of referring to it, it’s like we really hope that people, if they have an advisor that they are receiving this level of planning because clearly, you need it, clearly everyone needs it, and deserves it to make sure that they are taking advantage of opportunities because now, we are sort of combining, again, tax planning with a little bit of investment planning, being aware of where the market is, of course, but then making sure that you are leveraging and using every last bit of energy and effort to make a very difficult situation that much better.

I mean, I think you also referenced it earlier, Keith. I really got to kind of mid note about it is the fact that our job, as you were saying, is to make sure that our clients don’t miss opportunities or take advantage of that because I mean, certainly, they’re looking to us as to, okay, what do you do? What do you do? What should I do during these difficult times? And if we, as planners and anyone that either does it themselves or has a planner, kind of looks at it in a cool head, doesn’t get caught up in the emotions of it all, and just says, okay, all right, what’s the best way if this were to happen? And knowing what I know now, whatever in the future, like, what would I tell my clients?

And so, it’s things like this, it’s tax loss harvesting, Roth conversions. And then let’s go with a couple of other last little tips for end of year. So, we got tax loss harvesting, we have Roth conversions. And what else are you telling your clients at the end of the year?

Keith Ellis, Jr.: Just make sure if you have the ability to do so, obviously, times are tough. Inflation’s high. The dollar’s not stretching as far right now, but are you able to max out your contributions to your retirement accounts? That includes IRAs, 401(k)’s, 403(b)’s, HSA’s, all these different accounts, you want to be able to get that money in there by the end of the year, if possible. So, revisit that, make sure that if you have the ability to do so, you are doing that.

Matthew Peck: Well, just a positive to say, because we’ll go back to the other thing just to mention about how just on the 401(k) front, so I just want to go back to that because there could be free money on the table.

Keith Ellis, Jr.: That’s right. You got to get the matches.

Matthew Peck: If there’s a matching program that you’re receiving from your employer, I mean, you absolutely need to make sure that you are maximizing your contribution and maximizing the match that you may have.

Keith Ellis, Jr.: You had a new family come in over the last month and they weren’t making that contribution to that point to get the full match. And they’re like, “What’s the first thing you would do?” I said, “That’s the first thing I would change right there because it is free money. It’s money that the company is giving to you just by putting money into the program.” So, that’s the first adjustment that we made with them, was making the adjustments in regards to the contribution, so then they hit that level, so then they get that match.

Matthew Peck: And by the way, this goes for any year whatsoever to make sure that you’re getting your match in and your free money. But specifically, in 2022, I mean, we’re talking about doing Roth conversions and tax loss harvesting, but just to go back to Roth conversions, well, we’re really big on it. Again, for individual situations, you have to implement it properly. But at the same point, the whole goal is, okay, if the recovery happens, we want the recovery on our Roth IRA side of things. But here it is in regard to contributions. Also, extremely important, 2022, because you’re buying low.

Keith Ellis, Jr.: Exactly.

Matthew Peck: I mean, now is the time that you want to get that asset to work because things are as cheap now, and what were some of the numbers that we saw? Like the market is busy where it was like early 2020 or something.

Keith Ellis, Jr.: Yeah, I think the Nasdaq’s down over the last two years. Think about that. If you invested two years ago, you’ve lost money in the Nasdaq, which is it’s a little bit more risky, a little bit more high-tech weighted, but I mean, it also can grow quite quickly.

Matthew Peck: Yes, right.

Keith Ellis, Jr.: So, that’s an interesting statistic to look at for sure. I think one of the last things that people could also do is every year at the end of the year for folks 65 and older is open enrollment. So, a lot of folks just kind of coast and kind of relive and just kind of keep with the same Medicare program, which is just fine if you’re comfortable with that and things like that. But every year in November, there is a period of time called open enrollment, where you can look at your Medicare program, your Medicare Supplement, your Medicare Advantage, whatever program it is that you have to go alongside Medicare and make the proper adjustments for the next year.

Sometimes, that can be a missed opportunity for folks. And the window closes, and they’re like, oh, I should have done that. So, we just want to make people aware that now is the time. It’s not convenient because this is the holiday season, but now is the time to visit and revisit these types of things and take advantage of the opportunity that’s in front of you. And really, again, goes back to planning, planning, planning. We talked about taxes, we talked about taxes, we talked about health care, investing in the down markets. These are all very important strategies that should be discussed, should be visited with clients.

Matthew Peck: And just to go back to Medicare, just so everyone knows, I mean, the beauty of the Medicare situation is that each in their individual plans, so meaning that a husband can have one plan and a spouse can have another plan. And so, because at times and I think we’re all quite aware that everyone’s health is obviously different and we age differently and what happens. So, it’s very often that we will have– I’ll leave it, whether it’s the husband or the wife, but one of the spouses that are sicker than the other, well, they certainly should have a much better plan or more robust plan, whereas if the other spouse that’s very healthy, they could have more of a catastrophic plan, again, if they so choose.

So, it’s good to know that it’s all individual plans. But then to kind of go back to what you were mentioning to Keith and just how it’s all interrelated is because, all right, well, obviously, when you look at your health insurance and your open enrollment period and whatnot, you’re certainly taking a look at your budget. You’re taking a look at what is affordable and what’s not affordable. So, you are looking in the big picture of things. Now, that’s just one small piece of a big picture.

And so, we truly hope that people are receiving that type of comprehensive advising, whether it’s on your end-of-year kind of theme, which I’m going to recap in a moment, or whether it’s something that, as I said, about how health care affects your income and how your retirement plan, i.e., 401(k)’s and 403(b)’s obviously are affected by market conditions. So, I just truly hope that people are receiving this level of planning and this comprehensive nature because, especially in difficult years, as I said at the very, very beginning, we don’t want people just putting their heads in the sand, just saying, okay, I’m just going to pick my head up when it gets better. It’s like, no, it may not get better for another year for all we know.

And if we’re missing opportunities and if we’re missing deadlines, then people are missing out. And so, that’s really at a core of our job here is to make people aware. So, in review, in regards to end-of-year planning, there’s probably other stuff too, but here are kind of the big ones, of course, tax loss harvest. Again, if you do have any type of after-tax dollars, brokerage accounts, or whatever that may be, really make sure to see if there are any losses that you can harvest, make a sale, but then stay invested and avoid the wash sale, as Keith mentioned. But look into what’s called tax loss harvesting as a way of offsetting your current taxes and potentially your future taxes.

Also, Roth conversions, I think there’s a lot of confusion. Sometimes, people say, oh, I can’t do a conversion. It’s like, no, no, you might not be able to do a contribution to a Roth, but you can absolutely do a conversion. And the idea is that, okay, I’d rather have the recovery happen in our Roth IRA dollars than our traditional IRA dollars, or I’d rather have the recovery happen in our tax-free bucket.

Of course, same idea, everyone’s situation is different, everyone’s income’s different. So, we have to be very careful in regards to just broadly doing a Roth conversion, but again, something else to explore. And then the last two are topping off your retirement contributions, again, specifically because 2022 is a great time to buy low. And last but not least, making sure that you are aware of the open enrollment with the Medicare program and just not missing that opportunity to make a change to your coverage if it warrants it at this point.

But, Keith, thank you so much for giving us the tips that the people will take away from. And certainly, I’m wishing everybody a much happier and more fruitful 2023.