Blog - NorthStar Capital Advisors

Trouble ahead? (debt downgrade)

You might have heard that Fitch downgraded the U.S. government’s credit rating in August.¹

What does that mean for you?

Let’s discuss.

Who is Fitch Ratings, anyway?

When companies and governments issue bonds, the bonds get rated by one of three agencies: Fitch Ratings, Moody’s, and Standard & Poor’s.

The rating represents the agency’s evaluation of the bond issuer’s ability to repay interest and principal and avoid default.

The higher the rating, the safer the bonds are considered to be.

Fitch downgraded U.S. long-term debt from AAA (the highest possible rating) to AA+ (one grade below).

Why did the U.S. get its credit rating cut?

A few things are behind the change.

A few months ago, the U.S. just avoided defaulting on its debt during another dramatic showdown in Congress.

Unfortunately, this partisan dynamic is not new, and Fitch stated that it had lost confidence in U.S. governance after repeated political standoffs on debt.

Fitch analysts are also concerned about U.S. deficit spending and our growing national debt.

Publicly held U.S. debt skyrocketed to over 130% of GDP during the pandemic. While it has dropped since then, it is still over 100% of GDP.²

Analysts are concerned that the U.S. doesn’t have a plan to rein in its spending and balance its budget in the years to come.

You can see in the chart below that federal spending is projected to far outstrip revenue over the next decade.³

Chart showing federal spending projections

Has a downgrade ever happened before?

Yes.

In 2011, Standard & Poors downgraded the U.S. from AAA to AA+ after another contentious debt ceiling debate in Congress.¹

Since S&P still holds its AA+ rating on U.S. debt, the U.S. has lost its top-shelf status with two out of the three agencies.

Will the downgrade hurt the economy?

The most obvious consequence is that the U.S. will have to pay higher interest on future debt, increasing its debt load even more.⁴

Since interest payments form a significant percentage of federal expenditures, this may become a bigger issue in the future.²

However, the economy remains strong, and the downgrade alone is unlikely to spell recession or other dire consequences.

Should I be worried?

Not really. U.S. Treasury bonds are among the world’s highest quality and most liquid bond investments despite the downgrade.

It’s unlikely that will change any time soon.

However, we might see some additional stock market volatility as investors digest the implications of the new rating.

We can also expect to see higher rates on mortgages, car loans, credit cards, and other types of debt to account for the change.

On the flip side, we’ll likely see higher yields on bonds and savings accounts to compensate for the added risk.

Bottom line, this downgrade certainly isn’t good news. However, it’s not likely to impact the average American in any significant way.

Sources:

1. https://www.cnbc.com/2023/08/03/what-us-credit-rating-downgrade-means-for-your-money.html

2. https://www.pewresearch.org/short-reads/2023/02/14/facts-about-the-us-national-debt/

3. https://www.cbo.gov/publication/58946#_idTextAnchor004

4. https://www.usfunds.com/resource/the-implications-of-fitch-ratings-u-s-credit-downgrade/

Chart sources: https://fred.stlouisfed.org/series/GFDEGDQ188S, https://fred.stlouisfed.org/series/USRECQ, https://www.cbo.gov/publication/58946#_idTextAnchor007

Is a recession still coming?

A word about recessions.

Are we still going to see one this year?

Let’s discuss.

Why did so many people think a recession was coming?

Inflation and interest rates, primarily.

Historically high inflation has cast a pall over the economy since early 2021.¹

In response, the Federal Reserve has raised interest rates rapidly to bring inflation back down.

Analysts worried those rapid interest rate hikes could trigger a “hard landing” recession.

Line graph titled "Inflation Has Plummeted Since Last Summer" showing an upward trend from May 2020 to a peak in May 2022, followed by a steady decrease until May 2023; refer to the data in the email for details

But it looks like the dark mood is lifting. You can see in the chart above that inflation has been on a definite downward trend since last summer.²

That trend suggests that the Fed’s interest rate program has worked to tame inflation.

So, will the Fed keep raising interest rates?

Hard to say.

The Fed raised interest rates again by a quarter of a point at its July meeting, but it’s possible that it won’t raise rates again if inflation remains on a downward trajectory.⁴

In fact, some analysts think that the Fed’s next move might be to lower rates in 2024.

Does that mean a recession is definitely off the table?

That’s far too optimistic.

While the economy has been much, much more resilient than even seasoned analysts predicted, the accumulated effects of interest hikes may still deal a serious blow to growth.

There are signs that the economy is weakening in some areas.

For example, while American consumers are still spending, they aren’t buying as much stuff.⁵

That’s hurting the manufacturing sector, which has been in a slump for a while.⁶

Since consumer spending is worth about 70% of economic activity in the U.S. it’s an important indicator for future economic growth.

Employment trends will also be important to watch.

So far, the work of lowering inflation seems to have succeeded without damaging the job market.

However, there are signs that the labor market may be weakening, so that’s something to keep an eye on.³

Bottom line: things seem to be looking up.

The dark clouds on the horizon appear to be breaking and there are reasons to be optimistic.

Optimistically,
Dr. Chris

What is financial planning?

Today I want to zoom out to talk about the principles and beliefs that underpin good financial planning.

On its own, “financial planning” is a very broad and nebulous term.

But let’s narrow and clarify this.

These are the core principles from my perspective as a CERTIFIED FINANCIAL PLANNER™, a retirement planning firm owner, and someone who has walked this path with successful & thriving families for the past 17 years.

#1 — To Be Successful, You Must Have a Plan: Just like you don’t get into your car without a destination and an approximate route to get there in mind, financial planning is much the same. To be successful, we must first define what success means — that is the identification of your life’s purpose and the goals associated with that purpose. Then we can craft a financial strategy specifically designed to pursue those objectives.

#2 — We Are Planning Focused: Many firms are either primarily insurance or investment focused, whereas we are planning-focused. This is because we know that decisions made in one area will impact many others. Thus, we constantly keep your complete financial life in mind to ensure proper alignment between each of your life’s goals.

#3 — Financial Planning Is Not Precise; It Is Adaptive: We know that the world (markets, economy, tax law, etc.) and our personal lives (income, health, family) are ever-changing. A plan that sits on a shelf couldn’t possibly account for all that life will throw at you, so we meet regularly throughout the year to adjust your plan as needed to reflect the current reality.

#4 — We Control the Things We Can Control: We will not pretend to know which way the market will go next as there are no facts about the future. We believe in controlling what we can control. That is, the amount we save, how long we give our savings to grow, our asset allocation, our behavior, how we plan to minimize our lifetime tax bill, and how we plan for various risks. These are what will ultimately determine your success.

#5 — Prepare for What Can Go Wrong; Invest for What Can Go Right: Even the absolute best investment portfolio can be undone if you are not prepared for life’s what-ifs. A few examples might include an unexpected death, health issues, accidents, lawsuits, or becoming disabled. Planning for and insuring against these risks is what allows us to invest for all that can go right. We cannot control what happens to us, so it is imperative that we are prepared for each of these possibilities.

#6 — Good Planning Has a Long Time Horizon: We view every client relationship as a lifelong partnership. This is a significant advantage because our single objective is to provide advice that will (hopefully) result in the accomplishment of your multi-decade goals and we expect to walk with you every step of the way.

#7 — We Follow Our Own Advice: As the steward of our clients’ complete financial lives, we believe that we should plan for our own financial lives by using these same financial planning principles. So, that’s exactly what we do.

Whether you’re doing this work on your own or partnering with a professional, I strongly believe these concepts are critical to your process of success.

By the way, you will notice that much of the specifics in terms of HOW we do financial planning is purposefully omitted (click here if you’re curious about those technical details).

I’ve done this for a reason. It’s much more important that we agree on the core principles at a 30,000-foot level — versus specific tools & techniques — to achieve your best outcomes.

To your planning & continued success,
Dr. Chris

Correction coming?

Markets are doing their thing again, so let’s discuss.

Markets tumbled, heading into negative territory, and then bounced back. And then promptly fell again.¹

We’re caught in a whipsaw pattern of uncertainty.

Is this weird?

Not really. These things happen pretty regularly when investors get jittery.

Let’s talk about what’s going on.

(Scroll to the end if you just want my takeaways.)

What led to the selloff?

Phew. There’s a lot going on.²

There’s yet another debt ceiling deadlock between Congress and the White House.

Worries about the banking sector continue.

Sticky inflation is still on everyone’s radar.

And then there’s the endless speculation about recessions and what the Federal Reserve might do next.

All these stressors lead to jumpy investors and nervous markets.

Could we see another serious correction?

Absolutely. If the debt ceiling standoff drags on or more bad headlines appear, markets could react negatively.

And, corrections and pullbacks happen very frequently because there’s always something going on.

How often? Let’s go to the data.

Here’s a chart that shows just how often markets dip each year. (You may have seen this chart before because it’s an oldie and goodie.)

Take a look at the red circles to see the market drops each year.

The big takeaway? In 15 of the last 23 years, markets have dropped at least 10% each year.³

Market pullbacks happen all the time.

We’re dealing with a lot of uncertainty and investors are feeling cautious.

However, that doesn’t mean that we should panic and rush for the exits.

Markets are going to be turbulent this year and knee-jerk reactions can be costly.

I don’t have a crystal ball, so I don’t know how it’s all going to play out, but this situation isn’t surprising.

We expected volatility and we’re prepared.

Any questions or concerns I can address? Send me an email (chrismullis@nstarcapital.com) or call at 704-350-5028 ext 7. I’m here to help.

Dr. Chris

Sources

Thriving After You Lose Your Job

Losing a job can feel devastating (especially when you didn’t see it coming).

And there’s a lot that seems urgent all at once.

If that’s not something you’ve ever had to deal with, I’m glad to hear it because you’re lucky.

If you’ve experienced that kind of loss before, you probably remember the stress and pressure. And you survived it. Maybe used it as fuel to thrive.

If you ever have to deal with a job loss, here are 9 things you should do:

1. Take a deep breath. You’re going to be ok.

2. Get the contact information for HR. You’ll probably lose access to your email and these folks will be key to helping you with post-employment details like health insurance, retirement accounts, documents, etc.

3. Confirm the dates and details of your separation. Before you sign anything, make sure you fully understand the details of what you’re being offered.

Is there severance? A pension buyout? Continued vesting of company stock?

Is there any room for negotiating dates or amounts? Now is the time to ask.

4. File for unemployment if you’re eligible. You’ve earned it.

5. Tell the folks you love and ask for their support. Let them know if there are any specific ways they can help you (they’ll want to help). They might ask questions you don’t have answers to. It’s ok to say “I don’t know the answer right now, but I’m confident I’ll figure it out.”

6. Explore your health insurance options. It’s worth running the numbers before deciding between COBRA coverage, a new policy, or getting added to your partner’s insurance (if that’s an option).

7. Triage your spending. Review your monthly bills and determine what’s critical and what can be scaled back or cut if necessary.

8. Identify your sources of income and savings. I can help you figure out which accounts to draw down and in what order.

9. Network and jump into your job search. If possible, take some time to recover your equilibrium before plunging back into the job market.

I won’t pretend that losing your job is a picnic, but you might find that it unlocks dreams and depths that were previously hidden from you.

Be well,
Dr. Chris

SVB and bank collapses

Is it 2008 all over again? Should we be worried about the financial system collapsing?

Deep breath. Let’s discuss.

On March 10th, Silicon Valley Bank (SVB), a bank catering to startups closed its doors after it could no longer cover withdrawals.¹

Days later, regulators also took over Signature Bank.

There’s reason to believe a number of other banks may be in trouble.² Rising interest rates are hitting many banking portfolios hard and weaknesses are emerging.

Should we be panicked about these bank failures?

No. Here’s why:

The affected banks are small in the context of the overall banking system.

You can see in the chart above how small the two failed banks are relative to other, larger financial institutions.³

They also serve high-risk niches. These banks have a lot of exposure to cryptocurrencies, startups, and other highly volatile asset classes.⁴

Those risky assets can make them more vulnerable to bank runs and liquidity issues. Which is what we’re seeing happen.

Will more banks collapse?

That’s very possible. Moody’s, a rating agency, reported that it’s watching several other institutions with potential problems.²

Some larger banks may be affected as well, but it looks like regulators are stepping in quickly to protect the overall financial system.

What can we take away from the SVB failure?

We think it’s a good time for one of Warren Buffett’s famous bits of wisdom:

“Only when the tide goes out do you discover who’s been swimming naked.”

What he means is that adverse conditions expose vulnerabilities and risky choices.

Many strategies can look brilliant when markets are booming. You don’t always know or appreciate the risks until conditions turn against you.

Clearly, a number of institutions are finding that out.

We think there’s a lesson here for us as well:

When times are good, we might not worry too much about our income or our expenses. Or the risks we take in the market.

But when times get tough, we start appreciating the risks we’ve taken and the obligations we’ve taken on.

Understanding our actual tolerance for risk and our ability to withstand rocky times is absolutely critical.

It’s very hard to do when the sun is shining and life is good. But it’s a skill well worth developing because we can expect to experience bear markets, recessions, and uncertain conditions throughout our lives.

Sources

Chart source: https://www.washingtonpost.com/business/2023/03/13/bank-failure-size-svb-signature/

529 Rollovers (coming soon)

529 accounts are getting a lot more powerful with the recent SECURE Act 2.0 legislation that went into effect on January 1st.

Here’s what you need to know:

Typically, 529 money is dedicated to education expenses like college tuition. Taking money out for other “non-qualified” purposes generally triggers penalties and taxes.

Meaning that if your kid didn’t go to a qualified K-12 or college or didn’t use up the funds because they received a scholarship, you didn’t have a lot of choices for the money in the account that didn’t come with penalties.

Sure, you could change the beneficiary so the money went to pay for another child’s education, but that was about it.

Here’s some good news:¹

Starting in 2024, 529 funds that don’t get used for education will be able to roll over to the beneficiary’s Roth IRA, free of taxes and penalties.

But — and there’s usually a but — there are some caveats and limitations we need to keep in mind:

Rollovers will count as contributions and can’t exceed the annual IRA contribution limit ($6,500 in 2023)
Rollovers can only be made to the beneficiary’s Roth IRA (i.e. the child’s) and not the account owner’s
The 529 account must have been open for at least 15 years (and possibly be in the same beneficiary’s name for that period)
You can’t roll over contributions (or their earnings) made in the last five years
There’s a $35,000 lifetime cap on rollovers

Are 529 rollovers a big deal?

I think so. Simply because it opens the door to doing much more with your child’s education savings than simply paying for college.

Imagine the boost you could give your child’s retirement over their lifetime.

Imagine your child graduates college with funds still in their 529 account. So you roll the remainder to a Roth IRA in their name. Because you know that investing early in life is the best way to put time on their side. The money grows for the next 45 years, tax-free.

They could kick off their retirement with a sizable tax-free nest egg. All courtesy of you and your forethought.

Imagine the gift you could be giving your children (and grandchildren) by giving them such a head start.

What can you do with this information now?

If you have children and haven’t opened a 529 account, go ahead and establish one now, even if it’s for just a few bucks to get that 15-year clock started.

Scholastically,
Dr. Chris

SECURE Act 2.0 (2023 changes inside)

After months of debate, Congress finally passed some major changes to retirement laws at the end of 2022.¹

The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 changes are numerous, complex, and will roll out over several years.

So let’s focus for now on some changes for 2023:²

1. The age at which required minimum distributions (RMDs) begin increased to 73 in 2023. This change impacts folks born between 1951 and 1959.

2. The penalty for missing all or part of an RMD decreased to 25% in 2023. However, if you correct the past-due RMD and pay taxes on it within two years, the penalty drops to 10%.³

3. Qualified Charitable Distributions have a few more options. Starting in 2023, folks who are aged 70½ or older can gift a one-time amount of $50,000 (adjusted for annual inflation) to a charitable remainder unitrust (CRUT), charitable remainder annuity trust (CRAT), or charitable gift annuity (CGA).⁴

4. Roth savings get a boost. Starting in 2023, employers can offer workers the choice to receive vested matching contributions directly to their Roth account, where they’ll grow tax-free.² Also, Roth contributions to SIMPLE and SEP IRAs are authorized in 2023.⁵ However, we’ll have to wait for the IRS and custodians to work out procedures before folks can take advantage of these new opportunities.

5. More folks can take early distributions from their retirement accounts without penalty. Starting in 2023, victims of disasters and folks who are terminally ill will be able to access their retirement accounts early without incurring a 10% penalty.⁶There’s plenty of fine print, so let’s have a conversation if you think you might be eligible.

Bottom line: There’s A LOT to unpack in the new laws. Many new rules, including changes to catch-up contributions and 529 plans, will roll out in 2024 and 2025.

As we’ve learned with previous new regulations, Congress might enact new laws, but we often have to wait for the IRS and other agencies to catch up before we can fully make use of them.

Stay tuned for more updates as the new rules shake out.

Sources:

1. https://www.plansponsor.com/official-secure-2-0-law/

2. https://www.fidelity.com/learning-center/personal-finance/secure-act-2

3. https://www.kiplinger.com/retirement/new-rmd-rules

4. https://www.fidelitycharitable.org/articles/secure-act-2-0-retirement-provisions.html

5. https://tickertape.tdameritrade.com/retirement/secure-act-2-0-now-law-how-it-s-likely-to-change-your-retirement-planning–19304

6. https://www.jdsupra.com/legalnews/secure-2-0-changes-rules-for-retirement-9979502/

Time-sensitive planning (action needed)

You may have some time-sensitive planning that needs action before the year ends.

The 2022 window of opportunity is closing and I don’t want you to miss out.

For example, you might want to…

Fund year-end family or charitable gifts in an optimal way
Reduce your tax liability through tax-loss harvesting
Review your tax bracket to see if you should defer some income
Wrap up your 2022 Required Minimum Distributions
Review your big picture before 2022 opportunities close for good

The end of the year is a busy time for everyone, and I don’t want you to miss out on any of the key deadlines or final opportunities of the year.

Because if we don’t take action by December 31st, they’re gone, done, and finito.

Market lessons you should know (inside)

Let’s talk about markets for a minute.

The most recent inflation data shows that inflation continues to persist near recent highs.¹

The trend makes it likely that the Federal Reserve will raise interest rates again in November.²

Does that mean a recession is inevitable? Are we past the bottom or are markets going to fall further?

It’s hard to say.

We won’t know for sure how things will play out until long after current events are in the rearview mirror.

However, the uncertainty won’t stop the media from churning out scary headlines and flawed predictions.

Instead of speculating wildly about what the future brings, what if we look for lessons and guidelines we can follow?

4 Lessons About Life

Count your blessings. There is so much in our lives to be grateful for.
Cherish your most important relationships. They’re what truly matters, especially when the road gets rocky.
When you think of something positive about someone, tell them right away. It might be exactly what they needed to hear today.
“Experience is what you get when you didn’t get what you wanted.”³ (Randy Pausch said this. His book, “The Last Lecture” is well worth a read.)

5 Lessons About Markets

Markets can keep falling for a lot longer than we’d like.
Market bottoms don’t come with an all-clear signal, and missing the best days of the market can really shockingly damage your long-term growth.
Don’t panic and make sudden decisions. One bad decision can destroy years of good ones.
Stocks historically deliver strong growth over time.⁴ But you only benefit from it if you can withstand the painful periods that come with the territory.
You can’t avoid all risks. You CAN identify them, manage them, and focus on what’s in your control. (That’s what I’m here for!)