1Q 2023 Recap & 2Q Outlook

Financial Markets Start 2023 Strong But End the First Quarter on a Question Mark

First quarter economic data showed the U.S. economy entered 2023 with considerable momentum, even in light of the Federal Reserve’s interest rate hikes throughout 2022. Fourth quarter 2022 GDP data showed the U.S. economy grew at a +2.6% rate. The growth was largely driven by a resilient consumer, inventory restocking, and increased government spending, while businesses cut back their spending and the housing market remained weak. Additional economic data in Figure 1 highlights the broad economic trends. Jobs remain plentiful with job openings significantly above pre-pandemic trend, inflation is easing, and consumer spending remains above trend. The data shows growth is normalizing as the economy returns to its pre-pandemic trend but suggests the economy is withstanding higher interest rates thus far.

Financial markets turned rocky during the last month of the quarter. Three regional banks failed, and the U.S. Treasury bond market became more volatile as investors debated whether the Federal Reserve would continue to raise interest rates against an uncertain backdrop. This quarter’s recap discusses recent bank failures, including concerns about financial stability, and provides an update on year-to-date stock and bond returns.

Regional Banks Fail After Sudden Withdrawal Spree

Three regional banks failed in March as the banking industry faced a crisis of confidence and customers quickly withdrew deposits. The top chart in Figure 2 (next page) shows deposits at U.S. commercial banks rose from $13.2 trillion at the end of 2019 to a peak of $18.1 trillion in April 2022 as businesses and individuals flooded banks with new deposits during the pandemic. More recently, deposits at commercial banks decreased in 9 of the last 12 months. The bottom chart in Figure 2, which graphs the change in bank deposits from peak levels, shows total U.S. commercial bank deposits have declined -$607 billion since April 2022. The decline marks the biggest banking sector deposit outflow on record and is starting to stress bank balance sheets.

To meet withdrawal requests, banks maintain a portion of their assets as liquid reserves, such as government bonds and commercial paper, that can quickly be converted to cash. If banks exhaust the liquid reserves, they can either borrow from other banks and the Federal Reserve or sell assets, such as their bond holdings. This basic process helps explain why three banks failed.

Depositors overwhelmed the banks in early March with withdrawal requests. The banks exhausted their liquid reserves, could not obtain loans from other banks or the Federal Reserve in a time-efficient manner, and were forced to sell their most liquid assets, which consisted of U.S. Treasury bonds and mortgage-backed securities. The problem for the banks is interest rates are significantly higher than when the banks bought the bonds, and the bonds are now worth less. When the banks sold the bonds, the were forced to realize billions of dollars of losses, which drained their capital cushions and made them technically insolvent. State banking regulators and the FDIC immediately stepped in to take over the failed banks and protect depositors.

These recent bank failures have raised concerns about financial stability and drawn comparisons to 2008. However, there are important differences from 2008, including both regulatory changes and the causes of insolvency. Banking reforms after the 2008 crisis strengthened the overall financial system, and higher capital requirements now provide banks with a more robust financial cushion. In addition, regulators now possess greater authority to resolve issues in large, failed banks in order to avoid chaotic situations like the Lehman Brothers bankruptcy. In terms of cause, the 2008 crisis was primarily triggered by bad loans and complex securities. In contrast, recent bank failures resulted from the Federal Reserve’s rapid interest rate increases, which created paper losses for banks that made loans or purchased bonds at lower interest rates.

Navigating the Volatile Interest Rate Landscape

The Treasury market is experiencing more volatility and illiquidity because of conflicting signals about the strength of the U.S. economy and the Federal Reserve’s policy plans. Solid economic data in January showed the U.S. economy coping well with rising interest rates, suggesting the Federal Reserve may need to do more than anticipated to ease inflation. During early March congressional testimony, Federal Reserve Chair Jerome Powell spooked markets by suggesting the central bank would need to raise interest rates higher than initially thought and then keep interest rates higher for longer. The warning caused Treasury yields to rise and bonds to trade lower. Less than one week after Powell testified, multiple regional banks collapsed, causing worries about the U.S. financial system’s stability. Treasury yields reversed course and declined, causing bonds to trade higher. The two conflicting themes have resulted in wild price swings in the usually quiet Treasury market as traders place bets on the likelihood of future rate cuts.

Figure 3, which graphs the rolling 2-day percentage change in the 2-year U.S. Treasury yield, shows the recent spike in volatility. Taller bars indicate the 2-year Treasury yield experienced a bigger 2-day move. The chart looks like a heartbeat over the past 12 months, going up and down with occasional volatility as markets responded to new information. However, the far right of the chart shows a spike in both directions recently. The 2-year yield plunged -0.87% on March 13^th after two regional banks failed over the weekend, its biggest 2-day decline since the Black Monday stock market crash in October 1987. After banking regulators took over control of the banks and the Federal Reserve introduced lending programs to stabilize the banking sector, the 2-year yield surged +0.35% on March 21^st.

What is causing the volatility? Investors now fear the Federal Reserve faces a tough set of choices. The central bank must balance bringing inflation under control with minimizing damage to the U.S. economy. One factor complicating the central bank’s task and contributing to interest rate volatility is the lagged effect of monetary policy – it is difficult to model how 2022’s interest rate hikes already have and will impact the economy. As a result, there is little consensus inside the Federal Reserve on the path of monetary policy. The central bank’s Summary of Economic Projections, which provides forecasts for key economic indicators and offers insights into the future direction of monetary policy, shows a wide range of interest rate projections. Projections for interest rates at the end of 2024 range from 3.4% to 5.6%, while the 2025 projection range is 2.4% to 5.6%. With even the Federal Reserve uncertain about policy, interest rates could remain volatile in the coming quarters.

How does the volatility impact businesses, consumers, and investors? Treasury securities are considered safe-haven assets, used as collateral for loans and other debts, and serve as a benchmark for pricing other financial securities, such as corporate and municipal bonds, mortgages and other asset-backed securities, and money market instruments. Increased volatility and illiquidity can disrupt the flow of credit, making it more challenging to price loans and various other financial products. While current volatility is linked to uncertainty about Federal Reserve policy rather than financial system stress, the risk is interest rate volatility spreads to other corners of financial markets. For businesses and consumers, this could mean higher financing costs and more difficulty obtaining loans. For investors, this could mean borrowers are unable to refinance their maturing bonds and end up defaulting on their principal and interest payments.

Equity Market Recap – A Reversal in Performance Trends During the First Quarter of 2023

Stocks traded higher in January before giving up some of their gains in February and March. The S&P 500 Index of large cap stocks ended the first quarter up +7.4%, outperforming the Russell 2000 Index’s +2.7% return. Most of the S&P 500’s relative outperformance occurred in March as investors de-risked their portfolios following the bank failures. There was also a sizable shift in factor performance during the first quarter. The Russell 1000 Growth Index gained +14.3%, outperforming Russell 1000 Value’s +0.9% return. Like the S&P 500, the Growth factor’s relative outperformance occurred in March after the bank failures. Growth stocks tend to be higher quality businesses with stronger fundamentals, and recent bank failures may have motivated investors to rotate into higher quality companies. Regardless of the cause, Growth’s outperformance is a significant change from 2022 when the Federal Reserve’s interest rate increases weighed on expensive stock valuations.

The Growth vs Value performance reversal also shows up in first quarter sector returns, with Growth-style sectors outperforming. Figure 4 is a scatterplot that compares each sector’s 2022 return (vertical y-axis) against its first quarter 2023 return (horizontal x-axis). In general, the worst performing sectors in 2022 are the top performing sectors in 2023, while 2022’s top performing sectors are broadly underperforming to start 2023. Beyond the year-to-date performance reversal, there was no obvious preference for defensive or cyclical sectors.

Turning to global markets, international stocks posted positive returns during the first quarter. The MSCI EAFE Index of developed market stocks gained +9.0%, outperforming the MSCI Emerging Market Index’s +4.1% return. Europe was the top performing international region and boosted developed markets’ performance. The region managed to avoid a major energy crisis during the winter months thanks to unseasonably warm weather and efforts to secure alternative natural gas sources after Russia cut off most of its supply. Short-term gas prices have fallen from record highs, preventing severe shortages and rationing, although utility bills remain high. In Asia, all eyes remain on China as the country reopens after relaxing its Covid-zero restrictions. The reopening is expected to boost China’s economy, and potentially the global economy, but it is unclear how strong or lasting the growth will be.

Bond Market Recap – Riskier Bonds Underperform Due to Concerns About Refinancing Risk

Bonds traded in both directions during the first quarter, initially trading higher in anticipation of the end of the tightening cycle before trading back lower as the Federal Reserve hinted at higher interest rates for longer. Corporate investment grade bonds ended the first quarter with a +4.6% total return, outperforming corporate high yield’s +3.7% total return. Like equities, investment grade’s outperformance primarily occurred in March after bank failures raised concerns of increased default risk.

Tighter bank lending standards are becoming a concern in credit markets. For perspective, banks aggressively tightened lending standards during the last 12 months in anticipation of the Federal Reserve’s interest rate hikes slowing economic growth. With recent bank failures causing banks to question the stability of checking deposits, there is a risk that banks will adopt a more cautious approach to lending and reduce the total amount of credit they offer. The decreased credit supply and access to credit could have a domino effect, impacting the economy and financial markets over time. Borrowers, specifically high-yield issuers, could default on their debt if it becomes difficult and too expensive to refinance their maturing loans. Credit markets will be watching for signs of refinancing stress in the coming months.

Second Quarter Outlook – Back to the Fundamentals

The outlook is indecisive as financial markets close out the first quarter of 2023. Some investors believe the Federal Reserve’s actions will slow economic growth and tip the U.S. economy into a recession. This group points to recent bank failures as a warning sign that higher interest rates will have a negative impact. In contrast, some investors believe the U.S. economy is strong enough to withstand the Fed’s actions. This group points to first quarter economic data as a sign of strength and banking regulators’ actions as an indication the U.S. financial system is functioning as intended.

The back and forth is likely to continue until some of the market’s most pressing questions are answered. Key questions include the direction of Federal Reserve policy, the stability of the U.S. banking sector, inflation’s stickiness, corporate earnings growth, and the strength of the U.S. economy. Our team will be monitoring the answers to these questions in coming months to help guide investment portfolio positioning, with first quarter earnings season scheduled to start in mid-April.

As we have mentioned previously, the current investing environment requires a long-term outlook. Trend changes are frequent, fast, and driven by fluctuating market headlines, and keeping up with the day-to-day whims of the market can be emotionally taxing. Developing a financial plan and sticking to it are important steps to achieving your financial goals. Do not hesitate to reach out to our team if you have any questions or concerns about your financial plan or situation.

Important Notices & Disclaimer

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results. Investing involves risk, including the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.

READERS SHOULD VERIFY ALL CLAIMS AND COMPLETE THEIR OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.

PFG Private Wealth Management, LLC is a registered investment advisor.

Putting Context Around Recent Stock Market Volatility

Stock market volatility is rising this year after a relatively calm 2021. Financial markets are experiencing bigger moves up and down as investors navigate a long list of events, including Federal Reserve interest rate hikes, heightened geopolitical risk, and 40-year high inflation readings. This month’s chart provides historical context around stock market volatility and discusses how to think about your portfolio during periods of increased volatility.

Figure 1 charts the S&P 500 Index’s daily price return since 1970 and overlays the top 30 and bottom 30 days. There are two important takeaways. First, the best and worst trading days historically occur in clusters. Second, timing the market is almost impossible due to the close proximity of good and bad days. As an example, earlier this month the S&P 500 registered its 15^th biggest daily return since 1970 after the latest inflation data suggested price pressures may be easing. The +5.5% S&P 500 return on November 10^th followed volatile trading during September and October and demonstrates how market volatility occurs in groups.

What can you do to improve the chances of achieving your long-term goals? As always, our team recommends staying balanced and diversified. Different asset classes react to market conditions in different ways. Diversification spreads your investments around so your exposure to, and the potential impact from, any one type of asset is limited. More importantly, focus on the long-term rather than day-to-day price swings. History indicates lengthening your time horizon increases the odds in your favor. Should you have any concerns around market volatility, don’t hesitate to reach out to our team.

Important Notices & Disclaimer

PFG Private Wealth Management, LLC is a registered investment advisor.

Providing Context on Recent Market Volatility

Monthly Market Summary

The S&P 500 Index returned -4.1% during August, underperforming the Russell 2000 Index (-2.0%) for a second consecutive month.
Energy (+2.7%) was the top-performing S&P 500 sector during August despite oil prices falling -9.7%. Utilities (+0.5%) was the only other sector to produce a positive return. Technology (-6.2%) was the worst performing sector as interest rates rose, followed closely by Health Care (-5.8%) and Real Estate (-5.6%).
Corporate investment grade bonds generated a -4.4% total return, slightly underperforming corporate high yield bonds’ -4.3% total return.
The MSCI EAFE Index of global developed market stocks returned -6.1% during August, underperforming the MSCI Emerging Market Index’s -1.3% return.

Stock & Bond Markets Endure a Bumpy August After July’s Gains

The S&P 500 produced a -4.1% return during August, but the headline number doesn’t tell the full story. Equity markets initially rallied during the first half of the month, with the S&P 500 gaining +4.2% through August 16^th as July’s market rally continued. However, the second half of August marked a sharp reversal as the S&P 500’s gave back all its gains plus more. Credit markets also experienced a reversal during August as interest rates reversed higher and bonds produced negative returns. The increased volatility across stock and bond markets is being attributed to a wide range of investor views creating a tug of war effect in markets, as well as uncertainty regarding how long the Federal Reserve will continue to raise interest rates.

Federal Reserve Chair Pushes Back Against Hopes for Policy Pivot

The Federal Reserve held its annual August Jackson Hole meeting, and Chair Powell used his speech to forcefully push back against the notion the Fed will pivot and cut interest rates if economic data starts to weaken. Powell emphasized the central bank’s “overarching focus right now is to bring inflation back down to our 2 percent goal” and cautioned, “Reducing inflation is likely to require a sustained period of below-trend growth … [and] will also bring some pain to households and businesses.”

Investor hopes for a Fed pivot were one of the primary catalysts that propelled the stock market higher during July and August. Chair Powell’s speech dashed those hopes and sent the S&P 500 down more than -3% on the day of his speech. Why? Two lines from Chair Powell’s speech underscore the Fed’s goal, “There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job.” This focus on lowering demand for goods and services may increase portfolio volatility during the months ahead as investors debate how long it will take the Fed to achieve its goal and the impact tighter policy will have on the economy.

Important Notices & Disclaimer

PFG Private Wealth Management, LLC is a registered investment advisor.

Required Minimum Distributions – Not Required This Year But Should You Take It?

We recently saw a humorous quote stating that they “missed precedented times.” 😊 That is so true as we come near the end of 2020. There will be plenty of reflection that occurs for years to come. Hopefully, many good things can be remembered.

November is an excellent time to think about pre-planning. It’s a great time to look at strategies for reducing taxes before December 31st. Every year at this time we start talking with clients about their required minimum distributions (RMD). By definition, this is the amount of money that must be withdrawn from a traditional, SEP, or Simple IRA account and qualified plan participants of retirement age. The original starting age was 70 ½ and has now been changed to age 72. Earlier this year, Congress waived the required minimum distributions.

Even though participants do not have to take it, here are a few reasons some may consider it:
• Low income and low tax bracket – If your income for 2020 is in a low tax bracket, it may be wise to consult with your accountant and see how much money can be withdrawn from your tax deferred account with little or no taxes at all. If the funds are not needed for spending, then they can be transferred into a brokerage account and managed. If every year for your tax return you pay no taxes at all, then this might be something to investigate.
• Converting funds to a Roth – There are times where taking funds from the IRA and converting them to a Roth is extremely beneficial and this year may be the best time. When funds get converted, they show as income but stay in a retirement account and grow tax free. In traditional years, a Roth conversion is not allowed for RMD. In addition, those funds can then be withdrawn tax free if the Roth has been opened for 5 years or more.
• A known increase in taxes next year – If there is a known increase in income such as a sale of a business, an expected pay increase, or the potential of rental income from a property for 2021 and it will influence the tax bracket, then taking the RMD this year may be best.
• A higher RMD next year – If it is expected that the RMD is going to be much higher next year because none was taken this year, this is another reason. As a reminder, the RMD for each year is based off the December 31st value from the previous year and then it is calculated.

These are only a few reasons why taking the RMD could be considered. As always, we encourage you to consult with your accountant and your advisor to collaborate and come up with your best tax option for 2020.

At PFG Private Wealth Management, we thank you for your trust in us and encourage you to be safe.

PFG Private Wealth Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. This material and information are not intended to provide tax or legal advice. Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Ep 24: Importance Of Risk Management & Asset Protection

On This Episode

When it comes to retirement planning, many people focus on filling in an income gap, or making sure they will have enough money to get them through retirement. While this is fundamental to the plan, it’s important to make sure your assets are protected. John and Nick will explain what investment vehicles have some sort of protection and will also give a hypothetical example.

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Disclaimer:

PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

Speaker 1: Hey, everybody. Welcome in to Retirement Planning – Redefined with John and Nick of PFG Private Wealth, serving the Tampa Bay area. Thanks for tuning into the podcast. As we talk investing, finance and retirement, and we’re going to jump in and get started with the conversation. Guys, I hope you’re doing well. We were kind of laughing right before we started the session recording here that John’s been doing some swim lessons with his kids and it’s been going really well. And I wanted to make the joke that Nick, you finally learned how to swim.

Nick: Yeah, no, all joking aside, I can swim and swim well, but besides that-

John: You’re welcome, Nick. We’ve been doing some Zoom swim lessons [crosstalk 00:00:41].

Speaker 1: Zoom tutorials on swimming.

Nick: Yeah. I get in the bathtub with goggles and see what happens. But no, I’ve been doing well. Things are starting to slowly get back to normal from the standpoint of, I want to say last week I went out to dinner for the first time at a restaurant outside in a few months, so that was pretty cool. So things are slowly starting to get back to normal, although it’s going to be interesting is some of the numbers seem to spike here, how things will adapt over time, but no complaints, no complaints here.

Speaker 1: Yeah, it will be interesting to see as this cluster bang of a year continues to wobble on. So we’re about halfway through 2020 at this point. So we’ve still got a lot to go, so we’ll see how it shakes out. But that’s good. Glad to hear that there’s some good positive spots here and there. So let’s jump into our topic. So let’s review the importance of risk management and asset protection. Let’s just start with a basic overview, Nick.

Nick: Yeah. So for those that are listening that have been through our class that we hold at the local colleges, this will sound a little bit familiar, but we’ve had a couple of things pop up with clients and questions from friends and things like that. So we thought it would be a good topic to re-review where oftentimes people get focused on the fun or more exciting aspects of planning, which may be investments or talking about retirement and those sorts of things, but really risk management is a super important part of overall planning because really the objective is to increase your probability for success by reducing your risk. And then ultimately, overall the goal by doing that is to do it while keeping your costs down. So when we go through the planning process with clients, we do review their property and casualty insurance. We’re looking for how their accounts are titled. We’re looking and analyzing things from the standpoint of, “Are we making sure that things are protected?”

Nick: So we always like to make sure that people do realize, because it isn’t necessarily something that is top of mind and oftentimes, when you talk to people, the reality is that when they’re shopping out their homeowners insurance, their car insurance, they end up having been with the company for a long period of time. Usually it’s price dependent. So we’ve seen where people made a change to cut costs, six, seven, eight, nine, 10 years ago and now they’re in a completely different financial situation and they haven’t made adjustments to correlate to that from a risk management standpoint. So we just kind of want to walk some people through that.

Nick: So one of the first things that we review and talk about and help people to understand are that, there are certain assets that are creditor or protected in the state of Florida. This is something, again, we’re not attorneys, we’re not property and casualty agents, but these are topics that we review. And this is one of the perfect examples of something there where we can provide feedback, give you help, provide you with questions to ask and then help connect you with or you connect with an existing relationship that you have with a property and casualty agent, with an attorney if there are legal documents that need to be involved, that sort of thing. But in the state of Florida, it’s important and many people know that you can declare your primary residence as your homestead.

Nick: And there are a lot of protections built into declaring your home a homestead. So many people just focus on the tax benefits and that’s one thing, but really it provides a creditor protection and asset protection for your home. So that’s a big deal. If you own non-qualified annuities and/or have life insurance that has a cash value component to it, those are protected in the state of Florida. Qualified accounts, so in other words, 401k, IRA accounts, those accounts are protected in the state of Florida. One kind of caveat to that where we’ll have some people say, “Well, hey, I’m 60, 70 years old and I’ve got these accounts and my home, why do I need any sort of additional protection?” And one of the things that we like to remind people are that those qualified accounts, you do have to start taking money out at a certain point. And at the time that they go from qualified to non-qualified that becomes something that could be available.

Nick: From the aspect of different types of trusts, there are certain types of trusts that can be set up to provide protection for assets that’s absolutely 100% in the realm of working with an attorney. John’s going to talk about one of the misconceptions that a lot of people have when it comes to trusts. And just a basic thing that is important for people to consider, let’s say you own a business and you are not structured as an LLC, you could be putting yourself a little bit of risk from that standpoint.

Speaker 1: Yeah. Certainly there’s a lot of pieces in there. So again, homestead, annuities, qualified accounts, LLC, certain trusts, some of these things are the protected assets or at least in Florida. John, what are some of the non protected?

John: Yeah. So some of the non-protected assets would be cash accounts or your bank accounts, things like that, CDs, non-qualified investment accounts. Someone might have a brokerage account that they’re just putting money into monthly, or just maybe just put a lump sum in there. Just understand that just because your retirement accounts are invested and you have investments there and they’re [inaudible 00:06:27] protected. If it’s in a nonqualified account with investments, it’s not protected.

John: One other thing with the qualified accounts is to understand that there are limits to what is actually protected. So actually an ERISA plan, which is a 401k, 403(b) type plan, it’s typically fully protected, no matter what the amount is and IRA, and this does go up, it used to be a million, and I believe right now it’s about 1.3 million if an IRA is actually credit protected.

John: And then a recent rule change in the past few years, inherited IRAs are no longer credit are protected. So it’s important to understand that if you inherit an IRA from somebody, it is not credit protected at all. Something that will come up, Nick mentioned with the homestead where your primary home is credit protected, any secondary home you have is not. So that’s a misconception we see sometimes if you have a rental property, or let’s say your, like a second vacation home, it’s not credit protected. And then with the businesses, if you’re a sole proprietor and you never develop any type of LLC, so example I have a [inaudible 00:07:32], but I’m not LLC, that is not creditor protected. So that’s why it’s important to, if you’re working with an attorney, you want to ask these questions, “Hey, should I create an LLC with the business?” And you definitely want to have them help you draft the documents so they’re done correctly.

John: One of the biggest questions we get when we’re doing planning and part of the planning is we look at the estate side of it. We don’t draft any documents, but we are knowledgeable enough to have people ask the right questions and point them in the right direction. But it’s with trusts. A lot of people feel like, “Hey, if I set up a trust, does that protect my assets?” And if it’s a revocable trust, the answer’s no. So a revocable trust basically just get to the meat of it. You still have control of that trust. So you either are owner of it, or you make decisions of it. And basically with that, it’s still considered part of your estate [crosstalk 00:08:22] and for that reason it’s not credit protected.

Nick: Yeah. And just for further emphasis on those protections kind of tend to kick in after you pass and the trust stays, but while you’re alive, it’s includable in your estate and it doesn’t provide those protections. And one other caveat or thing to consider think about are for those non-qualified accounts, non-qualified investment accounts or non IRA, if you hold them jointly in the state of Florida using Tenancy by the entirety for those types of accounts, if you hold it with a spouse, so it has to be with a spouse to use that, that does provide some additional level of protection. Although it’s not the same as like a retirement account per se.

John: Definitely, as you can tell, it gets confusing. So you definitely want to ask the right questions if you’re wanting to know what is and what isn’t and just asks the right people and adviser will know enough, and attorney would definitely be the best resource.

Speaker 1: Yeah. I’m definitely say if you’re working with an advisor, obviously bring the conversation up with them, have them bring the attorney in and so on and so forth. And of course, John and Nick can help you in that arena as well. Now you mentioned property and casualty, so let’s do a quick review of that as well. What are some things to consider?

Nick: Sure. So the main types of property and casualty policies that people are going to have are going to be their car insurance, homeowners insurance, and maybe an umbrella policy. So one of the examples that we tend to give from the perspective of a car insurance policy is, really just walking you through a scenario. So when you look at your car insurance policy, you’re going to see that there are limits that are provided, that are referred to liability, and then you will see a designation for what’s called uninsured motorist or UIM.

Nick: So the example that we usually use is, let’s say John and I are both driving down the highway and we get into an accident. So we’re both in our late 30s, business owners, our incomes continue to go up. John has a family, I don’t, but if something happens to me, I do have assets going to parents and brother and that sort of thing. So let’s say we’re driving and we get into an accident and because John likes to multitask a lot, he was texting and it’s his fault. So we’re going to blame him. So I have the-

John: Wait, wait, wait, full disclosure, I never text and drive. I do multitask, but I do not do that.

Speaker 1: Good [inaudible 00:10:57].

Nick: That’s good. That’s good. So we get into an accident. I have damages, fairly serious damages and I’m going to go ahead and I’m going to sue him. There’s kind of a negative connotation oftentimes with the whole aspect of suing somebody, which the reason that we use this example is because, here we are, we’re friends, we’re colleagues, in many ways business partners, that sort of thing. But the reality is, is that if there’s damages and mistakes happen and mistakes are made, ultimately my responsibility for me and family is to try to become whole again, from a financial standpoint. So I go ahead, I sue him. The first thing that’s going to be reviewed and looked at are going to be his liability limits. So the liability limits protect him from lawsuit, from somebody else when he is at fault, essentially.

Nick: So let’s say he has one of the most common levels of coverage that we see is what’s called like 100/300. So what that means is 100,000 per person in the accident, a total of 300,000 in the vehicle. So in this instance, in this situation, I’m the only person in the vehicle, so the maximum amount of his car insurance company is going to pay out that they’re going to send their lawyers to deal with this lawsuit, the maximum amount that they’re going to pay out is 100,000. If I happen to have other people in the vehicle, that’s where that 300,000 limit would come into play. But let’s say my damages are 250,000 and the most his insurance company is going to pay out as the 100. So, now what? So at that point, what’s going to happen, there’s going to be kind of a different phases. So I’m going to have an attorney. And my attorney is going to look at, “Hey, does John have additional assets that are not protected, like we talked about earlier that are available through suit?”

Nick: So that’s something that he’s going to request, some sort of inventory, financial inventory, asset balance sheet via the lawsuit. The other thing that they’re going to look at is, “Hey, Nick, do you have uninsured motorist coverage?” And luckily because I do this sort of thing I have planned ahead and I have uninsured motorist coverage. So what uninsured motorist coverage does is it protects me in the case of having damages that are above and beyond what the person who inflicted the damage has. So in this case, my limits for uninsured motorist, let’s just say there are 250,000, I can essentially sue my own insurance company to fill in that gap, to get me up to that 250,000, so that coverage has protected me.

Nick: So the liability limits protect the person at fault against the person having damages and not having enough coverage. So, because we do see people oftentimes outright reject uninsured motorist coverage, and knowing that, especially in the state of Florida, people are often underinsured or uninsured, having uninsured motorist coverage is something that we think is important to have a level of protection.

Nick: So the same scenario, I was injured and John had coverage and I had substantially much more significant damages. Let’s say that I was permanently disabled and I wasn’t going to be able to work anymore, so the amount that the amount of protection and coverage that I’m looking for is going to be substantially more than the 100,000 that John has, or even the 250,000 that I have in the uninsured motorists. And that’s where something like an umbrella policy could come into play. So what an umbrella policy will do is, it’s a type of coverage that essentially goes above what you have for the auto coverage.

Nick: So an umbrella policy can be both liability and uninsured. So in this example, what we’ll use for the example is we’ll say, “Hey, Nick has an umbrella policy. And because my damages were a million dollars and John’s insurance company has paid out 100,000, my insurance company has paid out 250,000, there’s still a gap of 650,000. Essentially, I can go ahead and sue my insurance company from the standpoint of the umbrella to try to fill in that additional gap. So if John had had an umbrella policy, they would have tried to use that for protection. But in this scenario, me having an umbrella policy and being the one that had the damages really comes to the point of being able to protect me in my assets.

Speaker 1: Yeah. And certainly it’s important to review your risk management, your asset protection, because something like an accident can certainly derail retirement plans, it can really wreak a lot of havoc and other things that you had going on as well. There’s countless stories out there along situations like that. So if you’ve got some questions or concerns about this week’s topic, and you need some help, reach out to John and Nick, and of course they can help point you in the right directions for some of the things they don’t do as mentioned earlier. It’s always important to review and have these conversations about all these little assets. It’s not just about income, which obviously that’s super important in retirement, but there’s all these other little facets. So this week we focused on some risk management and asset protection when it comes to some of the things that are protected in Florida, not protected and a bit about the property and casualty as well.

Speaker 1: So reach out to them if you’ve got questions on these topics at 813-286-7776, to have a conversation about your own situation, 813-286-7776, or share the information with a friend who might benefit from that well and go to pfgprivatewealth.com to learn more about John and Nick and their practice, pfgprivatewealth.com, a lot of good tools, tips, and resources. You can also click on the podcast page, you’ll see that right at the top. And you can subscribe to us on whatever platform you like to listen to. And we would certainly appreciate it. Guys, thanks so much for your time this week. As always, I appreciate all that you do to help us out here and continue to do a good job with those swimming lessons there John.

John: Thanks.

Speaker 1: And Nick, maybe one day, you can take the floaties off, you’ll be good.

Nick: Hopefully.

Speaker 1: All right, guys, have a great week. We’ll talk to you soon. Stay safe, stay sane, and we’ll see you next time here on Retirement Planning – Redefined.