Our Wealth Services Advisors and Personal Insurance Experts provide insights about topics and trends that could impact your financial and personal goals.
SPRING 2023
Personal Finance Quarterly Our Wealth Services Advisors and Personal Insurance Experts provide insights about topics and trends that could impact your financial and personal goals.
government securities. However, they failed to hedge the risk against the loss in value of the bonds from rising interest rates. Had SVB properly hedged interest rate risk, they would likely have been protected from significant loss of capital. Instead, when there is a “run on the bank” and the bank was forced to sell those securities to meet demand, they may be selling them at a 15-20% loss to their face value. Signature Bank had relatively significant holdings in cryptocurrencies. Given the anxiety caused by SVB, depositors at Signature were concerned that their excess deposits may not be safe and caused a run at that bank, as well.
With a pace reflecting the lessons learned during the GFC, the US Treasury, Federal Reserve and the FDIC stepped in quickly to provide stability and assurances that FDIC-insured and uninsured deposits would be safe and that the impact to the financial system would be minimized and contained. The Treasury and Federal Reserve have begun to engineer the takeover of the stricken banks by better capitalized banks. The Swiss government has also taken the extraordinary step of allowing UBS to take over Credit Suisse. For savers and investors, higher current yields on short-term instruments like money market funds, certificate of deposits, and even FDIC-insured bank accounts, are very attractive. While
$110 Billion The assets First Citizens BancShares will assume from Silicon Valley Bank in a deal backstopped by U.S. regulators. REUTERS
Making Sense of the Recent Bank Failures Written and prepared by: Robert Janson, CIMA®, AIF® Senior Vice President, Senior Portfolio Manager, Wealth Services
The Federal Reserve has been aggressively raising the Fed Funds rate to reduce inflation as quickly as possible. During past rising interest rate cycles, history has shown that there have been unfortunate but almost inevitable unintended consequences for institutions caught out of position relative to the pace and direction of interest rate increases. In the past, it has been headline-making municipal or corporate bond failures. Or, in the case of the Great Financial Crisis (GFC) in 2008, it was the entire financial system on the brink of failure due to risky residential real estate lending practices. With the recent failure of several high-profile banks, it would be natural to wonder if this is a repeat of the 2008 GFC. While it is still relatively early, it appears that the failed banks made relatively simple mistakes in managing the risks of their obligations to their customers. The two initial bank failures were caused by relatively simple mismanagement of risks. Both Silicon Valley Bank (SVB) (Tech) and Signature Bank (crypto) were exposed to concentrated clientele. SVB held their capital in “safe” US
“The bank waited too long to address its problems and, ironically, the overdue actions it finally took to strengthen its balance sheet sparked the uninsured depositor run that led to the bank’s failure.” Michael Barr, The Federal Reserve’s vice chair for supervision
money market funds are not FDIC-insured, retail money market funds have become more heavily regulated in terms of the underlying investments in the wake of the 2008 GFC. Prime money market funds, which typically have very high initial minimum investments, are not as highly regulated and may present higher potential default risk than the retail version. While the urgency and subject matter are reminiscent of the GFC in 2008, there are key differences between the current situation and the GFC. The tech sector has been under pressure due to rising rates and higher cost of capital to fund continued operations. This has put unique pressure on regional banks. Money center banks seemed to have weathered the storm due to their significant reserves and “too big to fail” status. In 2008, the entire financial system was in jeopardy due to the collapse of the real estate sector which affected virtually every borrower and every financial institution regardless of size. The lesson for bank customers is that the financial strength and decision-making of individual banks still matters when deciding who they deposit their money with
and how much trust they place in their chosen institutions. If you have questions, please contact your Alera Group Advisor.
Personal Finance Quarterly | Spring 2023
What Is a Backdoor Roth IRA Conversion and Is It Right For Me?
Like it or not, taxes are a way of life. They fund great things like libraries, parks, and roads, but nobody wants to pay more than they must. We get questions like, “How can I minimize my income tax in retirement?” and one option is a Roth IRA. Roth IRAs are tax-advantaged retirement savings accounts that can be quite useful if you expect your tax obligations will rise as you get older. Because withdrawals from a Roth are tax- free, it’s especially attractive for high-earning households. Unfortunately, the US tax code prohibits individuals or households from contributing to a Roth IRA if they earn over a certain annual income, but there is an alternative. Backdoor Roth IRA Conversion What do you do if you can’t fund a Roth IRA because you earn over the income limit? Since traditional IRAs have no income limit, you may be able to open a traditional IRA. Then fund it with a nondeductible contribution in lieu of funding it with a normal deductible contribution thereby not claiming the tax deduction. It is then converted to a Roth IRA.
Becuase It can be complicated when you start to account for tax situations specific to your household, we recommend speaking with your financial advisor. The Pros The converted funds now held in the Roth IRA give you access to your funds tax free after age 59.5 with no required minimum distribution. You can pass it to your heirs (and unlike a traditional IRA, your heirs owe no taxes on an inherited Roth IRA). Also, there is no limit to the amount of money you can convert from a tax-deferred account to a Roth IRA. The Cons Because you haven’t yet paid taxes on the money in a traditional retirement account, when you convert to the Roth IRA the IRS views that as taxable income. So, you owe taxes on the amount you convert in the year you execute the conversion. For example, you’re in the 24% tax bracket and converted $100,000. That means you could owe $24,000 on top of your expected annual tax obligation.
There are other factors that can make a backdoor conversation complicated or messy. And remember, if you convert from a Traditional IRA, you must wait five years before you can withdraw funds. So, is it right for me? Ask yourself these five questions before speaking to your adivsor about initiating a Roth IRA conversation strategy: 1. Can I pay the taxes? Since traditional IRAs and other qualified retirement plans are tax-deferred, upon converting assets into a Roth IRA, you must pay income tax on the amount converted up front. 2. Am I Comfortable Increasing My Adjusted Gross Income (AGI)? A Roth IRA conversion will raise your income, thus increasing your AGI, which may move you
into a higher income tax bracket. Also, if you are retired, be mindful that Medicare Part B uses your two previous years’ income to calculate your monthly premium. As such, the conversion may increase your Part B payment for at least two years. 3. Will I Lose Eligibility For Specific Tax Write-Offs? Initiating a conversion may mean you lose deductions if your AGI increases. For example, the child tax credit and student loan interest deduction are determined by income. 4. Will I Need the Money Within Five Years? Roth IRAs typically offer penalty and tax-free withdrawals anytime on contributions. Still, investors must wait five years to access
Alera Group Wealth Services” is a brand name utilized by Alera Group, Inc and certain subsidiaries and affiliates (collectively “Alera”). Advisory Services offered through Alera Investment Advisors, LLC. Securities offered through Triad Advisors, LLC, Member FINRA & SIPC. Triad Advisors LLC is separately owned and other entities and/or marketing names, products or services referenced here are independent of Triad Advisors. Information provided by Alera should not be considered tax or legal advice. Should you require tax or legal information, please consult your tax advisor or attorney.
Personal Finance Quarterly | Spring 2023
Replacement Cost vs. Actual Cash Value
the funds without a 10% penalty when using conversion monies, regardless of age. If that’s a possibility, there may be a more appropriate strategy for you. 5. Does My Qualified Retirement Plan Allow Roth IRA Conversions? If your funds are inside your employer’s retirement plan, check the plan’s documents to see if a conversion is allowed. Then, consult your HR team or employer-sponsored retirement plan’s custodian for answers about your situation. A backdoor Roth conversion can make a lot of sense for high-earning individuals and households seeking to access tax-advantaged funds in retirement. However, tax implications can be tricky to calculate, so it’s important to consult a tax professional if it is right for you. If you have any questions, call us – we’re here to help.
Your homeowners insurance policy can offer financial protection in the event of an unexpected disaster involving your home or personal property. But how you will be reimbursed following a claim depends on the type of coverage you have. There are two main valuation methods — replacement cost coverage and actual cash value coverage . By understanding the difference between these, you can make informed decisions about your homeowners insurance and secure coverage that meets your needs. Key Differences Between Replacement Cost and Actual Cash Value Although replacement cost coverage and actual cash value coverage can both offer financial protection in the event of a claim, the amount that your policy will pay out differs between these two valuation methods. Here are the key differences: • Replacement cost coverage can offer compensation for the cost of replacing your stolen, damaged or destroyed property with a brand-new version (as long as it’s similar in kind and quality to the original). For example, if your couch is destroyed in a house fire, replacement cost coverage would reimburse you for the cost of purchasing a comparable new couch. This form of coverage can be especially beneficial in protecting against major losses, such as significant damage to the physical structure of your home or expensive items within your home.
However, it typically requires you to pay a higher premium. In addition, remember that you will only be compensated up to your policy limit amount—if you experience a covered loss that exceeds your policy limit, you may have to cover the difference. • Actual cash value coverage can offer compensation for the depreciated value of your stolen, damaged or destroyed property. This value is determined by the age, condition and expected remaining useful life of your property. Under this coverage, you wouldn’t be reimbursed for the full cost of replacing your destroyed couch from the example above. Rather, you would be compensated for current market value of the couch, based on the condition it was in before the fire. That being said, even if you initially purchased the couch several years ago for $2,000, you might only be reimbursed $1,000 for your loss due to depreciation. Although this form of coverage typically offers reduced compensation in the event of a covered claim, there are certain scenarios where this tool makes more sense such as a hunting lodge, cottage, etc. Actual cash value coverage can be more suitable for individuals that live in low-risk areas or own fewer expensive items. Which Coverage Is Best for You? There are pros and cons to both replacement cost coverage and actual cash value coverage. In order to select the best coverage that meets your specific homeowners insurance policy needs, follow these steps:
Interested in a state of the market review of Q2 2023? Register for our webinar on April 26 th at 11:00am CT. Robert Janson, Senior Vice President, Senior Portfolio Manager, Alera Investment Advisors, will provide an in- depth analysis of the key drivers of economic activity in the United States for the quarter. He will share the results/trends in the markets and economy with a focus on interest rates as well as the stock and bond markets.
Personal Finance Quarterly | Spring 2023
SEASONAL SPOTLIGHT
Understanding the Mediterranean Diet
• Determine what you can afford by assessing the impact of both coverages on your financial stability. It’s important to consider the difference in premium costs and claim compensation amounts between each form of coverage. • Create a home inventory checklist (be sure to include photos) of all of your belongings and their original value, as well as an estimate of their current value. This practice will help you better determine which coverage offers the best protection for your unique belongings. Keep in mind that certain high- value items—such as jewelry, collectible items or fine art—won’t be covered by your homeowners insurance policy and will require specialized coverage. • Calculate how much it would cost to recover damaged or lost property inside your home. Include added costs for labor, materials and any new or updated building codes in your community that you would be required to comply with. Avoid making a rough estimate for this cost. • Analyze your personal risk. Be sure to select a coverage option that fits within your budget, risk profile and comfort level. We’re Here to Help Alera Group is here to walk you through your homeowners insurance policy and provide expert guidance regarding which coverage option is best for you, your belongings and your wallet. Contact your Alera Group Personal Insurance Account Manager for further coverage guidance.
The Mediterranean diet is a meal plan focusing on consuming whole grains and heart-healthy fats. This diet may help support brain function, promote heart health and regulate blood sugar levels. Although there are no concrete rules for following the Mediterranean diet, there are some guidelines for incorporating the principles of this meal plan into your daily routine. The following foods are encouraged: • Fruits —This includes apples, bananas, dates, figs, grapes, melons, oranges, peaches, pears and strawberries. • Vegetables —This includes broccoli, Brussels sprouts, carrots, cauliflower, cucumbers, kale, spinach, onions, potatoes, spinach, sweet potatoes, tomatoes and turnips. •Nuts and seeds —This includes almonds, almond butter, cashews, hazelnuts, macadamia nuts, pumpkin seeds, peanut butter, sunflower seeds and walnuts. • Legumes —This includes beans, chickpeas, lentils, peanuts and peas. •Whole grains —This includes barley, buckwheat, brown rice, corn, oats and whole-wheat bread and pasta. •Fish and seafood —This includes clams, crab, mussels, oysters, salmon, sardines, shrimp, trout and tuna. •Herbs and spices —This includes basil, cinnamon, garlic, mint, nutmeg, rosemary and sage. •Healthy fats —This includes avocados, avocado oil, extra virgin olive oil and olives. The plan also encourages poultry (e.g., chicken, duck and turkey), eggs, cheese and yogurt in moderation. Sweets, red meat and other highly processed foods should be limited. You can start building Mediterranean-inspired meals with foods you already love or incorporate more fruits and vegetables into your meals and snacks. If you have any questions about your diet, talk to your doctor.
A Home Inventory Checklist To ensure that your possessions will be replaced in the event that your home is damaged or burglarized, complete a home inventory checklist. This is a document that lists your belongings and a great tool to assist you in determining which items were destroyed or stolen. The value of the items will help you determine if you have enough insurance coverage.
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This month’s Seasonal Spotlight video provides tips on how to manage seasonal allergies. This video is for informational purposes only and is not intended as medical advice. For further information, please consult a medical professional.
> Click here to download your own home inventory checklist.
Personal Finance Quarterly | Spring 2023
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