2023 End of Year Summary

Looking back at the summary I wrote in January of 2023, I said the market had hit its bottom on October 10th of 2022, and that pre-retiree savers, especially younger people, would reach new net worth milestones by the end of 2023. Retirees, on the other hand, probably wouldn’t reach new highs until sometime in 2024 or even 2025.

In reviewing the financial picture of all our planning clients, that has certainly proven to be the case. The huge market decline of 2022 was a buying boom for working people that saved aggressively into their accounts. They were able to purchase shares of stocks at deeply discounted prices, and benefited greatly as those shares rose in value throughout 2023.

However, 2023 was not a uniform market recovery. Nor should have anyone expected it would be. Unlike previous market declines, the federal reserve wasn’t coming to the rescue on this one. Quite the contrary, they were doing everything in their power to have a measured decline to economic growth as they fought rising inflation.

While some of the largest companies in our country were reaching new highs, the rest of the market was still suffering. Indexes like the S&P 500 gave the illusion that the entire market was recovering. But it was all on the backs of a small handful of companies – touted as the Magnificent 7 – Microsoft, Apple, Nvidia, Amazon, Meta, Google, and Tesla.

That disconnect presented a unique gift to the savvy investor. While one segment of the market recovered by mid-summer, they could focus their savings and Roth conversions on the section of the market that hadn’t yet recovered – thereby potentially still buying/converting shares on the cheap.

The savvy non-saving retiree took a different approach. They searched for spending efficiencies in 2023. Reducing their withdrawals and making sure that all withdrawals came from fixed assets – and not from liquidating equity shares. They aren’t buying new shares and are instead spending down their portfolio. So, as long as they maintain their equity positions throughout the recovery, they will likely reach new milestones. The timing of those new highs depends on how much they spend down along the way. Hence, my prediction that most retirees wouldn’t see new milestones until sometime later in 2024 or even 2025.

As we move into 2024, I believe there is still a huge segment of the market that has only just begun to recover. This gives savers a chance to do more of what they might have wished they did in 2023 – buy shares of the market and/or convert their IRAs to Roths. Large cap domestic growth stocks had a banner year, especially those “Magnificent 7” stocks. Large cap value, mid cap, and small cap stocks didn’t start to shine until November 2023. I think they hold most of the opportunity in 2024. While the market as a whole hasn’t recovered, portfolio returns of large cap growth were tremendous. And this gives an opportunity for retirees to rebalance out of those specific equities and refill the bond bucket if needed.

One of the many reasons that I dislike blended investments, like balanced funds and target retirement date funds, is that you can’t discriminate what portion of the market you rebalance. We have a video that goes into that detail - https://www.jpstudinger.com/videos, called “Target Retirement Date Funds”. If you hold blended funds in your 401k, you could divest out of them, and proportionately buy a similar allocation with multiple separate investments.

During this year’s review I’ll be on the lookout for which clients should build up their “burn rate” by selling some large cap growth equities. In the meantime, I continue to encourage retirees to get creative and efficient in their spending.

You save money to spend it. So, live your life and have fun. But spend wisely. One of the biggest wasteful spending is what I call the convenience tax. There is a short 1-minute video on that on our website, - https://www.jpstudinger.com/videos. Scroll down on the videos page to shorts section.

For both pre-retirees and retirees, everyone needs to analyze the Roth in their financial position. I’ve been talking about this non-stop for years but it’s a really big deal and the paradigm shift into Roth vs. pre-tax hasn’t happened yet for most people. I have plenty of videos on our website that describe why I think the Roth is so important.

The bottom line is this – we have some of the lowest tax rates in the last 100 years and the worst fiscal balance sheet in the history of our country. I believe tax rates have only one direction to go – up. We just hit $34 trillion in federal debt. That’s incredible. The debt grew by $11 trillion in the past 4 years. To put that into perspective, it took from 1790 when Alexander Hamilton wrote the first report on our public debt to 2009, 219 years, to reach $11 trillion.

We just did that in 4 years. The debt increased by $2.65 trillion in 2023. Federal income is $4.7 trillion. That isn’t even enough income to cover mandatory spending (social security, Medicare, student loans) and the interest payment. All the rest of what we do – military, infrastructure, aid, the running of our country… is funded with debt.

I explain important terms everyone needs to understand – federal revenue, deficit, and debt – in the video titled “Lowest Tax Rate & Worst Fiscal Balance Sheet”. Unlike consumer debt, like a car loan or mortgage, the federal government does not pay down principal. Federal debt is the accumulation of all its deficits. And our deficits are way too big. Our debt growth in 2023 of $2.65 trillion is larger than every single country’s entire budget with exception to China’s. Think about how crazy that is. Just our deficit, what we added to our federal debt, was larger than every country’s entire budget in the world except China’s.

I can go on and on about the importance of the Roth. But the bottom line is this – I don’t believe anyone that is still working/saving should put money into a pre-tax account. The Roth is available in workplace plans now and should be used to the max. Many pre-retirees should also consider Roth conversions.

Retirees need to look at their required minimum distribution schedule and determine if that, or their budgetary spending needs, puts them in a difficult tax scenario. If it does, then they need to consider if Roth conversions are a viable alternative.

I’m optimistic that we’ll continue to see economic and market improvements in 2024. Let’s work on strategies that help you reach new milestones and/or desired financial security.