Secure 2.0, legislation signed into law at the end of 2022, contains over 90 changes to retirement savings plans. We will discuss the key changes below. The interest rate environment has certainly changed since last year's update, so the next area we focus on is how there are good options for low-risk investing that didn't exist a year ago.  Read on for the details as well as a few other interesting investing tidbits.

Retirement Plan Changes Ahead

Secure 2.0, legislation signed into law at the end of 2022 that builds upon the Secure Act of 2019, contains over 90 changes to retirement savings plans. Here are some of the key provisions:

• Beginning in 2025, retirement plans started after 12/29/22 will have to automatically enroll employees, deducting between 3 and 10% unless the employee opts out. (There is a provision that allows employees to withdraw an automatic contribution within 90 days without the 10% tax penalty.)
• The percentage will automatically escalate by 1% each year on the service anniversary date (up to a maximum of 15%.)
• Catch-up contributions for older employees will increase, and for those making over $145,000 in 2023, they must be made to a Roth 401k (in other words, the contribution must be made after tax.)
• Employees can now request that employer matching contributions and any mandatory contributions be made to a Roth 401k.
• Certain long-term part-time employees will become eligible to participate in 401k plans sooner.
• Beginning in 2024, employers will make matching contributions for employees who are paying off student loans instead of saving in a retirement plan.
• Similarly, beginning in 2024, employees can make Roth contributions and earmark a portion for Emergency Savings, eligible for monthly withdrawals if necessary, but qualifying for matching employer contributions.
• There are additional programs to help cover emergency expenses, and in 2027, there will be additional federal matching of savings for the lowest paid employees.
• RMDs will be required at 73 instead of 72 beginning in 2023, and will move to 75 in 2033.

(ADP)

Interest Rates and Investing

The 2-year and 10-year yields have been inverted (when the shorter term debt yield is higher than the longer-term) a since last July and has the spread is now greater than it has been since 1981. A rate inversion such as this is typically experienced before a recession, yet the economy appears to be rocking on, but perhaps at a slightly less robust rate. (Reuters)

With the current interest rate scenario, there are plenty of solid investment options to the stock market that were not attractive when interest rates hovered around zero. The New York Times outlines fixed-income investments, like high-yield savings accounts, money market accounts and bonds, investments that are usually part of a balanced portfolio anyway, but take on much more luster when interest rates are higher. Also, if you are approaching retirement or have shorter-term investing goals (like buying a house), these options are far less risky. The article explains the pros and cons of each of these options, including the risk of interest rate changes in the future on any bond holdings. Not surprising is the recommendation to own bonds by buying a bond fund, just as you would buy an equity index fund instead of individual stocks.

Just how far have bond yields moved?  See below from Morningstar 

A Wealth of Common Sense asks and attempts to answer three questions about when interest rates will really matter.  They provide some food for thought.

When will interest rates matter to the stock market?

At the moment, there is a much heavier weighting in equity, particularly for baby boomers. This was understandable when interest rates were near zero, but now that you can earn 5% on very safe fixed-income investments, why isn’t there a pronounce shift? What will it take?

When will interest rates matter to the housing market?

As long as demand is outstripping supply, the real estate market for those few who are selling existing homes and for home-builders who are enjoying the demand with little competition from existing stock will be bright. Housing prices are increasing in spite of 7% mortgage rates. (This is true in my anecdotal experience--a house down the street sold for 25% more than was paid by the owners two years ago, and my parent’s apartment had a bidding war and sold for 20% more than the best offer a year ago when interest rates were still extremely low.)

When will interest rates matter to the labor market?

Will we need to see unemployment rise to get inflation is under control? The labor markets are booming and the last CPI release showed the 12^th consecutive month of improvement. What do you think?

The Stock Market

The first half of 2023 has been a good one for equity. For example, the S&P 500 was up 14%. And markets rallied further in the past week following the positive CPI and PPI data. Will this continue? The market bulls and bears have never been further apart. The bulls think things will continue, and the bears keep pointing to the inverted yield curve and any data that looks remotely like the economy is heading in the wrong direction. There is not much common ground. (MarketWatch)

If you are interested in bringing your students in on this debate, you might want to check out this breakdown of stock market data and returns between 1928 and 2022 by A Wealth of Common Sense. The data can be used to support their arguments. There are three graphs that I would show students in this article that really demonstrate that you can tell or see different stories depending on how you cut up and present the market data. (You could then have them layer on economic data that supports their argument as well.)

Here is a quick summary:

• Almost 6 out of every 10 years on the stock market has seen gains in excess of 10%.
• A little more than 1 out of every 3 years has been a return of 20% or more.
• Nearly 1 out of every 5 years was a 30% up year or better.
• Less than 1 out of every 10 years has seen a calendar year-end with gains in the 5% to 10% range.
• Around 1 of every 4 years has finished the year down.
• Roughly 1 out of every 8 years has been a double-digit down year.

The U.S. stock market has been more likely to finish the year up 20% or more than down on the year. That’s a pretty darn good track record.

But you can’t take these probabilities to the bank. When you look within each year, you see the peak to trough declines that occurred.

Here is the bottom line: Big losses accompany big gains and that is what makes investing in the stock market so risky. These charts should help get that point across.

General Investing News Items

Apple reached a $3 Trillion market cap on June 30 after flirting with that figure back in January. (It has slipped back to $2.999) Is Apple the stock equivalent of a GOAT? How much higher can it go? Some analysts think over $4 trillion.

“Apple is nearly $500 billion more valuable than the next-largest company, Microsoft ($2.5 trillion market cap), while Saudi Aramco ($2.1 trillion), Alphabet ($1.5 trillion), Amazon ($1.3 trillion) and Nvidia ($1 trillion) round out the exclusive trillion-dollar club.” (Forbes)

Harry Markowitz, the Nobel-winning father of Modern Portfolio Theory, passed away this week.

“As the Nobel-winning father of Modern Portfolio Theory, he is the one we must all thank for the knowledge that asset allocation—not which stocks you own—is responsible for the majority of investment returns. If you have a broad diverse stock portfolio today, his work is a big reason why.”

Read more about his contribution here: Fisher Investments

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.

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