Why is 2023 an important year for retired military service personal? For many, this year presents a once-in-a-lifetime-opportunity. A retiree can only elect SBP when retiring. He/She can’t elect SBP after they’ve already been retired; except in 2023. 2023 is a special open season for SBP where a retiree elect SBP to get coverage even when already retired. Why?
Silicon Valley Bank and Interest Rate Risk
You have likely heard by now that Silicon Valley Bank and its parent company SVB Financial Group (Nasdaq:SIVB) failed as a bank on Friday last week. There were a number of influences that together spelled the downfall of the bank.
In 2020 through 2021 Silicon Valley Bank took in incredibly high deposits through PPP loans and through their clients that were taking their companies public through a SPAC (Special Purpose Acquisition Vehicle). The bank took those deposits and decided to invest in long-term bonds such as mortgages and treasuries while interest rates were low.
2022 was a very different year and not only did Silicon Valley Bank’s unique customer base of private companies start to need cash and so pulled their deposits but also interest rates increased which impacted the mark-to-market value of their longer-term bonds. The bank, in an effort to appropriately deal with the impact of mark-to-market losses, used a valid accounting change to consider those bonds “held to maturity”. Any bonds that are held to maturity do not need to be updated with the market value but can be held on the books at cost.
Unfortunately, Silicon Valley Bank was unable to hedge their interest rate risk for any bonds that are in the “held to maturity” category as the accounting rules say that any bond that is hedged is not considered "held to maturity" and thus be marked at current value.
The combination of reducing deposits and too few assets that were marked at the market forced the bank to sell their held to maturity bonds to meet withdrawals by their customers. When the bank sold the mark-to-market securities they were forced to realize the losses and those losses effectively overwhelmed the bank equity causing the bank to fail.
This all happened over the course of a week and really over 2 days. The stock was worth $267.90 close of business Wednesday and worthless by the close of business Friday.
Did Silicon Valley Bank do anything wrong? The bank did not break any rules as they are written but they also did not effectively hedge their interest rate risk. Their poor risk management ultimately spelled their doom. It would have been easy enough to reduce purchases of so many long-term bonds back in 2021 but the appeal for the bank to make a little bit more money on their deposits was likely too strong. Also how many market participants expected the Federal Reserve to raise interest rates so much so quickly? They were caught offside.
Some have said it was a “bank run.” Is that right? Yes, when depositors realized that the banks tangible equity was falling, those who have more than the FDIC insured limit of $250,000 decided to take their additional savings out to be safe. Some depositors also wanted higher interest rates they could achieve with a money market fund (4.5% vs. 1% at many banks), and finally many of their depositors needed money because their startup businesses were not as successful due to the market environment.
Is this a risk for the big banks (over $250B in assets)? No. Big banks are stress tested regularly and are required to hedge their interest rate risk. As a result those banks are not at risk of the same problems from Silicon Valley Bank.
What about smaller banks? Yes, some smaller banks with more aggressive treasury operations (what they choose to do with the deposits and how they hedge or not) are at risk. Signature Bank of New York has also been seized by regulators and there are other midsize (less than $250B in assets) banks that seem to have low tangible equity. Banks can be notoriously hard to analyze so I expect many who invest for dividends to find greener pastures.
Impact to the market? We’re not sure yet how this will impact that market other than introducing more volatility. Some think the Fed must stop raising interest rates immediately to stem the losses of these poorly performing long-term bonds on bank balance sheets, while others think the Fed needs to continue to raise rates to combat inflation. One thing is certain – bond market volatility as measured by the MOVE index is likely to be heading higher. Last year when the MOVE index went higher, financial conditions tightened and the stock market declined and the economy slowed. It is likely that will be the case again in 2023.
We invest for long-term returns and recognize events like this do happen. Depositors will end up being OK. Equity holders of the banks will not. If you have any questions about this or your portfolio, please give me a call.
A New Way to Communicate
Entering 2023, we found there to be 2 types of financial information in video format:
1) The long and boring videos that drone on and on in a level of detail that you don’t possibly need to know. They go into complexity that isn’t necessary for most people. You stop watching after 60 seconds.
2) And the generic videos that last 3-4 minutes, but give you an explanation of a general concept. While it’s somewhat comprehensive, you don’t usually walk away with specific action points or ways that the concept relates to you.
We shake things up with our short videos. We bring value to the social media space and to your lives. It’s our goal to communicate financial planning strategies in a way that relates to you, your lifestyle, and your free time. Our videos are limited to 60 seconds so you can get a daily dose of financial planning, learn something new, and share information with your friends. You can find these short educational videos on YouTube, Facebook, Twitter, Instagram, and LinkedIn.
Estate Planning 101
You are never too young to think about estate planning. I know that even the term estate planning can feel touchy. Let’s be real: Estate Planning is a polite way of saying death and incapacity planning. No one WANTS to talk about it (well maybe estate planning attorneys do). While talking about death is a tough topic, it will occur. It’s worth planning what will happen to your assets after you pass away (or become unable to manage them – incapacity). Now, we are not estate planning attorneys, and we encourage you to seek out advice from one. But there are estate planning elements to everyone’s financial plan. There are easy steps many people can take to improve this overall plan.
The Psychology of Wealth for People in their 20s and 30s
Have you gone to work antsy because you haven’t exercised in a while? Perhaps you planned to visit the gym before work, but time got away from you. Then at work, there’s 10% of your brain that’s thinking “I need to go to the gym”. You don’t concentrate, and you don’t maximize your day. The thought of needing to exercise ruins your productivity and the joy you could have at work. It’s a sense of distraction and a sense that you aren’t accomplishing what you know you could accomplish.
I bring up this feeling because it’s what many people in their 20s and 30s feel when it comes to saving/investing for retirement. I think most people in their 20s and 30s know that early investing is the most important thing they can do for their retirement funds. But when they don’t save intentionally, spending money creates a twinge of guilt that reverberates. “I need to save,” they think, “Why did I buy this?” This feeling takes away from the joy of living in the moment and enjoying what you just bought. It’s not just important to save early for investment reasons, but for the stability it brings to our psychological lives as well.
To be clear, this blog post isn’t about the math of saving/investing early (but you should) nor is it about the amount saved (but 10%-25% of income is a good ballpark to be in). It’s about the importance of CONSISTENT saving for the purpose of investing for retirement. There are 6 reasons why consistent investing is just as important (if not more important) than the actual amount saved. Only one reason is mathematical. The rest are psychological.
Business Exit Strategy Series – Private Annuity
An annuity!? I’ll be honest, as an independent financial planner without any affiliation or incentive to sell particular products, I despise annuities (generally speaking). This is because you give up so much chance for asset growth for a guaranteed income stream. The fees are high, and the commissions taken by annuity sales-reps are typically very high. Why? Because they are so profitable for the annuity seller. I’ll go one step further to say that annuities prey on retired, older women. I’ll leave it at that. I don’t want to go down that rabbit hole. But I run into people all the time that have an annuity, either through work, personal purchase, or another means. For example, sometimes it’s a provided work benefit that your employer pays into, but you don’t. Then that annuity will be free money when paying out. So having an annuity isn’t necessarily bad. However, please reach out to us if you are thinking of purchasing an annuity. We really want to prove our point that annuities should only be acquired in rare circumstances.
Thanksgiving Special - Financial Conversations with Family
With Thanksgiving approaching, many people will see their families. When we love our family, we want what’s best for them. Sometimes this involves conversations about money. However, money can be a taboo topic in American society, just as health and politics can create “awkwardness” at the dinner table. We all know that feeling when someone brings up a political conversation at a family dinner (advocating for either left or right views) and their deep intent is just to spout their viewpoint with the goal of asserting their viewpoint’s supposed superiority. We internally cringe. We can get the same feeling when someone brings up health or criticizes some else’s weight. We lump this into either someone trying to elevate themselves above everyone else or denigrate others below them. The position of our heart is very important before bringing up “touchy” subjects. Money is no different.
Here are 6 tips for talking about money with family
(Almost) Everything the Average Person Needs to Know About RMDs
RMD stands for required minimum distribution. With some exceptions, when you turn 72, the IRS requires that you start taking money out of your 401(k), 403(b), 457(b), profit sharing plans, Traditional IRA, SIMPLE IRA, or SEP IRA. How much money you must take out depends on your age, your account beneficiary, and your account beneficiary’s age(s). Most people use the Uniform Lifetime Table (scroll halfway down) to calculate their RMD.
Business Exit Strategies Series - Self-Cancelling Installment Notes (SCIN)
Do you own a business but have significant estate planning tax considerations? Do you need to generate income from the business to fund retirement? A SCIN might be right for you.
A SCIN is a variation of the installment sale. Recall an installment sale spreads out the capital gain of a business over multiple annual payments rather than recognizing it all at once. SCINs add a little twist to the usual installment sale.
