The Big Picture continued from page 22
over the last 15 months , those days are over , said Charles Schwab & Co . chief investment strategist Liz Ann Sonders , in an interview with macro strategist Jim Bianco at Mauldin ’ s conference . She pointed to the stock market ’ s collapse last October and the Fed ’ s indifference to it as evidence that Jay Powell and his fellow Fed governors had other priorities . uations , like the 2013 taper tantrum or during 2018 when falling stock prices short-circuited efforts by Powell , then recently confirmed as chairman , to raise interest rates .
Asked by Bianco whether the Fed would change its 2 % inflation target if the rate falls below 4 % ( which he expects by July ), Sonders said it would not do so “ explicitly .” She thinks inflation will continue to fall , “ but getting to 2 %, which is somewhat arbitrary , could take time .”
In past slowdowns , lower-level workers were among the first to go . Sonders observed that this time , high-level executives are among the first to get pink slips .
“ The stock market was down 25 % and there was no ‘ Fed put ,’ especially with inflation running hot ,” Sonders said .
Bianco and Sonders agreed it was always possible that , in the event of a serious banking crisis or nasty recession , the Fed could revert to its old habits . But they also concurred that the central bank was unlikely to easily accede to the stock market ’ s wishes for relief in the same fashion it did in previous sit-
Bianco agreed . Powell “ can ’ t change his target now ” with inflation at 4 % or 5 % or “ he would be completely discredited ,” he maintained .
For her part , Sonders observed that , when it came to the disconnect between the Fed and the financial markets , which expects a reversal in monetary policy “ in short order ,” the Fed is likely to keep rates higher for longer than market participants are hoping .
“ The Fed put has been put to bed given what we ’ ve seen ,” she said . “ Financial market weakness is not the Fed ’ s problem .” Structural systemic weakness would be a different story , she said .
When Bianco asked her about the strength of the labor market , Sonders said it might not be as strong as it appears . Sales of homes and autos are already experiencing recessions of their own , although the service sector is keeping the economy going .
In past slowdowns , lower-level workers were among the first to go . Sonders observed that this time , highlevel executives are among the first to get pink slips .
A 40-year bull market in bonds became deeply imprinted on investors , corporate managers and policy makers and conditioned their behavior , Grant argues . The next set of problems “ will be concentrated ” on companies and people who borrow , he says .
What is normal depends on one ’ s reference point and moment in time . “ The bond market is still looking over a cyclical valley ,” Grant argues . America ’ s current set of problems were 20 years in the making and “ they won ’ t be solved in six months .”
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partially offset poor returns by reducing their current spending . This can help them preserve their portfolio ’ s value and sustain their future spending , thus helping them deal with the risks of running out of money if they live longer than expected .
Implement A Tax-Efficient Withdrawal Strategy
Once advisors have determined what their clients ’ annual spending strategy should be , they can also help to ease clients ’ risk of outliving assets by making the withdrawal strategy more tax-efficient . Many retirees hold their assets in multiple accounts , including taxable ac- counts as well as tax-deferred accounts — including IRAs and 401 ( k ) s — and tax-free accounts , such as Roth IRAs and Roth 401 ( k ) s . By following an informed withdrawal-order strategy , clients can minimize the total taxes they ’ ll pay over the course of retirement and thus increase their annual spending amount , terminal wealth values or the longevity of their portfolios .
Research by Vanguard has shown that a tax-efficient withdrawal strategy can add up to 120 basis points of average annualized value without any additional risk , depending on the client ’ s breakdown of assets and marginal tax bracket . With this process alone , advisors can demonstrate their value to clients paying fees for advice .
Advice That Meets The Moment
Retirement can be an emotional subject for anybody , and people retiring today might be feeling overwhelmed by all the new financial challenges they ’ re facing . But the economic volatility gives advisors an opportunity to show their value by acting as behavioral coaches and helping clients manage sequence and longevity risk to improve their chances of success after they leave work . By turning to prudent spending strategies and taxefficient withdrawal plans , advisors can share in the excitement as these clients enter retirement with confidence that their long-term financial plans will support them when they need it most .
COLLEEN JACONETTI , CPA , CFP , is a senior manager in Vanguard ’ s Investment Advisory Research Center .
56 | FINANCIAL ADVISOR MAGAZINE | JUNE 2023 WWW . FA-MAG . COM