End-of-the-Year Money Moves to Make Before Saying Goodbye to 2020

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What Has Changed for You in 2020?

For many, this year has been as complicated as learning a new dance. Did you start a new job or leave a job behind? That’s one step. Did you retire? There’s another step. Did you start a family? That’s practically a pirouette. If notable changes occurred in your personal or professional life, then you may want to review your finances before this year ends and 2021 begins. Proving that you have all of the right moves in 2020 might put you in a better position to tango with 2021.

Even if your 2020 has been relatively uneventful, the end of the year is still a good time to get cracking and see where you can manage your overall personal finances.

Keep in mind this post is for informational purposes only and is not a replacement for real-life advice. Please consult your tax, legal, and accounting professionals before modifying your tax strategy.

Do You Engage in Tax-Loss Harvesting?

That’s the practice of taking capital losses (selling securities worth less than what you first paid for them) to manage capital gains. You might want to consider this move, but it should be made with the guidance of a financial professional you trust. (1)

In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that amount can be carried forward to offset capital gains in upcoming years. (1)

Do you want to itemize deductions?

You may just want to take the standard deduction for the 2020 tax year, which has risen to $12,400 for single filers and $24,800 for joint. If you do think it might be better for you to itemize, now would be a good time to get the receipts and assorted paperwork together. (2,3)

Could You Ramp up Your Retirement Plan Contributions?

Contribution to these retirement plans may lower your yearly gross income. If you lower your gross income enough, you might be able to qualify for other tax credits or breaks available to those under certain income limits. (4)

Are You Thinking of Gifting?

How about donating to a qualified charity or non-profit organization before 2020 ends? Your gift may qualify as a tax deduction. For some gifts, you may be required to itemize deductions using Schedule A. (4)

Review a Portion of Your Estate Strategy

Specifically, take a look at your beneficiary designations. If you haven’t reviewed them for some time, double-check to see that these assets are structured to go where you want them to go, should you pass away. Lastly, look at your will to see that it remains valid and up-to-date.

Check on the Amount You Have Withheld

If you discover that you have withheld too little on your W-4 form so far, you may need to adjust your withholding before the year ends.

What Can You do Before Ringing in the New Year?

New Year’s Eve may put you in a dancing move, eager to say goodbye to the old year and welcome 2021. Before you put on your dancing shoes, consider speaking with a financial or tax professional. Do it now, rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation.

Sources

  1. Investopedia.com, April 18, 2020
  2. NerdWallet.com, July 17, 2020
  3. Investopedia.com, May 22, 2020
  4. Investopedia.com, July 14, 2020

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

How Important is the Dow Reaching 30,000?

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It’s a new high, but not dissimilar to celebrating say, 29,999 as a new peak, although the odd number didn’t receive the same level of media attention. These round market levels, whether it be the Dow Jones Industrial Average, Nasdaq, or others, tend to generate high visibility (especially in the slower post-election news cycle). If an index is old enough, and tends to show positive performance (as stocks have over the long haul), you’ll end up reaching new and higher milestones. The seemingly-large 30,000 level is just a reflection of how long the index has been in existence. (It was first assembled in 1896 by its namesake Charles Dow, former Wall Street Journal editor, in a day where calculating the price levels of a dozen stocks by hand on paper was ‘cutting edge indexing.’) We won’t go into how the Dow is a less desirable index to track relative to others, due to its outdated price-weighted construction methodology and concentrated membership of 30 stocks, but it remains well-watched regardless due to this historical legacy. The S&P 500, more widely used by financial professionals, has gained public traction over time, but its lower and less sexy 3,000-ish level is simply a reflection of its more recent creation (early 1950’s). Total return percentages matter much more than index levels.

Fear and Greed

Most importantly, these announcements can often cause investors to react in one of two ways: (1) consider buying, after they’re reminded of their FOMO (‘fear of missing out’); or, (2) consider selling, as they see the new milestone high as feeling ‘expensive.’ Neither is an ideal approach, based on news coverage alone.

Market Realities

The new highs for several U.S. equity indexes are a reflection of the unusual year we’ve experienced. Following a dramatic (-33%) drawdown in March, stocks have recovered—and then some (+65%). The rebound triggers opposing investor emotions largely because of what this extreme movement represents, in realities on the ground as well as anticipated future realities. While fundamentals (revenues and earnings) have improved as lockdowns eased mid-year, we’re now in the throes of a second wave which could dampen the recovery outlook again. Yet, promising vaccine data gives markets more of what they really want, which is the removal of uncertainty about an ending point for the pandemic. If sometime in 2021 provides virus containment and herd immunity, today’s multiples are expected to ‘grow into’ 2021 and 2022 earnings expectations. The damage from the lockdowns earlier this year were such that higher-than-average recovery growth, at the current path, could be the case for several quarters, if not a few years. The Fed also looks to remain on hold during that time. As important as anything, low interest rates tend to be an extremely powerful and positive input into fair values for stocks and real estate

Smart Investing

With the end of the year approaching, it’s likely a good time to reevaluate portfolio positioning. Reacting to recent equity strength by a knee-jerk extreme of going ‘all in,’ or ‘getting out’ completely can be disruptive, especially since the second question of ‘now what?’ offers few alternative. Rather, if one’s risk allocation level needs to be adjusted, doing so by a notch or two can provide continued market exposure, yet not cause one to completely miss out on potential market gains over time (or even sharp movements from the ‘best days’). Stock market timing is extremely difficult, if not impossible. Therefore, any move that changes exposure to that growth engine, relative to the stabilizing force of bonds in portfolio creates risk-return trade-offs. ‘Regret’ is a real force discussed many times by economists involved in behavioral finance.

▲ Impact of Being out of The Market

During periods of extreme market declines, a natural emotional reaction can be to sell out of the market and seek safety in cash. The results of this reaction can be devastating because often the best days occur close to the worst days during periods of market volatility. This chart compares an individual who was fully invested for the past 20 years in the S&P 500 to investors who missed some of the best days as a result of being out of the market for a period of time. Missing the top 10 best days will halve the annualized return; missing the top 30 days will result in a negative annualized return on the original $10,000 investment. Rather than emotionally reacting to or trying to time the market, adopting a disciplined long-term investment strategy may produce a better retirement outcome.

Sources

  1. LSA Portfolio Analytics
  2. JP Morgan Asset Management: Guide to Retirement

Here are the 2021 Contribution Limits for Your IRAs, 401(k) and 403(b)

On October 26, the Treasury Department released the 2021 adjusted figures for retirement account savings. Although these adjustments won’t bring any major changes, there are some minor elements to note.

401(k)s

The salary deferral amount for 401(k)s remains the same at $19,500, while the catch-up amount of $6,500 also remains unchanged. However, the overall limit for these plans will increase from $57,000 to $58,000 in 2021. (1)

Individual Retirement Accounts (IRA)

The limit on annual contributions remains at $6,000 for 2021, and the catch-up contribution limit is also unchanged at $1,000. (2)

Roth IRAs

Roth IRA account holders will experience some slightly beneficial changes. In 2021, the Adjusted Gross Income (AGI) phase-out range will be $198,000 to $208,000 for couples filing jointly. This will be an increase from the 2020 range of $196,000 to $206,000. For those who file as single or as head of household, the income phase-out range has also increased. The new range for 2021 will be $125,000 to $140,000, up from the current range of $124,000 to $139,000. (3)

Although these modest increases won’t impact many, it’s natural to have questions anytime the financial landscape changes. If you’re curious about any of the above, speak to your financial or tax professional for more information.

RETIREMENT PLANS (Annual Contribution Limits)202120202019
401(k), 403(b), most 457 plans
• 50+ Catch-up Contribution
$19,500
+$6,500
$19,500
+$6,500
$19,000
+$6,000
IRAs and Roth IRAs
• 50+ Catch-up Contribution
$6,000
+$1,000
$6,000
+$1,000
$6,000
+$1,000
SIMPLE IRA
• 50+ Catch-up Contribution
$13,500
+$3,000
$13,500
+$3,000
$13,000
+$3,000

Sources

  1. IRS.gov, October 26, 2020
  2. IRS.gov, October 26, 2020
  3. IRS.gov, October 26, 2020

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

How Elections Move Markets in 5 Charts

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How much do elections impact the stock market and portfolio returns? Should elections even matter to long-term investors in the first place? These are the questions investors and financial professionals are facing as we approach November 3rd. To provide answers, Capital Group has analyzed more than 85 years of data and identified five ways that elections influence markets and investor behavior.

1) Markets have tended to predict election results

A simple stock market metric has correctly predicted the winner in 20 of the last 23 presidential elections since 1936 — a track record that might make even the top pollsters jealous. If the S&P 500 Index is up in the three months prior to Election Day, the incumbent party usually wins. If markets are down during that period, the opposing party typically claims victory.

Why is this? It’s because equities tend to look ahead and “price in” uncertainty — including that caused by an upcoming election.

When the stock market and the economy are strong, there is usually less motivation for a change in leadership. In those years, stocks may not need to discount the uncertainty, which often allows stocks to continue rising, further bolstering the incumbent’s chance of reelection.

When the political and economic climate are more challenging, there is a greater chance that the opposing party will win. The market discounts the added uncertainty of the election outcome and what policy changes may occur, which can lead to higher volatility.

What does this mean for 2020? As of September 15, the S&P 500 is up 3% since August 3rd (three months prior to Election Day) and 5% year-to-date. In more normal times that would favor the incumbent, but today’s shaky economy offers a different story. Since 1912, only once has a president been reelected if he oversaw a recession within two years of the election. While this trend may be interesting, investors shouldn’t use it as an excuse to try to time markets. Historically, whether the incumbent wins or loses, election volatility has usually been short-lived and quickly given way to upward moving markets.

2) Gridlock or sweep? Equities have gone up either way

One of the biggest concerns investors have this election cycle is the possibility of a Democratic sweep of the White House and Congress. Many assume this so-called “blue wave” will lead to a reversal of policies like deregulation or the Tax Cuts and Jobs Act of 2017. While it’s true that a new party typically brings its own policy agenda, assuming such an outcome will lead to meaningfully lower stock prices is probably over-simplifying the complexities of stock markets.

History shows that stocks have done well regardless of the makeup of Washington. Since 1933, there have been 42 years where one party has controlled the White House and both chambers of Congress at the same time. During such periods, stocks have averaged double-digit returns. This is nearly identical to the average gains in years when Congress was split between the two parties. Historically the “least good” outcome has been when Congress is controlled by the opposite party of the president. But even this scenario notched a solid 7.4% average return.

What does this mean for 2020? This year’s election will almost certainly end in either a unified government under a blue wave or a split Congress, which could happen with either a Trump or Biden victory. Voters may have a strong preference, but investors should take comfort that both scenarios have historically produced strong equity returns.

3) Markets have trended higher regardless of which party wins the election

Politics can bring out strong emotions and biases, but investors would be wise to tune out the noise and focus on the long term. That’s because elections have, historically speaking, made essentially no difference when it comes to long-term investment returns.

Which party is in power hasn’t made a meaningful difference to stocks either. Over the last 85 years, there have been seven Democratic and seven Republican presidents, and the general direction of the market has always been up. What should matter more to investors than election results is staying invested.

What does this mean for 2020? Some have called the 2020 election the most important in our lifetime. But that has been said about previous elections and will be said again about future elections. This year has been unique in countless ways, but a look at past election cycles shows that controversy and uncertainty have surrounded many campaigns. And in each case the market continued to be resilient. By maintaining a long-term focus, investors can position themselves for a brighter future regardless of the outcome on Election Day.

4) Investors often become more conservative in election years

It can be tough to avoid the negative messaging around election coverage. And it’s natural to allow the rhetoric of political campaigns to make us emotional. History has shown that elections have had a clear impact on investor behavior, but it’s important that investors don’t allow pessimism to steer them away from their long-term investment plan.

Investors have poured assets into money market funds — traditionally one of the lowest risk investment vehicles — to a much greater degree in election years. By contrast, equity funds have seen the highest net inflows in the year immediately following an election.

This suggests that investors want to minimize risk during election years and wait until any uncertainty has subsided to revisit riskier assets like stocks. But market timing is rarely a winning investment strategy, and it can pose a major problem for portfolio returns.

What does this mean for 2020? This trend accelerated in 2020: Through July 31, net money market flows increased $546 billion while net equity fund flows decreased $36 billion. Of course, part of this year’s flight to safety was related to the pandemic-induced recession and not the election. Still, equity funds saw their largest monthly outflows in July, indicating that investors are remaining conservative ahead of the election.

5) Moving to cash in election years can reduce long-term portfolio returns

What has been the best way to invest in election years? It isn’t by sitting on the sidelines.

To verify this, we looked at three hypothetical investors, each with a different investment approach. We then calculated the ending value of each of their portfolios over the last 22 election cycles, assuming a four-year holding period.

The investor who stayed on the sidelines had the worst outcome 16 times and only had the best outcome three times. Meanwhile, investors that were fully invested or made monthly contributions during election years came out on top. These investors had higher average portfolio balances over the full period and more frequently outpaced the investor who stayed in cash longer. These results reflect four-year holding periods, but the divergence would be even wider if compounded over longer time frames.

Sticking with a sound long-term investment plan based on individual investment objectives is usually the best course of action. Whether that strategy is to be fully invested throughout the year or to consistently invest through a vehicle such as a 401(k) plan, the bottom line is that investors should avoid market timing around politics. As is often the case with investing, the key is to put aside short-term noise and focus on long-term goals.

What does this mean for 2020? It’s too early to know what the impact of this year’s flight to cash will be on investors’ long-term portfolio returns. But with the S&P 500 soaring over 50% since the March bottom and net equity selling continuing throughout the year, it is safe to assume many investors missed at least some of this powerful equity rally and remain on the sidelines ahead of the November election.

Source

  1. https://www.capitalgroup.com/ria/insights/articles/how-elections-move-markets-5-charts.html

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What Could the Impact of a Biden Presidency be on the Stock Market?

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The impact of a potential new President on stock market returns is always a key question in the weeks prior to a general election. It’s important to keep in mind that, despite frequent worries around this time of year, and that financial markets may react in the shorter-term term to poll results and election outcomes (especially surprises), the longer-term effects of any administration’s policies appear to be disconnected from financial market results. Instead, stocks especially tend to follow earnings, which follow economic growth trends. Nevertheless, there are always policy distinctions that could affect various industries to some extent.

In contrast to election season norms in prior decades, polarization between the two parties has become more pronounced, with more extreme positions on both sides forcing candidates away from traditional ‘centrist’ policy often adopted during general election campaigns. A Biden victory has the potential of moving policy toward a more progressive stance, although this is not as simple of a story as in past years, with the current administration having taken a variety of unconventional stances in its own right.

The potential retaking of the Senate by Democrats, in addition to their already holding power in the House, would heighten the risk of more progressive policies being voted in—with minimal opposition. On the other hand, Republicans successfully retaining the Senate would continue to act as an effective counterbalance against legislation from the House, potentially resulting in a policy log jam for the next four years. (Some see this as a best-case scenario, although doing little to alleviate the high current levels of political disagreement.)

The following represent a few areas that could be most impacted by a new Democratic administration, through either new legislation, reversals of prior policies, or no change:

Taxes

It is assumed that the corporate and personal tax cuts put into place in the current regime could be reversed—partially or fully—towards prior levels. Personal income tax policy rhetoric during the campaign has been aimed at the ultra-wealthy, but with high budget deficits and an unprecedented level of fiscal debt, higher tax rates for even middle-income Americans have been feared. This includes higher capital gains tax rates, seen as benefitting the wealthy the most, as they own the majority of financial assets. ‘Wealth taxes’ based on assets are out there as a wildcard as well (although targeted at billionaires). Even if corporate rates do not return to prior max levels of 35%, they are likely not to remain at 21%, either. Most directly, higher tax rates for companies directly erode multi-year earnings projections, which could result in lower stock valuation assessments.

Environment

This multi-faceted policy area includes not only ‘green’ legislation (likely to be promoted by a Biden administration), but also important carryover effects related to the energy industry broadly. It would likely be unfavorable for traditional petroleum- and coal-based energy production (and emissions), including limitations for drilling, and increased regulation of impacts. Conversely, alternative energy sources would likely be promoted—including wind and solar—as well as the potential taxation of carbon emissions.

U.S.-China Relations and Trade

This is a more challenging policy point, as both parties have adopted a hard line on China—for a variety of different reasons. The current administration has taken a more confrontational approach. This has been unique relative to prior regimes, which, at least at the surface, had attempted to avoid outright hostile language and direct economic sanctions. While the two parties agree in principle for a tougher stance, Republicans have focused this effort on corporate intellectual property, while Democrats have also included human rights concerns; specifically, based on the treatment of several ethnic and religious minority groups within the country. This remains a wildcard to some degree, but the majority of Americans and politicians now favor a tougher stance toward China—a rare point of policy agreement.

Antitrust Legislation

This wouldn’t normally surface as a key policy platform, but the rise of several technology behemoths has raised questions over the competitive environment and growing economic power of these firms. In prior decades, pro-business conservative politicians have been more reluctant to attack oligopolistic entities, while populist/progressive movements had been responsible for breaking up dominant ‘Robber Baron’ firms—such as Rockefeller’s Standard Oil in the early 1900’s. In recent years, though, the more progressively-minded tech giants have been supportive of the Democratic agenda and drawing the ire of Republicans—creating a role reversal. The pressure on these firms may continue to some degree, depending on who’s in charge. Some of this oligopolistic power is due to the structures of the industries. They’ve remained among the most fundamentally solid from a financial standpoint during the pandemic, which has rewarded investors. Of course, many small businesses have not fared nearly as well, fanning the flames of resentment.

Workers

Republican policies over the years have generally been focused on letting ‘laissez faire’ (free market) forces determine market competition and pricing dynamics—favored by many mainstream economists. Biden policies would likely offer more worker-friendly populist concessions, such as a higher minimum wage, better health coverage, paid leave, student loan relief, etc. On one hand, additional benefits and pay cut into company profit margins. On the other hand, more money in the pockets of consumers could be a catalyst for broader personal spending and consumption growth broadly, which benefits the broader economy in its own way.

Healthcare

The formation of the Affordable Care Act (‘Obamacare’) was followed by an immediate battle for repeal by Republicans and expansion by Democrats. This fight is likely to continue, with any enhancements in coverage (like ‘Medicare For All’) or other changes aimed at high prescription drug prices (also favored by the current administration, despite potential impact on corporate profits). Some pharmaceutical firms have acted to pre-emptively curb pricing for some drugs in efforts to stem the criticism and potentially unfavorable legislation. These firms counter that such high prices act as the funding mechanism for continued research and development on new therapeutics, which many politicians have accepted. The convoluted health care system, though, continues to overwhelm attempts at reform, which has led to a lower financial market probability for radical change in the near-term.

Defense

In prior years, a strong defense budget and global projection of power has been a Republican party tenet. Lately, this has taken a bit of an opposite turn with conservatives moving more towards a stance of isolation, and progressives seeking to maintain greater globalism. This may be an area with little net change, absent geopolitical surprises (which can be counted on).

Immigration

This doesn’t seem like a market-related topic at first glance, but movement of people across borders affects demographics, which, in turn, affects the size of the labor force and productivity—and ultimately economic growth. This has been a divisive issue throughout America’s history, and each side currently has a mixed relationship with it. Generally, economists argue that a more lenient immigration policy provides a larger pool of workers, which results in not only higher production but also higher consumption. Companies have often silently been in favor of these less restrictive policies, which brings in a higher supply of workers, which lowers wages and boosts profits. On the other side, and often in conflict with other elements of the party, Democratic politicians have tended to have strong support from unionized U.S. workers, which often oppose globalism and foreign worker competition—in efforts to retain jobs and sustain higher wages domestically. Realistically, on net, there could be few extreme changes due to these continual conflicts.

Fiscal Policy

In decades of old, Republicans were seen as the fiscally spendthrift party, while Democrats were cast in debates as ‘tax-and-spend.’ But even prior to the Covid recession, these traditional labels were less applicable, with higher spending proposed on all sides. Due to economic woes from the pandemic likely carrying over into 2021, and perhaps 2022, as well as increasing acceptance of policies such as Modern Monetary Theory (MMT), it appears the accepted spending may continue regardless of the party in office. However, at the fringes, Democrats have proposed more direct relief to workers, and Republicans to small businesses, in keeping with other distinct policy preferences.

Monetary Policy

This should be unaffected by politics, and largely has been over the years. Of course, there have been notable and theatrical exceptions, such as the Fed Chair being physically bullied at LBJ’s Texas ranch in the 1960’s, and the current President’s urging of low rates via social media. A Biden presidency could likely feature more restraint, and a conventional ‘hands off’ approach. However, the Fed could be increasingly impacted by the large Federal deficit and rising debt load, which affects both interest payment obligations as well as credit rating—which affect rates outside of the Fed’s control.

In short, by looking at individual industries, the outlook may not appear to change that much, aside from policy preferences one way or another. The key differences relate to tax policy, the broader regulatory environment, and fiscal spending policies.

It’s important to remember that an elected President has very little effect on market results, historically. In fact, some of the stronger periods of market performance have been under Democratic administrations, contrary to popular assumption. (1)

Avoid Market Timing Around Politics

Sticking with a sound long-term investment plan based on individual investment objectives is usually the best course of action. Whether that strategy is to be fully invested throughout the year or to consistently invest through a vehicle such as a 401(k) plan, the bottom line is that investors should avoid market timing around politics. As is often the case with investing, the key is to put aside short-term noise and focus on long-term goals.

3 Tips for Successful Investing in an Election Year

  1. Don’t allow election predictions and outcomes to influence investment decisions. History shows that election results have very little impact on long-term returns.
  2. Expect volatility, especially during primary season, but don’t fear it. View it as a potential opportunity.
  3. Stick to a long-term investment strategy instead of trying to time markets around elections. Investors who were fully invested or made regular, monthly investments did better than those who stayed in cash in election years. (3)

Sources

  1. https://www.capitalgroup.com/ria/insights/articles/election-watch-2020.html
  2. https://www.capitalgroup.com/advisor/pdf/shareholder/MFGEBR-121-632421.pdf
  3. https://www.capitalgroup.com/ria/insights/articles/3-investor-mistakes-election-year.html
  4. LSA Portfolio Analytics

Budgeting Basics for Your Household Budget

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Budgeting Towards Needs and Goals.

One of the objectives of creating a household budget is that, as time moves on and the various household members advance in their careers, they are likely to make more money. Knowing where that money goes can help direct that money to not only meet your day-to-day needs but also to potentially realize your financial goals. Rent payments may become mortgage payments, and socking away a few bucks into your savings each payday could change into an effective financial strategy involving various investment tools. (1)

Remember that investing involves risk, and the return and principal value of investments will fluctuate as market conditions change. Investment opportunities should take into consideration your goals, time horizon, and risk tolerance. When sold, investments may be worth more or less than their original cost. Past performance does not guarantee future results.

The Back of an Envelope or a Spreadsheet App.

Traditionally, a household budget could be worked out “on the back of an envelope.” Of course, this is still true, though you may have access to more bells and whistles than previous generations. Whether you prefer to work it out with pencil and paper or by computer, the main rule is to create and stick to the budget.

Easy Come, Easy Go.

Start by taking note of your income. Some Americans have more than one income source, either through a second gig or even a hobby turned small business. You don’t have to be making money very long, though, to realize that it doesn’t always sit still in your checking account. Along with your income, tally up your expenditures: Housing costs (rent, utilities, etc.), groceries, student loan payments, transportation expenses, phone, and Internet, as well as entertainment. It adds up! (More like subtracts, actually.)

Make Adjustments

Ideally, the number at the bottom of this reckoning should be a positive number. This means that you’re living within your means and, while you may want to make that a larger number by adjusting your expenses, you’re at a good starting point.

Adjustments are probably overdue if you have a negative number; you’ll need to take a cold hard look at those expenses and think about can I live without (such as mountaineering lessons) and what isn’t going to give (the essentials: food and shelter).

Your other choice, of course, is to make more money. As you move on in your career, this will likely happen as you earn salary increases or build your business. Don’t forget, though, that life gets more expensive over time, as well. Rents and fees will rise as time goes on. Regular adjustments are a natural part of good budgetary maintenance.

Goals and Strategies

If you have money coming in that is not being gobbled up by line items on your budget, and you stick to it and keep it that way, you’re (literally) coming out ahead. Now’s the time to put that money to work toward goals and strategies. Goals can be small, like saving up for a vacation or upgrading an item in your home. Or they can be larger, like saving for a major expense.

Goals can work side-by-side with financial strategies, which tend to be “bigger picture” in scope. Financial strategies tend to be things like looking ahead to your retirement or investing in creating more income (so you can get back to mountain climbing). For these bigger strategies and the shorter-term goals, there is an advantage to seeking out a financial professional geared toward helping you get the most from your efforts.

There is No “One Way” to Budget.

There isn’t a single, one-size-fits-all solution for creating and maintaining a household budget. Financial professionals also know this and can help craft a strategy suited to your risk tolerance, goals, and financial situation.

▲ Download this worksheet to help determine how you are spending your moey

Sources

  1. PewResearch.org, March 25, 2020

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

How Much Do You Really Know About Extended Care? Fact vs. Myth

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How much does eldercare cost, and how do you arrange it when it is needed? The average person might have difficulty answering those two questions, for the answers are not widely known. For clarification, here are some facts to dispel some myths.

True or False:
Medicare will pay for your mom or dad’s nursing home care.

FALSE. Medicare is not extended care insurance. (1)

Medicare Part A will pay the bill for up to 20 days of skilled nursing facility (SNF) care, but after that, you or your parents may have to cover some costs out-of-pocket. After 100 days in a SNF, you will have to cover all costs out of pocket. The only way to “reset the clock” for Medicare coverage of these services is if the patient can somehow go without skilled nursing care for 30 or 60 days or if they require a hospital stay of three full days or longer.

True or False:
A semi-private room in a skilled nursing facility costs about $35,000 a year.

FALSE. The median cost of a semi-private room is now $89,297. A private room in an assisted living facility has a median annual cost of $100,375 annually. A home health aide could run you up to $4,385 per month for full-time care. Even if you just need someone to help mom or dad with activities of daily living (ADLs), such as eating, bathing, or getting dressed, the median hourly expense is not cheap: non-medical home aides run about $23 per hour, which at 10 hours a week, means nearly $12,000 a year. (2,3)

True or False:
Only around 40% of Americans aged 65 and older are expected to need extended care.

FALSE. Someone turning 65 today has a 70% chance of needing extended care. That means that by 2030, it’s estimated that around 24 million Americans will need extended care. This is double the current number already receiving care. (4,5)

True or False:
The earlier you buy extended care insurance, the more manageable the premiums.

TRUE. Younger policyholders may pay lower premiums.

The best time to consider extended care insurance is when you are healthy. While you may be paying a premium for a longer amount of time, the expense may pale in comparison to paying for unexpected medical costs out of pocket. (6)

True or False:
Medicaid can pay nursing home costs.

TRUE. The question is, do you really want that to happen? While Medicaid rules vary by state, in most instances, a person may only qualify for Medicaid if they have no more than $2,000 in “countable” assets ($3,000 for a couple). A homeowner can even be disqualified from Medicaid for having too much home equity. A primary residence, a primary motor vehicle, personal property, and household items, burial funds of less than $1,500, and tiny life insurance policies (with face values of less than $1,500) are not countable. So, yes, under these economic circumstances, Medicaid may end up paying extended care expenses. (7)

▲Long-term care planning solutions

When planning for long-term care, consider multiple solutions that may be utilized including family assistance, income, savings, home equity, life insurance for a surviving spouse, and other insurance options that range from traditional long-term care insurance to combination products to annuities. Continuing Care Retirement Communities (CCRCs) are also a possibility for those who can afford them. Types of CCRCs vary – see MyLifeSite.net for more information. Medicaid may be a last resort; and if Medicaid is utilized, you may have less control of type of care and care setting. For specifics regarding Medicaid qualification in your area, consult with an eldercare attorney.

Sources

  1. Medicare.gov, March 26, 2020
  2. SeniorLiving.org, June 24, 2020
  3. APlaceForMom.com, May 11, 2020
  4. AmericanActionForum.org, February 18, 2020
  5. LongTermCare.gov, July 23, 2020
  6. Forbes.com, April 17, 2020
  7. LongTermCare.ACL.gov, July 23, 2020
  8. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What Could the Impact of a Trump Reelection be on the Stock Market?

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In many ways, policies to expect would likely be similar to what’s in place today, and largely opposite of those proposed under a Biden administration. At the same time, Trump’s policies have not followed ‘traditional’ Republican ideologies from decades past in a variety of areas. The Senate Republicans have been far more predictable from a policy standpoint, as have the Congressional Democrats.

The practical factor for the election continues to be whether or not the Democrats are able to take the Senate from the Republicans, which, in addition to holding the House, would allow for the ability to push through a greater volume of progressive legislation. A split-party legislative and/or administrative branch could result in four years of gridlock, with little net change in policy. (That might be perceived as the ‘worst case’ or ‘best case’ depending on the observer.)

Little may change from a higher-level view if the first Trump term morphs into a second. But, it’s important to remember from a financial markets perspective that the President in power has been relatively unimportant in driving longer-term sentiment and returns. Attempting to time election results or moving out of markets to avoid volatility can result in sub-optimal results, even though the weeks prior to an election can become more volatile. Interestingly, in the cases where an incumbent is seeking re-election, one of the few consistent tendencies over the past century is based on U.S. stock market results in the three months prior to Election Day. Based on the S&P 500, a positive return for that stretch has proven favorable for an incumbent’s chances, while a negative return has favored the challenger. (For perspective’s sake, from the window starting Aug. 3, the market is up 0.75% through Fri., Sept. 18—with several more weeks to go until Nov. 3.)

That said, while politics can coincide with day-to-day financial market movements at times, the two rarely correlate meaningfully over the long haul. The chart below bears this out fairly dramatically:

The following policy items assume that a Trump reelection is accompanied by Republicans retaining the Senate, which creates a ‘status quo’ situation. A newly Democratic senate majority would create more of a wildcard:

Taxes

It is probably safe to assume the tax cuts from 2017 would remain in place. These have served to benefit corporations, which receive an immediate boost to the bottom line, resulting in higher reported earnings. Consequently, this models out to higher multi-year growth and justifies higher equity valuations. Personal income tax rates would likely also remain low, along with capital gains rates. Traditional supply-side economists argue that stronger corporate performance and fewer hurdles (such as regulation and taxes) result in a larger ‘pot’ for everyone. However, this assumes that wealth trickles down proportionately to all workers, which has been debated in recent years as income equality between different groups has widened.

Environment

This would also be assumed to be status quo, which includes minimal promotion of green technologies. It would likely be coupled with a pushback on more stringent standards, such as those adopted by California (whose standards predate the EPA and are often stricter). While the energy sector has been struggling with low petroleum prices, due to weaker demand due to the pandemic, current policies would keep additional regulatory headwinds at bay. However, energy firms have been hurt far more by weaker demand from the pandemic than by other factors.
U.S.-China relations and trade. The geopolitical tension with China has been steadily growing, and a status quo result would assume more of the same. It’s been claimed by some China experts that the country is currently just playing a ‘waiting game’—for the Trump administration to eventually end, and to instead deal with the successor. As part of their 50- and 100-year national plans, such a delay is seen as just a temporary roadblock. The important component is that a tough U.S. stance on China has support across the aisle—it’s one of the few policy items both parties agree on. So, a longer-term decoupling is likely, although the public stances and negotiation styles could differ between administrations.

Antitrust Legislation

In years past, some Democratic platforms have been seen as anti-corporate (and conversely, pro-worker). This would have translated to a crackdown on large ‘oligopolies’ and a reining in of corporate power in the economy and society. In the current case, argued by some due to the more progressive political leanings of large tech companies, Democrats have appeared less interested in breaking up these firms. Republicans have certainly appeared more interested. Since it’s not quite clear where any ‘abuses’ lie and how consumers are adversely affected (many argue they’ve benefited greatly through both product variety and cost), this issue remains complex and path unclear.

Workers

In line with trends seen globally, not just in the U.S., both parties have taken on a more populist tone in recent years, largely in keeping with the larger societal income gaps. The polarization has taken place far more on the political side than the socioeconomic side, as all parties want to be seen as ‘pro-working class.’ This creates a conundrum, although no clear evolution in policy. Continued trade restrictions may help U.S. firms in the near term, although it’s not clear that benefits trickle down to workers longer-term and could hurt consumers through higher prices. Contrary to the Biden agenda, a second Trump administration would make more progressive items, such as a higher minimum wage and other benefits less likely—although these also depend on the Congressional makeup.

Healthcare

A Trump administration would likely continue to fight ‘Obamacare,’ and continue support for the current private insurance-based healthcare model. Despite the battles over universal coverage/single-payer format, there remains no constructed alternative to the current system for legislators to gravitate to. However, there is bi-partisan populist support for better regulation of high pharmaceutical prices and plugging some gaps to help reduce medical care costs for seniors. The industry has fought back on pharma prices, arguing that profits feed back into research and development for important new therapies, so this has largely resulted in a stalemate in recent years.

Defense

A traditional Republican policy platform has been a strong defense base. This is thought likely to persist, although the Trump administration has focused on far less global interventionism. This hasn’t manifested completely, but could continue to play a role in broader policy thinking. At the same time, China has been viewed as an increasing global military threat, which would necessitate further spending. The trend has been moving from conventional military spending towards new technologies, such as cyberwarfare, satellites, drones, etc.—all of which are technologically complex and expensive.

Immigration

The border ‘wall’ has largely been symbolic, as the Trump administration has clamped down on immigration mostly through policy, which would seem likely to continue in a second term. This has provided a seeming veil of protection for U.S. workers (championed by both candidates in different ways), but economists, who view labor in a global context, see increased restrictions of any kind as a hurdle to stronger economic performance. This is a complex issue, with outcomes the result of multi-decade trends, so the policy action of a single President may only provide a short-term impact on GDP growth. Demographics and business/worker competitiveness play a far more important role, with job training and education enhancements acting as a behind-the-scenes policy championed by many but not discussed as much by candidates in terms of specific plans.

Less stringent regulatory environment.

The President promised to rollback regulations imposed over the past administration, including the expanded use of executive orders, and that has certainly occurred. It’s likely another four years would continue regulation downsizing, in a generally pro-business way, including financial markets and their oversight.

Fiscal policy

The old stereotypes have been cast aside, as parties on both sides are in a spending mode. Republicans are a bit less in favor of direct stimulus to workers (at least in the same large amounts Democrats have been), and more in favor of corporate injections. During the pandemic, airlines and the travel industry have been lobbying especially hard for more aid. This pandemic will end up being expensive regardless of who ends up in the White House, with debt ramifications far beyond the next four years.
Monetary policy. As noted earlier, a central bank should be agnostic to political pressures, but that has been easier said than done. Pressure to lower rates or keep policy as ‘easy’ as possible is preferred, since it coincides with keeping the economy growing—which most administrations prefer under their watch. The U.S. Fed has sidestepped such pressure far better than in some countries, of course, but a continuation of the current administration and ‘tweeting’ about central bank decisions runs the risk of negatively influencing public opinion about the Fed and its functions. Politics can also appear in the nomination of certain new board members, such as the controversial Judy Shelton (who has favored revisiting the gold standard—a position rejected by many mainstream economists). Regardless, the Fed has continued to stay out of the political fray over the decades, despite a variety of administrations holding opposing views.

Judicial branch

The Supreme Court is typically not a top concern of financial markets, but with the passing of Justice Ruth Bader Ginsburg, a position on the bench has opened. Any new appointee’s political leanings can tilt the balance of key decisions toward either the conservative or progressive end of the spectrum. So, this can have ramifications for decisions involving business, regulations, or any other economically-relevant area.

Avoid Market Timing Around Politics

Sticking with a sound long-term investment plan based on individual investment objectives is usually the best course of action. Whether that strategy is to be fully invested throughout the year or to consistently invest through a vehicle such as a 401(k) plan, the bottom line is that investors should avoid market timing around politics. As is often the case with investing, the key is to put aside short-term noise and focus on long-term goals.

3 Tips for Successful Investing in an Election Year

  1. Don’t allow election predictions and outcomes to influence investment decisions. History shows that election results have very little impact on long-term returns.
  2. Expect volatility, especially during primary season, but don’t fear it. View it as a potential opportunity.
  3. Stick to a long-term investment strategy instead of trying to time markets around elections. Investors who were fully invested or made regular, monthly investments did better than those who stayed in cash in election years. (3)

Sources

  1. LSA Portfolio Analytics
  2. https://www.capitalgroup.com/ria/insights/articles/election-watch-2020.html
  3. https://www.capitalgroup.com/advisor/pdf/shareholder/MFGEBR-121-632421.pdf
  4. https://www.capitalgroup.com/ria/insights/articles/3-investor-mistakes-election-year.html

How Much Money Will You Need for Retirement?

Image by dietcheese from Pixabay

It depends on your goals, time horizon, and risk tolerance.

“Will I Outlive My Retirement Money?”

That’s one of the top fears for people who are starting to prepare for their retirement years.

So I have to chuckle a bit when I see headlines that say, “Here’s how much money Americans think they need to retire comfortably.” (1)

$1.9 million is the number, according to a nationwide survey of 1,000 employed 401(k) participants by a well-known financial services company. In 2019, the same survey reported the number was $1.7 million. But this year’s pandemic increased the total by $200,000.2

Is $1.9 million a realistic figure for retirement? It’s hard to say. The survey didn’t ask participants how they arrived at that figure or what information they used to draw that conclusion.

Determining How Much Money You Need in Retirement is a Process.

It shouldn’t be a number that you pull out of thin air.

The process should include looking at your current financial situation and developing an approach based on your goals, time horizon, and risk tolerance. The process should take into consideration all your potential sources of retirement income, and also may project what your income would look like each year in retirement.

A significant figure like $1.9 million does little good if you’re uncertain what it means for your retirement years. It’s a good idea to develop a retirement strategy combined with investment ideas designed to help you pursue the retirement you envision.

▲Retirement Saving Checkpoints

Achieving a financially successful retirement requires consistent savings, disciplined investing and a plan, yet too few Americans have calculated what it will take to be able to retire at their current lifestyle. This chart (for household incomes of $100,000 or more) helps investors to quickly gauge whether they are “on track” to afford their current lifestyle for 30 years in retirement based on their current age and annual household income. This analysis uses an appropriate income replacement rate (detailed on slide 15), an estimate of how much Social Security is likely to cover and the rate of return and inflation rate assumptions detailed on the right to determine the amount of investable wealth needed today, assuming a 10% gross annual savings rate until retirement. It is important to note that this analysis assumes a household with a primary earner who plans to retire at age 65 when the spouse is assumed to be 62. If an investor’s current retirement savings falls short of the amount for their age and income, developing a written retirement plan tailored to their unique situation with the help of an experienced financial advisor is a recommended next step.

Sources

  1. FoxBusiness.com, August 4, 2020
  2. Pressroom.aboutshwab.com, August 4, 2020
  3. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What the 2020 U.S. Election Means for Investors: 4 Potential Scenarios

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Heading into 2020, there was little doubt that the U.S. presidential election would be the biggest story of the year. The coronavirus pandemic drastically changed that narrative, pushing the election aside as a health care crisis triggered the worst economic downturn since the Great Depression.

With the election now less than 100 days away, however, investors are turning their attention back to the November 3 ballot. Amid rising COVID-19 infections, a battered economy and civil unrest in several U.S. cities, President Donald Trump is trailing former Vice President Joe Biden by a wide margin in major polls.

Many pundits are predicting defeat for the president, but it’s far too early for investors to anchor on that outcome, says Capital Group veteran political economist Matt Miller.

“We have more than three months to go before the election. That’s a lifetime in politics,” Miller says. “Given the rapid pace of developments and a compressed news cycle, we could have many turns of the wheel between now and November. In my view, the race will tighten as the Republican and Democratic campaigns shift into overdrive.”

Election Scenario Planning

For long-term investors, the outcome of U.S. presidential elections hasn’t mattered as much as staying invested and maintaining a diversified portfolio. Markets have tended to power through presidential elections — with some volatility along the way — regardless of whether a Democrat or Republican won the White House.

That said, election scenario planning plays a role in macroeconomic analysis, particularly in recent years as governments have increasingly intervened in the financial markets during times of crisis.

Excluding a contested election — which is certainly within the realm of possibility — here’s a brief look at four scenarios that could play out in November and potential implications for investors.

SCENARIO #1
Democratic Sweep

Democrats win the White House, the Senate and maintain control of the House — otherwise known as a “blue wave.” This scenario would produce the greatest degree of political change, starting with the likely reversal of Trump’s policy agenda on many fronts, including taxes, immigration and regulation.

One result could be a full or partial rollback of the Tax Cuts and Jobs Act of 2017, which included significant tax reductions. Overall corporate tax rates declined from 35% to 21%, providing a major boost to corporate earnings. A full or partial reversal would have the opposite effect, prompting investors to take that into account when estimating the overall corporate earnings outlook.

“We would see a much bigger emphasis on taxation and regulation across the board, with significant implications for the energy sector, telecommunications and technology companies,” Miller explains. “We could also see the elimination of the filibuster in the Senate, which, unlike today, would allow legislation to pass with a simple majority vote.”

SCENARIO #2
Gridlock

Biden wins the White House; Republicans maintain control of the Senate. This outcome would likely result in a gridlock scenario where it could be difficult to pass major legislation. Senate Republicans could block major Democratic initiatives, much as they did during the second term of the Obama presidency.

“In this case, I think we would see Biden governing through executive orders,” says Clarke Camper, head of government relations in Capital Group’s Washington, D.C. office. “There would be a great deal of pent-up frustration on both sides of the aisle. That’s an easy outcome to predict, though, perhaps not as easy to live with.”

Under this scenario, federal regulatory agencies would also likely exercise more power. From a financial markets perspective, that could mean more aggressive enforcement by the Securities and Exchange Commission, as well as a renewed policy push by the Department of Labor in connection with its oversight of employee retirement plans.

SCENARIO #3
Status Quo

Trump wins reelection, and Republicans keep the Senate. This scenario involves the least amount of change since it is, indeed, where we are today. The House is likely to remain in Democratic hands, so the current environment of political confrontation would continue — along with the rancorous attempts to approve COVID-19 relief legislation, including the $2 trillion CARES Act.

“Regardless of who is in the White House in January, there’s going to be a lot of post-COVID cleanup work to do,” explains Reagan Anderson, a senior vice president with Capital’s government relations team. “Today we are in stabilization mode, and we will hopefully be moving into recovery mode by 2021.”

SCENARIO #4
Unlikely Split

Trump wins reelection, and Democrats take the Senate. This scenario could set the stage for even greater hostility than we’ve seen in the past two years. While such an outcome is theoretically possible, it’s unlikely given the political dynamics of key Senate races, which increasingly track the presidential vote in each state.

“For instance, if Republicans lose key Senate races in Arizona, Colorado, Maine and North Carolina, then that’s clearly indicative of a ‘blue wave,’” Miller explains. “It’s hard to imagine Trump winning the White House if that happens.”

Either scenario involving Trump’s reelection raises another risk: If he wins without a majority of the popular vote as he did in 2016, Miller warns, that could lead to more civil unrest and further demands to abolish the Electoral College.

Investment Implications

Election season can be a tough time for investors to maintain a long-term perspective, given the strong emotions often evoked by politics. Campaign rhetoric tends to amplify negative and divisive issues. This election, in particular, is unprecedented in modern times — marked by the combination of a deadly pandemic, a global economic recession, widespread civil unrest and extreme market volatility.

Moving to the sidelines would be an understandable approach for anxious investors who prefer to wait and see what happens. As history has shown, however, that is often a mistake. What matters most is not election results, but staying invested.

Consider the historical performance of the Standard & Poor’s 500 Composite Index over the past eight decades. In 18 of 19 presidential elections, a hypothetical $10,000 investment made at the beginning of each election year would have gained value 10 years later. That’s regardless of which party’s candidate won. In 15 of those 10-year periods, a $10,000 investment would have more than doubled. While past results do not guarantee future returns, election-year jitters should not deter investors from maintaining a long-term perspective.

The only negative 10-year period followed the election of George W. Bush in the year 2000. During that decade, the S&P 500 posted a negative return amid two seismic events: the 2000 dot-com crash and 2008 global financial crisis.

In contrast, the biggest election year return would have been in 1988, when George H. W. Bush won office, and $10,000 would have grown to $52,567 by the end of 1997.

By design, elections have winners and losers, but the real winners have been investors who stayed the course and avoided the temptation to time the market.

Sources

  1. https://www.capitalgroup.com/ria/insights/articles/election-watch-2020.html
  2. https://www.capitalgroup.com/advisor/pdf/shareholder/MFGEBR-121-632421.pdf

Matt Miller is a political economist at Capital Group and host of the Capital Ideas podcast. He was formerly a senior advisor at McKinsey, a Washington Post columnist and author, host of public radio’s “Left, Right & Center” program, and a Clinton White House aide. He holds a law degree from Columbia and a bachelor’s degree in economics from Brown.

Clarke Camper is head of government relations at Capital Group. Prior to joining Capital, he was head of government affairs and public advocacy at NYSE Euronext. Before that, he was a vice president of external affairs at GE Capital. He holds a law degree and a master’s degree in public policy from Harvard, and a bachelor’s degree in public policy from Stanford.

Reagan Anderson is a member of the government relations team at Capital Group. Prior to joining Capital, Reagan worked as a senior vice president for congressional affairs at the Consumers Bankers Association. Before that, she held various positions in government affairs for the New York Stock Exchange and the Private Equity Growth Capital Council. Reagan holds a journalism degree from Ohio University.

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