Retirement Plan Update, Q2 2024

Market Recap:

Markets experienced a small pullback at the start of the quarter but came back to finish strong, achieving new highs in the last week of the quarter.  Investors remain optimistic about stocks, though a high concentration of returns in a small number of companies creates questions about how long the rally can continue at this pace.  The largest companies, especially in Technology, continue to dominate the stock market returns, while the broader market gains have been more modest.  The result was an unusual first half of the year, where markets had more than an 11% difference in return, favoring the size-weighted S&P 500 over the equal-weighted index of the same companies.  Bonds have largely been grinding sideways for several months based on shifting expectations for interest rate cuts. 

It's impossible to predict the outcome in most market conditions, but these have been especially tough. The economy is slowing down a bit, which helps to reduce inflation and make progress toward the targeted rate of 2%.  In this case, that slowdown is a good thing, but there’s also a risk that the economy will slow down too much and result in a recession, which nobody wants.  That’s the challenge ahead for the Fed, which has been cautious about cutting rates too soon in case inflation picks back up.  In a time that highlights the challenge of predicting market movement, the results achieved by regular contributions to your retirement plan underscore the power of these benefits to build more shares and retirement savings over time.

Roth Option Reminders

Many retirement plans offer a Roth option within the plan.  Participants often don’t know which option they should choose, pre-tax or Roth.  Pre-tax contributions are just that; they are made with pre-tax dollars.  You don’t pay taxes on that money in the current year.  The funds grow tax-deferred until you take distributions in retirement.  The theory is that you don’t pay taxes now when you’re working and potentially in a higher tax bracket, putting off paying taxes until later when you’re potentially in a lower tax bracket.  For the Roth option, contributions are made with after-tax dollars, so you pay taxes on those contributions this year.  The big deal about the Roth option, though, is that the earnings grow tax-free until you retire and beyond. That means when you withdraw those funds in retirement, you don’t have to pay taxes on that money. Because there are no taxes due, the IRS also doesn’t require you to take a Required Minimum Distribution (RMD), giving investors the flexibility to let that money continue growing tax-free if they don’t need it.  Generally, participants in higher tax brackets today or with a shorter window to retirement may benefit more from the pre-tax option.  Younger participants with a longer time until retirement, OR participants in lower tax brackets today, may benefit more from the Roth option.

As always, please consult with your plan’s advisor if you would like help assessing your personal situation.