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What does history tell us about what comes after two fabulous years of 20%+ consecutive returns?
- In eight of the nine historical instances, cumulative returns in the following two years were lower
- In five instances, cumulative returns, while lower, were still positive
- The three instances where cumulative returns were negative coincided with either recession (1957) or the Great Depression (1929-30 and 1937-38)
- In one instance (1995-1998) returns following the two years of 20%+ consecutive returns were higher
This data suggests that if the US economy avoids recession for the next two years, then there is a good chance that US stock returns will be positive in the 2025-2026 period.
The JP Morgan researcher Michael Cembalest (who compiled the data) has this to say about 2025:
- Expect a 10% - 15% correction at some point in 2025
- In 60 of the past 100 years there has been at least a 10% correction
- In 40 of the past 100 years there has been at least a 15% correction
- US equity markets should end the year higher than they began
- Be sure to have plenty of liquidity to take advantage of what might be a volatile year
Other Voices: four researchers that I respect and follow closely from three firms have made the following comments in their 2025 outlooks:
- Torsten Slok, Chief Economist at Apollo: “Incomes are high, stock prices are high, home prices are high, debt levels are low, interest rate sensitivity is low, and banks are more willing to lend to households. There is significant upside risk to US growth, inflation, and interest rates.”
- Howard Marks, co-founder of Oaktree Capital: “The markets, while high-priced and perhaps frothy, don’t seem nutty to me.”
- Nick Colas & Jessica Rabe co-founders of DataTrek: “We’re sure 2025 will have its share of concerns, but, in the end, we see little that could derail the ongoing move to higher stock prices.”
As we move into the next year, my take on 2025 is:
- Stocks continue to be an important part of the investment portfolio and a good bet for long-term investors
- Return prospects for intermediate-term bond funds have improved as Treasury bond yields have moved up toward 5%
- Inflation resurgence and surprise economic policies from the incoming Trump administration pose the biggest potential risks for financial markets
- While we’re likely to see episodes of stock selling and lower prices in 2025, conditions are not present for the onset of the next bear market
- Portfolio returns are likely to be satisfactory for many investors this year, though probably not as strong as in 2023 and 2024
Retirement Plan Super Catch Ups
Savers age 50 and older who are participants in retirement plans are permitted to do “catch-up” contributions of $7,500 in 2025. Add this to the annual elective deferral limit of $23,500, and over-50s can put up to $31,000 into their retirement plans.
This applies to most 401(k) participants, as well as those with 403(b)s, governmental 457 plans, and the federal government’s Thrift Savings Plan.
A subset of older 401(k) plan participants can make even higher catch-up contributions, starting in 2025. SECURE Act 2.0 increases the catch-up contribution limit for those participants who are age 60, 61, 62, or 63.
For these savers, the deferral limit is the greater of $5,000 or 150% of the normal “age 50” catch-up contribution limit ($7,500 in 2025). The 2025 super catch up equals $11,250, which means the total eligible for deferral for this subset is $34,750. This limit will be indexed for inflation starting in 2026.
Workplace plans need to offer this “super catch up” option for workers to be able to make a super catch-up contribution. Not all plans have this feature. Plan participants age 60-63 should check with their retirement plan administrator to see if this option is available.
Once a retirement plan participant reaches age 64, they revert to the age 50 catch-up contribution in effect for that year.
Altogether, the availability of "super catch-up" contributions could be attractive for many folks within the applicable age range and who have the funds available to do so. Consider that a couple where each partner is eligible would be able to contribute nearly $70,000 in total!
Social Security Fairness Act
On January 5, 2025 the Social Security Fairness Act became law. It will provide new or additional Social Security benefits for about three million individuals who receive government pensions from jobs not covered by Social Security.
Two parts of the law governing Social Security payments have been eliminated: the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). The new law eliminates the reduction of Social Security benefits that resulted from WEP and GPO.
Upon signing the legislation into law, President Biden said those affected will receive lump sum payments from 2024 in 2025. President-elect Trump also supported the legislation.
Additional details of the Social Security Fairness Act relating to WEP and GPO are:
- The new law repeals the Windfall Elimination Provision (WEP) which reduced Social Security or disability benefits for certain public sector workers such as teachers, nurses, police officers, and firefighters who receive pensions from jobs where they didn’t pay Social Security payroll taxes.
- WEP applied to 2.1 million beneficiaries, or 3.1% of the total in 2022, according to the Social Security Administration. Most retirees affected by the WEP have pensions that are higher than average Social Security benefits, the Center on Budget and Policy Priorities said.
- The law also eliminates the Government Pension Offset (GPO) which reduces Social Security benefits for about 750,000 spouses, widows, and widowers who receive pensions from jobs not covered by Social Security taxes.
Most state and local government workers (and all federal workers hired in 1984 or later) are in jobs covered by Social Security. Pensioners who worked in Social Security-covered employment in their government jobs will not receive increased Social Security benefits from the law.
According to the non-partisan news source TheHill.com, which focuses on US politics and government policy, actually making the new benefit structure a reality will be a challenge for the Social Security Administration (SSA).
An example of the additional administrative burden on the SSA: prior to the new law, individuals affected by the Government Pension Offset may not have been eligible to receive any Social Security spouse or survivor payments, so a number of these individuals likely did not file for Social Security and, as a result, are not in the SSA’s computer systems.
The Congression Budge Office expects the SSA will have to process new applications as a result of the legislation, and the new applications will lead to an extra 70,000 people coming onto the rolls for payments.
The Hill comments that SSA’s administrative budget has been in sharp decline over several years, and the SSA recently testified that it now has “one of the lowest staffing levels in 50 years.”
In their most recent communication from January 6, the SSA said: “The Social Security Administration is evaluating how to implement the Act. We will provide more information as soon as available.”
Keep in mind that the Social Security Fairness Act is retroactive to January 2024, so beneficiaries affected by the repealed provisions should receive lump-sum payments for benefits lost during 2024.
If you have been affected by WEP and GPO, what can you do to ensure that you receive your benefits?
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If you previously have filed for Social Security, the SSA is not recommending that you take action at this time (though you may wish to verify that your contact and banking information with the SSA are up-to-date)
- If you are receiving a public pension and are interested in filing for Social Security benefits, you may file online at www.ssa.gov/apply
- Keep an eye on the SSA website for further announcements at: www.ssa.gov/benefits/retirement/social-security-fairness.act
- Watch your email for communication from your former employer on this topic
- Check your bank statements closely on a regular basis during 2025 to see if / when your payment has been adjusted and to verify that you’ve received a lump sum payment related to 2024
College Planning: High School Juniors In Focus
Our colleague and college specialist Donna Cournoyer contributed the following update for college planning
A new year often brings with it a chance to review and renew plans and aspirations and to take action on important items and goals.
January is a good time to solidify college planning goals and to start taking action on steps toward the goals you have for seeing your student off to college.
It may seem like a long way off, but the next year and a half likely will be a blur!
Junior year is important for admissions applications, so keep your high school Junior’s focus on their studies and activities.
Here are some steps you can add to your checklist and start completing now:
January-March
- Register for Spring SAT and/or ACT exams. Consider the SAT Subject Test.
- Make a list of important criteria for which college you will attend: do you want a large university? A small community? What majors interest you? What sports and activities? Are there unique services you need? Will the school have these? What is the Cost of Attendance? And so on.
- Make your college list and find out when they have Spring tours- begin visiting schools on your list. Start with the closer schools.
- Do some online research on your school list and see if they measure up to your criteria and find out all you can and make lists of comparisons, including price!
April-May
- Finish your year well! Keep your grades up- schools will be requesting your junior transcripts for college applications.
- Consider adding activities to your schedule if you are not involved in many.
- Continue to visit colleges. Many Open Houses are in Spring. Make any travel plans ahead of time, if needed. Make a list of questions to ask beforehand.
- Read some college applications so it is not all new to you in Fall.
- Make a list of potential people you may want to ask for letters of recommendation. Teachers, employers, counselors, etc.
- Explore summer opportunities for work and include college campuses if you are near one.
For more information on checklists for Summer, Fall and Senior Year, please see previous articles:
How to Retire
Researcher Christine Benz, Director of Personal Finance and Retirement Planning for Morningstar, recently published How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement.
In the book, Benz interviews academicians and practitioners from the world of personal finance and retirement, with specialties in financial planning, tax, estate planning, insurance, asset allocation, Social Security, healthcare, and hospice care.
Each chapter is structured in a Question-and-Answer format, so the reader is able to engage as an observer of an interview.
In addition to lots of good advice about managing finances in retirement, Benz also moves beyond dollars and cents.
She says: “When, and how to retire is less than 50% related to money. Yes, you need to have the funds. But more important, you need:
- A network of people who care about you
- To practice healthy habits and take care of your body
- A plan for your days
- Activities that bring you joy”
The book is both information rich and thought provoking, and will be a good resource for those in retirement, or approaching that milestone.
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