CHARLES SCHWABCHARLES ONWARD

INSIGHTS FOR CLIENTS INVESTED IN THEIR FINANCIAL FUTURES FALL 2020 FLY RIGHT

FALL 2020 Fly Right 1 Reboot your finances 2 Rightsize your risk tolerance 3 Buy and sell the smart way Page 13 Page 22 Page 26 Dear Client,

With the disruption to the economy and market volatility reaching the highest levels since the Great Recession, few of us have been spared the financial turmoil caused by COVID-19. That’s why we’ve assembled guidance to help you move forward in an uncertain world, from getting your financial house in order (page 13), to reassessing your risk exposure (page 22), to making strategic— rather than emotional—buy and sell decisions (pages 20 and 26).

Elsewhere in this issue, we dissect the new rules for inherited IRAs (page 11), offer tips for converting your nest egg into a reliable monthly paycheck in retirement (page 30), and much more.

If you need help navigating your finances, I encourage you to reach out to us at 877-297-1126. We welcome the opportunity to speak with you about your financial situation and goals.

Sincerely,

Joseph Vietri Senior Vice President, Investor Services

See page 42 for important information. (0820-0NM2) Fall 2020 CONTENTS

5 13 26 30

DEPARTMENTS FEATURES

2 SCHWAB ORIGINALS PERSPECTIVES 22 Reassessing Risk Learn, listen, and watch. 13 What investors can do How much risk can you really to rebuild their finances. handle? The answer may By Rob Williams surprise you. 3 CEO’s NOTE Whatever your circumstances, 16 How to choose the right we’re here to help. target-date fund for you. 26 Investing Mindfully By Walt Bettinger By Michael Iachini The secret to more purposeful investment 17 Using investment losses to decisions. THE BOTTOM LINE your advantage. 5 Outsize gains + outsize By Hayden Adams losses can = long-term success. 30 Get Cracking Convert your nest egg into a 7 How much tax to withhold in 20 TRADING reliable monthly paycheck. retirement. Three Schwab Trading Services professionals on regrouping 8 What to know before adding after a market crash. 34 Parting Ways socially responsible investments Divorce after age 50 presents to your retirement portfolio. special challenges. 38 SPOTLIGHT 9 Shopping for bonds. Moving money on schwab.com; Onward (ISSN 2330-3514) is published quarterly. ™ Schwab Stock Slices ; This publication is mailed at Standard A postal Personalized Portfolio Builder. rates. ◆ If you prefer not to receive Onward, 11 FAMILY MATTERS please call 877-908-0065. ◆ POSTMASTER: What the new time limit on Send address changes to Onward, Charles Schwab & Co., Inc., P.O. Box 982600, El Paso, inherited IRAs means for your 44 ON YOUR SIDE TX, 79998-2600. Onward does not assume any estate plan. Perseverance pays off. liability resulting from actions taken based on the By Charles R. Schwab information included in this magazine. Mention of a company or security does not constitute endorsement. Some contributors to Onward may have active positions in securities or companies discussed in this issue. MAG105674Q320-00

ON THE COVER: SCULPTURE BY DIANA BELTRAN HERRERA FALL 2020 | ONWARD | 1

SCHWAB ORIGINALS

Learn Listen

Whether it’s when to adjust your risk exposure, how Join Wharton professor and decision scientist to sell in a down market, or where to find decent Katy Milkman for Season 6 of our podcast yields, we answer your most-pressing investment Choiceology™. Listen and subscribe at questions at schwab.com/volatility/faqs. schwab.com/choiceology.

Watch Follow

Schwab’s Trading Up-Close videos unpack key Fixed income @kathyjones trading concepts and explain how to use a variety of International @jeffreykleintop fundamental and technical indicators. Watch now at Markets and economy @lizannsonders schwab.com/trading-up-close. Personal finance @carrieschwab Research @schwabresearch Trading @randyafrederick Washington @miketownsendcs

(0820-0LYD)

Joe Carberry Mark W. Riepe, CFA® Sara Smith Senior Vice President, Senior Vice President, Editor in Chief Communications & Schwab Center for Owned-Channel Marketing Financial Research Jeremy Hartley and Community Managing Editor Tamar Dorsey Helen Loh Vice President, Stacia Miller Senior Vice President, Brand Journalism Associate Managing Retail Client & Editor

Owned-Channel Marketing PORLAN MIGUEL BY ILLUSTRATIONS

2 | CHARLES SCHWAB | FALL 2020 CEO’s NOTE

n T his year has eclipsed even the If you’re looking for market com- Come Great Recession in terms of the mentary, schwab.com/insights now personal and financial hardship so offers a curated selection of timely What May many families have had to endure. All analyses from Schwab experts as well of us have been impacted by COVID-19 as time-honored investing strategies Whatever the circumstances, in one way or another. for when markets turn volatile. we’re here to help. In these uncertain times, we at n If you have questions about your Schwab are here to support you in any account or how to use various way we can. That’s why we’ve been Schwab services, our new schwab.com/ rolling out resources to help make FAQs provides quick answers. sense of the current environment and n And, of course, you can reach us keep your finances on track: 24/7 at 800-435-4000 with any ques- tions or concerns. We’ve been rolling out At the same time, we’ve taken a resources to number of measures to safeguard the health and well-being of our employ- help keep ees so they can stay safe and care for your finances their families while also continuing to on track. serve you. Although the current crisis is unprecedented, this is not our first downturn, nor is it likely to be our last. But that doesn’t make us any less opti- mistic about the future. We still believe in the power of investing—and look forward to helping you achieve your goals, come what may.

Sincerely,

Walt Bettinger President & CEO

See page 42 for important information. (0820-0NLM)

FALL 2020 | ONWARD | 3 Be a true-blue friend.

Refer your friends and family, and they can get up to $500.

Friends and family earn a Bonus Award when they make a qualifying net deposit of cash or securities.

Net Deposit Bonus Award $1,000–$24,999 $100 Visit schwab.com/refer or call 800-398-8640 for details. $25,000–$49,999 $200 $50,000–$99,999 $300 $100,000+ $500

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New-to-fi rm clients who are referred, open an eligible account, enroll in the offer, and make a qualifying net deposit of $1,000–$100,000+ within 45 days can earn a Bonus Award of $100–$500. Schwab may change the terms or terminate this offer at any time. See schwab.com/refer for details. While we greatly appreciate all client business, we are unable to accept referrals from clients who hold only a PCRA or CRA with Schwab. ©2020 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. CC4260847 (0820-049K) ADP110412OW-00 (06/20) 00247392

ADP110412OW-00.indd 1 6/23/20 9:01 AM CONTENTS PORTFOLIO MANAGEMENT | TAXES | SOCIALLY RESPONSIBLE INVESTING | AND MORE

A fter months of fast drops and your long-term investments. “Those The Law of sudden rises in the market this deep valleys don’t look quite so scary year, investors may have all but forgot- if you’re able to zoom out from the Averages ten 2019’s record runup of nearly 30%. day-to-day and see the big picture,” But recency bias—or the tendency to says Mark Riepe, head of the Schwab How outsize gains plus believe something is more likely to Center for Financial Research. outsize losses can add up to happen again because it happened The fact is, the S&P 500 returned long-term success. recently—highlights the need to look an average of about 10.2% annually

ILLUSTRATION BY JOSIE PORTILLO JOSIE BY ILLUSTRATION beyond the present when it comes to from its inception in 1926 through

FALL 2020 | ONWARD | 5 THE BOTTOM LINE

2019 (see “The bigger picture,” below). accounts. “You shouldn’t focus on that your financial situation hasn’t funda- In other words, even the market’s money every single day,” Mark says. mentally changed,” Mark says. “If it has, darkest days—including three Black “At best, you’ll drive yourself crazy. At revisit your financial plan.” Mondays (10/28/1929, 10/19/1987, and worst, you’ll be tempted to sell when As for external events, remember 08/24/2015) and numerous other mar- markets turn against you.” that, good or bad, this too shall pass. ket corrections—couldn’t knock the Of course, you shouldn’t completely “Just as you shouldn’t make plans based index off its long-term march upward. ignore your investments, either. “Review on the good times lasting forever,” If you have a hard time stomaching your statements and adjust your hold- Mark says, “neither should you make volatility, Mark’s advice is to limit ings as necessary in order to maintain plans assuming the bad times will last how often you check your long-term your target asset allocation—assuming forever—because they won’t.”

The bigger picture Despite nearly a century of extreme peaks and valleys, the S&P 500 has averaged an annual return of 10.2% since its inception.

60% Average annual return: 10.2% 50%

40%

30%

20%

10%

0%

S&P 500 annual returns annual S&P 500 –10%

–20%

–30%

–40%

–50% 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Source: Schwab Center for Financial Research. Data from 1926 through 2019. Note: Annual returns from 1926 through 1970 are represented by the Ibbotson U.S. Large Stock Index, which comprised the same components as the S&P 500 and its predecessor indexes.

NEXT See page 42 for important information. ◆ Please read the Schwab Intelligent Portfolios Solutions™ STEPS disclosure brochures for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs. Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are made available through Charles Schwab & Co., Inc. (“Schwab”), a dually Investing with a robo-advisor can help registered investment advisor and broker dealer. ◆ Portfolio management services are provided by Charles keep your emotions in check. Learn Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are subsidiaries of The Charles Schwab more about Schwab’s robo-advisor, Corporation. ◆ Past performance is no guarantee of future results and the opinions presented cannot be ◆ ® viewed as an indicator of future performance. Investing involves risk, including loss of principal. Schwab Intelligent Portfolios , at ◆ Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in schwab.com/intelligent. directly. For more information on indexes please see schwab.com/indexdefinitions. (0820-0G4K)

6 | CHARLES SCHWAB | FALL 2020 Tax Withholding in Retirement How to help ensure you prepay enough taxes once you’re no longer working.

D uring your working years, you typically have one primary source of income: your paycheck. “In retirement, however, your income will likely be drawn from multiple sources—and the tax withholding rules for each may vary,” says Hayden Adams, CPA, CFP®, and director of tax planning at the Schwab Center for Financial Research. Here’s how federal tax withholding generally works for some common sources of retirement income (state withholding may also apply): are treated as wages using the IRS If you’re unsure how much you withholding tables in Publication 15 should have withheld each year, you n Traditional, SEP, and SIMPLE (see irs.gov/pub/irs-pdf/p15.pdf). You can use the IRS’ Tax Withholding IRAs: Unless you specify otherwise, can set up or change your withholding Estimator (see irs.gov/individuals/ your plan’s custodian will with- by submitting Form W-4P to the payer. tax-withholding-estimator) to calcu- hold 10% on taxable distributions. n Social Security: Withholding isn’t late your overall tax obligation. Generally speaking, you can change required on Social Security payments, “That said, your estimated tax obli- or eliminate your withholding at but a portion of your benefits may be gation is just that—an estimate—and any time by reaching out to your taxable, depending on your income. will not account for any fluctuations in individual retirement account (IRA) Visit ssa.gov/planners/taxes.html to income throughout the year,” Hayden custodian. see how benefits are taxed. You can says. As a result, it’s wise to work with n 401(k), 403(b), and other qualified set up or change your withholding by a tax professional. He or she may even workplace retirement plans: Plan submitting Form W-4V to the Social recommend you make quarterly esti- providers typically withhold 20% Security Administration. mated tax payments in addition to the on taxable distributions—unless n Taxable bank or brokerage amounts already being withheld. “That the withdrawal is made to satisfy accounts: In most instances, taxes way, you won’t end up underpaying the annual required minimum are not withheld from capital gains, the IRS throughout the year, which distributions (RMDs) mandated distributions, or other income gener- could result in penalties,” Hayden says. 2 by the IRS, which conform to IRA ated from such accounts. However, 1Under the Coronavirus Aid, Relief, and Eco- withholding rules.1 you may want to withhold more nomic Security Act, RMDs have been waived for 2020. | 2Certain taxpayers may be subject to n Annuities and pensions: Taxable elsewhere or pay quarterly estimated backup withholding, which requires a payer periodic (e.g., weekly or monthly) taxes to help cover any tax liabilities to withhold tax from payments not otherwise subject to withholding. Learn more at irs.gov/ NEXT payments from annuities and pensions produced by these assets. taxtopics/tc307. STEPS

Learn how Schwab can help you generate income See page 42 for important information. ◆ This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. and make tax-smart withdrawals in retirement at Where specific advice is necessary or appropriate, Schwab recommends consultation with a

ILLUSTRATION BY JOSIE PORTILLO JOSIE BY ILLUSTRATION schwab.com/retirementincome. qualified tax advisor, CPA, financial planner, or investment manager.(0520-0GJR)

FALL 2020 | ONWARD | 7 THE BOTTOM LINE

market, they may offer less diversifi- SRI and Your 401(k) cation than, say, a broad-based index mutual fund or exchange-traded fund What to know before adding socially responsible investments (ETF). For example, the VanEck Vectors to your retirement portfolio. Environmental Services ETF—which invests at least 80% of its assets in the O nly about 3% of 401(k) plans Here are four questions to consider stocks of companies involved in the currently offer SRI funds1— when selecting SRI funds for your environmental services industry— which use environmental, social, and retirement portfolio. allocates a whopping 41.67% to its governance (ESG) criteria to guide their top five holdings.3 “At such high con- investment decisions—but that figure 1 What’s its focus? Some funds centrations, a single stock could have may rise as investors push for funds broadly integrate ESG criteria into undue influence on the performance that both align with their values and their investing practices or focus on of your portfolio,” Michael cautions. “If deliver competitive returns. Indeed, companies that aim to solve specific that concerns you, look for funds with one survey found that 56% of plan environmental or social issues, lower allocations to any one company.” participants prefer investing in socially whereas others exclude certain kinds responsible companies.2 of companies—such as those that sell 4 What’s its annual fee? Every dollar “If investing with your values is tobacco products. you pay in fees is one you can’t invest important to you, SRI funds are a great for future growth—and that’s doubly way to go—provided they fit your 2 Does it have a solid track record? important when it comes to your goals,” says Michael Iachini, vice presi- “Generally speaking, you want to see retirement savings. “Some SRI funds dent and head of manager research at a track record of at least three years to charge astronomical fees while others Charles Schwab Investment Advisory. ensure the fund’s strategy is sound and are more on par with low-cost index “For example, retirement plans that not just a flash in the pan,” Michael says. funds,” Michael says. “Be sure you know offer SRI funds typically have only one what you’re paying before you invest.” option, and that option may or may 3 Is it diversified?Because SRI funds not be the best fund for you.” tend to focus on a narrower slice of the If your workplace retirement plan offers limited SRI choices—or none Growing good at all—consider investing through an individual retirement account, which In 2018, $11.6 trillion in assets were managed using ESG criteria in the U.S. typically provides access to the same alone—a 43% increase over 2016. investment options as a traditional Assets under management brokerage account.

2018 1Ron Lieber, “How to Get Socially Conscious Funds Into Your 401(k),” nytimes.com, $11.6 trillion 01/10/2020. | 2The Cerulli Edge—U.S. Retirement +43% Edition, Trends to Watch in 2019, Q1 2019. | 3Schwab.com, as of 05/22/2020. 2016 $8.1 trillion See page 42 for important information. ◆ Investors should consider carefully information contained in the prospectus, or if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can obtain a prospectus by calling Schwab at 800-435-4000. Please read it carefully before investing. ◆ The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before Source: Report on US Sustainable, Responsible and Impact Investing Trends, US SIF, 2018. making any investment decision. ◆ Investing involves risk, including loss of principal. To research SRI mutual funds for your portfolio, log in to schwab.com/ ◆ Socially screened funds exclude certain NEXT fundscreener and select Socially Conscious under the Basic Criteria investments and therefore may not be able to STEPS take advantage of the same opportunities or dropdown. To research SRI ETFs, log in to schwab.com/ETFscreener and market trends as funds that do not use social

select Socially Conscious under the Portfolio dropdown. screens.(0520-0PUR) PORTILLO JOSIE BY ILLUSTRATIONS

8 | CHARLES SCHWAB | FALL 2020 “Too many brokerages not only etc.—which, as with the markup, they Shopping for charge far too much but also conceal may or may not be required to disclose. such costs from investors,” Kathy says. Bonds So, before you buy your next bond, 4 What’s the accrued interest? When ask your broker these important ques- you buy a bond between coupon pay- You comparison shop for tions—and be sure you’re satisfied with ment dates, you’ll owe the seller any most everything else—so the answers. accrued interest since the last payment why not for bonds? date. This cost has nothing to do with 1 What’s the market price? This will your broker but does factor into the W ould you ever buy a car—or reflect the actual price it costs your total cost. even a new pair of shoes—with- broker to buy a bond from another out looking for the best deal? Probably dealer (which may include fees paid to 5 What’s the overall cost? This will not. So why don’t more investors the dealer). include all of the above: the market comparison shop for bonds? price, plus any markup, additional fees, “Many investors simply don’t realize 2 What’s the markup? Markups refer and accrued interest. different firms charge different prices to the difference between the market for the exact same bond,” says Kathy price of a bond and the price a broker- “Be wary of firms that fail to give you Jones, senior vice president and chief dealer charges to sell it. Markups are direct answers about their fees,” Kathy fixed income strategist at the Schwab generally wrapped into the price—and says. “They’re probably being opaque Center for Financial Research. may or may not be disclosed. (For more for a reason.” The problem stems from the fact on Schwab’s fixed income pricing, visit Indeed, even seemingly small differ- that bonds don’t trade on centralized schwab.com/fixed-income-pricing.) ences in markups can mean giving up markets like stocks, which makes hundreds, if not thousands, of dollars their true cost difficult, if not impos- 3 Are there additional fees? In addi- in total returns over time. And with sible, to ascertain. Instead, most are tion to markups, brokers may charge prices and yields fluctuating to the purchased “over the counter” through miscellaneous fees to cover adminis- degree they have recently, it pays to a brokerage firm that buys a bond on trative services, clearing fees, overhead, shop around. your behalf—and tacks on a fee, or markup, that can range from a fraction See page 42 for important information. ◆ Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various of a percent to several percentage other risks, including changes in credit quality, market valuations, liquidity, prepayments, early points, depending on factors such as redemption, corporate events, tax ramifications, and other factors. Lower-rated securities are bond liquidity and the firm executing subject to greater credit risk, default risk, and liquidity risk. ◆ In the bond market, there is no NEXT centralized exchange or quotation service for most fixed income securities. Prices in the secondary the trade. market generally reflect activity by market participants or dealers linked to various trading systems. STEPS Bonds available through Schwab may be available through other dealers at superior or inferior prices compared to those available at Schwab. All prices are subject to change without prior notice. ◆ ® Schwab reserves the right to act as principal on any fixed income transaction, public offering, or Schwab BondSource gives you access to a broad securities transaction. When Schwab acts as principal, the bond price includes our transaction fee selection of bonds, including new-issue municipal and may also include a markup that reflects the bid-ask spread and is not subject to a minimum or and corporate bonds, at the best price available maximum. When trading as principal, Schwab may also be holding the security in its own account prior to selling it to you and, therefore, may make (or lose) money depending on whether the to Schwab. Log in to schwab.com/bondsource to price of the security has risen or fallen while Schwab has held it. When Schwab acts as agent, a get started. commission will be charged on the transaction. (0820-06TJ)

FALL 2020 | ONWARD | 9 Schwab offers hundreds of ways to make an impact through socially responsible investing.

Socially responsible investing (SRI) helps you choose investments based on environmental, social, or ethical factors. Schwab’s research tools make it easy to choose from over 500 SRI mutual funds and over 80 SRI ETFs.

Plus, if you are looking for more personal guidance, you have the option to work with your Schwab Financial Consultant who can help you make the most of SRI at Schwab.

Learn more at schwab.com/SRI.

Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. Please read it carefully before investing.

Investing involves risk, including loss of principal.

Please note that there are certain requirements for working with a dedicated Financial Consultant.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Charles Schwab & Co., Inc., 211 Main Street, San Francisco, CA 94105

©2020 Charles Schwab & Co., Inc., All rights reserved. Member SIPC. (0920-05AP) ADP111542-00 (08/20) 00247790 I f you’ve built up sizable retire- accounts, so long as they took their Hard Stop ment accounts, recent changes IRS-mandated required minimum to the law may make it harder to ensure distributions (RMDs) each year. What the new time limit that your heirs, rather than the IRS, are Because RMDs are calculated based on on inherited retirement the main beneficiaries of these assets. life expectancy, the younger the heir, accounts means for your In the past, nonspouse beneficiaries the smaller the RMD—meaning more estate plan. —children, grandchildren, siblings, of the inherited assets could remain nieces, nephews, friends, etc.—of invested, potentially increasing their inherited tax-deferred accounts such growth prospects over time. as 401(k)s or individual retirement However, the Setting Every Comm­ accounts (IRAs) had their entire unity Up for Retirement Enhancement

ILLUSTRATION BY SHOUT BY ILLUSTRATION lifetimes to deplete the assets in such (SECURE) Act of 2019 put an end

FALL 2020 | ONWARD | 11 FAMILY MATTERS

to that for many beneficiaries. withdrawals over two 10-year periods, clock starts in the year the assets are Nonspouse beneficiaries who inherit which could help minimize the associ- inherited. Plus, they might also be sub- such accounts in 2020 or later must ated taxes. ject to the so-called kiddie tax—which now deplete them within 10 years of “Obviously, you can’t ever really taxes a child’s unearned income above the decedent’s passing—unless the know how much longer the surviving a certain threshold ($2,200 in 2020) at beneficiary is: spouse will live,” Susan says, “but such the parent’s marginal rate. a strategy will likely add at least a bit Chronically ill or disabled, as defined more flexibility for your beneficiaries.” 4 Pay it forward by law. In 2015, Congress made 10 or fewer years younger than the 2 Convert to a Roth perma­nent the qualified charitable decedent. If the majority of your retire- dis ­trib­ution (QCD) rule, which allows The decedent’s child and younger ment assets are in an account such as traditional IRA owners to satisfy part than the age of majority (18 in most a traditional IRA or 401(k), you may or all of their RMDs in a given year by states, or up to 26 if he or she is still in want to consider converting them to gifting up to $100,000 of IRA assets to school). The 10-year time limit kicks in a Roth IRA as part of your estate plan. a qualified charitable organization (but once the child comes of age. Inherited Roth IRAs are also subject not to a donor-advised fund). QCDs to the new 10-year withdrawal rule— are excluded from adjusted gross “Because of the new law, those with but because withdrawals from such income, so long as the account owner ample retirement assets may need to accounts generally are tax-free, the made no tax-deductible contributions rethink their estate plans,” says Susan money won’t count as income for your to the IRA during the year in which he Bober, a Schwab wealth strategist beneficiaries. or she also made the QCD. based in Indianapolis. You’ll owe taxes on any pretax con- By drawing down the value of your Here are four strategies that could tributions and earnings at the time tax-deferred retirement accounts help mitigate the tax consequences of the Roth conversion, but once the through QCDs, you can lessen the of the new provision for your assets are in the Roth IRA, you won’t potential tax hit on your beneficiaries beneficiaries. owe any additional tax if you make while also supporting the causes and withdrawals during your lifetime (pro- organizations you care about. Coordinate with your vided you’re at least age 59½ and have 1 spouse had the Roth for five years1). Better Talk it out If you and your spouse both have still, Roth IRAs aren’t subject to RMDs The effects of the SECURE Act on estate significant sums in your tax-deferred during your lifetime, meaning you can planning are not limited to the new retirement accounts and have shared let the account grow untouched until it rules around depleting tax-deferred beneficiaries, it may make sense to eventually passes to your beneficiaries, retirement accounts, so be sure to leave such accounts not to each other potentially boosting its value. consult your financial advisor, estate but directly to your beneficiaries. “Of course, you’ll need to be able to attorney, and/or accountant when “It may seem counterintuitive, but stomach the upfront tax hit from the establishing or revisiting your plan. this strategy could benefit both your conversion, so it’s best to time it for a “Your passing will undoubtedly be surviving spouse and your other year in which your income is relatively hard on your loved ones,” Susan says. beneficiaries,” says Tina White, a low,” Tina says. “Your accountant or “But with a little advance planning, Schwab financial planner also based tax planner may even advise you to you can at least shield them from any in Indianapolis. How? convert the assets over several years to unintended consequences where their better manage your tax burden.” tax liability is concerned.” n Skipping your spouse frees them 1 from having to take RMDs from your Note that each Roth conversion has a separate 3 Spread the wealth five-year waiting period. accounts in addition to their own. Another strategy is to spread Your nonspousal beneficiaries could See page 42 for important information. your tax-deferred retirement assets ◆ This information does not constitute inherit your and your spouse’s retire- among a greater number of benefi- and is not intended to be a substitute ment assets in two waves—once when ciaries. Instead of leaving them to just for specific individualized tax, legal, or you pass and again when your spouse investment planning advice. Where specific your children, for example, consider advice is necessary or appropriate, Schwab passes, or vice versa. That way, they can distributing them to their children, recommends consultation with a qualified tax LET’S potentially spread out their mandatory as well. advisor, CPA, financial planner, or investment ◆ TALK manager. Roth IRA conversions require Just be careful when including grand- a 5-year holding period before earnings children who are minors. Unlike your can be withdrawn tax free and subsequent Need help thinking through your estate plans? minor children, minor grandchildren conversions will require their own 5-year holding periods. In addition, earnings Call your Schwab financial consultant today to are not exempt until they reach the age distributions prior to age 59½ are subject to schedule an appointment. of majority—meaning their 10-year an early withdrawal penalty. (0820-06SM)

12 | CHARLES SCHWAB | FALL 2020 CONTENTS FINANCIAL PLANNING | TARGET-DATE FUNDS | TAX-LOSS HARVESTING

You’ll Be Back What investors can do to rebuild their finances. By Rob Williams

T he market sell-off triggered by COVID-19 may have shaken your confidence and taken at least a near- term toll on your finances. But times of uncertainty are also an opportunity to reevaluate your priorities. In fact, research has shown that spe- cific events—the start of a new year, for example, or the conclusion of a crisis— can be a powerful catalyst for change.1 If you’re ready to make a fresh start with your finances, here are five steps to get the ball rolling.

Step 1: Take stock You can’t make meaningful financial change unless you know where you stand:

Calculate your net worth: Make a list of all your assets and subtract your debts (or use a wealth-tracking app). This is the benchmark against which you can measure future progress. And don’t panic if your net worth declines away that money in a separate savings contributions from your employer, during tough market periods—what’s account so you’re less likely to tap it for starting in your 20s. If you started important is the long-term trend. other expenses. saving later than that, add 10% for See where your money is going: every decade you delayed. And if your After calculating your after-tax income, Step 2: Shore up your savings current budget won’t support your list your current expenses and decide Once you have a big-picture view of target savings rate, free up some cash which are essential (such as housing your finances, you should then make by eliminating nonessential expenses. and retirement savings) and which sure your savings are on track: Account for emergencies: Establish are nonessential (such as subscription an emergency fund with three to services and ordering takeout). If you Prioritize retirement: A rule of six months’ worth of essential living have a big expense coming up—like thumb is to save 10% to 15% of your expenses in a highly liquid checking,

PHOTOGRAPH BY DAN WONDERLY DAN BY PHOTOGRAPH college tuition or a roof repair—sock pretax income, including any matching savings, or money market account

FALL 2020 | ONWARD | 13 PERSPECTIVES | FINANCIAL PLANNING

to help cover unexpected expenses Diversify across and within asset consistent with your will and other without having to sell more-volatile classes: Diversification helps reduce estate-planning documents. investments. volatility risk by spreading your wealth Coordinate asset titling with the rest across myriad assets. Mutual funds and of your estate plan: When assets are Step 3: Manage your debt exchange-traded funds (ETFs) offer a titled jointly with rights of survivor- For many people, some level of debt is diversified basket of securities in just ship, they are not subject to probate a practical necessity—especially when about any asset class. and can pass directly to the surviving purchasing pricey assets such as a car Consider taxes: Place relatively owner without delay. However, if or home. Here’s how to manage it tax-efficient investments (such as ETFs, the joint owner is not a spouse, he or effectively: index funds, and municipal bonds) in she could face unexpected tax conse- your taxable brokerage accounts, and quences. Be sure to work with an estate Eliminate high-cost debt: The cost relatively tax-inefficient investments attorney, who can advise you on such of credit card debt adds up quickly if (such as actively managed mutual matters and ensure all titling adheres you carry a balance, so focus on bring- funds and real estate investment trusts, to state law. ing that down to zero—and keeping it or REITs) in your tax-advantaged retire- Name durable powers of attorney that way. ment accounts. for your health care and finances: Consolidate balances: If you own Review and rebalance as needed: Appoint trusted and competent confi- your home, consider establishing a Market ups and downs can have a dants to make decisions on your behalf home equity line of credit (HELOC) significant impact on the balance of should you become incapacitated, and to consolidate other types of debt stocks, bonds, and other assets in your make sure they know the location of at a potentially lower interest rate. portfolio. Check your holdings at least important estate documents. A HELOC can also serve as backup quarterly and rebalance as needed to Double-check your insurance emergency savings. ensure you’re still investing according coverage: This includes your property, Watch your total debt load: Don’t to your goals and timeline. casualty, auto, health care, disability, confuse what you can borrow with and, most important, any life insur- what you should borrow. Try to follow Step 5: Protect your assets, ance policies—which are invaluable if the 28/36 rule: Ideally, no more than dependents, and estate you have dependents, debts, or family 28% of your pretax income should Your estate plan is a way for you to needs that would be unfunded if you go toward your mortgage, and no support the people and things you passed away. more than 36% of your pretax income care about most. Enlist a lawyer or should go toward all debt. estate-planning attorney to help you: Take control We can’t control what’s happening Step 4: Optimize your Update your will and beneficiaries: in the world, but we can take steps to portfolio A will is crucial to providing for your bring some order to our own affairs. Create an investment plan that will dependents’ support and care. And And having a plan with realistic goals help you stay disciplined in all kinds reviewing beneficiaries ensures that the will go a long way toward making you of markets: proceeds from annuities, life insurance feel more confident about your ability policies, retirement accounts, and other to respond to any surprises that the Focus on your overall investment assets are distributed in a way that’s markets or life throws your way. n mix: Have a targeted asset allocation that’s in sync with your long-term goals, risk tolerance, and time frame. The longer your time horizon, the Rob Williams is vice 1Hengchen Dai, Katherine L. Milkman, and more opportunity you’ll have to ride president of financial Jason Riis, “The Fresh Start Effect: Temporal out a down market. (For more, see planning at the Landmarks Motivate Aspirational Behavior,” “Reassessing Risk,” page 22.) Schwab Center for Management Science, 06/23/2014. Financial Research.

LET’S TALK See page 42 for important information. u Diversification and rebalancing a portfolio cannot assure a profit or protect against a loss in any given market environment. Rebalancing may cause investors to incur transaction costs and, when a non-retirement account is rebalanced, taxable Need help getting your financial affairs in order? events may be created that may affect your tax liability. u This information does not constitute Your Schwab financial consultant can work and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with with you to ensure your plan is on track. Call today a qualified tax advisor, CPA, financial planner, or investment manager. u Investing involves risk, to schedule an appointment. including loss of principal. (0820-0MZN)

14 | CHARLES SCHWAB | FALL 2020 Schwab clients can save on home loans with exclusive discounts.

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Charles Schwab Bank, SSB and Charles Schwab & Co., Inc. are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products offered by Charles Schwab & Co., Inc. (Member SIPC) are not insured by the FDIC, are not deposits or obligations of Charles Schwab Bank, SSB, and are subject to investment risk, including the possible loss of principal invested. Charles Schwab & Co., Inc. does not solicit, offer, endorse, negotiate, or originate any mortgage loan products and is neither a licensed mortgage broker nor a licensed mortgage lender. Home lending is offered and provided by Quicken Loans Inc. Quicken Loans Inc. is not affiliated with The Charles Schwab Corporation, Charles Schwab & Co., Inc., or Charles Schwab Bank, SSB. Deposit and other lending products are offered by Charles Schwab Bank, SSB, Member FDIC and Equal Housing Lender.

Charles Schwab Bank, PO Box 982605, El Paso, TX 79998-2605 ©2020 Charles Schwab Bank, SSB. All rights reserved. Member FDIC. (0820-0759) ADP111156OW-00 (05/20) 00247092 PERSPECTIVES | TARGET-DATE FUNDS TAX-LOSS HARVESTING

Look under the hood assets to include, can have net expense Is “to” or “through” right for you? Dream Date ratios above 2%. Data from Morningstar All target-date funds grow more conservative over time. However, “to” funds Lost and Despite their relative simplicity, shows that lower-fee funds have proven reach their most conservative allocation at their target date, while How to choose the right target-date funds can vary widely in more popular in recent years. However, “through” funds continue to adjust their allocations well beyond that date. Found target-date fund for you. their asset allocation, management actively managed funds may be more By Michael Iachini approach, and more. When comparing responsive to market fluctuations.2 “To” glide path “Through” glide path ← Target date How to use investment funds, pay particular attention to: losses to your advantage. 100% arget-date funds have become n To view a breakdown of a fund’s By Hayden Adams T n fees, log in to schwab.com/research- a staple of many 401(k)s and Fees: All target-date funds generally 80% tools, input its ticker symbol, and individual retirement accounts involve some degree of human judg- W hether the result of a market (IRAs). According to BrightScope, ment in the selection of investments, click the Fund Facts & Fees tab. 60% downturn or just lackluster 21% of all assets in 401(k) plans were but some are more actively managed performance, losses in our portfolios in target-date funds in 2016—up n Glide path: This is the term for how 40% are something we all experience. from 3% just a decade earlier. More a fund’s asset allocations change over Fortunately, losing investments can have

broadly, total assets under management time. For example, some target-date stocks to Allocation 20% a silver lining: Through so-called tax-loss in target-date funds increased from funds move heavily into bonds and harvesting, you may be able to use them 0% roughly $7 billion in 2000 to nearly cash before the fund’s target date, 40 30 20 10 +10 +20 +30 to lower your tax liability and better 1 $1.4 trillion in 2018. while others continue to hold siz- Years to target date position your portfolio going forward. The appeal is understandable: able stock allocations well after Here are four situations in which Target-date, or age-based, that date (see “Is ‘to’ or ‘through’ The examples are hypothetical and for illustrative purposes only. it might make sense to ditch your funds offer an all-in-one mix right for you?” above right). losers—and what to consider if you of stocks, bonds, and cash Different funds may also have same series. Conversely, if it’s too approach, in which most of your retire- plan to reinvest the proceeds. that grows steadily more different allocation models. aggressive, try a fund with an earlier ment portfolio remains in a target-date conservative over time, For example, the stock date, such as 2020 or 2025. fund, with a portion left over for other 1 You want to realize with some funds reaching allocations among the half- investments you can manage yourself. some gains their most conservative dozen largest funds with a n To review a fund’s glide path, log If you decide to pursue this approach, When people talk about the benefits mix at their target date target date in 2020 range in to schwab.com/research-tools, take a holistic view of all your invest- of tax-loss harvesting, it’s often in the and others downshifting from 33% to 55%, according input its ticker symbol, and click the ments to ensure they’re complemen- context of offsetting gains. Even though their asset mix more to Morningstar.3 Prospectus link. tary and collectively in line with your the market has had a turbulent year, gradually. Their set-it- Compare different target asset allocation. you may still have some bright spots and-forget-it style makes allocation strategies be­fore n Holdings: While some funds stick to In short, target-date funds offer a in your portfolio. If you’re looking to them an attractive settling on one that matches a basic mix of stocks, bonds, and cash, simple, one-stop solution for many lock in those gains, selling some of your option for people who your own appetite for others incorporate investments like retirees. Simple, however, doesn’t losers can help minimize your capital don’t want to be actively returns and risk. In particu- commodities and real estate investment always mean easy. You’ll still need to do gains taxes (see “Using a tax loss to get involved in picking assets lar, look at a fund’s asset mix trusts (REITs). In general, broader is bet- your homework to find the right fund a tax break,” next page). or adjusting their alloca- at your current age, at your ter. That’s because the more asset types for you—and to stay on top of your tion over time. anticipated retirement age, you have, the less likely they’ll all move overall progress toward your goals. n 2 You want to reduce your Of course, this approach and at 10 years past your antic- in the same direction at the same time, taxable income may not be right for all ipated retirement age. If your which can help mitigate your losses 1Charles Schwab Investment Advisory, Inc. Data If you don’t have investment gains from 12/31/2000 through 12/31/2018. | 2Jeff investors. If you’re disci- main concern is outliving your sav- during a downturn. That said, Schwab Holt, “A Brief Overview of How the Target-Date to offset, or if you realize more losses plined about rebalancing your ings, you may be happier with a fund recommends that even the most aggres- Fund Landscape is Evolving,” morningstar.com, than gains, you can use up to $3,000 in 05/09/2019. | 3Randall Smith, “What the Market portfolio each year and confident that maintains a higher allocation to sive investor’s portfolio contain a total Selloff Revealed About Target-Date Funds,” losses to reduce your ordinary income in your ability to maintain an than others. Those made up primarily stocks at and beyond the target date. If of no more than 10% commodities, wsj.com, 04/05/2020. this year and every year thereafter until appropriately diverse portfolio, of index funds, for example, may offer your main concern is protecting your REITs, and other so-called real assets. the entire loss is accounted for. for example, subcontracting out net expense ratios as low as fractions of principal, you may want a fund that See page 42 for important information. u Investors should consider carefully information n To review a fund’s holdings and 3 your investment decisions may a percentage point. Actively managed maintains relatively little allocation contained in the prospectus or, if available, the You need the income feel unsatisfying. funds, which have professionals mak- to stocks at and through retirement. overall portfolio composition, log in to summary prospectus, including investment There’s an adage among traders: Let Even when a more-automated, ing more judgment calls about which Finally, if the target-date funds schwab.com/research-tools, input its objectives, risks, charges, and expenses. your winners run. Thus, if you don’t Please read it carefully before investing. u ticker symbol, and click the Portfolio hands-off approach is called for, available in your employer’s 401(k) are The information provided here is for general there are important considerations in too conservative or too aggressive for and Holdings tabs. informational purposes only and should not be choosing a fund that’s right for you. your tastes, consider a fund that’s dated considered an individualized recommendation Michael Iachini, CFA®, or personalized investment advice. The Hayden Adams, CPA, NEXT CFP®, is vice president, after or before your planned retirement “Core and explore” investment strategies mentioned here may not CFP®, is director of tax head of manager STEPS date. For instance, if you’re planning to be suitable for everyone. Each investor needs and financial planning research at Charles to review an investment strategy for his or her at the Schwab Center Schwab Investment retire in 2030 but the available target Alternatively, if you prefer to keep a own particular situation before making any for Financial Research. See how Schwab Target Date Funds work hard for Advisory, Inc. 2030 fund is too conservative for you, hand in overseeing your investments, investment decision. u Investing involves risk, your retirement at schwab.com/targetfunds. look at the 2035 or 2040 fund in the GETTY IMAGES/ISTOCKPHOTO POINT; 30 BY ILLUSTRATION PHOTO consider a so-called core-and-explore including loss of principal. (0820-0XLR)

16 | CHARLES SCHWAB | FALL 2020 FALL 2020 | ONWARD | 17 PERSPECTIVES | TAX-LOSS HARVESTING

want to sell your winners prematurely, page 26). That said, it can be hard Other considerations it might make more sense to generate to let go of an investment that’s lost If you’ve decided to sell some losers, the necessary income by selling your value thanks to the break-even fal- it’s important to understand a few of losers—which may allow you to offset lacy, or our instinct to wait to sell an the applicable tax rules before you up to $3,000 a year in ordinary income investment until it rebounds to our take action: in the process. purchase price. But holding on to the investment in n Short- vs. long-term capital gains: 4 The investment no longer hopes of a turnaround could further Short-term capital gains are taxed fits your strategy erode your returns, whereas taking the at ordinary federal income tax rates, Regardless of whether an investment loss could allow you to get your port- which for many taxpayers are higher has lost or gained value, you should folio back on track more quickly—and than the long-term capital gains rates never keep it if it no longer fits your potentially offset capital gains and/or of 0%, 15%, or 20%, depending on your strategy (see “Investing Mindfully,” ordinary income. income level. Note that any losses must first be applied to gains of the same type (i.e., Using a tax loss to get a tax break long- or short-term gains) before they A hypothetical investor who realized $10,000 in short-term capital gains can be applied to gains of a different and $15,000 in capital losses could use tax-loss harvesting to cut down her type. For example, if you have short- tax bill—this year and in future years. and long-term gains, you must use any long-term losses to offset your long- Short-term capital gains: $10,000 term gains first; then you can use any remaining long-term losses to offset your short-term gains.

n Wash-sale rule: If you plan to take a loss and reinvest the proceeds, be mindful of the wash-sale rule, which stipulates you can’t use the losses to offset gains if you purchase the same or a “substantially identical” Short-term capital losses: $15,000 investment within 30 days before or after the sale. Unfortunately, there’s no clear guidance on what constitutes a substantially identical investment. Stocks are fairly straightforward, but for exchange-traded funds and mutual funds, it’s best to err on the side of caution by selecting a fund that tracks a different benchmark or has a mark- edly different investment mix. A financial planner or qualified tax $10,000 of capital $3,000 of losses $2,000 of losses used advisor can help you make the most losses used to offset used to offset current to offset future gains or of any investment losses—without $10,000 of capital gains ordinary income ordinary income running afoul of the IRS. n

Taxes that could have been owed without tax-loss harvesting

Capital gains Ordinary income See page 42 for important information. u This information does not constitute $3,200 ($10,000 x 32%) $960 ($3,000 x 32%) $4,160 and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific Source: Schwab Center for Financial Research. Assumes a 32% combined federal/state marginal advice is necessary or appropriate, Schwab income tax bracket, with short-term capital gains taxed at ordinary income tax rates. The example recommends consultation with a qualified NEXT is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific tax advisor, CPA, financial planner, or investment product and the example does not reflect the effects of fees. STEPS investment manager. u Examples provided are for illustrative purposes only and not intended to be reflective of results you can

Read more insights about tax-loss harvesting and other tax strategies at schwab.com/taxes. expect to achieve. (0820-06W0) GETTY IMAGES/ISTOCKPHOTO POINT; 30 BY ILLUSTRATION PHOTO

18 | CHARLES SCHWAB | FALL 2020 Numbers tell only half the story. Your investments deserve the full story.

Strategic investing takes us beyond the numbers. This approach has helped inform our investment decisions since 1937. By asking the right questions at the right time, we seek to uncover opportunities and manage risk to continue guiding our clients through a variety of market conditions. Explore 31 funds on the Q2 2020 Mutual Fund OneSource Select List®. Visit Schwab.com/troweprice

Request a prospectus or summary prospectus at Schwab.com/OneSource; each includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. All funds are subject to market risk, including possible loss of principal, and are subject to management fees and expenses. Charles Schwab & Co., Inc., Member SIPC, receives remuneration from fund companies in the Mutual Fund OneSource® service for recordkeeping and shareholder services and other administrative services. Schwab also may receive remuneration from transaction fee fund companies for certain administrative services. The amount of fees Schwab or its affi liates receive from funds participating in the Mutual Fund OneSource® service is not considered in the Select List selection, nor does any fund pay Schwab to be included in the Select List. Schwab, Mutual Fund OneSource® and Mutual Fund OneSource Select List® are trademarks of Charles Schwab & Co., Inc. and used with permission. T. Rowe Price and Charles Schwab & Co., Inc. are not affi liated. T. Rowe Price Investment Services, Inc., Distributor. market crash. professionals a onregrouping after SchwabThree Trading Services WayThis Out for moving forward. of thoselosses inamatter ofweeks. Index intoitsfastest 30%decline discuss their key takeaways fromtheturbulence andprovide tips professionals— In awide-ranging Q&A,threeSchwabturmoil? Trading Services T So, what lessons cantraders learnfromthisrecent market in thefirst halfof2020, when COVID-19 senttheS&P500 here’s market volatility—and thenthere’swhat happened Lee Bohl Lee , Kevin Horner ever, only torecover themajority , and Joe Mazzola — ®

ILLUSTRATION BY IRENA GAJIC ant when theswings arebigger.Ialso size becomes that muchmoreimport ever—just gosmaller.Correct position trading stocks, futures, options, what Joe: “It doesn’tmatter whether you’re movingrisk forward? dotoWhat manage can traders trend tocapturegainsquickly.” tum—that is,trading theshort-term those comfortable trading momen ers who foundthemost success were again. So, toacertain extent, thetrad down several hundredpoints,thenup hundred pointsforacouple days, then during which themarket was upafew Lee: recent downturn? Did anyone succeed the during or greed.” on thetrade itself, rather thanfear mentally, ithelpskeep mefocused handle theloss bothfinancially and be happy aboutlosingit,butifIcan that money. That doesn’tmeanI’d enter atrade unless I’mwilling tolose looked at itthisway: Idon’twant to really comfortable trading. I’ve always percentage ofyour portfolio you’re Joe: going togetcrushed.” always thechance you’re theonewho’s absolutely crushing it—but there’s to gothrough periodswhen you’re It’s thenature ofthegame:You’re going remind ourselves ofcomplacency risk. sense of security. This is a chance to have lulledsometraders intoafalse real tests ormarket shocks,which may Kevin: “We went 11years without any episode? should take away from this What’s the biglesson traders science, sentiment, andthestimulus.” information, focusing onthingslike traders to turn nonfinancial data for began. In fact, it forced fundamental were allbutmeaningless once thecrash on traditional fundamentals,those nothing like this.Ifyou were trading heightened turbulence before, but Joe: volatility unprecedented? Is the recent episode ofextreme “You alsoneedtodeterminewhat “We’ve certainly seen bouts of “Therewere several periods - - - -

swings, your position ismorelikely when the market is experiencing big position—differently. Inparticular, at which you want tobuy orsella orders—where you setaspecific price also may needtomanageyour limit act fast enough onyour own. You picks up, becauseyou’re unlikely to a huge helpwhen market velocity strategy. Automatic orderscanbe then you needtohave abetter exit see how they behaved beforeacting, simply towatch your positionsand Lee: table at theendofday asyou can.” you. Take asmuchofthat riskoffthe that’s when things can go sideways for a positionopenovernight, because market ischoppy—that is,nothaving believe in‘goinghomeflat’ when the , CMT, Bohl Lee isatrading senior services of trading education services atCharles manager atCharles Schwab & Co., Inc. trading education services atCharles Kevin Horner isasenior managerof Joe Mazzola isamanagingdirector “Ifyour oldtrading style was Schwab & Co., Inc. Schwab & Co., Inc.

trading allthetime.” no circumstances doyou need tobe in linewith your risktolerance. Under you dofindaninteresting opportunity it meansyou’re preparedtoactwhen Kevin: “Cash is,infact,aposition.And market settles down abit.” a bad idea to just stay in cash until the “Absolutely.Lee: For traders, it’s never sit itout? iteverDoes make sense to just to step backandreassess your plan.” aren’t there, that should encourage you losses are coming from. If the profits and findout where your profitsand ners andlosers.Digintoyour results have tolookobjectively at your win and establishing your exit points,you In additiontorightsizing your trades a down periodlike we’ve hadthisyear. important, butit’seven moresoduring Kevin: “Reassessing Risk,”page22.) comfortable with.” (For more, see knowing how muchriskyou’re truly or along-term investor, it’sallabout ahead of time. Whether you’re a trader determining your degree of fortitude cold-blooded. Part ofthechallengeis it’s tough todealwith. Nobody isthat ments drop30%inamatter ofweeks, you have, when you seeyour invest Joe: somethingafter like this? How doyou regain confidence sale prematurely.” otherwise canhelpavoid triggeringa limits furtheraway thanyou might to reachitslimitprice, sosetting your u See page 42 for important information. See page42forimportant particular situationbefore makinganyinvestment decision. needs toreview aninvestment strategyforhisorherown mentioned here maynotbesuitable foreveryone.Eachinvestor or personalizedinvestmentadvice.The strategies should notbeconsidered anindividualized recommendation provided here isforgeneral informationalpurposesonlyand Investing involves risk, including loss of principal. includinglossof principal. Investing involvesrisk, “No matter how strong astomach “A trading planis always Schwab expertsbreak downfundamental and technicalstrategies.Watchnowat In eachepisodeofTrading Up-Close , FALL 2020 | n youtube.com/charlesschwab. u The information Theinformation ONWARD - - (0820-0UYD) WATCH |21

Investing Mindfully How to tune out the noise and make more purposeful investment decisions.

27 INVESTING MINDFULLY

starting to sour on a stock, you ask in high-yield bonds through an Most investors know that trying n Investment strategy: Whether Despite every intention of why, since sentiment is often a leading exchange-traded fund (ETF) or a to time the market is contrary to you’re looking for broad exposure indicator of price decline.” mutual fund can help mitigate default achieving their long-term goals, to the market or access to a specific risk. “Diversification is paramount but knowing that to be true doesn’t sliver, always confirm that a fund’s making rational, reasoned decisions— n To view a stock’s Sentiment when investing in high-yield bonds,” necessarily keep you from making investment strategy is in line with Grade, log in to schwab.com/ Collin says. “If you’re holding just a emotional decisions when markets your expectations. Two funds that especially when it comes to research-tools, search for its ticker handful of individual issues, even one are surging or slumping. seem similar on the surface could take symbol, and click the Ratings tab. default can have an outsize effect on To help keep a level head, predicate very different approaches with their your overall portfolio.” your buy and sell decisions on quanti- investments. our finances—we sometimes Bonds So when should you consider sell- fiable factors, such as: Likewise, it’s a good idea to check ing a bond? One good reason would in on your current funds’ strategies Because bonds are relatively stable, be if an issuer’s credit quality has n Fees: When adding funds to your periodically—especially your active allow emotions to get the investors are less likely to dump them deteriorated to the point where you portfolio, generally favor those with funds. “Managers may adjust their in a fit of panic selling. On the con- just aren’t comfortable with the addi- lower operating expense ratios, as strategies from time to time in an trary, bond investors should be wary tional risk. Another would be if you every dollar you pay in fees is one effort to boost returns or respond to better of us. of panic buying. Consider reevaluating simply need the cash. In either case, you can’t invest for future growth. the current environment,” Michael your next bond purchase if: don’t let a sale throw off your target That’s an easy rule to follow with says. “If this happens with any of your Worse, we have a tendency to rationalize away any n Be wary of stocks whose earnings allocation to bonds—you should still index funds, whose fees tend to be holdings, make sure you’re comfort- resulting missteps, which over time only compounds growth seems excessively high, n The purchase would upend your aim to keep your portfolio balanced relatively low, but it’s not so cut-and- able with the direction in which the the initial error. because it’s likely unsustainable. target asset mix: Having some expo- and in line with your goals. dried where actively managed funds fund is heading.” Nobel Prize–winning psychologist Daniel Conversely, you should also be skep- sure to Treasuries makes sense for are concerned. Kahneman has done extensive research into how we tical if a company has no earnings at many investors because bonds are n A Schwab fixed income specialist “Paying a higher fee for an n Log in to schwab.com/ can make more deliberate and logical decisions when all, especially if it’s in an industry that a vital part of a well-balanced port- can help review your options and actively managed fund could make ETFscreener or schwab.com/ our emotions are running high. His conclusion? Slow investors are piling into. “Those busi- folio. But think carefully about the determine the appropriate bond sense if you believe the fund will fundscreener to search for ETFs down. The more time you take, Kahneman’s research nesses are often living on borrowed appropriate allocation. If you rushed allocation and quality for your deliver superior returns,” says and mutual funds, respectively, suggests, the less likely it is that emotion will cloud capital,” Steve says. out of stocks and into Treasuries in portfolio. Call 866-893-6699 to Michael Iachini, vice president and using a variety of criteria, including your decision-making. response to a market downturn, you speak with someone today. head of manager research at Charles expense ratio, market exposure, In practical terms, that means taking a beat and When reviewing the stocks you probably had the wrong allocation to Schwab Investment Advisory. “But and more. really thinking through why you want to buy an already own: stocks in the first place. Besides, time don’t base such decisions on past investment. Does the asset support your goals or are in the market generally beats trying Funds performance, because strong returns you merely chasing a hot stock or market? The same n Watch for deteriorating fundamen- to time the market. (For more, see could be due to luck and might not Cool it holds true when you want to sell. Does the invest- tals, which often indicate trouble. “You “Reassessing Risk,” page 22.) It can be tempting to get into or out persist.” The same holds true for ment no longer fit your strategy—or is fear driving should ditch a stock as soon as it fails of ETFs and mutual funds whenever those you already own. “If any of your When your emotions are running hot, your decision? to live up to your reasons for buying it n You’re buying risky bonds in an there’s a big market swing. Unless current funds seem overly expensive they can steer you in the wrong direc- Here’s how to know whether you’re selling or in the first place,” Steve says. However, effort to boost yields: With 10-year you’re an active trader, however, you vis-à-vis comparable alternatives, tion—but slowing down and focusing buying stocks, bonds, and funds for the right reasons. if the stock’s price is falling but its fun- U.S. Treasury bonds yielding less than should avoid basing your investment it might be time to make a switch,” on the facts can help ensure you’re damentals remain strong, it could be 1%,1 it’s hard to ignore high-yield decisions on market trends. he says. making the right decisions at the right well-positioned for a rebound. “Don’t bonds paying 7% or more. But letting time and for the right reasons. That Stocks let fear trick you into parting ways your desire for higher yields dictate may sound obvious, but it’s harder with a worthy investment,” he adds. your investment strategy is exactly the than you might think—especially in “If you’re willing to buy or sell at any price, that’s type of emotional decision-making the heat of the moment. n a tipoff you’re not thinking rationally,” says n To research a stock’s funda- you want to avoid. “High-yield bonds 1 Steve Greiner, senior vice president of Schwab mentals, log in to schwab.com/ have a much higher default risk than As of 06/22/2020. Equity Ratings®. research-tools, search for its their investment-grade counterparts, Unless you’re an active trader, ticker symbol, and review the data To add more discipline to your investment so if you wouldn’t normally include See page 42 for important information. u Investors should decisions, study a stock’s fundamentals—including available on the Earnings, Ratios, them in your portfolio, I wouldn’t consider carefully information contained in the prospectus or, the price-to-earnings ratio, dividends and buy- and Dividends tabs. add them now,” says Collin Martin, you should avoid if available, the summary prospectus, including investment objectives, risks, charges, and expenses. Please read it carefully backs, and return on capital—and consider them director of fixed income at the Schwab before investing. u The information provided here is for general in context. Beyond fundamentals, it’s also a Center for Financial Research. “Plus, basing your investment decisions informational purposes only and should not be considered an good idea to pay attention to investor we’re likely to see more defaults in the individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for When adding new positions to your portfolio: sentiment about a particular stock. months ahead as the economy works on market trends. everyone. Each investor needs to review an investment strategy for “Following the herd isn’t a sound to recover from COVID-19.” his or her own particular situation before making any investment n Favor stocks with high levels of cash and low investment strategy, but that doesn’t That said, if you can tolerate a decision. u Diversification and asset allocation strategies do not ensure a profit and do not protect against losses in declining levels of debt, both of which suggest good financial mean you should ignore sentiment bit more risk while still adhering to markets. u Investing involves risk, including loss of principal. health. entirely,” Steve says. “If investors are your long-term strategy, investing (0820-0GZC)

28 | CHARLES SCHWAB | FALL 2020 FALL 2020 | ONWARD | 29 Reassessing Risk

How much can you really handle?

The answer may surprise you.

arket shocks are an inevita- 1. How much can I stand to ble part of investing—but lose emotionally? M that doesn’t make them any easier to stomach. Whether you’re just Investing is an act of faith—to say starting out or have been saving for nothing of willpower. The assets that decades, watching your hard-earned offer the highest potential reward gains evaporate overnight can cause are often the riskiest, but if you can you to question the entire enterprise. steel yourself against their occasional “When the market is going up and surges in volatility, you’re more likely up, it’s easy for investors to think to reach your long-term goals. they’re more comfortable with risk The question is, how much risk can than they actually are,” says Mark you really handle? To help answer that Riepe, head of the Schwab Center for question, consider the downsides and Financial Research. “But the 34% mar- upsides of five hypothetical portfolios ket decline between mid-February and (see “More pain, more gain,” page 25). mid-March1 may have forced people to Although portfolios with larger confront their true risk tolerance.” allocations to stocks delivered higher So, how do you go about reassess- returns over time, they were also more ing your tolerance for risk, come volatile—which may not work for what may? Ask yourself these three everyone. If you need the money in questions. the next few years, for example, you

22 | CHARLES SCHWAB | FALL 2020 ILLUSTRATION BY ROBERTS RU RANS REASSESSING RISK should choose a more stable investment mix. The would have a built-in cushion for such 3. How well do I know myself? More pain, more gain same is true if you simply can’t bear to see your port- emergencies. For example, Schwab folio plummet in value. “It’s perfectly reasonable to recommends having at least three “Knowing yourself is the beginning Consider five hypothetical $25,000 portfolios—from conservative (smallest allocation to stocks) say, ‘I’m willing to accept lower returns in exchange (and ideally six) months’ worth of of all wisdom,” wrote Aristotle. to aggressive (largest allocation to stocks): for more stability,’” Mark says. “But that means you essential expenses saved in a highly Unfortunately, human beings are may have to save more—or ratchet back your spend- liquid account. “The COVID-19 notoriously bad at predicting in ing expectations—to compensate.” outbreak demonstrated how quickly advance how they’ll actually respond Conservative Moderately Moderate Moderately Aggressive Indeed, reducing your exposure to stocks and other things can take a turn for the worse,” to a given set of conditions. conservative aggressive relatively high-risk, high-reward assets during your Mark says. “With an emergency fund That’s why Mark recommends peak earning years comes with its own kind of risk: in place, you’re less likely to need to asking someone close to you to rate falling short of your goal. “Market turbulence feels tap your long-term investments to your risk tolerance. “You might think Stock allocation 20% 40% 60% 80% 95% risky because it’s something you have to face again cover short-term expenses.” you’re comfortable with risk, but your and again,” Mark says. “But the more pernicious risk If you’re nearing or in retirement, spouse or a close friend may be able to comes from undercutting your long-term returns, however, your emergency fund identify patterns of behavior—such as because there’s often no coming back from that.” should be large enough to cover at your tendency to play it safe in other The greater the allocation to stocks, the greater the potential downside … To help manage your emotional response to least a year’s worth of expenses, with areas of your life—that you’re unable market volatility, consider cutting back on how another two to four years’ worth to recognize in yourself.” Worst year often you review the performance of your long-term saved in relatively liquid investments. Financial advisors are ideally suited –12.5% –20.9% –29.5% –36.0% –4.6% accounts. In fact, research suggests that the less often “Keeping that much cash on hand will to this role, because their experience people check their investments, the more risk they help you avoid having to sell assets with a broad range of clients can lend may be willing to take—and the better their returns during a downturn,” Mark says. some perspective on where you fall are likely to be over time (see “Less is more,” right). along the spectrum of risk tolerance. … but also the greater the potential upside: “You can’t wish your emotions away,” Mark says, As they get to know you, they may also “but you can take steps to keep them in check.” be able to help you identify whether That said, there may be reasons to review your Less is more you’re acting with your head—or your portfolio more frequently. “You should check in on In one study, participants who heart. “An advisor can help curtail the received yearly feedback on the 22.8% 27.0% 30.9% 34.1% 36.7% your investments and your broader financial plan emotional responses that might oth- Best year performance of their hypothetical anytime your situation changes substantially.” erwise get the best of you,” Mark says. portfolios had a higher risk tolerance than those who received 2. How much can I stand to Sleep easier monthly feedback. After 40 years, the portfolios with greater stock allocations had lose financially? $1,294,141 significantly larger values than those with smaller allocations: In the end, figuring out how much risk Bonds Stocks $1,186,221 While many people think about risk in terms of their you can really handle is an art as much Average annual returns ability to endure losses emotionally, there’s another as it is a science. “Sure, we can give you 100% $992,433 component to risk that’s equally important: your guidelines based on your age or time Conservative: 7.5% capacity to recover financially. 90% frame, but it ultimately comes down to Moderately conservative: 8.9% $748,633 “Time is a big factor here,” Mark says. “When how much you can stand to lose—both you’ve got a decade or more until you need to tap 80% emotionally and financially,” Mark Moderate: 9.6% your savings, short-term volatility isn’t a big risk. But 70% says. “Once you know that, you can Moderately aggressive: 10.1% $452,788 if you’ll need the money in, say, five or fewer years, a put together a plan that balances your Aggressive: 10.4% market downturn can be devastating.” 60% long-term need for growth with your Be that as it may, your financial capacity for risk near-term need to sleep at night.” n 50% may not square with your emotional tolerance for it. 1 ® An investor in his 40s, for example, probably has 20 40% Stock market is represented by the S&P 500 Index. Data from 02/19/2020 through 3/23/2020. 0 10 20 30 40 or more years until retirement, which should allow

Investment allocation Investment 30% him to invest aggressively. But some people simply can’t tolerate the ups and downs of holding that 20% LET’S Source: Schwab Center for Financial Research. Data from 01/01/1980 through 05/31/2020. See page 42 for important information. u The information provided much stock, regardless of their age or time frame. The example is hypothetical and provided for illustrative purposes only. It is not intended to here is for general informational purposes only and should not Conversely, even aggressive investors can be 10% TALK represent a specific investment product. Historical returns are weighted averages of the perfor- be considered an individualized recommendation or personalized mances of the indexes used to represent each asset class, include the reinvestment of dividends investment advice. The investment strategies mentioned here may waylaid by adverse life events like losing a job. “If and interest, and are rebalanced annually. The example does not reflect the effects of taxes or 0% ® not be suitable for everyone. Each investor needs to review an you need to tap your long-term savings to help make Monthly Yearly Need help reassessing your risk fees. The indexes representing each asset class are: S&P 500 Index (large-cap stocks); Russell 2000® Index (small-cap stocks); MSCI EAFE Index (international stocks); Bloomberg Barclays investment strategy for his or her own particular situation before ends meet, your capacity for risk can shrink over- feedback feedback tolerance? Your Schwab financial U.S. Aggregate Bond Index (fixed income); and FTSE 3-Month Treasury Bill (cash investments). making any investment decision. u Diversification and rebalancing night,” Mark says. “In such situations, downshifting consultant can help you review your Indexes are unmanaged, do not incur management fees or expenses, and cannot be invested in a portfolio cannot ensure a profit or protect against a loss in any Source: Richard Thaler, Amos Tversky, Daniel directly. Past performance is no guarantee of future results. given market environment. Rebalancing may cause investors to incur your risk exposure to help preserve capital could Kahneman, and Alan Schwartz, “The Effect of financial plan, asset allocation, transaction costs and, when a nonretirement account is rebalanced, absolutely be the right approach.” Myopia and Loss Aversion on Risk Taking: An and more. Call today to schedule taxable events may be created that may affect your tax liability. u Experimental Test,” The Quarterly Journal of Investing involves risk, including loss of principal. (0820-0E7E) Of course, in a perfect world your financial plan Economics, 05/01/1997. an appointment.

24 | CHARLES SCHWAB | FALL 2020 FALL 2020 | ONWARD | 25 Get Cracking

How to convert your nest egg into a reliable monthly paycheck.

ne of the biggest challenges facing new retirees is how O to replace their regular pay- check with a steady stream of income from their savings and other sources. Social Security and pension plans— which provide a reliable monthly paycheck for life—certainly help, but they’re unlikely to cover most retirees’ ongoing expenses. Indeed, Social Security was designed to replace only about 40% of average annual earnings (the percentage is actually lower for those in upper-income brackets), and the median monthly benefit for private pension plans is just $819.1 As a result, most retirees must fig- ure out on their own how to cobble together guaranteed payouts, irregular income streams, and withdrawals from their hard-won savings to create a steady “paycheck” in retirement. “Generating predictable retirement income is like putting together a puz- zle,” says Rob Williams, vice president of financial planning at the Schwab Center for Financial Research. “Because every retiree’s puzzle looks slightly different, there’s no one way to put it together.” Here are five steps for creating your own retirement paycheck, whatever your individual circumstances.

30 | CHARLES SCHWAB | FALL 2020 PHOTO ILLUSTRATIONS BY KYLE BEAN GET CRACKING

1 Nail down expenses additional dollar you don’t need to if you use a second home as both a For example, purchasing bonds withdraw from your retirement savings rental property and for extended with staggered coupon and maturity One rule of thumb is to assume is a dollar that can remain invested,” personal use, you may not be eligible dates—see “How to build a bond you’ll need only 75% to 80% of your Rob says. for all the deductions a rental prop- ladder,” below left—can help even out current income once you reach retire- Be aware, however, that earning erty alone would provide. your portfolio’s yields over time and Robo-advisors to the rescue ment, since some big work-related income in retirement could push “Supplemental income sources can provide a steady stream of income. expenses—such as retirement contri- you into a higher tax bracket, which provide extra cash flow in retirement, Dividends, on the other hand, are A robo-advisor can provide a low-cost, butions and commuting costs—will may affect the taxability of your which is always appealing, but they less regular and therefore harder to efficient way to help meet your income likely go away. That said, a ballpark Social Security benefits and the cost may also come with tax consequences plan for, but you can still estimate how needs in retirement. estimate gets you only so far, so it’s of Medicare. that shouldn’t be ignored,” Rob says. much income you can expect from best to create a budget where you can Another common source of income “It’s wise to consult a qualified finan- a stock or fund based on its annual assign real numbers to your expenses. is from rental properties—be it an cial planner or tax advisor about the dividend yield. investment or vacation property, potential benefits and drawbacks of When it’s time to tap your retirement invest- When you activate the Schwab Intelligent n Tools like the Monthly Budget or even a portion of your primary such income sources as you map out n To view the estimated income from ments for income, it can be challenging Income feature on your Schwab Intelligent Planner at schwab.com/budget can residence—which can provide not your income plan.” your Schwab accounts, log in to to figure out how much you can afford to Portfolios account, you’ll receive a projec- help you calculate your income needs. only regular cash flow but also poten- schwab.com and select Investment withdraw without depleting your savings tion of a monthly paycheck amount based tial tax benefits. For example, you may Estimate investment Income from the dropdown menu too quickly or generating a significant tax on your portfolio value and time horizon, 4 on the Accounts page. bill. That’s why Schwab created Schwab tools to help see how far your savings could Subtract guaranteed be able to deduct certain expenses, income 2 Intelligent Income™, which pairs the go, notifications if you veer off course, and income such as depreciation, from your annual rental income. With interest rates near historic technology of Schwab Intelligent Portfolios® tips for getting back on track. 5 Turn to your Once you know your monthly out- Keep in mind, however, that you’ll lows, income-generating investments retirement portfolio with a tax-smart withdrawal strategy that flow, it’s time to figure out how much likely face a host of tax obligations as aren’t as powerful as they once were. generates a predictable monthly paycheck n Learn about Schwab Intelligent Income at guaranteed income you can expect to well. Apart from property taxes, any Even so, regular interest and dividend After accounting for all other income from your investments. schwab.com/intelligentincome. receive. Social Security figures prom- rental income could potentially push payments can play an important role sources, you can estimate how much inently here, and the timing of when you into a higher tax bracket. Also, in your retirement income. of the principal in your retirement you collect can have a big impact on accounts you’ll need to tap each your total benefit. month. But how will you know if that Collecting early—anytime from age withdrawal rate is sustainable? may need to make up for that lost advisor, who can help you determine 62 through to your full retirement age “That’s where the so-called 4% rule income by taking a larger withdrawal which assets to tap when and in (between 66 and 67 for today’s retir- comes into play,” Rob says. “That is, from your retirement portfolio. what proportions. Some low-cost ees)—means taking a reduced benefit if you withdraw 4% of your portfolio Likewise, once you reach age 72, robo-advisors—including Schwab ® of up to 30% for life. By contrast, every How to build a value in your first year of retirement, required minimum distributions Intelligent Portfolios —can even do year you wait to collect past your full and then adjust that amount in future (RMDs) from traditional IRAs and this for you (see “Robo-advisors to retirement age (up to age 70) increases bond ladder years to account for inflation, it’s 401(k)s kick in, which may force you the rescue,” above). your benefit by 8%. You can estimate Staggering your bonds’ maturity highly probable your savings will last to rethink your income approach. “Whether you plan to generate your your benefits at ssa.gov/OACT/quickcalc. dates can create a steady stream 30 years.” (Note: As part of the Coronavirus Aid, own retirement paycheck or turn to a After you estimate your monthly of income from your portfolio. For example, imagine an investor Relief, and Economic Security Act, professional for help, know that your Social Security benefit, add to that with $1 million in retirement savings. RMD requirements have been sus- income needs could change over time any pension or other guaranteed Using the 4% rule, she should be able pended for 2020.) and your plan should account for income, then subtract the total from to withdraw up to $40,000 in her first If the task of generating a steady that,” Rob says. n To build a bond ladder: By perpetually reinvesting your your budget. The remainder is the year of retirement, or about $3,333 income stream feels daunting, 1“Income from Pensions,” pensionrights.org, as amount you’ll need to come up with principal, you more frequently cap- per month. consider working with a financial of 2018. from other sources. 1 Purchase a number of bonds ture prevailing interest rates—both Of course, market volatility can with varying maturity dates so they the highs and the lows—evening cause your portfolio value to fluctuate, See page 38 for important information. u Please read the Schwab Intelligent Portfolios Solutions™ disclosure come due at regular intervals—say, out your portfolio’s yield over time. making your income less predictable brochures for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios and Factor in u ® 3 every 12 months. (For adequate What’s more, many bonds make Schwab Intelligent Portfolios Premium programs. Schwab Intelligent Portfolios and Schwab Intelligent Portfolios supplemental income than you might like. In such cases, you Premium™ are made available through Charles Schwab & Co., Inc. (“Schwab”), a dually registered investment diversification, Schwab recommends their interest, or coupon, payments may want to consider a fixed annuity, advisor and broker dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. According to the Bureau of Labor a ladder of at least 10 high-quality, twice a year (barring default); these, which can provide a steady stream of (“CSIA”). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation. u Schwab Intelligent Income™ is an optional feature for clients to receive recurring automated withdrawals from their accounts. Schwab does not Statistics, roughly one in five people noncallable bonds.) too, can be staggered to provide a income for life. guarantee the amount or duration of withdrawals, nor does it guarantee any specific tax esultsr such as meeting age 65 and older participates in the predictable flow of income. required minimum distributions. u The information provided here is for general informational purposes only and workforce. Even part-time work can 2 To keep the ladder going, should not be considered an individualized recommendation or personalized investment advice. The investment Plan for change strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy supplement Social Security and other reinvest the principal from the If necessary, you could also use for his or her own particular situation before making any investment decision. u A bond ladder, depending on sources of guaranteed income, allow- maturing one-year bond in a new the principal from maturing bonds As you move through retirement, you the types and amount of securities within the ladder, may not ensure adequate diversification of your investment ing you to minimize the impact on 10-year bond, and so on as each to support your spending needs, may find that your income sources portfolio. This potential lack of diversification may result in heightened volatility of the value of your portfolio. You must perform your own evaluation of whether a bond ladder and the securities held within it are consistent with your retirement savings until you stop bond comes due. though this would disrupt the ladder change from year to year. If you stop your investment objective, risk tolerance, and financial circumstances. u Annuity guarantees are subject to the working completely. “After all, every and the benefits that come with it. working part time, for example, you financial strength and claims-paying ability of the issuing insurance company.(0820-0SWB)

32 | CHARLES SCHWAB | FALL 2020 FALL 2020 | ON INVESTING | 33 zo ren Lo De er ph While divorce is neversto easy, the hri y C breakup ofs b a union after age 50 tion stra presents Illu special challenges.

34 35 PARTING WAYS

Divorce after 50—the rate of which has dou- The most tax-efficient method for the receiving insurance policy and naming their former spouse as spouse is to roll such funds directly into their own the beneficiary rather than forfeit a portion of her or 1 bled since 1990 —can have an outsize impact retirement account. his pension. “In both cases, you’re offsetting the amount your on your financial security. Indeed, parting ways The receiving spouse can also qualify to have some ex would have received from your pension with with your spouse can potentially halve your 401(k) funds distributed directly for immediate something of equal value,” Bob says. expenses. (Such distributions are exempt from the assets while doubling your expenses, which 10% early withdrawal penalty for those younger 3 Social Security can be especially detrimental when you don’t than 59½, though the receiving spouse would still be subject to 20% withholding for federal taxes, plus any In contrast to retirement accounts and pensions, have decades to regroup and rebuild. applicable state taxes.) which may be subject to a lot of wrangling and compromise, the handling of Social Security benefits Any funds transferred directly to a receiving spouse in divorce is controlled by law and rarely open to “After a long marriage, there’s a greater likelihood cannot later be deposited into that spouse’s IRA, and interpretation. “The Social Security benefit is what it that much of a couple’s wealth resides in assets any rollover to an IRA must occur within 60 days of is—though keep in mind it may become part of the acquired together over the years,” says Bob Barth, a the receipt of the money or the IRS will consider it larger discussion around who gets what, which can Schwab wealth strategist based in Orlando, Florida. taxable income (minus the 20% withholding). itself be contentious,” Bob says. How those assets will be divided varies consid- If the couple was married for at least 10 years erably depending on where you live. For example, QDROs don’t apply to IRA assets, but a direct before splitting, the ex-spouse will be eligible to in the nine community property states—Arizona, rollover from one spouse’s IRA to another spouse’s apply for monthly benefits worth up to 50% of the California, Idaho, Louisiana, Nevada, New Mexico, IRA—again, the most tax-efficient method—can higher earner’s full retirement age benefit. (If the Texas, Washington, and Wisconsin—all earnings and occur only if outlined in the divorce settlement and lower earner remarries, however, he or she forgoes everything acquired with those earnings during the filed with the plan custodian. any claim to such benefits in most cases.) marriage are generally divided 50/50. In common Alternatively, account holders worried about This ex-spousal benefit in no way affects the benefit law states, on the other hand, marital assets should jeopardizing their retirement savings might instead of the higher-earning spouse—no matter how many be divided “equitably,” a standard that gives courts be able to relinquish other assets—a greater stake in times he or she has been married and divorced. “In Whose inheritance is it, anyway? considerable discretion in deciding what’s fair. For older the equity of a home or the contents of an investment that respect, this is a rare win-win—an ex-spousal Even assets that are understood to be separate— account, for example—to satisfy their financial obli- benefit that costs the spouse on whom it depends How to handle an inheritance can be a gray area in a gray divorce. such as certain types of inheritances (see “Whose couples, gations to the other spouse. absolutely nothing,” Bob says. inheritance is it, anyway?” far right)—may still figure sources of “Either way, states have a vested interest in seeing Even if you live in one of nine money from an estate during the into how a court decides who gets what. “You’ll want retirement that no one comes out of a divorce facing unnecessary Moving forward community property states (see marriage and deposited it into a the help of your financial advisor, accountant, and a savings financial strain,” Bob says. “So, when a married couple previous page), receiving an inher- shared account, on the other hand, lawyer well-versed in state-specific rules,” Bob says. can loom has saved successfully for retirement, those funds are Once your divorce is final, it’s important to consider itance during the course of your the funds will most likely be con- “Divorce is complicated, and there are a lot of different generally used to ensure that both parties end up how your new situation will affect your current and marriage doesn’t necessarily mean sidered marital property. Similarly, ways you can approach it.” especially financially secure.” future finances. Toward that end, make sure to revisit your spouse is entitled to a portion if one spouse inherited a house and For older couples, sources of retirement savings can large— your financial plan to ensure you’re still on track to of its value. the couple fixed it up, rented it, and loom especially large—because of both their size and because of 2 Pensions reach your goals. You should also update your will If inherited money was specifically shared the income, it also may be how soon you’re likely to need them. What’s more, both their and account beneficiaries with your new situation bequeathed to one spouse and was seen as a joint asset. such assets often are governed by their own rules size and how A defined-benefit pension that one spouse earned in mind. never mingled with shared funds, for “Consult an estate specialist regarding how they can be divvied up. With that in during the marriage is typically seen by the courts as “Make sure you update your beneficiary designa- example, the court might treat it as a in your home state if you have mind, let’s look at three assets of special relevance to soon you’re a shared asset, too. “This can become an emotional tions, in particular, as soon as your divorce is finalized,” separate asset in a divorce. Likewise, questions about how to divide an later-in-life divorce. likely to issue,” Bob says. “If one spouse has put in the time to Bob says. “If you don’t, you run the risk of leaving an inheritance structured as a trust inheritance that occurred during the need them. earn a pension, he or she may feel territorial about it.” additional assets to your ex, as some states don’t might fall outside the marriage and course of the marriage,” says Bob 1 Retirement accounts As with a 401(k) or an IRA, a qualifying spouse automatically nullify such designations after divorce.” be out of reach for the other spouse. Barth, a Schwab wealth strategist would be entitled to only that portion of the pension The truth is, most people don’t plan for divorce— If you or your spouse received based in Orlando, Florida. By law, 401(k)s and individual retirement accounts earned during the marriage. However, divvying up especially relatively late in life. But working with a (IRAs) can have only a single account holder. However, pension assets can be more complicated than pars- financial advisor before, during, and after your split the money that goes into such accounts during a mar- ing retirement accounts, because pension plan rules, can help both parties get back on track as quickly as riage technically belongs to both parties, so a spouse state laws, and whether a spouse has already begun possible. “If you find yourself facing divorce and retire- with a higher balance may need to transfer funds as receiving payments can all come into play. ment,” Bob says, “there are definitely concrete steps If you’re facing a later-in-life divorce, your Schwab financial LET’S part of the divorce settlement. If only one spouse has a pension, he or she may you can take to limit the impact on your future.” n consultant can help you adjust your financial plan, update In the case of 401(k) funds, both spouses need to wish to offer up other assets of equal value rather TALK 1Pew Research Center, as of 2015. beneficiaries, and more. Call today to schedule an appointment. file a qualified domestic relations order (QDRO) with than haggle over the pension itself. When both a state-level domestic relations court to spell out spouses have a pension but they are of unequal value, See page 42 for important information. u This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or how they want the money divided, keeping three the spouse with the larger pension might make up investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial things in mind: the difference by purchasing a single premium life planner, or investment manager. (0820-0PBM)

36 | CHARLES SCHWAB | FALL 2020 FALL 2020 | ONWARD | 37 SPOTLIGHT Move Money Safely SERVICES and Securely

Accessing your investments and finances is now simpler and more intuitive thanks to Schwab’s new Transfers & Payments center. When you log in to schwab.com from any web-enabled device, you can quickly and securely manage your accounts and move money with features like these:

Make a variety of transfers and payments.

1 Transfer funds between Schwab and/or linked Link or delete non-Schwab brokerage 1 external accounts and bank accounts and verify trial 2 deposits. 2 Transfer whole positions between Check the status your Schwab 3 of recent or brokerage accounts pending transfers. 3 Wire funds to another financial institution 4

4 Move money in Pay bills or schedule the mobile app automated payments Want to transfer on eligible accounts 5 funds with the convenience of 5 the Schwab Move investments from Mobile app other financial instead? Simply 6 institutions to your log in to the app Schwab account* for many of the *Transfers from qualified same features. accounts must be initiated at the firm holding your assets.

6 Request a check with NEXT STEPS funds from your Access your accounts, move money, and enabled accounts more by logging in to schwab.com and clicking Transfers & Payments, or by Quickly link to other features like wire downloading the Schwab Mobile app. instructions and routing numbers, tax withholding elections, and more.

See page 42 for additional offer information. u Requires a wireless signal or mobile connection. System availability and response times are subject to market conditions and your mobile connection limitations. Functionality may vary by operating system and/or device. (0820-00TY)

38 | CHARLES SCHWAB | FALL 2020

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With Schwab Stock Slices, you can now buy fractional shares of any of America’s leading companies in the S&P 500® Index, such as Amazon, Apple, Google, or Netflix, for as little as $5 each. And when you make your purchases through a custodial account, you can give the gift of ownership to the next generation of investors.

HERE’S HOW TO DO IT

1 Open a Schwab One® Custodial Account, which allows you to make a financial gift to a minor. You can manage the account on their behalf, and then SCHWAB STOCK SLICES See page 42 for important information. u Schwab Stock hand over control when they FEATURES AT A GLANCE Slices is not intended to be investment advice or a recommendation of any stock. Investing in stocks can be reach the age of majority. Learn volatile and involves risk including loss of principal. Consider more at schwab.com/ • Fractional shares trade just like your individual circumstances prior to investing. u The “S&P ® custodial. stocks and let you invest 500 Index” is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by Charles a set dollar amount to get part Schwab & Co., Inc. (“CS&Co”). Standard & Poor’s® and S&P® 2 Fund the account. This can of a share instead of buying a are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark take a few days, but you’ll be full share at market value of Dow Jones Trademark Holdings LLC (“Dow Jones”). Schwab notified when the funds are Stock Slices is not sponsored, endorsed, sold, or promoted available. • Invest from $5 to $10,000 by SPDJI, Dow Jones, S&P, or their respective affiliates, and none of such parties make any representation regarding the advisability of using Schwab Stock Slices or investing in any 3 Log in to your custodial • Buy fractional shares of any security available through Schwab Stock Slices, nor do they account and navigate to single stock in the S&P 500® have any liability for any errors, omissions, or interruptions of the S&P 500 Index. u The standard online $0 commission Schwab Stock Slices to buy or or up to 10 stocks does not apply to trades placed through a broker ($25) or by sell. automated phone ($5). See the Charles Schwab Pricing Guide • $0 commissions when for Individual Investors for full fee and commission schedules. Availability may be limited, plans are subject to change, and Whether it’s a gift for a birthday, purchased online through other exclusions or conditions may apply. (0820-08CK) holiday, or graduation, Schwab Schwab Stock Slices Stock Slices are a perfect way to help the next generation own their • Invest on behalf of a minor in a tomorrows. Visit schwab.com/ custodial account, or for GiveStockSlices to learn more. yourself in a brokerage account

FALL 2020 | ONWARD | 39 SPOTLIGHT Personalized Portfolio Builder Create a customized portfolio of mutual funds or TOOLS on schwab.com exchange-traded funds (ETFs) in just a few clicks.

With thousands of How does it work? fund choices available, building a diversified The tool helps you create a How do I get started? portfolio can be portfolio of funds using Log in to schwab.com/ challenging. Schwab’s Schwab’s asset-allocation portfoliobuilder to build a Personalized Portfolio models. These models help portfolio in five easy steps: Builder simplifies you determine an appropriate See page 42 for important information. allocation across various asset the selection process by u Investors should helping you find the classes, based on your consider carefully mutual funds or ETFs financial goals, risk tolerance, information contained that meet your needs. and time horizon. in the prospectus or, if Step available, the summary Choose the account in prospectus, including 1 which you want to build investment objectives, your portfolio. risks, charges, and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please Step Select your fund preference. read the prospectus carefully before You can build an all-ETF 2 investing. u When portfolio or all-mutual- using the Personalized fund portfolio—and choose Portfolio Builder, be taxable-bond funds or aware that Schwab is not analyzing your municipal-bond funds. investment portfolio; your individual circumstances; or considering or recommending what Step Select your risk tolerance, you should buy, hold, ranging from conservative or sell in your account. 3 to aggressive. u This is an example of a screen you might see when using the Personalized Portfolio Builder tool. This is for Specify your initial illustrative purposes Step only and does not investment. There is no depict actual funds or 4 minimum, but we suggest results. (0520-0KCY) at least $5,000 to ensure proper diversification.

GET STARTED NOW at schwab.com/portfoliobuilder.

Step Choose from a selection 5 of funds within each asset class and click “Trade” to QUESTIONS? complete your portfolio. Call us at 888-484-5340.

40 | CHARLES SCHWAB | FALL 2020 FALL 2020 | ONWARD | 41 IMPORTANT DISCLOSURES

The information provided here is for general informational purposes Pg. 16–17: Performance may be affected by risks associated with non- only and should not be considered an individualized recommendation diversification, including investments in specific countries or sectors. or personalized investment advice. The investment strategies Additional risks may also include, but are not limited to, investments in mentioned here may not be suitable for everyone. Each investor foreign securities, especially emerging markets, real estate investment needs to review an investment strategy for his or her own particular trusts (REITs), fixed income, small capitalization securities, and situation before making any investment decision. commodities. Each individual investor should consider these risks carefully before investing in a particular security or strategy. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from Pg. 16–17, 26–29: Charles Schwab Investment Advisory, Inc. (“CSIA”) is third–party providers is obtained from what are considered reliable an affiliate of Charles Schwab & Co., Inc. (“Schwab”). sources. However, its accuracy, completeness or reliability cannot be guaranteed. Pg. 26–29: Past performance is no guarantee of future results.

Examples provided are for illustrative purposes only and not intended Pg. 26–29, 30–33: Fixed income securities are subject to increased to be reflective of results you can expect to achieve. loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit The Schwab Center for Financial Research is a division of Charles quality, market valuations, liquidity, prepayments, early redemption, Schwab & Co., Inc. corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk. Pg. 5–6, 8, 16–17: Diversification, asset allocation, and rebalancing strategies do not ensure a profit and do not protect against losses in ©2020 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. declining markets. (0820-02GT)

ONLINE

Find this issue and archives of Onward at schwab.com/ onward.

42 | CHARLES SCHWAB | FALL 2020 FIND A SUSTAINABLE STRATEGY FOR THE LONG RUN.

iShares ETFs can help provide investors a strong foundation for the long-term.

Get a new perspective on your portfolio. Invest in something bigger.

Visit www.iShares.com to view a prospectus, which includes investment objectives risks, fees, expenses and other information that you should read and consider carefully before investing. Risks include principal loss. A fund’s environmental, social and governance (“ESG”) investment strategy limits the types and number of investment opportunities available to the fund and, as a result, the fund may underperform other funds that do not have an ESG focus. Black Rock Investments, LLC, distributor. ©2020 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. ICRMH0620U-1209001

J24312_1b_7_9375x10_25_OnWard_OnInvesting.indd Onward/OnInvesting Issue: 06.24.20 Epson Bleed: 8.1875” x 10.5” September 3, 2020 hn Trim: 7.9375” x 10.25” Live: 7.4375” x 9.75”

ISO 12647-7 Digital Control Strip 2009 3% A 100 60 100 70 30 100 60 100 70 30 100 60 100 70 30 100 40 40 100 40 100 40 70 40 70 40 40 40 70 40 40 70 40 70 40 40 3 10 25 50 75 90 100

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When it comes to life—and investing—perseverance pays off.

I was born in 1937, and since then have seen my fair share of times when our country struggled with seemingly insurmountable challenges. Financial crashes, pandemics, wars—big problems without obvious solutions. They were defining moments of my lifetime, and of the generations that endured them. The COVID-19 outbreak feels unprecedented, and in many ways it is—but so too were polio, the Great Depression, and the 9/11 terrorist attacks. In every case, we endured. We may have gotten knocked down, but together we got back up and moved forward. That kind of perseverance is the heartbeat of this country—and of investing. The greater the challenge, the greater our resolve to come back stronger than before. I know times are tough, but look to the future. Things will get better. And in the meantime, remember we’re here for you—at schwab.com, through our Schwab Mobile app, or by calling our experienced representatives at 800-435-4000.

Charles R. Schwab See page 42 for important Founder & Chairman information. (0820-0NMH)

44 | CHARLES SCHWAB | FALL 2020 With the foundation you leave them, imagine what they’ll build.

Whatever they decide to build, we’ll be here as a corporate trustee to administer your trust according to your terms. We’ll help you put everything in place so that your interests and benefi ciaries are taken care of—so your legacy lives on the way you planned it.

Call your fi nancial professional or visit personaltrust.schwab.com to learn more about Schwab Personal Trust Services from Charles Schwab Trust Company.

Charles Schwab & Co., Inc. (“Schwab”) is affi liated with Charles Schwab Trust Company (“CSTC”), the corporate trustee for Schwab Personal Trust Services (“SPTS”). Neither Schwab nor CSTC provides legal or tax advice. Consult with your legal counsel and tax advisors about your particular circumstances. ©2020 Charles Schwab Trust Company. All rights reserved. CC4254240 (0820-0LXE) ADP110128-01 (07/20) 00247237

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SCHWAB INTELLIGENT PORTFOLIOS PREMIUM™ Meet subscription-based financial planning.

Welcome to automated investing with unlimited financial planning help from a CERTIFIED FINANCIAL PLANNER™ professional for a monthly subscription fee.

Learn more at schwab.com/portfoliospremium.

Brokerage Products: Not FDIC-Insured • No Bank Guarantee • May Lose Value

Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochures at schwab.com/intelligentdisclosurebrochure for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ programs. Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium are made available through Charles Schwab & Co., Inc. (“Schwab”), a dually registered investment advisor and broker-dealer. Schwab Intelligent Portfolios has no advisory fee and doesn’t charge commissions, and Schwab Intelligent Portfolios Premium offers financial planning for an initial fee of $300 and a $30 per month advisory fee charged quarterly after that. ©2020 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. CC4248894 (0820-0PEA) ADP110337OW-01 (06/20) 00247227

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