In the aftermath of COVID-19, which invaded our lives in early 2020, we were informed of a disturbing societal trend. Between 2019 and 2020, Americans’ life expectancy at birth fell by 1.8 years, reversing a series of increases we have enjoyed for decades. Worse yet, between 2020 and 2021, life expectancy from birth dropped further, this time by nearly one full year.
Medicine, nutrition, and lifestyle choices have combined over many years to elevate our life expectancies. So much so, in fact, that the life insurance industry recently changed its mortality tables to reflect those increases. Following that fact, Congress changed both the formulas and start dates for Required Minimum Distributions (RMDs) from Qualified Retirement Accounts, reflecting retirees’ increasing longevity.
What do these revelations mean to you, as Americans and as investors? Will the insurance industry and IRS now revert to their prior life expectancy tables? Not a chance, and here’s why.
First, in the beginning paragraphs we noted that recent life expectancy revisions apply to newborns. Individual mortality factors vary in both nature and number over time. In adulthood, many mortality factors have essentially dissipated, though others begin taking their places. Among the deadliest factors is inexperienced driving, which sharply declines with ages over 21.
Another significant factor is illegal Fentanyl, which is only marginally related to COVID-19. There seems to be a correlation between school-age students being forced to stay home, and consequent drug use. With the proliferation of Fentanyl in the past 2 or 3 years, young people have been dying from overdoses at a rate of about 109,000 annually. While this has a negligible impact on the life expectancy of today’s adults, it is very significant for the young.
Murder rates in cities are also on the rise and tend to disproportionately affect young people. Gun and knife homicides are rampant in almost every major metropolitan area.
Conversely, COVID-19 has been deadlier for older people. However, the virus is age indiscriminate among people with significant co-morbidities, including obesity, which spans all age groups.
While infants born today have a life expectancy in their 70s, Americans who attain age 65 will likely live into their 80s. Assuming they have been cautious by adopting lifestyles that seriously reduce the chances of COVID infections, they will, on balance, live longer than at any time in the past.
Despite the new statistics.Van Wie Financial is fee-only. For a reason.
In the arena of moneylending, there is perhaps no more controversial topic than the so-called “payday loan” industry. Payday loan companies have long been a center of controversy. Generally, claims against the industry refer to the rate of interest charged as exorbitant (“usurious”). The payday loan industry presents an easy target, charging an average annual interest rate of 404%.
Outrageous, you say? Perhaps, but these are the shortest of short-term loans, often lasting only a few days, or even less. The lender has a difficult time earning a few dollars to cover the cost of loan processing, along with inherent lending risk. The industry has long been under attack, and now EWA (Earned Wage Access) is attracting a large segment of former payday loan customers.
EWA is a system being offered by a few noteworthy employers, including Target, McDonalds, and Walmart. Employees in the EWA program get access to their wages for already-worked hours at the end of a shift. This access has been called “daily pay” or “on-demand pay,” and has been very well received.
Conceptually, EWA can be used to prevent employees from incurring late fees, overdraft fees, and other excess costs, due to a lack of timely cash on hand. Many employees whose jobs include EWA have expressed a great deal of satisfaction with the system, reporting that EWA alleviates their need for (some say usurious) payday loans. EWA appears to be here to stay.
Younger workers in today’s environment tend to be serial job changers. Employers understand the high cost of employee turnover and have stumbled on EWA as a retention tool. According to EWA provider DailyPay, companies offering their system have experienced a 24% increase in longevity of employment. Hiring and training costs are lessened proportionately as turnover is reduced.
Among employees now using EWA report, 1 in 5 have used payday loans, and 6 in 10 have been late for bill payments. As a direct result of EWA, about 9 in 10 report having reduced or eliminated payday loans, and nearly as many have had less trouble paying bills on time.
How big will EWA become? Here’s a clue. Wal-Mart recently purchased Even, a provider of EWA that has served Wal-Mart for many years. Billboard advertising often includes EWA as a benefit for hourly employees. While EWA may not be the primary incentive for workers to choose a specific company, it appears to be an increasingly important tiebreaker.
While we can see opportunities for abuse, freedom of choice is well served with increased flexibility offered by EWA.
Van Wie Financial is fee-only. For a reason.
In a recent survey of 1,500 affluent and high-net-worth clients of financial advisors, 20% intended to retire earlier than they had planned prior to the COVID-19 pandemic, with a heavy tilt toward younger investors. 45% of survey participants under 35 years old, and 39% of investors from 35 to 44, have earlier retirement expectations, specifically because of the pandemic. These investors say they will be retired at 55, or 62 at the outside.
Stating it mildly, these people are delusionary.
During the March 2022 survey, markets had quickly recovered from the COVID-induced crash and had recently set new highs. Many young people had invested in crypto, and experienced huge (paper) returns. Life was good, and attitudes had been bolstered. Nascent economic problems, including lingering inflation and falling markets, had not yet damaged expectations.
At survey time, 24% had increased their estimated retirement spending needs, while only 20% said their retirement budgets had declined because of the pandemic. We do not understand their reasoning. Overall, less than half of the investors were very confident they will achieve their goals. In the “sandwich generation,” ages 45 to 54, less than a fourth were very confident they will reach their retirement goals. They cited paying for college, helping their parents, and a shrinking window for retirement savings. False confidence in early retirement seemingly conflicts with financial realism.
Where do financial advisors fit in? Younger people expressed feelings of entitlement and expectation that are not explainable in the real world. One troubling finding was that fully half of the youngest group of investors, those under 35, felt advisors showed a real understanding of their full financial picture. Many failed to disclose their crypto activity, clouding the picture.
Good advisors help their clients understand the realities of investment returns and drawdown rates, yet a quarter of participants said their advisors had not discussed long-term return expectations and withdrawal rates within the last 12 months. Unacceptable.
While only 1 in 5 survey advisors expected returns to be 10% or more per year, 3 in 5 investors said they did expect their returns to be 10% or more. Incredibly, 2 in 5 expected their returns to be more than 25%. On the withdrawal side, investors ranked inflation and market volatility being the greatest risks to their portfolios, while longevity risk (outliving your money) was the number one concern among advisors.
Advisors remain far more realistic than most of their clients and are therefore duty-bound to convey their reasoning to all age groups.
Van Wie Financial is fee-only. For a reason.
As soon as the Inflation Reduction Act of 2022 passed both chambers in Washington, D.C., proponents began to refer to the 700+ page leviathan as a “Climate Change Bill.” Why the sudden shift? In reality, this is an installment on Biden’s failed “Build Back Better” plan, as well as the progressives’ Green New Deal. We do not have a majority of American voters supporting the Green New Deal, so Washington powerbrokers hid that part from us. In plain sight. All we had to do was look below the headlines.
Our failure to perform individual due diligence will now result in more inflation (at least in the early years), higher taxes (when the Trump tax cuts expire in 2026), and higher energy costs, due to increased costs of wind and solar power generation. Yet, we are promised individual energy savings as the transition takes place. What slight-of-tongue sorcery supports that concept?
In a nutshell, costs of generating wind and solar power are estimated by the sorcerers using LCOE, or Levelized Cost of Energy, which includes complete costs for equipment, operation, and maintenance. It also assumes 24/7/365 production on all installations. All day, all night, all weather. However, the wind doesn’t always blow on windmills’ blades, and the sun doesn’t always shine on photovoltaic cells. The annual utilization of these assets is always less than 100%. Actual kilowatt-hour costs must be adjusted for capacity utilization, estimated at 40% for wind, and 30% for solar.
All-in costs, or LCOE, must then be applied to far fewer operational hours (and hence kilowatts) per year, raising actual per-kilowatt costs to consumers. Once the adjustment has taken place, suddenly wind and solar are dramatically more expensive than fossil-fuel power. There go the savings, and the “Big Lie” is left exposed. None of this even considers the necessary cost of duplicating the new capacity of wind and solar, so that fossil fuel systems can be activated during periods of no wind and no sun.
Far too often, within the halls of Congress (and in the supportive media), misleading names are assigned to legislation in order to obfuscate the true meaning and intent of the proposal. The so-called Inflation Reduction Act of 2022 is a classic illustration. Even worse, false naming obscures the crafty “estimating” of costs and savings within provisions of the legislation. Understated financial costs and embellished benefits are used to placate the electorate and reduce dissent.
For an excellent explanation of true costs of wind and solar energy, go to https://wattsupwiththat.com/2021/06/25/the-real-cost-of-wind-and-solar/.
We’ve been had.
Van Wie Financial is fee-only. For a reason.
In times of rising uncertainty, increasing inflation, and market turmoil, such as 2022 so far, investor preferences trend toward certain investments that are perceived as “safe havens” and stores of value. Among the likely recipients of investment dollars are annuities and precious metals. Fixed annuities are thought to hold their value during market pullbacks, and precious metals represent alternative investments that have always been rewarded during uncertainty. How are those asset classes holding up during the past 7 months of volatility?
According to the annuity industry, fixed-rate deferred annuity sales were up sharply in Q1, 2022, then rising again to eclipse the sales record set in the Great Recession. Logic and expectations are proving true in the annuity industry.
Precious metals, including gold and silver, have been bucking expectations. Gold, as tracked by the Exchange-Traded Fund (ETF) IAU, is down 2.72% Year-to-date. Silver, tracked by the counterpart ETF SLV, is down a whopping 13.37% Year-to-date. These results are counter-intuitive, and for many of us, extremely disappointing.
Over decades of education and investing experience, precious metals have been difficult to predict, defying reason more often than not. For years, there have been rumors of market manipulation, and those rumors are now verifiable. Few people know that silver prices are set twice daily by 5 people in London, at 10:30 and 3:00, via conference call. Recently, it is a non-fixed, but agreed-upon, pricing.
Rather than price fixing, gold is manipulated by a few large “bullion banks,” where their traders allegedly use a scheme known as “spoofing.” Huge orders are placed in the market for others to see and react. Before the orders are actually executed, the bulk of the orders are canceled. The remaining (uncanceled) portion is then executed at the market price, which is generally artificially lower or higher, depending on whether the trade is a buy or a sell order. These traders have been alleged to manipulate far more bullion than they control to back up their activity.
Recently, JPMorgan Chase’s (JPM) chickens have come home to roost. Three traders from JPM are on trial for market manipulation. As of this writing, there is not yet a verdict in the racketeering (RICO) trial of Michael Nowak, Gregg Smith, and Jeffrey Ruffo. All were charged with manipulating the markets for precious metals for their own (considerable) benefit, as well as that of their employer, JPMorgan Chase.
How much money did they make? JPM’s profits from their alleged manipulation from 2008 to 2018 ranged from $109 million and $234 Million annually. They also individually reaped incentive-based millions in compensation.
Should you harbor any misconception as to how the bank itself reacted to the 2018 charging of their traders, in 2020 JPM reaped the largest windfall of all, an astounding $1 Billion, from the metals trading desk. A few hedge funds, and certain banks, who were clients of JPM, also benefitted from the trading “success.” None other than George Soros’ hedge fund benefitted from the alleged illegal activity. Market manipulation lives on.
Anyone out there ready for some free-market metals trading? It may be on the way.
Van Wie Financial is fee-only. For a reason.
In the Vice-Presidential debate of 2008, Sarah Palin uttered the famous line, “Say it ain’t so, Joe.” That was said to Joe Biden, but this week I was reminded of Sen. Joe Manchin, who previously would not support the latest Democrat spending bill until he saw July’s inflation numbers. Sen. Manchin suddenly couldn’t wait, so he agreed to the spending this past week. His prior words were meaningless.
The working name for the Senate Bill is “Inflation Reduction Act of 2022.” However, many economists believe that the Bill is likely to fuel increased inflation. In fact, according to the Senate Byrd Rule, the name will likely have to be changed, as there is virtually no chance that the result will be less inflation. Quite the opposite, in fact.
Congress has a long and sordid history of misnaming Bills and subsequently enacting them into laws. In the naming process, words are often meaningless and frequently turn out completely contrary. Some notable examples include:
- Patient Protection and Affordable Care Act (a/k/a/ ObamaCare), which made health insurance and health care more expensive
- Patriot Act, which resulted in less freedom from scrutiny by the government, antithetical to our founding fathers’ intent
- American Recovery and Reinvestment Act (a/k/a “Stimulus”), which stimulated sign companies to announce projects, but somehow “shovel-ready jobs” were found lacking
Getting back to the Inflation Reduction Act of 2022., even the Administration admits that this Bill has a high cost for the first 3 years, with theoretical savings in years 4 through 10. Worse yet, another result would be increased taxes on all income levels, breaking another of candidate Biden’s 2020 campaign promises. Proposing tax increases when we are burdened with high inflation and a recession is socialistic thinking.
Economist Friedrich von Hayek said it best when he quipped, “If socialists understood economics, they wouldn’t be socialists.” This is reflected in the new “Inflation Reduction Act,” which was seemingly authored by socialist-leaning elected officials.
Conveniently, carefully chosen words obscure the truth. The Administration denies our current recession and continually prevaricates as to the cost of their proposed boondoggle. Changing the definitions of words and phrases does not alter simple economics. Words mean things. Or, used to, anyway. Hold on to your wallets (even tighter) if this Trojan Horse passes into law.
Van Wie Financial is fee-only. For a reason.
Assuming you don’t have some unusual, complicated tax situation, we assume that your 2021 Income Tax Return has already been filed. For most people, income taxes are now “out of sight, out of mind” until next spring. However, some small businesses and self-employed people may still have a chance to improve their situations retroactively, simultaneously improving their own personal financial futures.
Certain Small Business Retirement Plans can be opened until the extended filing date requirement, assuming an Automatic Extension was filed. This means October 17, 2022, is the date (October 15 falls on a Saturday, so the Extension Due Date moves to Monday, Oct. 17). Some small business owners may have been unpleasantly surprised at the size of their 2021 tax bills in April this year. For some of these people, some relief could be realized by opening a Qualified Retirement Plan (QRP) retroactively to 2021, with a corresponding deduction for 2021 contributions made in 2022.
For self-employed people (including Sub-S Corps, LLCs, etc.) with no W-2 employees except perhaps a spouse, an Individual 401(k) Plan offers the greatest flexibility in terms of administration and large contributions. Individual contributions are made through salary deferral, and the Company can contribute from annual profits. Plans can be opened until the Extended Tax Due Date, and Company contributions can be made retroactively for 2021. While some Plans allow Roth-style accounts, most Indy(k) Plans are used in part for tax deductions, and are therefore non-Roth style.
Small employers, if ineligible for the Indy(k) Plan, may open a Simplified Employee Pension Plan (SEP), also up to the Extended Tax Due Date. The SEP has less flexibility than the Indy(k), but works similarly, reducing taxable income and accumulating retirement funds for eligible employees.
Also available for small employers is the SIMPLE IRA, which has relatively easy rules, lower contribution limits, and comes with a few catches. First, it must be opened by September 30 of the year of the Plan is opened. It is not too late for 2022, but the SIMPLE Plan cannot be used to improve 2021 results. Other rules are straight-forward, and administration is (excuse me, please) simple. Once contributed, no funds can be withdrawn until a 2-year waiting period has been satisfied.
Tax years 2021 and 2022 allowed above-the-line deductions for some charitable contributions. Should Congress renew this deduction for 2022, this Blog will notify the readers in time to act on that valuable tax-saving provision.
Van Wie Financial is fee-only. For a reason.
Believe it or not, more than half of 2022 is in the rear-view mirror, and it is time to start planning year-end financial concerns. For many of us that includes tax considerations, including charitable contributions. Simply sending money to favorite qualified charities does not assure receiving the most favorable tax outcome. It is not much more difficult to treat yourself well, and your charities will be totally unaffected. A win/win, to be sure.
Since passage of the Tax Cuts and Jobs Act of 2017 (TCJA), a large group of American taxpayers no longer receive any benefit for itemizing deductions on Form 1040 Income Tax Returns, as they claim the larger Standard Deduction. Coupled with inflation and a down economy in 2022, charities are concerned that donations will not meet their operational needs for the year. Through years of income tax rules and the spirit of the Holiday Season, most donations are made and received late in the year.
Making tax-efficient donations requires advance planning in a tax environment that is constantly changing. At this time, some opportunities have expired for 2022. We have no crystal ball to forecast behavior in a Congress that is constantly at odds with each other and reality, so we inform readers while we await legislation. For tax years 2020 and 2021, taxpayers received “above-the-line” deductions for limited cash contributions. This provision expired, but Congress may reinstate it, along with several other expired provisions. This could happen as late as mid-December.
Qualified Charitable Distributions (QCDs) are available to IRA investors who have reached age 70-1/2, whether or not they are required to withdraw monies from their retirement accounts for Required Minimum Distributions (RMD)s. QCD donations are made directly from an IRA to a charity, and do not count as income to the taxpayer. This renders the QCD amount tax-free, and does not affect the charity. While RMD age has moved from 70-1/2 to 72 (with a likely change to 73 if Congress passes SECURE 2.0), QCDs remain available to IRA owners aged 70-1/2 or more.
For taxpayers subject to RMD requirements, all QCDs are limited to the lesser of the RMD total or $100,000 annually. This tax-efficient methodology requires advance planning to assure timely completion, and is tax-free. While the QCD is the most advantageous method for making charitable contributions, not everyone is qualified to use the technique. Taxpayers under 70-1/2 at year-end should watch carefully to see if the $600 cash donation income exclusion gets restored for 2022. This Blog will update readers when any changes are made.
In years past, many taxpayers used itemized deductions, which effectively reduced Taxable Income by the amount of qualified charitable gifts. Today, however, most of those deductions have been lost in favor of higher Standard Deductions. Using a QCD, your charitable gift is sent directly from your custodian to the qualified charity. It is not reportable income to you, and no tax is due. Note that the taxpayer is responsible for informing a tax preparer that a QCD was used.
Among tax considerations making their way through Congress is a change to the limits on “SALT” deductions, meaning State and Local Taxes. Should an increase in SALT deductions be implemented for 2022, some taxpayers may reap a benefit for larger charitable contributions by itemizing. In an ideal world, we would know the tax rules when the year begins. In today’s America, we hope that we will get the rules in time to perform some simple calculations and estimates before year-end.
Van Wie Financial is fee-only. For a reason.
When was the last time you looked at your paystub? Yes, I realize that there is no paper stub attached to your nonexistent paper paycheck, but that doesn’t mean it went away. It is probably available online, or you can ask your employer for a copy. Due to the absence of physical paystubs, most people fail to examine details of their hidden expenses or paycheck withholding.
Realizing exactly what is being paid out prior to “take-home pay” can be enlightening. Withheld earnings paid out to taxing authorities, insurance carriers, and company-sponsored retirement plans, all add to what we call the Invisible Cost of Living. “Off the grid” workers (those who work for cash only) have no paystub, real or electronic. In all cases, “out of sight, out of mind” applies to the true cost of living our daily financial lives.
Far too many Americans have no idea exactly how much they actually earn in a pay period, or over a year. When asked, a common response is, “I take home X dollars a year.” That does not answer the actual question. Similarly, many people do not know their gross monthly Social Security benefit, as they look simply at the deposited amount. Establishing an online account at socialsecurity.gov allows a recipient to see how much is being withheld for Medicaid B and Federal Income Taxes, if any.
For the dwindling group of Americans accruing Traditional Pension benefits, they should all comprehend the personal economic value of their employer’s pension contributions. Understanding the total cost of living, including the invisible portion, is vital for everyone, including job changes, as well as anyone considering gig work for a period of time.
Preparing for retirement and beyond is a years-long process, and therefore cannot be hurried. Like all insurance plans, Social Security and Medicare require payments (essentially insurance premiums) to be made into these Plans for a minimum of 40 calendar quarters. Lifetime credited earnings by each individual are available on the Social Security website, and should be checked occasionally.
Failure to understand the true cost of living, including the invisible portion, can result in disastrously underestimating retirement needs. Today, visible components of inflation are “in your face” at the gas pump, grocery store, and in the stack of unpaid bills on your desk at home. Invisible components are inflating as well, and changes in your Total Cost of Living must be understood in order to plan for eventual Financial Independence.
Like it or not, many people will be working longer than anticipated.
Van Wie Financial is fee-only. For a reason.
As financial planners, our goal is to assess current economic and market conditions and then design portfolios and select assets that have a good chance of being successful in whatever environment we encounter. Today we have very challenging financial markets, and we recently finished the worst half-year start in market history.
Hardest to understand is the “nowhere to run, nowhere to hide” mentality of this market. Historically, inflation is countered in portfolios by overweighting assets that have generally responded positively to overall rising prices. Among these are precious metals, inflation-linked bonds, real estate, commodities, and general equities. Recently, however, these assets have been falling in lockstep with the general market.
Asset classes that are traditionally friendly to inflation can easily be represented in portfolios. Many Exchange-Traded Funds (ETFs) are available to today’s investors at (lower) market prices, and with minimal expenses. History doesn’t provide us with any guarantees, but patterns of success and failure have always tended to be repetitive. Since inflation-friendly asset classes are on sale right now, adding small percentages to your portfolio may give your personal recovery a boost when the market changes focus.
Planning portfolio allocations and positions must be supplemented by common sense. History is on the side of those who avoid past errors. Patience is required, along with faith in the American economy. Right now, holding an above-average amount of cash in money market funds will allow investors to take advantage of opportunities that will inevitably arise. One helpful method of generating cash is to seek tax losses that can be harvested before year-end. This applies to non-tax-qualified funds held in brokerage accounts.
For qualified funds (IRAs, 401(k) Plans, etc.), today’s low asset prices present opportunities to perform Roth Conversions at very low prices, lessening the tax burden, while setting up tax-free growth as the market recovers. Since Roth accounts are never taxed, once established, and do not have mandatory Required Minimum Distributions (RMDs), savings can accrue over the rest of an investor’s life. Roth Conversions can no longer be reversed, so be cautious.
Meanwhile, every day brings us closer to a bottom, and history teaches us that a turnaround will occur when we least expect it. Losing out on the first few days of a recovering market is a formula for failure. As difficult as it has become tolerating the 2022 market slide, our best expectations are for long-term success through well-planned investing.
Van Wie Financial is fee-only. For a reason.