America is greying before our eyes. Baby Boomers are retiring at the torrid pace of around 10,000 per day. Unfortunately, not all of them are prepared for retirement, either emotionally or financially. In all too many cases, the two are interrelated. Financial preparation can ease the emotional transition from earning and accumulation to relaxing and distribution.

Financial preparation requires years of planning, saving, investing, and protecting assets. On April 1, 2022 (we presume this was not an April Fools’ joke), the Insured Retirement Institute (IRI) released a survey, painting a dismal picture of Americans’ retirement landscape. Research was done in March of 2021, among Americans ages 40 to 73. Their results would be laughable, except that it is no laughing matter. Among respondents, the top 5 regrets include:

  • They would like to have invested more aggressively
  • They should have learned more about retirement products
  • They wish they had saved more
  • They wish they had started saving earlier
  • They wish they had consulted a financial advisor

Given a Mulligan, what would most workers change if they could go back in time? As Eubie Blake remarked (upon turning 96), “If I’d known I would live this long, I would have taken better care of myself.” This is applicable to personal financial planning. If more people took early note of that last bulleted regret, the other 4 would likely be mitigated during the relationship.

What you can’t do is obvious–you can’t start sooner. Every day of procrastination requires saving more for the duration, and from the first dollar saved, investing more aggressively. What you can do, in keeping with your circumstances, includes starting today to put aside retirement funds. If you aren’t saving enough, start planning an increase in your saving rate immediately. Critical to most people is determining if you need help and then finding qualified advisors to interview.

Psychologists have for years studied the fears of Americans, and have concluded that there are two fears that, for many Americans, exceed the fear of death: public speaking, and running out of money. Most people can conquer their public speaking phobia with practice and coaching. Not so for running out of money, which requires more planning, and for a much longer time period.

Van Wie Financial is fee-only. For a reason.

Since the onset of COVID-19 in 2020, we have been tracking Congressional changes in rules for retirement savers. Unlike many legislative issues, Congress has improved the landscape for participants in employer-sponsored Plans and owners of Individual Retirement Accounts. Pending right now is the SECURE Act 2.0, which will (if passed) expand the user-friendly features of its big brother, SECURE Act 1.0, which became law in 2020. Both are supported by some of the most significant bipartisan majorities in history.

Lesser known than the SECURE series is a proposal from the House Education and Labor Committee, dubbed the Protecting America’s Retirement Security Act (PARSA, my word), which quickly created a partisan divide. What could cause a riff in an otherwise-agreeable retirement agenda?

PARSA requires Company Retirement Plans to automatically re-enroll participants periodically, improves fee disclosures, and creates a portal on the Department of Education’s website for personal financial planning. So far, so good. Count me in.

One major cause of conservative dissent regarding PARSA is an increase in government involvement in the retirement arena. According to Rep. Virginia Foxx (R-VA), PARSA would deepen government involvement in Americans’ individual decision making. How so?

Allowing retirement plan sponsors to include annuities with a delayed liquidity feature as a qualified default investment alternative is a non-starter for many conservatives. The annuity feature is supported (read: sponsored) by the Insured Retirement Institute. “Insured Retirement” is a buzzword of the annuity and life insurance industry.

I know a great deal about annuities, but I am no expert. It seems to me that the euphemism “delayed liquidity feature” means that your money becomes unavailable for a period of years once the annuity is purchased. The only reason I can come up with for a feature like this is to amortize a commission paid on the sale of a default investment.

Legend has it that the U.S. Senate is where Bills go to die. The Senate follows its own rules, and generally considers a multitude of proposals. In this case, the Senate could take up SECURE 2.0 as a stand-alone Bill and could do the same with PARSA if the full House of Representatives passes it through. Or, of course, the Senate could throw all the ideas into the Senate Vitamix, and see what emerges from the slurry.

Our view of the annuity option is simple; available yes, default no. We are included in the overwhelming majority of Americans who favor passage of SECURE 2.0 “as is.” Therefo9re, we implore the Senate to keep it simple, and pass SECURE 2.0. Independently, either modify or reject PARSA.

Van Wie Financial is fee-only.  For a reason.

For over two years now, we have tracked Congressional reaction to the sudden and unexpected onset of the COVID-19 pandemic. In Washington, the 2020 Congress produced two notable pieces of legislation, CARES Act and SECURE Act (now called 1.0). As 2022 unfolds, Congress is considering revisions to SECURE 1.0 in a Bill dubbed SECURE 2.0.

Uncle Sam claims to be in favor of the citizenry providing for themselves later in life. Financial behavior is easily influenced by Congress using the U.S. Tax Code. CARES and SECURE 1.0 made a large difference in taxation and financial self-reliance. We applaud the passage of both, and strongly support passage of SECURE 2.0.

Last week in the House of Representatives, a floor vote was taken on the House version of SECURE 2.0, and results were once again overwhelmingly positive, passing 414 to 5. The Senate version contains small differences and will require Reconciliation, as do most Bills. That should pose no obstacle, as overwhelming support spans both Houses of Congress. Also, some supporters of the Bill are retiring in November, and want this added to their credits before they leave.

There are several interesting highlights in the Bill, and individually most will affect only a small percentage of households. However, the cumulative impact is widespread and broad-based. Among the highlights:

 
  • Further increased triggering age for Required Minimum Distributions (RMDs) from Qualified Retirement Accounts, this time from 72 to 73, with further future increases
  • Expanded auto-enrollment into new ERISA (Employee Retirement Income Security Act of 1974) Plans (e.g., 401(k), 403(b))
  • Indexed for inflation IRA Catch-up Contributions, which were statutorily fixed at $1,000 annually, as well as provided additional contributions for savers ages 62, 63, and 64
  • Allowed Employer Plan participants to allocate employer matching funds to student loan repayments
  • Expanded functionality of QLACs (Qualified Longevity Annuity Contracts), which can defer part of RMDs to a later age (deferring taxes on that part of the Account)
  • Expanded individual ability to find lost retirement funds in various Plans via a national database
 

While about 80% of retirement savers draw on their RMDs of necessity, for those who don’t, SECURE 2.0 is a relief. Further, we hope that the new rules will stimulate additional contributions during working years. In Company-Sponsored Plans, employer matching funds will be required to be Roth-like funds, providing later tax-free income.

Summarizing, SECURE 2.0 is out of the starting gate with a substantial tail wind. We believe it will pass the Senate and be signed into law for 2022. Both sides could claim victory with passage, and in D.C. that is worth its weight in gold. Watch this Blog for updates.

Van Wie Financial is fee-only.  For a reason.

Inheriting retirement assets presents a giant step toward a more comfortable retirement. In an era where post-working life is expected to run into decades, additional assets increase your odds of living a good lifestyle in post-career America. Inheritance is a two-way street. Generally involving the loss of a loved one, the financial benefit can produce a timely windfall.

Unless that inheritance is inadvertently squandered.

What should be common financial knowledge has become increasingly uncommon. Following decades of neglect, education in personal finance has recently been renewed. Recently, states such as Florida have imposed new requirements on public educational systems, adding personal finance to high school graduation requirements. Preparing for retirement will never be more important, and financial education has never been more neglected. We applaud Governor DeSantis and others for their efforts.

Dealing with retirement assets, both during life and beyond, is complicated. Rules are numerous, complex, and ever-changing. Failure to understand and/or comply with all rules and regulations can be a costly error. Saving sufficiently for retirement is costly enough; no one needs to make costly mistakes.

Both Congress and IRS change rules and regulations frequently, and the changes are often complicated. They can also be costly to ignore. One recent example, though not carved in stone as of this writing, is most likely to be codified.  This new IRS regulation affects some beneficiaries inheriting funds from an IRA or Company Retirement Plan. If the account owner died in 2020 or later, rules for many beneficiaries have been changed by IRS decree.

The change requires some beneficiaries to take a Required Minimum Distribution (RMD) in 2021, though the Regulation wasn’t released until after 2021 was in the rear-view mirror. So far, there is no confirmation as to how these beneficiaries will be allowed to remove the money from their account without penalty.

Assuming these new regulations are made permanent, penalties for non-compliance could be extreme and might result in beneficiaries incurring a significant reduction in their own retirement account balances. When a process is clarified, we will let you know in this Blog and on the Van Wie Financial Hour radio program. Financial literacy is a lifetime pursuit in an ever-changing environment.

April is Financial Literacy Month. Perhaps some government officials need to brush up on their own responsibilities. We can only hope.

Van Wie Financial is fee-only. For a reason.

Rules for Individual Retirement Accounts (IRAs) are complex and widely misunderstood. Errors can be costly, sometimes in cash, and other times in lost opportunities. First and foremost is the eligibility to contribute, which now is only circumstantially related to age. Contributions were formerly limited to people under age 70-1/2. That restriction was eliminated in 2020, following the COVID-19 outbreak.

On the age scale, there is no statutory age limit for contributions, but there is a practical limit, based on income eligibility. At the earliest ages, unless you are one of the most beautiful babies ever (think: Gerber Baby), there is no legitimate way for infants to earn qualified income on which to base a contribution. Eligible income is a broad topic, and not widely understood.

In financial discussions, it is sometimes illustrative to begin with the negative; in this case, what is not considered eligible (earned) income is vitally important. Here are some examples:

  • Social Security income is not considered earned income
  • Annuity payments, including Traditional Pension Plan payments, are ineligible for IRA contributions
  • Investment income, including interest, dividends, and capital gains, are unearned, and therefore are ineligible
  • Sub-S Corporation dividend income is considered unearned, as are some partnership payments. (Note that wages and salaries from S-Corps and Partnerships are earned, payroll taxes are due on those earnings, and IRA contributions are allowed.)
  • Life insurance proceeds are ineligible (and non-taxable)
  • Disability payments and unemployment income, although taxable, are disallowed
  • Alimony and Child Support payments that are not taxable are ineligible
  • Income from rental properties is unearned, unless real estate is the taxpayer’s official business, and are ineligible
  • Gifts received are not qualified

Qualified income (for IRA contributions) takes several forms, most of which are obvious, but a few may catch you by surprise. Wages, Salaries, and Tips, etc. is a line item from the 1040 Form. Items that make their way into that category are IRA qualified. A few other items are generally acceptable, including income from a business you operate (self-employment), taxable alimony and/or maintenance received, and fees for serving jury duty and as directors of organizations.

Other qualified income sources are considerably more obscure, including:

  • Combat pay (even if no income tax applies)
  • Vacation pay accrued (even if paid in a different year)
  • Scholarships, if included in Box 1 of a W-2 (Box 1 includes wages, tips, and other compensation)
  • Non-tuition payments for fellowships or stipends
  • Difficulty of Care payments (received for caring for an individual who has a handicap, though these payments are generally excluded from taxable income)

Perhaps the most often missed opportunity happens when a married couple has only one breadwinner. In these cases, the non-working spouse can contribute based on the worker’s income, subject to all general rules and restrictions. This is called a “spousal contribution” into a “Spousal IRA.”

All IRA contributions are subject to annual limitations, currently $6,000 ($7,000 for ages 50 and up). Contributions are also capped by eligible income, and cannot exceed that total amount (whether single or married, including spousal contributions).

Knowing the rules may enable contributions from people who otherwise have no qualified source of income. Knowing the rules may also save a taxpayer from making an ineligible contribution, which leads to penalties.

A qualified Certified Financial PlannerÒ will assist you in planning your route to financial independence.

Van Wie Financial is fee-only. For a reason.

America is aging, and we owe a great deal of gratitude to the medical community for prolonging lifespans. Unfortunately, with advancing ages come increasing incidences of Diminished Mental Capacity, or DMC. That fact is changing the world of financial planning and investing. Professional financial planners must increasingly deal with Longevity Risk for so long as the trend continues. Running out of money is simply not an option.

Operating in a highly regulated business environment, our profession is in the fishbowl when it comes to protecting elderly clients and their assets. Our main regulatory body is FINRA (Financial Industry Regulatory Authority), and they are not messing around when protecting the assets of Americans of any age, but particularly the elderly. And that, by the way, suits us just fine. One of our top pet peeves is predators who prey on elderly and/or diminished capacity citizens.

One estimate of the annual cost of elder fraud is in excess of $3 Billion, and some estimates are significantly larger.

How can average Americans avoid falling prey to predators? According to FINRA, and incorporated into our Advisory business, is the concept of creating a relationship backup. Called a Trusted Contact Person (TCP), the backup concept was formerly more or less voluntary. Now, regulators are getting serious about the problem, and advisors are expected to implement processes and procedures to protect clients, including a TCP.

It’s about time.

Fundamentally, the DMC problem we face as clients’ wealth managers arises when patterns of client behavior change over time. This was first brought to our attention by couples who were becoming suspicious that one or the other may be changing. Patterns of changed behavior often involve unusual and excessive withdrawal requests.

Since we are bound by our Agreements with clients, and this requires honoring all direct requests and orders, we needed a way to protect the family should suspicious requests occur. In response, we created a voluntary system of backup verification for clients who want to add that level of protection for their own funds.

Apparently, we have not been alone in recognizing the problem. FINRA now has a rule (4512) requiring advisors to address this potential problem. Here is how FINRA sees our responsibility:

“…at the time of the account opening a member shall disclose in writing, which may be electronic, to the customer that the member or an associated person of the member is authorized to contact the trusted contact person and disclose information about the customer’s account to address possible financial exploitation, to confirm the specifics of the customer’s current contact information, health status, or the identity of any legal guardian, executer, trustee, or holder of a power of attorney, or as otherwise permitted by Rule 2165.”

It seems that we now have a shared responsibility for monitoring clients’ mental capacities. Rather than an additional burden, we see it as an opportunity to better protect our clients and their wealth.

We will be addressing this issue on an increasing basis with clients and their families, as well as with potential clients who come into our office for their complimentary 1-hour consultation. We will also discuss aging and protection on the Van Wie Financial Hour. Aging is already costly, and losing hard-earned assets to memory problems and/or fraud is unacceptable.

Van Wie Financial is fee-only. For a reason.

Difficult as it is to look back at 2020 with any fond recollections, for some Americans the single-year suspension of Required Minimum Distributions (RMDs) from Qualified Retirement Accounts was an actual highlight. The introduction of COVID-19 to our shores created severe turmoil in the markets, and most account balances were in need of bolstering.

As Tax Filing Day approaches, we focus on the few remaining methods of helping our own financial situations. Some 2021 opportunities expired at midnight on December 31, 2021, but others remain until Tax Filing Day in April of 2022. Most noticeable is the funding of a Traditional Individual Retirement Account or IRA.

Decreasing last year’s tax bill can be as easy as making a (last year’s) contribution to a Traditional (deductible) IRA. Receiving the tax deduction requires that the contribution be made on or before the Filing Date and that the deduction be allowable under IRS rules for IRA deductibility. IRAs can be opened and funded at the same time, and IRS will even make direct deposits (contributions) for you from a tax refund if so desired.

Sadly, RMDs returned for 2021. If for some reason you failed to take an RMD in 2021, distribute it immediately to limit potential penalty coats. It is too late to do anything rather than mitigate your loss.

Another pertinent IRA topic for this time of year is Charitable Giving. We know that most people get into the charitable mood later in the year, but one common mistake can be very costly, and it needs to be discussed early in the year. Many IRA owners aged 70-1/2 or higher do not understand the Qualified Charitable Distribution or QCD. Donations to qualified charities can be made by these people directly from their IRAs, and the tax savings are automatic because the income is not recognized on their Form 1099.

Here’s the rub: QCDs are able to be counted as RMDs, but RMDs cannot be classified as QCDs. That presents a timing situation.

That sounds complicated, but it is actually quite simple. One of the most common methods of distributing RMDs is to spread payments throughout the year as monthly income. Anyone using this distribution method, and also contemplating charitable gifting using the QCD method, must be aware of the sequencing of withdrawals in order to preserve the available tax advantage.

RMDs can be satisfied with a combination of regular withdrawals and QCDs. Planning for both is required in order to assure the availability of QCDs without over-drawing the account RMD (legal, but unwanted). Executing QCDs prior to taking RMDs assures the best tax advantage available. We can assist with tax planning and withdrawal timing.

Van Wie Financial is fee-only.  For a reason.

Personal financial planning is extremely challenging and requires the use of several mathematical concepts. Van Wie Financial attempts to simplify math concepts when explanations are needed. Our example today pertains to the reporting of household Net Worth.

Simply stated, Net Worth is the numerical difference between a family’s total assets and their total liabilities. The number can be positive or negative and generally changes over time. Determining your own Net Worth is an interesting project, and will actually help you become more familiar with your own finances. This is an early step in comprehensive lifetime personal financial planning.

Once Net Worth is computed, many people naturally like to know how they stack up among their peers. Do you compare your findings to the Average Net Worth or the Median Net Worth, and within your own peer group or among Americans in general? Those answers will likely dictate your attitude.

Average refers to the total American Net Worth, divided by the number of households studied. Median simply reflects the number at which an equal number of households have greater Net Worth, and an equal number have lesser Net Worth.

The Average Net Worth of American households is $748,800, while the Median Net Worth of American households is $121,700 (from the Federal Reserve in 2019). The difference merely reflects the method of computation. Average Net Worth weights billionaires according to wealth, rather than as individual households. Confusing the public is as easy as presenting the concept most likely to make the writer’s point. There is a fine line between reporting facts and deceiving readers using math.

Would anyone with a Net Worth of “only” $200,000 feel inadequate when compared to the average of $748,800? Probably, but a simple comparison to the Median Net Worth ($121,700) indicates relative success. A clever author (or politician) will often selectively present numbers to bolster a personal opinion or bias. Don’t be fooled; consider the source.

A truly meaningful comparison of your own Net Worth should be based on the Median Net Worth, but should also be confined within an age-related bracket.

Several recent media presentations are using Average numbers for the purpose of fomenting political unrest. The authors are apparently on the “Equity” bandwagon we hear so much about. Don’t fall for the deception.

Setting reasonable goals requires a practical and knowledgeable approach to financial planning. We can help.

Van Wie Financial is fee-only. For a reason.

Inflation is ubiquitous, reminders are everywhere, and nearly every American is feeling the pinch. Go to any gas station, grocery store, restaurant, car dealer—you name the place, and inflation has preceded your visit. This week we were informed by the Bureau of Labor Standards, or BLS, (the government agency assigned to monitor, calculate, and report cost-of-living changes) that the Consumer Price Index (CPI) indicated a 12-month price level increase of 7.5%.

I’ll have none of that, thank you.

Let’s look at some of the items. We’ll start with their more believable numbers, just to be fair. According to BLS, the 12-month increases for:

  • Used automobiles: up 40.5%
  • Gasoline: up 40.0%
  • Rental cars: up 29.3%
  • Transportation: up 20.8%
  • Hotel Rooms: up 20.3%
  • Furniture: up 17.0%
  • Household Energy: up 14.7%

From there, I am suspicious regarding other items of everyday consumption, including:

  • Food at home: up 7.4% (Who are they trying to kid? Grocery stores have raised prices on most of the items we buy far more than 7.4%. Worse, this totally ignores the phenomenon of “shrinkflation,” where we pay the same or more to receive a lesser quantity.)
  • Food at Restaurants: up 6.4% (This may be the biggest joke of all, as restaurant prices have skyrocketed. Also, I suspect that portion sizes have suffered shrinkflation, as well.)
  • Housing: up 5.7% (Home buyers have experienced an average 19% price increase over 12 months, plus higher mortgage interest rates. Current owners are experiencing dramatic increases for insurance, utilities, upgrades, and repair costs.)
  • Rent: up 3.8% (Who are they trying to hornswoggle? Landlords are raking in rent increases across the country. According to Money Magazine, rents have increased 14.1% in the past year. A similar analysis by Weiss Ratings found overall rents up 11% in 2021.)

Applying actual cost numbers would elevate the CPI increase to over 10%, and likely quite a bit higher. Expect continuing CPI increases and little action from our elected representatives. If Congress would control its own spending, encourage energy production, and reduce regulation of business, we could experience relief in a relatively short time. I am not optimistic, at least not for the next several months.

Van Wie Financial is fee-only.  For a reason.

Academia will study most anything, so long as they are hopeful of proving a hypothesis. One particularly dubious study concerning investment returns in Roth IRAs attempted to show that results are somehow influenced by the annual incomes of the account holders.

Finding #1 – Lower-income investors experienced lower investment returns than did their higher-income counterparts. Finding #2 – The performance gap was less in Traditional IRAs than in Roth IRAs. Finding #3 – Results are disturbing to the authors because the Roth IRA was designed to help the Middle Class.

So, who are these “lower-income” folks receiving supposedly discriminatory lower returns? For this study, annual incomes under $200,000 failed to reach the “wealthy” category. That’s a high bar to set for the annual income breakpoint.

Given these premises, let’s explore their findings. From 2004 to 2018, Roth IRAs owned by “the wealthy” returned 8.55%, while the lower-income folks realized only 3.6%. This supposedly increased American “wealth inequality,” which is, according to the authors, a grievous and “unfair” condition in our society.

How dismayed were the academic researchers? They concluded that performance disparity is so severe as to warrant government policy changes. Did they clarify what legislation could help? I failed to find even one suggestion.

Risk acceptance or avoidance is dependent on the circumstances of the investor. Novice investors with low levels of financial literacy tiptoe into the process and theory of market investing using lower-risk investments. Risk acceptance generally begins to expand with experience, knowledge, and increasing wealth. Because risk and return are strongly correlated, returns logically increase over time.

To us, this “research paper” constitutes a conclusion looking for a story.

It is never a good idea to “86” a critical analysis without answering the simple question, “What would we do better?” First, we would encourage economics, personal finance, and investing basics in the school curriculum. We could free up plenty of time in schools by eliminating Critical Race Theory. Second, we would lift (or remove) limits on IRA contributions, so that interested young workers could save more, learn faster, and accelerate their journeys to Financial Independence.

Sadly, too many American households are negligent regarding saving and investing, having been educated in school systems that value self-esteem over self-reliance and financial literacy. Want everyone to get higher returns? Improve overall financial literacy. And certainly, don’t despair if you are earning less than $200,000 per year. You, too, can achieve excellent returns in your Roth IRA.

April is Financial Literacy Month. Can we expand it year-round?

Van Wie Financial is fee-only. For a reason.