Recently, on economist Larry Kudlow’s popular Fox Business Channel TV program, he referred to a government bond that would yield nearly 10%. That rate is an eye-opener in these days of low-interest rates. He was referring to U.S. Government Series I Savings Bonds, or simply I-Bonds, in which the I stands for inflation protection. With a recent surge in actual and reported inflation, I-Bonds have logically been receiving increasing attention.

I-Bonds pay interest in two ways. First is the fixed interest portion, which has been pegged at 0.00% for some time. This has been a disincentive for income investors of any age. The second interest payment is variable and changes with inflation. Only recently has the inflation protection rate been raised high enough to rekindle interest among buyers. For the 6-month period that began May 1, 2022, I-Bonds’ variable interest portion is set at 4.81% for 6 months. Should that rate stay steady through the November 1, 2022, adjustment, the annual payout rate would be 9.62%.

I-Bonds can be purchased in paper form, electronic format, or a combination of both. These purchases are generally made through an account set up by the investor at the government website treasurydirect.gov. Also available is an option to purchase I-Bonds with income tax refunds, up to a $5.000 limit per person per year. These I-Bonds can be purchased in any amount up to that limit.

Logically, above-market interest rates carry some restrictions, and I-Bonds pose no exception. The most obvious is the variable-rate adjustment every 6 months, which could drastically reduce payouts when inflation subsides, and the variable portion is lowered. Next is the holding period, as the minimum hold is one year. Between 1 and 5 years of ownership, the penalty for selling is forfeiture of 3 months of interest. After 5 years, I-Bonds may be sold back to the Treasury without penalty, but all interest paid or credited during the holding period will be taxable immediately.

Favorability of I-Bonds to any individual is dependent on actual circumstances and their personal inflation outlook. In the short term, current rates are very attractive. Should inflation rates return to low levels of recent years, I-Bonds yields will fall dramatically.

Alternatively, Treasury Inflation-Protected Bonds (TIPS) may also be purchased by individuals, and annual limits are very high. TIPS are marketable and can be bought and sold at will. While current TIPS also carry a fixed interest rate of 0.00%, inflation adjustments are applied monthly to their principal value, thereby adjusting the market price for inflation. Ask your financial advisor for a further explanation.

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

Americans are concerned about their futures, far more so than any time in the past several years. Much of today’s economic environment reminds me of the 1970s, and if there is any period of my life that I do not care to revisit, it would be the Richard Nixon through Jimmy Carter era. In far too many respects, today’s America evokes bad memories from that period.

Ronald Reagan summed it up better than I ever could when he made this memorable observation; “Recession is when your neighbor loses his job. Depression is when you lose yours. And Recovery is when Jimmy Carter loses his.” Food for thought, to be sure, as today’s similarities are uncanny.

Recessions were prevalent in the 1970s and 1980s. The Oil Embargo of 1973 (thanks, OPEC) began the longest slump, which ran from November 1973 to March 1975. It was exacerbated by Richard Nixon’s Wage and Price Controls, from which emanated the pejorative term stagflation (rising prices without economic growth).

1980 brought another, albeit short, recession, from January to July. This one was triggered by the Iranian Revolution, which Carter bungled badly. Things went from bad to worse in July of 1981, when the so-called “Double Dip Recession” launched an era of prolonged contraction. This long economic downturn ended thanks to Reagan’s conservative economic policies. Unfortunately, Congress delayed the implementation of Reagan’s policies, extending the misery for many months.

Recessions occur naturally every so often in a large and complex economy. Despite efforts by the Federal Reserve (FED) to keep our economy on a growth path, and contrary to Bill Clinton’s claim that he repealed the business cycle, ups and downs are inevitable. It remains the responsibility of elected officials to react by implementing policy changes as needed to limit the depth and duration of bad economic times. Today, that is NOT happening.

Most of us were caught off guard when the First Quarter of 2022 GDP growth was reported as negative. Few of the classic signs of recession were evident, despite supply chain problems and accelerating inflation. But, the accepted definition of a recession is negative GDP growth for two consecutive calendar quarters. Will Q2 of 2022 produce a second negative number and confirm a recession? Does it really matter?

Whatever we call this period, when we look back at record gas prices, falling real wages, and general unrest, it will matter very little in the history books. All we know, and all we need to know, is that Americans are frustrated and angry. This will doubtless be reflected at the polls in November. Recession or not.

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

Any and all personal beliefs aside, the U.S. has arrived at a time and place wherein Social Security’s viability is financially threatened. So far, all proposals to address the System’s financial problems have been met with the coldest of Congressional shoulders.

Social Security is predicated on an ever-increasing number of young workers shoring up a growing population of benefit recipients. This “Ponzi-like” design has worked for decades, but the corner has been turned. Demographics are now working against us, and Congress, in its infinite wisdom, squandered the “Social Security Trust Fund” that, by design, had accumulated over many successful years.

Those halcyon days are gone, at least for now, and Social Security faces the real possibility of not being able to pay all promised benefits to future participants. Clearly, something must be done. Proposals abound, but none have been able to demonstrate viability, neither financially nor politically.

To make matters worse, COVID-19 and its variants reduced overall employment at a time when 10,000+ Baby Boomers daily were filing for eligible benefits. The strain on the financial system is obvious, and in certain circles that is raising concerns.

Easy and obvious methods of salvaging the failing system include reducing future benefits and/or raising Payroll Taxes. Unfortunately, no elected official will seriously entertain either option, as unpopular proposals are politically suicidal.

Perhaps acceptable to participants and elected officials would be to postpone payment of benefits to a later age, similar to what the Reagan Administration did in the 1980s. It was well-planned, took years to phase in, and added many years to the viability of Social Security. Unfortunately, it did not solve the problem on a long-term basis, as modern medicine simultaneously kept raising life expectancies.

There are other inherent problems. Notable is the current inflationary environment, which induced a Cost of Living (COLA) benefit increase for 2022 of 5.9%. For 2023, the projected COLA is currently 8.6%, adding insult to injury for the System. The actual 2023 increase will be announced in October, but regardless of the final number, wages (hence, Payroll Taxes) will rise more slowly than benefit payouts.

Certain members of Congress have recognized that older Americans are being squeezed by escalating Medicare costs, taxes, and our everyday cost of living. Congressman Bill Posey (R-IL) has introduced a bill dubbed “Senior Citizens Inflation Relief Act,” which would allow recipients to earn more income before incurring a reduction in monthly Social Security benefits. This applies to recipients who have not yet attained their Full Retirement Age, or FRA.

One does not need a degree in economics to understand that helping a particular group of Social Security recipients, while simultaneously doing nothing about increasing funding for the System in general, does very little to preserve future benefits for all. That said, we support Congressman Posey in his efforts to provide some relief for older working adults.

What will Congress do? Stay tuned.

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

Elon Musk is a one-man entertainment bonanza, and the pursuit of Twitter is keeping his legend alive. Despite stiff headwinds from some of the company’s Board of Directors, owners, and employees, Musk charged ahead, all the while sporting his trademark, “I know something you don’t know,” grin. According to recent news, Musk has succeeded in his negotiations. The deal has yet to close, but the components are in place.

Confusion and mystery surround “Big Business” and “Big Finance.” In today’s world, it doesn’t get much bigger than Elon Musk, who has attained the coveted title of “world’s richest person.” The usual whiners decry people like Musk as bullies and oligarchs, able to say and do “anything they want.” This is, of course, ridiculous.

Private companies are generally owned by one or more founders, officers, or investor groups. No shares are publicly available for purchase or sale. Public companies have some ownership (shares of stock) listed on exchanges, where shares are bought and sold (“traded”) electronically.

There are benefits to each form of ownership, and ownership forms are changeable. Public companies may go private when an individual or group buys up sufficient shares from public shareholders. Private companies may go public through an IPO, or Initial Public Offering. In fact, Musk recently announced his intention to take Twitter public about 4 years after taking it private.

Many false perceptions exist in the public and the media. One that is heard everywhere in the media, claims that “XYZ is a private company, so they can do whatever they want.” No, they can’t!

It is true that private company owners have far more control and flexibility than do their public counterparts. However, every company is subject to rules and regulations, including Federal and State Wage and Hour laws, environmental laws, and the grandaddy of all, “fiduciary responsibility.”

What is a fiduciary? Simply stated (thanks to Investopedia.com), “a fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own.” Fiduciaries can be involved in finance, money management, financial advising, banking, insurance, or accounting, plus serving as executors, board members, and corporate officers.

Now that Twitter will be a private, closely held corporation, Musk will have a far greater amount of control, along with vastly reduced reporting requirements. However, he most certainly cannot do “whatever he wants.”

Love him, hate him, respect him, or disdain him, Elon Muck is an American original (he was born a citizen of both South Africa and Canada, and was naturalized as an American citizen in 2002). And we haven’t even discussed his major accomplishments in technology, space, electric vehicles, and other ventures he has promoted.

Further, we already mentioned that, while doing good work, he has made himself the world’s richest man. Isn’t capitalism grand?

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

Back in 2019, we reported on a spreading phenomenon known as F.I.R.E., an acronym for “Financial Independence, Retire Early.” According to the “movement,” making certain current lifestyle adjustments would allow young workers to retire at age 40 and live happily ever after. Our comments at that time were very skeptical, as the idea seemed to have little redeeming social or practical value. Looking back, it appears that our comments were both timely and spot-on. Since then, the “movement” has been perpetuated.

Naturally, the emphasis for F.I.R.E. believers is on saving more money than they do now. That means cutting back on almost every aspect of lifestyle, including, if necessary, living in their parents’ basements. Cutting out, or at least reducing, Starbucks and certain other luxury items, makes sense (for everyone), but it won’t add up to retirement at 40. Maxing out 401(k) contributions is a great idea, but compounding investments requires decades to create real wealth.

Unless the young F.I.R.E. follower is an. Unusually high earner, such as certain physicians and attorneys, etc., making ends meet is enough of a challenge without having to save 80% of income. Many highly trained professionals also graduate with substantial student debt. Also, they contribute to society through developing and practicing skills. Most derive great satisfaction from their careers.

But all that is paltry compared to the inevitable conclusion from F.I.R.E. gurus that critical to the early retirement plan is earning extra money. “Do something you love,” they say, “write books, do whatever it takes to provide income.” In a word, “Work.” So, the secret to retiring is to work. Who knew?

We should mention health care, health insurance, Medicare, and Social Security, as well. Those require years of contributions in order to provide useful future benefits. Retiring prior to vesting, or missing the largest contribution years, will curtail the availability and value of later benefits.

Our bottom line is that taking shortcuts in life frequently results in disaster. Retiring at an age when most people have a very limited understanding of the world is a formula for failure. Are those braggarts who tout their own success stories doing something for mankind? Or, do you think that, just maybe, they are selling their books for a profit?

Some of the more recent F.I.R.E. supporters are actually raising the targeted age to 50, or even 59. While perhaps not totally practical, at least a planning case could be made for the possibility of success at those ages.

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

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.