Five months ago, in this very Blog, we discussed the emergence of I-Bonds as a safe investment with an excellent yield. Backed by the full faith and credit of the U.S Government (read: printing press), and, following years of nearly non-existent yields, I-Bonds suddenly began to advertise eye-opening interest rates. Increased interest rates stirred investors, but something went wrong.
In May, annualized interest on I-Bonds rose to 9.62%. But that didn’t mean that an owner would receive a 1-year yield of 9.62% because payout rates are adjusted every 6 months. Assuming we have now passed “peak inflation” for this cycle (something we suspect, but cannot promise), the new 6-month rate, which was supposedly effective with purchases starting November 1, 2022, would be somewhat less. Rate estimates were down, but still attractive. Naturally, many people wanted to lock in before an adjustment occurred.
There are two methods of purchasing I-Bonds, and the first one is only available to a few people annually, and for a very short time. These are taxpayers receiving refunds from their last year’s tax returns, who are allowed to purchase I-Bonds with all or part of their refund.
The second, and most common, way to purchase I-Bonds is to set up an account at treasurydirect.gov. I went there on Friday, October 28, 2022, to establish an account. There was still time to capitalize on the out-sized interest rate for 6 months, right? Actually not, as the website returned a message that it would be down all weekend for maintenance. Monday morning, October 31, it was scheduled to reopen, so there was still time, right? Not so fast. The November 1 interest rate restatement would be effective on October 31, 2022. The new rate was, however, not announced until Tuesday, November 1.
Logically, any business would seek to accommodate its customers after making a big announcement, but this is government, and different rules seemingly apply. The 20+ year-old Treasury website suddenly needed maintenance that interfered with making purchases at the high yield, and the rate change date had been moved ahead of the standard declaration date.
Worse, perhaps, was that several people have told us that for days leading up to the weekend maintenance, the website crashed when they attempted to purchase I-Bonds at the most favorable rate. Government in action.
While everyone prefers a much lower rate of inflation, the new 6-month I-Bond interest rate is a healthy 6.89%, and worthy of consideration. Note that I-Bonds have many restrictions and conditions that make them suitable for some investors, but the analysis is required to determine if a particular individual would benefit from ownership. We can help make that determination.
Van Wie Financial is fee-only. For a reason.
Every day in contemporary America, more than 10,000 Baby Boomers reach Medicare age. Many of them are leaving the workforce for a variety of reasons, including health issues, as well as voluntary and involuntary retirement. As they attain Medicare Age (65), most will become Medicare participants, which requires payment of a monthly premium for Part B. Some will also opt into Medicare Part D for prescription drug coverage. Medicare coverage must be earned and is not free. Monthly premiums are deducted from Social Security benefit payments whenever possible.
Medicare beneficiaries should be aware of the cost of their monthly premiums, but many people have no clue, as premiums are deducted before Social Security benefits are electronically deposited into bank accounts. Out of sight, out of mind. While individual costs are readily available online at socialsecurity.gov, most Americans do not bother to establish an online account to review their personal benefits and costs. As a result, many new Social Security recipients are overpaying for Medicare premiums, at least for a year.
Overcharging can be easily prevented, and should be.
Total Medicare premium payments (both Parts B and D) for Social Security benefit recipients are based on household income. A base premium amount is paid by all beneficiaries, and higher income participants also incur added monthly surcharges called IRMAA, for Income Related Monthly Adjustment Amounts. Calculated total premiums are based on individual tax returns from years prior to retirement. This is simply a byproduct of the IRS not having the reporting ability to feed data to Medicare in a timely manner since tax returns always reflect prior years.
Situations resulting in artificially high IRMAA surcharges may be corrected when and if a participant incurs a covered “life-changing event.” Covered events are listed on the Social Security website (www socialsecurity.gov), on Form SA-44. Covered events include retirement, marriage, divorce, death of a spouse, work stoppage or income reduction, loss of income-producing property, loss of pension income, and employer financial settlements.
When significant income-reducing life changes occur, but will not be immediately communicated to IRS, temporary inequities can and do arise. IRS recognizes these situations and has installed procedures to immediately update individual information. Affected participants should file Form SA-44 to notify Social Security of the event. If the change in income affects IRMAA brackets, the IRMAA charge will be eliminated, reduced, and/or refunded based on the expected new annual income. Help yourself by being proactive.
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 stub attached to your nonexistent paper paycheck, but that doesn’t mean it isn’t important. It is probably available online, or you can ask your employer for the details. Physical paystubs are antiquated, so most people fail to examine details of their “hidden expenses,” including paycheck withholding. Electronic tax withholding and benefits contributions are huge.
Discovering exactly what is being paid out prior to receiving “take-home pay” is important. Withheld amounts paid out to taxing authorities, insurance carriers, and company-sponsored retirement plans, all add to what we call your Invisible Cost of Living. These costs tend to rise stealthily over time.
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 per pay period.” That does not address the question. Similarly, many people do not even know their gross monthly Social Security benefit, as they look simply at their electronically deposited amount. Opening an online account at socialsecurity.gov allows a recipient to see how much is being withheld for Medicare Parts B and D (including possible IRMAA surcharges on higher-income Americans), and Federal Income Taxes, if any.
For the dwindling group of Americans accruing Traditional Pension benefits, they should comprehend the economic value of their employer’s pension contributions. Understanding your total cost of living, including the invisible portion, is vital for everyone, especially job hunters, as well as anyone considering “gig work.”
Preparing for retirement and beyond is a years-long process, and therefore cannot be hurried. Like all insurance plans, Social Security and Medicare require minimum payments (essentially insurance premiums) to be made into these Plans. These programs require 40 or more calendar quarter contributions. Lifetime credited earnings by individuals are available on the Social Security website, and should be checked occasionally.
Failure to understand your true cost of living, including the invisible portion, can result in disastrously underestimating retirement needs. Today, many 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.
In our current inflationary environment, finding a bargain should make our day. And so it seemed recently, when Medicare announced a price decrease for Part B premiums, starting in January 2023. However, 2022 pricing was excessive, having been predicated on an extremely high estimated cost of the new drug Aduhelm, which everyone was forced to cover, notwithstanding individual needs. The reported 2023 decrease of $5.20 monthly, coupled with a $7.00 per year reduced deductible, beats an increase of any size, right?
Not so fast. When is a price decrease not a price decrease? When your annual cost goes up, of course. And that is exactly what is happening to many Senior Citizens. The devil is always in the details, and those details lie in IRMAA, Medicare’s Income Related Monthly Adjustment Amounts. IRMAA imposes surcharges for Medicare Parts B and D, based on family income.
True, only a percentage of Medicare beneficiaries are subjected to IRMAA surcharges, but their next year’s surcharges will be raised by an amount that for many will exceed reported savings from reduced Part B premiums. IRMAA income brackets will increase somewhat, but far less than the rate of inflation. Overall, higher-income Medicare B recipients will incur a substantial increase, rather than savings. And that is after getting fleeced throughout 2022 by having had to pay for an expensive, but personally unused, Aduhelm.
Worse, IRMAA surcharges also apply to Medicare Part D, which is the optional Prescription Drug Plan. While signing up for Part D is optional, paying IRMAA surcharges is not. These same people are required to pay Part D IRMAA surcharges, despite not being part of the Drug Plan.
Only in America.
Within the overly complex U.S. Tax Code, there are many hidden costs and even more that are not necessarily hidden but require taxpayers to dig into the details to identify hidden costs. Additional costs, along with price increases, amount to bracket creep, albeit at a somewhat slower rate than in pre-Reagan days (before indexing became law).
One indicator of hidden taxes and bracket creep is easily seen in the taxation of Social Security benefits. In 1984, only 10% of Social Security recipients paid income tax on any part of their monthly benefits. That percentage has crept up to today’s 40% of recipients. That is a topic for another Blog.
Don’t be fooled; you are getting ripped off, quietly and stealthily.
Van Wie Financial is fee-only. For a reason.
We’ve all seen and heard the commercials, frantic homeowners who nearly lost their homes to fraudsters. We are told that a single piece of paper in the wrong hands is all it takes, and your house title belongs to scammers. Worse yet, the County Clerk is required to file that form once received, and you will no longer own your home. They say we can save our most valuable assets by paying a monthly fee to the providers of this novel form of “protection.”
Luckily, we can receive the same security free if we prefer. Talk about no-brainers, this one fits the bill. In certain areas, and spreading fast, is a service being offered by County Clerks’ offices, whereby anyone who registers for their service will receive an email directly from the County when any activity is detected on property owned by an individual, a couple, or a business. The Clerk’s office will not automatically file the fraudulent paperwork.
For residents of the tri-county Florida First Coast area, Duval County, St. Johns County, and Clay County, this service is offered to property owners within their boundaries. We have not researched surrounding counties, nor other states, so any readers with property outside these counties can simply search their County Clerks’ websites. If the free service is not offered, don’t automatically sign up for a needless and expensive private version. Instead, request the service, and make a note on your calendar (perhaps on your mortgage due date each month) to access your online records at the County.
For residents of our 3-county area, access to this service is on the following websites:
Duval County, FL https://www2.duvalclerk.com/property-fraud-alert/
St. Johns County, FL https://stjohnsclerk.com/recording-activity/
Clay County, FL https://trieshield.com/Agency?AgencyCode=12019
Given the severity of this uncommon scenario, taking a few minutes to establish protection of your property is a small price to pay, and is the only cost to you. In an ideal world, this would not be needed. With today’s criminal population improving their online skills daily, we all need to stay diligent and take personal responsibility.
While you’re at it, freeze your credit with all 3 reporting agencies (Experian, TransUnion, and Equifax) on their respective websites. Whenever you want to allow someone to access your credit for an authorized purpose, simply order a temporary “thaw” to your credit freeze.
Van Wie Financial is fee-only. For a reason.
Since the 1974 inception of the Individual Retirement Account, or IRA, this form of saving and investing has become ubiquitous in today’s financial world. In 1997, Congress authorized the Roth IRA, which added tax flexibility for account holders. Roth options have become an important part of many people’s retirement planning, and have expanded from the basic Roth IRA into ERISA-covered Plans, such as the Roth 401(k), and others. We will use the Roth 401(k) Plan to explain today’s concept.
Not all employers offer Roth 401(K) Plans, but more every day are adding the Roth option to their Traditional 401(k) offerings. Contributions to either, are made from after-tax income. Roth 401(k) Plan accounts can be rolled tax-free into Roth IRAs when service is terminated. No Required Minimum Distributions are required from a Roth IRA, and all withdrawals are tax-free to the original account owner. In other words, the tax treatment of the Roth 401(k) is identical to the tax treatment of a Roth IRA.
Why not simply contribute to a Roth IRA? Often, the potential Roth IRA account owner is precluded from contributing to a Roth IRA, as Congress imposes income limits on contributors. There are also other reasons to make after-tax contributions to a Traditional 401(k). Significantly higher contribution levels for ERISA Plans (such as all 401(k) Plans) attract serious savers. It is allowable to contribute to both, restricted only by eligibility rules.
Another option is the “Back-Door” Roth IRA. In this method, contributions are made to a Traditional IRA, but not deducted from the owner’s taxable income. Subsequently, those funds can be converted to a Roth IRA, through the so-called “Back Door” process.
Prioritizing Roth-style contributions should consider the long-term tax effects of the various account types. Easiest is the Roth IRA, which is tax-free forever and not subject to RMDs. Next is the Roth 401(k), which is likewise tax-free forever, but subject to RMD rules. Fortunately, Plan owners can avoid RMDs using a later tax-free rollover to a Roth IRA.
After-tax contributions to Traditional 401(k) Plans are treated differently. When eventually rolling the 401(k) funds into Individual Retirement Accounts, the only portion that can be split off into a Roth IRA is the after-tax contributions. Years of tax-deferred growth on those contributions become taxable at the time of withdrawal from the 401(k) or Traditional IRA. From the analysis, it is apparent that maximizing Roth contribution money into a pure Roth IRA or a pure Roth 401(k) has long-term benefits. Working with a qualified financial advisor is the best way to understand your options.
Van Wie Financial is fee-only. For a reason.
Presidential candidate Ronald Reagan campaigned for office in 1980 with several novel ideas appealing to American voters. Historically high-income taxes were among the most important issues of the era, and Reagan promised dramatic rate cuts, along with overall simplification. From the top tax rate of 70% at the time, he proposed (and got passed) an eventual (1988) top rate of 28%. There was only 1 other rate that year, 15%. Reagan’s argument to the American people and to Congress was identical to John F. Kennedy’s 1960 campaign argument; lower tax rates would result in higher government revenues.
They were both correct.
Last week, we explored the phenomenon known as Bracket Creep, whereby taxpayers who receive wage and salary increases, due solely to Cost-of-Living Adjustments (COLAs), could find themselves in a higher tax bracket. In an ideal world, this would not happen, and Reagan knew that. One of his legacies is indexed personal income tax brackets. Prior to his initiative, brackets were set by Congress, changing when, and only when, they felt like it.
“Bracket Creep – the Correction” was born with a 1981 law passed at Reagan’s insistence. While personal income tax brackets have been indexed to inflation ever since indexing has been applied to only a fraction of the overall stated rate of inflation. Today, we are burdened with higher income tax brackets and 5 more rates than in 1988. In addition, we are experiencing slow and steady Bracket Creep.
Further impeding our goal of simply keeping up with inflation is what we dubbed “Tax Creep,” which receives no attention in the media. We hear from virtually every pundit and commentator that workers are failing to keep up with inflation. The problem, according to media observers, is that wages are rising less than the inflation rate, and only by matching the rate of inflation can families “keep up.”
They are short-sighted, as their simplistic analysis omits consideration of “Tax Creep.” Most household purchases are made from after-tax income or take-home pay. The amount of extra taxable income required to buy inflated necessities is equal to price increases of our goods and services, plus the percentage of taxes withheld before we receive the money. To afford a 10% increase in grocery prices, we need to generate closer to 13% additional pre-tax income.
Setting a personal goal of keeping up with inflation requires an understanding of the impact of Tax Creep on our purchasing power. Don’t be fooled by incomplete comparisons. 8.3% more income will not break even in our 8.3% annual inflationary environment.
Van Wie Financial is fee-only. For a reason.
Inflation is on everyone’s mind these days, and with good reason. While the technical definition of inflation is “excess growth of the money supply,” everyday price increases constitute the most in-your-face indicator of inflation’s presence. We Americans deserve an accurate assessment of annual inflation, due to its impact on our lives.
Within the vast Federal Government, inflation determination is relegated to the Department of Labor (DOL), because Cost-of-Living Adjustments (COLAs) are pegged to inflation data. In an ideal world, that same annual inflation adjustment would apply to Social Security payments, indexed tax brackets, contributions to Qualified Retirement Plans, etc.
Let’s examine what actually happens in the (un)real world of Washington, D.C. In October 2021, Social Security announced a COLA for 2022 of 5.9%. Was that the universal COLA for the year? Hardly.
Prior to Ronald Reagan becoming President, personal income tax brackets were set by Congress, remaining stable until changed by legislation. This led to the phenomenon known as “bracket creep,” whereby receiving a COLA-indexed pay raise might boost a taxpayer into a higher tax bracket. In addition to higher taxes, this can negatively affect other payments, including Medicare Part B.
Last year, IRS should have indexed each 2022 tax bracket by exactly 5.9%, right? It seems IRS didn’t get the memo, because tax brackets were increased much less than the Social Security COLA. Worse yet, brackets were not all treated the same. Lower tax brackets were increased by a little over 3.1%, but the top 2 brackets were raised by a mere 2.86%. These adjustments amount to about ½ of the increase we received from SS, and the difference creates higher taxes, and perhaps bracket creep.
How about Retirement Account contributions? In 2021, limits on employee deferrals to 401(k) Plans, catch-up contributions for participants ages 50 and up, and IRA contributions, all were left unchanged. Maximum annual contributions were raised by a pathetic 1.75%. Although the government tells us that we need to become financially independent, they limit our ability to do so.
In 2022, most contribution limits were again left alone, though maximum 401(k) contributions were raised 5.1%.
Important to any discussion of inflation is the difficulty of keeping up financially, especially so because we all know that government significantly understates the actual changes in our cost of living. For instance, Social Security benefits have lost 40% of their purchasing power since 2000.
Please, tell us the real rate of inflation.
Van Wie Financial is fee-only. For a reason.
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.