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.
Although attendance was virtual this month, the annual Davos (Switzerland) World Economic Forum took place as usual. This year’s dog-and-pony show, which is always attended by carefully selected and invited uber-wealthy, self-important, so-called world leaders, produced noteworthy insight into U.S. Treasury Secretary Janet Yellen’s enthusiasm for John Maynard Keynes’ discredited economic theories. As if we didn’t get enough of her (and Keynes) while she served as FED chairman from 2014 to 2018.
At least Davos participants’ carbon footprint was significantly smaller this year, having grounded hundreds of private jets.
Students and proponents of Keynes have long existed in Washington, D.C., and regardless of my contrary opinion, they continue to believe that their results will improve over time and with new practitioners. Good luck with that.
Claiming a need to focus on increasing American productive potential, Secretary Yellen introduced 2022 Davos participants to a concept she dubbed “Modern Supply-Side Economics.” While I agree with the need for domestic capacity expansion and utilization, I strongly object to Yellen’s usurpation and bastardization of President Reagan’s “Supply-Side Economics.” By the way, Democrats hated the term “Supply-Side Economics,” and immediately substituted the moniker “Trickle-Down Economics,” which they derided for Reagan’s 8 presidential years.
With inflation running rampant, and the Biden Administration’s agenda faltering on Capitol Hill, Yellen is seeking to reframe the Administration’s economic agenda in a more expansive, optimistic way. But pretentious redefining of Reagan’s successful economic policy is simply smoke and mirrors.
Conservative economists (monetarist devotees of Milton Friedman) argue for lower taxes and reduced regulatory policies to unleash greater supply, while the Biden Administration focuses on Keynesian tax hikes and escalating spending to stabilize demand. Tax cuts and reduced regulations have been successful each and every time they were tried. Yellen knows that but prioritizes adherence to the Democrat party line.
“Our new approach is far more promising than the old Supply-Side Economics, which I see as having been a failed strategy for increasing growth,” Yellen said, arguing that tax cuts have failed to produce promised gains, and deregulation has been environmentally damaging. I wonder where Yellen was hanging out when she skipped her courses in U.S. history and Economics.
Yellen spent much of her career as a policymaker focused on solving the problem of insufficient demand in the economy. With her new comments, she acknowledges that America has the opposite problem right now. High demand is fueling current inflation due to a lack of supply. Her hypocrisy is as blatant as her plagiarism of Reagan’s proven economic theory. Remember, it is the trillions of unearned dollars of pandemic relief in the hands of consumers causing current demand-pull inflation.
The Biden Administration has argued for months that proposed “Build Back Better” legislation would decrease inflationary pressures and increase long-term economic growth. That ludicrous notion has failed to convince any elected Republican, as well as Sen. Joe Manchin (D-W.V.), the potentially decisive Senate vote. New Gobbledy-Gook from the Treasury Secretary probably won’t change Manchin’s mind, and definitely will not change mine.
Apparently, Secretary Yellen has not read or did not understand, the lessons of tax-cutters, including the Gipper, “W,” and Trump. Yellen’s speech doesn’t change economic or political realities on the ground. But it does signal a sea change in how Democrat economic policymakers attempt to sell their backward policies to an upset population. I miss Reagan and his ability to communicate, both at home and around the world.
Van Wie Financial is fee-only. For a reason.
In 1997, then-President Bill Clinton signed into law the Taxpayer Relief Act, (TRA) and with that signature was born the Roth IRA. Its namesake, Senator William Roth, was a Republican from (ready?) Delaware and Clinton was a notorious tax raiser. Somehow, the stars aligned, and TRA became the law of the land.
Twenty-three years earlier, Congress first authorized (Traditional) Individual Retirement Accounts (IRAs), and Americans slowly began to realize the benefit of pre-tax saving to enhance future retirement income. Similarly, Roth IRAs got off to a slow start, and over time have become popular because of their unique tax properties. Although the Roth IRA owner does not receive a current tax deduction for contributions, neither does he or she pay tax on later distributions, regardless of the growth in the account over time.
Non-taxation of Roth IRAs, and now Roth 401(k)s, has fueled speculation over several years regarding potential future taxation of withdrawals from Roth accounts. Personally, I have long feared that Congressional avarice may one day lead to taxation of growth in Roth IRA accounts as withdrawals are made. Others fear that all withdrawals may become taxable events, but even this skeptic does not support that theory. Taxing withdrawn contributions would constitute a direct double-tax situation, which is distasteful to politicians.
Most arguments in favor of retaining Roth non-taxation status quo do not comfort me. My fears are based on the inability of Congress to even slow their spending and accumulating unsustainable national debt. Remaining are few options for Congress to close the annual budget deficit, so untaxed Roth appreciation attracts scrutiny.
Indirect taxation of Roth withdrawals has already begun, though in a clandestine manner. The SECURE Act was a response to the COVID-19 pandemic and included several changes to retirement accounts. Notably, SECURE removed the “Stretch IRA” provision for most non-spouse beneficiaries of IRA owners. Replacing the Stretch option (withdrawals allowed over the lifetime of an inheritor) is a 10-year requirement to drain the account completely. While not a direct tax on the inherited funds, tax-free growth is limited to 10 years, after which the money must be distributed to the inheritor. Further investment of withdrawn proceeds is then taxable sooner than in pre-COVID years.
Probabilities of future higher personal tax rates drive most Roth investors to trade current deductions for after-tax contributions by switching from Traditional IRAs and 401(k)s to Roth IRAs and 401(k)s. Everyone’s situation is different, and a thorough review of the possibilities with a professional financial planner will be helpful.
Experience indicates that my fears place me in a small minority of investors and advisors. Nonetheless, evaluate your possibilities before deciding.
Van Wie Financial is fee-only. For a reason.
Debt management and control is crucial for achieving long-term financial independence. Success seems out of reach for too many Americans, often because they are so far in debt. In our Financial Planning practice, we have guided more than a handful of clients through the process of relieving a debt load. While it is never easy, potential rewards outweigh the sacrifices required to achieve success.
Over the years, one popular method of debt reduction and payoff has occupied center stage. Dubbed Snowballing, the process involves listing your debts by size (don’t count your home mortgage) and concentrating on the smallest debt. The Snowball method pays only the mandatory minimum on all except the smallest debt balance. Then, pay everything you can on the smallest debt until paid off. Once the first debt is eliminated, apply the extra cash from the paid-off debt to the next smallest balance. Lather, rinse, repeat, until all debts are gone.
We recently discovered an article by our local “Consumer Warrior,” Clark Howard, in which he applied a term we had not previously heard, to another debt reduction method. The Avalanche method is similar to the Snowball method, except prioritizing of various debts is by interest rates. The Avalanche method pays above the minimum (as much as possible) on the debt with the highest APR (Annual Percentage Rate) until gone. Other debts are serviced with only required minimums. Once one is eliminated, more is paid on the next higher debt by APR, and the process repeats on lower rate debts until eliminated.
Which is better? We have always leaned toward the Snowball method, but Clark took the hypothetical to a new level. Using a real-life example, he calculated payoff time and expense, using both methods, and the financial winner in the test case was the Avalanche. Your mileage may vary, but the calculation method remains the same.
Not yet totally satisfied, Clark introduced a third method dubbed Blizzard, which is essentially a hybrid model. The Blizzard method begins with a Snowball and pays off a debt or two for confidence, cash flow, and momentum. At that point, the Blizzard method shifts to Avalanche strategy to finish the process. Blizzard has the benefit of realizing early rewards by eliminating the smallest debt(s) via Snowball, and then Avalanche often contributes favorable numbers in terms of total interest paid.
Saving money is an important goal, and none of the methods will work for you unless you control your own budget. Whether Snowball, Avalanche, or Blizzard, you don’t have to wait for the proverbial cold day on the First Coast to get started.
An individual’s relationship with money includes elements of personality, lifestyle, upbringing, priorities, etc. In order to effect significant change in behavior with money, an individual must confront the past with an eye to change. It can be done, and once redirected, many people become highly successful investors. Like all Financial Planning processes, setting realistic goals is the first step toward success.
Ongoing thanks to Clark Howard for framing various topics in understandable terms, and for his willingness to get good information into public hands. His website is Clark.com.
Van Wie Financial is fee-only. For a reason.
For many Americans, the Holiday Season presents a perfect opportunity to improve chances of attaining true Financial Independence. Novice or experienced investor, this is a perfect time to improve your situation.
Personal tax refunds (in whole or in part) can be directed into an Individual Retirement Account (IRA). Open an account with your choice of custodians, and IRS will make the direct deposit. Your tax preparer can direct the refund to the IRA.
Do not invest in anything you don’t understand. Annuities, cryptocurrencies, NFTs, Life Insurance, and most individual stocks should be avoided by novice investors. Clever salespeople may attempt to steer you into “exciting opportunities for outsized returns.” As we say at Van Wie Financial, “If you can’t explain it to a 12-year-old in 5 minutes, don’t buy it.”
If you control your own income and expenses to a degree (small business owner, etc.) ask yourself if 2021 has been a great business year or not. What are your prospects for increased income and/or differing tax rates in 2022? Your answer may direct you to either accelerate or delay income and expenses to or from this year to the next year.
If you are legally required to take a Required Minimum Distribution (RMD) in 2021 but have not yet done so, do it immediately. The absolute deadline is midnight on December 31. Failure to take a timely RMD carries a 50% penalty, on top of the tax owed on the RMD. This year, everyone is busy, and you may have to make an insistent phone call to your account custodian in order to protect yourself from a severe penalty.
Review Beneficiary Designations on IRAs, various retirement accounts, and insurance policies. Family and personal situations change, so Beneficiary Designations must be reviewed, and updated if needed. Do you have a Will and/or a Living Trust? Make an appointment with an estate attorney if you need to update this aspect of your financial life. If you have a financial advisor, he or she should be able to help find one for you and coordinate the process.
Investors playing the home game (not using a professional advisor) should analyze their investment returns over the years. It is not important that you “beat the market.” However, if your returns are substantially under an average balanced portfolio, it may be time to consider hiring an advisor. We recommend finding a fee-only Certified Financial Planner® (CFP®) operating as a Registered Investment Advisor (RIA). Searches for qualified advisors are available online at sites such as the CFP® Board (letsmakeaplan.org) and the National Association of Personal Financial Advisors (NAPFA.org).
If your current advisor is not helpful in all areas of your financial life (investments, insurance planning, tax planning, retirement planning, estate planning, college funding, etc.) it may be time for a change. Now may present the perfect opportunity to begin a long-term relationship to facilitate eventual Financial Independence.
Van Wie Financial is fee-only. For a reason.
In August of 2017, we blogged about the dangers of owning physical gold and/or silver in an IRA, while storing the actual metals in your home. Back then, one could hardly avoid hearing commercials pushing gold and silver IRAs. Hold it in your hand, love it, cherish it, protect your assets, and succeed. All that, and purchase it with after-tax IRA dollars—what a deal!
IRS rules for IRAs include a strict prohibition on self-dealing. You cannot benefit from personal use of the assets in your IRA. Violations result in your IRA becoming instantly 100% taxable. A recent IRS decision confirmed the danger of trying to home base your physical IRA gold. As a result, a couple now owes $300,000 to IRS for storing gold in their home safe.
IRS allows the purchase of some forms of gold in an IRA, but it also specifies the special type of trustee that can custody the account. Specialized custodial accounts carry higher fees than do traditional IRA custodians. Unless and until IRS guidelines change, we would never own physical gold or silver in a home-custodied IRA.
Whenever our clients express an interest in owning precious metals, we prefer and suggest the electronic form of ownership. Several Exchange-Traded Funds (ETFs) exist, whereby investors can own precious metals by simply buying shares of the ETFs. These ETF assets are backed by physical commodities and can be held in taxable or tax-deferred accounts.
ETF-style ownership has several salient features. First, it has proven to be legal and penalty-free. Additionally, there is little or no emotional attachment to a share of an ETF. Selling shares allows the IRA owner to add or subtract small quantities instead of having to trade only high-value coins or bars. We do not believe that “buy and hold” for precious metals is necessarily a good long-term investment, as pricing fluctuates wildly over time. By paying attention, it is possible to buy low and sell high, then repeat at the next opportunity, based on price.
Many people likely disagree with our very conservative view on this subject, but in the absence of a verifiable change with the IRS, we cannot advise people to set up a home-based precious metals IRA.
For a more thorough education on the subject, simply execute an Internet search on a few keywords, such as “gold,” “IRA,” and “at home,” and you will find pages of information and opinion. Some websites contend that under a provision of the Pension Protection Act, it is legal for certain people to own IRA gold at home. When you read their disclaimers, you will draw a simple conclusion—you aren’t among them.
Van Wie Financial is fee-only. For a reason.