The Invisible Cost of Living

When was the last time you looked at your paystub? Yes, I realize that there is no paper stub attached to your nonexistent paper paycheck, but that doesn’t mean it went away. It is probably available online, or you can ask your employer for a copy. Due to the absence of physical paystubs, most people fail to examine details of their hidden expenses or paycheck withholding.

Realizing exactly what is being paid out prior to “take-home pay” can be enlightening. Withheld earnings paid out to taxing authorities, insurance carriers, and company-sponsored retirement plans, all add to what we call the Invisible Cost of Living. “Off the grid” workers (those who work for cash only) have no paystub, real or electronic. In all cases, “out of sight, out of mind” applies to the true cost of living our daily financial lives.

Far too many Americans have no idea exactly how much they actually earn in a pay period, or over a year. When asked, a common response is, “I take home X dollars a year.” That does not answer the actual question. Similarly, many people do not know their gross monthly Social Security benefit, as they look simply at the deposited amount. Establishing an online account at socialsecurity.gov allows a recipient to see how much is being withheld for Medicaid B and Federal Income Taxes, if any.

For the dwindling group of Americans accruing Traditional Pension benefits, they should all comprehend the personal economic value of their employer’s pension contributions. Understanding the total cost of living, including the invisible portion, is vital for everyone, including job changes, as well as anyone considering gig work for a period of time.

Preparing for retirement and beyond is a years-long process, and therefore cannot be hurried. Like all insurance plans, Social Security and Medicare require payments (essentially insurance premiums) to be made into these Plans for a minimum of 40 calendar quarters. Lifetime credited earnings by each individual are available on the Social Security website, and should be checked occasionally.

Failure to understand the true cost of living, including the invisible portion, can result in disastrously underestimating retirement needs. Today, visible components of inflation are “in your face” at the gas pump, grocery store, and in the stack of unpaid bills on your desk at home. Invisible components are inflating as well, and changes in your Total Cost of Living must be understood in order to plan for eventual Financial Independence.

Like it or not, many people will be working longer than anticipated.

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

As financial planners, our goal is to assess current economic and market conditions and then design portfolios and select assets that have a good chance of being successful in whatever environment we encounter. Today we have very challenging financial markets, and we recently finished the worst half-year start in market history.

Hardest to understand is the “nowhere to run, nowhere to hide” mentality of this market. Historically, inflation is countered in portfolios by overweighting assets that have generally responded positively to overall rising prices. Among these are precious metals, inflation-linked bonds, real estate, commodities, and general equities. Recently, however, these assets have been falling in lockstep with the general market.

Asset classes that are traditionally friendly to inflation can easily be represented in portfolios. Many Exchange-Traded Funds (ETFs) are available to today’s investors at (lower) market prices, and with minimal expenses. History doesn’t provide us with any guarantees, but patterns of success and failure have always tended to be repetitive. Since inflation-friendly asset classes are on sale right now, adding small percentages to your portfolio may give your personal recovery a boost when the market changes focus.

Planning portfolio allocations and positions must be supplemented by common sense. History is on the side of those who avoid past errors. Patience is required, along with faith in the American economy. Right now, holding an above-average amount of cash in money market funds will allow investors to take advantage of opportunities that will inevitably arise. One helpful method of generating cash is to seek tax losses that can be harvested before year-end. This applies to non-tax-qualified funds held in brokerage accounts.

For qualified funds (IRAs, 401(k) Plans, etc.), today’s low asset prices present opportunities to perform Roth Conversions at very low prices, lessening the tax burden, while setting up tax-free growth as the market recovers. Since Roth accounts are never taxed, once established, and do not have mandatory Required Minimum Distributions (RMDs), savings can accrue over the rest of an investor’s life. Roth Conversions can no longer be reversed, so be cautious.

Meanwhile, every day brings us closer to a bottom, and history teaches us that a turnaround will occur when we least expect it. Losing out on the first few days of a recovering market is a formula for failure. As difficult as it has become tolerating the 2022 market slide, our best expectations are for long-term success through well-planned investing.

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

Life expectancy has been rising since the earliest humans walked the Earth. Only in the last 30,000 years or so did the concept of a living grandparent become a reality. People just didn’t live long enough to see their own children give birth. Overall, Americans are enjoying lengthier life spans and improved quality of life. This is largely due to advances in medicine, vaccinations, and nutrition. Your own life expectancy was determined at birth, measured across the population of births in that time period.

Clouding this picture is the increased flow of Fentanyl across our unprotected borders and onto American streets everywhere. This scourge is so powerful, especially coupled with the COVID-19 pandemic, that it is statistically altering American data. Life expectancy is still rising (for all the right reasons), but many individual life spans are falling, due to avoidable deaths at all ages. This alters the average life span in specific age groups. Life expectancy and life span should not be confused. One is collective and the other personal. If you avoid COVID and Fentanyl, your prospect for outliving prior generations is fantastic.

Recognizing the challenges of increased life expectancy, Congress passed the S.E.C.U.R.E. Act (now dubbed “SECURE 1.0”) in 2020. Among other provisions, the Act increased the age for Retirement Account Required Minimum Distributions (RMDs), from the (arcane) 70-1/2 to a more reasonable 72. Increasing the RMD age helped align the law to reality, but recognized only part of actual longevity gains.

Recognizing that SECURE 1.0 was insufficient to reflect reality, several members of Congress are now supporting SECURE 2.0, which would further raise the RMD age. Immediately, the RMD age would go to 73, and every 5 years thereafter, for a decade, the age would be bumped up another year, until attaining age 75 in 2033. Absent any unseen future detrimental effects to our longevity, this protects younger generations from excessive erosion of their retirement savings.

There are many more provisions in SECURE 2.0, including many unknown and some unwelcome, but overall, it appears to be reasonable. Further, various proposals being integrated into a final SECURE 2.0 Bill have been receiving overwhelming majority support in both Houses of Congress.

Passage of SECURE 2.0 is required before the end of the year, or the entire package will need to be renegotiated. No one seems to have any tolerance for delay, and it appears that the final Bill will sail through Congress in 2022. President Biden would not hesitate to sign on to a Bill with nearly unanimous support of Democrats. Look forward to some (mostly) good news in a few weeks.

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

America’s much-maligned Millennial Generation (born between 1981 and 1996) have taken a lot of guff from media, parents, and comedians. Frankly, much of it was earned, as they attended expensive colleges, received some essentially worthless degrees, went heavily into debt, and moved back into their parents’ homes.

Somehow, time heals most wounds, people grow up, and priorities change. So, it seems with Millennials, who have quietly been acting more like their ancestral generations. We welcome the evolution.

When COVID-19 altered the lifestyles of people worldwide, Americans rekindled an interest in agriculture, but on a personal level. Personal food production caught fire and provided some relief for all uncertainties of where our purchased food had been, how it had been grown, and what may have touched the surfaces. Back yard gardens provided not only safe but high-quality food and people everywhere established their own producing plots. Online gardening purchases saw an increase of 100% during the pandemic. COVID-19 alone created almost 18.3 million new gardeners, most of whom were millennials.

At-home gardening has also played a role in mental health. While being cooped up for almost two years, people had to find new ways to fight feelings of isolation, anxiety, and depression. With online therapy helping in a professional sense, gardening gave people a reason to go outside more and socialize at a safe distance.

Inflation’s onset added a new dimension to personal food production, as seeds cost a fraction of store-bought food. Millennials apparently recognized all the benefits, including getting out of their parent’s basements, and into the outdoors. Demand has not slowed with the lessening prominence of COVID. In fact, America’s seed producers are having trouble with their own supply chains. With April 2022 having the largest price increase in Food at Home purchases since April 1979, people are looking for any way to save money on their food.

Today, personal food production has many reasonable and productive options, both for outdoor and indoor (hydroponic and other) production. There are many choices for the start-up gardener, ranging from various levels of involvement in at-home gardening, as well as the ability to rent plots or participate in a community garden in the area. An average home garden costs around $70 dollars and can produce on average $600 worth of food. Indoor systems are a great option for those living in apartments or homes that have very little outdoor space. Gardening supply companies can be relied on for both simple and sophisticated gardens, offering a variety of in-ground or above-ground gardening beds. One of the items perfect for use in Florida is the bug and critter barrier for your produce, as the staple for most gardens, the tomato, is often preyed upon by such creatures.

Welcoming the Millennial Generation to the world of personal agriculture by no means excludes Gen-X or Baby Boomer participants. From a Personal Financial Planning viewpoint, nothing makes more sense than lowering food costs while controlling your own freshness and quality.

Special thanks to our own Megan Todd, a Millennial herself, for her insight and assistance in constructing this week’s Blog.

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

Options for claiming Social Security benefits are as numerous as individual personal financial situations. Explaining all the options is not possible in a single Blog. Today, we look at people who are still earning income, but contemplating filing for Social Security benefits as well.

Simple rules of thumb can assist people in making “now or later” Social Security benefits filing decisions. Certain obscure exceptions exist, but you will not be likely to encounter any that apply to you. Most importantly, filing early results in a permanent reduction of monthly benefits. Filing decisions should be predicated on a participant’s age and financial situation, and with a serious eye to the future.

Full Retirement Age (FRA), also called Normal Retirement Age (NRA), is a moving target, based on year of birth, but every individual only has one. Delayed filing can take place any time after reaching FRA, up to age 70, whereafter no further benefit increase can be realized by further postponements. Early filing is available beginning on an individual’s 62^nd birthday, and then may be executed any time up to FRA.

FRA filing means you will receive your original targeted monthly benefit payment for life, along with accumulated Cost-of-Living Adjustments (COLAs). Delayed filing produces a larger monthly benefit for life, up to age 70, at which time the individual’s maximum monthly payment is reached.

Most people have heard that Social Security will reduce monthly payments for people who are working while collecting. This is true, but must be clearly understood. Prior to FRA, Social Security benefits will be reduced by $1 for every $2 or $3 earned over certain thresholds, depending on proximity to FRA. These reduced benefits are not lost, as they are actuarily applied to future benefits. Beginning at FRA, no earnings-based reductions apply.

Annual benefits reductions are applied to payments “up front.” No monthly payment will be received until the entire annual reduction is covered, at which time regular monthly payments complete the year.

As with any complex financial decision, advance planning is critical to an optimal outcome. Unlike most decisions, however, there is one chance to execute a do-over. At any time during the first year of receiving benefits, a participant is allowed to pay back 100% of the money received, cancel the filing completely, and start over with a clean slate. All future benefits will be increased as if a later filing had been chosen.

Van Wie Financial routinely assists clients with Social Security filing decisions as part of their overall financial plan.

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

Adam was recently featured on Stan The Annuity Man’s podcast!

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For the past several months, we have watched gasoline prices rise by a few cents each week, with each recent new price eclipsing all-time records. Most of us are downright angry, but Washington, D.C. policymakers don’t seem to hear us, or don’t care. Instead, the Administration repeatedly tells us how good we are feeling, how economically sound we are, and that it is really just Putin causing rampant inflation in our food and energy costs. This reeks of a classic gaslighting scheme.

Lies and excuses are thrown at us daily, presented in a tone that seems intended to make us sympathetic to our hapless “leaders.” We’re not buying it. This week, in a blue-checked Tweet, President Biden claimed, “At the time I took office about 16 months ago, the economy had stalled and COVID was out of control. Today, thanks to the economic plan and the vaccination plan that my Administration put into action, America has achieved the most robust recovery in modern history.” Consider the change in your own financial situations since 2021. Although 2022 is not even half over, public sentiment is crashing on a daily basis, directly opposite of the rise in gas and food prices.

Positive outlooks are not all we are asked to believe. Among other concepts we are supposed to accept are certain untenable premises, including:

• Banning assault weapons is necessary to stopping school shootings,
• Illegal border crossing should not be a criminal offense,
• Masks should continue to be worn on public transportation and elsewhere,
• Job creation is the most robust in history,
• Spending capacious amounts of fiat money will reduce inflation, and
• Men can get pregnant and have babies.

While never a huge fan of TV’s Judge Judy, I do think she has a way of being direct with people who often don’t understand anything else. Her 1997 book was called, “Don’t Pee on My Leg and Tell Me It’s Raining.” That sure sounds and feels like a gaslighting situation.

As to the future of inflation and gasoline prices, who would you believe; an inept and out of touch President, Vice President, and Cabinet, or such experienced and proven leaders in the fields of economics, energy, and manufacturing, like Larry Kudlow, Stephen Moore, Rick Perry, Elon Musk, and countless others? These people understand that our current crisis is one of our own making and that we could fix it quickly. Unfortunately, it will require sweeping political change.

Since the November election is still 5 months off, and apparently no policy change is expected before that, I am offering all challengers a quick and easy campaign platform. Two mantras for November, assuming Republicans are smart enough to adopt them (a somewhat dubious proposition), should be, “Drill, Baby, Drill” and “Build That Wall.” Both were proven successful a mere few months ago, when Americans actually were feeling financially comfortable and optimistic. Politicians ignore us at their own political peril. That low rumble we hear the awakening of the Sleeping Giant.

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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.