Today we look back at our blog posting from February 26, 2020, at the beginning of the Coronavirus pandemic. At the time, we issued a mass email to clients and friends, and also discussed these points on the Van Wie Financial Hour. How did we do in the face of that uncertainty? We’ll dissect the discussion, using actual quotes from the 2020 blog (italicized), with current comments following.
“When market conditions become unusually disrupted, it warrants communication with our clients and friends.” Looking back, the markets were actually roiling, trading halts were being imposed, sometimes even before the market opened. It was a scary time for investors, and there was much to discuss.
“We won’t try to sugar coat this morning’s market futures – they are ugly.” Time has told the tale, and this was accurate. The market dropped more than 27% over the next month. Responding responsibly to those uncertain conditions would prove critical to our long-term investment outcome.
“Our concentration is always on the outlook for the business environment and corporate profits, which have been doing very well. How much impact will ultimately be felt on Q1, 2020 profits are unknown”. We foresaw the disruption, including interruption of worldwide supply chains. Under no scenario would our short-term economy be a pretty sight. But over-reacting is not really an option.
“With a product-oriented company, the result will mostly be felt in delayed sales, rather than lost sales. Some service businesses, particularly restaurants and bars, will incur actual lost sales. Bottom line – there will be some impact on profits.” These cautions have been spot-on, as many service businesses faltered, and far too many failed. Fortunately, demand for products is still playing catch-up, and the appetite for restaurants, etc. is now voracious and growing.
“Looking at the positive side, Americans have been finding out (the hard way) that diversification in supply chains is as important as diversification in portfolios.” Supply chain diversification was moving forward nicely, and America was winning the onshoring battle for critical supplies. Under the current Administration, progress has been halted and is actually starting to reverse, as companies are once again offshoring, apparently caring more about saving money than protecting production.
“We are finally energy independent, something I remember being promised back in the 1970s.” Our energy independence dream was fulfilled in 2020, but now, in 2021, gasoline prices are much higher, and much domestic production has been severely curtailed. We are again becoming dependent on countries that do not like us.
“How long it takes for the market to attain another new high is unknown. In the interim, we look at the fundamentals, and we see strength.” We know how far the market dropped, and we have witnessed unusual speed and magnitude in the recovery. Several new market records have been set, and on Friday, July 9, 2021, all three major indices (DJIA, S&P500, and NASDAQ) closed at all-time highs.
“Our suggestion is to ride this out, even if a market correction occurs. After all, a correction is about a 10% drop in equities, and we have gains over the past 14 months far above that number. Also, our portfolios have components of bonds, cash, and alternatives, which will not fall like the equities.” While we actually experienced a Bear Market (20% or greater decline), the recovery has been stellar, and our clients’ portfolios are reflecting the strength and speed of the recovery.
“Should anyone feel that they will lose too much sleep, please call us. Otherwise, enjoy a good book and avoid the fearmongers.” Results have proven this to be good advice, even in the face of adversity. It was a difficult time for investors and advisors, and our approach was a solid call. Rushing to “do something” is a general formula for inferior investment performance. We invest for the long term.
Van Wie Financial is fee-only. For a reason.
Not everyone starts a tech company and becomes a billionaire. But Peter Thiel did, after his 1998 startup Confinity became successful and valuable. Within 3 years of startup, the company was handling over $3 Billion in annual online payments from over 10 million commercial customers. His success was rewarded and in a novel and unusual manner. Because of his Roth IRA, it is forever tax-free.
In 2000, Confinity merged with X.com, Elon Musk’s online banking site. It was used primarily by eBay. In June of 2001, Confinity became PayPal, which went public in 2002. On day 1 it gained 50%. When eBay bought PayPal in October of 2002, the company was valued at about $1.5 Billion.
Now, about Thiel’s Roth IRA. In 1999, he made a $2,000 contribution to his Roth IRA. Roth IRA assets are never taxed because contributions to the Roth IRA were made using already-taxed funds. In Thiel’s Roth IRA, he purchased 1.76 million shares of his startup company Confinity for $.001/each ($1,760.00). As success was achieved, his Roth IRA stock value rose, and because of Roth Account rules, will never be taxed.
While the average Roth IRA balance today is about $39,100, Thiel’s Roth is currently valued at about $5 Billion (9 zeros). Thiel’s account is exactly the same size as anyone else’s would have been, had they made the same investment when he did, and then let it grow tax-free. He has received no preferential treatment under the law. I should also note that he was audited by the IRS, and passed. Remember that, in an audit, the taxpayer (rather than the accusor) has the burden of proof. Thiel met the burden, and his Roth IRA was declared lawful.
What he has received is criticism from the likes of investigative website ProPublica. In a recent report created by them, they illustrate that a lot of rich people pay little or no taxes. The ProPublica report was based on illegally leaked tax returns for Jeff Bezos, Elon Musk, Warren Buffett, and the like. IRS claims to be looking for the leaker, who has committed several felonies. (As an aside, many of us believe that no one will ever be punished for the leaks.)
What’s the bottom line on those rich people’s returns? They didn’t pay taxes because they didn’t owe any. What a concept! Thiel’s tax-free wealth was due to the Roth IRA’s tax-free environment. Other wealthy people pay little tax due to untaxed capital gains on appreciated stock. Appreciated assets are only taxed upon being sold (so far, anyway).
Taxation rules are defined and codified in the U.S. Tax Code, written by some of the very people who complain about Thiel and other wealthy people. American class envy is at work once again, and some influential people want to change the rules because of Thiel. They want a piece of his enormous pie. Many apparently feel that they deserve it, for reasons I cannot comprehend.
Responses to the ProPublica report ranged from Thiel’s no response to Musk’s single question mark, to Bezos’ explanation that, while he believes the Tax Code needs changing, at his death 99.5% of his fortune will go to a combination of taxes and charities.
Here’s my take on all of this. Get over class envy, America. It doesn’t look good on you. If you care to speculate in your Roth, and if you hit a home run, good for you. A word to the wise in Congress; don’t make any Tax Code changes based on an individual, or even on a small group of people. It never works out well over time.
Van Wie Financial is fee-only. For a reason.
On Tuesday, June 15, 2021, financial media was frantic with headlines claiming retail sales had fallen 1.3% compared to the prior month. This lead most economic reporting for a couple of days, and was surprisingly negative, given the true situation. Negative economic news from the mainstream media during this Administration is rare, so we wondered what was going on.
First, look at the “reasons” proffered by the media. Supposedly, people are spending less on things, and more on experiences. Anyone who has followed the spending patterns of young people for the past decade knows that to be a trend. COVID-19 limited the universe of available experiences. Americans are now being released to pursue those delayed experience-oriented opportunities. No surprise then, that they are exercising their regained free will.
One of the more obvious data points in the comeback of experiences shows in the relationship of food purchased in grocery stores vs. restaurants and bars. Prior to COVID-19, restaurant and bar sales had overtaken food store sales, but that quickly reversed during the pandemic. In May of 2021, “food eaten out” sales once again eclipsed grocery sales.
Taking a deeper dive into data under the headlines is revealing. Actual statistics bely the negative tone of May sales headlines. Despite experiencing a slight decline in May, the overall level of recent retail sales has been spectacular. In the past 3 months, retail sales in the U.S. increased by 50.5% on an annualized basis. Those of us who have inhabited this planet for a long time have never seen data this strong. Among the largest changes were sales of cars and trucks (up 90.5%), clothing (up 145%), and “food out” (up 116%). Again, all figures are annualized from the prior 3 months’ data.
Adding to what should be good news was an upgrade to the Atlanta Federal Reserve’s estimate of overall economic growth for the quarter, which is now an astounding 10.5%. Again, unprecedented in our lifetime.
Inflation data was the downside of the week’s economic data. May monthly data showed a whopping CPI increase of 0.8%, bringing the 3-month annualized rate to 9.9%. For the preceding 12 months, inflation data showed a reported 6.6% increase. Despite the FED’s diligence in reporting the lowest possible increase in inflation, these changes are scary large.
Back to the original premise, what was the pro-Biden media trying to accomplish with those negative headlines? As with so many media proclamations, I have no earthly idea. Excluding inflation data, our economics are just plain good. For now, anyway.
Van Wie Financial is fee-only. For a reason.
“Actions have consequences,” our parents told us. “Elections have consequences,” warned Barack Obama. “Every action has an equal and opposite reaction,” Isaac Newton explained. “The Road to Hell is paved with good intentions,” goes an old English proverb. Good observations. We should all pay attention.
Since I cannot resist one more cliché, “What goes around, comes around.” From both an economic and a social perspective, we are currently seeing evidence of problems in the economy, our society, the educational system, our borders, and foreign conflicts, that once seemed to be resolved. Are these problems planned, or unintended results from flawed policy decisions?
Our post-COVID-19 American economy is rebounding with admirable strength and velocity. Job growth is rampant, wages are rising, yet millions of people remain unemployed. “Coincidentally,” the Federal Government is subsidizing unemployment with an additional $300/week, which is actually down from $600/week earlier. Even with reduced payments, millions of people are being handsomely rewarded to remain unemployed. Many exhibit little or no motivation to return to work until those payments end. Shouldn’t we have expected this, or is it merely an unintended consequence of government over-reaction?
Automobiles by the thousands are being stored in parking lots, nearly complete, but unable to be offered for sale. They sit, week after week, due to a shortage of computer chips that would allow them to be operated. Where are the semiconductor manufacturing plants? Largely in Asia, with many in Taiwan. Taiwan is under threat from Mainland China and COVID-19. Yet most microchips are single-sourced. Shouldn’t our automakers have predicted this, or is it an unintended consequence of shopping for components by price?
Inflation is rampant, and we all know it. Government bean counters and the Federal Reserve are in denial and doing their best to “fix” their numbers so they appear less scary to the public. Inflation is a monetary phenomenon, caused by “printing” too much fiat money in a short time. It is happening daily and has happened before. Earlier this year, those of us who remember the 1970s predicted today’s environment. In the words of Yogi Berra, “It’s déjà vu all over again.” Can we really plead unintended consequences?
These items constitute a small sampling of the problems we face today, and they could all be remedied. It would take time, it would be painful in some cases, and it would involve educating Americans to understand what is necessary. That would take a great deal of Congressional will. I can’t see any.
Van Wie Financial is fee-only. For a reason.
On April 13, 2020, we published a Blog explaining why it was a poor time to own Treasury Inflation-Protected Bonds or TIPs. A mere 14 months later, our position has reversed, but not because we are wishy-washy or undecided. The national situation has changed dramatically, so investment strategies need to be revised and updated to reflect our current financial environment.
Since 1997, TIPs have presented investors with bond interest, plus an extra “kicker” in the form of an inflationary adjustment. The inflation adjustment is made by raising the principal value of the bond by the reported rate of inflation for the prior year.
Early in 2020 the world was presented with a COVID-19 pandemic, and the resultant economic shutdown drastically reduced overall consumer demand for goods and services. Reported inflation turned negative. While TIP values are not revised down during deflationary periods, they are not revised up until all accumulated deflation has been offset by subsequent inflationary increases.
Also in early 2020, interest rates were already close to zero and showed few signs of being increased any time soon. With U.S. inflation reports being negative and interest rates being close to zero, we could not justify buying TIPs in early 2020. However, nothing stays the same for long.
Fast forward to June 2021, and conditions are vastly different. Consumer demand has outstripped supplies of many goods and services, leading to rising prices. Even government wizards, who manage to vastly underreport inflation, are admitting that the Consumer Price Index (CPI) is now rising rapidly. The period of declining CPI is over and forgotten (for now, anyway), and the cost of living is higher than ever.
Adding to the pro-TIP argument is the fact that several members of the FED have stated that ZIRP (Zero Interest Rate Policy) cannot last much longer. Rates will have to rise in an attempt to dampen inflation. In the new environment, TIPs are looking more sensible, and investors are paying attention.
While TIPs can be purchased in a number of forms, we like the iShares TIP Exchange-Traded Fund (ETF). Fourteen months ago, the market price of TIP was about $121.85. oN June 4, 2021, the closing price was $127.48, representing an increase of about 4.7%. In addition, TIP pays a monthly dividend whenever the combination of inflation adjustment plus underlying bond interest is positive.
Since June 1, 2020, TIP has paid a monthly dividend only half the time. This month, TIP is paying over $0.68/share, the largest monthly payout since June of 2008. This reflects the recent rising inflationary environment. We anticipate more inflation and more TIP dividends for the balance of 2021. This could be helpful for investors who are seeking diversification and income.
Van Wie Financial is fee-only. For a reason.
Sometimes a Certified Financial Planner® (CFP®) can provide the frosting on the cake of your personal financial planning. Accountants, attorneys, other tax preparers, stockbrokers, and insurance agents all fulfill necessary functions. But for some important retirement decisions, more is better. Recently, we had an interesting client case involving a 1-time income windfall and its consequences on Roth IRA contributions. We’ll set the table with some basic background.
- Married couple, both contributing monthly to IRAs; one to a deductible Traditional IRA, the other to a tax-free, non-deductible, Roth IRA. Neither makes maximum annual contributions
- During 2020, our clients sold an asset at a significant gain
- That gain elevated their joint income above the annual limit to make Roth contributions
- Since Roth contributions had already been made, a correction was necessary
In reviewing the case, we saw that Roth contributions had been a steady $150/month, and had been at that level for years. Therefore, $1,800 of 2020 Roth contributions were disallowed. Since contributions made before Tax Day can be for the prior year, we could reclassify those early 2020 funds as 2019 contributions. That represents Part 1 of the correction.
Here’s where it got creative. Remember what the actual Tax Due Date was in 2020 (for 2019 Returns)? COVID-19 response legislation made April 15 irrelevant, instead postponing the date for filing, paying, and contributing, to July 15, 2020.
The client’s 2019 Roth contributions actually made in 2019 were only $1,800, so we reclassified the first 7 (January through July, rather than 4) contributions made in 2020 back to 2019 contributions. That still kept the client below the $6,000 maximum for 2019.
While the sum of money may seem insignificant because we were able to preserve the funds in the Roth IRA when the funds are eventually withdrawn, the gains will not be taxable. Further, there will not be Required Minimum Distributions (RMDs) on that amount, plus growth. The penalty for failure to remove disallowed Roth contributions is 6% for every year the problem goes uncorrected.
The remaining five months of 2020 Roth contributions (August through December) in the account had to be moved out immediately. That represents Part 2 of the correction. For that, we use a process called a “Back-Door Roth IRA Contribution,” which allows contributions to end up in the Roth, after a couple of legal transactions have been completed.
First, the remaining money ($750.00) was moved to a Traditional IRA, with no deduction taken. Next, we converted those funds back to the Roth IRA, tax-free. Problem solved; the entire $1,800.00 remains in the Roth IRA. The main advantage of keeping the money in the Roth is the absence of later Required Minimum Distributions.
Perspective from a Certified Financial Planner® often makes a situation better. Details are constantly changing in the Retirement Account arena. We remain current in order to assist our clients in staying on course toward financial independence.
Remember that Van Wie Financial is not a tax preparer, and does not render tax advice. What we do well is Tax Planning, which is a no-extra-cost part of our comprehensive personal financial planning service. Does your financial advisor do that? Give us a call.
Van Wie Financial is fee-only. For a reason.
All walls are barriers, but not all barriers are walls. Barriers don’t have to be physical in nature. The Biden administration wants to discourage U.S. multinational corporations from shifting investments, production, and profits overseas. Their plan is to create barriers, such as regulations and taxes, in their attempt to keep businesses home. Oh, and incidentally, while they squeeze dramatically higher taxes out of all corporations.
“When other countries see us lower our rate, they lower theirs to undercut us,” Treasury Secretary Janet Yellen said last Wednesday. “The result is just a global race to the bottom.” Bottom of what? Competing international corporate tax rates, that’s what. Instead of old-fashioned competition, which is a “carrot” approach, the current Administration proposes taxes and penalties, using the “stick” disincentive.
According to the Treasury Department, corporate tax revenue in the USA is at historic lows. But, the unspoken reason corporate tax revenues have been running lower is COVID-19, and that is quickly reaching an end. Corporate tax collections are rising quickly, and are projected to continue rising for a decade.
First of all, the government cannot “pay for” anything until it stops running an annual deficit. Before any new spending is proposed every year, we will have already borrowed over $1 Trillion (12 zeroes) to fund the current budget deficit. Balancing the budget would allow us to consider new expenditures and how they would be funded. Printing money and spending has already caused a huge spike in the inflation rate. It will only get worse.
In 2017, President Trump spearheaded a change, slashing the maximum corporate tax rate from 35% to 21%, thus encouraging companies to return money and production to our shores. Immediately, factories began reopening domestically, new ones were built, and jobs were returned to the U.S. (along with hundreds of billions in cash). Barriers had been lifted. The Trump “carrot” worked. No “stick” is needed.
Among other provisions, Biden’s corporate tax proposal encourages other nations to join a global agreement to enact a minimum global tax. Many countries will play along to curry favor with the U.S., which can be very generous in return. Other countries won’t join, as they would rather compete in the business market.
The Biden Administration’s proposed 15% minimum tax on book income (rather than taxable income) of large companies ignores several facts. Aside from basic competition, a minimum tax overrides the U.S. Tax Code. Some companies (notably Amazon) use legal provisions of the Code to reduce taxable income by making legal investments and acquisitions. In so doing, they benefit employees and customers alike.
Last week, President Biden announced a $2.2 trillion proposal to upgrade the nation’s roads, bridges, broadband, and clean energy infrastructure. He wants to “pay for” most of the sweeping overhaul by raising the corporate tax rate from 21% to 28% and encouraging other countries to enact a global minimum tax. Global taxes, dictated by the United States? Be afraid, America, be very afraid. Personal income tax increases cannot be far off.
“It changes the game we play,” Yellen said of the blueprint. So, Janet Yellen apparently thinks that this is all a game. How many of you get seriously scared when you hear that?
Van Wie Financial is fee-only. For a reason.
We first wrote about the SECURE 2.0 Act in November of 2020, when it looked as though it would be easily passed by year-end. SECURE 2.0 addressed remaining issues from SECURE 1.0, and had bipartisan support. Post-election Congressional squabbling prevented the 2020 version of SECURE 2.0 from getting passed. The revised Bill has now been passed out of Committee by unanimous voice vote, and is headed to the floors of Congress.
2020 was not a complete legislative bust, as the Trump Administration was able to pass both the CARES Act and SECURE 1.0. SECURE 1.0 addressed provisions for owners of Retirement Accounts, and the CARES Act addressed the sudden lack of income from employment, as the country shut down from COVID-19. Both of these sweeping Bills were passed with huge bipartisan majorities. Many significant changes were made in each, and most people were affected by some of those changes.
Certain items from the 2020 Bill were updated and renegotiated into the 2021 version, ostensibly to save money (government money, not yours). Consequently, not all changes were as user-friendly as last year’s failed attempt. That said, it was not all bad, either.
- Repeal of Age Limits for IRA Contributions. There was no change in this part of the Bill. However, changes will affect some future contributions, as described below.
- Required Beginning Date for Minimum Distributions (RMDs) from age 70-1/2 to 72 for people born after June 30, 1949. The proposed Bill from 2020 would have raised the RMD age from 72 to 75 after 2021. Instead, the 2021 Bill would raise the RMD age over 10 years as follows; in 2022 the RMD age will be 73, in 2027 it will become 74, and in 2032 the RMD Age will become 75.s
- Proposed Catch-up Contributions – the Good. Retirement savers over age 49 have long had the ability to make supplemental, or Catchup, contributions to their accounts. Under SECURE 2.0, contribution limits for ages 62, 63, and 64 would be increased to $10,000 annually. Also, starting in 2023, Catch-up Contributions would be indexed to inflation.
- Proposed Catch-up Contributions – the Bad. Apparently, all Catch-up Contributions would have to be made on a Roth basis (not tax-deductible). This remains uncertain at this moment, and we will report once the Bill is finalized.
Researching SECURE 2.0 provisions leaves uncertainty to those of us who are not attorneys. We will keep you posted as clarifications or reconciliation changes are made. For now, at least, passage appears imminent.
Van Wie Financial is fee-only. For a reason.
Frequently heard in our office, “I’d like to retire early, but I can’t figure out how to continue affordable health insurance until Medicare.” In the absence of a beneficent employer, there is little one can do, except to select COBRA (the mandated availability to continue company insurance coverage for up to 18 months) or ObamaCare solutions, both of which tend to be prohibitively expensive. Any break in continuous health insurance coverage could result in personal economic ruin.
In the short term, there is possible assistance for some very specific Americans. Imbedded in the American Rescue Plan Act of 2021, which is known to most people as the most recent COVID-19 Spending Plan, there is a short-term assist for some people. Unfortunately, so far it applies only to calendar years 2021 and 2022, but if it becomes popular, that could well be extended into future years.
Under the 2021 COVID-19 law, people ages 63 or 64 may have a short-term solution. Since Medicare doesn’t start until age 65, Congress established “fallback” coverage under the Affordable Care Act, or ACA. Commonly dubbed “ObamaCare,” ACA coverage is not always “affordable.” Additionally, anyone who has checked the price of COBRA coverage through an ex-employer knows that COBRA is no financial panacea. Wildly expensive, it is out of reach for many Americans.
Under the new provision, and only for the remainder of 2021 and all of 2022, the cost of new ObamaCare coverage under ACA is capped, based on income. For under-65 Americans, ACA coverage costs will be capped at 8.5% of the taxpayer’s MAGI, or Modified Adjusted Gross Income, which for most people is the AGI on their Form 1040 Tax Return.
This means a taxpayer with a MAGI of $50,000 would only be required to pay $4,250 annually, or $354.17 per month. With that level of income, this deal could be very enticing. For many people, it could make the difference between a desired early retirement and working until Medicare age.Unfortunately, this assistance sunsets on 12/31/22. In an extremely politically charged year, the future of this provision is unclear. We will, as always, keep you posted.
If you fit the description of a person who would choose to retire early, and if you will reach Medicare age before the end of 2022, this may be of interest to you. It should be especially interesting if retirement would result in a large reduction in income. Carefully planning income, from Social Security claiming, Retirement Account distributions, etc. would enhance your ability to get coverage at very minimal cost.
As Congressional discussions go forward, the 12/31/2022 sunset date may be extended. If it happens, we will report, and there would potentially be many more people positively affected by this provision.
Van Wie Financial is fee-only. For a reason.
Recently on the Van Wie Financial Hour radio program, we discussed the Millennial Generation (a/k/a/ “Generation Y”) and their relationship with money and financial planning. The results were very interesting, and most everyone came away with a better understanding of this very large demographic.
Millennials are roughly described as people born between 1981 and 1996. They are often grandchildren of Baby Boomers, and their numbers are staggering. In fact, they have now replaced (remaining) Baby Boomers as the largest group of Americans. That alone is a Godsend, as that very fact gives Social Security a desperately needed financial boost. The sheer quantity of Millennials will not save Social Security, but it is a huge step in the right direction.
In order to shore up the failing Social Security System, Millennials need to work and pay into Social Security. Sadly for them, the percentage they will have to pay into the System is about to go up, whether or not anyone in Washington wants to admit that inevitability.
For meaningful numbers of Millennials to be employed, they must have a growing economy, fair and free trade, education, training, and a solid work ethic. That is a tall order in today’s Socialist-leaning America. Hopefully, as Millennials get older, they will develop a strong sense of responsibility and purpose, which generally accompanies the aging process. There is hope in the statistics.
Homeownership has become important to Millennials, although they tend to buy later in life than did previous generations. Unfortunately, affordable housing is in scarcity mode at this time, and prices are on the rise. Offsetting pricing somewhat (but also contributing to the problem) is our historically low-interest-rate environment.
Consumer preferences among Millennials are skewed toward experiences over material goods. Travel and leisure are high priorities for the group as a whole. Here again, there is good news, as many are blending experiences with assets, in the form of RVs, campers, boats, etc.
Where Millennials need to play “catch-up” is in the arena of Personal Finance. Only 24% of this huge (72 million+) demographic display any substantial knowledge of finance. Parents and grandparents of Millennials have been enormously successful, and will eventually be passing along trillions of dollars of wealth to Millennials. It would benefit them to understand more about money and investing before that happens.
It is true that Millennials are leaning very heavily on their families for support, especially in housing, but there appears to be light at the end of the tunnel. As much as Millennials have been maligned, large numbers of them are turning to more traditional values and priorities. For their sake, we hope they include having children and growing families.
Finally, the name of this Blog is “Dogs and Cats.” It turns out that Millennials own 35% of the nation’s pets. Good for them, as pet ownership fosters a sense of responsibility. Getting some professional financial planning assistance would be immensely helpful, as well.
Van Wie Financial is fee-only. For a reason.