February 1, 2020 brought the emergence of a United Kingdom newly freed from the stranglehold imposed by membership in the European Union (EU). The severing process, dubbed “Brexit,” took well in excess of 3 years after a 52%-48% approval in the popular vote. It was completed on January 31, 2020, to surprisingly little fanfare in the American media. I believe there will be more Brexit-style departures from the EU, starting relatively soon.

As usual, my humble opinion is not shared by all. The usual suspects are already posing several hypotheses that would result in undoing the will of the people. The naysayers have dubbed their new movement “Breturn.” I do not believe that it will ever see the light of day. Quite the opposite, in fact.

Spearheaded by the United Nations, governments around the world have been expanding their size and power for decades under the euphemism “globalism.” For citizens, having one’s own central government become too large is bad enough, but imagine being subjected to big government in another country! That is NOT the same as living in Florida and having a State government, while concurrently being governed by a Federal government in Washington, D.C. Ours is one country with one nationality; the European Union is not.

Our several European friends identify themselves as Portuguese, Spanish, German, Italian, Dutch, or whatever the specific country of their birth and residence. We identify ourselves as American citizens, residing in whatever state, regardless of birthplace. Never have I talked to anyone who claims to be a citizen of the European Union.

The origin of the EU was, in my opinion, a noble venture with reasonable goals. Since European geography is small and inter-country travel is frequent, the EU allowed Europe to function in a manner similar to our states. Unrestricted passage among and between countries similar in size to our states seemed reasonable and prudent, at least in pre-9/11 days. Its origins go back to 1951, and the EU we know today was finalized in 1993.

Central governments tend to have some characteristics of cancer cells. Left to their own accord, they grow, spread, and metastasize. So it went with the EU, slowly at first. In time, the EU wanted to exert its collective economic power, and a bad idea was born. The Euro currency was hyped to the various EU members, and several of them took the bait. Bad idea.

The Euro, an optional common monetary unit, began in 1999 as an accounting currency (not circulated). Printing and distribution began in 2002. Not all European countries adopted the Euro, preferring their own currencies to the collective. Chief among them was England. As a result, Brexit was less complicated than it otherwise would have been. Notable others not adopting the EURO include Denmark, Sweden, Romania, Poland, and a few others.

Individual differences among and between people, nationalities, countries and currencies have always existed, and will always exist. Comparisons are a necessary consequence of those differences. Obscuring those differences under a common currency does not change that. Look for the next “Brexits” to be from other countries that avoided adopting the Euro.

Brilliant economist Milton Friedman predicted in the early 1990s that Europe would adopt a common currency, and that common currency would ultimately fail. In 2004, he stated that there was a “strong possibility” that the 12-member (at the time) Euro Zone could collapse “in the next few years.” Once again, Dr. Friedman appears to have been spot-on.

Stifling individualism, identity and creativity in search of equality tends to limit the power of superior ideas to create better societies and economies. 52% of the voters in the UK seem to understand that premise. We will be watching the UK for signs of economic change, whatever direction it may take. I’m predicting success.

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

Ask a number of Americans of all ages how they are progressing toward financial independence, and most will admit that they believe themselves to be woefully behind. Others will likely be mistaken about their own progress. But the fun really begins when you ask unprepared people what their plan is to become financially independent.

Here are some of our favorite actual responses from our financial planning practice:

  • I buy Lottery tickets every payday
  • I am planning to start saving soon
  • I am waiting for my inheritance

It probably goes without saying that we consider these “planning tools” insufficient. Perhaps the Lottery concept has the worst odds, and although the actual winners always have purchased a ticket, most Lottery ticket purchases make people poorer, rather than wealthier. The Lottery is aptly dubbed a “regressive tax.”

The surest method of planning personal financial independence is to take responsibility for yourself through saving and investing. Tax laws favor retirement savers, and the financial markets have always rewarded long-term investors. Savers will also make a more positive impression on others who may name them as beneficiaries.

We refer to inheritance as the ultimate “bad news, good news” situation. When gaining an inheritance, the beneficiary has lost someone important, but has also gained ground financially. Because expected inheritance is so uncertain, it is not a suitable financial planning tool. In our day jobs, we use an expression that says, “Never plan on an inheritance (even if it is known to be happening), always plan for it.”

Waiting for an inheritance is dangerous at best, even if your extended family is reasonably well-off. In their later years of life, Americans tend to spend enormous sums of money on health care and maintenance. These expenses escalate after most people have stopped earning income, making asset draw-downs more significant.

Even relatives who retain significant wealth until end of life have the ability (and tendency) to become generous to charities and favorite causes. Their gifts may reduce the anticipated value of any estates that will be left to heirs.

There is no substitute for planning prior to receiving a windfall. Improper wealth planning (and especially no planning at all) may result in newly acquired assets being squandered. Financial independence (retirement) requires accumulation of wealth. Even a Lottery ticket of significant magnitude compels planning prior to collecting the cash. If you become one of the fortunate few to experience Sudden Wealth, either through inheritance or other windfall, we can help. For most people, orderly and well-planned saving is the most reliable method of wealth accumulation. Stay safe and smart — avoid risky outcomes through planning.

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

Those of you old enough to remember the NASDAQ Composite Index run-up in the 1990’s, and subsequent meltdown in early 2000, probably have not yet gotten over your “losses,” nor regained 100% confidence in the markets. I placed the term “losses” in quotations simply because most people were gaining paper wealth on very small actual investments, and when the bottom fell out, it was primarily paper losses that made many investors grieve.

In my early career in financial advising and doing live radio, I predicted that it would be many years before the NASDAQ regained its lofty high of 5,048.62, where it peaked on March 10, 2000. In fact, it did not achieve that level again until April 23, 2015 – a recovery period of over 15 years. Factoring in the inflation rate during that period, the NASDAQ Index was still effectively 37.6% lower than its high of 2000.

Today the seemingly unstoppable NASDAQ Composite Index has been setting new records, most recently 9,402.48 on January 23, 2020. This level reflects a gain of over 86% from the highs set in 2000, and a whopping 641% since the beginning of our current Bull Market in early 2009. “Is it sustainable?” is one of our most frequently asked questions.

“Sustainability” is not a particularly useful word to describe the level of the stock market. Financial markets are risky (which in this context means “variable”), and as such are always prone to a rise and/or fall of some magnitude. However, decades of history teach us that markets are also resilient, meaning they have always come back to, and then exceeded, any and all prior high levels.

The 1990s brought proliferation of the Internet into private homes all across America and the world. Home use, coupled with the burgeoning capability of innovators to provide new concepts, produced exponential growth of interest among potential investors.

Today’s NASDAQ Composite Index is computed the same as the 1990’s NASDAQ. However, individual valuations of companies in the Index is vastly different. In the 90s, startups (dubbed the “Dot-Coms”) were popping up every day. None had yet made a penny of profit, but the exciting new world of online investing did not care.

We all know the ugly result, when in early 2000 the NASDAQ (along with other market indices) made a stunning reversal. Companies ran out of cash, investors were left with little or nothing, and the sour taste in people’s mouths remains to this day.

“It’s different this time.” Those are some of the scariest words in the language. Yet, this time things really are different, and today’s successful NASDAQ companies are valued on more traditional attributes, such as actually making a profit. In a nutshell, that’s what took the recovery so long to produce new highs in the Index. It was worth the wait to regain sensibility in today’s market valuation formula.

In the “Dot-Com” era, too many “investors” were only invested in the fledgling NASDAQ companies. Perhaps the best takeaway from all the subsequent pain is the constant need for long-term investors to diversify among various asset classes and to stay diversified. We can help.

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

Once in a while, the government acts in the best interests of its citizens. On the rare occasions that this happens, we like to bring it to everyone’s attention. Governor Ron DeSantis recently announced that they are lowering rates on all of the Florida Prepaid College Savings Plans. This announcement is slated to save Floridians $1.3 Billion in college costs, including refunds of about $500 million to existing customers. This is truly great news for our Florida families.

In addition to the refunds, new and existing plan prices are being reduced, and existing plans may be paid off earlier than anticipated with he price reductions. These changes are the result of lower than anticipated increases in tuition and fees.

This is not the first time the plans costs have been lowered. In 2014, Governor Rick Scott dramatically lowered the price of all plans. Some plans were cut nearly 50%, going from $40,000 down to $20,000 per student in some cases.

Florida, as well as many other states, offers a 529 college savings plan in addition to the prepaid plan. The 529 plan is a way to save money for education expenses which grows tax-free (like a Roth IRA) until you use it. As long as the money is used for education-related expenses, the growth is never taxed. The Prepaid Plan is also purchased with after-tax dollars, but the benefit of that plan is that you are paying today’s tuition rates for college in the future. Both plans have great benefits, and many people use them in tandem with each other.

If you want more information about these college savings options, please call our office at 904.685.1505 during normal working hours and we would be happy to discuss college savings strategies with you.

Several years ago, I published a magazine article called, “Woulda, Coulda, Shoulda Financial Planning.” While the title may seem a bit strange, the intent should be quite clear.

A recently-released study by TD Ameritrade (conducted by Harris Poll) found that a majority of Americans ages 40 to 79 would grade their own readiness for financial independence (retirement or otherwise) at a “C” or below. Nearly everyone “woulda” done some things differently, and most “coulda” done exactly that. When pressed, most say that they “shoulda” done things differently.

Here are a few of the findings:

  • 53% of people in their 50s have less than $100,000 saved for retirement
  • 81% are aware that longer life expectancies require a modified approach to financial independence
  • Nearly half of respondents in their 40s have withdrawn money from retirement accounts to cover unexpected events
  • Only a third of respondents age 50 and older take advantage of “catch-up” (increased) contributions to retirement accounts
  • About 60% have no plans to reduce spending
  • Nearly 70% wish they had started saving earlier
  • 70% of people in their 70s regret having gone into personal debt for their children
  • Half of respondents say they retired sooner than they expected, due to unforeseen circumstances

What if you understand your own shortcomings, but have no idea what changes to make? There’s an app for that, so to speak. Working with a qualified, fee-only, Certified Financial Planner®, you can establish new goals, chart a new course, and improve your chances for success.

Don’t find yourself in that unwanted majority when you are older, having financial regrets. You might fall into the trap of deferred corrective action, when you realize that you “woulda,” “coulda,” and “shoulda” done things differently and earlier. Planning and flexibility are the keys to a more satisfying later life. We can help.

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

Is it me, or does April 15th seem to come around too quickly? We are subjected to this distasteful annual ritual with a frequency that is sure to drive your tax preparer crazy, even if that preparer is you!

Full disclaimer: we are not tax preparers, nor tax attorneys, and we cannot, and do not, give tax advice. Rather, as financial planners, we work with our clients in the arena of tax planning. This requires a fundamental understanding of the U.S. Tax Code, as well as the rules for investment accounting.

There is some good news this tax season, however, in that many fewer Americans are itemizing deductions since implementation of the Tax Cut and Jobs Act of 2017 (TCJA). IRS Form 1040 in the years since TCJA is shorter and applicable to most Americans. As a taxpayer’s tax complexity grows, various Schedules and Forms are required to be included with the filing.

In order to see if you might benefit by itemizing tax deductions, the place to start is by examining your last year’s (2018) return. (We will be filing 2019 returns this year.) Last year, we had no basis for a direct comparison under the new Code, as 2017 returns were filed under pre-TCJA rules. This year, we do have a basis for comparison. Here are some items to check from your 2018 tax returns:

  • Income. Has your income changed dramatically, whether in magnitude or source? If not, you are likely to file a Form 1040 that resembles last year.
  • Tax Deductions. Did you itemize, or did you claim the Standard Deduction for 2018? Look at Line 9 of last year’s 1040 and see if it is a recognizable number, such as $12,000, $18,000, $24,000, or $26,600. If so, you did not itemize deductions, and your planning for 2019 will likely be easy.
  • Tax-Related Forms. Income verification forms, including W-2s and 1099s, are beginning to arrive for 2019. Accumulate those forms and pay attention to two areas; the amount of income, and the amount of Federal Income Tax withheld.
  • Do I need a Professional Preparer? There will be many more taxpayers this year who find that they no longer need a professional tax preparer. These taxpayers include people who took the Standard Deduction for the first time in 2018, and did not have a long series of Schedules attached. (Naturally, many people want to use a professional anyway, for comfort and accuracy, and we fully support them.)

For the most part, it is no longer necessary to keep every receipt in a shoe box, or to carefully document every medical expense, no matter how small. Very few people will qualify for a medical expense deduction, and State and Local (SALT) Tax Deductions have been limited to $10,000 annually. If your SALT doesn’t exceed that limit, it is unlikely that you will be an itemizer anyway.

The Tax Code is a little friendlier under TCJA. Understanding the 2018 changes could make this tax season less unpleasant. Start by understanding your 2018 return, and perhaps your stress level will be lower between now and April 15, 2020. Wouldn’t that be a nice change?

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

Avoiding a partial government shutdown, a massive year-end spending bill was recently passed by Congress and signed into law by President Trump. Part of that bill, the Setting Every Community Up for Retirement Enhancement, or S.E.C.U.R.E. Act, will do more long-term good than harm. My assessment comes despite the sketchy grammar applied to naming this significant financial makeover.

While championed by the annuity industry, the Secure Act includes many changes to non-annuity forms of retirement accounts. Details of the Act are being continuously updated and published, and as they are, we will do our best to explain new provisions in understandable terms. Highlights include:

  • Repeal of Age Limits for Traditional IRA Contributions. Many Americans are working beyond age 70-1/2, and those workers were not able make Traditional IRA contributions until now; there is no longer an age limit.
  • Required Minimum Distribution (RMD) Age. Owners of Traditional IRAs and other tax-qualified retirement accounts were mandated to begin taxable withdrawals at age 70-1/2 (never mind what an idiotic age that was), but that has been changed to age 72. This affects anyone who was born in 1950 or later.
  • Loss of “Stretch IRAs” for Inherited Retirement Accounts. After 2019, there is no longer a stretch provision allowing an inherited retirement account to be distributed over the beneficiary’s lifetime. Instead, IRS no longer cares how quickly or slowly money is withdrawn and taxed, so long as it is fully withdrawn within 10 years following the year of death.
  • Smaller Required Minimum Distributions (RMDs). IRS has rewritten Life Expectancy Tables to reflect our increasing lifespans. Starting in 2021, less money will be required to be withdrawn every year, reducing taxable income and preserving assets for longer lives.
  • Universal application of lowered RMD. The Secure Act allows people who are already taking RMDs to use the new Life Expectancy Tables, reducing withdrawal amounts beginning in 2021.
  • Qualified Charitable Distributions (QCDs) were continued “as is,” meaning that people of age 70-1/2 and up can still make direct charitable donations without losing their tax deduction.
  • “Kiddie Tax” rates were restored to their pre-2018 level, corresponding to the parents’ tax rates, rather than the excessive Trust tax rates from the Tax Cut and Jobs Act of 2017.

A batch of the usual “tax-extenders” passed, as well. These are the small items that Congress is too unfocused to legislate, so they wait until year-end to “kick the can down the road’ another year at a time. Again, those provisions are numerous and affect relatively few people, so we will not address them here. The Secure Act presents a mixed bag, but all-in-all I give it a ‘thumbs up.”

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

Roth IRAs were invented in 1997 to supplement Traditional IRAs, and in some situations the Roth presents a better overall financial opportunity. There are many reasons to consider using a Roth IRA. Some people make too much money to deduct a Traditional IRA, but others (in low tax brackets) also favor using the Roth IRA. Investors just starting to save money may realize that a Roth IRA can be used for a variety of beneficial pre-retirement financial transactions not available using the Traditional IRA.

In appropriate circumstances, we are huge supporters of the Roth IRA. BUT, experience has shown us that far too many Roth IRA owners are under-utilizing their own wealth accumulation potential. Here are a few common errors:

  • Confusing the account with the investment. This is common in banks and credit unions, when the customer is convinced to open an IRA that simply winds up in an interest-bearing CD.
  • Investing too cautiously. Roth IRAs are perfect vehicles in which to maximize investment risk, as the returns over time, no matter how large, will never be taxed.
  • Failing to maximize contribution potential. Unlike Traditional IRAs, Roth IRAs can accept contributions after age 70-1/2, assuming that the owner (or the owner’s spouse) has sufficient earned income to cover the contribution.
  • No Required Minimum Distributions, or RMDs, need to be taken during the life of the owner. Beneficiaries will have to take RMDs after inheriting a Roth IRA, but the withdrawals will be small, and the proceeds will not be taxable.

The true wealth-building opportunity offered by a Roth IRA is unlocked by maximizing both lifetime contributions and investment risk. Every investor should understand the relationship between risk and reward. “No pain, no gain” is ubiquitous in the physical fitness industry, but is also applicable to investing. In both cases, more is gained over time by taking more risk, which means increasing the variability of returns in an IRA.

Riskier assets, such as stocks, have a track record of higher, but less predictable, returns. Money market funds, CDs, and the like offer predictable, but much smaller, returns. Over time, higher average returns from stocks should provide a more favorable outcome. With no required withdrawals, Roth IRAs may continue to grow throughout a lifetime, and then be inherited tax-free by beneficiaries.

The purpose of a Roth IRA (or any tax-qualified retirement account) is to grow it as much as possible over time. Retirement funds will help replace your income once you reach retirement. Invested properly, a Roth IRA is the perfect vehicle for aggressively growing retirement funds. Merely parking Roth IRA contributions in an interest-bearing account for years is tantamount to carrying buckets of water from one end of a swimming pool and dumping them into the other end. Why bother?

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

Every year I like to review my last year’s Congressional Financial Wish List, both to see what actually happened since last year, as well as to see what could be improved next year. Since passage of the Tax Cuts and Jobs Act of 2017, which took effect on January 1, 2018, a lot has changed. Many changes were positive for the majority of Americans, but much remains undone.

  • Wish # 1 – Income tax rates were lowered for individuals until 2026; the new rates need to be made permanent. (No progress in 2019, despite promises)
  • Wish # 2 – Reduce Capital Gains tax rates, which were not modified in the 2017 Act. (No progress in 2019; little help in sight)
  • Wish # 3 – Dramatically increase contribution limits for IRAs, which are currently only adjusted for inflation. (No progress in 2019; little or no change in sight)
  • Wish # 4 – Repeal all Estate and Gift Taxes. (No progress in 2019; not a whimper from Congress)
  • Wish # 5 – Eliminate the Clinton-era tax increase on Social Security benefits for certain income levels. (No progress in 2019; I may be the lone dissenter)
  • Wish # 6 – Eliminate the Alternative Minimum Tax (AMT) on individuals. (No progress in 2019; all talk, no action)

As is evident from the forgoing analysis, it appears that I am getting a legislative lump of coal in my 2019 stocking. In 2018, Republicans promised to pass Tax Cuts 2.0 before the end of the year. As is too often the case, that promise was hollow.

What, if anything, can we realistically expect Congress to address from this list? A good start would be passing Wish #1, which simply extends current tax rates into the future for individuals. Unfortunately, even that one is looking elusive. While the term “Do-Nothing Congress” has long been applicable, this past year must be a record.

Entering into an election year, perhaps some elected officials would like to make some actual improvements in the lives of average Americans. Only time will tell. I, for one, am not holding my breath. Nevertheless, we wish everyone a very Merry Christmas and an exceptionally Happy New Year.

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

In the closing hours of 2017, Congress promised to help most Americans financially. Given the track record of the past several Congresses, that would have required a 180-Degree course correction regarding taxation. Skeptical Americans (including this author) demanded that Congress and President Trump “Show Me.” Lo and behold, they did just that.

The Tax Cuts and Jobs Act of 2017, or TCJA, passed and was signed into law, then took effect for tax years beginning January 1, 2018. Tax Returns for that year were due on April 15, 2019, and offered automatic extensions until October 15, 2019, for those who needed more time. Those dates have passed, returns have been filed, and results are in. The Journal of Financial Planning, one of our industry’s most respected publications, compiled IRS statistics for Tax Year 2018, with the following results and comments:

  • Contrary to early media reports, the average tax refund was down only $29, or 1%, from Tax Year 2017
  • Payroll withholding tables were adjusted to withhold less tax from paychecks, causing a corresponding increase in “Take-Home Pay”
  • The combination of an increased paycheck and a similar refund amounted to 67% of taxpayers receiving a measurable tax cut in 2018
  • Only 6% of taxpayers actually paid more in 2018 than under the prior Tax Code, and a slightly larger percentage had no measurable effect
  • Some people owed more due to the new $10,000 annual limitation of State and Local Tax itemized deductions, or SALT, were negatively impacted
  • Only 10% of taxpayers itemized deductions, due to the new, larger Standard Deduction
  • Tax cuts due to TCJA were not skewed to favor “the rich”
  • 92% of taxpayers used e-file for 2018 Tax Returns, compared to 67% the prior year
  • Small businesses fared well under TCJA, thanks to Wisconsin Senator Ron Johnson, who convinced President Trump and the Congress that a provision had to made for “pass-through” businesses to equalize tax rates with larger companies

Many tax preparers added a demonstration page to 2018 Tax Returns, showing what the taxpayer actually paid, against what would have been owed absent TCJA. If you used a professional to prepare your 2018 Tax Returns, you may be able to see for yourself how you fared under TCJA.

Congress has more to do if they truly aim to help the majority of taxpayers. Due to strange and outdated budgeting rules, personal tax rates expire after 10 years. Current reduced rates need to be made permanent. There are other areas Congress should address, such as encouraging higher retirement savings rates. Congressional Republicans have several proposals on the table, but the divided government has essentially ground to a halt. Only time will tell how this saga ends.

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