We are being lied to by our own government, which constantly understates the increase in the cost of living. We are told that prices are rising very slowly, and the “proof” is evidenced by the very slow and low increases in the Consumer Price Index (CPI). Simply put, inflation is not a problem, they say. I beg to differ.

Inflation simply refers to reduced purchasing power of the dollars in your pocket. Since 1913 (when the Federal Reserve was created), the purchasing power of the American Dollar has fallen more that 96%. A home purchased in 1913 for $10,000 would cost $257,814 today. According to Uncle Sam, who contends that inflation has averaged 3.2% for the decade, everything is under control.

We don’t believe them (or the CPI), and neither does Ed Butowsky, the creator of the Chapwood Index, which measures our actual cost of living using a simple methodology – he tracks the cost of the same goods over time in constant select cities “across the fruited plain.”

According to Butowsky, “The CPI no longer measures the true increase required to maintain a constant standard of living. This is the main reason that more people are falling behind financially, and why more Americans rely on government entitlement programs.”

It gets worse from there, because Social Security has now adopted the so-called “chained CPI,” which takes into account changing consumer behavior. For instance, people shift to hamburger from steak when steak gets too expensive. That may be true, but it certainly isn’t voluntary!

One of the charges given to the Federal Reserve (FED) is to “control” inflation using monetary policy. They have, in an apparent attempt to make us believe them, defined their own measure of inflation, the “Personal Consumption Expenditure,” or PCE. This is, in fact, another way to deceive the public by informing them that they should not believe their own lying eyes.

When we go to the grocery store, and find that prices for our routine purchases are up 8%, 10% or more, we know that the rate of inflation is higher than the FED’s 2% “target.” Much higher. Over time, inflation gets muddled in our minds, but I am old enough (and many of you are, too) to remember 25-cent gas, 10-cent movies, $10,000 houses, and so on.

Don’t get me wrong – I love (some) inflation. Reasonable, consistent inflation. But I detest getting lied to about the magnitude we experience virtually every day. There is no end in sight.

The Chapwood Index (www.chapwoodindex.com) measures the cost of living in the top 50 cities in America. Jacksonville is one of them. For 2018, the Chapwood Index says that our local inflation rate is actually 8%. Further, our 5-year average is also 8%.

Jacksonville is low by comparison to most cities, especially those on the coasts. The highest is Oakland, CA at 13.4%, with a 5-year average of 13.1%. The cost of living in Oakland doubles every 5-1/2 years. Could you keep up?

The FED is signaling a recent rise in reported inflation, and this adds to the many reasons they should NOT cut interest rates. However, I believe they will do so, and then will live to regret their action. In the near future we will discuss investments that thrive during inflationary periods.

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

As it stands now, social security is scheduled to run out of money by 2034. If that is allowed to happen, about 62 million recipients, or 1 out of every 6 Americans, will have their benefits cut to 79% of the current level. Clearly, no politician would allow this to happen, but fixing the problem needs to start now, not in 15 years when the system is bankrupt.

Here are twelve ideas that could help fix the system.

  1. Reduce current benefits
  2. Lower benefits for future recipients
  3. Allow the system to reduce benefits in 2035
  4. Increase current payroll taxes now or in the future
  5. Raise or lift the cap on payroll taxes now or in the future
  6. Raise the age to receive social security in the future
  7. Allow privatization of part or all social security accounts
  8. Eliminate early filing
  9. Change benefit accruals
  10. Change Cost of Living adjustments
  11. Tax State and Federal workers who are eligible for Social Security
  12. Invest the Trust Fund in a diverse portfolio to increase returns

I took these twelve ideas and ranked them on the following criteria:

  1. The positive impact on retirees and near-retirees
  2. Political Popularity
  3. Impact on the Social Security system

The results of my test yielded 4 ideas that scored a 7 or above, and here they are:

4) Raise or Lift the Payroll Taxes Now or in the Future: The problem with this one is that it is just another massively unfair wealth redistribution plan that punishes success. Should this pass, this would mean that W-2 employees would pay an additional 6.2% on income above $132,900. Self employed people would pay 12.4% more on every dollar earned above that threshold. For that additional tax, they would receive no future benefit, so it is transferring their current income to the future income of someone else. I think this would need to be tweaked by either lowering the rate paid or giving some benefit accrual for dollars paid in above the limit.

3) Invest the Trust Fund in a Diverse Portfolio to Increase Returns: The Trust Fund is invested entirely in U.S. Treasury securities that return almost nothing. Investing a diversified, conservative portfolio would amplify those returns. Why are we not doing this yet?

2) Change benefit accruals: This one could be done behind the scenes and would be the hardest to understand and explain politically. Essentially, it would change the way benefits are calculated for future recipients, so the payouts would be lower. This would have a large impact on the system, and could be slanted toward lower income earners to be sold to the public.

1) Raise the Age to Receive Benefits in the Future: I am 42 years old. That means it will be 20 years before I am eligible to receive my first check. If the government came to me and said you can receive 79% of what you though you would be getting in 20 years, or 100% of it in 21 or 22 years, that is a trade-off I will make. Do I love it? No. Is it a better deal? Yes.

  Positive Impact on retirees Popularity Impact on System Total
Reduce current benefits 1 1 3 5
Lower benefits for future recipients 2 2 2 6
Allow the system to reduce benefits in 2035 2 1 2 5
Increase current payroll taxes 3 1 2 6
Raise or lift the cap on payroll taxes now or in the future 3 1 3 7
Raise the age to receive social security in the future 3 2 3 8
Allow privatization of part or all social security accounts 3 1 1 5
Eliminate early filing 1 1 2 4
Change benefit accruals 2 2 3 7
Change Cost of Living adjustments 1 1 3 5
Tax State and Federal workers who are eligible for Social Security 2 2 2 6
Invest the Trust Fund in a diverse portfolio to increase returns 3 2 2 7

 

Ask any mature adult, say, over about 40 years old, if he or she would take a 1-time deal to go back to an younger age, and the answer is almost universally, “Sure, I’d love to be younger, but only if I can take with me everything I know today.” There is no direct replacement for experience in life. But, extensive learning and planning provide a healthy boost to the accumulation of wisdom that comes with age.

Perhaps the most difficult period of a young person’s life begins with the realization that it is time to get married and start a family. There is so much to do with so little cash flow, and so many concurrent demands to obstruct the path to a successful financial future. The early years of child rearing present young parents with constant demands for time and money, and conflicts are inevitable.

When presented with the reality that there will soon be three people in the family, a common and natural reaction is panic. Since this is a financial blog, here is a “short list” of financial obligations that will soon be competing for dollars of new parents-to-be.

  • Who should continue to work; one or both?
  • Can we afford today’s astronomical Day Care expenses?
  • Do we need life insurance; what kind, and how much?
  • What expenses will our health insurance not cover?
  • Should we keep renting, or is it time to buy?
  • How will we be able to retire our student debt?
  • Will our current vehicles be large enough and safe enough?
  • When should we start saving for college?
  • Should we make a formal Will?
  • Can we continue to fund our own retirement savings?
  • What changes are needed to our home?
  • How will this impact our social life?

While not an exhaustive list, it is nonetheless daunting. With increasing priorities demanding the attention to allocation of expenses and savings, managing money is a critical priority. Yet, most young adults have little-to-no experience doing exactly that.

Establishing a relationship with a competent financial advisor seems out of reach for most young people, as they believe they do not yet have sufficient net worth to justify professional wealth management. Fortunately, financial planning during this period is primarily a process of identifying and ordering priorities.

There are an increasing number of young couples seeking professional financial advice. The number one caution for young people should be to avoid commissioned salespeople calling themselves financial planners in order to sell insurance and/or annuities. Salespeople are not fiduciaries with respect to their clients of any age. The fiduciary standard, which you can reference using a simple search, is critical to avoid making seriously costly financial mistakes.

Start any search for a fiduciary planner using online resources, such as the Certified Financial Planner Board of Standardsâ (letsmakeaplan.org) or the National Association of Personal Financial Advisorsâ (NAPFA.org). These professional organizations will steer you to the right planner for your situation, and will help you avoid commissioned product peddlers looking for gullible young customers.

Free financial resources are invaluable, but only if they are trustworthy. That is the reason we started the Van Wie Financial Hour, our 1-hour radio program heard every Saturday morning from 10:00 a.m. to 11:00 a.m. on WBOB radio, 600AM and 101.1FM, and streaming on the Internet at wbob.com. You can also hear prior shows through our website, strivuswealth.com, where all past programs are archived. While on our website, look around for other solid financial information and guidelines.

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

As someone who has long supported a Tax Code change to index capital gains for inflation, I am very happy to have read more than one recent story about a proposal currently in Congress. Indexing has failed many prior attempts over three decades, but this time just might be different.

Many people know the difference between “real” and “nominal” profits. “Nominal” refers to an actual numerical gain; i.e. buy a stock for $100, and sell it later for $200, and the “nominal” profit = $100. In the current Tax Code, the entire $100 is taxable. “Real” profit however, is the reduced value of the profit due to inflation incurred during the holding period. In the last example, if inflation had been 20% during the holding period, the “real” profit (the taxable part) would only be $80.

There is a simple argument in favor of indexing capital gains, as taxing the inflationary part of the gain is unfair and discourages investment. In Washington, D.C., of course, nothing is simple, and few things are considered “fair.” Opponents claim that the distribution of tax savings would benefit primarily wealthier people.

There are several considerations that have given me recent optimism for passage of indexing. In no particular order, they include:

  • Having a businessman President steeped in real estate, depreciation, capital gains, and inflation, makes Trump the logical person to drive the current discussion
  • Among the proponents pushing this through Congress is Grover Norquist (from Americans for Tax Reform), who understands far better than most elected officials the benefits of passing tax reform, and many Washington insiders listen to him
  • The current crop of White House economic advisors, including Larry Kudlow and Art Laffer, are not Keynesians, and understand that economic activity in the private sector is far more important than in government (Governments can print money, but they can’t print wealth)
  • Having seen the success of the Tax Cuts and Jobs Act of 2017, many more elected Republicans have come to understand Economics 101 regarding lower taxes
  • The public taste for tax cuts is still fresh, though the Administration did not do a good job educating the public on the concept, and then highlighting the results

There are also reasons for trepidation, including, in no special order:

  • Virtually the entire media complex tries to make Trump look bad, at least until the 2020 election
  • The government is loath to use dynamic scoring for economic proposals, preferring the old static process (Dynamic scoring would show that increased economic activity from the indexing proposal would raise revenue for the public and the government)
  • Indexing is a complex issue that will require extensive planning and design

Still, this time I do believe that the indexing push may produce results. If so, income planning, tax planning, and estate planning will all be enhanced for the average citizen – you do not have to be a “one-percent” upper-income American to benefit from user-friendly tax law. My fingers are crossed.

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

Each and every week on the Van Wie Financial Hour, we present to the listeners a trivia question. The winner (if any) receives whatever prize we are offering for the week. Trivia questions (our way, at least) are designed for more than time fillers — we always strive to educate people. Most often, our point is designed to give the audience an appreciation for the “order of magnitude” of a topic.

Order of magnitude is a concept with several definitions, but the fundamentals involve having a concept of the size (and/or relative size) of almost anything. A few examples include:

  • An amount of money (Millions have 6 zeros, Billions have 9 zeros, and Trillions have 12 zeros)
  • The size of a population (worldwide, US, statewide, or local)
  • Geographical distances between any 2 points
  • An amount of time (no matter how long or short)
  • Financial market statistics (one of our concentrations)
  • Relative sizes of economies and companies

Topics for trivia are nearly endless, and our questions always have a point. The exact answer to any of our trivia questions is far less important to us than the message we are trying to convey. Understanding the Order of Magnitude in the subject matter gives savers and investors an edge when they see or hear actual news. Being able to analyze information logically and in the correct setting is one key to financial insight.

There are about 8 billion (9 zeros) people on our planet, but only about 330 million (6 zeros) of them are in the USA. The US produces an astounding 24.4% of the world’s GDP (Gross Domestic Product). Americans are fortunate to be experiencing current economic prosperity. Understanding the relative value of your own personal place in the vast American economic engine can propel you to success.

The size of the U.S. Stock Market (measured by market capitalization, meaning current prices times number of outstanding shares) is about $30 Trillion (12 zeros). Since the last federal election, that has risen about $7 Trillion (12 zeros). Understanding the underlying reasons is critical to sound investment strategy.

One person, or a small but organized group, can make a relatively large impact, and in a capitalistic society, the rewards may be significant. A thorough understanding of the order of magnitude of your own endeavors can only help your progress.

Never stop learning, and never stop teaching, and we will all grow. The Van Wie Financial Hour has been criticized for our “silly” trivia, but we will not stop utilizing our teaching technique. Listen every week, and you will gather very useful information that should increase your understanding of where you are going. We also think it is fun, and hope that you do as well. Comments regarding our radio show are always welcomed.

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

Have you ever heard of an Income Share Agreement? If you have not, you are not alone. It is an innovative way to pay for college when all other options are exhausted. This type of plan is currently only offered at a few colleges like Purdue University and the University of Utah.

The way an Income Share Agreement works is that in lieu of taking on loans, students sign a contract that pledges a certain percentage of their income once they graduate and get a job back to the University. The amount and the term varies by major. For instance, in computer science, a graduate would pay a lower monthly rate for less time based on the assumption that their income will be higher. Conversely, an English major will pay a higher percentage of their income over longer period of time based on their lower earning potential. The most popular major that uses this program at Purdue is Biology. Biology students end up paying about 16% of their annual salary back to the school for 112 months, or $550 per month.

Income Share Agreements are not for everyone. The are largely unregulated, there is no early payoff option, and the are 100% private meaning there is no government forgiveness option. However, they provide an opportunity to finance higher education that may not be available for certain students, and they won’t saddle you with debt for 20-30 years. Despite the very small number of schools currently using this program, it is a program that I could see becoming more popular in the future.

Today’s society is saturated by acronyms, contractions, and verbal shortcuts. Who doesn’t like a good “BOGO” (buy one, get a second one free) or a “Twofer” (two for the price of one)? These are often found in grocery stores and general retailers, but have you ever heard of a “Twofer” for financial planning services?

Several years ago, Adam and I started a new financial planning organization, Van Wie Financial, modeled on our collective business experience. Business School students and graduates use a lot of buzz-words these days, and one of them is “best practices.” That is exactly what we set out to do with Van Wie Financial.

Business startups can be tedious and difficult, but they present a perfect opportunity to “get it right the first time.” That was our goal in forming Van Wie Financial and the Van Wie Financial Hour radio program. Starting a service business means finding a way to provide top quality services that provide actual value. Being a boutique family business in a big industry dictates differentiating ourselves from others, many of which are large and high-profile.

Aside from the natural advantage of being an educated and qualified father-son team, we decided to operate the business as a “Twofer.” This means that all clients of the firm are handled by both of us, from the initial meeting through what we hope will be years of an ongoing business relationship. They are our clients, not “Adam’s clients” or “Steve’s clients.”

While our business structure provides an obvious value to clients, it also provides them with a viewpoint fashioned through different experiences, over a varied time frame. Generational outlooks are not always identical, so we blend our knowledge and experiences into a customized approach for any particular client’s situation.

Van Wie Financial has been very successful, which reflects the thought and planning that went into its creation. We are proud to say that about 35% of our clients are single women and female-controlled accounts. Some are widows, some divorced, some single, and others happily married while being in charge of the financial aspects of life. All are comfortable with their business relationship with Van Wie Financial.

Anyone seeking a long-term association with a financial advisor should consider getting a “Twofer.” Check out our website, “strivuswealth.com” or give us a call at (904) 685-1505 to discuss our services. After all, doesn’t everyone love a “Twofer?”

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

Late spring is graduation season across America, including high schools, colleges, vocational colleges, and military academies. As a direct result, a sudden rush of job seekers annually pours into the labor market. While competition every year is intense, 2019 is shaping up to be one the best years in history for graduating job applicants. There are, quite literally, more jobs available than applicants to fill them.

Many of today’s graduates are, like “Uncle Eddie” in National Lampoon’s Christmas Vacation, “holding out for a management position.” Graduates too often believe that everything they need to know is reflected in the diploma they received for completing the required curriculum. They are too often wrong.

Even the most diligent among the graduating masses may not be prepared for the “big jobs” they seek. College doesn’t prepare students for that job; it only prepares them to begin a career. Even the professions, including medicine and law, will not produce outstanding practitioners right out of college. Many, in fact, need several more years of study, only then to become someone’s understudy while their skills are honed.

Offering advice to recent graduates is likely an exercise in futility, as many have not yet learned how, when, and why to listen. Science has recently shown that the human brain is not fully developed until ages 26 to 28. Complex decision making is a skill developed over time and with experience.

How many times have we all mused, “If only I had known then what I know now?” Success in 21st Century America is dependent on what you actually know, how hard you work, and how artfully you utilize everything you learn. The college education dilemma will get more and more complicated. Rethinking post-high school education is a must for young people today. There are many ways to quality for success and a happy life.

These days we are having a great national debate, not just on younger voting, but on the value vs. cost of higher education. Educational debt now exceeds credit card debt, and consumes such a large portion of the income of recent graduates that lifestyle decisions are being postponed. This helps no one.

Not everything you need to know will be taught in school. Formal education is, in fact, a small, but important step in a successful life. Enjoy the ride, make some mistakes, but most of all find and seize an opportunity to begin your real education. Life.

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

Americans love their income tax refunds. Some take vacations with the proceeds, others finally pay off lingering Christmas bills, and yet others put a down payment on a new car or other high-priced toys. A few use the annual event to fund a Retirement Account, and we congratulate them for finding a worthwhile use for their own money. After all, their own money is being returned to them by the same government that took it away in the first place. The annual refund has become a staple in American lifestyle. That is unfortunate (I know, that is not what most people believe, much less what they want to hear).

Every now and again our overly-complex U.S. Tax Code is changed significantly by Congress. When this happens, new tax withholding tables are produced by the IRS. The new tables are designed to reflect differences in expected individual tax bills after the tax changes are applied. In theory, your individual refund (or tax due) will remain roughly the same as the prior year. In theory.

The Tax Cuts and Jobs Act of 2017 was passed late in 2017, and took effect almost immediately on January 1, 2018. This change caught most of us by surprise, and left insufficient time for IRS to make required tax withholding table changes. Subsequently, many people were surprised that their refunds were vastly different in early 2019. Reactions went both ways, as the tax changes affected people differently.

While there is a direct relationship between “take-home pay” and tax refunds, that distinction is lost on many Americans. Although most people received larger paychecks throughout most of 2018, many failed to make the connection between their net paychecks and the next tax refund (or bill). Many were mightily unhappy with refunds they received in 2019 for the prior tax year.

As the 2019 tax return filing season began, early tax refunds were, on average, smaller than those received in 2018. This left many people bewildered, and served as political fodder for opponents of this Administration. However, as more and more tax returns were processed, 2019 refunds rose to historical averages. The naysayers quickly quieted.

From the perspective of a financial planner, the most desirable tax refund (or tax bill) is a big, fat Zero. This would mean the taxpayer pre-paid the exact amount due, rather than making an interest-free loan to “Uncle Sam.” Theory is wonderful, but it is apparent that many people would rather receive a refund.

IRS uses Form W-4 to give taxpayers some say in how much of their gross pay is withheld from every check. The W-4 is once again being redesigned, and when that is complete, we will cover the new form and its implications. For now, rest assured that about 84% of taxpayers received actual cuts in taxes starting in 2018. Managing your refunds will take some doing. We offer Tax Planning to clients as part of our overall service.

Meanwhile, do not expect to find a simpler Form W-4 in 2019. Adapting your own withholding to the current Tax Code will require a more thorough understanding of the changes.

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

A simple definition of tariff is a tax levied on imports. There is considerable discussion as to who actually pays any tariff. Eventually, all taxes are passed on to the ultimate consumer. The tariff is not, however, called a tax at the point of purchase. Instead, the tariff is embedded in the price of the item being purchased, which then costs more. Once collected, tariff revenues are sent to the Customs Agency of our Federal Government.

There are tariffs built into the cost structure of a vast array of imports purchased in the USA. Generally small, most tariffs do not completely offset the cost of buying American counterpoints, but they make our goods somewhat more competitive. The remaining inequity results from bad trade “deals” negotiated over decades by US trade officials. The North American Free Trade Agreement, or NAFTA, is a great example. There are dozens of Trade Agreements, but NAFTA has proven extremely onerous to Americans.

NAFTA was implemented on January 1, 1994, after which our economy boomed. At that time, NAFTA was apparently doing no harm, and perhaps was even contributing to the success of the economy. That is exactly what we were told by politicians and the media. Below the economic surface, in America’s Rust Belt things were deteriorating fast. Factory closings and job losses were mounting, and replacement jobs were nowhere to be seen. Still, macroeconomic numbers remained strong for a long time, due to the burgeoning Internet economy. Then, in early 2000, the “Dot-Com” bubble burst.

Most political conservatives were free trade disciples, and many still are. From now on, however, we will find out just how “free” and just how “fair” our Agreements are in reality. Merely including the word “free” in a trade agreement does not make it so. Details matter, words mean things, and information is now readily available, thanks to the Internet.

The Trump Administration is currently imposing tariffs in order to eliminate tariffs. As strange as that may sound, it is working. Tariffs imposed by the Administration in 2018 on steel and aluminum imports from Canada were lifted several days ago. Three days later Canada lifted the retaliatory tariffs they had imposed on our farmers and ranchers. This is a giant step toward fairness and complete implementation of the USMCA (United States, Mexico, and Canada Trade Agreement), otherwise known as “NAFTA 2.0.”

President Trump claims that tariffs are a necessary tool toward “getting to zero tariffs.” So far it has worked as advertised. If correct, this will be a turning point in worldwide trade, eventually benefiting everyone, everywhere, for a long time. What an incredible legacy that would be.

Brilliant economist Milton Friedman once said, “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” Recent results suggest that tariffs can be used as a force for free and fair trade.

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