April 15, 2019 was a month of reckoning for the Tax Cuts and Jobs Act of 2017. That was the first time taxpayers had to pony up their unpaid taxes on income earned in the first year under the new law. We know that more than 80% of taxpayers received a cut relative to the prior year, but we had so far been unable to gauge the effect on government revenues. Simple reasoning says that when tax cuts are implemented, the government collects less money. This assumption uses “Static” budgeting, which does not account for changes in human behavior, and once again it has proven fallacious.
“Dynamic” analysis considers changes people make in response to external stimuli. Economically, when people have more money to spend, the confident consumer tends to purchase more merchandise and services. Companies prosper, profits rise, and taxes are paid on those profits. At the same time, hiring takes place, and more taxpayers are created. Concurrently, businesses are started and expanded, and the Treasury gets a share of all the new prosperity.
Proponents of the 2017 Act cited the probability that cutting taxes would actually enhance government revenues. This “Dynamic” budgeting proponents were basing their argument on history by pointing to the aftermath of tax cuts implemented by John F. Kennedy, Ronald Reagan, and George W. Bush.
Results of what actually happened during 2018 (and paid in April of 2019) were announced earlier this month, and the “Dynamic” scorers prevailed. According to Investors Business Daily, government revenue in April was $515 Billion, an increase year-over-year of 13%, and a new April record. Further, for the first 7 months of this fiscal year, revenues are up 11.5%. Payroll taxes are also up, increasing by 2.8%.
Now the CBO (Congressional Budget Office) is increasing its estimates for economic growth and revenue, having added an additional $1 Trillion to their earlier estimates. Congress forces the CBO to use Static Budgeting. It doesn’t take a rocket scientist to understand that a change to Dynamic Budgeting would produce more reliable results. Congress apparently has very few accomplished economists, and even fewer rocket scientists.
One additional complaint about cutting taxes was also dispelled in the recent CBO report. Claims that tax cuts went mostly to “the rich” didn’t pan out, as taxation became even more “progressive” after the 2017 Act. Right now, fewer people are living paycheck-to-paycheck than ever before, and the “Quality of Life Index” is at a 14-year high.
Tax cuts work every time they are tried. How much proof do we need to provide for Congress to make the lower rates permanent? Or, better yet, to further reduce our tax burden.
Van Wie Financial is fee-only. For a reason.
“Crisis” is one the most abused words in the English language today, being haphazardly applied to whatever political disagreement of the day, the national debt, our failing “public” educational system, border security, the increasing national drug problem, trade wars, and on and on, ad nauseum. Perhaps the biggest tragedy in this scenario is that truly important issues become indistinguishable from lesser problems. When everything is called a crisis, nothing gets treated appropriately as a crisis.
We shouldn’t use the term “crisis” lightly – it should be extremely important on a national scale. The size and rate of increase of personally-held educational debt qualifies (in our opinion) as a national crisis. We know how we got there; can we find a way out? Let’s “set the table,” as the popular saying goes.
Following the victory experienced by the USA winning WWII, remaining service members came home in large numbers. Concurrently, at every level of production, America was returned to a consumer orientation. Multitudes of marriages occurred, tens of thousands of homes were built, and vast numbers of children were born. The “American Dream” was in full bloom. The “Greatest Generation” (a term coined by Tom Brokaw as far as we know) desired to provide their offspring with a better quality of life than they themselves had experienced.
Our national standard of living rose dramatically in the years following WWII. It was widely assumed that the Baby Boomer Generation would go to college, simply because that was acknowledged to be the path to success. The American Dream, parents believed, begins at the hallowed halls of higher education.
At the time, post-secondary education was inexpensive, effective, and rare. Demand was growing, and prices inevitably rose. New college entrants began to borrow money, and lenders were more than happy to oblige. When the borrowers graduated, they simply paid off the debts the old-fashioned way; monthly payments until the balance was zero.
However, the rapidly-escalating cost structure of institutions required ever-increasing borrowing. Students were delighted to have their parents absorb part of the debt. Today, parents account for 14% of new college loan originations. Many parents lack resources to repay their loans without sacrificing hard-earned lifestyles.
We have said that student loan debt has become a crisis. According to the website Studentloanhero.com, aggregated college debt in the U.S. is now $1.56 Trillion, spread among 45 million Americans. That figure is approximately 1.5 times the nation’s credit card indebtedness.
During the “Great Recession,” wages and salaries stagnated, and only recently have they begun to rise. 11.5% of student borrowers are 90 days or more behind in their payments. Far too many parents and grandparents on fixed incomes are experiencing declining quality of life. Graduates are feeling pressure to delay big decisions regarding starting families, buying homes and cars, and other life-changing events. This creates a drag on the nation’s economy.
Unlike many forms of debt, student loan debt is generally not forgiven in a bankruptcy, despite contributing to many of those same bankruptcies. There are now some student loan forgiveness programs, but they are complicated and fraught with potential pitfalls.
There are answers to the complexities of educational funding. More than ever, college planning has become a key element of Comprehensive Personal Financial Planning. It is never too soon to begin the process of planning for educational expenses. Finding a qualified financial advisor begins with a search for a fiduciary Certified Financial Plannerâ.
Van Wie Financial is fee-only and always a fiduciary. For a reason.
Living in good economic times (as we are) should be fun and prosperous, so we should be happy. Most of Van Wie Financial’s clients, as well as most people we talk to on our radio show, fall into that exact mold. Yet we are deluged in the media with morose descriptions of current sub-standard life in America. Warnings of an all-but-imminent recessionary downturn in the economy are everywhere.
Ubiquitous “gloom and doom” predictions are designed to get our attention. One of the oldest sayings in media is that “if it bleeds, it leads.” Good news is boring, optimism is uninteresting, and satisfaction is unacceptable to political candidates aspiring to replace incumbents at all levels of government.
Coupling the media frenzy with a general misunderstanding of economics produces misguided and unfounded negative forecasts. Anyone with a reasonable education in modern economics knows that the American economy has responded to recent tax cuts and regulatory repeals in a positive manner.
Disagreeing with current Administration policies does not make current policies incorrect or ineffective. This plain fact disappoints many people who despise the current Administration. It does not, however, change the laws of economics. Wishing on a star is not about to change anything in a massive and fast-moving economic system. Capitalism is alive and well in the United States.
Investors would be wise to ignore the ramblings of partisan naysayers. Individually, developing long-term goals and plans to reach those goals is the same great idea it has always been. Many people are uncomfortable planning and investing by themselves, and that is why Van Wie Financial is here to help.
Recent studies have shown that investors under perform their own assets. This more-or-less strange sounding result is easily explainable. Fear and greed cause many investors to ignore the most simplistic rule of success; buy low and sell high. Doing the reverse is not only detrimental to success, it is unfortunately commonplace.
We have said many times that the hardest job of a competent financial advisor is to avoid “doing something” at those frequent times when we are convinced that any change is most likely to produce bad results. We appear to be in an era where patience is a virtue.
One day that pesky predicted recession will hit. We will react accordingly, as should you. That day is not today.
Van Wie Financial is fee-only. For a reason.
On a recent Van Wie Financial Hour live radio program, we had a phone call from a listener with an excellent question. The caller was in his 80s and owned a profitable Variable Annuity (VA) that he had moved into cash when the market got rough late last year. His essential question was whether to get back into the market, and if so, when and how to do that.
We generally start our discussion by asking questions. From our line of questioning, we deduced that the caller had no foreseeable use for the money in the annuity. He has children, and they are the named beneficiaries on the account. From there, we determined that his investment priorities were not actually those of a typical person in his or her 80s. In fact, the objective of the account was to provide for his children.
Had the caller’s priorities been determined to be those of a typical 80-something, we would have advised an investment plan that was oriented toward income and preservation of capital. However, knowing that this money was most likely going to help fund the later years of his children, we suggested a somewhat more aggressive investment plan.
Without the luxury of a long and detailed discussion, we suggested dividing the money in the VA into a 1/3, 1/3, 1/3 allocation among Target Retirement Funds with varying target dates. This plan is simple, well-diversified, and carries enough market risk that the possibility of growth is solid.
When advising older investors, it is essential to discover the true objectives of their investments. Things are not always exactly what they seem on the surface. The purpose of having a thorough Discovery (an element of the overall Personal Financial Planning process) is to individualize financial advice. This is not possible on a short phone call, so our goal on the radio is to tell people what can be done, rather than what to do. There is only so much that can be done on a limited telephone call.
If your situation is in any way non-standard (and whose isn’t?), it may benefit you to have a thorough and confidential discussion in our office. We offer a free conversational meeting in our office just for the asking. We call that process “Suitability,” the purpose of which is to determine if we all believe there may be value in establishing an ongoing relationship.
Van Wie Financial is fee-only. For a reason.
This past weekend, our radio show fell on 4/20, and for those of you not familiar with the term, that number is commonly used by consumers of marijuana to signify using the product. The roots of the term are traced back to a San Rafael, California high school in the 1970’s. Over the years, April 20th has morphed into a counter-culture holiday that has grown in size and scope to include festivals across the United States, and the world. It also has an activist tilt, as the day is used to push for marijuana legalization, although one has to assume that this takes place earlier in the day, as motivation might be lacking in the afternoon.
The marijuana industry in America is still in its infancy, as technically it is still illegal at the Federal level. Obviously, the push is towards legalization on a state by state basis, but the industry is still hampered by the legal status at the federal level. The industry would benefit if things were reversed, and the Feds made it legal, and then it was illegal on a state to state basis. There are currently 10 states where marijuana is legal for recreational use. There are an additional 23 states, including Florida, where marijuana is legal for medicinal use, but not recreational. There are only 15 states left where marijuana is still fully illegal, and the rest have seen it at least decriminalized.
Marijuana has two main extracts, which are THC and CBD. THC is the extract that causes the feeling of getting “high”. CBD does not cause this feeling, but still has the health benefits, and therefore has grown in popularity in recent months so much that Walgreens plans on selling it in certain markets. CBD is used for a large variety of ailments, from depression to pain relief to lowering anxiety and blood pressure.
Medical Marijuana is the next step up from CBD, and it has a variety of uses as well. The most common is pain relief caused by different conditions including headaches, cancer, or glaucoma. Medical Marijuana is sold in stores called dispensaries, and is only available with a marijuana card prescribed by a doctor. Other uses for medical marijuana include muscle spasms, nausea, and weight loss caused by disease. Medical marijuana can be smoked, vaporized, eaten , or taken as a liquid extract.
Recreational marijuana is primarily used for pleasure, inducing the “high” feeling that is frequently referenced by pop culture. It is also used for medical issues, although a marijuana card is not needed to purchase it. Retail stores in states that have legalized marijuana are abundant, and in many cases are serious businesses that aim to maximize the overall customer experience. These aren’t the shady back room deals that you may or may not have experienced in your youth.
The point of all this is that Marijuana is now a serious industry in the US, with some major money backing it and some serious retail operations and serious consumers. The industry is in its infancy, but the competition level is already quite high (no pun intended). However, buying publicly traded companies that are in the industry is quite risky, and there is a better way to participate. Two ETF’s are now available, the first being MJ, which is offered by Tierra Funds and has grown to more than a billion in assets. The other, which was just released on 4/19, trades under the ticker YOLO, and is offered by Advisorshares. The largest holding in MJ is Aurora Cannabis, followed by GW Pharmaceuticals and Canopy Growth. Other names you may have heard of include Cronos and Tilray, both of which have been in the news lately. As with most ETF’s this is a great, cheap way to diversify in the industry and avoid single-stock risk.
The Ways and Means Committee of the U.S. House of Representatives passed the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019)earlier this year in a supposed attempt to help workers save more for retirement. A provision included in this lofty-sounding moniker works directly against the goal of increasing retirement income security.
A provision in the bill would force the distribution of an inherited Retirement Account within 10 years for most non-spouse beneficiaries. This would throw cold water on a strategy known as the “Stretch IRA,” which currently allows beneficiaries to withdraw the funds over their own life expectancy.
The House version of the bill would force a distribution of the account’s value within 10 years. The Senate version would force distribution of the account in five years if the beneficiary is not a spouse and if the account value exceeds $400,000 as of the date of death of the original account owner. Both proposals make exceptions for spouses and a few other special cases.
Why would Congress include contradictory concepts in this supposedly well-meaning proposal? The only reason we can see is that requiring inherited accounts to be distributed faster accelerates collection of income taxes on the distributions. Once again, Congress is placing its excessive spending priorities ahead of what is good for American citizens. This time, they are trying to hide their ulterior motive in plain sight.
Fortunately, should this provision of the SECURE Act be passed into law, there are alternative planning strategies to delay distribution of the inherited funds. Unfortunately, these techniques are complex and expensive. We see no compelling reason to alter the “Stretch” provisions that were welcomed by financial advisers and their clients when Congress voted them into law several years ago.
Most Americans have woefully little retirement savings. Congress repeatedly indicates a willingness to encourage saving for retirement, while at the same time testing the political climate for raising taxes. These concepts cannot peacefully co-exist.
We at Van Wie Financial have a better idea. Why not raise contribution limits for retirement savings plans, including IRAs, 401(k)s, and 403(b)s? After all, a wealthier retired population will pay more in taxes throughout their retired years. That would be a more responsible long-term goal for our elected officials.
Van Wie Financial is fee-only. For a reason.
April was designated “Financial Literacy Month” by the U.S. Senate in March of 2004. First conceived by the National Endowment for Financial Education in 2000 as Financial Literacy Day, over the next few years, it was recognized by the House of Representatives and President George W. Bush, it was expanded to include the entire month of April. More importantly, in our opinion, it was expanded to include all age groups.
Financial Literacy has gone from bad to worse in America. Most high school graduates could not balance a checkbook. Remember the old joke, “How can I be out of money – I still have checks left?” Great humor is usually based in truth.
The Van Wie Financial Hour radio program is devoted to the furtherance of financial literacy. Every week we present current events and news to the audience, but we also explain concepts and practices in personal financial topics. We like to believe that our small contribution to literacy makes a difference. Florida now ranks 23rd best among the 50 states.
We are publishing this blog on April 15th, the due date for individual tax return filing) as a reminder of the importance of learning more about personal finance. Start with your 2018 Tax Return – examine it and see if you can understand the line items. How the line items work together determines what you owe (or the refund you will receive). Does it make sense to you?
Most people would rather watch paint dry (or, possibly, get a root canal) than to make a critical assessment of their own Income Tax Returns. But what could be more important to your financial health than to understand your own tax situation? See if you can grasp the concepts of “Above-the-Line Deductions,” and “Below-the-Line Deductions,” as well as Itemized Deductions or Standard Deductions. Understanding how these work may save you actual cash by reducing your taxes. Remember that the best way to make money is to save it.
If you use a professional tax preparer, feel free to ask questions of him or her. Start with the qualifications of the person assisting you; is your preparer a Certified Public Account (CPA), an Enrolled Agent, or a lower-level tax preparer? Ask him or her about any line items that leave you confused.
Most preparers will include a page at the end of your tax return comparing your 2018 tax data to the past year or two of returns. We had a big change in tax law beginning in 2018. How did it affect you? What could you do to positively affect your 2019 tax burden? Knowing the answers to these questions can only improve your ability to minimize your tax liability.
With the Internet, financial talk radio, 24/7 cable news, and the myriad other sources of financial information, there is no longer any excuse for remaining financially illiterate. You never know for sure, but just maybe you will actually enjoy learning more about personal finance.
Van Wie Financial is fee-only. For a reason.
The Van Wie Financial Hour has entered into its fifth year on WBOB, 600AM and 101.1 FM radio. Where the time goes is a mystery, but how much we have learned and the fun we’ve had is tangible. Both the fun and the learning are products not of what we say and teach, but rather what we hear from live callers, coupled with the discussions that follow.
We envisioned the Van Wie Financial Hour radio show over four years ago. The format for the Van Wie Financial Hour had to be a live, call-in show encouraging listeners to participate. Content had to be current, and it had to be educational.
Over the years we have taken calls on a wide variety of topics. The most memorable calls were those which could never be reproduced by doing a pre-recorded radio monologue. Among our most memorable moments:
- Our favorites (these have happened a few times) are when callers tell us they are inheriting money, and they want to know how much tax they will owe.With these callers, we say something like, “You’d better sit down. Do you take good news on Saturdays?” Of course, they do, and we tell them there will be no tax due. The reason is that estate tax, if any, is paid by the estate prior to asset distribution. It doesn’t get any better than that; spreading happiness creates happiness.
- Virtually nothing compares to the annuity-related calls we get periodically. The best of these happened when a caller (we’ll call him “Dad”) was about 40 years old. He was beginning to explore investing options to help with expenses of post-secondary education for his 12-year-old son. He had recently discussed the subject with an “advisor,” who had suggested a Variable Annuity (VA) as the ultimate investment tool for the occasion. Dad sounded uncomfortable with the (so-called) advice. Here is an outline of our response:
- VAs carry the highest commissions of virtually all financial products
- VAs carry a Surrender Charge on withdrawals during what is generally a several-year period while the commission is being amortized
- All distributions of investment gains from annuities are taxable as ordinary income
- VAs have among the highest internal costs in the investment world
- VA performance is general underwhelming, partly because of high internal fees
- Most VAs require paying a separate fee if you want to ensure that your heirs get your unused money back (otherwise, it stays with the insurance company when you die)
- Depending on the VA and the age of the owner, there may be a 10% penalty tax on withdrawals
- A 529 College Savings Plan (our advice) has low internal costs, grows tax-free, and is not subject to any taxation when withdrawals are used for qualified expenses
Through hundreds of live phone calls over many years, the inter-reaction between callers and hosts is what drives interest in the program. Listening to pre-recorded shows doesn’t have the same impact.
Do you have any questions about your own financial situation, either now or upcoming? We invite any and all calls during the show, and if we don’t know the answer, we will get it for the next weekly show. For a strictly confidential answer to your question, you can email us through the website or at info@vanwiefinancial.com. Alternatively, we provide a complementary meeting in our office, which can be scheduled by calling us at (904)-685-1505, or directly through our website.
Look for an independent, fiduciary, qualified Registered Investment Advisor (RIA). That company should be owned and operated by a Certified Financial Planner™, or CFP® . (We would suggest finding a CFP® that is proficient and willing to answer questions during a live phone call.) A good place to start is www.strivuswealth.com.
Van Wie Financial is fee-only. For a reason.
On last week’s Van Wie Financial Hour radio program, we received a phone call late in the hour from a listener obviously concerned (as we all should be) about our rapidly-escalating national debt. Trillion Dollar annual deficits and the rising national debt have become commonplace, but elected officials in Washington, D.C. don’t seem to care. Spending is a nonpartisan problem, as Republicans and Democrats are equally guilty.
While we frequently agree with our concerned callers, we also have a duty to advise clients and listeners as to what we believe is their best financial course of action. Theory and good practice have not always aligned themselves. An organization that grows its debt far more quickly than it grows revenues will eventually run into financial difficulty.
Under George W. Bush, our debt grew substantially. Under Obama, the total debt of all prior Presidents debts doubled. President Trump’s deficits are approximating those of Obama’s. Should a rational financial advisor predict that this time will different, and that the country will collapse soon? Our experience and recent history would dictate otherwise.
Whether an investor should avoid equity markets, hide cash in the mattress, and ruin his or her daily life is a personal decision, but would be a colossal waste. Market corrections will happen; when, and of what magnitude, are impossible to predict. Intelligent investors, along with their advisors, make a plan, monitor the results, and make changes as needed.
In the long run, there are three ways for a country to get out of debt.
- One, it can spend less than its own revenues. This concept has no support among the elected class.
- Two, it can print money to cover its own overspending. This has so much support in Washington that they created the Federal Reserve to do the dirty work for them. Of course, this ultimately becomes highly inflationary.
- Three, it can default on its debts, but of course this is unacceptable to nearly everybody.
Another idea gathering steam these days is the creation of a new, fully-electronic currency (a form of crypto-currency). We believe that this would be dangerous to the American economy.
None of these debt “solutions,” except less spending, is palatable to us, either as investors or as financial advisors. At Van Wie Financial, we recommend prudent investing, including diversification.
Van Wie Financial is fee-only. For a reason.
As young people, Baby Boomers often opined that if we could ever get our parents’ mortgage rates, life would be grand. After all, Mom and Dad only paid around 5% – 6% for fixed 30-year mortgages. A few decades ago, Boomers were paying up to and including about 18% for mortgages. We all “knew” that we would never be so fortunate as to see those old 5% rates.
Guess what. It not only happened, but we actually beat that 5% rate over the past few years. Forgetting, for now, the unpleasant economic reasons why that happened, it was fun and profitable for those of us who fixed our mortgage rates, many under 4%.
Our recent economic upturn has caused the FED to gradually tighten monetary policy. Mortgage rates rose back up to the (once-desirable) 5% range. Then, a strange thing happened. When the calendar turned over to 2019 rates began to fall, even in the absence of any easing FED policy.
Suddenly, we again find ourselves in an era of (nearly-forgotten) low mortgage rates. In many geographic areas, 30-year fixed-rate mortgages are once again under 4% for qualified buyers. Further, although home prices have risen, the increase in home values remains manageable. In short, we have perfect conditions for purchasing a home right now.
Perhaps strangely, the national inventory of homes for sale is very small. This would generally result in rapid price appreciation, but price appreciation seems to be lagging. This has provided an opening for anyone who is thinking of changing homes to both sell their current home and buy a new home at a good price, and with great financing terms. It is a “Goldilocks” market for both buyers and sellers. Not too hot, and not too cold, it is “just right.”
Anyone contemplating a home purchase, or a home sale/purchase, should move quickly. Market conditions are virtually unprecedented in our lifetimes. No reasonable person would expect this situation to be anything other than short-lived. In our opinion, now is an excellent time for those who have been contemplating action to execute their plan.
Van Wie Financial is not a licensed real estate brokerage, and our expectations are based solely on experience and knowledge of financial markets and interest rates. Consult a real estate professional if you are contemplating a change in your housing situation. You may well be glad that you did it — right now.
Van Wie Financial is fee-only. For a reason.