One month ago, in this Blog, I wrote: “This is the best of times, this is the worst of times (my apologies to Charles Dickens). Having spent my considerable adult lifetime studying economics, investing, and personal finance, I cannot remember a more confusing economic landscape. Advising clients as to their financial future options requires balancing pros and cons of the national (and world) economic outlook. Our crystal ball is hazy.”
Throughout the ensuing month, our crystal ball has remained hazy, but we may be seeing a slight clearing through the fog. This week brought the FED meeting, which produced zero surprises. And the market loved it.
For a few hours.
Suddenly, traders woke up on the wrong side of the bed the next morning. A series of reports began to be published, suggesting new fears of recession. Is this warranted? Following are a few of our observations.
The Unemployment Rate is figured differently than when I was an economics student – today, we use the U-3 Unemployment Index, rather than the old U-6, which today’s rate is 7.8%, not even close to the current 4.3% U-3. Manufacturing is in a downturn, contracting in 20 of the last 21 months. The new Purchasing Managers Index for manufacturing dropped to a contractionary 46.5.
Gas prices are up 46% in 3-1/2 years, taking money out of the pockets of Americans, whose spending accounts for 70% of our economy. Overpaying for energy creates no economic benefit, instead robbing consumers of purchasing power. Exorbitant grocery prices have a similar deleterious effect. Overall food prices are up 19.2% during the current Administration.
July jobs reports were dismal, relative to expectations. Inflation, while declining, remains prevalent and punishing to consumers. Wages have not kept pace with inflation, and that doesn’t even include the effects of taxation, which reduces spending power.
The bottom line is still difficult to discern, but it now seems likely that the economy is slowing, and recession is becoming a greater likelihood. However, the probability remains uncertain. FED actions will be taken, and we hope they are not too little, nor too late. This may require emergency action, and soon.
Market interest rates are beginning to ease, and the Yield Curve seems on the verge of ending its long inversion period. These remain some hopeful signs for a “soft landing,” as the FED likes to say. One thing is coming into focus – the Fed will cut interest rates on or before the September meeting. In fact, there is a reasonable (and growing) probability of at least a ½% cut.
Is the Fed going to save the day? A piece of advice from someone who has been around a long time: don’t count on it for your investment planning.
Van Wie Financial is fee-only. For a reason.
In this week’s Blog post, we continue our criticism of the U.S. Tax Code. Remember the old saying about not wanting to watch sausages or laws being made? The Code itself represents the worst and most contentious lawmaking by elected officials with diametrically opposite opinions. From the original Code, which contained a total of 27 pages, the size and complexity of the current Code has grown to tens of thousands of pages, understood by very few.
Due to large tax demands on our earnings, an entire industry has grown for the dual purposes of Code compliance and tax minimization. Most Americans utilize accountants, attorneys, and/or investment managers annually. The Code is simply too complex for all but the most qualified practitioners.
Conceptually, our American tax system should be fair to all who fall under its mandates. I have no misconceptions about that remote possibility, but our lawmakers should continually strive to achieve that status. Any lawmakers who adopt the fairness challenge will face a long road ahead.
In recent Blogs, we have discussed the Marriage Penalty, as well as some Inflation-indexing already built into the Code. Both fall short of achieving Code fairness. This week, we look at Code provisions that claim to be inflation-indexed but, in reality, represent an injustice commonly found in rules for Retirement Accounts (a topic near and dear to Van Wie Financial).
Stepped indexing applies to items such as IRA (Individual Retirement Account) contribution limits, which do rise, but only when the CPI rises enough over time to exceed a predetermined increase, such as $500 or $1,000. The same is true for so-called “catch-up contributions,” which are additional limits for people ages 50 and up. In times of moderate inflation, several years may go by without allowing our contribution limits to grow, creating another de facto tax increase in the non-adjustment years.
Since changes are applied to the Tax Code annually, it would be no more burdensome for taxpayers to up their annual contributions by smaller amounts, matched to actual (government-calculated) inflation. Over time, the extra dollars invested over the years would compound to enhance retirement incomes for Americans. After all, that’s why we take on personal responsibility for our own financial futures.
Contributions to company-sponsored Retirement Accounts work essentially the same way, although the numbers are larger than for IRAs. Nonetheless, during many tax years, participants are unable to step up their contributions (deductible or not) to reflect actual inflation, until the next “step” is authorized.
Of government and sausage, I’ll have the bratwurst. No plant tour, please.
Van Wie Financial is fee-only. For a reason.
Inflation creates an insidious and regressive tax on the American citizenry. Rising prices generally outpace increased earnings. Add the tax effect, whereby increased incomes are depleted by our marginal income tax rates, and our individual purchasing power suffers. In times of rampant inflation, as we have experienced since COVID-19, purchasing power erodes at an accelerated and often painful pace.
In the late 1970s and early 1980s, as the country was experiencing Carter Era hyperinflation, presidential candidate (and later President) Ronald Reagan recognized the phenomenon of “Bracket Creep.” Under our so-called “progressive” tax system, higher earners pay increasingly higher percentages of their income in Federal Income Tax. Incomes rose in response to inflation, but tax brackets were not changed in response. Taxpayers found themselves in higher brackets, resulting in further reduction of after-tax purchasing power. Bracket Creep.
This week’s topic, Statutory Items, are hard numbers in the Tax Code, changeable only by Congressional action. One classic example is the $3,000 limit for deducting investment losses in excess of investment gains on an annual basis. This number has been fixed (by statute) at least back to 1978, and with this fixed limit, Americans suffer an annual de facto tax increase through the failure of Congress to inflation-index the deductible limit. Based on an inflation calculator, it should be at least $14,456 today.
A more recent example emanates from the Tax Cut and Jobs Act of 2017 (TCJA), in which the deductibility of State and Local Taxes (SALT) was statutorily limited to $10,000 annually. This number is also not inflation-adjusted.
Neither example is adjusted for filing status, granting the same number to Married couples Filing Jointly (MFJ) as to Single Filers (SF). Logically, the MFJ limit should be double. Inflation indexing during the years since 2017 would produce a substantially larger deduction for affected taxpayers ($12,817 and $25,634, for SF and MFJ, respectively). Again, a de facto tax increase results during any year in which inflation occurs.
Statutory provisions in the Tax Code are guaranteed to penalize taxpayers during inflationary times. I see no reasonable excuse for “freezing” dollar-based items in a Tax Code that claims to be inflation-indexed. The only winner in this process is the U.S. Treasury (through the IRS), and in this case, they certainly did not do anything to earn their windfall.
Van Wie Financial is fee-only. For a reason.
Individual Income Taxes were (re)born in 1913, having appeared briefly (1862 – 1872) to finance the Civil War, and again for one year in 1894, when the tax on income was found unconstitutional. Hence, the 16th Amendment (allowing an income tax) was permanently installed in 1913, and the rest is history.
Over decades of change, the U.S. Tax Code has become an ever-morphing leviathan, consuming increasing portions of our earnings and investments. While the term “fairness” is abused in discussions of the Code, we could improve actual fairness with some changes. Today, we look at the so-called “Marriage Penalty,” which taxes Married Filing Jointly (MFJ) relatively higher than Single Filers (SF).
Based on the Equal Protection clause in our Constitution (14th Amendment), any tax system should treat singles the same as married couples under the Code.
A few of the ways they aren’t equal today include:
- Mandated Federal Tax Withholding (FICA and Medicare) are applied to each earner, forcing a working couple to double-pay, while a family with one worker, with the same earned income, pays only once. (The non-working spouse is benefit-eligible based on the working spouse.)
- Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), State and Local Tax Deductions (SALT) were unlimited, but under TCJA, the maximum deduction is $10,000 annually, whether for MFJ or SF. (MFJ should be $20,000 to be equalized.)
- Additional Medicare Tax (0.9%) applies to incomes above $200,000 for Single, but only $250,000 for MFJ, short of equality by $150,000.
- Medicare premiums in addition to the base rates (called IRMAA, for Income-Related Monthly Adjustment Amounts), are applied to the top 2 income brackets disproportionately by $250,000 for MFJ.
- AMT (Alternative Minimum Tax) exemptions apply to singles up to $85,700, but only up to $133,300 for MFJ, $38,200 short of parity.
- Long-term Capital Gains and Qualified Dividend Tax rates at the 15% rate apply to Single filers up to $492,000, whereas MFJ rates apply only up to $553,850, short of parity by a whopping $430,150.
- IRA deductibility phases out for Single Filers at $87,000, but only at $143,000 for MFJ, short of parity by $31,000.
- Roth IRA contribution eligibility phases out at $161,000 for single, but only $240,000 for MFJ, short by $82,000 of being equal (and fair)
When Congress, along with our future president, will begin to rid us of the income tax Marriage Penalty once and for all, the Van Wie Financial Hour and this Blog will report on the progress. Don’t hold your breath.
Van Wie Financial is fee-only. For a reason.
Nearly 65 million people receive Social Security retirement income benefits monthly (data as of May 2024, from the Social Security Administration). A vast majority of recipients would rebel against any person or plan to reduce or eliminate their monthly benefits. Congress knows this, and only Congress can prevent the system from going broke, or even from reducing benefits.
While I share Americans’ limited respect for how Congress performs its overall duties and responsibilities, I also understand the dilemma they face, individually and as a lawmaking body. Our so-called Social Security Trust Fund will be dissipated in a decade or so, and the actual cash has already been spent, replaced with low-yielding Government Bonds. Those bonds are being redeemed on a daily basis, and will soon run out completely. At that point, monthly payouts will be reduced by about 25% for everyone, including current recipients. Unacceptable.
Any fix would require increased contributions to the Fund and/or a reduction in monthly payouts. Americans say ‘No!’ to both.
Examining current Bills in front of Congress, all supposedly introduced to solve the dilemma, we find their suggestions far less than serious. Here is what we have found so far:
- Fiscal Commission Act of 2023 would establish a “fiscal commission” to address the national debt and suggest changes to Social Security (passing the buck)
- You Earned It, You Keep It would repeal federal taxes on all Social Security benefits (decreasing income to the System)
- House Budget Committee Fiscal 2025 Budget would also establish a “fiscal commission” (see above comment)
- Boosting Benefits and COLAs for Seniors Act would require the Social Security Administration to determine future Cost-of-Living (COLA) increases using the Consumer Price Index (CPI) for Americans 62 years of age and beyond (hurting older people by reducing COLAs)
- Safeguarding Social Security and Medicare Act would require the U.S. Comptroller General to develop a Plan to protect benefits from inflation (raising costs)
Following years of inaction, it is officially too late to make necessary changes without some sacrifices. But it has to be done, and all that ever seems to happen in Washington, D.C. is talk.
Oh, and “taxing the rich.” That is certainly not problem-solving. Congress is unserious about the difficult but necessary work of preserving Social Security.
Van Wie Financial is fee-only. For a reason.
This is the best of times, this is the worst of times (my apologies to Charles Dickens). Having spent my considerable adult lifetime studying economics, investing, and personal finance, I cannot remember a more confusing economic landscape. Advising clients as to their financial future options requires balancing the pros and cons of the national (and world) economic outlook. Our crystal ball is hazy.
Governments around the globe frequently lack integrity, instead acting from motives more political than economically astute. Yet, the world economy continues to expand, annually elevating certain groups of people out of abject poverty. Logically, there has to be more to investing success than ramblings of the political class. I believe this to be true.
Perhaps the best lesson in market investing is the simple measurement of growth. Although the Dow Jones Industrial Average (DJIA) is not the broadest and best performance measure for stocks, it is the Index most popular among investors. Beginning with Reagan’s first inauguration, this country, its people, and the market have survived times and events but thrived. From under 1,000 on January 20, 1981, to recently closing over 40,000, nothing keeps the market down for long. Why?
The answer to this seeming dilemma is indigenous to the USA. Capitalism (and not politics) is the engine of prosperity. Our independent business leaders are charged with maximizing profits for their shareholders. No conflicts of interest are inherent in the common pursuit of sustained profit growth.
Why, then, are so many investors fearful?
Since Reagan, we have seen wars, terrorism, financial crises, political upheaval, recessions, tax increases, and any number of events that can, and sometimes have, negatively affected the market. This includes losing about half the value of the major indices in the global financial crisis of 2007 – 2009. Again, recently the DJIA closed over 40,000—practically miraculous.
Today’s salad of economic data and predictions precludes accurate predictions. Fortunately, in the long run, history tells us that the market will continue to provide opportunities for decades.
First and foremost, investors must commit to a minimum of 5 years. Market risk dissipates over time. Sometimes that is challenging, but it works.
Van Wie Financial is fee-only. For a reason.
Inflation is rampant, and our lifestyles are suffering from the ravages of ever-higher prices for necessary goods and services. Our government touts a falling rate of inflation, but they mislead the public by implying that prices are falling. This is categorically untrue, as a decreasing rate of inflation simply means that prices are rising a bit slower, but rising all the same.
In the manipulative world of statistics, if the inflation rate for 12 months is 4.2%, and the average hourly wage rate goes up during that same period by 4.2%, consumers are keeping up. Everyone knows (from experience) that is false.
Anyone who pays attention knows that the inflation rate as reported is nonsense. Prices of most items rise quicker, and last longer, than reported by government agencies. Incomes generally rise much slower than reported numbers. Average hours worked are trending down, as full-time jobs are being lost by the hundreds of thousands, while part-time jobs are increasing. The new jobs not only provide fewer hours worked, but also pay less on a per-hour basis. Most of them have limited or no company-paid fringe benefits.
Perhaps the most significant item not usually addressed by the bureaucracy is taxation. How much of what we all spend every month is tax-deductible? Very little, for most of us. Deductible contributions to retirement plans, property taxes (subject to the $10,000 annual deduction cap), mortgage interest, and sometimes medical expenses may be itemized and deducted. However, about 80% of Americans claim the Standard Deduction, eliminating Itemized Deductions. Most of our daily expenses are paid from after-tax dollars.
Earned income requires payroll withholding of 7.15% (15.3% for self-employment income), and most Americans pay income taxes of at least 12%. Self-employed people and higher earners are subjected to even higher overall tax rates. Taxes, while necessary, reduce our spending power.
Inflation is driven by excessive government spending. Examining Americans’ ability to keep up with actual inflation, there is no hope unless Congress stops spending so much money. That idea, of course, is ludicrous. Every congressional expenditure is (at least partially) meant to buy votes. Spending cuts are viewed as political suicide.
When you hear the Administration use dumb phrases such as “lowering costs for Americans” and “building the economy from the bottom up and the middle out,” it is a smokescreen for over-taxation of working citizens.
Everyone’s approach to getting along in this inflationary environment is different, but in general, the best way to survive is to work longer, harder, and more often, until a policy shift begins to return us to a more normal economic environment. Before it’s too late.
Van Wie Financial is fee-only. For a reason.
Long-term investing requires patience, diligence, and an understanding of financial markets. For many, a helping hand in the form of an experienced financial advisor is valuable. Any competent advisor understands the importance of diversification to long-term success. Those who do not are speculators, not worth the fees and commissions they collect from clients and customers. Avoid those “so-called” advisors.
Types of financial assets (Primary Asset Classes) include Cash and Equivalents, Domestic Stocks, Domestic Bonds, Foreign Stocks, Foreign Bonds, Real Estate, and Alternatives (commodities, etc.). Diversifying a portfolio is a process of adding assets from more than one Primary Asset Class. How many are included is a function of portfolio value, investor preferences, and the advisor’s skills, if there is one.
Given those parameters, I was surprised recently to read that Bill Gross had declared his concept of “Total Return Investing,” or “TRI,” to be obsolete. Explaining my surprise requires some background information. First, Bill Gross is widely considered to be the GOAT (Greatest of All Time) in his niche, which was in bond trading. He co-founded PIMCO, which remains one of the premier investment companies in the world.
Total Return Investing, the concept Gross developed around 1981, used bond coupon yields, along with bond value changes from natural fluctuations in market interest rates over time. When interest rates rise, bond prices fall, and vice-versa. Through tactical buying and selling, Gross added trading profits to interest payments, dubbing his outstanding results “Total Return Investing.”
Why is Gross now abandoning TRI? According to his recent statement, it is due to today’s low bond yields, generally in the 4% to 5% range, compared to the 16% yields available in the early 1980s.
Van Wie Financial continues to believe in and practice Total Return Investing. Where we differ from Mr. Gross is in portfolio design. Gross applied his TRI to a portfolio of only bonds, a single Primary Asset Class. In doing so, he excluded from consideration other forms of income and asset appreciation. Dividends from stocks and Real Estate Investment Trusts (REITs), swings in commodity prices, and worldwide variations in economic conditions also provide elements of Total Return Investing.
When we praise TRI, we encompass the full range of available financial assets to diversify portfolios. In this environment, Total Return remains a viable concept. Over time, the main component of portfolio performance is derived from asset diversification among (and within) Primary Asset Classes.
Van Wie Financial is fee-only. For a reason.
Comprehensive Financial Planning is an exercise in problem-solving. At the basic level, the retirement problem/goal we all face is to create a lifetime income sufficient to outlast a minimum 30-year post-retirement life. Thanks to advances in health, safety, and nutrition, coupled with reduced lifetime physical challenges (resulting from working in the information age), significant numbers of retirees are lasting more than 30 years.
Pew Research projects a quadrupling of centenarians (people aged 100 and above) over the next 30 years. Hopefully, Retirement Income Planning will have been a priority for this group. They will need it for the long haul.
Given America’s range of lifestyles and geographic locations, the cost of living comfortably during post-working years must be determined individually. Ipso facto, step one in Retirement Income Planning is estimating your own income needs. Most people are somewhat unaware of their current spending habits, causing us to recommend journaling. Understanding current spending helps with developing future plans.
Once a future spending goal is determined, saving and investing begins. This is the problem-solving portion of Retirement Income Planning. Most Americans should try to retire with more than one form of income. Lifetime pensions provided answers for prior generations, but pensions are rare these days. Social Security contributes, but it was never intended as a complete plan.
We subscribe to the “4% rule,” which states that your investments should safely provide 4% of their face value as lifetime annual income. Multiply your planned annual income by 25 to determine how much you will need to save for retirement, which is generally a dauntingly large number. But, it is not the whole story.
With pensions and annuities (including Social Security), 25 times the annual benefit payout is a number we call Equivalent Net Worth or ENW. Because pension and annuity income is guaranteed throughout your life, no personal assets (equities, bonds, and qualified plans) are required to produce that income. In Retirement Income Planning, your ENW number is subtracted from your overall needed investment and saving portfolio value. For example, a Social Security annual benefit of $36,000 reduces assets needed by $900,000 (25 times $36,000).
After applying the ENW calculation, the targeted asset pool should appear much more attainable, resulting in fewer discouraged savers and investors. We can help savers and investors understand how to fund a successful retirement. It may not prove as difficult as you fear.
Van Wie Financial is fee-only. For a reason.
Baby Boomers were born following our decisive victory in World War II, which produced record family formation. Wealth creation among Boomers escalated as the American economy morphed from wartime production to satisfying consumer wants and needs. Economically, the USA became a peacetime powerhouse. Boomers now control about $84 Trillion (12 zeroes) of assets, which will be passed along to subsequent generations.
You may or may not be in line for an inheritance. In either instance, one fundamental financial planning guideline is to not plan on it for your future. A parallel guideline is to always plan for it once you become aware of an impending windfall.
Unexpected inheritance falls into the category of Sudden Wealth. Lottery winners are classic examples of Sudden Wealth, and many go broke. Exceptional young professional athletes frequently become suddenly wealthy. Following a very short career as a professional athlete, many find themselves destitute in a very few years. Unexpected inheritors often suffer the same fate. These groups have too often not planned for the windfall, meaning they frequently go on a luxury buying spree with their unexpected and newfound capital.
Those who anticipate an inheritance often view their expected windfall as a viable retirement plan. It is not, as many things can go wrong. Boomers sometimes contract long-term illnesses and wind up spending their savings on medical care prior to death. Some potential beneficiaries have personal fallouts with family members, resulting in being excluded from inheritance. Occasionally, Baby Boomers remarry and leave their nest eggs to the new spouse.
Until notice of a pending distribution is received by a beneficiary, nothing is certain. However, once notified, that should trigger some immediate financial planning. If the amount is significant (meaning something different to each individual), we recommend a consultation with a competent financial professional. Most people would be well served by a free consultation with an independent, fee-only, fiduciary, Certified Financial Planner®, or CFP®.
With so much wealth beginning to transition to the next generation, inheritances of a few hundred thousand dollars are common. This amount of money can easily be blown on a spending splurge, or even lost to an unscrupulous “advisor.” Handled correctly, however, that sum can provide an entirely different (read: better) lifestyle in retirement. That requires planning, and this time we mean planning for the windfall.
We understand the emotions accompanying an inheritance. For many inheritors, we recommend they “splurge” with no more than 10%, and then let the plan take over for long-term investing. It is your personal responsibility.
Van Wie Financial is fee-only. For a reason.