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.
Adam was recently featured on Wealth Unplugged with Joey Loss, CFP®!
Click the link above to check it out!
Young people have long been stressed about their finances. Recent inflation and higher interest rates have joined forces to render the American Dream of home ownership nearly impossible for all but the highest earners. Throughout 2023, only 4% of home buyers were under the age of 24. Interestingly, that is the same percentage of buyers on the other end of the age spectrum, the Silent Generation, now over 76 years of age.
Millennials (ages 24 to 32) bought homes at a rate three times higher, comprising 12% of 2023 buyers. While better, this statistic is not encouraging, as a sizeable majority of home buyers were in their 30s, 40s, 50s, and 60s. For younger Americans striving to form households, start families, and begin the lengthy process of building equity in their homes, these past two years have been nightmarish, as interest rates increased from about 3% to over 7%. At the same time, home prices rose (along with the price of most everything else).
Many younger people are all too familiar with the disappointment of being turned down for a conventional mortgage. Nationally, lending standards remain restrictive, as conventional providers are restrained by regulatory agencies. Qualifying for any home mortgage is difficult, and younger people are being forced into smaller and less desirable dwellings. Too often, those buyers will need to “trade up” soon, as their family and career needs grow.
For younger Americans seriously contemplating a first home purchase or even an upgrade from their current abode, there is some good news. Creative financing is available for would-be home buyers who are willing to take the initiative. While financial institutions are generally bound by restrictive lending guidelines, independent investors and mortgage brokers often team up to creatively fill demand in the mortgage market.
Non-traditional borrowers need to link up with innovative lenders. Van Wie Financial works with a variety of such lenders, and we can recommend avenues of pursuit for otherwise disappointed buyers. One of our preferred providers was recently able to help a customer who had $93,000 in credit card debt, with interest rates ranging from 17% to 22%. There are also assistance programs for young people sincerely desiring to own their own residence.
Budgeting for young couples, with or without children, is a complex and difficult exercise and can reveal the true state of their financial position. Remember that there are two sides to the home-buying equation: income and expenses. Identifying weaknesses and strengths in each area through budgeting is helpful when looking for a suitable home purchase.
Moving forward after being declined for a traditional mortgage requires ambition, planning, and creativity.
Van Wie Financial is fee-only. For a reason.
Imagine, if you can, becoming not just financially comfortable but confident of a fully funded 30-year retirement. Does that require a degree or two from a prestigious university? In truth, it never has, but our current national economy seems to signal a more emphatic “NO!” Thanks partly to a few influential people, including Mike Rowe and (Cheers Star) John Ratzenberger, college degrees are being exposed as unnecessary for some millions of Americans with goals of achieving true financial independence.
In the course of history, the USA has morphed from an agricultural to an industrial economy and, more recently, an information powerhouse. Generations of American parents have been convinced of the importance of sending their kids to college. The college-bound pendulum swung so far toward white-collar jobs that we gradually realized a nationwide shortage of blue-collar workers.
In an ironic twist, traditional blue-collar businesses have become extremely successful. So much so, in fact, that in 1996 Thomas Stanley and William Danko published their excellent book, The Millionaire Next Door. More than 4 million copies have been sold, one of them to me, and I loved it. The book is jam-packed with true descriptions of real people, many of them owner/operators of small businesses, including plumbers, electricians, landscapers, and various construction specialists. All were extremely successful.
Nothing in outward appearance would indicate that the millionaires profiled in the book were financially independent. They had one common denominator, a 7-figure net worth. The most common vehicle in their driveway was a pickup truck (they heavily favor the Ford F-150), and most had been in their current homes for decades. They raised families, lived traditional Middle-Class lives, and were comfortable in their own shoes (or boots). And they saved money.
In modern-day Economics, Small Businesses are defined as having less than 500 employees. Growing up in 1950s Midwest America, our neighbors were frequently sole proprietors, sometimes with a handful of skilled tradespeople providing services we all need. Truly small businesses. Most of us were willing to do whatever was available to earn a few bucks. Small businesses in the trades are too often overlooked as role models.
Since America’s awakening to the excesses of higher education for the masses, more young people are looking for alternatives. Apprenticeships, vocational training, and a boost from involved Americans (as mentioned above) are creating successful, debt-free households.
For an inside look at the evolving workplace, mikeroweworks.org is an invaluable trove of information, where financial assistance can be obtained for the right candidates. Warning to all—there is no easy path to success.
Van Wie Financial is fee-only. For a reason.
Interest rates, and especially mortgage rates, reflect the economy, as well as consumers’ collective optimism or pessimism. Baby Boomers’ parents lived in post-WWII prosperity when mortgage rates were around 5% – 6%. As Baby Boomers grew into adulthood, we wanted our parents’ mortgage rates, but instead, rates skyrocketed, due to poor economic and foreign policies.
Throughout the 1980s and 1990s, the American economy steadily improved, as policy was re-oriented toward free markets. But mortgage rates were, by today’s standards, high. Two decades of lower taxes, coupled with the introduction of household Internet service, begot a period of falling mortgage rates, from a 1981 high of 16.63% to about 7.4% by 1999. This slide provided substantial relief from the 1970s, a decade of malaise, energy shortages, hostages, high inflation, and steep mortgage rates.
During the first decade of the 21st Century, mortgage rates started to fall gradually in the aftermath of the terrorist attacks on September 11, 2001. After the initial shock and response to 9/11, Americans regained confidence, and the economy grew. Mortgage rates stabilized in the 6% to 7% range.
In the wake of the 2008 Financial Crisis (remember the “real estate bubble?”), mortgage rates fell sharply, resulting in an all-time low of 2.96% in January 2021, as COVID-related policies upset almost everything, economically and socially. Nice mortgage rates, but not a good time in America’s financial history.
Where are we going with this? During the best economic times in America, rates tended toward 6% – 7%, and the balance between housing demand and supply remained close. Anyone of sufficient age and experience likely remembers these periods fondly. Looking at a chart of historical interest rates is like a trip down Memory Lane. Times of very high rates, as well as times of very low rates, were reflective of problematic periods. Mortgage rates of 6% to 7% generally represented stability.
And yet, although rates are in that range today, today’s bad economic policy indicates that we are in for a rough ride, regarding the current mortgage rate environment.
While current mortgage rates resemble those during America’s best decades, our economy is not stable enough (read: inflation, CPI, and consumer confidence) to support economic stability. Waiting for a return to 3% mortgage rates may be the wrong strategy. Always remember that mortgages can be refinanced when conditions improve, and rates fall.
Van Wie Financial is fee-only. For a reason.