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.
Two months of our Blog posts have targeted young people, who (through no fault of their own) are unprepared to face the realities of their own personal financial lives. Over time, a dearth of education leads to a society where nearly half the population ages 55 through 66 have no retirement savings. Worse, perhaps, is that nearly 40% of all age groups could not handle a $400 emergency expense. We know this simply because it describes present-day America.
Relying on Social Security monthly benefits for complete retirement income is not a sufficient plan. Nor was it ever intended to fulfill that role in society. According to the U.S. Government, the 2024 poverty level for a couple is $20,400, or $1,703/month. Today’s average Social Security monthly benefit is currently $1,760. Fortunately for some families, both partners are qualified for benefits, lifting them above poverty, but not by much. For renters, that amount of money provides a very meager shelter, and even homeowners are faced with escalating property taxes, utilities, and homeowners’ insurance.
Inflation is pummeling our expenses. Social Security Cost-of-Living Increases, or COLAs, will never keep up. Food costs, medical costs, energy costs, and a host of other monthly expenses are on the rise. Medicare pays only a fraction of total medical expenses, and Medicare is costly. Without a supplemental income, our seniors’ standard of living is being threatened.
Retirees are responding by re-entering the workforce when and if they can. However, over half of retirements are involuntary, being forced by sudden illness, poor health, or business conditions in the workplace. Finding work is not a guarantee, even for those retirees who are serious and qualified. Every economy has ups and downs, and slack times take a toll on those seeking to supplement their retirement incomes.
Hence, for a large swath of society, it is too late for them to improve their situations. Securing a comfortable retirement must begin as early as possible in life. Younger people will only provide for themselves if they possess knowledge and understanding of the financial world in which they live. Van Wie Financial is dedicated to helping Americans help themselves, through education and understanding.
Participation in dynamic financial markets will assist investors in reaching their goals, but only after those goals have been specified. Americans are fortunate to live in a society that rewards work, saving, and investing. Ignore the possibilities at your own long-term financial peril. Learn all you can while you have time left.
For the record, purchasing Lottery tickets is NOT a retirement plan.
Van Wie Financial is fee-only. For a reason.
A palpable sigh of relief can be heard throughout the land, as Tax Filing Day is again in the rearview mirror. However, an escalating cost of living remains in our faces, as we visit gas stations and grocery stores for life’s necessities, only to return home, and pay our increasing monthly bills. Whatever inflation’s cause, we need to nip it in the bud, as we are all suffering from the ravages of ever-higher prices.
Perhaps nowhere is inflation more oppressive than in supermarkets across the land. Feeding our families has become an onerous financial chore, as some of life’s necessities have been hardest hit by high prices. Dairy, and especially eggs, are poster children for our economic misery, hence our topic today. In times such as these, we look to the current Administration in Washington, D.C. for answers. What will they do to bring down inflation?
One current inflation-fighting “suggestion” from the White House is to increase Corporate Tax Rates from 21% to 28%, thus moving American business taxation from competitive internationally to an outrageous high, by undoing half of the Trump Era rate decrease (35% to 21%).
Only a basic understanding of economics is required to know that when corporate taxes are increased, costs rise, and those increased costs are passed along to consumers. Under these proposed higher taxes, egg prices would rise, not fall. That understanding does not require a college degree, so why is this folly being promoted? It’s called Politics over Economics: business as usual in Washington, D.C., where class envy and wealth envy are ubiquitous. “Wishing and hoping” is not an effective economic policy.
Free market economies operate on the fundamental principle of supply and demand. Price stability is realized only when the two are in balance. Price changes occur when the balance shifts on one or both sides of the equation. More supply begets lower prices, as does reduced demand. Upward shifts in demand, as well as reduced supplies, bring us higher prices.
Eggs are among the most basic essentials for feeding families, and we have a growing population. Costs must come down in order for producers to react by lowering prices and increasing production. Raising taxes does not lead to reduced costs of retail goods and services.
Increasing egg supplies would reduce market prices. However, producers have been adversely affected by increased transportation costs, as well as higher feed costs for hens, because of government over-regulation. Fewer restrictions on energy production and agriculture would stimulate supplies and reduce costs. Adhering to standard economic fundamentals would lead to a decline in market prices for eggs. We would all benefit.
Van Wie Financial is fee-only. For a reason.
As this Blog gets posted on our website, Tax Filing Day 2024 is behind us. That is not a good reason to put taxes out of your mind for another 11+ months. Instead, since memories are fresh, we will continue our exploration of the process by which we pay our mandated share of income to the Treasury, all the while doing what we can to pay not one dollar more than necessary. Understanding the Tax Code formula and its impact on our own situations improves our ability to avoid overpayment. This year’s lessons may become next year’s savings.
In early April we discussed the concepts of Total Income and its subset, Adjusted Gross Income, or AGI. In order to arrive at the actual tax we owe, the next step is to apply Tax Deductions, as defined in the Code. Whatever deductions we are allowed further reduce the taxable portion of our AGI. Again, our goal is to reduce the taxable amount of income by all legal means.
For generations, Americans have had the right to itemize allowable deductible expenses, and to subtract that total from Adjusted Gross Income, or AGI. Americans have also had a “shortcut” alternative available in the form of a Standard Deduction. Every year, each taxpayer gets to decide which to apply in preparation for their Form 1040 Individual Tax Return.
Since the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), fewer taxpayers have chosen to itemize deductions. This was by design and has been largely successful. Simplifying Form 1040 and its preparation was a laudable goal. One of TCJA’s primary objectives was to increase the proportion of taxpayers who opt for the Standard Deduction, so the amount of the Standard Deduction was increased substantially. Raising the level had the desired effect of migrating many taxpayers to the simplified system, and away from Itemized Deductions.
Simplification of our Tax Returns was a bit oversold to the public, but in reality, because a higher percentage of Americans did switch to the Standard Deduction, they now have to devote less time and energy annually to tax preparation.
Allowable deductions are found on Schedule A of Form 1040. There are 5 general categories, including Medical and Dental Expenses, State and Local Taxes (SALT), Deductible Interest, Charitable Gifts, and Casualty Losses, many of which have restrictions and/or limitations.
Once the deductible portion in each category is computed, deductions are totaled and compared to the Standard Deduction. Taxpayers may use either the Itemized or the Standard Deduction and generally choose the highest number. The Net from AGI becomes Taxable Income. Tax is then applied from a Table or a Formula, and you are nearly done. Next week, we’ll examine Tax Credits and Other Taxes, the final steps before filing your 1040 with the IRS.
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Not only is April 15 the Due Date for Income Tax filing but April was also designated Financial Literacy Month by George W. Bush in 2003. In 2022, Gov. Ron DeSantis of Florida added financial literacy to Florida’s required curriculum. 35 States now require a course in Personal Finance to graduate, and 28 require a course in Economics. More States need to sign on, but it’s a good start.
This Blog has recently been featuring introductory lessons on Personal Finance and Income Tax, and today’s topic is an important concept called Adjusted Gross Income, or simply AGI. Reasons abound for understanding AGI, as well as its redheaded uncle, Modified AGI, or MAGI, to determine what happens on your Form 1040, U.S. Individual Tax Return, and the effect on your overall tax bill.
In a prior Blog, we covered the term “Gross Income.” The most prevalent components of Gross Income are Wages, Salaries, Tips, Interest, Dividends, Business Income from non-W-2 employers, Retirement Account Distributions, Social Security Benefits, Pensions, Annuities, and Capital Gains. These are listed as Gross Income on Page 1 of Form 1040.
Schedule 1, Part I lists other Additions to Income, including rent, gambling, jury duty pay, etc. If you have any of these, Uncle Sam wants to know.
Schedule 1, Part II, contains Adjustments to Income that reduce your income for taxation purposes. Arriving at Adjusted Gross Income, or AGI, requires combining Additional Income with Total Adjustments, and then adding to, or subtracting from, Total Income.
For most taxpayers, MAGI is the same as their AGI. Computing MAGI simply adds any tax-free interest income to your AGI.
Eligibility for certain tax-related deductions and credits is dependent on a taxpayer’s AGI (or MAGI), including the Earned Income Tax Credit (EITC) and certain Child Credits. Deductibility of Student Loan Interest is lost above a certain level of AGI, as are certain other Educational Tax Breaks.
One of the most important and useful applications of AGI and MAGI is in determining eligibility for certain Retirement Plan contributions and deductions. For IRA savers, attention needs to be paid to MAGI to determine eligibility for Roth IRA contributions, as well as the deductibility of Traditional IRA contributions.
Social Security recipients use a slightly different calculation to determine MAGI. This formula includes only half of Social Security benefits to Gross Income and then follows a formula for determining the taxable component.
Understanding the process puts you in control. Next week, we will cover Deductions to be applied to compute Taxable Income.
Van Wie Financial is fee-only. For a reason.