As of today, the taxpayers of the United States have collectively earned enough money to pay the Federal government’s tax bill for the year. Bad news, it doesn’t include State Tax Freedom Day, which for Connecticut is May 21st (The latest of all 50 states).
5 Theories Why Americans Don’t Save More
The Atlantic recently published an article in which they outline five compelling theories why Americans don’t save more for the future:
- Americans stopped saving when their incomes stopped growing
- The poor and middle class went into debt to buy houses
- U.S. policies make it easy to not save money
- The U.S. is uniquely susceptible to conspicuous consumption
- The pressure to keep up with richer neighbors has been greatly exacerbated by rising income inequality
It seems to me that all five theories contribute in part to the current situation. However, I disagree with the authors belief that the solution requires more government programs and involvement. Even the author contradicts himself: The lottery hurts the rate people can save and the government’s push for homeownership contributed to the housing crisis.
Recently, I have become quite interested in how our clients and prospects save and in particular the amount they keep set aside for emergencies. Don’t these government programs, such as social security, storm damage, health insurance, unemployment, mortgage forgiveness, student loan forgiveness and multitude of other programs, have an unintended consequence? Are Americans, as a whole, becoming more dependent on the generosity of others and the government? This point is not well addressed in the article.
2015, Just The Numbers
Earnings for the 500 largest U.S. companies; the S&P 500 are reported in two ways. First is reported or GAAP (Generally Accepted Accounting Principles) earnings. This number is what is reported to the SEC. The second is operating or non-GAAP earnings. Companies often report both operating or non-GAAP earnings along with required GAAP earnings. The non-GAAP earnings are what analysts follow because it adjusts for one-time events and is said to more actually reflect their business.
Reported or GAAP earning for 2015 were about $87 (the total of all 500 companies in the index), depending on how and when they were measured. This compares to about $102 for 2014, and about $100 for 2013.
Operating or non-GAAP earning for 2015 were about $100, depending on how and when they were measured. This compares to about $113 for 2014, and about $107 for 2013.
In 2015, the major U.S. corporations earned substantially less. Much, but not all, of this was due to the decline in the price of oil hurting the energy companies.
The S&P 500 started the year at 2,059 and closed at 2,044 paying out an approximate 2.15% dividend for a total return of about 1.4%.
Negative Interest Rates: A Grand Experiment
Frustrated by the fact that your savings account isn’t paying you any interest? It could be worse. Imagine putting $10,000 into your savings account, getting no interest and you have to pay the bank $60 per year in addition to any bank fees. No longer does the bank pay you, rather you pay the bank for the privilege of lending them your money.
It’s called negative interest rates and the concept is catching on in other parts of the world as an extreme attempt to grow their economy. Over 7 trillion dollars worth of government bonds have been sold worldwide with yields below zero. This is a new tool for central banks to shore up their struggling economy. The problem is that it’s unproven. There aren’t many, if any, cases of negative interest rates being used by world economies up until now. No one knows what the unintended consequences will be from using this kind of policy. At $7 trillion, this is one giant global experiment!
These aren’t small emerging markets experimenting with this policy. Denmark, Switzerland, Sweden, and Japan currently have negative interest rates. So does the European Central Bank. Janet Yellen, the US Fed Chair, has not ruled out the use of negative interest rates in the future and several other countries are in the process of making interest rates negative.
So what’s the appeal? Imagine being paid to borrow money. Would you rather pay $10,000 upfront for a new roof or pay $9,500 for a new roof spread over several years? If you thought 0% loans to buy a new car was enticing, imagine how many cars would be sold if it became cheaper to take out a loan than to pay upfront. The purpose is to punish savers and encourage spending and investing, by both consumers and businesses
A grand and global experiment is occurring right now, one that every economist in the world is trying to understand.
The Most Important Financial Lesson Millennials Must Learn
Start saving early. The chart below shows why it’s better to start saving earlier rather than waiting. True, it may be most hard to save in your early 20s when you have student loans and an entry level salary. But look at the difference between those who save early on those who wait (even 10 years)! This is the magic of compounding interest.
The Reverse Mortgage in Your Retirement Income Strategy
Recently, I had a few conversations with clients about their retirement portfolios. In these cases, there was some disappointment with the returns that the markets have provided, or not provided, in the last couple of years. For them, and I suspect other clients as well, there’s an added complication: taking big distributions every month, or every year, can reduce the IRA balance significantly and quickly. They fear they’re running out of money.
These discussions have led to my taking a refresher course on the concept of a reverse mortgage, loans that let you borrow against the value of your home, but don’t require repayment while you’re still living in it. This type of loan has been around for a while, but it may become more popular for several reasons. Here is what I learned.
Five Things You Should Know About Reverse Mortgages:
- Federal laws and regulations implemented in 2013 and 2015 were the game-changers. Added safeguards make these government-backed loans safer for both the borrower (especially seniors) and the banker, and also cheaper than they used to be (but still more expensive than a traditional home-equity line of credit). Most reverse mortgages today are Home Equity Conversion Mortgages (HECMs), a type of Federal Housing Administration (FHA) insured reverse mortgage. Home Equity Conversion Mortgages allow seniors, age 62 or older, to convert the equity in their home to cash up front, or a line of credit.
- Your age is a factor. The older you are, and the more equity you have in your home, the more you can borrow. The loan can amount from 50% to 70% of your home’s value. (You can estimate your borrowing limit at reversemortage.org)
- You’ll have a safety net. You can take the loan as a lump sum, monthly payments, or a line of credit. But the borrowing has no set time limit. And the lender can’t freeze, cancel, or reduce your credit line; in fact, it’ll grow over time whether you use it or not! The newer rules have the government on the hook in case the reverse mortgage ever grows to exceed the home’s value. Plus, if one spouse dies, or has to go to a nursing home, the non-borrowing spouse can’t be kicked out.
- There can be multiple benefits. If you’re 62 or older, you can establish a line of credit with an HECM, whether you need the money now or not. You might need it later. That credit line will grow annually, perhaps substantially over the years. When you do tap your credit line, you pay no income taxes. This added borrowing might relieve some financial pressure. Perhaps you’d postpone receiving your Social Security benefits, or reduce withdrawals from your IRA, or pay the taxes from a Roth conversion, or undertake some age-in-place renovations to your home. A lump sum withdrawal might be used to pay off an existing mortgage, perhaps entirely, or more quickly, and thus reduce the expense of monthly mortgage payments.
- You can still get into trouble. If you don’t pay your property taxes and your homeowner insurance, you can still lose your house. If you want to move out of the home, the HECM must be paid off (it holds a lien on your house). So if you can’t live with these restrictions, downsizing is probably a better idea.
Your retirement portfolio should not be the only resource you use for your income. I’ve always been a proponent of the 3-legged stool for income stability. For many people, the HECM can become one of those legs.
The One-Page Financial Plan: A Book Review
I recently read Carl Richard’s “The One-Page Financial Plan” and was impressed with Richard’s approach to working through some complex financial issues. In particular, he focused almost exclusively on the emotional issues that investors face. What does money mean to the investor? What are the investor’s goals? It’s these issues that overwhelm many investors to the point where they give up or procrastinate for years.
For folks that need a plan and don’t know where to start, this is a useful resource. It’s simple and easy to follow and the principles are very similar to what I employ with my clients. This is a great guide to help investors think about money in terms of goals and how to get on the same page with a spouse on what the future looks like. It is the most difficult part of financial planning.
It lacks specificity and implementation ideas. Since every investor has a unique situation. This makes the title of the book a little misleading since you don’t end up with a true financial plan on one page. The book doesn’t go into detail about growth rate assumptions or serial payments or how to calculate time value of money. Rather it focuses on concepts at a high level.
If the goal is to starting thinking and talking about the future, this is a great place to start.
Get Ahead With Tax Planning Strategies for Next Year
Are you hunting for last minute ideas and strategies to reduce your tax bill? If so, consider spending that time preparing to reduce your tax bill for next year. It will be a lot more productive to take steps now that could reduce the tax bill for 2016 than to trying to hunt for some donation receipt. Here are a few strategies to consider going forward:
Get a handle on your income tax brackets: If you convert a portion of your IRA into a Roth, or you periodically cash in savings bonds, or if you have a taxable investment account or you can control when you recognize income, it’s critical that you understand your income tax bracket thresholds and plan throughout the year. Recognizing income (through a conversion or sale) can bump you up into a higher tax bracket and you end up paying more in taxes. Sometimes that tax can be steep and costly, affecting your income taxes, your social security taxation, and even your Medicare premiums!
Tax Loss Harvesting: If you have a taxable account, you are well aware of how frustrating it is to own an investment with a huge unrealized gain and don’t want to sell it because of the tax it will generate. The solution is to sell it in coordination with one or several investments that have underperformed. The gain and loss can offset each other. 2015 was a particularly great year to do tax loss harvesting, but we won’t be that lucky in the future.
Gifting Strategies: If you’re charitably inclined, consider giving gifts of appreciated stock. You get a tax deduction AND avoid paying capital gains on the stock. If you’re over 70.5, you can make direct charitable contributions from your IRA which can offset your annual Required Minimum Distribution.
ZIRP, QE, NIRP
Sounds boring, but wait, read on. These terms are behind much that matters. First is ZIRP or Zero Interest Rate Policy. The developed world (Europe, Japan, USA) dropped interest rate to zero save the economy from the 2008 crash. Unfortunately, the economy stagnated while bank savings rates to dropped to almost nothing. It did, however, fuel the stock market beyond fair value (see post below). Next is QE or Quantitative Easing. The central banks bought bonds from the public and flooded the system with cash. The plan was to force the banks to lend out that idle cash and start up the economy? That did not work either.
With interest rates now near zero, there is NIRP or Negative Interest Rate Policy. The central banks will force interest rates down through to zero the point where the consumer will be charged to keep their money in the bank, forcing the depositor/consumer to spend it instead and revive the economy. Right? Well, maybe not. The smart choice may be to withdraw the cash and keep it under the mattress. But this would cause bank runs as depositors cash out the accounts. So first, cash must be outlawed. No $100, no $50, no bank runs, nowhere to go. This sounds ridiculous but read the news. Negative interest rates are raging in Europe and Japan, and a “cashless society” is being proposed everywhere.
Perhaps the next step is Direct Monetary Fiscal Policy. The way things currently work is when our government needs money beyond what it collects, they issue debt in the form of Treasury bonds. So far that comes to $19 Trillion in Federal Government debt, $9 trillion of which was just borrowed by the Obama administration. Fortunately, our Federal Reserve Central Bank has soaked up trillions of that through the above-mentioned QE program. So, to oversimplify, our government owes itself trillions. Again, ridiculous. So what may be coming are that laws will be changed so the Federal Reserve can create money to pay for massive government programs directly without the U.S. Treasury issuing any new debt. Traditionally, this would be highly inflationary, but we are not in traditional times.
Being an optimist, I hope it works.
A Problem In My Industry and What I’m Doing To Fix It
There is a growing problem among Financial Advisors and Financial Planners – one that many industry veterans don’t want to talk about. Just like baby-boomers, most advisors are approaching retirement and may begin slowing down soon. More than half of all advisors are over the age of 50 and about a third of all advisors will retire in less than ten years. (source)
The concern is that advisors will be retiring in droves just as their clients enter the most difficult stage of their financial life – retirement. There couldn’t be a worse time to start looking for a new financial advisor. Finding a new financial advisor to guide you through the complicated retirement process can be time intensive and stressful especially when you have to make important decisions in the near future.
Fortunately for our clients, we operate as a team. I have been working closely with my father for years now and we have several staff members that work behind the scenes to help clients.
But our current approach is not the norm. To complicate matters, younger advisors are no longer entering the business like they once did. The training programs at many of the big firms have been scaled back significantly.
Over the last few months, I have worked with the local chapter of the Financial Planning Association to launch a NexGen community. It’s a group for financial advisors and financial planners under the age of 40 in the Hartford region to meet and learn from each other. The purpose of the group is to foster involvement of younger advisors and to improve their skill sets and to match younger advisors with older advisors.
Based on attendance from the first event – we’re on to something.