The Independent Investor: Attention Retirees!
It has been more than a year since President Trump admonished the government to strengthen retirement security in America. This week, in response, the Internal Revenue Service (IRS) released a proposal to comply with that executive order. Its suggestions were decidedly underwhelming.
Truth be told, financial planners and tax accountants have been speculating for years that, at some point, the IRS was going to have to recognize certain facts of life concerning retirement. One of which is that Americans are living longer. Why should that matter so much to you, the retiree?
Because everyone that has a tax-deferred savings account like an IRA, 401(k), 403(b), etc., is required take a Required Minimum Distribution (RMD) from those accounts once they reach 70 1/2 years old. Those distributions are then taxed at whatever the retiree's prevailing income tax rate is at the time of distribution. These RMDs are required until you die or there is no money left in the account. Simple enough, so far.
Readers may ask how the IRS determines these distributions. The taxman uses a ratio based on how much is in the subject account at year's end, plus how old the retiree is, and how long the person is estimated to live. Therein lies the rub.
Americans are living longer than they have in the past. And while that is good news, for many middle-class retirees, it presents a challenge. As readers know, I have dozens of such clients and when we go through financial planning one of the first questions they asked is "Will my savings be enough to support me through the rest of my life?"
Back in the day, that wasn't an important topic. Most people died young. A person born in 1900, for example, could only expect to live on average to age 47. By 2011, life expectancy ballooned to 76.3 years as a result of massive breakthroughs in medicine and life sustaining technology. As such, even the IRS had to acknowledge that they might have to adjust their own tables of life expectancy. Unfortunately, the last time they did so was back in 2002.
Since then, life expectancy has increased by more than 2 percent (1.6 years) on average for all Americans, but more than 8 percent for those of us who have reached 65 years of age. And those average numbers can be misinterpreted. For example, the rule of thumb is that most of us will kick the bucket by age 85 (with women living about 5 years longer than men). But that is an average number.
If you live past 65 then the numbers change big time. Chances are that someone like me (age 71, next month) could conceivably still be living (and writing) into my nineties! That means my RMD must last far longer than the calculations used by the IRS.
A look at the suggested new timetables is not encouraging. For someone with an IRA with a value of $1 million (most of us have a lot less), the new proposed first year change in your RMD would decrease it by about $2,100. Only a portion of that amount would be paid in taxes, so the overall savings would not materially extend the amount of money you would need throughout your lifetime.
Any decrease is better than nothing; however, the majority of retirees (80 percent) are taking much more than their minimum RMD each year. Unlike the millionaires, most retirees need much more than their minimum RMD to make ends meet (and thus their worry that their money is not going to last a lifetime of retirement).
The bottom-line is that the changes won't materially impact the 20 percent (the rich), who take a minimum RMD. They are no help to the rest of us and for those who are younger and face even a longer potential life span; the difference is infinitesimal.
I would think that a government and an agency that could transfer $1 trillion to corporate America in tax savings in one year could do a little better than this to help the middle class but what do I know? This is the country we are living in today.
The Independent Investor: Fringe Benefits Important as Paycheck
Most of us know to the penny how much we made last paycheck, but how many of us know the details of our fringe benefits? Not many, I suspect, and that is a big mistake.
Retirement benefits are available to 77 percent of private industry workers and 91 percent of state and local government employees as of March 2019, according to the Bureau of Labor Statistics. Back in the day, offering perks to workers was a way to stand-out from your competition, but today they are essential tools of recruitment. And countless studies have shown that these benefits are a means to engage employees and increase productivity. That all sounds good on paper but in real life things may be different.
In my line of work, I often ask prospective clients to run through their employment compensation. Salary and bonus, as you might imagine, are right at the top, followed by paid vacation days. After that, things get a bit hazy.
With some initial prompting, most clients do know they have some kind of tax-deferred retirement plan, but exactly how it works and even how much they are contributing is usually answered with a "I'll get back to you."
In similar fashion, most employees will answer "yes" to medical coverage, but when I burrow down to the details, such as "what are your co-payments, deductibles, and do you have dental or vision coverage," the answers are not forthcoming. In many cases, questions concerning life insurance, paid sick and leave time, disability insurance, educational assistance, flexible schedules and more might be offered, but most confess to not knowing or understanding most of what they are offered.
This seems to be the case with most, although not all, of company employees I talk to. At the same time, I know many companies task their human resources person or department to explain in detail all the benefits that an employee can obtain. And yet many employees continue to be either dissatisfied with their benefits or claim that they are too complex and difficult to understand.
As someone who reviews fringe benefits plans, I can understand their point. Many plans I have seen are written in financial or medical gobbly gook. Explanations and directions are communicated through company directives (usually via computer programs) or big fat books that confuse more than they help employees. It is not that the employee is stupid, or doesn't care about the benefits, they simply do not have the background and experience to make rational decisions.
I have found that once each benefit is explained and applied to their particular life situation, most employees not only "get it" but appreciate it. Zack Marcotte, our resident Certified Financial Planner, recommends a few key points:
- If your company offers a Flex Spending account, sign up for it
- Both vision and dental coverage makes economic sense
- Critical Illness Coverage should be avoided in most cases
- Accident Coverage should also be avoided
- Voluntary life and insurance coverage — group coverage is a better way to go
- Short-term disability coverage — avoid (assumes you have an emergency fund)
- Long-term disability — critical to have, which should cover 60 percent of your income
- All and any free coverage should always be accepted
For any readers that may have specific questions along these lines, just send me an email. I will either respond to your question directly, or I may use it as a topic for another column.
The Independent Investor: NCAA Up Against Ropes on College Pay for Athletes
This week the Board of Governors of the National Collegiate Athletic Association (NCAA) met at Emory University in Atlanta to hear the pros and cons of allowing athletes to accept money for endorsements. It has been a long time coming.
This is an issue that has been around for as long as I can remember, but it has only been the recent moves by certain states, as well as the Federal government, that has forced the NCAA to at least acknowledge that the status quo is no longer working for them or for their students.
It is currently illegal for athletes to receive gifts or income related to their college athletic activities. If they do and get caught, the offending student and the college program can expect harsh punishments. That means students can't make money from signing autographs, can't sell any merchandise or memorabilia, nor can they cash in on charging money for the use of their likeness in everything from sports video games to college commercials.
At least that was the case until recently. California introduced a bill this year that makes it illegal for colleges in that state to penalize athletes for doing any and all of the above. If the bill passes, it would be effective in 2023. The bill states that any California college that makes more than $10 million in revenues from media rights would have to allow students to make money from their likeness. Students would also be allowed to hire an agent or attorney to represent them in business deals.
Mark Emmet, the president of the NCAA, has argued that this legislation would give an unfair advantage to California colleges over schools in other states. The NCAA would therefore bar California schools from competing in college championships. The problem is that California is not an isolated case. Twenty additional states (plus two members of Congress on the national level) are proposing similar legislation.
Finding a solution that is acceptable to the athletes as well as the 1,100 schools that make up the NCAA (including 353 in Division I) is not going to be easy. But it is necessary if the NCAA wants to preserve their franchise.
The pros and cons on both sides of the debate make a compromise difficult at best. Overall, recent polls of college students by College Pulse, a student-focused analytics company, found that 53 percent of all students polled support compensating college athletes. Sixty percent of the students thought college sports students should be paid salaries, allowed to profit from their likeness (77 percent) and/or be paid if their image is used to sell merchandise (83 percent).
Those who argue for compensating students for their sports efforts say that being a college student-athlete is a full-time job, not an extracurricular activity, as the colleges claim. Sports schedules leave no time for students to earn money by taking part-time jobs, for example, plus playing in tournaments require so much time that students are often forced to miss class, which is the very reason they are supposed to be in school in the first place.
And it is not as if the money schools earn from the efforts of their athlete-students go toward academics, critics claim. Instead, much of the profits ends up in the hands of multi-million-dollar salaried coaches. athletic directors and some administrators.
Winning college sports teams also bring an enormous amount of free advertising, good will, and alumni contributions into the school coffers that benefits all the students, the faculty and the staff of the school. Why shouldn't sports students be compensated for that?
There is also the issue of injuries. There have been repeated and numerous cases of serious injuries where college athletes have put their bodies on the field and now face the prospect of life-time injuries that end any hopes of a professional career while never ever earning a cent from their efforts.
From the NCAA's point of view, students are already (and always have been) compensated in the form of scholarships and other benefits. In addition to free tuition, plus room and board, many athletes receive stipends for books and other basics. This is a form of compensation, the NCAA argues, which sets them apart from the rest of the student body.
Remember too, that most other students will have generated an enormous student loan debt while in school that will plague them for years after they graduate. The college athlete, on the other hand, will be largely debt-free and possibly on the verge of a lucrative professional sports career.
Colleges also argue that only a few college sports programs are actually profitable, and that the money from sports such as football and basketball are often used to subsidize other athletics programs on campus. Finally, there is no ready formula on exactly how college compensation for athletes would work. How and by how much would compensation to athletes at one school be fair and equitable without, at the same time, be putting some other colleges and students at a disadvantage?
Whether offering cash compensation is better or worse than the present system of scholarships, free tuition, lavish sports facilities, and multimillion-dollar sports programs remains to be seen. One thing is for sure, the future economics of college sports is about to get a big overhaul in my opinion.
The Independent Investor: Will Trump Ruin Thanksgiving?
Nov. 21 will mark the deadline for the nation's lawmakers to approve a government budget for next year. Given the animosity between the two parties, the present all-encompassing focus directed at an impeachment inquiry, and the rage of many congressmen towards Trump's handling of the Syrian Crisis, is there any hope for a meeting of the minds when it comes to a budget resolution?
Right now, I would say it is a good bet that Congress just does not have the time to pass all of the 12 annual spending bills that are required to fund the portions of the government that Congress controls. Some of those bills will come up for a vote next week. That should give us an indication on whether there is enough good will between the two parties to do anything more than pass yet another short-term spending bill.
However, none of what Congress might do will matter if President Trump decides not to sign it. Trump has already said he is not interested in signing any domestic spending bills until there is an agreement on additional funding of his border wall. If this sounds familiar, it is, because the same thing happened last year.
In December 2018, the U.S. Republican-controlled Senate unanimously approved a resolution to keep the government funded, but they postponed a decision on funding a wall between Mexico and the Unites States. Trump wanted $5 billion to pay for some of it, which would have fulfilled one of his campaign promises but broke another one (his promise to have Mexico pay for it).
Trump might have signed it anyway, but criticism from some of his hardline media supporters (like Rush Limbaugh and Ann Coulter), who called him "weak" and a "loser," stung Trump's fragile ego. The rest is history.
The federal government shut down from Dec. 22, 2018, until Jan. 25, 2019. It was the longest government shutdown in history. It ruined both Christmas and New Year's for an enormous number of Americans. Federal workers suffered the most from Trump's actions. And yet, after 35 days of misery, Trump agreed to sign the same deal he could have had five weeks earlier and avoided the shutdown altogether.
After over two years of turmoil, it seems clear that when cornered, the president tends to strike out, attempting to cause the most damage to all those who he believes are against him. Almost 50 percent of Americans support removing him from office. Republicans are criticizing him for handing over Syria to his "great friend," Vladimir Putin, and no one liked his self-serving efforts to hold the next G-7 meeting at one of his Florida hotels.
How better to alter these story lines than by once again threatening to shut down the government, unless he receives more money to buil his wall? Washington insiders believe his game plan could be to Divert attention from his problems. He could resurrect the image of ravenous immigrants attacking our southern borders, while blaming the Democrats for being weak on border security. He could even pin his failure in Syria on Congress for not spending enough money on national security.
Of course, the real victims in such a scenario would be the American people. But maybe I worry too much. Maybe the president will have learned from his past mistakes; but then again, how can someone learn from something he has never made?
The Independent Investor: Was There Really a Trade Deal?
Last Friday a "phase one" trade agreement between the United States and China was announced with great fanfare. The problem is that nothing was written down, nor were the terms agreed upon. In the end, we only have a gentlemen's handshake. Will that be enough?
With the stock market up by over one percent, President Donald Trump spent most of the that day in front of the cameras crowing that China had agreed to buy $40-$50 billion worth of food imports from our nation's farmers. He repeated those numbers over and over, throwing in comments of how famers were going to have to buy bigger tractors to handle the business.
China's Vice Premier Liu He smiled in the background, yet he never backed up those numbers, preferring instead to deliver a note by his boss, President Xi Jinping, that simply referred to a "healthy and steady relationship."
However, before the weekend was out, the official, government-backed news agencies in China disputed the Trump's take on what was accomplished or agreed upon. For example, China wants the U.S. to drop all the tariffs the White House has imposed on them thus far in exchange for Trump's $40-$50 billion in imports.
And by the way, that was a number that could be imported over three years, not next year. And no, the Chinese have not "already begun buying," as President Trump claimed. Many on Wall Street believe that the entire announcement was little better than a public relations stunt to woo Trump's farming base of voters back into the fold. Unfortunately for the president, few farmers or ranchers seem to be falling for the ploy. It may be that they also know who will benefit the most from these additional exports and it won't be the family farmer.
If we take pork, for example, (one of the products that China is interested in importing), the lion's share of benefits will go to global mega producers that are domiciled in the United States. Eleven of the world's 26 such producers are in the U.S.
And guess what company dominates pork production in this country? Smithfield Foods. And guess who purchased Smithfield back in 2013? WH Group LLC; and who are they? WH Group is a publicly traded food and meat-processing company owned by and headquartered in China.
As for soybeans, another potential target of additional Chinese imports, can you guess who controls 90 percent of U.S. production? No? I will give you a hint -- the same company that is up to its eyeballs in 13,000 lawsuits over Roundup -- the Monsanto Corp. I could go on down the list naming companies such as Cargill, Dow, and Dupont, but you get the drift.
Thanks to the outbreak of the deadly African swine fever last year, China's domestic hog production has been decimated. As a result, China's pork prices have climbed 69 percent, while overall food prices in China gained 11.2 percent in September. That's not something you want to see happen when you have one quarter of the world's population to feed on a daily basis.
As you might imagine, China's sources of food production are a critically important strategic concern. Since they are nowhere near self-sufficiency in food production, the Chinese are reliant on other nations for food. And they also have a long memory.
Most readers probably forgot that back in the 1980s, the U.S. targeted the food security of the then-USSR, establishing a partial grain embargo in retaliation for Moscow's invasion of Afghanistan back in 1979. The embargo was finally lifted when our politicians realized that the only losers in the embargo were our farmers, since Russia quickly established alternative supplies of both corn and wheat.
Imports of American grains to Russia have never recovered. Fast-forward to today where Donald Trump (most likely not an avid reader of U.S. post-war history) is either ignorant or failed to learn from that lesson. But the Chinese have.
I believe that China may increase food purchases from America in the short-term, because it is expedient to do so and suits their purpose for now. But over the longer-term, China, like Russia, will seek to develop more reliable (less political) sources of food supplies.
It is already happening as China imports more from Brazil and other food producing nations around the world. Reducing their over-reliance on the U.S. for food will most assuredly hurt our agricultural sectors a few years out, but hey, by then it will be another president's problem and who knows, maybe we can blame the Democrats.