The Independent Investor: Changes to Social Security and Medicare Benefits
As the year begins, those who are retired, or who plan to soon, need to know the changes the government has recently announced to your benefits.
The good news is that retirees will get a 2.8 percent increase in Social Security payments. While that doesn't sound like much, it happens to be the largest cost-of-living adjustment in seven years. What that amounts to for the average couple in retirement is about $67 per month, or an average monthly payment of $2,448.
If you are one of those workers like me, who waited until 70 years of age before collecting benefits and are considered a "high earner," then you will be receiving as much as $73 more per month up to $2,861. On the opposite end of the scale, individuals who want to claim their benefits earlier than their full retirement age, (but still plan to work) get a benefit. The amount of money they can make before their Social Security benefits are reduced or eliminated has increased. This year, a worker younger than 66 can earn up to $17,640 before losing any social security benefits. That is $600 more than last year. After that, they will lose $1 in benefits for every $2 of earnings over that limit.
If you are going to turn 66 this year, you can earn as much as $46,920 without jeopardizing your benefits, which is $1,560 more than you could last year. Anything over that new limit will mean you will lose $1 in benefits for every three bucks you make. The earnings cap goes away once you reach full retirement age. That means you can earn any amount without forfeiting your benefits.
However, the government both giveth and taketh away. As I predicted in past columns, the government has increased the retirement age yet again. For those readers born after 1954, the new current retirement age is 66 years old. Those of us born in 1957 or later have just had six months tacked on to full retirement age. You now have to wait until you reach 66 1/2. You can still opt for early retirement at 62, but your benefits will now be reduced by 27.5 percent (compared to 25 percent last year).
As most readers know, in order to qualify for Social Security in the first place, you must earn at least 40 "credits" with a maximum of 4 credits each year. That came to $5,280 worth of credits per year. Now, those four credits must be worth at least $5,440, or a $40 increase from 2018.
Social Security benefits, despite the tax cut this year, will still be taxed in the same way. That is, your tax will be based on your adjusted gross income, plus tax-exempt interest (such as municipal bonds) and half of your Social Security benefits.
Let's say you bring home between $25,000 and $34,000 in income this year all-in. In that case, half of your Social Security benefits will be taxed. Anything more than $34,000 and 85 percent of Social Security income will be taxed. What happens if you are married? If your combined incomes range between $32,000 and $44,000, up to 50 percent of your benefits will be taxed. Over $44,000, 85 percent will be taxed.
While income taxes for many may be going down this year, payroll taxes are going up — at least for high-income workers. Maximum wages subject to FICA taxes have increased by $4,500 in 2019. What that means is that high-wage earners could be paying as much as an additional $344.25 in payroll taxes this year.
Medicare, by the way, receives 1.45 percent of the tax on all wages. Individuals making over $200,000 and married couples pulling in more than $250,000 a year will be required to fork over an additional high-income surcharge of 0.9 percent in Medicare taxes this year. Speaking of Medicare, the good news is that your Part B premiums (outpatient service charges and doctor visits) will only increase slightly this year.
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The Independent Investor: The Fed Stands Tall
Sometimes it takes a while, but financial markets almost always test a new incoming Federal Reserve Bank chairman. On Wednesday, Jerome Powell faced his test and passed with flying colors. Of course, a glance at the stock market averages at the end of the day on Wednesday would have the casual observers scratching their heads.
As most readers know, the stock market has been declining since October. One of the reasons for the sell-off is the fear that the Federal Reserve Bank's gradual tightening policies have gone too far. Their continuous interest rate hikes coupled with the selling of $50 billion of U.S. Treasury bonds every month had started to reduce the excess liquidity from the financial markets.
Investors fear that these actions will slow the growth of the economy and tip the country into a recession as early as next year. No one is sure that this will happen, although most economists are already ratcheting down our forecasted growth rate to somewhere around 2-2.5 percent for 2019. That is by no means a recession, simply a slowing of growth, but nonetheless, investors have decided to sell first and see what happens as events unfold.
The continued losses in the stock market, after so many years of gains, have driven the level of angst to a point where the markets (and the president) have demanded that the Fed stop tightening — now. The media and Wall Street, coming into Wednesday's FOMC meeting, were convinced that the Fed would cave-in to their demands and announce a cessation of their tightening policies. Investors wanted him to say no more rate hikes and possibly a slow-down in the amount of bonds the Fed planned to purchase in the future.
None of that happened. Instead, Jerome Powell, while bowing to the fact that the economy was slowing a wee bit, simply reduced the Fed's planned rate hikes next year from three to maybe two, depending on the economic data. As for his bond sales, that process will continue at its $50 billion monthly clip until circumstances warrant a change.
Clearly, given the 1-2 percent declines in the U.S. stock market averages for the day, investors were dismayed and sold stocks in protest. In the past, many investors have talked about the "Fed Put." Initially, this concept was coined to reflect the Federal Reserve's willingness to intercede and support the equity and bond markets during the financial crisis.
Markets understood at the time that the Fed "would have their back" in times of crisis. Through the last decade, when Greece and the Euro seemed to be in crisis, when political in-fighting in Washington jeopardized our ability to pay interest on our debt, through the various government shut-downs, etc., the Fed was there to ensure market stability.
However, those days are gone. The Fed did its job. The global economy recovered and grew. It was, the Fed explained, time to normalize their relationship to the financial markets. Their traditional job is to control the nation's inflation rate and support employment, not make sure that investors always make money in the markets. That, I believe, is the lesson everyone must re-learn.
Back in the day, you took risks and you generated returns. If you were wrong, you paid heavily, depending upon your investment choices. As we face the new year and the possibility of a recession sometime in the period of 2020-2022, the Fed's message is clear. We are returning to a time where you (and your adviser) will be responsible for your investment choices, where there is no "Fed Put" to save you if you guess wrong. And, no, the Fed has not abandoned us. It is simply returning to its historical duties. You can't have it both ways.
From the president on down, most Americans espouse the concept of a free market; how we want our economy to run with the minimum of government interference, fewer rules and regulations and, for the most part, the Darwinian concept of "every man for himself." I suggest we start practicing what we preach.
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The Independent Investor: Will Our Country's Military Win the Next War?
There was a time, not long ago, when most Americans would answer that question in the affirmative without much thought. It was one of those "truisms" that we didn't give much thought. But today, many experts are debating that answer.
Back in the day, after World War II, our military prowess, (aided by the development of the atomic bomb) was unquestioned throughout the world. Growing up, it was never a question of spending on defense for me, it was simply how much. Republicans wanted more, Democrats wanted less. Today, not only is the amount of spending crucial but also its predictability and even more importantly, what those billions are spent on.
The Pentagon's National Defense Strategy was issued in January. Like all of their tomes before, it is heavy reading and fairly boring but this time around things were different. The United States Institute of Peace, a federal institution, issued a 98-page report rebutting some of the assumptions made about peacetime competition or wartime conflict.
The authors focused primarily on our top competitors for global hegemony, Russia and China, but also included recognized threats in Europe, Asia, portions of the Middle East. The report authored by a panel of former security officials and military experts did not mince words.
"The U.S. military could suffer unacceptably high casualties and loss of major capital assets in its next conflict. It might struggle to win or perhaps lose, a war against China and Russia. The United Sates is particularly at risk of being overwhelmed should its military be forced to fight on two or more fronts simultaneously."
Unlike WW II, where we did fight successfully on two fronts, on future battlefields we will face enemies that have developed extremely lethal weaponry, outnumber us, will be fighting on their own turf and will get to hit us first. In addition, it would be a big mistake to assume that our enemies would confine their attacks to the war theater. America and its military should expect devastating kinetic, cyber or other types of attacks (biological or otherwise) while fighting us abroad.
Until recently most of our conflicts were fought with America enjoying total air dominance, our logistics base (supply lines) were safe and secure from interdiction. Rarely, if ever, did we face long-range fire. About the worst anti-armor our tanks and Humvees faced were rocket-propelled grenades. We also owned the field when it came to unimpeded communications.
What our soldiers can expect to face in the next war will be advanced, tandem warhead anti-tank guided missiles, precision-guided artillery projectiles, long-range guns, armed drones and air-delivered weapons. The skies will no longer be exclusively ours as well. By now you are getting the picture.
Warfare is changing but the report says we are not keeping up. The proliferation of advanced technology, things like hypersonic and artificial intelligence that our enemies are applying to weaponry and soldiers on a mass scale are quickly eroding U.S. advantages and creating new vulnerabilities in a military that has relied for far too long on more ships, tanks and aircraft carriers.
Not only must the actual spending be increased but it should be allocated to those areas where we are behind the competition. The report suggested a 3-5 percent increase (above inflation) for the Department of Defense with areas such as cybersecurity and new technologies taking the brunt of the increase. Of course, that will cause lots of problems in Congress where "pork" has been a tradition among legislators when voting for the defense budget roll s around.
Year after year, politicians allocate the lion's share of defense spending to their states, which manufacture all that traditional and increasingly obsolete hardware. That would need to change but don't hold your breath. Those jobs (and votes) are what make Washington the swamp that it is.
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The Independent Investor: Sustainability Investing and Millennials
The demand for sustainability investments is growing. Companies that offer measurable social and environmental impacts that address issues like world hunger, climate risk, poverty and access to health care, seem like a good investment for those socially-minded. Finding companies that also provide a good financial return at the same time is not so easy.
Sustainability investing is different from the decades-old trend called "social investing." Generally, social investments are those that bet on solar power, clean water, or the avoidance of "sin stocks" such as tobacco, guns or liquor companies. Most of these areas were not viable investments without a great deal of government help.
The idea of sustainability goes far beyond that concept. In this modern-day make-over, the idea is to use your money to solve some of these enormous global environmental, social and governance (ESG) issues and also make a profit over the long-term. Of all social groups measured, it is the Millennials who profess the most interest (80 percent) in social-impact investing. An increasing number of younger investors (28 percent) are putting their money where their mouth is. They want to select investments that reflect their own values and personal priorities.
After all, when you think about it, they are inheriting a world that we, the Baby Boomers, have totally messed up. Just look around you. Our fossil fuels are burning the planet alive. The air in China, or in Mexico City among many other locales, is so bad citizens routinely wear masks. Millions are starving. Water is fast disappearing from much of the earth.
I know, I know, I can already see your eyes glaze over. By this time, most oldsters of my generation have tuned out these warnings. Most Boomers are immune to socially-responsible rants. They don't want to hear it, have no solution for it, and don't want to face the guilt and shame of their actions.
But realize that there are one and maybe two generations of our population that want (and need) to do something about it. Given that the millennials and the Gen Z populations are the ones who will inherit this earth, from their point of view, they need to tackle these problems, because for them it is a life or death proposition.
A number of studies predict that Millennials are poised to receive more than $30 trillion of inheritable wealth. The money is already starting to flow in as my generation kicks the bucket. These young investors are fully-versed on the issues they face. For example, by 2050, an estimated 2 billion more people will crowd into the earth's cities and towns. Global demand for food, water and energy will drive the need for innovative improvements in infrastructure simply to handle the demand for additional resources.
The question is: can you also make money by fixing these issues? The jury is still out on whether the two can be accomplished together, but initial results are encouraging.
Sustainability investing is experiencing a compound annual growth rate of over 100 percent. Granted, it is still only a niche market, representing only 18 percent or so of the wealth and asset management industry. A recent study by mega-broker Morgan Stanley, which evaluated over 10,000 funds and managed accounts, show that sustainability investing has usually met and often exceeded the investment performance of comparable traditional investments.
Environmental, social and governance (ESG) investment performance achieved an annualized return of 10.2 percent versus the bench market S&P 500 equity Index return of 9.7 percent.
Since all of the challenges facing the world are also long-term in nature, it makes sense that global pensions funds, especially in Europe and Japan, would be interested in this area. Given their own long-term investment views, global pension managers have invested about $23 trillion or 26 percent of managed assets in these areas.
To date, there are 50 ETFs(exchange-traded funds), and about 250 open-end mutual funds that offer access to the ESG/sustainability area. ESG funds (as they are called) have the least assets among the eleven smart-beta categories according to a Bloomberg survey. But before you start buying, investors should beware that most of these investments are extremely illiquid, experience enormous amounts of price volatility, and should be thought of as very speculative, long, long-term investments at best. They are not for widows, orphans or 98 percent of retail investors.
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The Independent Investor: The Origin of Black Friday
As you finish your turkey and prepare to get an early start on Black Friday shopping, you might wonder how shopping became such an integral part of your Thanksgiving holiday. The term has followed a circuitous route through our financial history.
Although the term "Black Friday" is a new phenomenon, its origins date back to the late 19th century. The term was first associated with a stock market crash on Sept. 24, 1869.
Two speculators, Jay Gould and James Fisk, tried to corner the gold market. This created a boom-and-bust atmosphere in gold prices. That volatility spilled over into stocks. Before it was all said and done, stocks lost 20 percent of their value, while commodities fell by over 50 percent. Neither speculator was ever punished for their deeds (sound familiar?) due to political corruption within New York's Tammany Hall. The term Black Friday, however, was used to describe that period of our financial history for the next century.
It wasn't until 1905 that the day after Thanksgiving had anything to do with shopping. It was in that year that a Canadian department store, Eaton's, launched the first Thanksgiving Day parade in downtown Toronto. Santa lead the parade in a horse-drawn wagon, while Eaton's benefited by seeing an uptick in shopping at their store the following day.
But it wasn't until 1924 that Macy's followed the Canadian lead by announcing their own parade. A similar increase in holiday shoppers convinced Macy's and soon other retailers across the nation, that Thanksgiving parades were good for business.
Retail sales on the Friday after turned out to be so good that the government got involved just to ensure that this extra business was here to stay. Congress passed a law in 1941 that made Thanksgiving the fourth Thursday in November. That allowed retail stores to plan their holiday shopping events every year on a predictable schedule.
It worked so well that the Friday after became just as important as the holiday itself. In the 1950s, shoppers began calling in sick on Friday to extend the holiday to a four-day weekend while also taking advantage of the shopping deals. It soon became a wholesale practice among workers across the nation. Businesses, after attempting (unsuccessfully) to discourage the practice, began giving that Friday off as another paid holiday and everyone was happy.
It wasn't until 1966, that the modern-day term "Black Friday" was officially coined in my home town of Philadelphia. It was there that the police department in the "City of Brotherly Love" used the term to describe the traffic jams, the free-for-all invasion of the town's department stores, and the well-publicized fisticuffs among shoppers that was becoming a tradition among consumers.
Since the 1920s, retailers had followed a "gentleman's agreement" to wait until Black Friday before advertising holiday sales. It worked. If one looks back through history, roughly half of all holiday shopping occurred on Black Friday. But that agreement began to unravel in the new millennium.
The advent of internet shopping spurred many retailers with a presence on the internet to extend the shopping holiday to include Mondays. On November 28, 2005, two marketing agents created the term "Cyber Monday." The concept proved an astounding success. Last year internet sales on that Monday reached $6.59 billion, making it the largest single internet shopping day of the year.
In 2011, retailers (ever a greedy group of buggers), disgruntled to see an increasing share of their brick and mortar sales being siphoned off by the internet, came up with a solution to make up those sales. Why not extend the shopping weekend by yet another day? Thus, the crowding out of Thanksgiving in exchange for more hours in the store.
At this point, I suspect someone will need to invent yet another catchy phrase to describe this national, five-day, retail spending spree. It is a trend that has all but obscured a day when, in the distant past, we came together as a family, to give thanks for something more than a 20 percent discount on a 4-D TV.
Nonetheless, as a traditionalist who is showing his age, I wish all my readers a Happy Thanksgiving. You can bet I will be spending it with my family, giving thanks for all I, and this nation, have received.
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