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.
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@theMarket: Phase One Deal Keeps Markets Bullish
It was all about the trade deal this week. Both sides seem to want a resolution to the crippling tariffs that have sent the world's economies to the brink of recession. The relief that investors feel is reflected in the new highs we are enjoying at the moment.
I say "at the moment" because anything can change with a tweet. However, given the mounting problems of the Trump presidency, I believe he needs something positive (and fairly soon) to divert the nation's attention away from the impeachment hearings next week.
Trump appears willing to drop, or at least roll back, some (or all) of the tariffs he put in place, but he can't be seen as too "soft" in the negotiations. That's why it was no surprise that on Friday Trump tweeted that he still has not agreed to grant tariff relief to the China, a sticking point in the negotiations. That took some wind out of the market's sails, but I see it as just more of the same Trump tactics that have become increasingly obvious and predictable.
And if I see it, so does China. From their point of view, why not sign a deal? They expect to get everything they want and nothing they don't want. China will allow more financial services companies to set up there, but they were already planning on that before the tariff war. They also get to import all the agricultural products they need, but U.S. farmers will only increase exports back to the level they were before the trade war. At the same time, the Chinese remain steadfast in not giving in to anything more despite Trump's demands and threats over the last two years.
What, you may ask, was the purpose of all this bravado, these tariffs, and such? The administration will say that this is "only" Phase One. The real substantive issues will be tackled "later." No one has issued a timetable on Phase 2 or, if there is one, a Phase 3. China is not giving any indication that they are ready to do more than they have already agreed upon.
If it were any other politician but Donald Trump, I would say that further progress on a comprehensive trade deal (that would truly benefit the U.S.) would be tied to the 2020 election results. In the meantime, the president can stump the country, claiming a trade deal victory.
Only the fake news could possibly see this Phase One for what it might be — simply a way to keep the suffering farmers and ranchers within the president's base from flying the coop come next November. But, as we all know, our president is not a politician. Our president is an honest, truthful man that is simply misunderstood by the majority of Americans.
And China is not the only country that may see some relief from American tariff threats. The president has until Nov. 13 (his self-imposed deadline) to decide whether he will levy additional tariffs on European autos. You see, the president believes that EU auto imports to the U.S. pose a serious security threat. But I'm betting that won't happen. I would expect a surprise announcement to coincide with the televised impeachment hearings next week. As for the security threat, well, that was then, and this is now, right?
Where do the markets go from here? I remain bullish, possibly through the end of the year. Saying that, however, I believe we are overdue for a minor pullback of 3-5 percent or so, but it would be a dip to buy, not to sell.
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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.
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@theMarket: Will Record Highs Beget Record Highs?
As third-quarter earnings wind down, the Fed cut interest rates again this week. Since both events seemingly matched investor expectations, what, then, will investors worry about in the coming months?
As predicted, the S&P 500 Index hit a modest new high this week based on the central bank's one quarter-point cut of the short-term Federal Funds interest rate on Wednesday. Robust earnings from certain favored companies, like Apple and Facebook, also helped sentiment and so the averages ground higher.
"You would think," said one miffed investor, "that after two years trapped in a trading range, we would have had a little more enthusiasm over this break-out."
Instead, traders simply took it in stride and actually took profits. One reason for the lack of enthusiasm could have been that investor sentiment was already bullish. The averages simply confirmed what we all expected would happen. Investor sentiment seems to confirm that.
The U.S. Advisors Sentiment indicators released this week had market bulls pegged at 54.2 percent versus 52.8 percent last week. From a contrarian point of view, any reading above 50 percent should invoke some caution among the trading crowd. At the same time, the number of pros who are expecting a market correction declined to 28 percent from 29.3 percent. Readings under 30 percent also signal a more cautious approach to the markets.
On the plus side for the markets, we are now over the September-October period when stocks usually do their worst. November through January is normally the best of the best months for positive stock market performance. The question is whether historical data matters at all, given markets where politics mean more than fundamentals.
The trade war, in my opinion, will continue to cast a sobering shadow over the stock markets in the months ahead. As readers are aware, I thought this "skinny" deal between China and the U.S. was a joke. It seems that more investors are now realizing the same thing. The president's latest "phase one trade deal" is much more a public relations stunt and less a meaningful breakthrough. The Chinese seem to agree.
The hope of signing even this paltry deal has now been postponed, since Chile canceled the upcoming November conference (due to political unrest) where Xi and Trump were supposed to meet, greet and sign the deal. Investors worry and wonder whether any deal will be signed at all. In my opinion, it is simply more of the same drama we have been putting up with for the last two years.
Thursday, for example, "unnamed officials" in China let it be known that they did not hold out much hope that any substantive deal with Trump would ever be signed. The markets dropped immediately. So, what's next? We should expect either Trump (through tweets or an impromptu Q&A with the fake news) or some administrative official (it is usually former CNBC fake newsman, Larry Kudlow) to run out and to assure us all that everything is just perfect, that the economy is great, that negotiations are going better than expected, yada, yada, yada.
It comes down to this: investors and the nation are ping pong balls in this global trade game. How you deal with that depends on your level of cynicism. Should you believe those "no good Chinese," or in the honesty and sincerity of the self-described "greatest president in the history of the United States?"
Aside from that drama, we have the impeachment inquiry that is heating up and coming to the attention of more and more Americans. I expect that Trump, in an effort to strike back at the Democrats and change the focus of the nation away from impeachment, may create a confrontation with the outcome being a possible government shutdown later this month. I warned readers in my column last week that there is a high probability that the president will use funding for his wall as a pretext to shut down the government once again -- just in time for Thanksgiving.
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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.
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