Take or Delay?

November 12, 2021

 

Most American workers who have at least 10 years of work history will be able to start taking Social Security benefits as soon as they reach age 62.  But should they?

 

Some years back, there was considerable debate about whether a person was better off receiving the monthly checks early and investing them in the markets, or waiting until full retirement age (currently age 67)—or, alternatively, waiting until age 70 and receiving even higher benefits. 

 

Today, that debate has largely gone away.  Most advisors recommend waiting, if you can, at least until full retirement age and, even better, holding off until age 70.

 

Why?  The problem with most of those older calculations was that they were assuming that the U.S. investment markets would follow historical long-term averages—which, as I think most of us have seen—is not guaranteed.  What IS guaranteed is that the Social Security benefits will rise with each and every year that a qualified recipient waits to start taking them.  For persons born after 1943 (that is, pretty much everybody who is qualified to take Social Security benefits), the “delayed retirement credit” is a whopping 8% a year.  Yes, that means that each year you wait means that the monthly check will be 8% higher than it would have been before.  You will not get that kind of guarantee from the investment markets.

 

The Social Security Administration offers a calculator on its website which shows the percentage of your normal retirement age benefits you would receive depending on what age you start taking your monthly checks.  For a person born in September of 1960 who decides to turn on the Social Security benefits at age 62, the benefits represent 70.42% of the checks that same person would have received if he or she had started taking benefits at age 67.  By waiting until age 70, the same person would receive 124% of the so-called “primary insurance amount.”

 

But there’s more to the story than simply larger checks.  Social Security is the only guaranteed source of retirement income that is protected against inflation, which means offering protected purchasing power.  Those larger checks become proportionately larger depending on the inflation rate.  That is not the case with annuity checks and most pension accounts—where the amount received will be less valuable with each passing year.

 

Of course, there are always questions about Social Security’s solvency.  The Social Security Trust Fund has been projected to run out of money in 2033, which wouldn’t mean a total loss of benefits, since working taxpayers would still be paying into the system.  In a worst-case scenario, those payment amounts would cover 78% of today’s projected benefits.  But it seems unlikely that Congress would fail to shore up a system that currently delivers benefits to 69.1 million voters.  In fact, the Social Security Enhancement and Protection Act was recently reintroduced in the U.S. House of Representatives; among the provisions is a 5% increase in monthly benefits for all beneficiaries who have been retired for 20 years, and bolstering the Trust Fund by phasing out the Social Security payroll tax cap, which currently applies only to wages up to $142,800.  In addition, the payroll tax rate would gradually rise from the current 6.2% to 6.5%.

 

We hope that you and your family are safe and well. 

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Sources:

https://www.ssa.gov/oact/quickcalc/early_late.html

https://www.cnbc.com/2021/08/19/bill-in-congress-aims-to-keep-social-security-beneficiaries-out-of-poverty.html

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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QCDs to the Rescue

November 5, 2021

 

When the 2017 Tax Cuts and Jobs Act raised the standard deduction for taxpayers to $24,000 for couples ($12,000 for singles), and lowered individual tax rates, an unintended consequence was the reduction in the tax benefits of making charitable donations.  Fewer taxpayers were itemizing, which means their donations didn’t count as deductions.  Itemizing taxpayers—including people who intentionally raised their level of giving in order to cross the standard deduction threshold—found that the lower brackets reduced their tax benefits. 

 

The Urban-Brookings Tax Policy Center has estimated that the law reduced the marginal tax benefit of giving to charity by more than 30 percent and raised the after-tax cost of donating by about 7 percent.

 

Some taxpayers, however, are able to avoid these limitations.  How?  As most of us know, people age 72 and older who have individual retirement accounts (IRAs) are required to take required minimum distributions (RMDs) out of their account(s)—and those percentages increase with age.  If they’re charitably inclined, and perhaps otherwise frustrated by the new tax rules, they can take their distribution in the form of a qualified charitable distribution (QCD).  The distribution would be a direct transfer to the charitable organization of their choice, up to a limit of $100,000.

 

How does that benefit them?  If the QCD is made directly to the charity, it is not counted as income for federal tax purposes—and therefore reduces the income that the taxpayer has to include on the 1040 form.   In effect, the QCD gives back the full charitable deduction that was otherwise lost to the tax reform writers.

 

Due to a quirk in the law, IRA owners as young as age 70 1/2 can make QCDs, even though they aren’t required to take RMDs until age 72.  Why would someone take a distribution before he or she has to?  Once again, for someone who is charitably inclined, the QCD brings back the full charitable deduction.  And some taxpayers might want to reduce the size of their IRA before they have to start taking distributions, in order to lower their future income to fit into lower tax brackets.

 

If a taxpayer and spouse each have IRAs, each can make their own qualified charitable donations.  And the option is not limited to IRA owners.  IRA beneficiaries—that is, people who have inherited IRAs, and have to take out the money within 10 years, can also make QCDs if they choose. 

 

Finally, taxpayers who make the full $100,000 donation direct to a charity can also make further donations out of their IRA.  But in those cases, only the first $100,000 will come out without any tax consequences.  The remaining amount will be treated as a taxable distribution, which would then qualify for a normal charitable deduction if the taxpayer itemizes deductions.

 

We hope that you and your family are safe and well. 

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Sources:

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals

https://www.taxpolicycenter.org/briefing-book/how-did-tcja-affect-incentives-charitable-giving

https://www.irahelp.com/slottreport/your-qcd-questions-answered

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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Inflated COLA

October 21, 2021

 

Reports from the Federal Reserve, which sets interest rate policy in the U.S., have famously told us that the current inflation that we’re experiencing is “transitory” despite a lot of data that might seem contradictory.  (Has anybody seen gas prices lately?  Has anybody tried to buy a house in this market?)  The current labor shortage is leading to higher wages, which usually find their way into the prices of goods and services, and the government has been printing money (mainly by issuing bonds and extending credit) at rates never seen before.

 

Add to this a new data point, one that will be welcome to many retirees.  The Social Security Administration, which relies on annual inflation data to set its cost of living increases, has just announced that Social Security benefit checks will be 5.9% higher in 2022 than they were this year.  This is the largest increase since 1982, when inflation was still rampant from the “stagflation” economic era.  To put that into perspective, Social Security’s cost of living (COLA) increase has averaged 1.65% over the past decade.

 

The average retiree received $1,565 in monthly Social Security benefits this year, and that will go up $92 a month, to $1,657.  The AARP tells us that this will be nearly all the income received by 25% of seniors in America, and many more rely on these checks to pay for a large part of their retirement expenses.

 

We hope that you and your family are safe and well. 

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Source:

 

https://www.usatoday.com/story/money/2021/10/13/2022-social-security-cola-benefits-rise-5-9-amid-inflation-surge/8424187002/

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

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Default in China?

October 8, 2021

 

 

It’s only getting sporadic press coverage, but a lot of fixed income insiders are talking about the possible default of a giant real estate developer in China.  If you’ve seen the term “Evergrande” in a headline, this is what they’re discussing.

 

The short version of the story is that Evergrande is a big company, with 200,000 employees worldwide.  It owns more than 1,300 projects in more than 280 cities across China, including apartments and residential and commercial properties, investments in electric vehicles, a theme park (Evergrande Fairyland), a bottled water producer, grocery and dairy product companies, and an artificial island with malls, museums and amusement parks.  The company also happens to own a soccer team and is in the process of building the world’s largest soccer stadium.

 

All of this would not be news except that the company now seems to be having trouble paying its lenders.  This is not totally uncommon in China, where it’s not hard to find huge residential complexes and office towers that were built on speculation and now sit empty.  Empty buildings, needless to say, are not generating the cash flow to pay interest on their construction loans, and the Chinese system is not averse to walking away from bond obligations.  A number of state-owned companies defaulted on a record $6.1 billion worth of bonds between January and October of last year. 

 

Analysts estimate that Evergrande’s current liabilities total $310 billion, owed to creditors, suppliers, and even homebuyers (for their down payments on buildings that were never built).  The company has $700 million in payments due through January, and the money is not there.  Because of its size, Evergrande is hoping that the Chinese government will be forced to step in and require its creditors to restructure the loans; already, the government appears to be organizing a creditor’s union among the nation’s banks.  Shares of Evergrande stock are down roughly 85% so far this year, and the company’s credit ratings have been repeatedly downgraded.

 

The concern is that an Evergrande bankruptcy, and subsequent default on $300 billion of bonds, could trigger the same kind of global crisis that the bankruptcy of Lehman Brothers caused in 2008, when it defaulted on $600 billion of assets.  A real estate crash in China would be equivalent to a stock market crash in the U.S.; real estate holdings account for nearly 60% of Chinese household investments, compared to roughly 33% in the U.S.  Real estate construction activity also accounts for 30% of China’s GDP.  Thousands of Chinese investors own unfinished apartments, and millions of construction workers are in danger of being stiffed for their labors. 

 

Chances are, this is not the last you’ll hear about the Evergrande bankruptcy.  But the odds are also good that the Chinese government—which can print unlimited amounts of currency—will find a way to avoid a global catastrophe.  It’s not unreasonable to expect the creditor’s union to find a way to restructure, possibly liquidate, and sweep the whole mess under a carpet before it causes further embarrassment to the Chinese leadership.

 

We hope that you and your family are safe and well. 

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

 

Sources:

https://kraneshares.com/evergrande-explained/

https://www.cnn.com/2021/09/24/investing/china-evergrande-group-debt-explainer-intl-hnk/index.html

https://www.cnn.com/2020/12/09/economy/china-debt-defaults-state-companies-intl-hnk/index.html

https://en.wikipedia.org/wiki/Bankruptcy_of_Lehman_Brothers

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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What if We Don’t Raise the Debt Ceiling?

September 29, 2021

 

The news media, in its coverage of the Congressional debate over raising the debt ceiling, has alarmed its readers and viewers with terms like “government default” and “global financial crisis.”  But if there is a government shutdown looming in our future, what is the most likely outcome for investors?

 

First, there is no question that the government debt levels are remarkably high based on historical norms.  The government owes almost 29 trillion U.S. dollars, around 1.7 trillion more than at this time last year.  Raw numbers aren’t a perfect way to compare current vs. past debt levels, since the U.S. economy (and therefore, tax revenues) have grown dramatically.  But if we measure government debt as a percentage of the U.S. GDP, the current numbers are still somewhat alarming.  The long-time record debt was 119% of U.S. GDP in 1946, at a time when the government had ramped up the printing presses and issued bonds to pay for the costs of World War II.  (Total debt that year: $269 billion.)  For most of the 1960s and 1970s, debt-to-GDP dropped back into the low 30s, before creeping up again, reaching 50% in 1988 and never looking back.

 

Debt to GDP eventually breached the 100% level in 2014, but the biggest jump came in 2020, when the debt-to-GDP figure rose from 107% to roughly 130% of GDP in the span of 12 months.  Bottom line: today’s debt levels are in record territory.

 

It’s interesting to note that the largest owner of U.S. Treasury securities is not any foreign country, but the Social Security Trust Fund ($2.9 trillion), followed by the nation of Japan ($1.28 trillion), the nation of China and the U.S. Military Retirement Fund ($1 trillion each) and the Office of Personnel Management & Retirement ($955 billion).  Mutual funds and private investors are holding about $3.8 trillion collectively.

 

There are several reasons to wonder whether the current debt is as alarming as the numbers look in isolation.  First, interest rates are so low that the government isn’t paying much for the privilege of borrowing investors’ dollars.  And is it so terrible that the government is making secure bond investments available to the public (and its in-house agencies)?

 

But what if we DO have a government shutdown next month?  What would be the consequences? 

 

One would be the suspension of Social Security checks—which might not be the ideal political message for recalcitrant Republican Senators and Representatives to send to their retired voters.  Nonessential government agencies would be shut down, including National Parks and the economists who collect government statistics.  Government employees would be furloughed.

 

But if we look at past shutdowns, they are all temporary blips, soon forgotten.  The debt fiascos of 2011, 2013 and 2018 were all resolved and everybody was made whole; there is not going to be a permanent wholesale default on government obligations this time around either.  And most meaningfully, none of the past exercises in brinkmanship impacted long-term equity returns; indeed, the S&P 500 rose during the 2018 shutdown.

 

So the biggest danger is short-term: that the alarming media coverage might spook timers and traders, who could go on a short-term selling rampage before realizing that the government taking a week or two off didn’t really depress actual underlying value of U.S. companies.  And, of course, an actual shutdown is unlikely in the first place.  The games Congress is playing is looking like a terrific example of much ado about nothing (we hope).

 

We hope that you and your family are safe and well.  Stay calm and try to have a bright and beautiful Fall!

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

 

Source:

https://www.advisorperspectives.com/articles/2021/09/23/history-shows-stock-market-disregards-debt-limit-shutdown-talk

https://www.thebalance.com/national-debt-by-year-compared-to-gdp-and-major-events-3306287

https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124https://www.quora.com/Are-salaries-in-the-US-significantly-higher-than-in-Europe-If-so-why

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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Kohlhepp Investment Advisors, Ltd.
3655 Route 202, Suite 100
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