Though many services professionals had long been expecting it, when the news broke on May 4 that the Fed was raising the interest rate by a half point, it still felt like a thunder clap.

According to a CNBC article, Here’s what the Fed’s half-point rate hike means for your money, the Fed’s half point increase is its largest bump in more than two decades. So, you’re probably asking yourself, “why now?” According to the article, the increase is a response to our current and much publicized bout of significant inflation. The Fed is trying to walk a very fine line of tamping down inflation without damaging the economy.

WHAT IT MEANS FOR BORROWERS

For many, the first question after the news of the rate hike broke was, “how is this going to hit borrowers?”

The quick answer is that both credit card borrowers and homebuyers could soon see increases.

Generally, credit cards come with variable rates, and that means those rates are directly tied to the Fed’s rate. That means you may want to be prepared for a percentage rate jump within your next handful of billing cycles.

Credit card rates are currently sitting at a whisker over 16 percent, which is certainly a lot higher than just about any other consumer loan that’s out there. But, after the Fed’s decision, it’s possible that credit card rates could nudge up to about 18.5 percent by the end of 2022.

Let’s next look at what the rate hike may mean for homeowners.

Because many long-term mortgage rates are fixed, many homeowners won’t be affected by the hike. However, the story is different for those looking to buy a home. The same CNBS article notes that shortly after the Fed’s news, the average interest rate on a 30-year fixed mortgage rate jumped to 5.5 percent, the highest since 2009.

WHAT IT MEANS FOR SAVERS

While the Fed doesn’t directly influence deposit rates, they do typically correlate to changes in the target federal funds rate. Accordingly, the savings account rate at some large banks has been consistently at an extremely low average of 0.06 percent.

Because deposit account rates are still largely controlled by brick and mortar banks, they’ve been very slow to tick up. One important note here. Thanks mainly to how much they save on overhead expenses, the CNBC article, Here’s what the Fed’s half-point rate hike means for your money, mentions the savings rate from online banks is currently about 0.5 percent, a healthy jump above the rate from brick and mortar banks.

Additionally, the current inflation rate is higher than all the savings rates we just discussed. And that means the money you have in savings is slowly losing its purchasing power. And while on the one hand that’s dispiriting news, on the other hand, the savings vehicles you choose to utilize can make a difference.

WHAT IT MEANS FOR STOCKS

High market interest rates have the potential to negatively affect the stock market. When the Fed increases the rate, borrowing often becomes more expensive. And that means the cost of doing business is costlier for public and private companies alike. Accordingly, as time goes on, the supply of money in circulation contracts, which generally lowers inflation while also cooling off the economy as a whole.

If the expense of borrowing money rises too high, the opportunity to increase investment in capital goods may become much more difficult for some companies.

For some public companies, a combination of higher costs and reduced business could lead to less revenue and a stunted growth rate, and all of that could ultimately lead to reduced stock value.

The psychological impact of the rate increase may be the biggest domino to fall after the Fed’s decision. After a rate increase, it’s not uncommon for some traders to hastily sell off stocks and transition to a more defensive strategy.

The problem is, some of them do so before it can be determined what will happen after the increase has had time to work its way through the entire economy.

SOURCES

¹ https://www.cnbc.com/2022/05/04/heres-what-the-feds-half-point-rate-hike-means-for-your-money.html

² https://www.forbes.com/advisor/investing/fed-raises-interest-rates/

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2223.

When it comes to retirement planning, it’s only natural to be consumed with big picture items like finding the ideal community, whether to stay in your current home or downsize, and how much travel you’ll be able to do. And those are all great and very important things to think about. But a successful retirement often boils down to some of the more nitty-gritty details. And perhaps nothing is more nitty-gritty than having a strong tax strategy to see you through retirement.

Traditional IRAs and 401(k)s

Let’s first look at traditional IRAs and 401(k)s, which are tax-deferred retirement accounts that many Americans rely on during retirement. Money that you dedicate to these accounts typically slashes your current taxable income which thereby trims your tax tab in a given year. Savings, dividends, and investment gains in these accounts grows on a tax-deferred basis.

But those deferments don’t last forever. Once you’re officially retired and begin taking withdrawals, you’ll need to pay taxes on any gains and your pre-tax or deductible contributions. And it’s important to also bear in mind that these accounts have required minimum distributions, or RMDs, which is the point in time when you have to begin taking money out.

When do those RMDs kick in?

At present, RMDs begin at age 72 for a traditional 401(k) or IRA. If you work past your 72nd birthday you may qualify to delay an RMD from your employer’s 401(k) as long as you don’t own more than five percent of the company you work for.

Your withdrawals from your traditional 401(k) or IRA are taxed at your standard income tax rate.

Next, let’s look at Roth IRAs. First things first, they come with one significant long-term tax perk: While contributions to a Roth IRA aren’t tax deductible, your future withdrawals may not be taxed. But to enjoy those potentially tax-free withdrawals, you must have held your Roth IRA account for a minimum of five years. And while you can take out the amount you contributed at any time, tax-free, in most cases you must be at least 59 ½ to take withdrawals without a 10% early withdrawal penalty.

Social Security is yet another area where taxes are lurking after you retire. Until 1983, Social Security benefits were tax-free for every American, regardless of income. And while Social Security benefits still aren’t taxed for a sizeable chunk of the population, others are hit fairly hard. If you have provisional income, you may have to pony up federal income tax on as much as 85% of your benefits. To figure out your provisional income, begin with your adjusted gross income and then add 50% of your Social Security benefit and all of your tax-exempt interest. If your provisional income is less than $25,000 for individual filers or $32,000 for joint filers, you won’t have to pay taxes on your Social Security. However, if your provisional income falls between $25,000 and $34,000 for individual filers or $32,000 and $44,000 for joint filers, then as much as 50% of your benefit is subject to taxation. Finally, if your provisional income is north of $34,000 for individual filers and $44,000 for joint filers, then as much as a whopping 85% of your benefit is considered taxable.

What about pensions? The majority of pensions are funded using pre-tax dollars, which means the full value of your pension income would become taxable once you receive the money. Payments from both private and government pensions are generally taxable at your ordinary income tax rate. This is for informational use only and not to be considered advice. Please see a qualified tax professional.

SOURCE
https://www.kiplinger.com/retirement/602231/how-10-types-of-retirement-income-get-taxed

During the 12 months ending in June 2021, consumer prices shot up 5.4%, the highest inflation rate since 2008.¹

The annual increase in the Consumer Price Index for All Urban Consumers (CPI-U) — often called headline inflation — was due in part to the “base effect.” This statistical term means the 12-month comparison was based on an unusual low point for prices in the second quarter of 2020, when consumer demand and inflation dropped after the onset of the pandemic. However, some obvious inflationary pressures entered the picture in the first half of 2021. As vaccination rates climbed, pent-up consumer demand for goods and services was unleashed, fueled by stimulus payments and healthy savings accounts built by those with little opportunity to spend their earnings. Many businesses that shut down or cut back when the economy was closed could not ramp up quickly enough to meet surging demand. Supply-chain bottlenecks, along with higher costs for raw materials, fuel, and labor, resulted in some troubling price spikes.²

CPI-U measures the price of a fixed market basket of goods and services. As such, it is a good measure of the prices consumers pay if they buy the same items over time, but it does not reflect changes in consumer behavior and can be unduly influenced by extreme increases in one or more categories. In June 2021, for example, used-car prices increased 10.5% from the previous month and 45.2% year-over-year, accounting for more than one-third of the increase in CPI. Core CPI, which strips out volatile food and energy prices, rose 4.5% year-over-year.³

In setting economic policy, the Federal Reserve prefers a different inflation measure called the Personal Consumption Expenditures (PCE) Price Index, which is even broader than the CPI and adjusts for changes in consumer behavior — i.e., when consumers shift to purchase a different item because the preferred item is too expensive. More specifically, the Fed looks at core PCE, which rose 3.5% through the 12 months ending in June 2021.⁴

Competing Viewpoints The perspective held by many economic policymakers, including Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen, was that the spring rise in inflation was due primarily to base effects and temporary supply-and-demand mismatches, so the impact would be mostly “transitory.”⁵

Regardless, some prices won’t fall back to their former levels once they have risen, and even short-lived bursts of inflation can be painful for consumers. Some economists fear that inflation may last longer, with more serious consequences, and could become difficult to control. This camp believes that loose monetary policies by the central bank and trillions of dollars in government stimulus have pumped an excess supply of money into the economy. In this scenario, a booming economy and persistent and/or substantial inflation could result in a self-reinforcing feedback loop in which businesses, faced with less competition and expecting higher costs in the future, raise their prices preemptively, prompting workers to demand higher wages.⁶

Until recently, inflation had consistently lagged the Fed’s 2% target, which it considers a healthy rate for a growing economy, for more than a decade. In August 2020, the Federal Open Market Committee (FOMC) announced that it would allow inflation to rise moderately above 2% for some time in order to create a 2% average rate over the longer term. This signaled that economists anticipated short-term price swings and assured investors that Fed officials would not overreact by raising interest rates before the economy has fully healed.⁷

In mid-June 2021, the FOMC projected core PCE inflation to be 3.0% in 2021 and 2.1% in 2022. The benchmark federal funds range was expect-ed to remain at 0.0% to 0.25% until 2023.⁸

However, Fed officials have also said they are watching the data closely and could raise interest rates sooner, if needed, to cool the economy and curb inflation. Projections are based on current conditions, are subject to change, and may not come to pass

1, 3) https://www.bls.gov/news.release/pdf/cpi.pdf
2) https://www.wsj.com/articles/supply-chain-issues-car-chip-shortage-covid-manufacturing-global-
economy-11633713877
4) https://www.bea.gov/data/personal-consumption-expenditures-price-index-excluding-food-and-energy
5-6) https://www.bloomberg.com/news/articles/2021-05-02/biden-economic-adviser-says-inflation-pressures-
transitory
7-8) https://www.federalreserve.gov/newsevents/speech/clarida20211108a.htm

As the beneficiary of an inheritance, you are most likely to be faced with making many important decisions during an emotional time. Short of meeting any required tax or legal deadlines, don’t make any hasty decisions concerning your inheritance.

Identify a Team of Trusted Professionals

Tax laws and requirements can be complicated. Consult with professionals who are familiar with assets that transfer at death. These professionals may include an attorney, an accountant, and a financial and/ or insurance professional.

Be Aware of the Tax Consequences

Generally, you probably will not owe income tax on assets you inherit. However, your income tax liability may eventu­ally increase. Any income that is generated by inherited assets may be subject to income tax, and if those assets produce a substantial amount of income, your tax bracket may increase. This is particularly true if you receive distributions from a tax-qualified retirement plan such as a 401(k) or an IRA. You may need to re-evaluate your income tax withholding or begin paying estimated tax. You also may need to consider the amount of potential transfer (estate) taxes that your estate may owe, due to the increase in the size of your estate after factoring in your inheritance. You may need to consider ways to help reduce these potential taxes.

How You Inherit Assets Makes a Difference

Your inheritance may be received through a trust or you may inherit assets outright. When you inherit through a trust, you’ll receive distributions according to the terms of the trust. You may not have total control over your inheritance as you would if you inherited the assets outright.

Familiarize yourself with the trust document and the terms under which you are to receive trust distributions. You will have to communicate with the trustee of the trust, who is responsible for the administration of the trust and the distribu­tion of assets according to the terms of the trust.

Even if you’re used to handling your own finances, receiving a significant inheritance may promote spending without planning. Although you may want to quit your job, or buy a car, a house, or luxury items, this may not be in your best interest. Consider your future needs, as well, if you want your wealth to last. It’s a good idea to wait at least a few months after inheriting money to formulate a financial plan. You’ll want to consider your current lifestyle and your future goals, formulate a financial strategy to meet those goals, and determine how taxes may reduce your estate.

Develop a Financial Plan

Once you have determined the value and type of assets you will inherit, consider how those assets will fit into your fi­nancial plan. For example, in the short term, you may want to pay off consumer debt such as high-interest loans or credit cards. Your long-term planning needs and goals may be more complex. You may want to fund your child’s college educa­tion, put more money into a retirement account, invest, plan to help reduce taxes, or travel.

Evaluate Your Insurance Needs

Depending on the type of assets you inherit, your insurance needs may need to be adjusted. For instance, if you inherit valuable personal property, you may need to adjust your property and casualty insurance coverage. Your additional wealth from your inheritance means you probably have more to lose in the event of a lawsuit. You may want to purchase an umbrella liability policy that can help protect you against actual loss, large judgments, and the cost of legal representation. You may also need to recalculate the amount of life insurance you need because of your inheritance. The cost and avail­ability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased.

Evaluate Your Estate Plan

Depending on the value of your inheritance, it may be appropriate to re-evaluate your estate plan. Estate planning involves conserving your money and putting it to work so that it best fulfills your goals. It also means helping reduce your exposure to potential taxes and creating a comfortable financial future for your family and other intended beneficiaries.

Some things you should consider are to whom your estate will be distributed, whether the beneficiary(ies) of your estate are capable of managing the inheritance on their own, and how you can best shield your estate from estate taxes. If you have minor children, you may want to protect them from asset mismanagement by nominating an appropriate guardian or setting up a trust for them. If you have a will, your inheritance may make it necessary to make significant changes to that document, or you may want to make an entirely new will or trust. There are costs and ongoing expenses associated with the creation and maintenance of trusts and wills. Consult with an estate planning attorney for proper guidance.

To expand on these topics or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.