Before we begin this morning, I want to take a moment to congratulate my assistant, Brayden, who passed the CFP Board exam yesterday. We’ve been working together for over three years, and I’m proud of him for accomplishing this goal. Congratulations Brayden!

Today let’s look at maximizing retirement savings. Saving all you can toward retirement might sound like a no-brainer, but the mechanics can catch folks off guard. Next week we’ll discuss RMDs and gifting strategies.

Before we get to this week’s installment, here are some questions to ponder about your financial life so far in 2021. Any “yes” answers are topics to drill down on because there could be planning, investing, or tax issues to consider.

• Have you had any big income changes this year? Maybe you switched jobs, downshifted to part-time, or even retired? Have you started or closed a business?
• Any large expenses on the horizon?
• Have you sold investments or other assets for what you consider to be a large gain or loss?
• Have you inherited money or other assets?
• What’s your financial outlook for next year? Does it include any of the above?

Another question might be, “Have I saved all I can this year toward my retirement?” While trying to do so might seem obvious, actually getting it done can be challenging, and not just financially. The challenges are structural. 401(k) plans weren’t created to be what they are today. The new plan type was latched onto by large employers in the late-1970’s and 80’s who wanted to offload much of the risk associated with running a traditional pension plan. Or at least that’s my take on the history. 401(k) plans have evolved since to become the dominant retirement account type in the country, so we’ll focus on them in today’s post.

Government regulations try to set the stage for employee success by requiring a certain amount of transparency and plan quality, but the reality is far from ideal. The result is that employees have to shoulder much of the burden in terms of figuring out how much they can afford to contribute to the plan, how to invest the money once it’s there, how to manage the account over time, and myriad other rules and regs along the way. This is part of why there’s such a disparity between the long-term performance of more highly educated workers compared with their blue-collared brethren.

Okay, on that note, let’s look at a common structural issue for 401(k) savers – underfunding. I’ve found that it’s not often a lack of affordability at issue, it’s a lack of time. People are busy, they’re stressed, and it can be difficult to get into the nitty gritty of one’s 401(k) plan, especially if it’s one of the many subpar plans out there.

It’s pretty typical for workers to save all year only to find they hadn’t been contributing as much as they thought, or that they could have easily saved more. This is problematic for lots of reasons but approaching year-end the biggest issue is taxes.

As you’re aware, dollars saved into a 401(k) are considered pre-tax, so they come right off the top of an employee’s W-2 income and aren’t taxed by the Feds or the state. These savings won’t be taxed as they grow either and, if you play your cards right, won’t start being taxed until age 72 (or older – some proposals in D.C. would see the minimum age to start mandatory taxable distributions go to 75). These years, or even decades, of tax deferral are huge when it comes to accumulating money for retirement.

Some fuzzy math as I’m writing shows that if you maxed out your 401(k) contributions each year, the additional amount invested from tax deferral could add over $130,000 to your bottom line over 20 years! So, in a real sense, time lost from not maximizing this benefit is time and money you’ll never get back.

The government sets limits on how much you can save into your 401(k) each year. This cap gets adjusted for inflation and is currently $19,500 while those 50 and older can save $26,000 through Dec 31^st. Or you might be part of a SIMPLE 401(k), a less common type, with maximums of $13,500 and $16,500, respectively. Again, this is a cap on what the individual employee can save each year. It doesn’t count money the employer adds as matching contributions. This is also true if you’re self-employed except that you function as the employee and employer, matching your own contributions. I can’t tell you how many people misunderstand this employee/employer dynamic and save less because they were worried about overfunding. Most plans have a mechanism to ensure you don’t overfund your account anyway, so that’s less of a concern. Don’t overthink it, it’s hard enough already!

So, as we get closer to year-end, have you saved all you can into your 401(k)? Maybe you’re trying to hit the annual maximum and are coming up short, even with remaining pay periods. Or you realize you’re sitting on extra cash in your bank account and can afford to contribute more for the rest of the year. A lot of people contribute only a few percent of their pay while they save cash at the bank. Emergency funds are great, but don’t let inertia keep you from retiring better.

I suggest logging into your plan to confirm what you’ve saved so far this year and then try to fill in any gaps.

Good quality plans might only take a pay period to make these changes, so it’s possible to still get several paychecks into your plan if you’re coming up short. Usually you can do this sort of thing yourself. But if your plan is one of the many with a horrible website, you may need to pick up the phone. Something good to remember is that most plans allow you to contribute up to 50% or even 100% of your paycheck to your 401(k). That’s often the only way to get extra money into your plan at year-end since unfortunately they won’t let you simply mail in a check.

However you do it, try to fill up your 401(k) as much as possible this year. It will save on you taxes, add money to your bottom line over time, and get you one (or many) steps closer to being ready for retirement.

Have questions? Ask me. I can help.

Last week I provided updates on a couple of timely developments in Social Security and bitcoin. This week I’m following up on the same topics.

Social Security COLAs –

We learned recently how the Social Security Administration is bumping payment amounts in 2021 by 5.9%, an increase not seen in decades. The SSA is doing so in response to a spike in inflation that’s becoming more apparent every day.

But this raises an obvious question that I should have included in my post last week.

If you’re planning to wait on starting Social Security until 67, or even 70, should you start drawing your benefits early to take advantage of the big cost-of-living adjustment, or COLA?

This is a good question with a short answer. No, you shouldn’t file early to take advantage of the 5.9% bump because you’re effectively getting an 8% bump per year by waiting.

Of course, if you need the money to live on you might want to start early, ideally after doing some planning work to review your options. Instead, waiting grows your benefit base and this base receives future COLAs, so you want it to be as large as possible. And waiting is the simplest way to grow your base, short of working longer and paying more and higher taxes into the system. This waiting zone currently maxes out at age 70.

If you draw your benefits before your Full Retirement Age, often 66 and some months or an even age 67, your base shrinks by a fraction of a percentage point for each month you’re early. That’s a dramatic reduction if you started your benefits at the earliest possible age of 62. The bottom line for retirees is that since the filing decision can be made any time after you turn 62, try to wait as long as possible. If you can hold out long enough, each month you wait beyond your FRA incrementally adds to your base at the rate of 8% per year.

How do you get by in the meantime? Ideally you’d tap into cash savings, or even sell investments in a non-retirement account. Doing either usually saves you on taxes and could even create some planning opportunities like doing Roth Conversions or realizing additional capital gains for “free” if you’re in a low enough tax bracket.

Deciding when to start taking Social Security benefits can be difficult and definitely goes beyond the straightforward financial stuff. Many folks are concerned that the program will run out of money and won’t be around for them when the time comes. This is a rational fear given the hyperbolic headlines we see from major news outlets. The reality is more complicated, however, and hopefully not as dire as it often seems. Try not to let fear drive a decision like this.

Here’s an article from Investment News with more information on this topic.

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Home ownership has long been seen as a critical component to success in America. This has so impacted our psychology that many renters feel inadequate for not taking part in what has been called the ownership society. So it’s fair to ask how far will (or should) you go to be a homeowner. It seems declining affordability is causing some buyers to get creative.

GW Bush wasn’t the only president to aim for growing home ownership, of course. FDR’s New Deal and the post-WWII economic and baby boom helped grow our home ownership rate from 44% in 1940 to about 62% by 1960. Growth continued before peaking at 68% in 2007 and obviously took a hit during the Great Recession. We’ve been in the mid-60% range ever since.

While average on the world stage, our current home ownership rate of about 64% seems poised for more growth. There’s so much demand chasing not enough supply. Even amid what many term an affordability crisis, the drive to own a home is so strong that some are looking for alternatives to traditional home ownership.

For example, there’s a growing number of people buying homes in partnership with each other, something known as co-buying. We’ve all heard of this in terms of buying a vacation property with a friend or even with strangers as part of an investment scheme, but more buyers are using co-buying to buy a primary residence. They live together, share expenses, and potential home equity growth as well. They also share risk, which can work out badly if not planned for and if, unfortunately, they’re unlucky.

Honestly, I didn’t know co-buying was that big of a thing, but I’ve been reading about it and wanted to share some information. Ultimately, it’s an interesting development in the ongoing saga of rising real estate prices and what’s sustainable longer-term.

First, let’s review some charts and commentary from my research partners at Bespoke Investment Group. They conduct a monthly survey of 1,500 consumers based on Census data and often come up with interesting analysis. This time it’s about the rise of Millennials and Gen Z as homeowners. This data confirms the anecdotes about younger folks being eager to buy and also excited to fix up their space.

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As we march headlong toward the end of another eventful year, let’s look at some important calendar-based financial considerations. Now is a great time to do so because it’s late enough in the year to hear the clock ticking, but not so late that you don’t have time to act.

We’ll look at generating cash in a non-retirement account, maximizing retirement savings, RMDs and gifting, and a few more. I’m going to break this list up over the next few weeks.

Before we get into the first installment, here are some questions to ponder about your financial life so far in 2021. Any “yes” answers are topics to drill down on because there could be planning, investing, or tax issues to consider.

• Have you had any big income changes this year? Maybe you switched jobs, downshifted to part-time, or even retired? Have you started or closed a business?
• Any large expenses on the horizon?
• Have you sold investments or other assets for what you consider to be a large gain or loss?
• Have you inherited any money or other assets?
• What’s your financial outlook for next year? Does it include any of the above?

Okay, let’s look at generating cash in your non-retirement account. This question comes up throughout the year but takes on added significance as we edge closer to year-end. The reason has to do with our tax code and the calendar. Some things carry over until tax time, such as IRA contributions made for the year prior, but most tax issues have a distinct deadline as the year turns over.

We’re now in the best season (November, December, and January) performance-wise for stocks, so you can look at trimming them back for spending cash during a strong market. Or, depending on the makeup of your portfolio, you could also trim back bonds a bit. Or both!

Ideally you have a structure in place that allows you to monitor how much your investments have grown relative to others. It’s counterintuitive, but your best candidates for trimming are likely your best performers. Maybe you have some energy-related or real estate investments that have done well, or perhaps a broad stock market index fund that you could trim. The latter is likely up around 24% this year and energy and real estate could be up 40+%.

As I’ve mentioned before, this trimming, or rebalancing, is important to the long-term health of your portfolio. Combining this with generating spending cash makes all the sense in the world.

But as you’re likely aware, you’ll pay taxes to the Feds and probably the state too, on your net realized capital gains when you sell investments in a non-retirement account. That’s kind of a mouthful, but you can make this work for you if you understand the basics.

The cool part about capital gains taxes, if I could even think such a thing, is that you’re just taxed on what you gain – hence the name. The amount you invested and certain expenses associated with it is known as your cost basis and isn’t taxed.

Here’s a simplified example of how this works.

Let’s say you need $10,000 and have the following investments:

$50,000 of Total Stock Market Index Fund that you bought for $20,000

$50,000 of Total Bond Market Index Fund that you bought for $52,000

Since your cost basis isn’t taxable, only $6,000 of the $10,000 you get from selling some of the stock fund would be taxed as a capital gain. This assumes that you only made one purchase at least a year ago. Maybe you’ve made multiple buys over the years? Each buy has its own cost basis, and you can be choosy when deciding which to sell. Try to avoid selling shares owned for less than a year because these short-term gains are taxed as ordinary income, likely higher than the federal capital gains rate of 15%.

But what about the losses in the bond fund? The same concept applies, just in reverse. If you also sell shares of the bond fund you can subtract those losses from the stock fund gains, lowering your net gain to $4,000. Or you could simply sell shares of the bond fund, generate the cash you need with no taxable gain, and let the stocks ride. Not to overcomplicate things, but you have a number of options, especially if you also have retirement accounts to rebalance in.

Gains and losses are calculated per share, so you’ll need to sell all of the bond fund to take advantage of the $2,000 loss. This isn’t a dealbreaker because you can swap your remaining sale proceeds from selling the bond fund for something similar, maybe another bond index fund or a low cost actively managed fund. In other words, you can’t simply sell your fund at a loss and then immediately buy it back. That would be too easy. You have to wait at least a month or risk invalidating the loss by triggering a so-called wash sale. Avoid this like the plague.

Fortunately cost basis data is mostly kept track of by your brokerage firm. Regulations on this changed around 2010 and your firm may not have data for what you owned prior – you can log in and check or call and ask about it. This is important because you’ll want nice clean data documenting your buying and selling come tax time.

Assuming these are the only transactions you make all year, the $4,000 of net gain goes onto your tax return where it can impact your tax bracket, your Medicare premiums, and other areas that could lead to higher taxes than anticipated. Now, taxes on $4,000 might not break the bank but start adding zeroes and taxes can get crazy awful fast. It might also be possible to pay no federal capital gains taxes if your income is low enough. Best do some basic planning on your own with the tax tables online or, ideally, work with your tax advisor (or even your humble financial planner) to get a better gauge on all this.

Have questions? Ask me. I can help.

There’s a couple top-of-mind items as I sit down to write this morning so I’m going to break this post into two parts. The first is an update on Social Security and the second has to do with bitcoin. Let’s jump right in, shall we?

It’s always nice to get a pay raise. Often you have to ask (or beg) for one but sometimes it just happens. Fortunately for Social Security beneficiaries the latter is the case starting in 2022.

We’ve known about the expected bump coming for Social Security beneficiaries given how much inflation there’s been lately, we just didn’t know how big the bump would be. Last week the benevolent folks at the Social Security Administration announced a 5.9% increase in benefit checks beginning this January. That increase is huge and hasn’t been seen since 1982 when payments rose by 7.4% (and the two prior years had double digit increases – lots of inflation back then, of course)! The closest since then was 5.8% for payments in 2009. While one could argue that an almost 6% raise still isn’t enough these days, it’s much better than the 1’s and 2’s, even 0’s, we’ve seen during the last decade.

How did the SSA come up with 5.9%? We’ve discussed this previously, but as a reminder the Bureau of Labor Statistics calculates a variety of inflation metrics and the SSA looks at one called CPI-W, as mandated by Congress. They do this every third quarter each year and compare to the same period the year prior. If there’s inflation they round the number to the nearest tenth and that sets the benefit increase for the next year beginning in January (but the first payment is actually made at the end of December).

The bottom line is that this should be welcome news to anyone living on a fixed income. The typical monthly bump should be around $92 based on the average benefit payment of about $1,559 per month. That’s taxable for some folks, of course, but even after adjusting for taxes the increase might cover a utility bill, help pay for Medicare, or otherwise be more meaningful than last year’s $20 average.

Bumps like this are a double-edged sword, of course, and we’ll have to see how 2022 plays out, how inflation behaves, and what the next raise from the SSA might look like.

Here’s a link to some general information about this from the SSA’s website.

https://www.ssa.gov/oact/cola/latestCOLA.html

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US and global stock markets performed well for much of the summer before faltering just prior to the end of the third quarter (Q3). Investor confidence took a step back as prices fell and volatility rose. The downward slide was due to a host of issues that festered throughout Q3 but remained unresolved as the calendar shifted quarters.

Here’s a roundup of how major markets performed during the third quarter and year-to-date, respectively:

• US Large Cap Stocks: up 0.6%, up 15.9%
• US Small Cap Stocks: down 4.3%, up 12.3%
• US Core Bonds: basically flat, down 1.7%
• Developed Foreign Markets: down 1.1%, up 8.4%
• Emerging Markets: down 8.7%, down 2.1%

September has historically been one of the worst months for stocks. According to Bespoke Investment Group, the past 20 years has only seen positive returns 38% of the time for the S&P 500 during September. Add in a long period of low volatility mixed with a waning-but-still-concerning Delta variant, a potential government shutdown and debt default, trillions of potential new spending from Congress, and then a looming “Lehman Moment” coming out of China late in the month, and it’s no surprise we saw a rocky September.

Across sectors, the Financials and Utilities sectors fared best for Q3 as a whole, while Industrials and Materials performed the worst. But during September Energy was up almost 9% while the other major sectors finished in the red, with most down 5% to 7%. Developed foreign markets followed suit, down about a percent for the quarter and about 3% during September. The main emerging markets index was down almost 9% for Q3 and about 4% for September on concerns emanating primarily from China, Hong Kong, and Brazil.

While the surge in volatility was due to many factors coming together seemingly all at once, one of them, inflation, has been of growing concern at least since the pandemic lows in 2020. Since then the Federal Reserve has pumped trillions of dollars into the financial system to help support the economy and markets. Congress added its own cash as well. This spending was meant to be inflationary but controllable, or at least short-lived. We seemed to reach a point of consternation when inflation numbers through August showed prices rising by 5.3%, a number not seen for at least a decade. In response, the Fed continued to profess being relatively unconcerned about rising prices and reiterated it can move to control inflation if needed.

Along those lines, bonds were volatile during Q3, although the changes were small when compared to the stock market. The yield on the 10yr Treasury, a major benchmark, began the quarter at about 1.4%, then sank to almost 1% before reaching about 1.5% at quarter’s end. These moves kept major bond indexes about flat for the quarter. Longer-term bonds were negative.

Another factor causing market volatility was growing tension around the debt ceiling, an arbitrary limit Congress sets for our nation’s borrowing that has been around for over 100 years. Since then it’s never been reduced, only extended many times, and sometimes temporarily suspended as it was last year. This year Congress has to raise it or risk running out of room to borrow to pay government debts. The latter would mean “default” and is very similar to a household running out of available credit as the bills keep coming due. But since the federal government can always create more money where households can’t, debt ceiling debates are essentially an opportunity for political theater that moves markets and scares a lot of people unnecessarily. The rhetoric picked up steam late in September, but the issue was left unresolved as the quarter ended.

Investors also focused on spending plans in Congress. There was short-lived concern that the government would be forced to shut down at the end of September, but that risk was pushed off until December. Congress also left in the air multi-trillion-dollar spending packages that would alter the tax code, retirement savings, and personal banking, just to name a few areas that would be of direct concern to investors. While more spending would certainly benefit the economy in the short- and medium-term, as the quarter waned investors grew uneasy about what the final bills might contain and how these provisions would play out in the real economy.

But people in the real economy seem to be doing pretty well, at least on average. According to government statistics consumers have more cash in the bank, more home equity, and less consumer debt than before the Great Recession. Rising stock prices and a hot housing market and have helped folks who hold these assets feel the so-called wealth effect which increases confidence. And government subsidies have helped those who don’t (as well as many who do) shore up their personal balance sheets. In short, there’s still a lot of spending money out there and this should help keep the economy growing.

This continued growth is expected to be a tailwind for the stock market as we enter the fourth quarter. And just as September is often a bad month for stocks, the winter months are usually good. I wouldn’t expect a cakewalk, however. Volatility is likely to be with us for awhile as we work through the variety of issues alluded to above.

Have questions? Ask me. I can help.