Did the Internet Wipe Out Inflation?

3 Minute Read

An interesting theory is making its way through investing circles to explain why inflation and interest rates have remained so low for so long….the internet!

Inflation is the rise in the prices of goods and services over time.  Let’s take a look back to the cost of living back in 1960:

New House $12,675
Average Income $5,200/Year
New Car $2,610
Movie Ticket $1
Gasoline $0.25 per gallon
Stamp $0.04
Eggs $0.30 per dozen
Burger $0.58 per pound
Milk $1.04 per gallon
Bread $0.20 per loaf

The measure of inflation is important because if your investments make 10%, but inflation is 7%, your REAL return, hypothetically speaking is only 3%.  High inflation can be damaging to an economy, but some inflation is considered good, almost like greasing the wheels of capitalism.

Historically speaking, higher inflation comes with an expanding economy and low unemployment, the exact economy the US is experiencing.  Only one problem, there is little to no inflation and economists are baffled.

Current inflation is coming in at 1.8%, and expected to hover around 2% for the foreseeable future.  Some argue these readings aren’t accurate and inflation is even lower.

Did the internet wipe out inflation?
Interest rates follow inflation and the current 10-Year US Treasury is only yielding 2.4%.  This means that traders expect low inflation and interest rates to last for the foreseeable future.  Proponents of this theory argue that the internet has wiped out inflation through:

  • Transparent pricing across industries.
  • Amazon’s effect on brick & mortar retailers.
  • Technological & software advances increasing worker productivity.

These factors along with the decline in union representation (less wage leverage for workers) frame the argument that low inflation and interest rates are here to stay.

If this is the case, what does this mean for us as investors?

  • While stock market returns may trend lower long-term, REAL investment returns could remain the same if inflation stays muted.
  • I continue to prefer short-term bond investments, they are yielding the same 2.4% but allow for flexibility should inflation and interest rates rise.
  • I recommend staying with mostly with high quality bonds such as US Treasuries, CDs and A rated companies.
    • Investors will sometimes make the mistake of “Reaching for Yield” by investing in bonds from low quality companies, those with shakier prospects of paying the money back.  This is what fueled the housing crisis, investors lending their money to subprime borrowers for a few extra percentage points.

My philosophy for managing client portfolios is not to try and predict what will happen near term, but rather position client portfolios to be adaptable, and potentially take advantage of opportunities in these ever changing markets.

I hope this was helpful, as always if you have any questions please don’t hesitate to contact me at the office.  Have a great weekend!

Higher Bank Savings Rates

Ever wonder if there is a way to increase the interest you receive on your bank savings/checking account?  In this low interest rate environment, it’s a great question and one I receive frequently.

One of the many great things about our country is entrepreneurship; new businesses entering a market to provide a better, more cost effective solution, or in this case creating a market where there is need from consumers.

MaxMyInterest is a technology platform that will find the highest yielding interest rate among participating online banks for your savings.  Your money is held directly with the online bank, fully liquid and available to you at any time.  Bank interest rates are reviewed every month and if a more competitive rate is found, your savings is automatically transferred to the higher yielding account.

The highest current rate among participating banks is 2.71%.

These online banks provide the same FDIC protections up to $250k per account as your local bank.  If you have over the $250k FDIC limit in savings, MaxMyInterest will even split your savings up between banks to ensure all savings is FDIC insured.

If you would like more information on this solution, please contact me and I’ll be glad go through it in more detail.

Saving for a Child/Grandchild

What are some ways that you can save for a child or grandchild, and how do those accounts affect college aid in the future?  Here are two types of popular accounts, details on taxation, along with how they affect college aid in the future.

For determining financial aid eligibility, applicants file a FAFSA that details the previous year’s assets and income of both the child and the parent(s).  The higher the incomes and assets, the less of a chance to qualify for the preferred financial aid packages such as the Pell Grant, Work Study, and Subsidized Student Loans.  Student loans and scholarships are still available for those who do not qualify for the preferred financial aid packages.

529 – An investment account where earnings grow tax-free, and withdrawals are tax-free as long as they are used for college related expenses.  These accounts provide a NY state income tax deduction for contributions, and can be re-registered to another child at anytime.

If owned by the parent, these accounts are considered a parental asset, and receive preferential treatment in terms of the above referenced financial aid calculation.  In addition, withdrawals are not counted as income for either the parent or child.  Withdrawals for non-college related reasons result in tax and penalty implications.

If a grandparent or other relative owns the 529, the withdrawals are counted as the child’s income and can decrease financial aid eligibility.  In these situations, it can be advisable to wait until after the last FAFSA has been filed, and the child is in their last years of college to withdraw funds so they do not affect financial aid eligibility.

UTMA – An investment account in the name of a child, but controlled by a guardian until the child’s age of 21.  Withdrawals can be made at anytime and for any reason as long as it is for the benefit of the child.  There are no tax implications until the investments generate over $1,050 of income during a calendar year.

The downside is in terms of financial aid, the UTMA is counted as a student asset and could decrease eligibility for preferred financial aid.  That said, if you are sure the child is going to go to college, you can transfer the UTMA into a 529 prior to the child going to college.

In summary, the 529 provides great tax benefits and is helpful for college planning, but really is specific for college.  The UTMA is an investment vehicle providing greater flexibility for a child that may use the funds prior to college, or not go to college at all.

If you are interested in setting up either a 529 or UTMA for a child, please contact the office and I’d be glad to help.

Paycheck Tax Overhaul

Filing out your W-4 could get much more difficult starting as soon as 2020.  Your W-4 is the form you complete to indicate how much to have withheld from your paycheck for taxes.  Currently, you simply indicate 0, 1, or 2 where ‘0’ is the most withheld for taxes and ‘2’ is the least.

The new tax law has a goal of more accuracy at tax return time, they would like to owe you 0 and you owe them 0.  To achieve this goal, they are going to ask you to complete your W-4 and include more detailed information such as estimated dividends and interest, itemized deductions, expected tax credits, number of dependents, and several other outside tax related items to more accurately estimate your proper tax withholding.

If you routinely receive a tax refund, this could potentially lead to you receiving more in your paycheck.  It could make sense to create a plan for that extra money, whether it goes into a retirement plan or a savings account on a regular basis.

If you routinely find yourself paying in for taxes, this could potentially lead to higher paycheck withholdings and a required adjustment to your ongoing budget.

What will be interesting is how this change will apply to retirees taking income from social security, pensions, and retirement accounts.  There is sure to be some planning around this update for those in retirement.

There are still a lot of details to be ironed out, but the IRS plans to roll this out beginning in 2020.  I’ll be tracking these updates and communicate once they are finalized.

If you have any questions or would like to start planning for this change, please feel free to reach out and I’ll be happy to create a plan for your individual tax situation.

New Retirement Plan/IRA Legislation

 

Weekly Update – New Retirement Plan/IRA Legislation

Earlier this week, the Ways and Means house committee passed the SECURE Act.  This provisions of the bill would be the most signficant to retirement plans since the Pension Protection Act of 2006.

The Senate is creating their own version with similar concepts that could find its way to the president’s desk by the end of this year.  Here are the significant provisions of this legislation:

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