HOW HIGH CAN THE U.S. DEBT GO?
We only have about eight months left before we elect a president, all members of the House, and one-third of the Senate to terms of, 2 and 6 years, respectively. One of the biggest issues facing our country is what to do about our annual budget deficits that add to our national debt of approximately $34 trillion. This is up from $17.8 trillion just ten years ago and up from $7.4 trillion twenty years ago. According to the Congressional Budget Office, it could increase another $19 trillion in the next decade.
Our national elected officials think they have a piggy bank that can’t be exhausted, but that is simply not the case. At today’s ten-year rate of 4.2%, it means the interest expense will cost us about $2.2 trillion ANNUALLY and continue growing. We simply cannot afford it and it will likely cause much financial pain for America.
How do you solve the problem? The simple answer is to reduce expenses and to increase income. Just like an individual that is in debt over their head. They can reduce expenses, increase income, or both. Unlike an individual, the US cannot default on its debt by declaring bankruptcy. The national debt’s rapid growth demands a long-term approach. We must set ourselves on a path where we cut expenses after adjusting for inflation and increase tax revenue by a similar amount gradually over one or two decades.
Who can disagree with that idea? Everyone. Why? You can cut any expense you want as long as it isn’t going to affect my life and we should raise taxes, but not on me. We must have a different mindset, otherwise we will have a much different life than we have today.
RETIREES AND ALMOST RETIREES THINK THEY ARE PREPARED, BUT ADVISORS DON’T
In a recent survey from Allspring Global Investments, about 65% of clients thought they were ready for retirement, but only 40% of their advisors agreed. Where and why is there a disparity? The biggest differences were around Medicare and Social Security, two of the most complicated and important retirement planning decisions.
About 30% of almost retired individuals and 46% of retired individuals said they know enough about Medicare to make an informed decision, but only 8% of advisors agreed. Social Security carried even greater confidence with 44% of almost retired and 54% of retirees feeling prepared, but only 10% of advisors thought the same thing. At the risk of having conflict, we agree with the advisors. Let us try to prove the point by having you take the quiz below:
- You or your spouse are still working at age 65 and have a health plan at work. Can you keep your plan and sign up for Medicare when you retire?
- When you sign up for Medicare, you have a choice between traditional Medicare and a supplement, or Medicare Advantage. Which would you choose and why?
- Once you are on Medicare, you can switch between Medicare Advantage and traditional Medicare on an annual basis. True or False.
- When can you start Social Security and how does that impact your benefit amount?
- If you start Social Security before full retirement age, can you continue to work?
- If you delay your Social Security past Full Retirement age how much does the benefit increase each year that you delay and what is the age for the maximum benefit?
Here are your answers:
- It depends. If you work for an employer with less than 20 employees, then your workplace plan likely won’t cover you if you don’t sign up for Medicare. If you work for an employer with >20 employees, then you can keep the current plan but may want to sign up for Medicare Part A (hospital coverage). Why? Medicare Part A covers hospital stays and is generally free. However, if you are contributing to an HSA account, you are no longer considered to have high-deductible health insurance so you would be prohibited from making additional contributions to your Health Savings Plan.
- There is no answer to this question as either may be best for you. Traditional Medicare generally covers 80% of your costs for hospitals, doctors, and testing. You would generally purchase a supplement to cover the remaining costs as well as a separate prescription drug plan. For an individual in the highest tax bracket, the annual cost for all this coverage is likely around $11,000.As an alternative, you could choose a Medicare Advantage plan. The same individual would likely pay $7,200 and may receive additional benefits like dental, vision, and hearing. Given the additional benefits and lower cost, why wouldn’t someone choose a Medicare Advantage plan? Well, some costs go beyond financial. Traditional Medicare allows you to see any provider that accepts Medicare. Medicare Advantage plans generally require you to see doctors within the plan’s network and service area and often require pre-approval. The questions you may want to consider include:
- Is your current doctor in the plan? When you want/need a specialist, will they be in the plan?
- When your doctor recommends a certain procedure, will it need to be pre-approved by the insurance company?
- Also, see the answer to the next question. We have software to help you make this decision.
- It is true that you can change plans each year between October 15th and December 7th. However, after the first six months of Medicare eligibility, in most states, you will be subject to underwriting to qualify for a Medicare supplement. Unfortunately, this means that once someone has an underlying medical condition that may make a traditional Medicare plan more attractive, they may be unable to qualify for a supplement.
- You can elect to begin receiving reduced Social Security benefits as early as age 62. This reduction can be significant and also results in lower increases each year leading to substantial differences in benefit amounts in the future. For example, let’s suppose that your monthly benefit at full retirement age (age 67 for anyone born in 1960 or later) is $3,000. However, you decide to take it early at age 62. The reduced benefit amount would be $2,100/month, but you could collect over $126,000 in those five years rather than nothing. Tempting, isn’t it? That is a lot to make up for. But let’s say you live to age 90 and inflation averages 3%. The monthly benefit at age 90 for someone who started at age 62 would be $4,804. If you had waited until age 70 to start your benefit, you would receive over $8,100 per month at age 90. At some point, waiting to start your benefits becomes more advantageous, but it often takes 10-12 years to realize this benefit. We have software to help make this decision.
- If you are receiving Social Security and are below your Full Retirement Age, your Social Security benefits will be reduced and possibly eliminated if you have work earnings that exceed $22,320 in 2024. If you reach full retirement age this year, then the earnings threshold is increased to $59,520.
- Your Social Security benefits increase 8% per year past Full Retirement Age plus the inflation adjustment. Maximum benefit amounts are achieved at age 70.
COULD NVIDIA BECOME ANOTHER INTEL?
On February 21st, Nvidia announced earnings that blew away expectations and the stock jumped about 16% in a single day. It reminded us of another great chip company that had phenomenal growth back in the 90s…Intel. In January 1995, Intel sold for about $2.38 per share on an adjusted basis, and about five years later it reached a price of $37.31, a 15.5x increase or a compounded annual return of 76.6%. WOW! Investors were very happy. Unfortunately, over the next two years, Intel fell to $7.99 which was a negative annual compound return of -57.6%. Five years ago, Nvidia had a price of $39.11 per share. On February 23, it had risen to $789 per share for an annual compounded return of 82.3%. We are not predicting the same fate for Nvidia as we don’t foresee a dot com bust in front of us, but we are attentive to the similarity of the two stocks. If the same thing did happen, however, Nvidia would fall to $169. The good news for Nvidia shareholders is that the PE ratio dropped from 89 to 65 after the great earnings this past quarter.
NOT EVERYONE HAPPY WITH LOWER INFLATION
Inflation added an increase of 5.9% in 2021, 8.7% in 2022 and another 3.2 % in 2023. All significantly higher than the 1.3% in 2020. With inflation coming down, the Senior Citizens League estimates that the increase for Social Security next year will be 1.75% and could be lower if inflation continues to wane. It will depend on inflation in the third quarter of this year. All that in the face of a 3.1% increase year over year in inflation through January.
IS COLLEGE EDUCATION STILL WORTH THE COST?
Getting a college education was once considered to be the best way to a lifetime of financial security versus a high school education. But, with the rising cost of college and the debt that follows, many are questioning this wisdom. According to bestcolleges.com, the average undergraduate debt at the end of the 2023 school year was $30,070. At an 8% rate of interest, it would take about $320 per month for ten years to pay it off. Coming out of college on a teacher’s salary of $45,000 versus a business student who starts at $80,000, the hardship that comes with paying off the debt is quite different.
First, graduating from college does not ensure a successful and happy life. So, what do you want to do with the rest of your life? It is an individual decision. Next, a college education is not just about the classroom education, it is also a transitional period from young adult to adulthood where many life skills are learned.
But let’s get back to the financial side. The Institute for Higher Education Policy recently completed an analysis of the financial implications and concluded that public institutions were a better value than private colleges. They used a concept called “threshold zero” which equals recovering the cost of a college education plus ten years of earnings versus the fourteen years of earnings for an individual with a high school education. They determined that for 97% of students from a four-year public education and 83% for a private school, threshold zero was exceeded. In other words, after ten years, these college students were ahead of the game.
COLLEGE COSTS AND SAVINGS BONDS
Do you have some savings bonds lying around? Keep in mind that after 30 years they do not pay any interest, but in the meantime, the interest accumulates tax deferred if you want. Thus, it is not unusual for interest to come due all at one time. Did you know that there is a way to possibly make the interest tax-free? Use the bonds to help pay for a college education…but there are lots of rules to consider. First, it is based on your income as it phases out between Modified Adjusted Gross Income (MAGI) of $145,200 and $175,200 for a married couple and $96,800 and $118,000 for an individual. Here are the additional rules: 1) applies to Series EE or I bonds issued after 1989; 2) they are cashed in the year you use them for a college education for yourself, spouse, or dependent; 3) you don’t file separately; and, 4) the owner was at least age 24 when the bond was purchased and the student isn’t a co-owner on the bond. Although you can’t use a bond in the student’s name for the exclusion, you can still use them.
We hope you continue to stay safe and well.
Proudly and successfully serving our clients for over 38 years. As always, we encourage you to call or email us if you would like to discuss anything.
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