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Another Inflation Battle Won, But the War Continues

Inflation is officially off the boil, with headline CPI finally down to the 2% range (2.97% year-over-year) in June. Chairman Powell also highlighted recent labor market weakness as justification for a rate cut this year and the economy is holding up relatively well. Has the Fed won? Are we in a not-too-hot, not-too-cold goldilocks environment? We are hesitant to ring the victory bell just yet. Inflation has a dastardly way of rearing its ugly head as we saw back in the 1970s hyperinflationary period. Inflation seemingly peaked at the end of 1974 above 12% before dropping to sub-5% two years later. However, supply side shocks reignited inflation and by early 1980 to almost 15%.

What could reignite inflation this time? Partially, the same supply side issue – namely, oil. Conflicts in the Middle East are having a material impact on shipping costs. The Drewry’s World Container Index1, which measures shipping costs, is up almost 300% from last year. This undoubtedly raises the price of goods (and services) going forward. Another area to keep an eye on is shelter. Housing affordability2 is at levels last seen in the 1980s with supply still catching up from disruptions during the Great Financial Crisis, and mortgage rates the highest in two decades. Apartment rental rates3 are slightly down year-over-year.

Ultimately, inflation could regain momentum this Fall. While 15% inflation is likely out of the cards, it could be enough to limit or eliminate any planned rate cuts. The risk, of course, is for the Fed to cut rates too fast and throw lighter fluid on an inflation flame that could already be building.

Sources:

  1. https://www.drewry.co.uk/supply-chain-advisors-supply-chain-expertise/world-container-index-assessed-by-drewry
  2. https://www.nar.realtor/research-and-statistics/housing-statistics/housinaffordability-index
  3. https://www.apartmentlist.com/research/national-rent-data

Good News – Bad News

With the most recent inflation report on Thursday of -0.1% (that’s right, a negative number), the anticipated cost of living increase for Social Security dropped from 3.2% to 2.7%. Good news that inflation is moving down, but the increase, if you can call it that, for the COI is bad news and likely to go lower if this trend continues.

What Would You Do With $130 Billion?

What a fantasy imaging that amount of wealth? It’s a question that seems almost incomprehensible. For Warren Buffett, whose Berkshire Hathaway stock is worth at least that amount, it’s a question that will define his legacy. Since Buffet took over Berkshire Hathaway in 1965, his name has become synonymous with generosity, donating billions to the Gates Foundation and other foundations.

Buffett, 93, must be thinking about his own mortality, especially after the recent death of his good friend and business partner, Charlie Munger. At his death, Buffet plans on leaving his vast fortune to a new charitable trust managed by his two daughters and one son. They must agree unanimously on how and to whom the money should be given.

Buffet’s trust could give away 5% each year, or about $650 million dollars, making a significant difference to the charities fortunate enough to receive the money. While it may ultimately be a smaller amount due to estate and inheritance taxes, it will still be a significant amount of money.

Inflation Puts More Retirees at Risk of Running Out of Money

Retirees are withdrawing more from their savings to keep up with rising prices, risking depletion of their retirement funds. A Boston College study shows that high inflation significantly affects retirement security, with middle-income retirees projected to see a 14.2% decline in financial wealth between 2021 and 2025. Nearly a quarter of retirees and near-retirees increased their withdrawal rates, with average distributions rising by $1,810 annually. “High inflation later in life is often harmful to retirement security,” said Laura Quinby, a senior research economist at Boston College’s Center for Retirement Research.

Wealthier retirees, who invest more in stocks, are less impacted by inflation, facing an average 4.3% reduction in wealth by 2025. However, those in the bottom third of the wealth distribution, heavily reliant on cash and bonds, could see an 18.8% reduction. Near-retirees aged 55 to 61 are also struggling, with many saving less and spending more from their savings, leading to a projected 21.7% drop in financial wealth by 2025.

Inflation Puts More Retirees at Risk of Running Out of Money – WSJ

Working at Two or More Places This Year?

The cap on Social Security taxes this year is based upon a wage base of $168,600. Once you make this amount, your paycheck gets bigger. Every employer must collect this tax from each employee up to the yearly wage base (adjusted for inflation each year). Further, each employer must match the amount collected.

What if you work for two or more different companies during the year and your wages between all the employers exceeds $168,600? Good news for you, but not so good news for the companies. When tax time comes around next year you can file on Schedule 3 of your 1040 tax return for the amount of overpayment and get a refund. Unfortunately, the same does not apply to the employers. The additional funds paid in by companies are retained by the Social Security Administration.

How to Use Spousal IRAs to Boost Your Retirement Savings

Did you know that a spousal IRA (Individual Retirement Account) gives non-working and low-income spouses a way to save for retirement? It’s a useful tool that helps couples increase their retirement savings, even if only one spouse has earned income.

Spousal IRAs offer both quantitative and qualitative benefits by allowing the non-working spouse to be an active participant in saving for retirement. Since the account is opened in the nonworking spouse’s name, they may achieve a feeling of fulfillment and equality with their spouse.

Equally important, it increases the couple’s retirement savings which they will rely on for income down the road. A $7,000 contribution could turn into over $53,000 after 30 years, assuming a 7% annualized growth rate. Couples can choose between Roth and traditional IRAs. Roth IRAs offer tax-free withdrawals in retirement, while traditional IRAs provide tax deductions upfront. This decision depends on the couple’s tax situation, goals, and preferences. We recommend that each couple seek the advice of a financial planner or CPA when making this decision.

There are rules regarding who is eligible to contribute to this type of account. To qualify, couples must be legally married and file a joint tax return. The couple’s joint earned income must be equal to or greater than the contribution made to the non-working spouse’s IRA. Spousal IRAs have the same contribution limits as regular IRAs ($7,000 for those under 50 and $8,000 for those over 50). There are also income restrictions when it comes to making Roth IRA or deductible traditional IRA contributions.

Spousal IRAs empower non-working spouses to actively participate in retirement planning. By understanding the rules and leveraging the benefits, couples can enhance their financial well-being together.

How Spousal IRAs Can Help Couples Save for Retirement – WSJ

What Is a Spousal IRA? Definition, How It Works, and Contributions (investopedia.com)

Consumer Behavior

Although we like to think we are logical people, moved only by what the best decision is for our pockets, marketers’ tactics might influence you to make a decision you might not otherwise. Have you ever seen a sign or gotten a message from a company promoting “FLASH SALE!”? Companies use this tactic to create a sense of urgency – you could miss out if you don’t buy right now! (Even if their discounted price is still more than other businesses’ normal prices). Instead, take a few minutes and compare their price to see if the sale is really a discount at all.

When you purchased your cable service, were you asked if you wanted to upgrade to a “better” package for a discounted price? This is a common tactic marketers use to try to get you to buy something you likely don’t need. For some people, an upgrade or addition to their package is perfect and will give them more of what they will use at a lower price; however, this discount also encourages those who don’t need the upgrade to consider it and ultimately purchase it, since it’s only a few more dollars per month. This line of thinking can really add up, prioritizing what is most important to you and setting aside what you need for it is the best way to make sure you don’t waste your excess cash.

Best Value Public Universities

The Princeton Review (nothing to do with the college) analyzed 650 public and private universities to determine the best value based on academics, cost, employment, student debt, student surveys and graduation rates. Here are the top ten:

10) University of Texas, Austin

9) North Carolina State

8) University of California, Santa Barbara

7) University of Michigan, Ann Arbor

6) University of California, San Diego

5) University of California, Irvine

4) University of North Carolina, Chapel Hill

3) University of Virgina

2) University of California, Berkeley

1) Georgia Institute of Technology

We hope you continue to stay safe and well.

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