INTEREST RATE INCREASES ALMOST DONE
When the Federal Reserve started raising interest rates in the Spring of 2022, many wondered how many and how much would follow. Here we are 21 months later with the highest interest rates in 20 years, which is good for savers and the 60% stock and 40% bond portfolios going forward, but bad for borrowers. The Fed has one meeting left this year and most feel that they are done raising rates given the good inflation news from October. Better yet, early indications of the November number should also be good as the CPI number with oil threatening $75 a barrel instead of $100 per barrel. More importantly, core inflation (excluding energy and food) should continue its downward trend as well.
So, what happens next? Simply, the rising interest rate life cycle has many more months behind it than it has in front of it. But all year long, we have said that interest rates will stay higher for longer. Lacking some unforeseen event, don’t look for interest rates to decline until the middle of next year. Even then, subsequent cuts will not likely go down as fast as they went up unless a more severe recession happens.
Large companies that borrowed money before the Spring of 2022 and those with a lot of cash are in a very enviable position relative to other large companies that didn’t borrow at low interest rates. These companies should continue to prosper throughout 2024 and beyond. Small companies will continue to be hurt as the cost of borrowing is creeping up close to 8% of revenues which will hurt profitability. That said, small companies have been beaten up so badly that they could still do well in 2024.
SOCIAL SECURITY’S DEMISE
The amount you can save towards retirement is going up in 2024 due to an inflation adjustment. While not as big as last year, it is still a good jump. For those who can contribute to a 401k, 403b, and 457 plan, the amount is going up to $23,000 from $22,500 in 2023. The catch-up provision for those age 50 and over remains at $7,500. If one is eligible for an IRA, the amount increases from $6,500 to $7,000 while the catch-up of $1,000 remains the same. When it comes to funding an IRA, income limits determine how much of the contribution is deductible if you or your spouse also has a workplace retirement plan, and Roth IRA contributions are not allowed for people with income over certain levels. Those contributing to a SIMPLE plan will be able to put in $16,000 up from $15,500 and the catch-up remains the same at $3,500.
INFLATION COOLS IN OCTOBER
According to Social Security Trust Fund, Social Security recipients will see their benefits cut by 25% in 2034 and then by 28% in 2040. Why? Because the surplus that has built up over the years will be exhausted and the tax revenue from those still working will not be large enough to make the payments.
Our Founder and Executive Chair, Ray Ferrara, remembers that in the early 70s, the Baby Boomers assumed that Social Security would not be there for their retirement. Drastic changes were made in the early 1980s. President Reagan and Speaker of the House, Tip O’Neill, made what many call the greatest political compromise of all time…part of which was “saving” Social Security for the future. But that future is now projected to end within the next 10 years despite a few tweaks to Social Security over the past two decades. Everyone knows how to fix it, but the political cost would likely be a loss in the next election. What politician is willing to make that sacrifice? The time bomb is ticking.
About 25 years ago, in a similar article, we proposed that a comfortable (not easy) way to raise more revenue would be to increase the amount of income that is taxed by the CPI plus another $1,000. The average taxpayer would not have been affected, and those with higher wages would have only seen $62.50 more taken out of their paycheck which would have been matched by employers and compounded. Small steps over time add up to big numbers. At that time (1998), the wage base was $68,400 according to the Social Security Administration. Instead of having a wage base of $168,600 in 2024, this concept is estimated to have raised the wage base to at least $205,000 next year. Unfortunately, that “fix” would have only been temporary, but it would have delayed the inevitable.
The same concepts could still work today. None of the concepts are new and none are well liked as each has its drawbacks. What are they? First, raise the wage base faster than the rate of inflation; 2) raise the minimum age to begin Social Security from 62 to 65 over time; 3) raise the Full Retirement Age (FRA) from 67 to 70 over time; and 4) change the formula as to how the benefit is determined. Yes, you can punch holes in all these options and perhaps there are other ways to “fix” the problem, but they too will have economic and political consequences. The longer Congress waits, the more difficult it will be to “solve” the problem. Oh yeah, let’s not forget who elects our Representatives and Senators. An ugly truth.
REAL ESTATE COMMISSIONSARE LIKELY GOING DOWN
Much to the disappointment of the National Association of Realtors and realtors across the country, a jury in a Kansas City court ruled last month that the NAR conspired to inflate prices and awarded $1.8 billion in damages. Yes, they will appeal, but as a lawyer once said to us, “Do you know the best way to win on appeal?” “No”, we said. “Win the case in the first place. Judges hate to overrule another judge.” What does this mean going forward? As anyone knows who hires a realtor, the traditional compensation is a 6% commission (even higher for commercial property) and is generally paid 50/50 to the selling and buying agents by the seller.
Going forward it is likely that sellers will be more likely to negotiate the commission paid as a lower percentage or perhaps even a flat fee. It is also possible that the buyer and seller will negotiate separate contracts with realtors. Either way, realtors will need to be more transparent with how much they make.
1099s DELAYED FOR THIRD PARTY PLATFORMS
Who doesn’t have a PayPal, Venmo, Zelle, or some other payment platform? Okay, maybe some. Many people enjoy having an easy way to move money to another person. In the early days of third-party platforms, it was a little like the Wild West as some “bad” people used these platforms to move illicit gains and even make them “clean” money.
Several years ago, the American Rescue Plan Act of 2021 required any transactions of goods and services over $600 to be reported. The IRS announced they were going to require these platforms to send a 1099 to the recipient of an account. Then, it would be taxed as income unless the owner could prove that it was money from family or friends, but the burden fell on the account owner to keep track.
Some speculate that the number of 1099s would increase by 100 million. Since the IRS isn’t ready, they are not requiring 1099s for the 2023 tax year. They plan on beginning in 2024 and will increase the threshold to $5,000 that year and slowly move to $600. Essentially, they are easing into this large volume of 1099s. We will check back with you next year to see what they do, not necessarily what they say.
A PROVISE HOLIDAY TRADITION
FOUR TRAITS FOR A SUCCESSFUL RETIREMENT
Goldman Sachs recently partnered with Syntoniq, a behavioral finance company, to determine the behavioral traits of those who are successful in preparing for retirement. Participants who thought about the future and saved more rather than focusing on their quality of life today experienced less stress in retirement. The three successful retirement traits are: high optimism, financial literacy, and reward orientation vs. risk orientation. Further, these traits led to more retirement savings, a higher level of social activity, and a more balanced lifestyle. This group generally had a financial plan and was more disciplined with their investments.
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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