Planning

inflation

Retirees Get a Raise as Inflation Persists

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First the good news: Retirees will get a generous increase in their Social Security checks come January 2022. Social Security and Supplemental Security Income (SSI) benefits will increase by a whopping 5.9% in 2022, the biggest increase in 40 years.1 That means that the average monthly retirement benefit of $1,565 will grow to $1,657. Although Social Security accounts for only about 30% of overall retirement income, millions of retirees — over 10% — rely on Social Security for 90% or more of their income. So the increase will be more than welcome for many.
The bad news is that the boost only adds to an already disturbing inflation picture. The Consumer Price Index (CPI) came in 6.2% higher in October compared with a year earlier, even faster than an already heady 5.4% pace through September, and above economists’ forecasts. Rates have moderated since summer, but they remain stubbornly high. Prices for cars, fuel, rent, meat, and other groceries are noticeably higher, and many families are feeling the pinch.

Bottlenecks, Shortages, and Stimulus

The root cause of the rising prices is of course Covid. The pandemic has caused major disruptions in supply chains across the globe. From microchips to lumber, supply bottlenecks have led to shortages and price increases. Labor shortages have exacerbated the situation, particularly in leisure and hospitality businesses, resulting in wage increases — many long overdue. Add to this the massive government stimulus packages passed since the spring of 2020, and you have the perfect inflationary storm.

The big question is: will it persist? Are we headed toward a 70s-style inflation cycle? Six months ago, the consensus answer to this question was an emphatic no. The uptick was widely expected to be short-lived, basically just a rebound from the price drops at the outset of the pandemic in the spring of 2020. Since then, however, supply chain problems have festered and structural issues such as labor shortages have surfaced. What’s more, the price of oil has more than doubled over the past year, up 35% in just the past two months. Although most economists still believe that inflation will moderate in the coming months, many are less certain in their outlook. There is also the matter of the huge infrastructure and spending bills currently before Congress, which if passed, will add to inflationary pressures.

For its part, the Federal Reserve is increasingly concerned that supply disruptions could last long enough to prompt consumers and businesses to expect higher prices, setting off an upward spiral of wage and cost increases. It has already signaled a slowdown in bond purchases, and could start raising interest rates if the inflation numbers remain elevated. But raising rates is not a popular move in Washington, on Wall Street, or on Main Street, so the Fed will likely proceed very cautiously, with definitive moves — if any — unlikely before year-end.

What You Can Do

In the face of rising prices, consumers do not have many options. You can be more selective in your purchases, charge more for your services if you’re self-employed, or try to convince your employer to raise your salary to compensate. But in the end, if food, rent, and fuel cost more, you have to pay more.

For investors, the key to staying ahead of inflation is to seek investments that have the potential to deliver higher returns. Historically, stocks have shown the greatest ability to outpace inflation over time, although past performance is no guarantee of future results. There are also inflation-indexed bonds issued by the U.S. Treasury, but they generally make sense only if you expect a major uptick in inflation.

Talk to your financial professional to see what investing strategy might best suit your circumstances in an inflationary or rising rate environment.

 

 

Notes:

Social Security Administration, October 13, 2021.

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All company names noted herin are for educational purposes only, and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

Treasury Inflation-Protected Securities (TIPS) help eliminate inflation risk to your portfolio, as the principal is adjusted semiannually for inflation based on the Consumer Price Index (CPI), while providing a real rate of return guaranteed by the U.S. government. However, a few things you need to be aware of are that the CPI might not accurately match the general inflation rate; therefore, the principal balance on TIPS may not keep pace with the actual rate of inflation. The real interest yields on TIPS may rise, especially if there is a sharp spike in interest rates. If so, the rate of return on TIPS could lag behind other types of inflation-protected securities, like floating rate notes and T-bills. TIPs do not pay the inflation-adjusted balance until maturity, and the accrued principal on TIPS could decline, if there is deflation.

Car Shopping in the Time of COVID

Car Shopping in the Time of COVID

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The COVID pandemic has had many unexpected consequences. A booming stock market. An overheated housing market. A glut of office space. But who would have ever thought it would have such a profound impact on buying or renting a car? Yet that’s exactly the case. Car prices have skyrocketed, delays are common, and shortages are rampant. Meanwhile, renting a car could set you back several weeks’ pay — if you can even find one. Why all this is happening is a lesson in the myriad effects of the global pandemic.

New Cars

The average price of a new car topped $40,000 in June 2021, up 15% from a year earlier.1 This sharp increase is the result of two factors right out of classical economics: an increase in demand and a decrease in supply. On the demand side, sales have risen because people are driving more. After months of lockdown and quarantine, Americans are using their cars again to drive to work or go on road trips. Car dealerships that were closed during the pandemic have also opened up, and they’ve bumped up prices to help compensate for last year’s losses.

On the supply side, the widely-publicized shortage in semiconductors has constricted the output of all major car manufacturers. The chip shortage is attributed to the huge uptick in demand for cell phones and other personal electronics during the pandemic, as locked-down consumers went on a spending spree. This, in turn, crowded out orders by car manufacturers, which had already cut back in early 2020. Recent COVID-19 outbreaks in Southeast Asia, a major supplier of semiconductors, have further exacerbated the situation. In all, new-car inventories in the US were down 54% in June 2021 compared with two years earlier.2

Used Cars

The situation with used cars is even more dramatic. As of September, used car prices had risen 25% from a year earlier, and over 40% since March 2020.3

The markets for used cars and new cars are closely related. So the microchip shortage and the closure of dealerships during the height of the pandemic also affected used car sales, as many people turned to the secondhand market instead. That brought a whole new set of customers to the used car market — ones willing to spend more money on a car.

Also impacting the used car market are rental car companies (see below), usually a major source of used cars, but which have been keeping cars longer in the face of surging demand.

And Rentals…

Rental car companies, facing a standstill in demand last year, sold off about a third of their fleets to raise enough cash to survive the pandemic. Now, with travel rebounding, rental car companies have a major shortage of cars to rent. They have also raised prices to help make up for last year’s red ink. According to AutoWeek, rental car prices have increased by more than 30% since 2020, and renting a car can cost upward of $300 a day in some locations.4

Tips for buyers and renters

All in all, buying or renting a car right now can be a frustrating experience. Not only are cars pricier, but they are in short supply. Anyone looking for a car should consider these tips.

  • Shop around. Prices can vary widely from dealer to dealer for the same car. And keep an eye out for dealer or manufacturer incentives.
  • Be open to different makes and models. Some are more available than others. And some have had significantly lower price increases.
  • If you’re putting a deposit on a model that’s not currently available, make sure it’s fully refundable in case you change your mind.
  • If you’re in no hurry, considering putting off your purchase until next year, when supply chain disruptions are expected to improve.
  • If you intend to trade in your current vehicle, look for higher trade-in values. Check Kelly Blue Book or Edmunds for your car’s current value.
  • If your car is coming off a lease, look for a residual value that’s higher than the original estimate. See the links above to find your car’s current value.
  • When renting, consider TURO or other car sharing services instead of the traditional car rental companies. Also, be open to different sizes, makes, and models.

 

 

Notes
1Road/Show, Average new car price absurdity continues, blasts past $40,000, June 25, 2021.
2Source: Business Insider, Why are used cars so expensive right now?, July 12, 2021.
3Source: Business Insider, Used-car prices are surging — again — and it’s probably going to get worse, September 20, 2021.
4Source: https://www.wjtv.com/news/pine-belt/rental-car-prices-increase-as-shortage-continues/

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All company names noted herin are for educational purposes only, and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

floods

Floods Are Getting Worse. Are You Covered?

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It’s hurricane season again, and this year is looking worse than ever. The National Oceanic and Atmospheric Administration has predicted a total of 15-21 named storms, including 7-10 hurricanes, 3-5 of which may become major hurricanes.1

In fact, hurricanes are becoming stronger, rainfall heavier, and flood risk higher. Damages from Hurricane Ida alone are estimated to top $15 billion — much due to flooding.2 Given climate change and the growing likeliness of more frequent and severe weather events, it may be time to consider federal flood insurance.

Are You Prepared?

Although wind damage is usually covered under a typical homeowner’s policy, flooding is not. It may cover certain types of water damage, such as that resulting from a leaky roof, a broken water pipe, or a cracked water heater. But damage from a real flood — a river or stream that flows over its banks or storm waves that surge over the coastline — usually won’t be covered by homeowners or renters policies. To insure against floods, you must purchase special flood insurance, generally offered only through the government-run National Flood Insurance Program (NFIP).

Whether flood insurance is right for you will depend upon a number of factors. Ask yourself these four questions.

  1. Is it available? Contrary to popular belief, flood insurance is not restricted to properties located in flood-prone areas like beaches or riverfronts. It is generally available in communities that adopt and enforce what Federal Emergency Management Agency (FEMA) considers sound floodplain-management practices. To find out whether your community participates in the flood insurance program, contact your local government or one of the resources provided by the NFIP.
  2. Do you need it? As countless property owners have learned the hard way, if you live in a flood-prone area, the waters are likely to rise at some point — and the longer you live there, the greater the chance you’ll experience a flood, especially given climate change. You may want to hedge your bets and consider flood insurance well before a hurricane or major storm is on the way.
  3. What does flood insurance cover? Most flood-related damage is covered under an NFIP policy. Although you can buy flood insurance through your insurance agent, the policy and coverage generally come from the NFIP. Read this summary of what’s covered and what’s not.
  4. How much does it cost?The average flood insurance policy obtained through NFIP currently runs $734 per year.3 But premiums vary widely, depending upon coverage, deductibles, and other factors. What’s more, they are all about to change.

 

Overhaul Ahead

Starting on October 1, NFIP is changing its pricing structure to make rates more accurately reflect each property’s unique flood risk. Pricing will now factor in a home’s replacement cost, its specific flood risk, and the proximity of the property to the potential flood source. Most important, the program will now factor in future catastrophic modeling from climate change, including sea level rise, drought, and wildfires. Rates will go up for some properties and down for others, but the average policyholder is likely to see a 10% increase.

If you already have an NFIP policy, make sure you know how these changes will affect you. If you are considering flood insurance for the first time, make sure to investigate your options regarding cost, deductibles, coverage, and other factors. For more information, contact the NFIP.

Notes

1Source: National Oceanic and Atmospheric Administration, Atlantic hurricane season shows no signs of slowing, August 4, 2021.

2Source: Wall Street Journal, Firms Estimate Hurricane Ida Could Cause Over $15 Billion in Insured Losses, August 31, 2021.

3Source: ValuePenguin by Lendingtree, Average Cost of Flood Insurance 2021, September 8, 2021.

 

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 

All company names noted herin are for educational purposes only, and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

           

real estate boom

Real Estate is Booming? Is a Bust Ahead?

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Anyone looking to buy or sell a home lately has probably been hit by sticker shock. Residential real estate prices have gone through the roof, increasing at rates unseen since 2005. According to S&P Case-Shiller, home prices in March saw their highest annual rate of growth in over 15 years — up 13.2% from a year earlier, following a 12.0% annual gain in February. Some markets — most notably Phoenix, San Diego, and Seattle — saw gains of 18% to 20%.1 What’s more, the median price of a new home sold in April was $372,400, up 20.1% from a year earlier, the strongest annual gain since 1988.2

Bidding wars are now common, and in some neighborhoods, competition is so fierce that many homes are sold before they even hit the market. According to Zillow, nearly half of the people who sold homes in April accepted an offer within a week.3

What’s Behind the Surge

Several different factors are driving the frenzy. For one, mortgage rates remain historically low. Although they have crept up some since their all-time low in January, the rate on a 30-year conventional mortgage was just 2.93% as of June 27.4 That means that anyone looking to spend a fixed amount per month on a mortgage can now afford much more house than they could a few years ago.

There are also demographic factors at work. Millennials, who, as a group, have long shunned buying in favor of renting, are now entering the market in force. COVID-19 and the prospect of long-term telecommuting have encouraged many to move from urban apartments to suburban homes. Many others are transitioning into larger homes to accommodate families.

Perhaps the biggest reason for the current spike in prices is supply — or lack thereof. The inventory of new houses has been sharply constricted by a widespread lumber shortage, along with shortages of kitchen appliances and other building supplies, such as copper and PVC pipe. Transportation logjams, brought on in part by COVID lockdowns and business closures, continue to impact new home construction. This has put pressure on the overall inventory of existing homes as well, as would-be buyers of new homes opt for existing homes instead. Although existing home sales are up year-to-date, they dropped in April for the third consecutive month, according to the National Association of Realtors.5

Will it continue?

Although the current supply shortage shows no signs of abating, over time, the bottlenecks will likely work their way out, as the post-COVID economy kicks into gear. Price appreciation is unlikely to continue at its current heady pace, but most real estate analysts do not foresee any major price drop, as happened back in 2006 to 2012 when overbuilding and lax lending standards posed more fundamental issues. The bigger concern may be mortgage rates. Average rates remain below 3%, but that could change if inflation prompts the Federal Reserve to raise interest rates. The Fed has indicated that it intends to hold rates steady for the time being, but should inflation continue at its recently reported level of over 4%, it will likely take action. Should that happen, mortgage rates would rise and real estate demand would cool down.

So stay tuned, but be prepared for more of the same in the immediate future.

Notes:

1S&P Dow Jones Indices, S&P Corelogic Case-Shiller Index Shows Annual Home Price Gains Climbed to 13.2% in March, May, 25, 20121.

2Source: Wall Street Journal, U.S. Home-Price Growth Surges as Demand Overwhelms Supply, May 25, 2021, based on figures released by the Commerce Department.

3Source: NBC News, It’s a red-hot real estate market — so why are home sales plunging?, May 22, 2021

4Source: Freddie Mac, as of June 17, 2021.

5National Association of Realtors, Existing Home Sales, May 27, 2021.

 

                                                                                                                                                                            

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

tax preparation

Haven’t Filed Your Taxes Yet? Be Aware of These Features

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As if the pandemic hasn’t already affected every other aspect of people’s lives, now there’s taxes. But in this case, the effect is positive. The different relief packages passed over the last year offer a host of features that can help taxpayers lower their 2020 tax bill. And if you are among the many who are filing your return later due to the extended filing deadline, you still have time to take advantage of these features.

So, as you sit down to prepare your tax return, keep in mind the following.

Stimulus checks aren’t taxable.

The millions of Americans who received stimulus checks in 2020 will not have to report it or pay taxes on it. If, for some reason, you were owed one but didn’t get it, or you did not receive the full amount that you were entitled to, you can get it in the form of a Recovery Rebate Credit when you file.

Unemployment benefits may not be taxable.

The latest relief package, the American Rescue Plan Act of 2021 (ARPA), passed in March, made the first $10,200 of unemployment benefits received by an individual taxpayer (or in the case of a joint return, received by each spouse) in 2020 tax free if your annual household income is under $150,000. For those who already filed their taxes and reported unemployment benefits before passage of the ARPA, the IRS will automatically recalculate the correct amount of taxable unemployment and refund any resulting tax overpayment (or apply it to other outstanding taxes owed).

Paycheck Protection Program (PPP) loan proceeds may be tax deductible.

For those businesses that received loans under the PPP, eligible expenses that were paid with loan proceeds may be deducted from taxable income. Keep in mind, however, that under the program, any loan forgiveness is subject to the approval of the Small Business Administration.

Those claiming the standard deduction still may be able to deduct $300 for charitable contributions.

In an effort to help charities hard-hit by the pandemic, the CARES Act allows taxpayers who take the standard deduction to deduct up to $300 in cash donations made in 2020. Usually, only those who itemize can write off donations to charity.

No penalties for early withdrawals from your retirement plan.

Normally, if you are under age 59½ and withdraw money from your qualified retirement plan — such as a 401(k) or IRA — you must pay a 10% early withdrawal tax and ordinary income tax on taxable portions of the distribution. But the CARES Act waived the penalty for early withdrawals made during 2020, up to $100,000, if you were impacted by coronavirus. What’s more, you are allowed to spread out any taxable income related to such distributions over a three-year period rather than reporting it all in your 2020 taxes.

There are a number of other tax provisions contained in the different relief packages that could also potentially reduce your tax bite for the 2020 tax year. If you are not already working with a tax professional, now may be the year to do so, as a professional may be able to identify other one-time opportunities to lower your 2020 tax bill.

                                                                                                                                                                            

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

understanding your social security benefits

Social Security Benefits and You

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Social Security Benefits and You

Social Security benefits currently represent approximately 33% of the aggregate total income of Americans aged 65 and older, according to the Social Security Administration. For future generations of retirees, Social Security may represent a much smaller percentage of retirement income.

A System at Risk

When Social Security was established in 1935, the average life span among Americans was 63 years. Today, the average lifespan is almost 79 years, according to the Center for Disease Control mortality statistics.

In 1950, 16.5 workers paid retirement benefits for each retiree. By the year 2037, the ratio may be just 2.2 workers to every one retiree.1 By then, the burden of taxes on each worker may well be unmanageable. This aging of the population has led some experts to predict that the Social Security Old Age and Survivors Insurance Trust Fund may run out of assets by the year 2034, a possibility that makes building your own funds for retirement more important than ever.

Even under the best scenario, the Social Security system was created as the foundation for retirement, but it was never intended to provide the sum total of financial security during the retirement years. So the more you can do for yourself to save and invest for retirement, the better off you may be.

How Much Will Social Security Pay?

The exact amount of your Social Security benefit will depend upon your earnings history. You can obtain an estimate of your benefits using the Social Security Administration’s online estimator. You can also create a personal mySocial Security account online or call the Social Security toll-free number at (800) 772-1213 and request form SSA-7004, the “Request for Social Security Statement” to get a personalized estimate of your benefits, plus a record of your annual earnings. Like reconciling your bank statement, your Social Security summary of annual earnings should be verified against your tax return statements, W2 forms, or your own records. If there are any discrepancies, report them at once.

Shares of Aggregate Retirement Income
For all people age 65 and older:
Social Security Benefits 33%
Pensions 21%
Earnings 34%
Asset Income 9%
Source: Social Security Administration, Fast Facts & Figures About Social Security, 2017.

How Social Security Works

Social Security contributions are paid by you and your employer. Your contributions have been deducted from your paychecks since the day you started working and are matched by an equal amount paid by your employer. These contributions pay for:

Retirement benefits — Collectible at any time after age 62 and based on the number of years you’ve been working and the amount you’ve earned. In some cases, your children and your spouse may also be eligible for benefits on your account.

Survivor’s benefits — A kind of life insurance coverage available to your spouse and dependents.

Disability insurance — Provides a monthly income in the event you are unable to work due to a disability. Eligibility depends on the number of “credits” you have earned and your age.

Medicare — Entitles you to medical benefits and coverage, including hospital insurance after age 65. Bear in mind that Medicare is also experiencing funding issues, and the Hospital Insurance Fund could run out by 2026.

Social Security Benefits for Other Family Members

When you receive Social Security benefits, other payments may also be made to:

  • A spouse age 62 or older.
  • A spouse under age 62 who is caring for a child under 16 or a disabled child who is receiving benefits from your earnings.
  • Unmarried children under 18 (or under 19) if they are enrolled full time in high school.

When You Retire Determines What You Get

  • Currently, you can retire at normal retirement age (between age 66 and age 67 depending on when you were born) and receive full benefits.
  • Retire between 62 and normal retirement age and receive a reduced benefit.
  • Continue working and delay the receipt of benefits and get a bonus for each year of work past normal retirement age, up to age 70. “Delayed retirement credits” currently amount to 8% a year in order to encourage later retirement.

Changes in Your Monthly Benefits

Your monthly Social Security check may change to reflect the following:

  • Cost-of-living increases.
  • Eligibility for disability benefits after retirement but before you reach normal retirement age.

Make the Most of Your Benefits

You must apply for Social Security benefits and for Medicare benefits. If additional insurance is being considered, remember to apply within six months of Medicare eligibility to be accepted without regard to preexisting conditions. When you apply, you’ll want to:

  • Decide whether you’ll collect your own Social Security benefits, based on your earnings and work history, or your spouse’s. Presumably, you’ll want to choose the one that pays the most. If you retire before a spouse, you can collect your own benefits, then switch and choose the spousal benefits if they are greater.
  • Remember to apply for retirement benefits a few months before you want them to start. Some time is required to process all the paperwork, including Social Security number, proof of age, and evidence of recent earnings (W-2 forms from the last two years, or, if you’re self-employed, copies of your two most recent tax returns).
  • Apply for Medicare before you retire.
  • Apply for any additional health insurance within six months of Medicare eligibility.
  • Reconcile your Social Security earnings report with your own records at three-year intervals. Report any discrepancies.
  • Bear in mind that “earnings limitations” (which change each year) may limit the amount you may earn while still receiving Social Security benefits. Those limitations end when you reach normal retirement age.
  • Keep Social Security records up to date if you change your name in order to have your earnings credited properly.

Regardless of your Social Security options, think of Social Security as only a small percentage of your total retirement plan, and set aside a portion of your income on a regular basis. Saving and investing for your own retirement nest egg is a “must.”

 

Notes

1Fast Facts & Figures About Social Security, 2020, Social Security Administration, July 2020

 

Ways to manage your debt

Manage Your Debt

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New Year’s Resolution: Manage Your Debt

As the new year dawns, most Americans are probably happy to bid good riddance to 2020, a year marked by the COVID-19 pandemic, lockdowns, political brawls, and challenging economic times. Many have had to take on debt to tide them over. If you’re among them, or one of the many other Americans who pay an ever increasing portion of their paychecks to service debt, now may be the ideal time to reassess your finances and take steps to manage and reduce your debt.

I Owe, I Owe…

In America today, carrying some debt is unavoidable, and even desirable, for most households. But between mortgages, car payments, student loans, and credit cards, many Americans find themselves in over their heads. In fact, the average U.S. household carries $6,124 in credit card debt, owes $27,649 in auto loans and $46,459 in student loans, and has a mortgage balance of $197,445.1 Paying off such debt can be costly, in terms of both cash on hand and your overall financial health. So it helps to plan. Start by finding out where you stand, then take the appropriate steps to dig out.

Assessing Your Debt

How much debt is too much? The figure varies from person to person, but in general, if more than 20% of your take-home pay goes to finance non-housing debt or if your rent or mortgage payments exceed 30% of your monthly take-home pay, you may be overextended.

Other signs of overextension include not knowing how much you owe, constantly paying the minimum balance due on credit cards (or worse, being unable to make the minimum payments), and borrowing from one lender to pay another.

Here’s how you can build a clear picture of your debt situation:

  • List all of your credit cards and how much you pay to them each month;
  • List all of your fixed loans (such as car loans and student loans) and their monthly payments; and
  • List your monthly mortgage or rent payment.
  • Once you are done, add them all up. That’s your total monthly debt load.

If you find that you’re overextended, don’t panic. There are a number of steps you can follow to eliminate that debt and get yourself back on track.

Begin With a Budget

The first step in eliminating debt is to figure out where your money goes. This will enable you to see where your debt is coming from and, perhaps, help you to free up some cash to put toward debt.

Track your expenses for one month by writing down what you spend. You might consider keeping your ATM withdrawal slip and writing each expense on it until the money is gone. Hang on to receipts from credit and debit card transactions and add them to the total.

At the end of the month, total up your expenses and break them down into two categories: essential, including fixed expenses such as mortgage/rent, food, and utilities, and nonessential, including entertainment and meals out. Analyze your expenses to see where your spending can be reduced. Perhaps you can cut back on food expenses by bringing lunch to work instead of eating out each day. You might be able to reduce transportation costs by taking public transportation instead of parking your car at a pricey downtown garage. Even utility costs can be reduced by turning lights off, making fewer long-distance calls, or turning the thermostat down a few degrees in winter.

The goal is to reduce current spending so that you won’t need to add to your debt and to free up as much cash as possible to cut down existing debt.

Three Steps to Reduce Debt

Once you’ve got your budget settled, you can begin to attack your existing debt with the following steps.

Pay off high-rate debt first. The higher your interest rate, the more you wind up paying. Begin with your highest-rate credit cards and eliminate the balance as aggressively as possible. For example, assume you have two separate cards, each with a $2,000 balance, one charging 20% interest, the other 8%. By paying the maximum you can afford on the higher rate card, and the minimum on the lower-rate card until the higher-rate card is fully paid off, you will be able to reduce your overall interest costs — perhaps significantly over time.

Transfer high-rate debt to lower-rate cards. Consolidating credit card debts to a single, lower-rate card saves more than postage and paperwork. It also saves in interest costs over the life of the loan. Comparison shop for the best rates, and beware of “teaser” rates that start low, say, at 6%, then jump to much higher rates after the introductory period ends. You can find lists of low-rate cards online from sites such as CardTrak and Bankrate.

If you can only find a card with a low introductory rate, maximize the value of that low-interest period. By paying off your balance aggressively, you will reduce the balance more quickly than you will when the rate goes up.

You can also contact your current credit card companies to inquire about consolidation and lower rates. Competition in the industry is fierce, and many companies are willing to lower their rates to keep their customers. Even a percentage point or two can make a difference with a sizable balance.

Borrow only for the long term. The best use of debt is to finance things that will gain in value, such as a home or an education, or big-ticket necessities, like a washing machine or a computer — assets that will still be around when the debt is paid off. Avoid using your credit card for concert tickets, vacation expenses, or meals out. By the time the balance is gone, you’ll have paid far more than the cost of these items and have nothing but memories to show for it.

By analyzing your spending, controlling expenses, and establishing a plan, you can reduce — and perhaps eliminate — your debt, leaving you with more money to save today and a better outlook for your financial future.

 

1Source: Nerdwallet.com, 2019 American Household Credit Card Debt Study, updated June 2020. Balances are as of June 2020 for households carrying that type of debt.

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.

 

COVID college costs

College Costs in the Era of COVID-19

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Paying for College in the Era of COVID-19

This semester, millions of students, teachers, and college administrators are having to deal with a radically changed landscape while still managing college costs. At many institutions, classes have been cancelled or moved online. Sports programs have been suspended and dormitories, libraries, and labs shuttered. In fact, traditional campus life has been turned upside down thanks to COVID-19, and it’s unclear how long it will last.

Meanwhile, the cost of a college education is higher than ever. According to the College Board, the average total charges at four-year public colleges (in state) for the 2019-2020 academic year were $21,950. Average costs at four-year private nonprofit colleges were more than double that ($49,870).1 And while increases in costs have moderated in recent years, they continue to outpace inflation and median household income, resulting in a growing dependence on student loans; the average student borrower graduating in 2018 owed about $29,000.2

For cash-strapped students and parents, the current crisis has tipped the scales. Many are rebelling at the high costs in the face of a severely diminished college experience. Others have decided to wait until the crisis has passed before enrolling. Still others are questioning the very value of a college degree under current circumstances.

But the issue of soaring college costs is hardly new, and there are two sides to consider.

Students and Parents: Give Us a Break!

“We are paying a lot of money for tuition, and our students are not getting what we paid for,” comments one California parent, incensed at paying in-person prices for education that has moved online. On-campus facilities and services like computer labs, libraries, and networking opportunities have also been severely diminished by closures.

Already suffering from a pandemic-induced recession, many families are feeling the pinch and want relief. Students in particular have been hard hit with furloughs and layoffs, as many rely on retail service jobs to help them get by — the same jobs that have suffered the most in the face of closures and lockdowns. Many students had also signed leases for off-campus housing and are now stuck with them even if classes are cancelled. In short, students and parents are demanding tuition rebates, increased financial aid, reduced fees, and leaves of absences to compensate for what they feel is a diminished college experience.

Colleges: How Can We Manage?

Meanwhile, colleges and universities are taking a major financial hit from the pandemic. Enrollment is down. International admissions and offshore semesters have been halted. Entire programs have had to be suspended for health reasons. What’s more, substantial resources are required to set up an online curriculum, administer the courses, and train educators. There are also major costs involved with constant COVID testing of students and disinfecting of classrooms, offices, and other facilities. And, colleges must continue to pay existing vendor contracts, maintain facilities, and compensate their own staff. The situation has created an existential crisis among smaller colleges, who lack the endowments and funding of larger institutions. For many, it’s a question of survival.

A Mixed Response to Managing College Costs

Given this predicament and the widely varying circumstances faced by different institutions, it’s no surprise that their responses vary widely. A handful of universities have announced substantial price cuts. Some have cut fees. But most have kept prices flat, and a few have even increased them. While many offer refunds of fees and room and board, the reimbursement policies vary from school to school — and nearly all have drawn the line at tuition. Here’s a sampling of actions taken — or not — by different schools:

  • Full or partial refunds for room and board costs
  • Reduced tuition and fees
  • Discounts in the form of scholarships or loans
  • Renegotiated financial aid packages
  • Frozen tuition at previous year’s level
  • Imposition of “COVID fees” to cover added costs
  • Increased tuition to cover added expenses

Which of these actions a given school takes depends largely on its financial health and reputation. Smaller, private colleges with more at stake are generally offering more in the form of relief. Larger, well-endowed institutions, such as the Ivy League colleges and large state schools, trend toward the status quo. But there are many exceptions, and each institution has its own approach.

What Can You Do?

If you are a student or parent seeking compensation or relief, your options are limited, especially for the current semester. At nearly all institutions, tuition reimbursement is almost nonexistent after several weeks, no matter what the circumstances. Some schools are now offering tuition insurance, but coverage typically applies only when a student withdraws for medical reasons. To find out what relief may be available at your school, contact the registrar.

Alternatively, you can join the thousands of students and parents who have signed petitions or filed lawsuits demanding tuition cuts, housing reimbursements, and more. Check online to see if any such actions may be already in the works at your school.

In the end, like so many other issues arising from the pandemic, the current predicament facing students and schools is likely to be with us until a COVID-19 vaccine is in place. Even then, skyrocketing costs and mounting student debt pose longer-term issues. Any resolution will take time and likely have far-reaching implications for the costs and nature of a college education.

Notes:

1The College Board, Trends in College Pricing 2019.

2The College Board, Trends in Student Aid 2019.

                                                                                                                                                                            

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.

Converting a Traditional IRA to a Roth IRA

Converting a Traditional IRA to a Roth IRA

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Thinking of Converting Your Traditional IRA to a Roth? Now May Be the Time

Anyone who is thinking of converting a traditional IRA to a Roth IRA may want to consider do it this year. Why? Because today’s unique conditions create an opportunity to minimize the tax bite from converting. In fact, many have already taken advantage of this opportunity, with one provider reporting a 67% increase during the first four months of 2020 compared to a year earlier.1

But before you begin to decide whether or not to convert, make sure you are familiar with what’s involved with a Roth conversion.

What’s a Roth Conversion?

When you convert your traditional IRA to a Roth IRA, any deductible contributions you had made, along with any investment earnings, are taxed as ordinary income for the year of the conversion. That means the taxable value of the conversion could push you into higher federal and state tax brackets.

You will be responsible for full payment of all taxes in the year the conversion is made. If you use assets from the traditional IRA to pay those taxes, the tax amounts could be treated as premature withdrawals, so you could be subject to additional taxes and penalties.

Depending upon your personal financial situation, a Roth IRA conversion could potentially provide a tax-adjusted benefit over time, provided you meet the eligibility requirements.

Why Now?

The coronavirus pandemic has created unique conditions that may make a Roth conversion more attractive than usual.

Your taxable income may be lower

If, like millions of Americans, you have been furloughed or laid off, or your sales commissions are down, you will likely report lower taxable income for 2020. This may put you in a lower tax bracket so that monies converted to a Roth would be taxed at a lower rate than would otherwise apply (unless the amount converted pushes you into a higher bracket). For instance, converting a $15,000 IRA when your marginal federal tax rate is 12% saves $1,500 of tax compared to converting at a 22% marginal rate — and that does not include state tax, which might also drop.2

Your business may incur a loss

The pandemic is causing many businesses to close or incur a loss. If you expect to report a business loss on your personal return, you may be able to convert to a Roth at a reduced tax cost. With the Roth conversion creating additional income, you could use the loss generated by the business to offset some or all of that income.

Your IRA balance may be down

To minimize taxes, it’s better to convert assets when they’re low in value. Although U.S. stocks have recovered most of the ground lost in February and March, it’s possible your IRA balance may still be well off its peak, depending on how it is invested.

RMDs are suspended for 2020

As part of the CARES Act, required minimum distributions (RMDs) for traditional IRAs and qualified retirement plans were suspended for this year. Not taking distributions from a traditional IRA might keep or put you in a lower tax bracket by reducing your taxable income, making it even more desirable to convert to a Roth.

Current tax rates are low and could go up

The 2017 Tax Cuts and Jobs Act (TCJA) reduced federal tax rates, cutting the top marginal rate to 37%. That’s relatively low compared with recent history. Given the staggering price tag of the pandemic bailout (so far) and the ballooning budget deficit, it’s reasonable to assume that at some point, tax rates may increase. When this might happen is anyone’s guess, but converting while rates are relatively low is something to consider.

To Convert or Not?

Whether you would be better off leaving your funds in a traditional account or moving all or some of them to a Roth IRA will depend upon your personal circumstances. Generally speaking, Roth IRA conversions are best suited for investors who have significant time until retirement, are high wage earners, think they may be in a higher tax bracket at retirement, or are looking for an estate planning tool to help pass wealth to their heirs.

Whatever your circumstances, keep in mind that IRS rules governing IRAs and conversions are complex. So be sure to consult with a financial or tax professional before deciding.

Source/Disclaimer:

1Money, Roth IRA Conversions Are Surging. Here’s Why This Retirement Savings Strategy Is So Popular Right Now, June 4, 2020.

2Example is for illustration only. Your results will differ.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year your convert, you must do so before converting to a Roth IRA.

 This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.