Wealth Planning - Inflation's Impact
Projecting what could happen in the future includes making assumptions based on the information at hand today. An integral assumption in a wealth plan is estimating how quickly goods and services might rise over time. March’s Consumer Price Index-Urban (CPI-U) of 8.5% year-over-year signifies higher prices in retirement for many; with energy, shelter, and food prices contributing to most of this increase. While the Federal Reserve (the Fed) would like to see long-term inflation at the 2% benchmark, we think this is unlikely in the foreseeable future. We see tremendous value in using a higher inflation estimate in our financial planning models – close to 4% annually – to ensure our clients feel confident and prepared for the future.
Whether you are a first-time planning client or simply re-visiting your plan with us, please leverage our experienced team of wealth planners. Your wealth plan is included as part of our service at no additional charge.
Fret Less Over Debt
Jerome Powell and the Fed have started to tackle higher inflation by raising interest rates. The federal funds rate has increased to 25 bps with further increases expected in the upcoming Fed meeting on May 4th. The after-effects are already being felt with average residential mortgage rates on a 30-year fixed-rate mortgage now above 5%. Other lending products benchmarked to short-term interest rates such as credit cards, new and used car auto loans, and lines of credit are moving from their low points over the past 2 years as well. Business owners are also experiencing higher costs of capital from their banking partners.
If you have a variable rate on any debt, it is worth revisiting to make changes such as refinancing, locking in a fixed rate, or paying off the debt altogether.
Distributions On Your Terms
If you have any of the retirement accounts below, you’ve likely heard of the term, Required Minimum Distribution, or its acronym, RMD. Once you reach the age of 72, the IRS generally requires you to initiate withdrawals based on your life expectancy. While they can be satisfied via an in-kind transfer of securities to a taxable account, RMDs are often thought to be synonymous with a one-time, lump-sum payment in cash at the end of the calendar year. However, clients in need of retirement income are permitted to automate their RMDs in weekly, monthly, or annual cash installments and can even elect the desired day to deposit these distributions for predictable cash flow.
- Qualified plan accounts such as corporate 401K, 403(b), and individual/solo 401K
- Profit sharing plans
- 457(b)
- Keogh / H.R. 10
- Traditional IRA
- Rollover IRA
- SEP IRA
- SIMPLE IRA
- Inherited / Beneficiary IRAs, including traditional and ROTH (*minimum distributions for inherited IRAs are affected by SECURE Act regulations; please reach out to Main Street to discuss the specifics around your inherited IRA.)
Please reach out to our team if you are thinking of automating these distributions. Of course, if you are not in need of the income, we can also use these RMDs and reinvest into your portfolio accordingly. If you are turning age 72 this calendar year, our MainStreet team will be in contact to discuss in more detail.
IRS Resources - Helpful articles from the IRS
RMS Comparison Chart (IRAs vs. Defined Contribution Plans)
Retirement Topics - Required Minimum Distributions (RMDs)
Washington, D.C. Landscape
Elections
Midterms are fast approaching and before long, many of us will be at the polls voting in the primary and general elections in the second half of 2022. Elections can have far reaching political implications leading to different outcomes - one of which includes the Democratic Party continuing their slim majority in the House and Senate. It’s also quite possible for Republicans to turn the tide in Congress which would most likely create legislative gridlock for the next two years under the Biden Administration. While a mixed result is also possible, what we can glean from history is that midterm election years tend to experience increased market volatility; as if the recent market events weren’t enough, midterms add another variable into the mix of inflation, war, and monetary policy. We expect to see continued political posturing as a means to garner votes. Overall, 34 of the 100 Senate seats and all 435 House seats will be contested during the mid-term elections. To boot, there are also 36 governorships which could largely affect control of states.
SECURE Act 2.0
In 2019, the initial Setting Every Community Up for Retirement (SECURE) Act was passed to boost retirement savings for Americans. Less than 3 years later, we are seeing politicians working through an expansion of these rules taking form in SECURE Act 2.0.While it is still only a bill and not official law, the potential & notable changes making headlines include:
- Automatic enrollment of employees in employer retirement plans leading to an opt-out for nonparticipating employees.
- For older employees, the required minimum distribution (RMD) age would increase to 75 from age 72 currently.
- Increased ‘catch-up’ contribution amounts for employees.
- Part-time employees would be permitted to participate in company retirement plans.
- For younger employees, contributions dedicated to student loan repayment would be eligible for company matching.
Education and Lingering Loans
For our next generation clients, we understand that college loans may play a role in your financial picture. The moratorium on federal student loan payments has recently been extended to August 31st , 2022allowing borrowers more time to defer payments. While loan forgiveness is a popular topic of conversation and an enticing, yet uncertain one, we advocate for chipping away consistently by paying principal down on these loans (budget allowing) even with the moratorium in place. Loans for education come in many shapes in sizes; while borrowers have the optional reprieve on federal loan repayment, private student loans however do not fall into this category.