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The Retired Investor: Increase Tax-Deferred Contributions Right Now
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In 2022, Congress increased the amount an individual can contribute to an Individual Retirement Account (IRA) as well as a 401(k), 403(b), and most 457 plans. If you have not already, it is time to increase your contributions for 2023 to take advantage of this opportunity.
If you missed it, the Internal Revenue Service (IRS) announced in October 2022 the largest-ever annual increase in 401(k) contributions. It boosted the maximum contribution limit by $2,000 to $22,500 for 2023. For those over 50 years old, an additional "catch-up" contribution will rise by $1,000 to $7,500. As for the contribution limits for an individual IRA, an additional $50 in contributions to $6,500 from $6,000 last year was implemented. The catch-up amount, however, remains the same at $1,000.
The IRS also raises the income threshold for which tax deductions for IRA contributions will be phased out. For those who are not aware, at a certain level of income, you can still contribute to a tax-deferred account, but you don't get a tax deduction when you do. The new income bar will be set at $73,000 to $83,000 for individuals and single heads of households, and for married couples filing jointly, the new threshold will be $109,000 to $129,999 for married couples.
These are generous benefits, and they are occurring at just the right time. Unfortunately, many savers may be hesitant to take advantage of this gift. There is a tendency among those saving for retirement to reduce or postpone contributions to their retirement accounts when the equity markets are declining, or inflation is rising. Allianz Life, a Minneapolis-based insurance company, found in a recent survey that 54 percent of Americans reduced or stop contributions to their retirement savings.
On the surface, with trillions of dollars wiped out of retirement savings, I can understand this hesitation. Human nature is such that the first reaction in a down market to putting more money in the markets is not to. With the average retirement account down 20 percent in 2022, I often hear "Why put good money after bad in a market like this?"
The answer is that the best time to invest is when the markets are going down, not up. Furthermore, at least for those saving through a 401(k) or similar plan, contributions are made monthly and usually on autopilot. That means as the markets decline each month you contribute your cost basis on a particular fund or stock is going down — not up. That means you are getting a better price month after month on your investments and buying more shares at the same time.
"Yes," you may say, "but the total amount in my retirement plan is going down." That's true, but for how long?
Remember, this is money that you are saving for retirement. It is not money you will be spending next week or next year. Consider this: Since 1928, the benchmark S&P 500 Index has suffered through 21 bear markets, or, on average, one every 4.5 years. The typical bear market lasted 388 days or a little over one year. That means that every five years or so you get the opportunity to buy the market at a great price.
This year, you are getting a double whammy: the savvy saver is not only getting to buy at a great price, but Uncle Sam is allowing you even more tax-deductible money to spend in the form of increased contributions to your retirement plans across the board.
If the bears are correct, sometime in this first quarter, the stock market may plummet once again. If it does, I suspect markets will rebound and likely go higher from there. Still not convinced then consider it this way; let's say you are in the market for a top-of-the-line, new car. Suddenly, your local dealership announces a sale on the auto you want at a 30 percent discount off the list price and offers you a credit on top of that, plus a guarantee that the car will appreciate over the next 15 years. would you buy it?
Hopefully, you have already increased your contributions for 2023. If you haven't, I suggest you call your back office and arrange to increase your monthly contributions right now. In the years to come, you will thank me for it.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
@theMarket: Macro-Economic Data Indicate a Soft Landing
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The economy grew faster than most expected in the fourth quarter. Unemployment continues to remain tame and corporate earnings, while not stellar, have been good enough to support financial markets this week.
Good news on the economy has been bad news for the stock market at least since the Fed has been tightening interest rates. The reasoning has been that stronger growth and employment would feed the inflation rate forcing even further tightening by the U.S. central bank and ultimately choking off the economy.
Now that inflation appears to be coming down, a bullish case is building that says we might get away with just a mild (as opposed to a full-fledged) recession. If so, corporate earnings would slow, but not fall off a cliff. Unemployment would rise, but not decidedly so, and a quarter or two of flat to slightly down GDP growth could suffice to continue pushing inflation lower. I call that the Goldilocks Scenario.
This week's macro data appeared to support that theory. U.S. fourth-quarter Gross Domestic Product for 2022 came in higher than expected at 2.9 percent versus an estimate of 2.6 percent. But that was down from the third quarter's 3.2 percent gain. Unemployment claims for the last week of 2022 fell by 19,000 to a seasonally adjusted 204,000. However, the number of temporary jobs, which usually leads to the overall unemployment rate is starting to decline.
The Fed's favorite inflation gauge, the Personal Consumption Expenditures Price Index, (PCE) came in a bit cooler in December. And corporate earnings, while not great, are still good enough for most stocks to maintain price support.
Most readers know that the quarterly earnings reports are a dance where the Street reduces earnings estimates low enough that most companies can "beat" estimates. Future guidance is therefore the focal point for investors. Coming into this week, traders were positioned for a "worst-case" scenario for most earnings announcements.
Microsoft is one of the most important stocks in the equity universe. It announced so-so earnings, but the stock leaped higher by 6 percent after the announcement because it could have been much worse. In the discussion after the announced results, however, management guided investors to expect fewer sales and profits in the quarters to come. The company's stock swooned in the after-hours. It dropped even further the next day and took the entire market down with it.
Traders decided at some point during the next day that the bad news was fully discounted and preceded to bid the stock back up to close even on the day. The same exercise occurred several times throughout the week on many stocks that announced earnings. On a macro level, the same thing happened on Thursday after the positive GDP quarterly data was announced. The markets spiked higher, but then gave it all back as the "good news is bad news" crowd reasserted themselves. In short, investors are grabbling to find a happy medium between the strength in the economy, the Fed's intentions toward future tightening, and the proper level for the markets given these unknowns.
It had been my view that the stock market could retest or even break last year's lows as early as February. I had predicted this unraveling as far back as early November of last year. It has now become the consensus view, which has made me increasingly uncomfortable.
If the bearish view were to come true, equities, as well as commodities and precious metals around the world would decline, interest rates would spike higher, and the U.S. dollar would skyrocket. I believe that would be a fantastic generational opportunity to buy the dip. Materials, gold, and silver as well as miners, would be high on my list of areas to accumulate. China and emerging markets would also be up there.
If, on the other hand, my prediction fails to materialize, and the market continues to grind higher, we could ultimately see 4,370 on the S&P 500 Index, which is another 300 points higher from here, before all is said and done.
In the end, it all comes down to what the Fed will decide to do in its February FOMC meeting next week. The problem is that the higher the markets climb, the more dovish the Fed would have to be to support the market.
A continuation of their hawkish stance will disappoint the markets while sending the U.S. dollar and interest rates higher. If they moderate their message and hint at a possible pause to assess the results of past tightening, markets will continue higher. I wish I had a crystal ball, but I don't. However, either way, in the longer term, it seems that we end up in the same place, which is higher going into the second half of the year.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
The Retired Investor: Back to the gym
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As the New Year gets underway, the fitness industry is breathing a sigh of relief. It has been a rough three years for those who provide the means to a healthy body for millions of Americans, but times are changing for the better.
During the pandemic, one in four health and fitness facilities across the nation closed permanently. Americans, who were forced to hunker down at home either gave up their fitness routine overall or made do as best they could with a few dumbbells and maybe, if they could afford it, online membership to one of the many internet fitness sites such as Peloton.
Most readers are not aware that gyms and fitness studios were among the hardest-hit businesses during that period. First, it was the lockdowns, followed by limits on the number of people allowed to attend classes, or even to work out at the gym. Strict rules on wiping down equipment, wearing masks, and maintaining distances between members discouraged even the most die-hard members after a time.
While other services such as restaurants, bars, and other live venues were supported with federal aid, health clubs were left to survive on their own. The National Health & Fitness Alliance, an industry group, found that 25 percent of U.S. health clubs and studios closed permanently due to the pandemic. My gym, a nationwide franchise, was among the victims.
Personally, my wife, Barbara, and I are confirmed gym rats and have been for decades, so COVID-19 decimated our routines. Fortunately, we were early members of Peloton, so we already had the bike for several years before the pandemic. These online classes had already been included in our daily routine at home.
In addition, we own a rower, and a comprehensive set of weights, which we used when not at the gym. Thanks to that backup equipment, we managed to maintain our physical routines during this period. Of course, our living room suddenly became a mini gym, but our workouts were just too important to sacrifice. In addition, we supplanted our indoor activities with an increased level of outdoor hiking, lake swimming, kayaking, and aquacise.
However, we recognize that both of us are highly motivated individuals, and somewhat competitive. All I need to see is my wife huffing and puffing during one of her internet classes for me to jump on the rower, or go for a run shortly thereafter — but that's us. I recognize that not everyone is as motivated (obsessed) with physical fitness as we are.
For many, the health club functions as a community where social interaction and group motivation is as important as exercise for many members. To their credit, the industry fought back as membership plummeted, and did what it could to survive. They diversified their offerings to maintain and attract members.
Outdoor classes in parking lots, public parks, and beaches, even winter greenhouses, sprang up across the U.S. On the weekend, for example, one enterprising local gym set up shop in a lakeside parking lot. Berkshire Money Management, whose owner Allen Harris, is another dedicated gym rat, offered his company grounds as an outdoor venue for both yoga and workout enthusiasts.
By necessity, class sizes were reduced, and workout areas enlarged, while many gyms pivoted to online training sessions. Personal training has also come back into fashion. All these innovations seem to be working. Many facilities plan to continue and enlarge these services into a hybrid form of exercise that encompasses both the home and the fitness facility.
It is not as if the business is booming at health clubs quite yet. Foot traffic is still down 3 percent compared to the beginning of 2019, but up 40 percent compared to 2021, according to Placer.ai, which tracks foot traffic in the retail gym space. And don't forget we are in the optimal time of the year for new memberships at health clubs. The New Year resolutions crowd is joining gyms once again. If history is any guide, half of these new members will fall by the wayside within three months.
However, one unintended positive consequence of the pandemic for the industry is that it did drive home to most Americans the importance of a healthy body. The impact of COVID and its various mutations has proven to be far more serious for those individuals who are unhealthy, obese, and with chronic illnesses. That may change the equation in the psyche of many. In short, in a post-pandemic world, a healthy body could be the difference between life and death for many Americans.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
The Retired Investor: The Billionaire Lottery
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On the surface, you would think that inflation has hit the lottery. Billionaire-dollar jackpots were infrequent until recently. But lately, the total winnings in the Mega Millions lottery have hit close to or over that magical mark several times. Is it inflation, or something else that has moved these jackpots to a whole new level?
There was a time when winning a million dollars in one of the nation's weekly lotteries was a big deal. Today, million-dollar winnings are no more than consolation prizes for those who picked a couple of winning numbers, but not the whole enchilada. As of today, there have been only a few times that the U.S. lottery has surpassed $1 billion. I don't know about you, but I have played and lost every one of them.
For those who don't know, the lottery is played in 45 states. It is also available in the District of Columbia and the U.S. Virgin Islands. A breakdown of the proceeds of your $2 ticket is interesting. Seventy-five cents funds the jackpot, approximately 35 cents go to non-jackpot prizes and the rest (90 cents) goes to the government. It is much more than that, since winners are required to pay taxes on their gains.
As a rule of thumb, the after-tax lump sum of winning a $1 billion prize is somewhere north of $600 million, since the federal tax rate is about 40 percent. Oh, and don't forget the IRS withholds an extra 25 to 28 percent because the winnings came from gambling. Of course, there are also state taxes to worry about as well, unless you live in a state that doesn't charge a tax on your winnings. Add all of this up and the government's share of your ticket can easily top $1.30.
We all know that the chance of winning the lottery is low, like 300 million to one low. Statistically speaking, that's close to zero. But it is worse than you think. If you do win, there is a 50 percent chance that you will have to share the jackpot with at least one other winner who chose the same numbers. Back in 2016, there was a $1.6 billion Powerball jackpot that had to be split three ways.
But winning anything from the nation's lotteries has become harder and harder overall. Mega Millions and Powerball organizers have been gradually reducing the odds of winning for decades. The largest change was back in 2015 when the lottery added more number combinations, which nearly halved the odds of winning.
Before the change, the odds of winning Powerball, for example, were around 175 million to one. Today, those odds stand at 292.2 million to one. Mega Millions waited until 2017 before adding more number combinations to their game, while also increasing ticket prices. The results are the same. You are now paying more for a product that has reduced your chance of winning.
Nonetheless, we keep playing and losing. Another way organizers are luring more ticket sales from us is to direct more of their revenues toward winning the jackpot, and less on smaller prizes, which are easier to win. Many players do not realize that the advertised jackpot size is based on the amount a winner receives if they chose to be paid out in an annuity over 30 years.
This is where today's higher interest rates inflate the prize. The higher the interest rates are during a drawing will translate into a higher total payout from the life of the annuity fund. The lump-sum option, on the other hand, is directly fueled by ticket sales. In November 2022, when one Powerball jackpot stood at $1.2 billion, the lump sum option was worth less than $600 million.
Is it any wonder, given the reduced probabilities of winning, that there are fewer jackpot winners? That is just fine with the organizers because the jackpots just get bigger and bigger as they are rolled over. That in turn attracts more and more ticket sales, which means you are playing against a bigger and bigger crowd. That in turn reduces the odds of winning even lower, and so goes the vicious circle.
Most people are aware that the odds are stacked against them, so why do we play? Assuming you are not addicted to gambling, I am guessing that like me there is always the hope that for $2 all my wishes will come true. Purchasing a ticket, I usually have at least two days' worth of daydreaming about what I would do with all that money before the next drawing. Come to think about it, that's a cheap dopamine high for my two bucks.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
The Retired Investor: Beware Political Pollsters
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The pollsters were wrong in 2016, 2020, and now 2022. The recent "Red Wave" of GOP wins, so confidently predicted in the final days of the mid-term elections, failed to be no more than a red ripple. Is this a question of "three times you're out?"
Heading into November 2022, Republicans were shown to have a clear edge in battleground states, as well as throughout the nation generally, according to the average of most polls. A minority of polls, mostly those of traditional pollsters, seem to dispute those results but were drowned out by the red wave forecasters.
Some argue that the traditional pollsters got it right, especially in the final weeks of the mid-term elections. Those surveys indicated that the Democrats were running neck and neck with Republicans, even in those races where opinion seemed to favor Republicans hands down. What happened to skewing the averages the other way?
One misconception is that polls are meant to predict the future. The value of polls is to explain the how and why of voters and their feelings, attitudes, and behaviors. It is a snapshot of time and not a prediction of future outcomes. Anyone can conduct a poll, you see, regardless of experience, political agenda, and in some cases, even honesty.
But beyond the right questions to ask, interpreting those answers, and extrapolating that data to form generalities with a high level of confidence is just as important. Strong poll results for a candidate or political party, or even a company, can bring several advantages. Companies, for example, that consumers consider a number one brand or a great place to work, or to have a social conscience can increase sales, profits, morale, and even the caliber of new hires. The fact that traditional polling organizations do not claim to predict the future is largely ignored.
In the political arena, strong poll numbers can mean more contributions in campaign financing, a boost to morale for volunteers, a shot in the arm for the political party overall, and in the final days and weeks of an election greater turnout at the polls. The Republican Party figured this out early on.
During Donald Trump's upset election in 2016, few pollsters got it right. Four years later, it happened again, only this time the opposite occurred, and Democrats took control. By November of last year, the polling industry was a free-for-all with partisan-aligned pollsters springing up virtually overnight to try their hand at polling.
After all, if the traditional pollsters couldn't get it right, maybe new blood with a new outlook might do better. Polling organizations, many backed by political PACs, with a great deal of enthusiasm, but little experience jumped into the fray. Even some high school students tried their hand at polling and found their results were taken as seriously as any others.
As I mentioned, traditional nonpartisan pollsters did a pretty good job of reflecting reality during the run-up to the November 2022 elections, but at the same time, they conducted far fewer polls than in the past. This left open a vacuum that fledgling newcomers in the polling business were happy to fill. And that is where the "average" poll comes in.
In this day of internet streaming, social media, and partisan news shows, political polling results can be a big business. The news media, always in pursuit of higher clicks and ratings, were eager to promote and broadcast these new poll results (even high school results), especially in key battleground states. Few questioned the ability of these pollsters to conduct surveys, or their skill and experience in what questions to ask, what groups to target, and how to analyze the outcomes of their results. Those that should but didn't pay attention to this deliberate flooding of polls were the aggregators. These are organizations that average several polls conducted by different organizations and come up with a leading candidate overall.
As more and more polls were generated, many by partisan groups showed Republicans widening their leads, the "average" poll results leaned more and more into the red column.
This had profound effects on campaign strategies for both parties. Despite internal polls conducted by veteran polling organizations that continued to call the election a toss-up, both parties began to doubt those findings in the face of the average poll results. They too began to operate as if a red wave was coming.
Some candidates that were in little danger of losing their seats found that political action committees and other organizations funneled more money than necessary into campaigns where candidates were leading. In comparison, these candidates who were fighting for their political lives, but were assumed to win in a red wave, were ignored.
The bottom line is that a "three times you're out" attitude toward political polling results may be a bit extreme. However, if partisan polls, no matter what the subject matter, continues to gain traction and the media accept those results carte blanche, the value of polls overall will surely continue to diminish.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
