Broker Check

August 27, 2018

| September 11, 2018
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LABOR DAY

Labor Day is about a lot more than the end of summer and the start of a new school year. The holiday, which celebrates American workers, became a federal holiday in 1894 and was created to recognize the contributions and achievements of the labor movement. History.com explained:

“…at the height of the Industrial Revolution in the United States, the average American worked 12-hour days and seven-day weeks in order to eke out a basic living. Despite restrictions in some states, children as young as 5 or 6 toiled in mills, factories, and mines across the country, earning a fraction of their adult counterparts’ wages. People of all ages, particularly the very poor and recent immigrants, often faced extremely unsafe working conditions, with insufficient access to fresh air, sanitary facilities, and breaks.”

The holiday is celebrated in many cities and towns across the United States with parades, picnics, fireworks, and other public gatherings.

On this Labor Day, cheer the 40-hour workweek, vacations, lunch hours, workplace retirement plans, work place safety and other innovations that have greatly improved our lives.

UPDATES FROM THE RECENT FEDERAL RESERVE MEETING

This week the Fed published the minutes from its August 1stmeeting. While no changes were made to interest rates, the minutes did provide insight to how the Fed sees the U.S. economy.

Key Insights:

  • The economy is strong. The economy is poised for its best annual growth in a decade due to stimulation from tax cuts and federal spending. The current nine-year bull market is about to be the longest bull market in history and the stock market hit a new high last week. Inflation is back to the target 2 percent range, after missing for several years, and the already tight labor market continues to tighten, reported The Wall Street Journal.

        While the Fed remains concerned about the risks of inflation, it also is concerned about slowness in the housing market. Home building has declined due to labor shortages and higher costs in materials from tariffs, according to The New York Times.

  • When will the Fed stop raising rates? The Fed is all but guaranteed to raise rates in September, with market odds at a 96 percent probability and a 60 percent probability for another hike in December. The Fed will continue its gradual interest rate increases for now as long as economic activity is consistently expanding at a sustainable rate. The minutes revealed the Fed governors will soon revise its policy stance from “accommodative to neutral,” reported MarketWatch.

  • What does the Fed think about tariffs? The Fed is aware tariffs could derail their initial plan of steady rate hikes. Although concerned about President Trump’s tariffs, they are waiting for economic data to assess the damage. They did, however, say tariffs would have “adverse effects on business sentiment, investment spending, and employment. Moreover, wide-ranging tariff increases would also reduce the purchasing power of U.S. households,” reported The New York Times.

The Fed is content, for now, with their current policy stance of steady rate hikes, but are on edge as they wait to see how fiscal policy plays out in the data. The Fed is more likely to raise rates two more times this year given the strength of the economy.

ECONOMIC UPDATE

Source: CME Group

KEY POINTS FOR THE WEEK

  • The S&P 500 ended the week at a new record high.

  • The Federal Reserve’s minutes indicate gradual rate increases will continue.

  • Markets emphasized the message in the Fed’s minutes and other positive news over unproductive Chinese trade talks.

CAN SOCIAL SECURITY BENEFITS HELP WITH LONGEVITY RISK?

How long will you live? It’s not a question anyone can answer with any certainty, and that creates a significant risk when planning for retirement. Your retirement may last for a long time, and you will need to have enough income to live comfortably without running out of money.

In 2018, Gallup surveyed retirees about their retirement income. The top income sources for Americans were:

57 percent Social Security benefits

37 percent Employer provided pension plans

27 percent 401(k), IRA, or other retirement plan savings

19 percent Home equity

17 percent Taxable savings and investment accounts

15 percent Stocks, bonds, and other investments

Clearly, Social Security is the cornerstone of retirement income for many Americans, and it delivers a steady stream of income, indexed for inflation, for life.

How long have you been paying into the Social Security system?

Americans contribute to the Social Security system throughout their working years. Every pay period, money is deducted from our paychecks to fund Social Security and Medicare. This payroll tax is called FICA (Federal Insurance Contributions Act).

During 2018, American workers pay 6.2 percent of their income, on up to $128,400 in earnings, into FICA. Employers also pay 6.2 percent. If you are self-employed, you pay the entire 12.4 percent, representing both the employee and employer share.

The money goes into the Old Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds, which pay Social Security benefits. These are two distinct funds, although, they are often referred to as a single entity: OASDI.

An additional 1.45 percent on your total income (there is no cap) is withheld for Medicare’s Hospital Insurance program and matched by your employer. If you’re self-employed, you pay the full 2.9 percent.

The money paid to the OASI and DI Trust Funds is used to pay benefits to:

  • Current retirees

  • People with disabilities

  • Survivors

  • Dependents

Social Security benefits can help minimize longevity risk

There are many different Social Security claiming strategies. The one you choose will depend on a variety of factors, including your current savings, your health (and the health of family members), your legacy goals, and other issues. If you’re not familiar with claiming strategies, please contact us before registering for benefits.

Timing makes a difference, too. In general, you can take benefits early (if you’re willing to accept up to a 30 percent lower benefit), take benefits at ‘normal’ retirement age, or delay your benefits and receive a higher payment. If you’re married, the decision can affect how much income your spouse and dependents receive, as well.

If you can afford to delay taking benefits, you may be able to minimize the risk associated with increasing longevity because you’ll receive more monthly income from Social Security once you start to take it.

There is just one catch: The Social Security system is at risk

You should receive Social Security benefits for life, as long as they’re still available.

According to a recent Gallup survey, fewer Americans are concerned about the solvency of Social Security today than they have been in the past. It’s a notable state of affairs because the system is at risk. Justin McCarthy reported on Gallup.com:

Americans’ level of worry about the Social Security system is on the low end of the nearly two-decade trend, but the financial solvency of the program's fate is in jeopardy, as it faces long-term sustainability challenges.”

2018 is a milestone year for the OASI Trust Fund. This is the first year since 1982 the cost of benefits paid is expected to exceed income. Unless changes are made, the OASI Trust Fund will be depleted by 2034. At that time, the income received will be enough to pay about 77 percent of scheduled benefits.

The 2018 Social Security update from the Center for Retirement Research at Boston College concluded:

The 2018 Trustees Report confirms what has been evident for almost three decades – namely, Social Security is facing a long-term financing shortfall which equals 1.0 percent of GDP…stabilizing the system’s finances should be a high priority to restore confidence in our ability to manage our fiscal policy and to assure working Americans that they will receive the income they need in retirement. The long-run deficit can be eliminated only by putting more money into the system or by cutting benefits. There is no silver bullet.”

WHAT ARE WE READING?

Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.

Interpreting Modern Art Incorrectly Can Be Risky!

A visitor at the Serralves Museum in Portugal recently fell into an exhibit of a cartoon-like hole. The exhibit, purported as an 8-foot drop, was roped off from visitors. But some questioned whether it was truly a giant hole, thinking it looked more like a circle painted on the floor with very dark black paint. They will not be questioning that anymore. The man is okay.

Impressive New Car Safety Features.

If you have not bought a new car in years, they are starting to come with some cool safety features. Some of the interesting features we like are the automatic braking, adaptive cruise control and alertness monitoring. There is little doubt that technology may eventually make driving a car safe. Interestingly, some of these safety features may even lower your auto insurance premiums. That is a nice double benefit.

Weekly Focus

The tax advisor had just read the story of Cinderella to his four-year-old daughter for the first time. The little girl was fascinated by the story, especially the part where the pumpkin turns into a golden coach. Suddenly she piped up, ‘Daddy, when the pumpkin turned into a golden coach, would that be classed as income or a long-term capital gain?’”

~ Unknown

The greatest pleasure in life is doing what people say you cannot do.”


~ Walter Bagehot

He who is fixed to a star does not change his mind.”

~ Leonardo da Vinci, artist

Mistakes are the usual bridge between inexperience and wisdom.”

~ Phyllis Theroux, Journalist

Links & Disclaimers

RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M.  The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein.  There is no assurance any of the trends mentioned will continue in the future.  Any opinions are those of the author and not necessarily those of RJFS.  Any expression of opinion is as of this date and is subject to change without notice.

Opinions expressed are not intended as investment advice or to predict future performance.  Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.  Past performance does not guarantee future results.  Investing involves risk, including loss of principal.  Consult your financial professional before making any investment decision.  Stock investing involves risk including loss of principal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock companies maintained and reviewed by the editors of the Wall Street Journal. Please note direct investment in any index is not possible.

The Russell 1000 Value Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and lower forecasted growth values. The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The small business optimism index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members.

Links are being provided for information purposes only.  RJFS, SPC and S&M are not affiliated with and do not endorse, authorize or sponsor any of the listed websites or their respective sponsors, and they are not responsible for the content of any website, or the collection or use of information regarding any website's users and/or members.

http://www.history.com/topics/holidays/labor-day

https://news.gallup.com/poll/234032/social-security-financial-bedrock-retirees.aspx?g_source=link_NEWSV9&g_medium=TOPIC&g_campaign=item_&g_content=Social%2520Security%2520Still%2520Financial%2520Bedrock%2520for%2520Retirees

https://www.ssa.gov/thirdparty/materials/pdfs/educators/What-is-FICA-Infographic-EN-05-10297.pdf

https://www.ssa.gov/oact/progdata/taxRates.html (Click on OASDI to see the trusts as separate entities)

https://www.ssa.gov/oact/progdata/oasdiRates.html

https://www.ssa.gov/pubs/EN-05-10024.pdf

https://www.ssa.gov/oact/quickcalc/early_late.html

https://www.nytimes.com/2017/02/18/your-money/retiring-longevity-planning-social-security.html

https://news.gallup.com/poll/232172/adults-nearing-retirement-worry-social-security.aspx?g_source=link_NEWSV9&g_medium=TOPIC&g_campaign=item_&g_content=Adults%2520Nearing%2520Retirement%2520Worry%2520Most%2520About%2520Social%2520Security

https://www.ssa.gov/oact/tr/2018/II_A_highlights.html

http://crr.bc.edu/wp-content/uploads/2018/06/IB_18-11-1.pdf

https://www.federalreserve.gov/newsevents/pressreleases/monetary20180822a.htm

https://www.wsj.com/articles/as-central-bankers-meet-economic-uncertainties-weigh-on-sunny-outlook-1535029200

https://www.nytimes.com/2018/08/22/business/federal-reserve-rate-hikes.html

https://www.marketwatch.com/story/fed-minutes-show-support-for-september-interest-rate-hike-combined-with-anxiety-about-a-trade-war-2018-08-22

https://www.taxconnections.com/best-tax-jokes-and-quotes-ebook

RJ Approval # 2229549

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