Category Archives: Investing

Financial Guidance for the Younger Generation

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Modeling positive financial behaviors for the younger generation especially in affluent communities can pose unique challenges. Here are some key topics I’d like you to consider:

1.    Understanding the concept of “enough”: In affluent communities, where material possessions are abundant, it’s essential to teach the young (and not so young!) that wealth is not solely defined by possessions.  I like to keep my focus on President Roosevelt’s quote “Comparison is the thief of joy” and encourage a focus on spending that has lasting satisfaction rather than buying the next ‘in thing’. Usually, this includes understanding the role that money plays in their lives and how they wish to integrate financial security, spending, saving, and investing.

2.    Value of Budgeting and Understanding their Spending: Teaching younger generations to follow and understand their income and expenses is crucial for financial independence and achieving life goals like homeownership and retirement. Helping them understand their spending patterns provides opportunities for money conversations and creates comfort around money conversations. The goal is to encourage them (however slowly) to plan their spending and create sustainable financial habits that will last them a lifetime.

3.   Understanding the value of employment: Encouraging loved ones to recognize the value of a job or career is part of growing up. We all know that employment provides value beyond earning money since it can add unique opportunities. It will also provide them with a steady source of income, so they have money to eat out, do fun things with friends, and hopefully also begin saving.

Financial literacy for the younger generation is challenging since so much of their world is imbued by marketing. The challenge is how to model or engage with them not to crave what others seem to have but rather to understand what brings them long term satisfaction.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

H.S.A. Contributions – Did You Know?

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Health Savings Accounts (H.S.A.) in retirement can be useful tax-free pools of money that can be used for health care expenses without increasing taxable income and potentially increasing Medicare premiums (through IRMAA). Contributions to H.S.A. accounts are only permitted if you participate in a specific type of health care insurance (High deductible) and only prior to Medicare enrollment.

Since H.S.A. contributions are NOT permitted with Medicare it often leads to misunderstandings on how to contribute maximally to an H.S.A. during the year in which you have both a high deductible H.S.A. insurance plan and eventually change to a Medicare plan. H.S.A. contributions must be pro-rated for the months prior to Medicare engagement (unless you are in an employer funded H.S.A.).

Couples contributing to a family H.S.A. who are over age 55, are entitled to contribute an additional $1K each as part of their catch-up annual contribution. Unfortunately, H.S.A. accounts can only accept one catch-up contribution, so couples are often uncertain how to fund their H.S.A.’s fully. The couple must contribute $1K catch-up each to two different H.S.A. accounts and only contribute the family core amount to one of the two H.S.A. accounts. Let us know if you have questions.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Social Security Benefits Primer

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Social Security benefits were never intended to be the sole financial support during retirement but for 21% of retirees Social Security benefit is the only source of income. For most American workers, Social Security benefits are the only guaranteed retirement income that is also inflation adjusted each year.

All workers in America are entitled to pay into Social Security and based on their pay history, to receive a lifetime income each month starting from ages 62 to 70.

Ideally prior to retirement, you’ll also maximize other income sources that include taxable savings, IRAs, ROTH, Qualified plans (401K, 403b, 457b), annuities, deferred compensation, and employer pension plans.

Since your future Social Security benefit is calculated from your Social Security work history, you must ensure (and correct if necessary) that this history has been recorded correctly at www.socialsecurity.gov/myaccount OR the new www.ssa.gov/myaccount.

Social Security benefit calculation uses your top 35 highest earning years and projects your estimated benefit at your FULL RETIREMENT AGE (FRA).

Your FRA is based on your birth year and, as you can see on this table, it has been increasing. In fact, since 1983 when the FRA was 65, it has been increased gradually so that by 2025 (for those born in 1960 or later) the FRA will be 67. To understand Social Security, you must first determine your FRA.

When can you collect Social Security? At FRA, you can file and receive your full benefit (100%) based on the amount of Social Security tax paid to your Social Security number. The earliest you can collect Social Security benefits on your record is at age 62 (when your FRA amount is reduced ½% for each month or 6% less each year until FRA) and the latest at age 70. If you delay past your FRA, you earn Delayed Retirement Credits (DRC) and for each month it will grow two-third of a percent or 8% per year until age 70.

Example of how benefits are calculated: If you were born in 1960 and your FRA amount is $1K/month then collecting at age 62 will result in a lifetime amount of $700/month but delaying until age 70 would result in $1,240/month (plus annual COLA adjustment).

When creating your financial plan, we will consider different Social Security timing strategies based on your financial and longevity expectations. When deciding on your best timing we always request that you consider your health, your family’s longevity, and known increases in population longevity.

Compared to what you earned, what can you expect to receive?
As an example, an average earner ($58K) could receive $1,907 or $23K per year in benefits for life, starting at FRA. On the other hand, those who paid Social Security at maximum earnings for 35 years would receive $3,822/month or $45K per year if 2022 was their FRA.

What if you take early benefits while still working? It seldom makes sense to work and take Social Security benefits early because your benefits are reduced by $1 for each $2 earned above an annually set earning level (in 2024 you can only earn up to $22,320 per year ($1,860/month) before your benefits are reduced). Once you reach FRA your Social Security benefits are NOT reduced (regardless of earnings).

We encourage each of you to work with us to review your Social Security history and then use your financial plan to make the best Social Security timing decision for you.

Applying for Social Security should be started three to four months prior to your chosen Social Security benefit start date. You would apply online at www.socialsecurity.gov or call (800-772-1213) or go to the local Social Security office.
One last and very important cyber security reminder: Protect your Social Security log in information (or credentials) – make certain that you are using a secure device when you log into your account.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

The Crypto Saga Continues

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Though Bitcoin gets the Crypto headlines, I continue to remind you that it is Blockchain that is the promising digital technology that has a place in investment allocation in a long-term retirement portfolio.

Though in 2017 Crypto looked promising, in 2022 we saw the complete collapse of Terra (4th largest cryptocurrency and its related Luna coin) that was believed to be the most stable crypto (it was linked to US dollar) and in 2023 we saw the high-profile collapse of cryptocurrency exchange FTX (Sam Bankman-Fried was convicted of fraud and is awaiting sentencing in 2024). Bitcoin was at $64.4K in November of 2021 and the same single coin was worth $16,500 by November 2022 and was back at $34K by November of 2023. That is certainly too much volatility for a retirement portfolio and yet speculators, media, and pundits promote that it be included. The most stable Cryptocurrency platform and coin are currently Ethereum and its Ether coin, but it is still very volatile.

The progress and growth of Blockchain as a financial digital technology (rather than as a currency) has increased and it looks like it may be an important part of productive AI (Artificial Intelligence) technology development. In addition, Blockchain technology has already seen much revenue growth. Consider that the revenue was around $35M in 2019 and in 2023 increased to $1.75B.

As time passes, we are seeing more acceptance and conversation on how to best allocate digital assets in a portfolio. The most recent was the SEC acceptance of Cryptocurrency-based exchange-traded funds (ETFs) which are primarily for currency allocations. Unfortunately, we are also seeing danger signs. Use of cyber/virtual currency to fund terrorism and destabilize governments may be its undoing since a significantly large and obvious connection between Blockchain and terrorism will cause a global crackdown. My hope is that a crisis will instead generate protective processes/tools which may allow Cryptocurrencies to compete directly with fiat currency.

For now, Cryptocurrency is an investment to be consider like you might consider investing in art, collectible cars, rare coins, and stamps. It can gain and lose a lot of value and not be liquid to use in a crisis particularly during your retirement.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

2024 – Financial Opportunities and Challenges

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In 2024 we are expecting recoveries in some real estate categories, a settling of interest rates, and dramatic growth in the AI (Artificial Intelligence) space. It is the latter that could help businesses improve efficiencies and deal with headwinds from labor costs/shortages though it is still at its infancy. In addition, we are seeing growth in capital invested to deal with the expected scarcity in rare earth metals. If we have limited supplies then price volatility will greatly impact data, electronics, alternative energy, and agriculture investment sectors (new sources for these metals are from mining of asteroids and other stellar bodies).

The less predictable potential for volatility, in the USA, will come from our ability to deal with the destabilizing forces all around us from climate change and the election. I suspect that the US consumer will continue to spend through volatility and reward companies that meet the consumer demands (as they did in 2023).

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

AI and Data Analytics – new SEC rules in 2024

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At end of July, the SEC approved a plan that they say will root out conflicts of interest that can arise when financial firms use Artificial Intelligence (AI) to serve clients. They are also improving rules requiring companies to disclose serious cybersecurity incidents within four business days of any significant breach.

I would be more impressed if these were required for all technology firms that handle customer data analytics (not only financial firms).

The SEC asserts that the new regulations will ensure that ‘predictive data analytics is used to optimize services that better serve clients’ and not for the benefit of the financial firm. Banks and brokerage firms are typically using AI for fraud detection and market surveillance, but recently the shift has been made to have AI and analytics as part of trading recommendation, asset management, and lending. This is a huge development with serious implications for consumers. The goal of the new regulation is to ensure that biases are not ingrained in the technology algorithm, particularly since many vendors and consumers accept technology output, as fact, without human verification.

In this vein, The Federal Trade Commission (FTC) has opened an investigation into Microsoft Corp – OpenAI Inc (the creator of ChatGPT) to examine what risks the chatbot poses for consumers . . . these programs are written by humans and can extend biases and discrimination.

The ideal ‘responsible innovation’ in technology is appealing but so is responsible capitalism or governance and we are currently not doing well in any of these areas.

AI has the potential to draw on reams of data to target individual investors and nudge them to alter their behavior on trading, investing, borrowing, or even opening financial accounts for them. Many of the new tools can be transformative in our time, and I would love to use them. Even so, we should be leery about the concentration of this technology and powerful data in the hands of only a few firms which can pose a huge risk for future stability in financial markets.

It is important that we not provide our private data to technology or analytics software that is not yet fully tested and regulated from unregulated companies. We need to continue to demand that regulations be developed to ensure the safety of our data and particularly add controls for how for-profit firms can use our data. I am particularly concerned when I see errors in financial software output that are accepted as correct because they are software generated.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Charitable Deductions

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There are many ways to give to charitable causes without risk of IRS wrath. We agree that there is a lot of value in making contributions to charities partly with dollars that would be paid in income taxes, but each person has to recognize that you must simultaneously give away non-tax money. For example, a gift of $1M can in some cases reduce your taxes by about $400K (or 40% of the donated dollars) BUT you must accept that the other $600k will be funded from your savings (non-tax dollars).

The tools used to make charitable contributions can be simple direct donations to a charity or to many using Donor Advised Funds (DAF), or a specific group using a charitable trust or use of Family Private Foundations. The type of contributions can be cash, stock, shares in a company, or any asset. What is important is that the charitable deduction follow IRS proven process to the letter. This will prevent negative consequences of having to pay taxes and tax penalties years later.

This month, we have a case (Braen, et. al v. Commissioner of Internal Revenue, TC) that disallowed a $5.22 million charitable income tax deduction claimed by the Braen family in connection with a sale of a property in NY made through S Corp shares. The rejection appears to be based on not adhering to standard timing/practices and on property valuation misstatements. Unless they appeal, the family will have no deduction and must pay substantial penalties to the IRS.

What does this mean for you? There is nothing risky about using known and established ways to reduce your tax liability and particularly advantageous if you can also use it to fulfill your philanthropic plan, but this must be implemented using proven processes. Let us know if you are ready to create your philanthropic financial plan.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

US credit downgrade by Fitch

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As you have no doubt heard, Fitch downgraded US credit to double A plus from triple A. Many reasons have been given for their decision though I think only one is at the core of the downgrade — “the increasing failure of politicians to tackle pressing reforms” and demonstrate a stable process for making long-term country-wide financial decisions. I can’t argue with that . . . the debt ceiling crisis demonstrated that our politicians are disinterested in an orderly financial decision process.

A bit of history to provide perspective on these credit rating companies:
Fitch Ratings Inc., Moody’s, and Standard & Poor’s are the “Big Three” credit rating agencies nationally recognized to evaluate financial products/companies by the Securities and Exchange Commission (SEC) since 1975.

In 2011, the S&P Global Rating was the first to drop US credit to double A. The market mostly ignored this downgrade since this is the same credit rating company that continued to sustain a AAA rating for Lehmann Brothers even as LB filed for bankruptcy. Making matters worse, when the dust settled, this credit agency was found to have benefited from providing high credit ratings to packaged subprime mortgages (i.e., those with no-job, no income) that were then sold to unwary investors.

Moody’s is the remaining credit agency that still believes that the US will pay off its bills and deserves the AAA rating.

Though the remaining countries with triple A credit ratings from all three agencies have stable financial process around debt management many of them have high national debt levels. The countries are Germany, Denmark, Netherlands, Sweden, Norway, Luxemburg, Singapore, and Australia.

What does this downgrade mean? For now, not too much since the US dollar remains the go-to currency and US Treasuries are still considered the risk-free asset to have, particularly during a crisis. Unfortunately, this downgrade does mean that the debt service payments will increase and erode faith in the US dollar.

To resolve this issue, the US needs to deal with long-term fiscal issues in an organized and responsible manner.

What does this mean for your portfolio? Not much in the short-term. It does though remind us to maintain a globally allocated portfolio.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Volatility (Bear & Bull Markets) and Market Behavior

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Since this year’s market is expected to continue to be volatile, I want to remind you that in times of market volatility, going to safer alternatives is tempting but can be costly. Safer alternatives should only be used for money that you want to use in the short-term and not as a response to potential market downturn fears.

We would all like to miss market drops (Bear market) but avoiding short-term declines by exiting the market often results in missing large market increases (Bull market). In fact, if you missed the market’s 10 best days over the past 30 years, your returns would have been cut in half. And missing the best 30 days would have reduced your returns by an astonishing 83%.

S&P 500 Index Average Annual Total Returns: 1993–2022*

*Past performance does not guarantee future results. [Data Source: Morningstar 2/23].

The bottom line – “Good Days Happen in Bad Markets” and exiting to safer allocations due to fear usually results in significant losses.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

The Market and Commentary on US Debt

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So far this year, we’ve seen improvements with increased investment opportunities as businesses appear to be recovering and new ventures are obtaining needed capital. We are expecting that portfolio recovery will continue in parallel with improving inflation and business growth rather than the current politically created debt ceiling crisis.

This debt ceiling extension (currently at $31.5T) crisis is causing the US irreparable damage in the eyes of those who buy our debt. For many it is a demonstration that the US debt is no longer a low-risk investment of choice.  Hopefully this deadlock will be resolved without further damage to our financial standing. According to Yellen, it needs to be approved by June 5th.

The current agreement caps military spending at $886B and nonmilitary discretionary spending at $704B and would only allow increases of $9B and $7B respectively in the following year. This means a claw-back of the unspent COVID relief ($28B) and shift of $20B to nondefense items. Also elimination of at least $1.4B funding for the IRS. There are increased work requirements for some recipients of Medicaid, Temporary Assistance for Needy Families (TANF) and the Supplemental Nutrition Assistance Program (SNAP). A requirement to streamline permitting in the National Environmental Policy Act was also added to the list. These are some of the requirements to extend the Debt limit beyond the next election.  So far the agreement has no impact on Medicare/Social Security/climate change and promotion of clean energy.

As soon as this crisis is resolved we will refocus on economic activity and inflation to prepare for the next Federal Reserve meeting on June 14th. On June 2nd we expect the employment report and June 13th the CPI (Consumer Price Index). Together this information will guide the Federal Reserve on whether to implement the current expected ¼% interest increase.

Finally, it is hard to understand how we willingly accept debt accumulation levels for the US that we wouldn’t accept for ourselves. As you know from your own finances, if you take on too much debt then you may not have a lender for additional debt. In the same manner as we saw recently with the runs on the SVB and First Republic Bank, when the US debt exceeds the amount that willing buyers want to buy, then central banks do not have anyone to provide us with liquidity, so they have to increase interest rates or print dollars. This crisis would be worth the turmoil if it actually generated actions that deal with the long-term accumulation of US Debt regardless of who is in government. The last time we attempted to deal with US Debt was in 2010-11 with the Simpson-Bowles plan under Obama and yet our debt accumulation has continued to grow.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com