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30
Nov

2022-2023 School Year College Cost Data for

The College Board annually releases  new college cost data and trends. Average cost figures of approximately 4,000 colleges across the country are included in the survey.

Average price for tuition, fees, and room and board has increased 46% at public colleges and 30% at private colleges over and above increases in the Consumer Price Index over the past 20 years. The increase  is reflected in the student debt increase.

Here are cost highlights for the 2022-2023 year.1 This year, public colleges have done a better job than private colleges at keeping tuition and fee increases under 2.3%. Note: “Total cost of attendance” includes direct billed costs for tuition, fees, and  room and board, plus indirect costs for books, transportation, and personal expenses.

Public colleges: in-state students

 Tuition and fees increased 1.8% to $10,940
 Room and board increased 3.0% to $12,310
 Average total cost of attendance: $27,940

Public colleges: out-of-state students

Tuition and fees increased 2.2% to $28,240 
Room and board increased 3.0% to $12,310 (same as in-state)      
Average total cost of attendance: $45,240

Private colleges

Tuition and fees increased 3.5% to $39,400
Room and board increased 3.0% to $14,030
Average total cost of attendance: $57,570

Note: Many private colleges are at or approaching $80,000  per year in total costs.

Sticker price vs. net price

The College  Board’s cost figures are based on published college sticker prices. Many families pay less than full sticker price. A net price calculator, available on every college website, can help families see beyond a college’s sticker price. It can be a very useful tool for students who are currently researching and/or applying to colleges.

A net price calculator provides an estimate of how much grant aid a student might be eligible for at a particular college based on the student’s financial information and academic record, giving families an estimate of what their out-of-pocket cost — or net price — will be. The results aren’t a guarantee of grant aid, but they are meant to give as accurate a picture as possible.

FASFA for 2023-2024 year opened on October 1

Planning for college costs should start years before the first year of college. The Free Application for Federal Student Aid (FAFSA) for the 2023-2024 year opened on October 1. It’s important to keep in mind that the 2023-2024 FAFSA will factor in your income information from two years prior, which it will get from your 2021 federal income tax return, but it uses current asset information.2 Your income is the biggest factor in determining financial aid eligibility.

1) College Board, Trends in College Pricing and Student Aid 2022

2) U.S. Department of Education, 2022

3
Nov

What Does a Strong Dollar Mean for the U.S. Economy?

In late September 2022, the U.S. dollar hit  a 20-year high in an index that measures  its value against six major currencies: the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc. At the same time, a broader inflation-adjusted index that captures a basket of 26 foreign currencies reached its highest level since 1985. Both indexes eased slightly but remained near their highs in October.1–2

Intuitively, it might seem that a strong dollar is good for the U.S. economy, but the effects are mixed in the context of other domestic and global pressures.

World Standard

The U.S. dollar is the world’s reserve currency. About 40% of global financial transactions are executed in dollars, with or without U.S. involvement.3As such, foreign governments, global financial institutions, and multinational companies all hold dollars, providing a level of demand regardless of other forces.

Demand for the dollar tends to increase during difficult times as investors seek stability and security.  Despite high inflation and recession predictions, the U.S. economy remains the strongest in the world.4 Other countries are battling inflation, too, and the strong dollar is making their battles more difficult. The United States recovered more quickly from the pandemic recession, putting it in a better position to weather inflationary pressures.

The Federal Reserve’s aggressive policy to combat inflation by raising interest rates has driven demand for the dollar even higher because of the appealing rates on dollar-denominated assets such as U.S. Treasury securities. Some other central banks have begun to raise rates as well — to fight inflation and offer better yields on their own securities. But the strength of the U.S. economy allows the Fed to push rates higher and faster,  which is likely to maintain the dollar’s advantage for some time.

Exports and Imports

The strong dollar makes imported goods cheaper and exported goods more expensive. Cheaper imports are generally good for consumers and for companies that use foreign-manufactured supplies, but they can undercut domestic sales by U.S. producers.

At the same time, the strong dollar effectively raises prices for goods that U.S. companies sell in foreign markets, making it more difficult to compete and reducing the value of foreign purchases. For example, a U.S. company that sells 10,000 euros worth of goods to  a foreign buyer would receive less revenue when a euro buys fewer dollars. Some experts are concerned that the strong dollar will dampen the post-pandemic rebound in U.S. manufacturing.5 More broadly, the ballooning trade deficit cuts into U.S. gross domestic product (GDP), which includes imports as a negative input and exports as a positive input.

Overseas Exposure

Generally, large multinational companies have the most exposure to risk from currency imbalances, and the stock market has shown signs of a shift from large companies — which have dominated the market since before the pandemic — to smaller companies that may be more nimble and less dependent on overseas sales. The S&P SmallCap 600 index has outperformed the S&P 500 index through late October; if the trend continues through the end of the year, it would be the first time since 2016 that small caps have eclipsed large caps.6 The S&P MidCap 400 index has done even better. In the current bear market, however, better performance means lower losses; all three indexes have had double-digit losses through October 2022.7

Global Pain

A weak currency can be a boon for a country by making its exports more competitive. But with the world economy weakening, other countries are not reaping those benefits, while paying more on debt and imported essentials such as food and fuel that are traded in dollars. The Fed is focused on domestic concerns, but it is effectively exporting inflation while trying to control it at home, and global economic pain could ultimately spread to the U.S. economy.8

Slowing the Dollar

In the near term, the Fed’s aggressive rate hikes may reduce domestic demand for foreign goods, reducing the trade deficit and weakening the dollar. The advance Q3 2022 GDP estimate showed the trade gap closing, but it’s unclear if the trend will last.9

In the longer term, as inflation eases in the United States, the Fed will likely take its foot off the gas pedal and ultimately bring rates down. This would allow other central banks to catch up if they choose to do so and would make foreign currencies and securities more appealing. Lower oil prices (denominated  in dollars) and/or any reduction in world tensions — such as a slowdown in the Russia-Ukraine war — might also help reduce demand for dollars.

The dynamics of these factors are complex, and it may take time for any of them to unfold. In the meantime, the strong dollar is a sign of U.S. economic strength, and it would not be wise to place too much emphasis on it for long-term investment decisions. However, this could be a great time for an overseas vacation.

U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could  be worth more or less than the original  amount paid.

All investments are subject to market volatility and loss of principal. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, and economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost. The value of a foreign investment, measured in U.S. dollars, could decrease because of unfavorable changes in currency exchange rates.

The S&P 500 index is an unmanaged group of securities that is considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary.

1) MarketWatch, October 19, 2022 (U.S. Dollar index)

2) Federal Reserve, 2022 (Real Broad Dollar index)

3, 8) The New York Times, September 26, 2022

4, 6) The Wall Street Journal, October 17, 2022

5) The Wall Street Journal, October 9, 2022

7) S&P Dow Jones Indices, 2022

9) U.S. Bureau of Economic Analysis, 2022

29
Sep

FAFSA Opens October 1or 2023-2024 School Year

College Students can start filing the Free Application for Federal Student Aid (FAFSA) for the next academic year October 1, 2022. The FAFSA is a prerequisite for federal student loans, grants, and work-study, and may be required by colleges before they distribute their own institutional aid to students.

Some tips for filing  FAFSA

  • The fastest and easiest way to submit the FAFSA is online at https://studentaid.gov/. The site contains resources and tools to help complete the form, including a list of the documents and information need to file it. The online FAFSA allows your tax data to be directly imported from the IRS, which speeds up the overall process and reduces errors. The FAFSA can also be filed in paper form, but it will take much longer for the government to process it.
  • You and your child will each need to obtain an FSA ID (federal student aid ID), which can be completed  online. Instructions for completing the application are provided. The FSA ID can be used each  year.
  • The earlier you file the application the sooner it can be processed. The federal aid programs operate on a first-come, first-served basis. Colleges typically have a priority filing date for both incoming and returning students; the priority filing date can be found in the financial aid section of a college’s website. You should submit the FAFSA before that date.
  • Students must submit the FAFSA every year to be eligible for financial aid (along with any other college-specific financial aid form that may be required,  such as the CSS Profile). Any colleges you list on the FAFSA will also get a copy of the report.
  • There is no cost to submit the FAFSA.

Calculating financial need for the FAFSA

The FAFSA looks at a family’s income, assets, and household information to calculate a family’s financial need. This figure is known as the expected family contribution, or EFC. All financial aid packages are built around this number.

FAFSA uses information in  your tax return from two years earlier to determine your income. This year is often referred to as the “base year” or the “prior-prior year.” For example, the 2023-2024 FAFSA  will use income information in  your 2021 tax return, so 2021 would be the base year or prior-prior year.

FAFSA uses the current value of your and your child’s assets. Assets that not counted do not need to be listed on the FAFSA. These include home equity in a primary residence, retirement accounts (e.g., 401k, IRA), annuities, and cash-value life insurance. Student assets are weighted more heavily than parent assets; students must contribute 20% of their assets vs. 5.6% for parents.

Your EFC remains constant, no matter which college your child attends. The difference between your EFC and a college’s cost of attendance equals your child’s financial need. Your child’s financial need will be different at every school.

After your EFC is calculated, the financial aid administrator at your child’s school will attempt to create an aid package to meet your child’s financial need by offering a combination of loans, grants, scholarships, and work-study. Colleges are not obligated to meet 100% of your child’s financial need. You are responsible for paying the difference between the cost and the amount of the package. Colleges often advertise on their website and brochures whether they meet “100% of demonstrated need.”

Two (2) reasons for many applicants to File the FAFSA even if your child is unlikely to qualify for aid.

First, all students attending college at least half time are eligible for unsubsidized federal student loans, regardless of financial need or income level. (“Unsubsidized” means the borrower, rather than the federal government, pays the interest that accrues during school, the grace period, and any deferment periods after graduation.) If you want your child to be eligible for this federal loan, you’ll need  to submit the FAFSA. Your child won’t be locked in to taking out the loan. If you submit the FAFSA and then decide your child doesn’t need the student loan, your child can decline it through the college’s financial aid portal before the start of the  school year.

Second, colleges typically require the FAFSA when distributing their own need-based aid, and in some cases as a prerequisite  for merit aid. So, filing the FAFSA can give your child the broadest opportunity to be eligible for college-based aid. Similarly, many private scholarship sources may want to see the results of the FAFSA.

Next year’s FAFSA will change

Changes are coming to the 2024-2025 FAFSA, which will be available October 1, 2023. These changes are being implemented a year later than originally planned. One notable modification is the term “expected family contribution,” or EFC, will be replaced by “student aid index,” or SAI, to better reflect what this number is supposed to represent — a measure of aid eligibility and not a definite amount of what families will pay. Other important changes are that parents with multiple children in college at the same time will no longer receive a discount in the form of a divided SAI; income protection allowances for both parents and students will be increased; and cash support to students and other types of income will no longer have to be reported on the FAFSA, including funds from a grandparent-owned 529 plan.

17
Aug

Highlights of the Inflation Reduction Act High

The Inflation Reduction Act, signed into law on August 16, 2022, includes healthcare and energy-related provisions, a new corporate alternative minimum tax,  and an excise tax on certain corporate stock buybacks. Additional funding is also provided to the IRS. Some significant provisions in the Act are discussed below.

Medicare

The legislation authorizes the Department of Health and Human Services to negotiate Medicare prices for certain high-priced, single-source drugs. However, only 10 of the most expensive drugs will be chosen initially, and the negotiated prices will not take effect until 2026. For each of the following years, more negotiated drugs will be added.

Starting in 2025, a $2,000 annual cap (adjusted for inflation) will apply to out-of-pocket costs for Medicare Part D prescription drugs.

Deductibles will not apply to covered insulin products under Medicare Part D or under Part B for insulin furnished through durable medical equipment until 2023,  . Also, the applicable copayment amount for covered insulin products will be capped at $35 for a one-month supply.

Health Insurance

Starting in 2023, a high-deductible health plan can provide that the deductible does not apply to selected insulin products.

Affordable Care Act subsidies (scheduled to expire at the end of 2022) that improved affordability and reduced health insurance premiums have been extended through 2025. Indexing of percentage contribution rates used in determining a taxpayer’s required share of premiums is delayed until after 2025, preventing more significant premium increases. Additionally, those with household incomes higher than 400% of the federal poverty line remain eligible for the premium tax credit through 2025.

Energy-Related Tax Credits

Many current energy-related tax credits have been modified and extended, and a few new credits have been added. Many of the credits are available to businesses, and others are available to individuals. The following two credits are substantial revisions and extensions of an existing tax credit for electric vehicles.

Starting in 2023, a tax credit of up to $7,500 is available for the purchase of new clean electric vehicles meeting certain requirements. The credit is not available for vehicles with a manufacturer’s suggested retail price higher than $80,000 for sports utility vehicles and pickups, $55,000 for other vehicles. The credit is not available if the modified adjusted gross income (MAGI) of the purchaser exceeds $150,000 ($300,000 for joint filers and surviving spouses, $225,000 for heads of household). Starting in 2024, an individual can elect to transfer the credit to the dealer as payment for the vehicle.

Similarly, a tax credit of up to $4,000 is available for the purchase of certain previously owned clean electric vehicles from a dealer. The credit is not available for vehicles with a sales price exceeding $25,000. The credit is not available if the purchaser’s MAGI exceed $75,000 ($150,000 for joint filers and surviving spouses, $75,000 for heads of household). An individual can elect to transfer the credit to the dealer as payment for the vehicle.

Corporate Alternative Minimum Tax

For taxable years beginning after December 31, 2022, a new 15% alternative minimum tax (AMT) will apply to corporations (other than an S corporation, regulated investment company, or a real estate investment trust) with an average annual adjusted financial statement income more than $1 billion.

Adjusted financial statement income means the net income or loss of the taxpayer set forth in the corporation’s financial statement (often referred to as book income), with certain adjustments. If regular tax exceeds the tentative AMT, the excess amount can be carried forward as a credit against the AMT in future years.

Excise Tax on Repurchase of Stock

For corporate stock repurchases after December 31, 2022, a new 1% excise tax will be imposed on the value of a covered corporation’s stock repurchases during the taxable year.

A covered corporation means any domestic corporation whose stock is traded on an established securities market. However, the excise tax does not apply: (1) to a repurchase that is part of a nontaxable reorganization, (2) with respect to certain contributions of stock to an employer-sponsored retirement plan or employee stock ownership plan, (3) if the total value of stock repurchased during the year does not exceed $1 million, (4) to a repurchase by a securities dealer in the ordinary course of business, (5) to repurchases by a regulated investment company or a real estate investment trust, or (6) to the extent the repurchase is treated as a dividend for income tax purposes.

Increased Funding for the IRS

Substantial additional funds are provided to the IRS to help fund operations and business systems modernization and to improve enforcement of tax laws.

5
Aug

Are we in a Recession?

A common definition is that a recession occurs when there are two consecutive quarters of declining in gross domestic product (GDP). The GDP is the total of all the goods and services produced in a country. The National Bureau of Economic Research (NBER) determines when the United States (U.S.) is in a recession. It is a private nonpartisan organization that began dating business cycles in 1929. The committee, which was formed in 1978, includes eight economists who specialize in macroeconomic and business cycle research.1 The NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” The committee looks at the big picture and makes exceptions as appropriate. For example, the economic decline of March and April 2020 was so extreme that it was declared a recession even though it lasted only two months.2

The committee studies a range  of monthly economic data, with special emphasis on six indicators: personal income, consumer spending, wholesale-retail sales, industrial production, and two measures of employment. Because official data is typically reported with a delay of a month or two — and patterns may be clear only in hindsight — it generally takes some time before the committee can identify a peak or trough. Some short recessions (including the 2020 downturn) were over by the time they were officially announced.3

Public Opinion
Consumer sentiment is a significant factor. It is a powerful factor in consumer spending. Consumer spending is a substantial part of GDP. An early July poll, 58% of Americans said they thought the U.S. economy was in a recession, up from 53% in June and 48% in May.4 Yet many economic indicators, notably employment,  remain strong. The current situation is unusual, and there is little consensus among economists as to whether a recession has begun or may be coming soon.5

GDP
Real (inflation-adjusted) GDP dropped at an annual rate of 1.6% in the first quarter of 2022 and by 0.9% in the second quarter.6

Since 1948, the U.S. economy has never experienced two consecutive quarters of negative GDP growth without a recession being declared. However, the current situation could be an exception, due to  the strong employment market and some anomalies in the GDP data.7

Negative first-quarter GDP was largely due to a record U.S. trade deficit, as businesses and consumers bought more imported goods to satisfy demand. This was a sign of economic strength rather than weakness. Consumer spending and business investment — the  two most important components of GDP — both increased for the quarter.8

Initial second-quarter GDP data showed a strong positive trade balance but slower growth in consumer spending, with an increase in spending on services and a decrease in spending on goods. The biggest negative factors were  a slowdown in residential construction  and a substantial cutback in growth of business inventories.9 Although inventory reductions can precede a recession, it’s too early to tell whether they signal trouble or are simply a return to more appropriate levels.10 Economists may not know whether the economy is contracting until there is additional monthly data.7

Employment

Economic data has been mixed recently. Consumer spending declined in May when adjusted for inflation, but bounced back in June.11 Retail sales were strong in June, but manufacturing output dropped for a second month.12 The strongest and most consistent data has been employment. The economy added 372,000 jobs in June, the third consecutive month of gains in that range. Total nonfarm employment is now just 0.3% below the pre-pandemic level, and private-sector employment is actually higher (offset by losses in government employment).13

The unemployment rate has been 3.6%  for four straight months, essentially the same as before the pandemic (3.5%),  which was the lowest rate since 1969.9 Initial unemployment claims ticked up slightly in mid-July but remained near historic lows.14  In the 12 recessions since World War II, the unemployment rate has always risen, with a median increase of 3.5 percentage points.16

With employment at such high levels, it may be questionable to characterize the current economic situation as a recession. However, the employment market could change, and recessions can be driven by fear as well as by fundamental economic weakness.

Inflation
The fear factor is inflation which ran at an annual rate of 9.1% in June, the highest since 1981.17 Wages have increased, but not enough to make up for the erosion of spending power, making many consumers more cautious despite the strong job market.18 If consumer spending slows significantly, a recession is certainly possible, even if it is not already under way.  Inflation has forced the Federal Reserve to raise interest rates aggressively, with a 0.50% increase in the benchmark federal funds rate in May, followed by 0.75% increases in June and July.18 It takes time for the effect of higher rates to filter through the economy, and it remains to be seen whether there will be a  “soft landing” or a  more jarring stop that throws the economy into a recession.

Among the factors driving inflation are: Covid-19, Russian Invasion of Ukraine, supply chain disruptions, CARES ACTs 1, 2 and 3, fewer homes for sale than buyers, limited supply of semiconductors .

Unfortunately, no one knows the future, and economic forecasts vary significantly. Forecast range from remote chance of a recession to an imminent downturn with a moderate recession in 2023.19 If that turns out to be the case, or if a recession arrives sooner, it’s important to remember that recessions are generally short-lived, lasting an average of just 10 months since World War II. By contrast, economic expansions have lasted 64 months.20 To put it simply: The good times typically last longer than the bad.

Projections are based on current conditions, are subject to change, and may not happen.

1-3) National Bureau of Economic Research, 2021

4)  Investor’s Business Daily, July 12, 2022

5) The Wall Street Journal, July 17, 2022

6) U.S. Bureau of Labor Statistics, 2022

7-8) MarketWatch, July 5, 2022

6,9,11,21) U.S. Bureau of Economic Analysis, 2022

10) The Wall Street Journal, July 28, 2022

12) Reuters, July 15, 2022

13–14, 17–18) U.S. Bureau of Labor Statistics, 2022

15) The Wall Street Journal, July 14, 2022

16) The Wall Street Journal, July 4, 2022

19)  Federal Reserve, 2022

20) The New York Times, July 1, 2022

20
Jul

Increased Standard Mileage Rates for July 1 through December 31, 2022

IRS , in response to the increased price of gas, increased optional standard mileage rates for the last half of 2022. The rates are used for computing the deduction for automobiles used for business, medical, and moving expense. The rate did not change for calculating the deduction for use of an automobile for charitable purposes as the rate is set by statute which did not change.

The change applies for the second half of 2022  are:

Business use of auto: 62.5 cents per mile (up from 58.5 cents for January 1, 2022, to June 30, 2022) may be deducted if an auto is used for business purposes. If you are an employee, your employer can reimburse you for your business travel expenses using the standard mileage rate. However, if you are an employee and your employer does not reimburse you for your business travel expenses, you cannot currently deduct your unreimbursed travel expenses as miscellaneous itemized deductions.

Charitable use of auto: 14 cents per mile (the same as for January 1, 2022, to June 30, 2022) may be deducted if an auto is used to provide services to a charitable organization if you itemize deductions on your income tax return. Your charitable deduction may be limited to certain percentages of your adjusted gross income, depending on the type of charity.

Medical use of auto: 22 cents per mile (up from 18 cents for January 1, 2022, to June 30, 2022) may be deducted if an auto is used to obtain medical care (or for other deductible medical reasons) if you itemize deductions on your income tax return. You can deduct only the part of your medical and dental expenses that exceeds 7.5% of the amount of your adjusted gross income.

Moving expense: 22 cents per mile (up from 18 cents for January 1, 2022, to June 30, 2022) may be deducted if an auto is used by a member of the Armed Forces on active duty to move, pursuant to a military order, to a permanent change of station (unless such expenses are reimbursed). The deduction for moving expenses is not currently available for other taxpayers.

The IRS normally updates the standard mileage rates once a year in the fall for the next calendar year. Mid-year increases in the standard mileage rates are rare — the last time the IRS made such an increase was in 2011.

IRS Announcement 2022-13

18
Jul

Roth Conversions are getting a lot of attention

Some consider the drop in the markets maybe a good time for some to consider converting traditional IRAs to Roth IRAs. The withdrawal of the assets from the traditional IRA would be taxed currently. The resulting tax would be lower as the value of the investment would be lower. The future growth of the assets would not be taxable in the Roth or to the beneficiaries of the Roth. There are many assumptions and conditions to achieve the desired benefits. 

Tax rate assumptions

One assumption is that you will be in a lower tax bracket when you retire. A related assumption is that the tax laws will not change when the funds are distributed from the Roth. One approach would be to calculate your tax based on various assumptions. Depending on your current tax bracket and assumed future tax brackets to see how much to convert now.

Future values

There is a risk that the value of the investment will not grow or will drop in value.

Two five-year tests

To qualify for  tax-free and penalty-free withdrawal of earnings, including earnings on converted amounts, a Roth account must meet a five-year holding period beginning January 1 of the year your first Roth account was opened, and the withdrawal must take place after age 59½ or meet an IRS exception. If you have had a Roth IRA for some time, this may not be an issue, but it could come into play if you open your first Roth IRA for the conversion.

Assets converted to a Roth IRA can be withdrawn free of ordinary income tax at any time, because you paid taxes at the time of the conversion. However, a 10% penalty may apply if you withdraw the assets before the end of a different five-year period, which begins January 1 of the year of each conversion, unless you are age 59½ or another exception applies.

Roth account are not subject to Required Minimum Distributions (RMD)

Roth IRAs are not required to minimum distributions.  Distributions are tax-free to the original owner of the Roth IRA and spouse beneficiaries who treat a Roth IRA as their own.  Other beneficiaries inheriting a Roth IRA are subject to the RMD rules. The longer your investments can pursue growth, the more advantageous it may be for you and your beneficiaries to have tax-free income.

There are many considerations and assumption in determining if a Roth Conversion is appropriate for anyone. The above is not intended as a complete discussion of the subject. A trusted advisor should be consulted to see if a conversion should be considered .

All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.

6
Jul

Good and Bad News about Social Security

With approximately 94% of American workers covered by Social Security and 65 million people currently receiving benefits, keeping Social Security healthy is a major concern.1 Social Security is financed primarily through payroll taxes. Unless Congress act benefits may eventually be reduced. Trustees of the Social Security Trust Funds     release a detailed  report to Congress in June. The good news was that the effects of the pandemic were not as significant as  projected a year ago.

Mixed news for Social Security

Social Security program consists of two programs, the Old-Age and Survivors Insurance (OASI) program and Disability Insurance (OASDI). Each program has its own  financial account (Trust Fund). Payroll taxes collected are deposited in the applicable Trust Fund. OASI provide benefits to retired workers, their families, and survivors of workers. D provides benefits to disabled workers and their families. Funding is also provided by other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation).

Social security is required to invest funds collected in special government-guaranteed Treasury bonds that earn interest. These funds are now being used to pay benefits more than the payroll tax collected. Payroll taxes are not sufficient to pay current benefits. Changes in our demographics are a significant reason for the deficiency.

A recent report by the Trustees estimate that the funds will not be able to fund full retirement and survivor benefits. Benefit would then be reduced to 77% of scheduled OASI benefits, declining to 72% through 2096, the end of the 75-year, long-range projection period.

The Trustees report, estimate the combined reserves (OASDI) will be able to pay scheduled benefits until 2035. Benefit would then be reduced to 80% of scheduled benefits, declining to 74% by 2096. OASI and DI Trust Funds are separate, and generally one program’s taxes and reserves cannot be used to fund the other program. However, this could be changed by Congress, and combining these trust funds in the report is a way to illustrate the financial outlook for Social Security as a whole.

The above is based on current conditions and likely future demographic, economic, and program-specific conditions. Future events including the impact of the pandemic may results in changes not reflected in the Trustee’s estimates.

Some changes can be made to improve the situation

The Trustees continue to urge Congress to address the financial challenges. The sooner Congress acts the less harsh the changes will be. Some of the options that have been suggested including the following:

  • Raising the current Social Security payroll tax rate. Increasing the payroll tax to 15.64% from 12.4% would correct the situation
  • Raising or eliminating the ceiling on wages subject to Social Security payroll taxes ($147,000 in 2022).
  • Raising the full retirement age from 67 (for anyone born in 1960 or later).
  • Raising the early retirement age from 62.
  • Reducing future benefits by about 20.3% for all current and future beneficiaries, or by about 24.1% if reductions were applied only to those who initially become eligible in 2022 or later.
  • Changing the benefit formula that is used to calculate benefits.
  • Calculating the annual cost-of-living adjustment (COLA) for benefits.

A comprehensive list of potential solutions can be found at https://www.ssa.gov/OACT/solvency/provisions/.

1) Social Security Administration, 2022

15
Jun

Turmoil and the Bear Market

Where we go from here is unknown. There have been many times the stock market and the economy have recovered from worse. The following is intended to be a general discussion. How to proceed will depend on each person’s circumstances (it depends). There are numerous technical issues not included in this discussion.

During the intensely volatile first 100 trading days of 2022, the Stocks of companies in the S&P 500 index delivered their worst performance since 1970 .1 The S&P 500 continued to tumble, and the benchmark index descended into a bear market — typically defined as a sustained drop in stock prices of at least 20% — on June 13, 2022. When the market closed, the S&P 500 had dropped 21.8% from its January 3 peak, and the tech-heavy NASDAQ, already in bear territory, had plunged 32.7% from its November 19, 2021 peak.2

Some investors who are nervous about the future and their portfolios seem to have taken a defensive stance by selling riskier assets, including investments in growth-oriented technology stocks.

What’s causing market volatility?

Throughout 2021, U.S. businesses dealt with unpredictable demand shifts and supply shocks related to the pandemic, but near-zero interest rates and trillions of dollars in pandemic relief supported consumer spending, boosted economic growth, and drove record corporate profits. Companies in the S&P 500 posted profits in 2021 that were 70% higher than in 2020 and 33% higher than in 2019, which helped fuel a stock market total return of nearly 29%.3-4

But in the first months of 2022, investors began to worry that the anticipated tightening of monetary policies by the Federal Reserve — intended to cool off stubbornly high inflation — would stifle economic growth and cause a recession. Prices began rising in the spring of 2021 due to high demand, supply-chain issues, and a labor shortage that pushed up wages. Inflation picked up speed in the first quarter of 2022 when China’s COVID-19 lockdowns impacted the supply of goods, and Russia’s invasion of Ukraine sent already high global food and fuel prices through the roof. In May 2022, the Consumer Price Index rose at an annual rate of 8.6%, a 40-year high.5

The relentless acceleration of price increases puts pressure on the Federal Open Market Committee (FOMC), which meets on June 15 and 16, to act aggressively to tame inflation. At the beginning of May, the FOMC raised the benchmark federal funds rate by 0.5% (to a range of 0.75%–1.00%). This was the first half-percent increase since May 2000, and Fed projections suggest there will be more to come.6

Rising interest rates push bond yields upward, and the opportunity for higher returns from lower-risk bond investments makes higher-risk stock investments less attractive. Moreover, stock investors are buying a portion of a company’s future cash flows, which become less valuable in an inflationary environment. Higher borrowing costs can also crimp consumers’ spending power and cut into the profits of companies that rely on debt.

The problem with one sector dominating the market

Stocks tracked by the S&P Information Technology Sector Index, which fell 29.2% from a January 3 high, have been hit harder than the S&P 500. Plus, like many benchmark indexes, the S&P 500 is weighted by market capitalization (the value of a company’s outstanding shares). This gives the largest companies, most of which are in the tech sector, an outsized role in index performance. As of May 31, the information technology sector still accounted for 27.1% of the market cap of the S&P 500, compared with weightings of 14.4% for health care and 11.2% for financials, the next-largest sectors. Apple, Microsoft, Alphabet, and Amazon, respectively, are the four most-valuable companies in the index; Nvidia is ranked ninth and Meta has fallen to number 11.7

For the past several years, tech stock gains drove the market to new heights, but when their share values began to plunge, they dragged the broader stock indexes down with them. A Wall Street Journal analysis of market data through May 17 found that just eight of the largest U.S. companies — the six previously mentioned, plus Netflix and Tesla (in the consumer discretionary sector) — were responsible for an astounding 46% of the S&P 500’s 2022 losses (on a total return basis).8

These well-known technology companies have grown into massive multinational businesses that have a major influence on everyday life. Some dominate their respective business spaces — social media, smartphones, online search and advertising, e-commerce, and cloud computing — enough to spark antitrust investigations and calls for stricter regulations in the United States and abroad. They also have plenty of cash on hand, which means they may be in better shape to withstand an economic slowdown than their smaller competitors.9

Takeaways

Spreading investments among the 11 sectors of the S&P 500 is a common way to diversify stock holdings. But over time, a stock portfolio that was once diversified can become overconcentrated in a sector that has outperformed the broader market. Tech-sector stocks notched huge total returns of about 50% in 2019, 44% in 2020, and 35% in 2021, so you may want to look closely at the composition of your portfolio and consider rebalancing if you find yourself overexposed to this highly volatile sector. (Rebalancing involves selling some investments to buy others. Keep in mind that selling investments in a taxable account could result in a tax liability.) 10

If you feel shell-shocked after more than five months of market turbulence, try to regain some perspective. Some market analysts view recent price declines as a painful but long overdue repricing of stocks with valuations that had grown excessive, as well as a reality check brought on by waning growth expectations. The forward price-to-earnings (P/E) ratio of companies in the S&P 500 has fallen from 23.3 at the end of 2021 to 17.8 in May 2022, much closer to the 10-year average of 16.9.11-12

It could be a while before investors can better assess how the economy and corporate profits will ultimately fare against fast-rising inflation and higher borrowing costs — and the stock market is no fan of uncertainty. Disappointing economic data and company earnings reports could continue to spark volatility in the coming months.

It may not be easy to take troubling headlines in stride, but if you have a sufficiently diversified, all-weather investment strategy, sticking to it is often the wisest course of action. If you panic and flee the market during a downturn, you won’t be able to benefit from upward swings on its better days. And if you continue investing regularly for a long-term goal such as retirement, a down market may be an opportunity to buy more shares at lower prices.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Investments seeking a higher return tend to involve greater risk. Diversification is a method used to help manage risk. It does not guarantee a profit or protect against investment loss. The S&P 500 is an unmanaged group of securities that is considered representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary. Dollar-cost averaging does not ensure a profit or prevent a loss. Such plans involve continuous investments in securities regardless of fluctuating prices. You should consider your financial ability to continue making purchases during periods of low and high price levels. However, this can be an effective way for investors to accumulate shares to help meet long-term goals.

1) SIFMA, 2022

2) Yahoo! Finance, 2022

3) The New York Times, May 31, 2022

4, 7, 10-11) S&P Dow Jones Indices, 2022

5) U.S. Bureau of Labor Statistics, 2022

6) Federal Reserve, 2022

8) The Wall Street Journal, May 19, 2022

9) The New York Times, May 20, 2022

12) FactSet, 2022

For the past several years, tech stock gains drove the market to new heights, but when their share values began to plunge, they dragged the broader stock indexes

7
Jun

IRS Releases 2023 Key Numbers for Health Savings Accounts

The IRS has released the 2023 contribution limits for health savings accounts (HSAs), as well as the 2023 minimum deductible and maximum out-of-pocket amounts for high-deductible health plans (HDHPs). An HSA is a tax-advantaged account that’s paired with an HDHP. An HSA offers several valuable tax benefits:

You may be able to make pre-tax contributions via payroll deduction through your employer, reducing your current income tax.

If you make contributions on your own using after-tax dollars, they’re deductible from your federal income tax (and perhaps from your state income tax) whether you itemize or not.

Contributions to your HSA, and any interest or earnings, grow tax deferred.

Contributions and any earnings you withdraw will be tax-free if used to pay qualified medical expenses.

Key tax numbers for 2022 and 2023.

Health Savings Accounts

Annual contribution limit      2022    2023

Self-only coverage                 $3,650   $3,850
Family coverage                     $7,300   $7,750

High-deductible health plan: self-only coverage        2022       2023

Annual deductible: minimum                                        $1,400    $1,500
Annual out-of-pocket expenses required to be paid
(other than for premiums) can’t exceed                       $7,050    $7,500

High-deductible health plan: family coverage            2022      2023
Annual deductible: minimum                                         $2,800    $3,000

Annual out-of-pocket expenses required to be paid (other than for premiums) can’t exceed
$14,100  $15,000

Catch-up contributions                                                
Annual catch-up contribution limit for individuals age 55 or older  $1,000 2022 and 2023

The IRS has released the 2023 key tax numbers for health savings accounts (HSAs) and high-deductible health plans (HDHPs).