What Do Rising Interest Rates Mean for You?
On March 16, 2022, the Federal Open Market Committee (FOMC) of the Federal Reserve raised the benchmark federal funds rate by 0.25% to a target range of 0.25% to 0.50%. This is the beginning of a series of increases that the FOMC expects to conduct over the next two years to combat high inflation.1
The FOMC released economic projections that suggest the equivalent of six additional 0.25% increases in 2022, followed by three or four more increases in 2023 when it announced the current increase, 2 These are only projections, based on current conditions, and may not happen. However, they provide a helpful picture of the potential direction of U.S. interest rates.
What is the federal funds rate?
The federal funds rate is the interest rate at which banks lend funds to each other overnight to maintain legally required reserves within the Federal Reserve System. The FOMC sets a target range, usually a 0.25% spread, and then sets two specific rates that function as a floor and a ceiling to push the funds rate into that target range. The rate may vary slightly from day to day, but it generally stays within the target range.
Although the federal funds rate is an internal rate within the Federal Reserve System, it serves as a benchmark for many short-term rates set by banks and can influence longer-term rates as well.
Why does the Fed adjust the federal funds rate?
The Federal Reserve and the FOMC operate under a dual mandate to conduct monetary policies that foster maximum employment and price stability. Adjusting the federal funds rate is the Fed’s primary tool to influence economic growth and inflation.
The FOMC lowers the federal funds rate to stimulate the economy by making it easier for businesses and consumers to borrow, and raises the rate to combat inflation by making borrowing more expensive. In March 2020, when the U.S. economy was devastated by the pandemic, the Committee quickly dropped the rate to its rock-bottom level of 0.00%–0.25% and has kept it there for two years as the economy recovered.
The FOMC has set a 2% annual inflation goal as consistent with healthy economic growth. The Committee considered it appropriate for inflation to run above 2% for some time to balance the extended period when it ran below 2% and give the economy more time to grow in a low-rate environment. However, the steadily increasing inflation levels over the last year — with no sign of easing — have forced the Fed to change course and tighten monetary policy.
How will consumer interest rates be affected?
The prime rate, which commercial banks charge their best customers, is tied directly to the federal funds rate, and generally runs about 3% above it. Though actual rates can vary widely, small-business loans, adjustable-rate mortgages, home-equity lines of credit, auto loans, credit cards, and other forms of consumer credit are often linked to the prime rate, so the rates on these types of loans typically increase with the federal funds rate. Fixed-rate home mortgages are not tied directly to the federal funds rate or the prime rate. Although Fed rate hikes may put upward pressure on new mortgage rates.
Rising interest rates make it more expensive for consumers and businesses to borrow. Although, retirees and others who seek income could eventually benefit from higher yields on savings accounts and certificates of deposit (CDs). Banks typically raise rates charged on loans more quickly than they raise rates paid on deposits, but an extended series of rate increases should filter down to savers over time.
What about bond investments?
Interest-rate changes can have a broad effect on investments, but the impact tends to be more pronounced in the short term as markets adjust to the new level.
When interest rates rise, the value of existing bonds typically falls. Put simply, investors would prefer a newer bond paying a higher interest rate than an existing bond paying a lower rate. Longer-term bonds tend to fluctuate more than those with shorter maturities because investors may be reluctant to tie up their money for an extended period if they anticipate higher yields in the future.
Bonds redeemed prior to maturity may be worth more or less than their original value, but when a bond is held to maturity, the bond owner would receive the face value and interest, unless the issuer defaults. Thus, rising interest rates should not affect the return on a bond you hold to maturity, but may affect the price of a bond you want to sell on the secondary market before it reaches maturity.
Although the rising-rate environment may have a negative impact on bonds you currently hold and want to sell, it might also offer more appealing rates for future bond purchases.
Bond funds are subject to the same inflation, interest rate, and credit risks associated with their underlying bonds. Thus, falling bond values due to rising rates can adversely affect a bond fund’s performance. However, as underlying bonds mature and are replaced by higher-yielding bonds within a rising interest-rate environment, the fund’s yield and/or share value could potentially increase over the long term.
How will the stock market react?
Equities may also be affected by rising rates, though not as directly as bonds. Stock prices are closely tied to earnings growth, so many corporations stand to benefit from a more robust economy, even with higher interest rates. On the other hand, companies that rely on heavy borrowing will likely face higher costs going forward, which could affect their bottom lines.
The stock market reacted positively to the initial rate hike and the projected path forward, but investors will be watching closely to see how the economy performs as interest rates adjust — and whether the increases are working to tame inflation.3
The market may continue to react, positively or negatively, to the government’s inflation reports or the Fed’s interest-rate decisions, but any reaction is typically temporary. As always, it’s important to maintain a long-term perspective and make sound investment decisions based on your own financial goals, time horizon, and risk tolerance.
The FDIC insures CDs and bank savings accounts, which generally provide a fixed rate of return, up to $250,000 per depositor, per insured institution. The return and principal value of stocks and investment funds fluctuate with market conditions. Shares, when sold, may be worth more or less than their original cost. Investments offering the potential for higher rates of return also involve higher risk.
Investment funds are sold by prospectus. Please consider the fund’s objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
1–2) Federal Reserve, March 16, 2022
3) The Wall Street Journal, March 17, 2022
Telephone Scam Tips (1)
People lose a significant amount of money to phone scams. In some scams, the callers act friendly and helpful. In others they may threaten or try to scare you. The scammer will always try to get your money or personal information to later commit identity theft crimes.
Common phone scams include:
1. Prize and lottery scam.
2. Loved one in trouble and needs money for bail / medical expenses.
3. Past due tax scam.
4. Overdue bill such as electric or water bill.
5. Computer is allegedly broken and needs repair.
6. Loan or improved credit card interest rate scam.
7. Charity scams.
How to recognize a scam:
1. There is no prize – if you have to pay money for a prize or lottery you were selected for, it is a scam. If it is too good to be true, it is.
2. You won’t be arrested – scammers pretend to be law enforcement and threaten to arrest or fine you if you don’t agree to pay back taxes or some other debt right away.
3. There is NEVER a good reason to send cash or pay with a gift card – scammers will often ask you to wire money, pay through a money transfer app, or through a gift card (Target card, Apple iTunes gift card, etc.)
4. Scammers want you to feel pressured to make a decision right away. They do not want to give you time to verify the information they are telling you is inaccurate.
5. Government agencies, utility companies, or banks will not call to confirm your sensitive information such as your social security number.
What to do if you receive a call:
1. HANG UP.
2. Consider blocking the phone number.
3. Don’t trust your caller ID – scammers can make any name or number show up on your caller ID.
4. If in doubt, call 911 to have an officer respond to your location. The officer can assist you in verifying if the call is a scam.
(1) Wilmette Police Department March 9, 2022
Common Tax Scams to Watch For
Internal Revenue Service has issued numerous Tax Sam/Consumer Alerts (1). According to the Internal Revenue Service (IRS), tax scams tend to increase during tax season and/or times of crisis.(2). Following
are some of the scams to watch out for.
Phishing and text message scams
Phishing and text message scams usually involve unsolicited emails or text messages that seem to come from legitimate IRS sites to convince you to provide personal or financial information. Once scam artists obtain this information, they use it to commit identity or financial theft. The IRS does not initiate contact with taxpayers by email, text message, or any social media platform to request personal or financial information. The IRS initiates most contacts through regular mail delivered by the United States Postal Service.
Phone scams
Phone scams typically involve a phone call from someone claiming that you owe money to the IRS, or you’re entitled to a large refund. The calls may show up as coming from the IRS on your Caller ID, be accompanied by fake emails that appear to be from the IRS, or involve follow-up calls from individuals saying they are from law enforcement. These scams often target more vulnerable populations, such as immigrants and senior citizens, and will use scare tactics such as threatening arrest, license revocation, or deportation.
Tax-related identity theft
Tax-related identity theft occurs when someone uses your Social Security number to claim a fraudulent tax refund. You may not even realize you’ve been the victim of identity theft until you file your tax return and discover that a return has already been filed using your Social Security number. Or the IRS may send you a letter indicating it has identified a suspicious return using your Social Security number. To help prevent tax-related identity theft, the IRS now offers the Identity Protection PIN Opt-In Program. The Identity Protection PIN is a six-digit code that is known only to you and the IRS, and it helps the IRS verify your identity when you file your tax return.
Tax preparer fraud
Scam artists will sometimes pose as legitimate tax preparers and try to take advantage of unsuspecting taxpayers by committing refund fraud or identity theft. Be wary of any tax preparer who won’t sign your tax return (sometimes referred to as a “ghost preparer”), requires a cash-only payment, claims fake deductions/tax credits, directs refunds into his or her own account, or promises an unreasonably large or inflated refund. A legitimate tax preparer will generally ask for proof of your income and eligibility for credits and deductions, sign the return as the preparer, enter a valid preparer tax identification number, and provide you with a copy of your return. It’s important to choose a tax preparer carefully because you are legally responsible for what’s on your return, even if it’s prepared by someone else.
False offer in compromise
An offer in compromise (OIC) is an agreement between a taxpayer and the IRS that can help the taxpayer settle tax debt for less than the full amount that is owed. Unfortunately, some companies charge excessive fees and falsely advertise that they can help taxpayers obtain larger OIC settlements with the IRS. Taxpayers can contact the IRS directly or use the IRS Offer in Compromise Pre-Qualifier tool at https://irs.treasury.gov/oic_pre_qualifier/ to see if they qualify for an OIC.
Unemployment insurance fraud
Typically, this scheme is perpetrated by scam artists who try to use your personal information to claim unemployment benefits. If you receive an unexpected prepaid card for unemployment benefits, see an unexpected deposit from your state in your bank account, or receive IRS Form 1099-G for unemployment compensation that you did not apply for, report it to your state unemployment insurance office as soon as possible.
Fake charities
Charity scammers pose as legitimate charitable organizations to solicit donations from unsuspecting donors. These scam artists often take advantage of ongoing tragedies and/or disasters, such as a devastating tornado or the COVID-19 pandemic. Be wary of charities with names that are like more familiar or nationally known organizations. Before donating to a charity, make sure it is legitimate and never donate cash, gift cards, or funds by wire transfer. The IRS website has a tool to assist you in checking out the status of a charitable organization at https://www.irs.gov/charities-and-nonprofits.
Protecting yourself from scams
Fortunately, there are some things you can do to help protect yourself from scams, including those that target taxpayers:
- Don’t click on suspicious or unfamiliar links in emails, text messages, or instant messaging services — visit government websites directly for valuable information
- Don’t answer a phone call if you don’t recognize the phone number — instead, let it go to voicemail and check later to verify the caller
- Never download email attachments unless you can verify that the sender is legitimate
- Keep device and security software up to date, maintain strong passwords, and use multi-factor authentication
- Never share personal or financial information via email, text message, or over the phone
1) https://www.irs.gov/newsroom/tax-scams-consumer-alerts
2) Internal Revenue Service, 2022
The Federal Reserve System Fights Inflation
The Federal Reserve System (Fed) adjusts its monetary policy in response to rising inflation. The Federal Open Market Committee (FOMC) quickened the reduction of its bond-buying program mid-December 2021. They projected three increases in the benchmark federal funds rate in 2022, followed by three more increases in 2023 and speedup its buying bonds. These steps were more aggressive than previous FOMC actions or projections.1
A closer look at the FOMC’s tools and strategy may help to appreciate the impact of how these steps may affect the U.S. economy, investors, and consumers.
Jobs vs. Prices
The Federal Reserve is our national bank. It has two mandates, maintain price stability and full employment. These mandates require some inflation. An economy without inflation is typically stagnant with weak employment. A strong economy with high employment is prone to high inflation.
The FOMC currently has set a 2% annual inflation target based on the personal consumption expenditures (PCE) price index to meet the Fed’s mandate. The PCE index represents a broad range of spending on goods and services and tends to run below the more widely publicized consumer price index (CPI). The Committee’s policy is to allow PCE inflation to run moderately above 2% for some time to balance the periods when it runs below 2%.
PCE inflation was generally well below the Fed’s 2% target from May 2012 to February 2021. But it has risen quickly since then, reaching 5.7% for the 12 months ending in November 2021 — the highest level since 1982. (By comparison, CPI inflation was 6.8%.)2-3
Fed officials, and many other economists and policy makers, originally believed that inflation was “transitory” due to supply-chain issues related to opening the economy. But the persistence and level of inflation over the last few months led them to take corrective action. They still believe inflation will drop significantly in 2022 as supply-chain problems are resolved, and project a PCE inflation rate of 2.6% by the end of the year.4
The Fed’s Toolbox
The FOMC uses two primary tools to meet an acceptable balance between employment and prices. The first is its power to set the federal funds rate, the interest rate that large banks use to lend each other money overnight to maintain required deposits with the Federal Reserve. This rate serves as a benchmark for many other rates, including the prime rate that commercial banks charge their best customers. The prime rate usually runs about 3% above the federal funds rate and acts as a benchmark for rates on consumer loans such as credit cards and auto loans. The FOMC lowers the funds rate to stimulate the economy to create jobs and raises it to slow the economy to fight inflation.
The second tool is purchasing Treasury bonds to increase the money supply or allowing bonds to mature without repurchasing to decrease the supply. The FOMC purchases Treasuries through banks within the Federal Reserve System. Rather than using funds it holds on to deposit, the Fed simply adds the appropriate amount to the bank’s balance, essentially creating money. This provides the bank with more money to lend to consumers, businesses, or the government (through purchasing more Treasuries).
Shifting from Extreme Stimulus
When the economy shut down in March 2020 in response to the COVID pandemic, the FOMC took extraordinary stimulus measures to avoid a deep recession. The Committee dropped the federal funds rate to its rock-bottom range of 0% to 0.25% and began a bond-buying program that reached an unprecedented level of $75 billion per day in Treasury bonds. By June 2020, this was reduced to $80 billion per month and remained at that level until November 2021, when the FOMC decided to wind down the program at a rate that would have ended it by June 2022.5-6
The December decision accelerated the wind down, so the bond-buying program will end in March 2022, at which point the FOMC will likely consider raising the federal funds rate. Although it’s not certain when an increase will occur, the December projection is that the rate will be in the 0.75% to 1.00% range by the end of 2022 and the 1.50% to 1.75% range by the end of 2023.7
Rising Interest Rates
Currently the Fed’s plan is to slow inflation by returning to a more neutral monetary policy; this represents confidence that the economy is strong enough to grow without extreme stimulus. If these are the only actions required, the impact may be relatively mild. The first increase in rates will likely occur in the spring.
Rising interest rates make it more expensive for businesses and consumers to borrow, which could impact corporate earnings and consumer spending. Rates have an inverse relationship with bond prices. When interest rates rise, prices on existing bonds fall (and vice versa), because investors can buy new bonds paying higher interest.
Conversely, higher rates on bonds, certificates of deposit (CDs), savings accounts, and other fixed-income vehicles could help investors, especially retirees, who rely on fixed-income investments. Brick-and-mortar banks typically react slowly to changes in the federal funds rate, but online banks may offer higher rates.8
Many believe Inflation is a far greater concern other than rising interest rates, and it remains to be seen whether the Fed’s projected rate increases will be enough to tame prices. There are other moving parts, such as the movement of wages and prices. Generally, it is best not to overreact to policy changes. Often the best approach is to maintain an investment portfolio appropriate for your situation and long-term goals.
U.S. Treasury securities are guaranteed by the federal government as to timely payment of principal and interest. The principal value of all bonds fluctuates with market conditions. Bonds not held to maturity could be worth more or less than the original amount paid. The FDIC insures CDs and bank savings accounts, which generally provide a fixed rate of return, up to $250,000 per depositor, per insured institution. Forecasts are based on current conditions, subject to change, and may not happen.
1, 4, 6–7) Federal Reserve, 2021
2) U.S. Bureau of Economic Analysis, 2021
3) U.S. Bureau of Labor Statistics, 2021
5) Federal Reserve Bank of New York, 2021
8) Forbes Advisor, December 14, 2021
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.
Supply-Chain Chaos
The network, supply chain, that products and parts moved from the factories to distributors and resellers to the consumer have been under pressure since the pandemic began. This situation has gotten worse in the latter months of 2021at the same time demand for goods increased as the holiday season approached.1
California ports receive about 40% of U.S. imports. Operating 24/7 was enough to solve the problem. Workers were not able to keep up with the flow of container ships arriving from overseas. In mid-November, there was a record backlog of vessels waiting offshore for more than two weeks to unload their cargo.2 Other U.S. ports are also congested, and severe shortages of truck drivers and warehouse workers have further slowed the distribution of goods. The availability of contains is another factor slowing the flow of merchandise. These bottlenecks held up finished merchandise, as well as the inputs and raw materials needed to manufacture products domestically.
Compounding supply-chain issues have been increasing freight and labor costs, delaying shipments, and leaving consumers with higher prices and fewer options since the spring of 2021. As the seasons changed, logjams remained and time was running out, raising fears that U.S. retailers would not have sufficient inventories of goods to meet consumer demand during the holidays.
The good news is that many businesses responded nimbly to challenging conditions, and some consumers have been innovative, too. Here’s a glimpse into how these kinks in the supply chain might affect your holiday shopping in 2021.
Are Retailers Ready?
Many of the nation’s largest retailers anticipated problems and went to great lengths to ensure that shelves would be well stocked with a robust variety of goods in time for the holiday shopping season. In many cases, this required paying much higher freight costs to charter their own smaller ships or cargo planes so they could bypass clogged ports and make up for production delays.3
These costly measures are usually not an option for smaller retailers, which could put them at a disadvantage. In a November survey, 48% of small businesses reported that supply-chain disruptions are having a significant negative impact on their holiday sales.4
Expecting enthusiastic consumer demand, the National Retail Federation (NRF) forecast record holiday spending of 8.5% to 10.5% above 2020 levels. But retailers have also warned consumers that sporadic product shortages and shipping delays would continue and perhaps worsen later in the season.5
Poised to Spend
U.S. retail sales rose 1.7% in October, a surprisingly strong showing and the third monthly increase in a row.6 The potential for a more limited selection of some types of products has been widely reported, and it seems that consumers are paying attention. According to an annual NRF survey, a record share of consumers (49%) started their holiday shopping before November, and 36% did so to avoid missing the chance to buy key holiday items.7
U.S. households have extra money to spend this year after amassing about $2 trillion in excess savings during the pandemic. This was largely due to historic levels of economic relief provided by the federal government, along with fewer spending opportunities due to lockdowns.8 The recent rise in consumer spending bodes well for retailers and economic growth, but heavy demand also weighs on the supply chain and pushes up prices.
A Season of Inflation
Unfortunately, escalating prices for holiday gifts and basic needs could prompt the loudest “bah humbug” of the 2021 holiday season. With businesses paying more for the raw materials, packaging, labor, transportation, and fuel needed to produce and distribute products, a portion of the additional costs are being passed on to consumers. Some sellers have added additional price increases.
Measured by the Consumer Price Index (CPI), prices across the U.S. economy increased 6.2% during the 12 months ending in October 2021 — the highest inflation rate in nearly 31 years. Grocery prices (food at home) rose 5.4% year over year, while prices for the category that includes meats, poultry, fish, and eggs spiked 11.9%.9
Energy prices overall have climbed 30% since October 2020, and the natural gas that keeps many homes warm and cozy increased 28.1% year over year. Gasoline prices rose nearly 50% over the prior 12 months, slamming the budgets of households who plan to drive to family gatherings over the holidays.10
Because supply-and-demand shocks have driven these sharp price increases, some economists still believe they are temporary and that inflation will moderate in 2022 as supply constraints ease.11 Of course, even short bursts of inflation can be especially painful for consumers with lower incomes and little or no savings, and no one knows for certain how long prices might stay elevated. The impact of price increases and the many factors that impact the economy are beyond the scope of this discussion.
Shop Early or Be Flexible
On top of being more expensive, some in-demand products could be hard to find, and transportation bottlenecks aren’t the only issue impacting supplies. A global shortage of semiconductors, or computer chips, is limiting the production of all kinds of electronic devices, including cars, home appliances, laptops, smartphones, TVs, and gaming consoles. The availability of some brands of sportswear, shoes, and accessories could be affected by a COVID outbreak that shut down factories in Vietnam. Other reported shortages include jewelry, some popular toys and books, frozen turkeys, cardboard boxes needed for shipping, and Christmas trees, both real and artificial.12
If you need certain items for entertaining or have family members with specific gifts on their wish lists, it could be risky to wait until the last minute to buy them. Otherwise, shopping locally, being open to alternatives, and giving cash or gift cards to be spent later might end up being your best options.
Projections are based on current conditions, are subject to change, and may not happen.
1) Consumer Reports, October 20, 2021
2) Bloomberg, November 13, 2021
3) The Wall Street Journal, October 10, 2021
4) National Federation of Independent Business, November 3, 2021
5, 7) National Retail Federation, November 16, 2021
6) U.S. Census Bureau, 2021
8) Bloomberg, November 16, 2021
9-10) U.S. Bureau of Labor Statistics, 2021
11) Moody’s Analytics, November 18, 2021
12) CBS News, November 18, 2021
Employer Open Enrollment: Make Benefit Choices That Work for You
Open enrollment is the time when employers may change their benefit offerings for the upcoming plan year. If you’re employed, this is your once-a-year chance to make important decisions that will affect your health-care choices and your finances.
Even if you are satisfied with your current health plan, it may no longer be the most cost-effective option. Before you make any benefit elections, take plenty of time to review the information provided by your employer. You should also consider how your life has changed over the last year and any plans or potential developments for 2022.
Decipher Your Health Plan Options
The details matter when it comes to selecting a suitable health plan. One of your options could be a better fit for you (or your family) and might even help reduce your overall health-care costs. But you will have to look beyond the monthly premiums. Policies with lower premiums tend to have more restrictions or higher out-of-pocket costs (such as copays, coinsurance, and deductibles) when you do seek care for a health issue.
To help you weigh the tradeoffs, here is a comparison of the five main types of health plans. It should also help demystify some of the terminology and acronyms used so often across the health insurance landscape.
Health maintenance organization (HMO). Coverage is limited to care from physicians, other medical providers, and facilities within the HMO network (except in an emergency). You choose a primary-care physician (PCP) who will decide whether to approve or deny any request for a referral to a specialist.
Point of service (POS) plan. Out-of-network care is available, but you will pay more than you would for in-network services. As with an HMO, you must have a referral from a PCP to see a specialist. POS premiums tend to be a little bit higher than HMO premiums.
Exclusive provider organization (EPO). Services are covered only if you use medical providers and facilities in the plan’s network, but you do not need a referral to see a specialist. Premiums are typically higher than an HMO, but lower than a PPO.
Preferred provider organization (PPO). You have the freedom to see any health providers you choose without a referral, but there are financial incentives to seek care from PPO physicians and hospitals (a larger percentage of the cost will be covered by the plan). A PPO usually has a higher premium than an HMO, EPO, or POS plan and often has a deductible.
A deductible is the amount you must pay before insurance payments kick in. Preventive care (such as annual visits and recommended screenings) is typically covered free of charge, regardless of whether the deductible has been met.
High-deductible health plan (HDHP). In return for significantly lower premiums, you’ll pay more out-of-pocket for medical services until you reach the annual deductible. HDHP deductibles start at $1,400 for an individual and $2,800 for family coverage in 2022 and can be much higher. Care will be less expensive if you use providers in the plan’s network, and your upfront cost could be reduced through the insurer’s negotiated rate.
An HDHP is designed to be paired with a health savings account (HSA), to which your employer may contribute funds toward the deductible. You can also elect to contribute to your HSA through pre-tax payroll deductions or make tax-deductible contributions directly to the HSA provider, up to the annual limit ($3,650 for an individual or $7,300 for family coverage in 2022, plus $1,000 for those 55+).
HSA funds, including any earnings if the account has an investment option, can be withdrawn free of federal income tax and penalties if the money is spent on qualified health-care expenses. (Some states do not follow federal tax rules on HSAs.) Unspent balances can be retained in the account indefinitely and used to pay future medical expenses, whether you are enrolled in an HDHP or not. Be sure to save receipts if you decide to delay using the funds in the HAS in the future. Delaying using the funds allow the earnings and growth of the funds invested free of income tax. If you change employers or retire, the funds can be rolled over to a new HSA.
Three Steps to a Sound Decision
Start by adding up your total expenses (premiums, copays, coinsurance, deductibles) under each plan offered by your employer, based on last year’s usage. Your employer’s benefit materials may include an online calculator to help you compare plans by taking factors such as your chronic health conditions and regular medications into account.
If you are married, you may need to coordinate two sets of workplace benefits. Many companies apply a surcharge to encourage a worker’s spouse to use other available coverage, so look at the costs and benefits of having both of you on the same plan versus individual coverage from each employer. If you have children, compare what it would cost to cover them under each spouse’s plan.
Before enrolling in a plan, check to see if your preferred health-care providers are included in the network.
Tame Taxes with a Flexible Spending Account
If you elect to open an employer-provided health and/or dependent-care flexible spending account (FSA), the money you contribute via payroll deduction is not subject to federal income and Social Security taxes (nor generally to state and local income taxes). Using these tax-free dollars to pay for health-care costs not covered by insurance or for dependent-care expenses could save you about 30% or more, depending on your tax bracket.
The federal limit for contributions to a health FSA was $2,750 in 2021 and should be similar for 2022. Some employers set lower limits. (The official limit has not been announced by the IRS). You can use the funds for a broad range of qualified medical, dental, and vision expenses.
With a dependent-care FSA, you can set aside up to $5,000 a year (per household) to cover eligible child-care costs for qualifying children aged 12 or younger. The tax savings could help offset some of the costs paid for a nanny, babysitter, day care, preschool, or day camp, but only if the services are used so you (or a spouse) can work.
One drawback of health and dependent-care FSAs is that they are typically subject to the use-it-or-lose-it rule, which requires you to spend everything in your account by the end of the calendar year or risk losing the money. Some employers allow certain amounts (up to $550) to be carried over to the following plan year or offer a grace period up to 2½ months. Still, you must estimate your expenses in advance, and your predictions could turn out to be way off base.
Legislation passed during the pandemic allows workers to carry over any unused FSA funds from 2021 into 2022, if the employer opts into this temporary change. If you have leftover money in an FSA, you should consider your account balance and your employer’s carryover policies when deciding on your contribution election for 2022.
Take Advantage of Valuable Perks
A change in the tax code enacted at the end of 2020 made it possible for employers to offer student debt assistance as a tax-free employee benefit through 2025, spurring more companies to add it to their menu of benefit options. A 2021 survey found that 17% of employers now offer student debt assistance, and 31% are planning to do so in the future. Many employers target a student debt assistance benefit of $100 per month, which doesn’t sound like much, but it adds up.1 For example, an employee with $31,000 in student loans who is paying them off over 10 years at a 6% interest rate would save about $3,000 in interest and get out of debt 2½ years faster.
Many employers provide access to voluntary benefits such as dental coverage, vision coverage, disability insurance, life insurance, and long-term care insurance. Even if your employer doesn’t contribute toward the premium cost, you may be able to pay premiums conveniently through payroll deduction. Your employer may also offer discounts on health-related products and services, such as fitness equipment or gym memberships, and other wellness incentives, like a monetary reward for completing a health assessment.
1) CNBC, September 28, 2021
Medicare Open Enrollment for 2022 Starts October 15
Medicare beneficiaries can make new choices and pick plans that work best for them during the annual Medicare Open Enrollment Period. Costs and coverage typically change annually. Changes in your healthcare needs over the past year also may have changed. The Open Enrollment Period — which begins on October 15 and runs through December 7 — is your opportunity to switch your current Medicare health and prescription drug plans to ones that better suit your needs.
During this period, you can:
- Switch from Original Medicare to a Medicare Advantage Plan
- Switch from a Medicare Advantage Plan to Original Medicare
- Change from one Medicare Advantage Plan to a different Medicare Advantage Plan
- Change from a Medicare Advantage Plan that offers prescription drug coverage to a Medicare Advantage Plan that doesn’t offer prescription drug coverage
- Switch from a Medicare Advantage Plan that doesn’t offer prescription drug coverage to a Medicare Advantage Plan that does offer prescription drug coverage
- Join a Medicare prescription drug plan (Part D)
- Switch from one Part D plan to another Part D plan
- Drop your Part D coverage altogether
Any changes made during Open Enrollment are effective as of January 1, 2022.
Review plan options
Now is a good time to review your current Medicare benefits to see if they’re still right for you. Are you satisfied with the coverage and level of care you’re receiving with your current plan? Are your premium costs or out-of-pocket expenses too high? Has your health changed? Do you anticipate needing medical care or treatment, or new or pricier prescription drugs?
If your current plan doesn’t meet your healthcare needs or fit your budget, you can switch to a new plan. If you find that you’re satisfied with your current Medicare plan and it’s still being offered, you don’t have to do anything. The coverage you have will continue.
Information on costs and benefits
The Centers for Medicare & Medicaid Services (CMS) has announced that the average monthly premium for Medicare Advantage plans will be $19, and the average monthly premium for Part D prescription drug coverage will be $33. CMS will announce 2022 premiums, deductibles, and coinsurance amounts for the Medicare Part A and Part B programs soon.
You can find more information on Medicare benefits in the Medicare & You 2022 Handbook on medicare.gov.
Social Security’s Uncertain Future: What You Should Know
Social Security is a pay-as-you-go system, which means today’s workers are paying taxes for the benefits received by today’s retirees. There are many factors that are causing long-run fiscal challenges. Factors causing long-run fiscal challenges, including demographic trends such as lower birth rates, higher retirement rates, and longer life spans. There are simply not enough U.S. workers to support the growing number of beneficiaries. See the discussion under “Pandemic Impact” below. Social Security is not in danger of collapsing, but the clock is ticking on the program’s ability to pay full benefits.
Annually, the Trustees of the Social Security Trust Funds provide a detailed report to Congress that tracks the program’s current financial condition and projected financial outlook. In the latest report, released in August 2021, the Trustees estimate that the retirement program will have funds to pay full benefits only until 2033, unless Congress acts to shore up the program. This day of reckoning is expected to come one year sooner than previously projected because of the economic fallout from the COVID-19 pandemic.
Report Highlights
Social Security consists of two programs, each with its own financial account (trust fund) that holds the payroll taxes that are collected to pay benefits. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are referred to as OASDI.
Combined OASDI costs are projected to exceed total income (including interest) in 2021, and the Treasury will withdraw reserves to help pay benefits. The Trustees project that the combined reserves will be depleted in 2034. After that, payroll tax revenue alone should be sufficient to pay about 78% of scheduled benefits. OASDI projections are hypothetical, because the OASI and DI Trusts are separate, and generally one program’s taxes and reserves cannot be used to fund the other program.
The OASI Trust Fund, considered separately, is projected to be depleted in 2033. Payroll tax revenue alone would then be sufficient to pay 76% of scheduled OASI benefits.
The DI Trust Fund is projected to be depleted in 2057, eight years sooner than estimated in last year’s report. Once the trust fund is depleted, payroll tax revenue alone would be sufficient to pay 91% of scheduled benefits.
All projections are based on current conditions, subject to change, and may not happen.
Proposed Fixes
The Trustees continue to urge Congress to address the financial challenges facing these programs soon, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. Combining some of the following solutions may also help soften the impact of any one solution.
- Raising the current Social Security payroll tax rate (currently 12.4%). Half is paid by the employee and half by the employer (self-employed individuals pay the full 12.4%). An immediate and permanent payroll tax increase of 3.36 percentage points to 15.76% would be needed to cover the long-range revenue shortfall (4.20 percentage points to 16.60% if the increase started in 2034).
- Raising or eliminating the ceiling on wages subject to Social Security payroll taxes ($142,800 in 2021).
- Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
- Reducing future benefits. To address the long-term revenue shortfall, scheduled benefits would have to be immediately and permanently reduced by about 21% for all current and future beneficiaries, or by about 25% if reductions were applied only to those who initially become eligible for benefits in 2021 or later.
- Changing the benefit formula that is used to calculate benefits.
- Calculating the annual cost-of-living adjustment for benefits differently.
Pandemic Impact
The 2021 Trustees Report states that Social Security’s short-term finances were “significantly affected” by the pandemic and the severe but short-lived recession in 2020. “Employment, earnings, interest rates, and GDP [gross domestic product] dropped substantially in the second calendar quarter of 2020 and are assumed to rise gradually thereafter toward recovery by 2023, with the level of worker productivity and thus GDP assumed to be permanently lowered by 1%.” The projections also accounted for elevated mortality rates over the period 2020 through 2023 and delays in births and immigration. Because payroll tax revenues are rebounding quickly, the damage to the program was not as great as many feared.
Sharp increases in consumer prices in July and August suggest that beneficiaries might receive the highest annual benefit increase since 1983 starting in January 2022. The Social Security Administration’s chief actuary has estimated that the 2022 cost-of-living adjustment (COLA) will be close to 6.0%.1(The official COLA had not been announced at the time of this writing.)
What’s at Stake for You?
The Census Bureau has estimated that 2.8 million Americans ages 55 and older filed for Social Security benefits earlier than they had anticipated because of COVID-19.2 Many older workers may have been pushed into retirement after losing their jobs or because they had health concerns.
If you regret starting your Social Security benefits earlier than planned, you can withdraw your application within 12 months of your original claim and reapply later. But you can do this only once, and you must repay all the benefits you received. Otherwise, if you’ve reached full retirement age, you may voluntarily suspend benefits and restart them later. Either of these moves would result in a higher future benefit.
Even if you won’t depend on Social Security to survive, the benefits could amount to a meaningful portion of your retirement income. An estimate of your monthly retirement benefit can be found on your Social Security Statement, which can be accessed when you sign up for my Social Security account on SSA.gov. If you aren’t receiving benefits and haven’t registered for an online account, you should receive an annual statement in the mail starting at age 60.
No matter what the future holds for Social Security, your retirement destiny is still in your hands. But it may be more important than ever to save as much as possible for retirement while you are working. Don’t wait until you have one foot out the door to consider your retirement income strategy.
All information is from the 2021 Social Security Trustees Report, except for:
1) AARP, September 15, 2021
2) U.S. Census Bureau, 2021
2022-2023 School Year Opens on October 1 for FAFSA
Financial aid kickoff season begins in October. Incoming and returning college students can start filing the Free Application for Federal Student Aid, or FAFSA, for the next academic year. 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.
How do I submit the FAFSA?
The FAFSA for the 2022-2023 school year opens on October 1, 2021. Here are some tips for filing it.
- The fastest and easiest way to submit the FAFSA is online at studentaid.gov. The site contains resources and tools to help you complete the form, including a list of the documents and information you’ll 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.
- Before you file the FAFSA online, you and your child will each need to obtain an FSA ID (federal student aid ID), which you can also do online by following the instructions. (Once you have an FSA ID, you can use the same one each year.)
- The FAFSA can also be filed in paper form. But it will take much longer for the government to process it.
- You don’t need to complete the FAFSA by October 1. But it’s a promising idea to file it as early as possible in the fall because some 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.
How does the FAFSA calculate financial need?
The FAFSA looks at a family’s income, assets, and household information (for example, family size) to calculate what a family can afford to pay. This figure is known as the EFC or expected family contribution. All financial aid packages are built around this number.
Tip: Starting with the 2023-2024 FAFSA (which will be available next year starting October 1, 2022), the EFC will be renamed the SAI, or student aid index.
When counting income, the FAFSA uses information in your tax return from two years earlier. This year is often referred to as the “base year” or the “prior-prior year.” For example, the 2022-2023 FAFSA will use income information in your 2020 tax return, so 2020 would be the base year or prior-prior year.
When counting assets, the FAFSA uses the current value of your and your child’s assets. Some assets are not counted and 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 craft an aid package to meet your child’s financial need by offering a combination of loans, grants, scholarships, and work-study. Keep in mind that colleges are not obligated to meet 100% of your child’s financial need. If they don’t, you are responsible for paying the difference. Colleges often advertise on their website and brochures whether they meet “100% of demonstrated need.”
Should I file the FAFSA even if my child is unlikely to qualify for aid?
Yes, probably. There are two good reasons to submit the FAFSA even if you don’t expect your child to qualify for need-based 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 and during 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. But don’t worry, 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.
Too Hot to Handle: What’s Ahead for the U.S. Housing Market?
The U.S. housing market, already strong before the pandemic, has heated up to record levels in 2021. The Case-Shiller U.S. National Home Price Index, which measures home prices in 20 major metropolitan areas, reported a 12-month increase of 18.6% in June 2021, the largest year-over-year gain in data going back to 1987.1
The National Association of Realtors (NAR), which provides more current data, reported that the national median price of an existing home was $359,900 in July, down from a record $362,800 in June. Even so, this was the 113th consecutive month of year-over-year price increases. The June to July price relief was due in part to increased supply. Total inventory of new and existing homes increased 7.3% over June but was still down 12.0% from a year ago.2
The July 2021 NAR data suggests that the red-hot market may be cooling slightly, but prices are still extremely high, and industry experts expect them to remain high for the foreseeable future. Here’s a look at some key factors behind the current trend and prospects for future direction.
Low Supply, Surprise Demand
The housing supply has been low for more than a decade. The housing crash devastated the construction industry, and a variety of factors, including labor shortages, tariffs, limited land, and restrictive permit processes, have kept the supply of new homes below historical averages, placing more pressure on existing homes to meet demand.3
The pandemic exacerbated labor problems and led to supply-chain issues and high costs for raw materials that held back construction, while demand exploded despite the economic downturn. With the shift to remote work and remote education, many people with solid jobs looked for more space, and low interest rates made higher prices more affordable.4
At the same time, homeowners who might have seen high prices as an opportunity to sell were hesitant to do so because of economic uncertainty and the high cost of moving to another home. Refinancing at low rates offered an appealing alternative and kept homeowners in place. Government mortgage forbearance programs have helped families from losing their homes but also kept homes that might have otherwise foreclosed off the market.5
Health concerns also played a part. The pandemic made it less appealing to have strangers entering a home for an open house. And older people who might have moved into assisted living or other senior facilities were more likely to stay in their homes.6
Taken together, these factors produced a perfect storm of low supply and high demand that drove already high prices to dizzying levels and created desperation among buyers. All-cash sales accounted for 23% of transactions in July, up from 16% in July 2020. The average home stayed on the market for just 17 days, down from 22 days last year. Almost 90% of homes sold in less than a month.7
Freezing Out First-Time Buyers
Recent inventory gains have been primarily in more expensive houses, and there continues to be a critical shortage of affordable homes. First-time buyers accounted for just 30% of purchases in July 2021, down from 34% the previous year.8 A common formula for home affordability is to multiply income by three — i.e., a couple who earns $100,000 might qualify to buy a $300,000 house. A study of 50 cities found that home prices in Q2 2021 were, on average, 5.5 times the local median income of first-time buyers, putting most homes out of reach.9
The lack of affordable housing for first-time buyers also helps to drive rents higher. People with higher incomes who might be buying homes are willing and able to pay higher rents. Rents on newly signed leases in July were 17% higher than what the previous tenant paid, the highest jump on record. After dropping while many young people lived with parents during the pandemic, occupancy of rental units hit a record high of 96.9%.10
Is This a Bubble?
From 2006 to 2012, the housing market plummeted 60%, taking the broader U.S. economy with it.11 Mortgage requirements were made much stricter after the housing crash, and homeowners today are more likely to afford their homes and to have more equity from larger down payments. The housing market has always been cyclical, so it’s likely that prices will turn downward at some point in the future, but less likely that prices will collapse the way they did during the Great Recession.12
What’s Next?
Prices are so high that some buyers are backing off, but demand remains strong and will outstrip housing supply for the foreseeable future. Some near-term relief might come if high prices inspire more homeowners to sell, and if the end of government programs puts more foreclosed homes on the market. There are more single-family homes under construction than at any time since 2007, but it will take months or years for those homes to increase the housing supply.13
The housing market tends to be seasonal, with demand dying down in the fall and the winter. That didn’t happen last year, because pent-up demand was so strong that it pushed through the seasons. With the supply/demand tension easing, the seasonal slowdown may be more significant this year.14 The Federal Home Loan Mortgage Corporation (Freddie Mac) projects that home prices will grow by 12.1% in 2021, lower than the current pace, and drop further to 5.3% growth in 2022.15
Location, Location
Although national trends reflect broad economic forces, the housing market is fundamentally local. The West is the most expensive region, with a median price of $508,300 for an existing home, followed by the Northeast ($411,200), the South ($305,200), and the Midwest ($275,300).16 Within regions, there are dramatic price differences among states, cities, and towns. The trend to remote work, which helped drive prices upward, may help moderate prices in the long term by allowing workers to live in more affordable areas.
1) S&P Dow Jones Indices, August 31, 2021
2, 7, 8, 16) National Association of Realtors, August 23, 2021
3, 4, 6) The New York Times, May 14, 2021
5) NBC News, July 6, 2021
9) The New York Times, August 12, 2021
10) Bloomberg Businessweek, August 18, 2021
11) NPR, August 17, 2021
12) The Wall Street Journal, March 15, 2021
13) Bloomberg, August 19, 2021
14) CNN Business, August 23, 2021
15) Freddie Mac, July 2021
