Are we headed towards a repeat of 2008?
We are watching a blossoming real estate market. Local real estate listings are staying on the market for an average of 17 days. We see several sellers finding themselves in bidding wars and selling their houses for more than market price. Buyers find themselves shut out of deals as cash offers are put in at $20k, $30k, or even $50k over the asking price.
The stock market has been on a relatively steady uphill trajectory since the downturn back in March of 2020. The Dow Jones Industrial Average and the S & P 500 Index are both up over 12% for the year. With the Fed’s announcement of increasing interest rates starting in 2023, we will start to see bond rates increase.
The stock market and the real estate market rarely exhibit highs like this – the last significant time being just before the 2008 downslide. What should make us concerned about the near-term future?
COVID cases are spiking again. If there becomes a need to shut down businesses again, this likely would negatively impact the current recovery.
Business owner’s inability to fill open employment positions is going to stifle growth. We see many businesses having to shorten their hours because of not enough staff. When they can find individuals willing to work, those employees are often commanding higher wages. Hiring new employees at higher wages means that current employees also expect an increase in their wages. Increasing wages generally will lead to higher product prices.
Higher prices mean less disposable income as a larger portion of income needs to be used for the basics – food, utilities, and shelter costs. Inflation has been on the rise for several months, and there is an anticipation that it will be going as high as 4-5%. This means a continuation of rising costs which are likely to become more widespread.
Shortage of some parts like computer chips has caused manufacturing delays for various products from computers to automobiles. This has caused rising prices – we are hearing from individuals about car prices being $5,000 or higher than the pre-pandemic prices.
With the change in shopping habits, local sales tax collection is likely to stay lower than pre-pandemic levels. Schools have seen a significant increase in costs as they attempt to manage online schooling, additional PPE costs, and the anticipation of continued higher costs. Rising government costs to manage PPE expenses, the cost of ongoing protests and additional costs due to rising tensions are likely to increase property, local, and state taxes.
There are already proposals working through Congress to increase federal income taxes. The current Biden plan is looking to increase taxes only for those with an income above $400,000. Several of the financial gurus I follow, like David McKnight and Ed Slott, as well as myself, believe that income level will need to come down, and taxes will need to be increased for those at much lower income levels. Even if the tax rates themselves do not increase, changes to capital gains rates, decreases in some credits, and other potential proposed changes would increase overall tax liability.
What does all this mean for you personally? Some strategies could reduce the future impact of rising interest rates, taxes, and prices.
Review your fixed expenses and see where there are ways to cut costs. Are there ways to lower insurance costs by adjusting deductibles, removing unnecessary coverage, or even potentially changing companies? Lower utility costs by installing smart thermostats or adjusting temperatures by a degree or two.
Pay attention to variable expenses and determine if there are ways to reduce costs. Shop and stock up during sales. Use coupons or a cashback service to reduce the net costs. Comparison shop – both in-store and online. Make from scratch instead of purchasing pre-made meals.
Think twice before buying. Do you really need it? Do you already have something that you can use instead? Is there are an option to rent or borrow instead of buying? When you consider how many hours you must work to afford to purchase that item, is it worth it? Can you delay the purchase until later?
Review outstanding debt. Does it make sense to refinance for lower interest rates and/or shorten the loan length? Make extra payments on high-interest rate debt to get it paid off sooner. While you may be in deferral for your student loans, consider making voluntary payments. Make debt payments more frequently to reduce the amount of interest you will need to pay.
For years, we have been working with clients to get taxes paid currently to avoid higher tax bills in the future. Maximize Roth conversions in the next few years before anticipated tax rate increases. Through your work plan – 401(k), 403(b), or 457 choose Roth contributions rather than pre-tax if that option is available. If you do not have it available within your plan, I would recommend that you lobby your employer to add that as an option.
Use other non-taxable savings options to maximize tax benefits. Take full advantage of an HSA option if you are eligible to participate in one. Depending on your plan and age, you are eligible to put up to $7,000 into an account. If your employer and your payroll deduction will not maximize the contribution amount you are eligible for, you can put a lump sum in and get a deduction on your tax return.
If you are eligible for a dependent care or medical flexible spending account at work, take advantage of them. You are getting medical or childcare expenses paid with pre-tax dollars, thereby netting you a lower cost.
Are you saving for college education costs – consider using a College 529 plan for your savings. Some states provide a tax deduction for contributions. Any earnings within the plan are tax-free if the distributions pay qualifying expenses.
Depending on your need for income and when funds are anticipated to be required, consider if it makes more sense to have growth stocks with little current income or income-producing stocks within non-qualified accounts.
The order in which you use your funds can also impact the overall taxes you will pay. Be strategic in determining where to take distributions from and when to collect Social Security. For example, generally leaving Roth funds until last to allow for the maximum growth of tax-free income makes sense. Taking taxable distributions from retirement accounts earlier rather than later may make sense to reduce required minimum distributions later in life. Using retirement dollars while delaying the collection of Social Security may decrease the taxability of Social Security later in life.
One of the biggest worries for those in or near retirement is outliving their funds. Inflation, taxes, and medical expenses are the trifecta of unknowns. Minimizing the impact of inflation through controlling costs will stretch available funds. Getting as many taxes as possible paid during this period of low tax rates will stretch available funds. And – keeping yourself healthy can help to minimize medical expenses.
If you need assistance in making sure that you are maximizing your available income and investments, please reach out to us at Riverside Income Taxes for assistance.
