Investment Philosophy

Our Investment Recommendation to You and Your Family

After you have established appropriate cash reserves, invested in money market funds or municipal bonds, we will recommend that you pay down, or better yet, eliminate personal debt.

We will recommend that you invest long-term assets in shares of large, profit-motivated, rationally run, multi-national companies.  Although the future is unknowable, and certainly unpredictable, the investment return to you, from ownership in these companies, should be greater than return from other savings programs.  We expect, but do not know, that the fluctuation in value of your investments in these companies will be significant.  We also expect the fluctuation to be temporary.  A significant part of Our Service to you, and your family, is to encourage you to invest as large a portion of your assets in these companies as you can tolerate.  Then, Our Service to you, and your family, is to encourage you to maintain your investments in the shares of these Great Companies during market downturns.

Only by maintaining your investment during market downturns can you realize the long-term rewards as an owner of the great companies of America and the World.  Read our General Investment Disclaimer.

The following are recent articles that expand on our Investment Philosophy. Please use the search function on your right for older articles.

What is an Inverted Yield Curve?

If you ask an economist what makes them toss and turn at night, chances are they’ll tell you, “Fear of missing the warning signs of a recession.”  After all, for anyone who studies the economy for a living, few things could be worse than a sudden economic slump catching you by surprise.

That’s why many economists rely on certain indicators to predict if there’s rough weather ahead.  Historically, one of the most reliable indicators is the inverted yield curve.  This is when the yield on long-term bonds drops below the yield on short-term bonds.  Why does this matter to economists?   Because an inverted yield curve has preceded every recession since 1956.1

Long-Term Bond Yield Hits Record Low2
Stocks Skid as Bonds Flash a Warning
3
The Wall Street Journal, August 14, 2019

On August 14, the yield on 10-year Treasury bonds dropped below 1.6%, officially falling beneath the yield on 2-year Treasury bonds for the first time since 2007.4  That’s an inverted yield curve.  The markets responded the way children do when a hornet gets inside the family car – they panicked.  The Dow, the S&P 500, and the NASDAQ all fell sharply, with the Dow plunging over 700 points.3

The obvious question, of course, is “Why?”

It’s a smart question!  To the average investor, the term “inverted yield curve” probably doesn’t sound very scary.  So, why does it have the markets freaking out?  Let’s break it down by answering a few basic – but also smart – questions.

  1. What’s a bond yield, again?

A bond yield is the return you get when you put your money in a government or corporate bond.  Whenever an investor buys a bond, they’re agreeing to loan money to the issuer of that bond – the government, in the case of Treasury bonds – for a specific length of time.  Typically, the longer the time, the higher the yield, as investors want a greater return in exchange for locking up their money for years or even decades.  That’s why the yield on long-term bonds is almost always higher than on short-term bonds.  When these trade places, we have an inverted yield curve.

  1. Okay, so why have bond yields inverted?

Bear with me here, because I’m about to get a little technical. 

Bond yields have an inverse relationship with bond prices.  That means when prices go up, yields fall, and vice versa.

What do I mean by price?  Well, investors must pay to buy bonds, of course, and when more people buy them, the price of these bonds goes up.  (It’s the basic law of supply and demand: When the demand for something increases, so does the price.)   When that happens, yields drop.

Investors often see bonds as safe havens of sorts, especially during economic turmoil.  Stocks, on the other hand, tend to be seen as “higher risk, higher reward” investments.  In this case, investors are selling their stocks and plowing more and more money into long-term bonds, pushing prices up and yields below that of short-term bonds.  The fact investors are doing this suggests they’re not optimistic about the near-future health of the economy and are seeking safe places to park their money.

  1. Why are investors so worried about the economy?

On the home front, it’s largely because of the trade war between the U.S. and China.  As the two nations engage in an ever-growing battle of tariffs, the fear is that businesses in the U.S. will have to raise prices, thereby hurting consumers.  On August 13, President Trump decided to delay the most recent round of tariffs until December, saying he didn’t want tariffs to affect shopping during the Christmas season.5  Previously, Trump predicted tariffs would not hurt U.S. businesses, so this sudden about-face suggests even he is worried.

Investors are also worried about a slowdown in the global economy.  Two of the world’s most important economies, China and Germany, have both shrunk.  Put all these things together and it’s not hard to see why investors worry about a recession in the near future.

Fears the recent news about inverted yield curves will only stoke.

  1. So is a recession imminent?

As I mentioned earlier, inverted yield curves have preceded every recession since 1956.  This includes the Great Recession of 2008.  But does this mean a recession is just around the corner?

No!

There are two things to keep in mind here.  First, a brief inverted yield curve is not the same thing as a sustained one.  While inversions have preceded every modern recession, inversions do not always lead to a recession.  Think of it this way: You can’t have a rainstorm without dark gray clouds.  But dark gray clouds don’t always lead to a rainstorm.  Make sense?

You see, correlation does not equal causation.  By this I mean that while inversions and recessions are often seen together, one does not actually cause the other.  An inverted yield curve is like a sneeze: It’s a symptom, not the disease itself.  And while a sneeze can mean you have a cold, it doesn’t lead to a cold.  Sometimes, we sneeze because we got pepper up our nose.

Second, let’s assume for argument’s sake that this recent inversion is a warning sign of a future recession.  That doesn’t mean a recession is imminent.  Some analysis suggests that it takes an average of twenty-two months for a recession to follow an inversion.1  That’s a long time!  A long time to save, invest, plan and prepare.

  1. So does an inverted yield curve even matter, then?

I’ll put it simply: It matters enough to pay attention to.  It doesn’t matter enough to be worth panicking over.

Make no mistake, we’re in a volatile period right now.  There’s a lot of evidence to suggest that volatility will continue.  But while comparing the markets to the weather has become something of a cliché, it also makes a lot of sense.  When storm clouds gather, we pack an umbrella or stay inside.  We don’t run for the hills.

The same is true of market volatility.

Remember, an inverted yield curve is an indicator, not a prophecy.  Economists can toss and turn about such things, but you and I are focusing on something much less abstract: your financial goals.  More important than any indicator, more important than the day-to-day swings in the markets, is the discipline we show.  If you think about it, market volatility is really a symptom, too – a symptom of emotional decision making.  Investors see a good headline, and they buy, buy, buy!  That’s a market rally.  Investors see a bad one, and they sell, sell, sell!  That’s a market dip.

Investing based on emotion leads to one thing: Regret.  Regret that we bought into the hype and bought when we should have waited for a better deal.  Regret that we fell into fear and sold when we should have held on longer.  We invest by being disciplined enough to buy, hold, or sell when it makes sense for your situation.

That’s the best way to stay on track toward your goals.  That’s the best way to not toss and turn at night.  We don’t make decisions based on predictions.  We make decisions based on need.

My team and I will keep watching the indicators.  We’ll keep doing our best to explain the twists and turns in the markets.  And we’ll keep doing our best not to overreact to any of them.  In the meantime, please contact me if you have any questions or concerns.  We always love to hear from you!

 

 

 

1 “The inverted yield curve explained,” CNBC, August 14, 2019.  https://www.cnbc.com/2019/08/14/the-inverted-yield-curve-explained-and-what-it-means-for-your-money.html

2 “Long-Term Bond Yield Hits Record Low,” The Wall Street Journal, August 14, 2019.  https://www.wsj.com/articles/bond-rally-drives-30-year-treasury-yield-to-record-low-11565794665

3 “Stocks Skid as Bonds Flash a Warning,” The Wall Street Journal, August 14, 2019.  https://www.wsj.com/articles/asian-stocks-gain-on-tariff-delay-11565769562

4 “Dow tumbles 700 points after bond market flashes a recession warning,” CNN Business, August 14, 2019.  https://www.cnn.com/2019/08/14/investing/dow-stock-market-today/index.html

5 “U.S. Retreats on Chinese Tariff Threats,” The Wall Street Journal, August 13, 2019.  https://www.wsj.com/articles/u-s-will-delay-some-tariffs-against-china-11565704420

General Social Security Rules

General Social Security Rules

 

Popular wisdom suggests jumping at the opportunity to collect Social Security retirement benefits as soon as possible, which currently is age 62.  About 73% of Social Security beneficiaries collect at 62.  While this strategy may have been prudent for millions of Americans in the past, longer life expectancies have changed the face of retirement planning. Waiting to collect Social Security benefits may well be a more advantageous option. While there is no one-size-fits-all approach, this much is universally clear:

TIPS

Life expectancy is exploding, particularly for our clientele.

 

Warning – Social Security has its own language.

DECIDING WHEN TO BEGIN TAKING SOCIAL SECURITY BENEFITS IS AN IMPORTANT AND MULTIFACETED CONSIDERATION that should be factored into each individual’s broader retirement plan.  In order for us to help you decide how and when to take your Social Security, we must go over some basic Social Security concepts.  In the following memo, we review key details to consider in your Social Security decision-making.  Your Social Security strategy must be integrated with your investment plan and your overall retirement plan.

Social Security Benefits-Divorced

Social Security Benefits for Divorced People

 

When Should I Take My Benefits ?

OVERVIEW:  As an Ex-Spouse you may be entitled to your individual benefits and spousal or survivor benefits.  We will review both sets to decide what decision you should make.

 

Individual Benefit Collection Decision

 

COLLECTING BENEFITS AT FULL RETIREMENT AGE

Your benefits, known as your Primary Insurance Amount (PIA) is the monthly benefit for which you are eligible at your full retirement age (FRA). FRA varies based on year of birth. Originally age 65, the federal government has increased FRA for anyone born after 1937 in recognition of longer life expectancies.  Life expectancy in 1937 was less than 65.  Today, it is about 78.  We expect our clients to live even longer.

TIPS

You must have worked for 40 Quarters to be eligible to receive benefits.

 

Planning Tip:  Social Security aims to encourage you to collect your benefits at Full Retirement Age, known as FRA in Social Security Language.

 

Your monthly benefit, known as your Primary Insurance Amount (PIA), is calculated based on your highest 35 years of employment.

The Social Security Administration (SSA) uses your highest 35 years of employment to arrive at your Average Indexed Monthly Earnings (AIME).  For more information, please visit www.ssa.gov to get your Social Security statement. If you continue working after reaching FRA, the SSA will automatically recalculate your benefits each year you continue to work. If your current income is greater than any of your previously calculated “highest 35 years”, your benefits will be adjusted upward. The increase generally will be made in October of the following year, but will be retroactive to January 1.  In addition, Social Security retirement benefits are automatically modified each year for inflation, known as Cost-Of-Living Adjustments (COLAs).

TIP

COLAs have averaged between 1% and 2% over the past 10 years.  Over the last 90 years inflation has averaged about 3% per year.

TIP

Benefits are reduced by about 6% per year for each year you receive benefits prior to your full retirement age (FRA).

COLLECTING BENEFITS EARLIER THEN FRA

While your full benefit, your PIA, is payable at your FRA, you are entitled to  collect benefits as early as age 62. However, if you choose to collect early, you will permanently reduce the size of your benefits. Your benefits will not be adjusted upward when you attain FRA. The amount of your reduction will depend on two factors—your FRA and the number of months before it that you start collecting. If you begin taking benefits on your 62nd birthday, you are subject to the maximum reduction. That reduction will be smaller for each month you delay benefits after age 62 but prior to reaching FRA.

COLLECTION AGE IMPACTS BENEFIT AMOUNT

WORKING WHILE COLLECTING BENEFITS PRIOR TO FULL RETIREMENT AGE

 

Social Security benefits are intended to supplement retirement income.  There are consequences to collecting your benefits early if you are not retired and are still receiving wages. If you choose to collect benefits prior to FRA, you are subject to an Earnings Test every year until you reach FRA.

 

If your earnings exceed certain thresholds, the SSA will Withhold part or all of your benefits. The earnings test for individual and survivor benefits looks only at the salary or wages of the individual collecting early benefits. It does not consider any other type of income, nor does it

consider the salary or wages of a spouse. However, the test on spousal benefits (see memo on Married Couples) may take into account both spouses' wages if both are under age 62.

TIP

Withheld benefits are different and in addition to reduced benefits.

 

The Withholding on Social Security before FRA eliminates Benefits for many Employees.

WITHHELD BENEFITS

Benefits withheld by the SSA due to early collection will not be refunded. However, your benefits will be adjusted at FRA to account for the benefits that were withheld.  For example, if your FRA was 66 and you began collecting benefits at age 62, the SSA would have reduced your benefit by 25%. Assuming you returned to work at age 64; the SSA may have withheld two years’ worth of benefits by the time you reached FRA. The SSA would then lessen your 25% reduction to give you credit for the two years of lost benefits. Your new reduction would be as if you started collecting benefits at age 64 (13.3% reduction) rather than age 62.

2019 RETIREMENT EARNINGS LIMIT

Under FRA

  • $1 of benefits withheld for every $2 in earnings above $17,640
  • Earned $27,640 – $17,640 = $10,000 over x 1/2 = $5,000 withheld

                                                                                                                                                                                                                                               

Year individual reaches FRA

  • $1 of benefits withheld for every $3 in earnings above $46,920 for months prior to attaining FRA
  • Earned $56,920 – $46,920 = $10,000 over x 1/3 = $3,333 withheld

                                                                                                                                                                                                                                               

Month individual reaches FRA

  • Unlimited

                                                                                                                                                                                                                                               

 

 

WAITING TO COLLECT BENEFITS

If you elect to defer collecting benefits beyond your FRA, the SSA will give you a delayed retirement credit (DRC) for every month you defer between FRA and age 70, the age at which

your benefits max out. This increase will be in addition to the annual COLA, if applicable. Depending on your year of birth, your increase will amount to 7% to 8% annually

TIP

When collecting before FRA, always consider the net (after-tax) benefits you will receive. A working spouse may cause more of your benefits to be taxed, and at potentially higher tax rates.

TAXATION OF BENEFITS

You should plan on income taxes on Social Security Benefits.  Individuals with high total incomes must include up to 85% of their benefits as income for federal income tax purposes. Special step-rate “thresholds” on Provisional Income determine the amount which you may be taxed. We should plan as if you will pay income tax on your benefits when making the decision.

COLLECTING SPOUSAL BENEFITS

If you are married to an individual who is collecting Social Security retirement benefits and you are at least age 62, you may be entitled to collect spousal benefits.  Spousal benefits will be equal to 50% of your spouse’s PIA if you collect benefits at FRA or later. If you are entitled to your own benefits and your PIA is less than 50% of your spouse’s PIA, spousal benefits will be paid in addition to your own. These combined benefits will equal 50% of your spouse’s PIA, assuming you start collecting both benefits at FRA or later.

 

COLLECTING SPOUSAL BENEFITS EARLY

If you collect spousal benefits prior to your FRA, your adjusted spousal benefits (amounts in addition to your own benefits) will be reduced. Your spouse’s collection age has no impact on your spousal benefits.

COLLECTING SURVIVOR BENEFITS

If you have been married for at least nine months and your spouse passes away, you may be entitled to survivor benefits. If you remarry before age 60, survivor benefits will not be paid unless the subsequent marriage ends.  Remarriage after age 60 does not prevent or stop entitlement to benefits. The amount of your survivor benefits depends on when your spouse began taking benefits. If the death occurs prior to your spouse collecting benefits, your survivor benefits will equal 100% of your spouse’s PIA when you attain FRA. If your spouse was collecting benefits at the time of his or her death, your survivor benefits will equal his or her actual benefits, assuming you have attained FRA.  The only exception is if he or she was collecting benefits that were reduced more than 17.5%. In that case, your survivor benefits will be 82.5% of your spouse’s PIA. The survivor benefits, if higher, will replace your other benefits.

COLLECTING SURVIVOR BENEFITS EARLY

You can collect survivor benefits as young as age 60. If you collect at age 60, your survivor benefits will be reduced by up to 28.5% .

 

 

CHOOSING BETWEEN BENEFITS

If you are entitled to both individual and survivor benefits, you can choose to begin collecting one and then switch to the other at a later date. It is possible to collect reduced survivor benefits at age 60, and then convert to your own unreduced benefits at FRA or later. You also have the

option to collect individual benefits and then switch to survivor benefits.

 

SPOUSAL AND SURVIVOR BENEFITS AFTER DIVORCE

If you are not married but previously had been married to the same individual for at least 10 years, you may be entitled to collect spousal and/or survivor benefits based on your ex-spouse’s

work history, as described earlier. To collect spousal benefits you and your ex-spouse must be at least 62. You are not required to wait until your ex-spouse files for benefits.

 

What decision should you make ?  Please contact us for an appointment.

 

Social Security Benefits-Widows and Widowers

Social Security Benefits for Widows and Widowers

When Should I Take My Benefits ?

 

OVERVIEW:  As a widow or widower you may be entitled to your individual benefits and survivor benefits.  We will review both sets to decide what decision you should make.

 

COLLECTING BENEFITS AT FULL RETIREMENT AGE

Your benefits, known as your Primary Insurance Amount (PIA) is the monthly benefit for which you are eligible at your full retirement age (FRA). FRA varies based on year of birth. Originally age 65, the federal government has increased FRA for anyone born after 1937 in recognition of longer life expectancies.  Life expectancy in 1937 was less than 65.  Today, it is about 78.  We expect our clients to live even longer.

TIPS

You must have worked for 40 Quarters to be eligible to receive benefits.

 

Planning Tip:  Social Security aims to encourage you to collect your benefits at Full Retirement Age, known as FRA in Social Security Language.

 

Your monthly benefit, known as your Primary Insurance Amount (PIA), is calculated based on your highest 35 years of employment.

The Social Security Administration (SSA) uses your highest 35 years of employment to arrive at your Average Indexed Monthly Earnings (AIME).  For more information, please visit www.ssa.gov to get your Social Security statement. If you continue working after reaching FRA, the SSA will automatically recalculate your benefits each year you continue to work. If your current income is greater than any of your previously calculated “highest 35 years”, your benefits will be adjusted upward. The increase generally will be made in October of the following year, but will be retroactive to January 1.  In addition, Social Security retirement benefits are automatically modified each year for inflation, known as Cost-Of-Living Adjustments (COLAs).

 

TIP

COLAs have averaged between 1% and 2% over the past 10 years.  Over the last 90 years inflation has averaged about 3% per year.

TIP

Benefits are reduced by about 6% per year for each year you receive benefits prior to your full retirement age (FRA).

COLLECTING BENEFITS EARLIER THEN FRA

While your full benefit, your PIA, is payable at your FRA, you are entitled to  collect benefits as early as age 62. However, if you choose to collect early, you will permanently reduce the size of your benefits. Your benefits will not be adjusted upward when you attain FRA. The amount of your reduction will depend on two factors—your FRA and the number of months before it that you start collecting. If you begin taking benefits on your 62nd birthday, you are subject to the maximum reduction. That reduction will be smaller for each month you delay benefits after age 62 but prior to reaching FRA.

COLLECTION AGE IMPACTS BENEFIT AMOUNT

WORKING WHILE COLLECTING BENEFITS PRIOR TO FULL RETIREMENT AGE

 

Social Security benefits are intended to supplement retirement income.  There are consequences to collecting your benefits early if you are not retired and are still receiving wages. If you choose to collect benefits prior to FRA, you are subject to an Earnings Test every year until you reach FRA.

 

If your earnings exceed certain thresholds, the SSA will Withhold part or all of your benefits. The earnings test for individual and survivor benefits looks only at the salary or wages of the individual collecting early benefits. It does not consider any other type of income, nor does it

 

consider the salary or wages of a spouse. However, the test on spousal benefits (see memo on Married Couples) may take into account both spouses' wages if both are under age 62.

 

TIP

Withheld benefits are different and in addition to reduced benefits.

 

The Withholding on Social Security before FRA eliminates Benefits for many Employees.

WITHHELD BENEFITS

Benefits withheld by the SSA due to early collection will not be refunded. However, your benefits will be adjusted at FRA to account for the benefits that were withheld.  For example, if your FRA was 66 and you began collecting benefits at age 62, the SSA would have reduced your benefit by 25%. Assuming you returned to work at age 64; the SSA may have withheld two years’ worth of benefits by the time you reached FRA. The SSA would then lessen your 25% reduction to give you credit for the two years of lost benefits. Your new reduction would be as if you started collecting benefits at age 64 (13.3% reduction) rather than age 62.

2019 RETIREMENT EARNINGS LIMIT

Under FRA

  • $1 of benefits withheld for every $2 in earnings above $17,640
  • Earned $27,640 – $17,640 = $10,000 over x 1/2 = $5,000 withheld

                                                                                                                                                                                                                                               

Year individual reaches FRA

  • $1 of benefits withheld for every $3 in earnings above $46,920 for months prior to attaining FRA
  • Earned $56,920 – $46,920 = $10,000 over x 1/3 = $3,333 withheld

                                                                                                                                                                                                                                               

Month individual reaches FRA

  • Unlimited

                                                                                                                                                                                                                                               

 

 

WAITING TO COLLECT BENEFITS

If you elect to defer collecting benefits beyond your FRA, the SSA will give you a delayed retirement credit (DRC) for every month you defer between FRA and age 70, the age at which

your benefits max out. This increase will be in addition to the annual COLA, if applicable. Depending on your year of birth, your increase will amount to 7% to 8% annually.

TIP

When collecting before FRA, always consider the net (after-tax) benefits you will receive. A working spouse may cause more of your benefits to be taxed, and at potentially higher tax rates.

TAXATION OF BENEFITS

You should plan on income taxes on Social Security Benefits.  Individuals with high total incomes must include up to 85% of their benefits as income for federal income tax purposes. Special step-rate “thresholds” on Provisional Income determine the amount which you may be taxed. We should plan as if you will pay income tax on your benefits when making the decision.

COLLECTING SURVIVOR BENEFITS

If you have been married for at least nine months and your spouse passes away, you may be entitled to survivor benefits. If you remarry before age 60, survivor benefits will not be paid unless the subsequent marriage ends.  Remarriage after age 60 does not prevent or stop entitlement to benefits. The amount of your survivor benefits depends on when your spouse began taking benefits. If the death occurs prior to your spouse collecting benefits, your survivor benefits will equal 100% of your spouse’s PIA when you attain FRA. If your spouse was collecting benefits at the time of his or her death, your survivor benefits will equal his or her actual benefits, assuming you have attained FRA.  The only exception is if he or she was collecting benefits that were reduced more than 17.5%. In that case, your survivor benefits will be 82.5% of your spouse’s PIA. The survivor benefits, if higher, will replace your other benefits.

 

COLLECTING SURVIVOR BENEFITS EARLY

You can collect survivor benefits as young as age 60. If you collect at age 60, your survivor benefits will be reduced by up to 28.5% .

 

CHOOSING BETWEEN BENEFITS

If you are entitled to both individual and survivor benefits, you can choose to begin collecting one and then switch to the other at a later date. It is possible to collect reduced survivor benefits at age 60, and then convert to your own unreduced benefits at FRA or later. You also have the

option to collect individual benefits and then switch to survivor benefits.

 

What decision should you make ? Please contact us for an appointment.

 

Social Security Benefits-Singles

Social Security Benefits for Singles

When Should I Take My Benefits ?

 

Individual Collection Decision

COLLECTING BENEFITS AT FULL RETIREMENT AGE

Your benefits, known as your Primary Insurance Amount (PIA) is the monthly benefit for which you are eligible at your full retirement age (FRA). FRA varies based on year of birth. Originally age 65, the federal government has increased FRA for anyone born after 1937 in recognition of longer life expectancies.  Life expectancy in 1937 was less than 65.  Today, it is about 78.  We expect our clients to live even longer.

TIPS

You must have worked for 40 Quarters to be eligible to receive benefits.

 

Social Security aims to encourage you to collect your benefits at Full Retirement Age, known as FRA in Social Security Language.

 

Your monthly benefit, known as your Primary Insurance Amount (PIA), is calculated based on your highest 35 years of employment.

 

The Social Security Administration (SSA) uses your highest 35 years of employment to arrive at your Average Indexed Monthly Earnings (AIME).  For more information, please visit www.ssa.gov to get your Social Security statement. If you continue working after reaching FRA, the SSA will automatically recalculate your benefits each year you continue to work. If your current income is greater than any of your previously calculated “highest 35 years”, your benefits will be adjusted upward. The increase generally will be made in October of the following year, but will be retroactive to January 1.  In addition, Social Security retirement benefits are automatically modified each year for inflation, known as Cost-Of-Living Adjustments (COLAs).

TIP

COLAs have averaged between 1% and 2% over the past 10 years.  Over the last 90 years inflation has averaged about 3% per year.

TIP

Benefits are reduced by about 6% per year for each year you receive benefits prior to your full retirement age (FRA).

COLLECTING BENEFITS EARLIER THEN FRA

While your full benefit, your PIA, is payable at your FRA, you are entitled to  collect benefits as early as age 62. However, if you choose to collect early, you will permanently reduce the size of your benefits. Your benefits will not be adjusted upward when you attain FRA. The amount of your reduction will depend on two factors—your FRA and the number of months before it that you start collecting. If you begin taking benefits on your 62nd birthday, you are subject to the maximum reduction. That reduction will be smaller for each month you delay benefits after age 62 but prior to reaching FRA.

COLLECTION AGE IMPACTS BENEFIT AMOUNT

WORKING WHILE COLLECTING BENEFITS PRIOR TO FULL RETIREMENT AGE

 

Social Security benefits are intended to supplement retirement income.  There are consequences to collecting your benefits early if you are not retired and are still receiving wages. If you choose to collect benefits prior to FRA, you are subject to an Earnings Test every year until you reach FRA.

 

If your earnings exceed certain thresholds, the SSA will Withhold part or all of your benefits. The earnings test for individual and survivor benefits looks only at the salary or wages of the individual collecting early benefits. It does not consider any other type of income, nor does it consider the salary or wages of a spouse. However, the test on spousal benefits (see memo on Married Couples) may take into account both spouses' wages if both are under age 62.

 

 

 

TIP

Withheld benefits are different and in addition to reduced benefits.

 

The Withholding on Social Security before FRA eliminates Benefits for many Employees.

WITHHELD BENEFITS

Benefits withheld by the SSA due to early collection will not be refunded. However, your benefits will be adjusted at FRA to account for the benefits that were withheld.  For example, if your FRA was 66 and you began collecting benefits at age 62, the SSA would have reduced your benefit by 25%. Assuming you returned to work at age 64; the SSA may have withheld two years’ worth of benefits by the time you reached FRA. The SSA would then lessen your 25% reduction to give you credit for the two years of lost benefits. Your new reduction would be as if you started collecting benefits at age 64 (13.3% reduction) rather than age 62.

 

2019 RETIREMENT EARNINGS LIMIT

Under FRA

  • $1 of benefits withheld for every $2 in earnings above $17,640
  • Earned $27,640 – $17,640 = $10,000 over x 1/2 = $5,000 withheld

                                                                                                                                                                                                                                               

Year individual reaches FRA

  • $1 of benefits withheld for every $3 in earnings above $46,920 for months prior to attaining FRA
  • Earned $56,920 – $46,920 = $10,000 over x 1/3 = $3,333 withheld

                                                                                                                                                                                                                                               

Month individual reaches FRA

  • Unlimited

                                                                                                                                                                                                                                               

 

 

WAITING TO COLLECT BENEFITS

If you elect to defer collecting benefits beyond your FRA, the SSA will give you a delayed retirement credit (DRC) for every month you defer between FRA and age 70, the age at which

your benefits max out. This increase will be in addition to the annual COLA, if applicable. Depending on your year of birth, your increase will amount to 7% to 8% annually.

TIP

The 8% per year increase is greater than the expected return from most investments.  In addition, increase applies to Survivor Benefits.

TIP

When collecting before FRA, always consider the net (after-tax) benefits you will receive. A working spouse may cause more of your benefits to be taxed, and at potentially higher tax rates.

TAXATION OF BENEFITS

You should plan on income taxes on Social Security Benefits.  Individuals with high total incomes must include up to 85% of their benefits as income for federal income tax purposes. Special step-rate “thresholds” on Provisional Income determine the amount which you may be taxed. We should plan as if you will pay income tax on your benefits when making the decision.

Social Security Benefit-Married

Social Security Benefits for Married Couples

When Should We Take Our Benefits ?

 

OVERVIEW:  Each spouse is entitled to their individual benefits and spousal benefits.  We have to review your individual benefits first.

 

Individual Collection Decision

COLLECTING BENEFITS AT FULL RETIREMENT AGE

Your benefits, known as your Primary Insurance Amount (PIA) is the monthly benefit for which you are eligible at your full retirement age (FRA). FRA varies based on year of birth. Originally age 65, the federal government has increased FRA for anyone born after 1937 in recognition of longer life expectancies.  Life expectancy in 1937 was less than 65.  Today, it is about 78.  We expect our clients to live even longer.

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You must have worked for 40 Quarters to be eligible to receive benefits.

 

Social Security aims to encourage you to collect your benefits at Full Retirement Age, known as FRA in Social Security Language.

 

Your monthly benefit, known as your Primary Insurance Amount (PIA), is calculated based on your highest 35 years ofemployment

 

The Social Security Administration (SSA) uses your highest 35 years of employment to arrive at your Average Indexed Monthly Earnings (AIME).  For more information, please visit www.ssa.gov to get your Social Security statement. If you continue working after reaching FRA, the SSA will automatically recalculate your benefits each year you continue to work. If your current income is greater than any of your previously calculated “highest 35 years”, your benefits will be adjusted upward. The increase generally will be made in October of the following year, but will be retroactive to January 1.  In addition, Social Security retirement benefits are automatically modified each year for inflation, known as Cost-Of-Living Adjustments (COLAs).

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COLAs have averaged between 1% and 2% over the past 10 years.  Over the last 90 years inflation has averaged about 3% per year.

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Benefits are reduced by about 6% per year for each year you receive benefits prior to your full retirement age (FRA).

COLLECTING BENEFITS EARLIER THEN FRA

While your full benefit, your PIA, is payable at your FRA, you are entitled to  collect benefits as early as age 62. However, if you choose to collect early, you will permanently reduce the size of your benefits. Your benefits will not be adjusted upward when you attain FRA. The amount of your reduction will depend on two factors—your FRA and the number of months before it that you start collecting. If you begin taking benefits on your 62nd birthday, you are subject to the maximum reduction. That reduction will be smaller for each month you delay benefits after age 62 but prior to reaching FRA.

 

COLLECTION AGE IMPACTS BENEFIT AMOUNT

WORKING WHILE COLLECTING BENEFITS PRIOR TO FULL RETIREMENT AGE

 

Social Security benefits are intended to supplement retirement income.  There are consequences to collecting your benefits early if you are not retired and are still receiving wages. If you choose to collect benefits prior to FRA, you are subject to an Earnings Test every year until you reach FRA.

 

If your earnings exceed certain thresholds, the SSA will Withhold part or all of your benefits. The earnings test for individual and survivor benefits looks only at the salary or wages of the individual collecting early benefits. It does not consider any other type of income, nor does it consider the salary or wages of a spouse. However, the test on spousal benefits (see memo on Married Couples) may take into account both spouses' wages if both are under age 62.

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Withheld benefits are different and in addition to reduced benefits.

 

The Withholding on Social Security before FRA eliminates Benefits for many Employees.

 

WITHHELD BENEFITS

Benefits withheld by the SSA due to early collection will not be refunded. However, your benefits will be adjusted at FRA to account for the benefits that were withheld.  For example, if your FRA was 66 and you began collecting benefits at age 62, the SSA would have reduced your benefit by 25%. Assuming you returned to work at age 64; the SSA may have withheld two years’ worth of benefits by the time you reached FRA. The SSA would then lessen your 25% reduction to give you credit for the two years of lost benefits. Your new reduction would be as if you started collecting benefits at age 64 (13.3% reduction) rather than age 62.

2019 RETIREMENT EARNINGS LIMIT

Under FRA

  • $1 of benefits withheld for every $2 in earnings above $17,640
  • Earned $27,640 – $17,640 = $10,000 over x 1/2 = $5,000 withheld

                                                                                                                                                                                                                                               

Year individual reaches FRA

  • $1 of benefits withheld for every $3 in earnings above $46,920 for months prior to attaining FRA
  • Earned $56,920 – $46,920 = $10,000 over x 1/3 = $3,333 withheld

                                                                                                                                                                                                                                               

Month individual reaches FRA

  • Unlimited

                                                                                                                                                                                                                                               

WAITING TO COLLECT BENEFITS

If you elect to defer collecting benefits beyond your FRA, the SSA will give you a delayed retirement credit (DRC) for every month you defer between FRA and age 70, the age at which

your benefits max out. This increase will be in addition to the annual COLA, if applicable. Depending on your year of birth, your increase will amount to 7% to 8% annually.

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The 8% per year increase is greater than the expected return from most investments.  In addition, increase applies to Survivor Benefits.

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When collecting before FRA, always consider the net (after-tax) benefits you will receive. A working spouse may cause more of your benefits to be taxed, and at potentially higher tax rates.

TAXATION OF BENEFITS

You should plan on income taxes on Social Security Benefits.  Individuals with high total incomes must include up to 85% of their benefits as income for federal income tax purposes. Special step-rate “thresholds” on Provisional Income determine the amount which you may be taxed. We should plan as if you will pay income tax on your benefits when making the decision.

 

Spousal Collection Decision

COLLECTING SPOUSAL BENEFITS

If you are married to an individual who is collecting Social Security retirement benefits and you are at least age 62, you may be entitled to collect spousal benefits.  Spousal benefits will be equal to 50% of your spouse’s PIA if you collect benefits at FRA or later. If you are entitled to your own benefits and your PIA is less than 50% of your spouse’s PIA, spousal benefits will be paid in addition to your own. These combined benefits will equal 50% of your spouse’s PIA, assuming you start collecting both benefits at FRA or later.

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Consider collecting your individual benefits first, then spousal benefits once your spouse starts collecting benefits.

COLLECT  MORE INCOME BY COMBINING SPOUSAL

AND INDIVIDUAL BENEFITS

COLLECTING SPOUSAL BENEFITS EARLY

If you collect spousal benefits prior to your FRA, your adjusted spousal benefits (amounts in addition to your own benefits) will be reduced. Your spouse’s collection age has no impact on your spousal benefits.

 

 

WAITING TO COLLECT SPOUSAL BENEFITS

Unlike your own benefits, spousal benefits are not subject to guaranteed annual increases if you defer collecting them beyond FRA. Spousal benefits are at their maximum when you reach FRA, so there is no advantage to be gained by deferring collection.

COLLECTING SURVIVOR BENEFITS

If you have been married for at least nine months and your spouse passes away, you may be entitled to survivor benefits. If you remarry before age 60, survivor benefits will not be paid unless the subsequent marriage ends. Remarriage after age 60 does not prevent or stop entitlement to benefits. The amount of your survivor benefits depends on when  your spouse began taking benefits. If the death occurs prior to your spouse collecting benefits, your survivor benefits will equal 100% of your spouse’s PIA when you attain FRA. If your spouse was collecting benefits at the time of his or her death, your survivor benefits will equal his or her actual benefits, assuming you have attained FRA. The only exception is if he or she was collecting benefits that were reduced more than 17.5%. In that case, your survivor benefits will be 82.5% of your spouse’s PIA. The survivor benefits, if higher, will replace your other benefits

 

COLLECTING SURVIVOR BENEFITS EARLY

You can collect survivor benefits as young as age 60. If you collect at age 60, your survivor benefits will be reduced by up to 28.5%.

 

CHOOSING BETWEEN BENEFITS

If you are entitled to both individual and survivor benefits, you can choose to begin collecting one and then switch to the other at a later date. It is possible to collect reduced survivor benefits at age 60, and then convert to your own unreduced benefits at FRA or later. You also have the option to collect individual benefits and then switch to survivor benefits.

 

Market Volatility 2019

“Investing When Money Markets Moves Our Way”

The last several years, and even the last several months, have been a microcosm of the money markets. The 7% drop in the month of May set off by one of Trump’s tweets was followed by an almost immediately 7% upswing in the month of June and continuing into early July. In the year 2018, we had two different 20% downturns, each of which were promptly followed by strong market upturns. As most of our clients know, and have come to accept, this level of market fluctuation is normal but unpleasant. Our strategy to deal with these market fluctuations is to acknowledge that they will continue to occur, but it is the price that we must pay for the higher equity market returns that we receive and expect to receive in the future. That the new market records would be a good time to address a couple of changes in the markets. First, I have finally decided that it’s time that for me to get on Twitter. Our president has decided that he’s going to, generally speaking, bypass the normal press release mechanism and release new information to the public through Twitter. I understand that Twitter is used for all kinds of purposes other than general policy announcements. It also seems to be used for sparring with your enemies, and it’s certainly being used to communicate directly with the US citizens and bypass the Washington Press Corps. I don’t want to spend too much time on the technical details of our work for you, but I can’t help but notice that the equity market mutual fund ETF purchases by the general public has been running at very low levels with bond fund purchases outrunning them throughout the month of June. That is, most of your fellow investors were selling stocks and buying bonds during the June period when the market was setting market records, unfortunately we cannot help them because they’re not our clients, but it is an indicator to us how many people are poor investors.

It has been and continues to be our recommendation to you that you maintain your investment in these wonderful multi-national rational companies in which you have invested.  The value of these companies may fluctuate dramatically in the stock market.  Your fellow investors may sell out at the latest whim or presidential tweet, but you know and we agree with you, that all of these changes and the daily press fixations on one matter or another all pass very quickly and it becomes insignificant to the long-term health of these rationally run companies.  This is a wonderful time for you to point out to your family that market ups and downs change very quickly, change unpredictably, but that we believe the long-term trend is up and that the 20% up and down turns, the 7% up and down months, are part of the cost of being a good long-term investor.  Please note that during all of last year with its ups and downs and this year with its ups and downs, the dividends in your account have continued to come into your account and to rise.  If you come across any of your good friends or family who are complaining about and concerned about market fluctuation, market volatility, please give them our name and we would be happy to talk to them and see if we can help them.

A final point that I would like to address, because I hear it come up from time to time are various market strategies that fall into the category of technical analysis, sometimes the “trend following,” sometimes they’re called market momentum play.  All of them are designed to offer an investor the possibility of avoiding large market downturns and yet participate in the upside of markets.  Many times, their components will argue for loss protection analysis or plan to protect capital.  We believe that all these technical analysis type programs sound great, a program which avoids serious market downturns.  But unfortunately, we can’t, because they don’t work.

The market technical analysis for rules-based investing is designed to help you stay invested in investment programs that are working well now and avoiding programs that are not working well.  The idea being that the recent past can indicate and predict what the future will be.  Our argument is that the future is unknowable, and that we have faith that capitalism will, and the investment markets moving cycles, will fix any problems that they’ve had in the past, any excesses that they’ve had in the past.  We will move forward, solve our problems, and figure out a way to increase earnings going forward.

The market analysts offer you the possibility and pretend that they have a system whereby they can avoid these losses.  It sounds very enticing because it’s exactly what you would like to hear, that losses can be avoided, and gains realized.  This is not possible, so our strategy to deal with market downturns is for you and your spouse to fully acknowledge that they’re coming, to embrace them, to treat them as part of the entire process, and then to teach your children the exact same formula, so that they don’t make the mistake of getting involved in any one of these market time schemes that promise to have you out of the markets and selling before a downturn, and yet somehow magically getting you back into the markets in time for an upturn.

The last two years are just further evidence and a career’s worth of evidence, that these programs don’t work.  That they have you sell to late, have you buy back into an investment program too late as well, so that you realize a lot of the loss don’t get the gain get the market gets her upturn, and are disappointed anew with significant transition cost all along.  Our approach to dealing with market downturns is to understand that they’re coming.  This is not a prediction for the future, but we understand that they will come.  They will come at an unpredictable, unknowable time, that it’s part of the process.  Both you and your spouse should understand that.  You should explain it to your children so that they can become effective investors as well.

If you, your spouse, or any family members have any questions, please give us a call.  We continue to be optimistic about the future.  Your prosperity is our business.  Thank you.  Contact me with any questions.

Very truly yours,
James Vaughan III

The Family Vacation House #2

01/24/2019

Last summer we discussed the Family Vacation Home.  You gave me a lot of good advice regarding how your Family handles the Family Vacation Home.  The following is an attempt to develop Best Practices.  Please comment.  (Click Here to read memo #1 on Vacation Homes).

Our experience, and that of our clients, has been that the vacation home can be the source of great family unity.  As a resident of a North Jersey suburb, I have found that the suburban home is not the one that attracts the family; it is the Summer Home.

What can the family do to make the Summer Home an enjoyable experience for all?  …And a positive force for family unity and prosperity?

The following are some of the strategies that families have used to make the Summer Home an enjoyable experience.  We will also have some of the pitfalls to avoid.  Of course, a “Best Practice” for one Family may be a “Worst Practice” for another!

Finances for the House

By far the biggest source of trouble is financial.  The best answer, of course, is to have the family matriarch and patriarch buy the house and pay for it!  If the ongoing expenses of the house are funded by parent assets, the financial burden of supporting the Vacation House is solved for the second generation!  The Vacation House can be endowed with its own funding source (as an alternative where children share expenses).  One family reported that a multi-year ledger is kept of expenses of the property with a running capital account for each child.  Many of you reported that as soon as any member of the second generation cannot support the Vacation House, then it should be sold.

Scheduling

The second generation will start to have their own children, and the house will fill up.  This creates the problem of scheduling.  Who is going to go to the house at different times, how many family members can they bring, can the grandchildren bring friends?  Suddenly, the house can start to get to be too small.  If the house is large enough to contain all who come, that is a blessing, but it is not usual.

It works best if the matriarch and patriarch can handle scheduling.  In families where the grandparents view scheduling as enjoyable, a way to stay in touch, then the scheduling becomes a positive.  If grandparents view scheduling as a burden because the children are disagreeing, then we have an early indication that the Vacation Home should be sold after the parents no longer use it.

Maintenance

The house must be maintained.  Maintenance requires both management and money.  If parents are willing to handle the maintenance management, then this works best.  The duties for the maintenance may pass to the next generation at a different time then the financial obligation to pay for the maintenance.

When the parents die, there can be significant conflict among the next generation regarding finances, scheduling and maintenance.  In the Best Practices category, family members who want to be bought out of the house, typically because they’re not using it, or cannot afford it, should be allowed to sell their share to the other family members.  The Selling Family member wants a fair price and typically is aware of creating new financial burdens on the buying remaining Family member. Certainly, the strategy is to allow conflict-free exit from the Family House.  Some families have created a capital account for each child’s share of the Vacation Home.  If a child does not want to or cannot make a capital contribution, then an adjustment is made on the Vacation Home books.  All capital accounts are then made whole upon the sale of the Vacation Home.

Several client families have had success discussing how to handle the Family Vacation Home in advance of the death of parents.  Many report significant and surprising disagreements after the parents’ death.  After all, the Vacation House is supposed to promote family unity.

If the money to support the house is the issue, then an alternative family strategy could be to endow the house, the family vacation location, with separate funding to support the house.

Want to hear a Worst Practice?  In every Family where the parents transferred the Vacation Home to the children because the parents could not afford it, the Family relationships (and the Vacation Home) deteriorated.

Have you had some strategy work (or not work) with your Family’s Vacation Home?  Please let me know.

You may forward this email to any of your Family Members or Friends who are involved with a Family Vacation Home.  We would like to be a resource to keep a Family Vacation Program going – Your Grandchildren are counting on us!

Regards,
Jim Vaughan

The Family Vacation House

01/23/2019

Summer is here and the family is going down to the Family Vacation House.  This is a great time to get out in the sunshine, see your family members, and have a great time on the beach, in the ocean, at the lake, or wherever it is that you may go.  But it can also be a time when the closeness of family also leads to other problems, scheduling conflicts, who pays for the house, who fixes the leaky faucets and other repairs, varying definitions of important concepts like “cleanliness”, “friends”, “sharing”.

Our experience, and that of our clients, has been that the summer home can be the source of great family unity.  As a resident of a North Jersey suburb, I have found that the suburban home is not the one that attracts the family; it is the Summer Home.

As you may know, my clients are the source for many of my best ideas.  I want to know what your Family did correctly or incorrectly in regard to your Summer Home.  All comments are welcome!

What can the family do to make the Summer Home an enjoyable experience for all?  …And a positive force for family unity and prosperity?

The following are some of the successes, maybe we will even call them “Best Practices”, that families have done to make the Summer Home an enjoyable experience.  We will also have some of the pitfalls, we will call them “Worst Practices”, to avoid.  We are aware that a “Best Practice” for one Family may be a “Worst Practice” for another!

Many families have had the family matriarch and patriarch buy the house, pay for it, and that continues and works out just fine, especially for the second generation!  The second generation starts to have their own children and the house fills up.  This  creates the problem of scheduling.  Who is going to go to the house at different times, how many family members can they bring, can the grandchildren bring friends?  Suddenly, the house can start to get to be too small.  If the house is large enough to contain all who come, that is a blessing, but it is not usual.  If the matriarch and patriarch can pay for the house throughout this entire process, that works best.  But at some point the house must be maintained and the duties for the maintenance will pass to the next generation…Now we have two potential areas for conflict – scheduling and finances.

When the parents die, there can be significant conflict among the next generation regarding finances and scheduling.  In the Best Practices category, family members who want to be bought out of the house, typically because they’re not using it, or cannot afford it, should be allowed to sell their share to the other family members.  Of course, the selling Family member wants full price while creating new financial burdens on the buying Family member.  Potential conflict there!

We have seen with various families, it is very difficult to maintain the Family Home when the parents die. From a practical point of view, we don’t live with our brothers and sisters and their families year-round. Why should we expect to go on vacation with them for any extended period of time?

Several client families have had great success discussing how to handle the Family Vacation Home in advance.  They may have concluded that when the parents die, the default position is going to be to put the Summer House on the market for sale.  Certainly, the strategy is to allow conflict-free exit from the Family House. A “Best Practice” might turn out to be that if a family member cannot be bought out, because the other family members don’t have the finances, then that is a signal that it is time to buy out all and sell the house.  All family members might agree in advance.  Since most vacation homes are in towns or areas where there are other homes for purchase, the proceeds from the buyout of the main Family Home can be used to subsidize, or even purchase, a few homes in the area.

If the money to support the house is the issue, then an alternative family strategy could be to endow the house, the family vacation location, with separate funding to support the house.  To expand this idea further, the separate funding could be used to maintain the home, and might even be used to pay for family meetings and transportation to and from the family vacation location.  The separate funding could even be a bank of sorts to allow for transactions between family members.

Have you had some strategy work (or not work) with your Family’s Vacation Home?  Please let me know.  You may forward this email to any of your Family Members or Friends who are involved with a Family Vacation Home.  We would like to be a resource to keep a Family Vacation Program going – Your Grandchildren are counting on us!

Regards,
Jim Vaughan

Tariffs and Trade 2019

Please open your economic textbooks to page forty-seven, class, because it’s time to talk about something you probably haven’t thought of since college: tariffs.

On Thursday, March 1, President Trump announced a new plan to institute a 25% tariff on steel imports and a 10% tariff on aluminum.1 Like so many things these days, the response was radically different depending on who you talk to.  More on that in a moment.

Traditionally, tariffs are something most of us don’t have to think about, especially as tariff levels in the United States have been low for decades.  But for investors, President Trump’s announcement has the potential to be very significant.  Why?  Because of the possibility that it could spark a trade war.

Should a trade war actually happen, it could have a major impact on investors.  To understand why, let’s have a short Q&A session.

What are tariffs and why do they matter?

Since it’s probably been a while since your Economics 101 class, let’s quickly cover a few basics.

To put it simply, a tariff is essentially a tax on imported goods and services.  Tariffs can be levied on almost anything: metals, foodstuffs, products, etc.  Historically, tariffs are most commonly used when a country wants to protect certain industries within its own borders.  For example, the Tariff Act of 1930 was designed to protect farmers by increasing the cost of importing agricultural products.  By making it more expensive to import crops from other countries, people would be forced to buy mainly from American farmers.  This is known as protectionism.

Once upon a time, tariffs in the United States were both high and common.  But after World War II, average tariff rates dropped significantly, and have stayed low ever since.  In fact, since the 1970s, the average tariff rate on imports has been well under 10%.2

So are tariffs good or bad?

Remember how I said the response to President Trump’s announcement was radically different depending on who you talk to?  That’s because a tariff’s effects can vary wildly, too.

Tariffs can bring two major benefits:

  • Because tariffs are a kind of tax, they can bring more revenue to the government.
  • Tariffs, and protectionism in general, can be a major boon to certain industries – including the workers within those industries.  In this case, the U.S. steel industry would benefit from a 20% tariff on steel, because it means more people are buying from them instead of their competitors overseas.

You can see why the idea of tariffs can be attractive for many people.

Unfortunately, tariffs can also cause some very negative side effects.  Specifically:

  • Tariffs can make life more difficult for consumers, whether they be individuals, families, or businesses.  That’s because higher tariffs often lead to higher prices, which in turn lead to higher expenses.  For example, if companies must pay more for the steel they need, that could significantly eat into their own profits.
  • Higher tariffs can lead to trade wars.

Okay, so what is a trade war, anyway?

We live in a global, interconnected world.  Toss a stone into the water off one shore and the ripples can be seen near another.  In this case, higher tariffs can cause some very large ripples.

When one country raises tariffs on a certain kind of product, other countries that depend on exporting that product won’t take to it kindly.  As a result, those countries might retaliate by increasing tariffs on their imports, thereby harming the first country.  Before you know it, tariffs become weaponized and a trade war breaks out.

Trade wars are risky things, because they can quickly jump from industry to industry.  Let’s take the current situation as an example.

After President Trump announced his plan to raise tariffs on steel and aluminum, the European Union threatened to do the same to U.S. imports – everything from motorcycles to bourbon to bluejeans.3  Other countries like Japan and Canada, which are both major steel producers and important trading partners, have threatened similar measures.  Should all this happen, the currents of international trade will quickly become choked.  That would lead to higher prices on many goods and services, which in turn would lead to lower profits, higher costs of living, and even – potentially – higher unemployment.

Should all those things happen, the markets will surely suffer.  As an investor, you don’t need me to tell you what that means.

So why did President Trump decide to raise tariffs?

For decades, the United States has seen a worsening trade deficit with many countries.  In other words, we pay more for importing their goods than they do for ours.  According to the Wall Street Journal, the U.S. “ran a global goods deficit of $810 billion” in 2017.4  One of the president’s most long-standing campaign promises was to address that deficit.  It appears that tariffs, along with renegotiating certain trade agreements, like NAFTA, are his tool of choice.

Geopolitical economics is a loaded topic, and there’s a lot of disagreement out there about causes and effects.  Again, tariffs can unquestionably bring lots of advantages, and there’s no question the United States is on the lower end of a trade imbalance with many countries.

At the same time, there’s also no question that Trump’s announcement has spooked both the markets and the global economy.  The Dow fell more than 400 points on the day of the announcement, and continued to fall the next day.5  Many world leaders have already warned about a trade war being a very real possibility.  Even many Congressmen in President Trump’s own party have spoken out against the prospect of higher tariffs.  This isn’t surprising, because the Republican party – or at least a large percentage of it – has traditionally been very much in favor of free trade.

As I’m not an economist, it’s not really my place to decide whether protectionism is good or bad.  It’s worth noting, however, that a trade war did break out the last time the U.S. raised tariff rates this high.

The Tariff Act of 1930, or Smoot-Hawley Tariff Act, raised tariff rates to their second highest level in U.S. history.  These days, economists generally agree that the resulting trade war worsened the Great Depression.  (What no one seems to agree on, though, is by how much.)  On the other hand, the United States is in a very different position in 2018 than it was in 1930.  Back then, the Great Depression had long-since started.  These days, our economy is much stronger.  That makes it hard to predict how hard a trade war will hit.

What happens now?

There are still so many things we don’t know.  For instance, we don’t know if President Trump will actually go through with his plan.  If he does, we don’t know if the tariffs will apply across the board, or if they’ll only be levied against certain countries.  (This is something many of his advisers are recommending.  If our closest allies are exempted, then the effects of a trade war would likely be minimized.)  And we don’t know what other nations will do in response.

What we do know is that the possibility of a trade war can have a substantial impact on the economy and the markets.

At the moment, I don’t believe we need to take any action. Back in February, the markets took a hit due to the threat of inflation and rising interest rates – and then recovered.  While the markets dipped slightly in response to President Trump’s announcement, it’s far too early to make any changes to your portfolio.

However, this is why my team and I keep such a close eye on what’s going on in the world.  Part of my job is to keep you informed of any ripples in the water so that you always stay afloat.  It’s impossible for me to say what’s going to happen next, but I’ll tell you this: We’ll always be here keeping our hands on the tiller.

In the meantime, please contact me if you have questions, or if there’s anything I can do for you!

Sources
1 “Trump to Impose Steep Aluminum and Steel Tariffs,” The Wall Street Journal, March 1, 2018.  https://www.wsj.com/articles/trump-wont-quickly-announce-new-tariffs-on-aluminum-steel-1519921704
2 “Average U.S. tariff rates, 1821-2016,” U.S. International Trade Commission, https://www.usitc.gov/documents/dataweb/ave_table_1891_2016.pdf
“U.S. allies around the world steel for Trump tariff tussle,” The Wall Street Journal, March 2, 2018.  https://www.wsj.com/articles/asian-allies-steel-for-trump-tariff-tussle-1519977304
4 “Trade Wars Are Good, Trump Tweets,” The Wall Street Journal, March 2, 2018.  https://www.wsj.com/articles/trade-wars-are-good-trump-tweets-1519996161
“U.S. Stocks Tumble After Trump Announces New Import Tariffs,” The Wall Street Journal, March 1, 2018.  https://www.wsj.com/articles/global-stocks-struggle-after-bad-month-1519868670?tesla=y