There has been a lot of news on high inflation coming and its looming effects on everything from investment portfolios to the price of milk.

As people are searching for ways to combat high inflation and preserve how far their money can go, we’ve been receiving many questions on an investment option called I Bonds. Questions about what they are and why they haven’t heard of them before.

Our hope is to shed some light on Series I Savings Bonds (I Bonds), available here, and outline how the investment works before offering our recommendations.

How risky is an I Bond?

I Bonds are US treasury bonds, meaning they are backed by the full faith and credit of the US government, making them one of the safest, lowest risk investments possible.

What is the interest rate on an I Bond?

There are two parts to the interest rate on an I Bond.

• A nominal (fixed) rate — currently 0% as of November 2, 2021.

• An inflation (floating or adjustable) rate that changes every 6 months — currently 3.56% as of November 1, 2021.

These two rates are added together to determine the interest rate on an I Bond, so the current rate on the I Bonds for 6 months is 0% (nominal) + 3.56% (inflation) = 3.56% total (which is 7.12% annually). This interest rate cannot drop below 0% even if there is ever a negative inflation adjustment. See here for historical I Bond interest rates.

The floating rate on I Bonds will adjust as inflation adjusts. Today, inflation rates are high, but as the historical rates table in the link above shows, inflation rates can be lower.

When can I access my money?

An important factor to consider is that I Bonds only pay interest upon maturity, so you will not receive cash flows from the I Bond as you hold it.

I bonds have no secondary market, so you cannot resell your I Bond, you can only redeem it. I Bonds have no liquidity for the first year after purchase, so it’s important that you will not need to access the funds for at least one year. For years 1-5 after purchase, you may redeem your I Bond early by forfeiting the last 3 months of interest. After 5 years, you may redeem the bond early without penalty. I Bonds will mature 30 years after purchase.

How do the taxes work?

I Bonds only pay interest upon maturity. You can claim (pay) the taxes on the earned interest every year on your I Bonds, or you can pay taxes on all interest upon maturity of the I Bond. I Bond interest is not subject to state or local taxes. See here for more information.

How do I purchase I Bonds?

You have to purchase I Bonds directly through treasurydirect.gov, or with your federal income tax refund. See here for more information.

You are limited to $10,000 of I Bonds through electronic purchase, and $5,000 of I Bonds through paper purchase via your tax refund, for a total limit of $15,000 of I Bonds in a calendar year.

The pros and cons of waiting to get paid out

If you’re still wondering if these bonds are right for you and your financial plan, weigh the pros and cons below against your goals.

Pros:

• The inflation adjustment makes I Bonds a great inflation hedge

Cons:

• Interest is only paid out upon maturity, so don’t utilize I Bonds as a source of cash flows over time

• Funds are locked up for 1 year, so don’t use I Bonds for any funds you might need before then

Other considerations:

• I Bonds must be purchased on your own, so they’re for a more DIY inclined investor

• The inflation adjustment rate will change adjust over time, so the precise amount of interest an I Bond will earn is uncertain

• Consider the potential taxes of having all interest hitting upon maturity of the I Bond, or having to pay taxes each year on interest you have not yet received

• You are limited on how much you can purchase in a year

I Bonds are typically best for medium term (i.e. around 5 year) savings goals.

The inflation adjustment reduces your risk of losing purchasing power due to inflation. The low nominal rates on I Bonds today means your funds will not grow faster than inflation.

For longer term savings goals (i.e. retirement in 10+ years), equities are a great long-term inflation hedge, because companies can adjust their prices (and therefore dividends & earnings) based on inflation. Treasury Inflation Protected Securities (TIPS) are another, lower risk than equities, investment that adjust for inflation.

If you have more questions about I Bonds, or would like to speak to a financial professional about other investments, please reach out to us at hi@humaninvesting.com or 503-905-3100.

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Season’s Greetings! We have assembled this post during the final days of 2021. We hope you have enjoyed some rest these past few days and you are heading into 2022 feeling optimistic.

As promised, we are sharing some of our favorite charts from Q4. Specifically, we included charts that include information about the increase in Social Security benefits, the S&P500’s 69 all-time highs in 2021, mentioning the S&P500 powerhouses, and reviewing some annual price changes.

1: Social Security and Supplemental Security Income (SSI) benefits will increase 5.9% in 2022.

In October, it was announced that Social Security benefits will increase by 5.9% starting in January 2022. As this chart indicates, the 5.9% increase starting in 2022 is the largest uptick since the 1980’s. This is good news for most people since social security checks will be bigger.

The increase in benefits impacts households who are already taking social security and those who will be taking their benefits soon. If you haven’t already received the COLA notice in the mail, you can access your updated Social Security statements here: my Social Security | SSA

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Source: Lance Lambert

2: The S&P500 reached 69 all-time highs in 2021.

Throughout this past year, the S&P500 hit a new all-time high 69 times. That’s remarkable! You should spend some time looking at this chart, but as a sneak peek, 1995 is the only year that incurred more all-time highs that 2021.

What does this mean for you? Looking back, it means that checking your account balances in 2021 was thrilling if you have exposure to the S&P500. To summarize the year’s performance, the index is up almost 30% since January 1, 2021.

During market years with this many records, the stock market attracts fair-weather fans. Going forward, we recommend that you define and/or revisit your investment goals and stick to your plan as best as possible.

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Source: Charlie Bilello

3: The S&P500 powerhouses.

The S&P500 is a stock market index that measures the performance of about 500 companies in the US. If you have attended one of our group presentations, then you may recognize that we often say that “the S&P500 is synonymous with the US stock market”.

By the end of 2021, there were 6 companies that made up 26% of the market capitalization (# of shares x price of the shares) of the S&P500. These same 6 companies only made up 10% of the S&P500’s total revenue, or the money the companies pulls in from their sales.

This chart made an appearance in our final Charts of the Quarter post for 2021 as a reminder that these six organizations (Microsoft, Apple, Google, Amazon, Tesla, and Meta Platforms) have kept their spots in the starting line-up of the US stock market. We can also give kudos to these six companies for the S&P500’s returns in the recent past. Since 26% of the S&P500 has strong performance, the 2021 bad apples received less attention.

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Source: @Sean_YCharts

4: Picking trends is (still) hard.

We assembled a chart with two companies that we rely on everyday — Peloton and Zoom. Zoom has been crucial for engaging with our clients these past two years and many Human Investing employees converted to Peloton workouts mid-pandemic. Look at this chart! There is a disconnect between Zoom and Peloton’s abysmal performance in 2021 and our expectations as loyal customers.

Let this chart be a reminder that picking trends in the stock market has always been challenging and it will continue to be going forward. Investing in individual companies can lead to a make-or-break situation.

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Source: @Sean_YCharts

5: Inflation took over headlines in Q4 2021.

Overall, the CPI (Consumer Price Index) rose 6.2% from October 2020 to October 2021. This is the fastest annual increase since 1990. While it is true that things got more expensive this past year, inflation is a delicate topic because every year some things get more expensive while other things become more affordable. For this reason, we try to avoid generalizations about inflation.

As the chart indicates, this past year we have experienced a concentrated increase in transportation costs like fuel oil, motor fuel, car and truck rentals, piped utility gas service, and used cars and trucks. Meanwhile, the average cost of an airline ticket has decreased compared to 2020.

We agree that inflation is uncomfortable. That is a true statement even though inflation is always moving and rarely a stable metric.

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Source: The New York Times

That is a wrap for the 2021 year. We wish you the very best 2022! — Your Human Investing Team

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Medicare is an important part of your retirement plan. We hope this overview is a helpful resource to know when to apply and how much it may cost.

Before you turn 65…

Most people turning age 65 should sign up for Medicare during their Initial Enrollment Period (IEP). During your IEP, which starts 3 months prior to the month you turn 65 and lasts until 3 months after, you can enroll in Medicare Part A (Hospital coverage), and Medicare Part B (Doctor visits). Medicare Part B pays 80% of most medically necessary healthcare services and the beneficiary pays the remaining 20%. You may also join a Medicare Part D plan (Prescription Drugs) within 3 months of when Medicare coverage begins to avoid any late enrollment penalties.

What if I’m still working past age 65?

If you are still working and have employer-based health insurance at a company with 20 employees or more, you can delay enrollment in Medicare until retirement. If, however, you work for a company with less than 20 employees, you will likely need to sign up for Medicare at age 65.

When your employment health plan coverage ends, you will need to add Part B within eight months of either a) the end of your employment or b) then end of your group health coverage. COBRA can help bridge the gap between employment coverage and Medicare. COBRA will end once Medicare begins.

If you are still working past age 65 and want to continue contributing to a Health Savings Account (HSA) with a high deductible plan, you will need to delay your Medicare Part A coverage.

What does Medicare cost?

Most beneficiaries will only pay the standard premium amount for Part B ($158.50 in 2022). They may be required to pay a premium based on their income represented in the chart below. Medicare uses the modified adjusted income from the beneficiary’s IRS tax return two years prior.

Typical cost for Part B is shown below with income ranges that increase Medicare premiums:

If you do not enroll in Medicare Part B when you are first eligible:

• Your Part B monthly premium will increase 10% for each 12-month period that you are not enrolled.

• You will pay a higher premium for the remainder of your life.

What if I need additional coverage?

Your IEP is also when you can buy Medicare Supplemental Insurance (also known as Medigap) from insurance companies. This is an additional policy that Medicare beneficiaries can purchase to cover the gaps in their Part A and Part B Medicare coverage. You are guaranteed the right to purchase this insurance without going through medical underwriting (i. e. you can’t be denied). This is critical if you have one or more chronic health conditions. Cost for Supplemental Insurance can typically range from $200 to $300 per month.

How do I sign up?

• Online (at Social Security) — It’s the easiest and fastest way to sign up and get any financial help you may need. (You’ll need to create your secure my Social Security account to sign up for Medicare or apply for benefits).

• Call Social Security at 1-800-772-1213. TTY users can call 1-800-325-0778.

• Contact your local Social Security Office.

Sources: medicare.gov

Medicare can be a complicated concept, but the help of a professional can make all the difference. Please reach out to our team if you could use some guidance as you approach retirement.

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Given the combination of low interest rates, soaring housing prices, and saving habits during the global pandemic, we have noticed more people are needing a strategy for their excess savings. Contributing to a Roth IRA account is strategic for individuals who have already funded their emergency account and have some extra savings. We are helping people plan for scenarios like these three examples below:

Michaela, age 29: “I have $15,000 of extra cash savings. I started to build this savings account with the intention of buying a home sometime in the next five years.”

Martin & Angela, age 40: “We are a dual-income house with two young children. We manage to pay our monthly bills, live within our means, and we need a plan for our extra money. We looked at high-yield savings accounts but are underwhelmed with the current return. Our main concern is wanting access to the dollars in case we need it in the coming years.”

Samuel, age 35: “I am currently leasing my car. The lease is up in 3 years, and I might be interested in buying the car at the end of the lease.”

All three of these examples include an element of uncertainty or unpredictability. Michaela hasn’t engaged with a realtor and isn’t certain if/when she will buy a home, Martin & Angela don’t have an immediate need for their excess savings, and Samuel may change his mind about buying his car in a few years. These three situations share these things in common:

• There is no specific timeline for the savings to be spent.

• These people are all seeking a way to grow their dollars.

• These people want distribution flexibility in the future.

Roth IRA Eligibility

In the year 2022, the maximum annual Roth IRA contribution is $6,000 per person. The annual contribution increases to $7,000 for people ages 50 and older. This $6,000 contribution amount is different than making Roth contributions inside a 401(k) account. All employees with a Roth contribution type available inside their 401(k) account are eligible to save Roth that way regardless of their income. Due to the tax-advantages of Roth IRA accounts the IRS has set the following income limits for Roth IRA eligibility:

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If your income is above these limits, then you are not eligible to make a Roth IRA contribution this year.

Roth Distribution

If you’re eligible, let’s review why this account has both tax advantages and distribution flexibility. Because Roth IRA’s are funded with after tax dollars, you are allowed to take out your contributions without taxes and penalties. Here is an example:

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In this scenario you can take up to $6,000 out of your account without penalties and taxes because you are withdrawing what you originally deposited into the account. If you take out the $800 of growth, then it will be taxed and subject to a 10% penalty for non-qualified distributions.

In this example, the account value increased overtime. Like any investment account, there is no guarantee that the account value will have appreciated at the time of the withdrawal. Be mindful that a Roth IRA account value could decrease below its initial contribution amount. 

better savings Compared to What?

In order to give Roth IRA’s credibility, let’s compare them to other accounts for excess savings. Here are some examples of common comparisons:

Roth IRA vs. 401(k) Accounts: Most 401(k) accounts have stricter rules on accessing your money before retirement age. The quick and easy distribution of principal contribution is not guaranteed in Roth 401(k) accounts.

Roth IRA vs. Traditional IRA: Unless the distribution is for one of these reasons, early distributions from IRA accounts result in a 10% penalty and income tax payable on the amount distributed. For example, if Samuel from above (age 35), wanted to take out $5,000 from his Traditional IRA account he would owe a 10% penalty and income taxes on the $5,000 in the year of distribution. Not ideal!

Roth IRA vs. High-Yield Savings Accounts: High-yield savings accounts do offer principal production, but not an inflation-protected return. As an example, most high-yield savings are currently paying .5% APY and the average inflation rate is approximately 2.84%. This is not an ideal investment strategy if you are saving up for future purchases. The current interest rate environment means that high-yield savings accounts are not optimal for growing your savings. As an example, the current high-yield savings account is paying .5% APY meaning someone would only earn $30 a year on an account with $6,000.

Roth IRA vs. Brokerage Account: Brokerage accounts are Roth IRA’s fiercest competitor. To start, brokerage accounts are accessible by all savers because there are no income eligibility limitations for brokerage accounts. Brokerage accounts aren’t tax-sheltered. Let’s compare the same $5,000 distribution as above, but this time in a brokerage account instead of a Roth IRA.

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Ideally, Roth IRA’s are setup with long-term investment strategies and the dollars stay invested for a long period of time to serve you later on. However, the distribution flexibility outlined above is why Roth IRA’s can be a reasonable savings account for extra money that does not have predetermined utility in the coming years.

We hope that this article provides some clarity if you need a place to invest your excess savings. If you have any questions, please get in touch with our team at Human Investing.

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Full transparency: I am a Roth enthusiast.  

If you are reading this article, it’s likely that we have already spent some time reviewing the benefits of Roth together and you have sensed some of my fervor. While the excitement is real, the concept of saving dollars in tax-sheltered accounts like an IRA, 401(k), HSA, or 529 account is complicated to grasp. With that said, I am offering some written advice about Roth accounts for my fellow visual learners.

Before you read on, here is an outline of the two different ways to save Roth.

Roth IRA

• Contribution limit: $6,000 per year ($7,000 if you are ages 50 and older)

• Eligibility: Single tax filer with 2022 income less than $144,000 or Married filed jointly with 2021 household income less than $214,000

Roth 401k

• Contribution limit: $20,500 per year ($27,000 if you are ages 50 and older)

• Eligibility: All employees can contribute up to $20,500 regardless of your income and salary.

• Employer match: Employer contributions are always pre-tax. If you contribute Roth inside your 401(k) plan you will still receive your pre-tax employer contributions. This is important! People are commonly surprised to learn that 401(k) accounts have Roth inside them.

401(k) Account – two savings types under the same umbrella

In summation, if your annual income is less than $125,000 (single filer) or $198,000 (married filed jointly) then you could save up to $26,500 in Roth accounts for the year 2022. The math is here:

Hierarchy of Roth

What should you do if you have access to save Roth inside your 401(k) account but are also eligible to make Roth IRA contributions? Which account should you actively contribute to this year?

First, we recommend that you contribute enough to your Roth 401(k) account to receive your employer match (if applicable). For example, if your employer match is designed so that if you save 5% your employer will contribute 4%, then we recommend you meet the 5% savings rate to take advantage of the free money.

If you can still save additional dollars, use the Venn Diagram and these two examples to help formulate your decision.

Meet Michaela, age 29, single tax filer

Michaela, like many 29 year-olds, just started a job at her fourth employer in 8 years. Let’s imagine that she just enrolled in her current 401(k) plan which has a save 4%, get 4% employer match structure. She has also noticed her total savings and checking account balances have grown over the past year. As a result, she wants to set aside additional dollars to invest for the future, but also has some concerns about possibly needing access to the dollars in the coming years. Michaela could easily increase her 401(k) contributions to above 4%, but she decides to open a Roth IRA instead because of the flexible distributions. For Michaela, the hierarchy of her Roth savings is as follows:

Meet Martin, age 40, married, joint tax filer

Martin is busy juggling their full-time job, building a deck in their backyard, and spending time with their energetic family. They are currently saving 8% Roth into their 401(k) plan which equates to $7,500 annually. Martin is a great candidate for increasing their Roth 401(k) contributions since they still have $12,000 of potential savings into this account to reach the $20,500 maximum this year. Given their busy lifestyle, Martin will benefit by leaning into the automation of a 401(k) account.

Increasing your contribution rate is easier than opening a Roth IRA, making contributions throughout the year, and creating an investment strategy for that account. For Martin, the hierarchy of their Roth savings is as follows:

Since Michaela and Martin’s examples don’t speak to all situations, here is a Venn Diagram with additional considerations for you:

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The IRS recently announced increases to both the standard deduction and tax brackets for taxpayers in 2022. Are you aware of how an increase to the standard deduction and an increase to tax brackets will impact you?

As you know, there are many headlines leading up to anticipated tax code changes, a litany of speculations throughout the process, and a cacophony of opinions once official tax code changes are announced. To be succinct, these two 2022 tax changes will have a small but favorable impact on most households. Everyone’s tax situation differs, but we wrote this blog to break down the complexities of the latest tax code changes.

What has changed?

1. The standard deduction will increase for the 2022 tax year. See below for a summary of the increases:

2. Federal income tax brackets will increase 3% for the 2022 tax year compared to 2021. Including a visual of the 2021 federal tax brackets is TMI for this post, but below are the new 2022 tax brackets:

what does this mean for me? it may not be much.

The practical answer is that these 2022 updates are not expected to have a significant impact on your taxes, cash flow, or budget. Both increases are good news for most households, but not life changing. To show how the changes are applied, we included a fictitious example and illustration below.

The academic or technical answer is that the increase in standard deduction means households will have less income subject to taxes, and the income that is subject to taxes will be subject to better tax brackets.

To provide an example of the impact of the 2022 increased standard deduction and 2022 increased tax brackets, read on.

Meet MARTIN & ANGELA

Below is a breakdown of their taxable income and taxes due in 2021 compared to 2022.

As you can see, they reported $100,000 of combined income which is reduced by their pre-tax 401(k) contributions and the standard deduction. Specifically, the standard deduction for married filed jointly is changing from $25,100 to $25,900 in 2022 so their taxable income is less than it was in 2021. Less taxable income puts Martin and Angela on track to pay less federal tax in 2022 than in 2021.

PORTIONS OF YOUR INCOME GET TAXED AT DIFFERENT RATES

Tax brackets calculate the tax rate you will pay on each portion of income. Tax brackets are part of our progressive tax system, which means the tax rate increases as someone’s income grows. As shown on the second image of this blog, there are 7 different federal tax brackets in 2022.

Looking at the image above, you can see that you can split your taxable income to take advantage of the lowest tax bracket. Isn’t it true that Martin and Angela would prefer to have a portion of their income taxed at the 10% rate before moving into the 12% tax bracket? In 2021, the maximum income allowed at the lowest tax bracket of 10% was $19,900. In 2022, the maximum income allowed will be $20,550.

DRUMROLL, PLEASE…

After this exercise is completed for all their taxable income, you can see that their total taxes owed in 2021 is $7,990 compared to $7,881 in 2022. As illustrated above, Martin and Angela will pay $109 less federal taxes in 2022 than they did in 2021. This will be welcomed news, but not a life-changing update when compared to the amount of buzz these two tax changes will generate in the media.

If you have questions about your unique tax situation, please schedule a time to connect with our team. As always, we would love to hear from you!

Disclaimer: this post is for educational purposes and not predictive of your 2022 tax situation. The fictitious example is not a full presentation of a tax filing.

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There is good news for retirement accounts! The IRS has increased the contribution limits for the upcoming year. As you can see below, an important change for 2022 is that 401(k) elective deferrals increased from $19,500 to $20,500. That’s not all! Please see below for the applicable updates for the coming year:

How do these changes impact your savings in the upcoming year? Are there any changes you should be making? Use this link to schedule a time to meet one-on-one with our team. We look forward to working with you in 2022!

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Welcome to fall! Before we race to the pumpkin patch, let’s look back on July, August and September. We selected 5 different visuals from the past quarter to share with you.

1: The S&P 500 Reaches an All-time High

On September 2, 2021, the S&P 500 closed at an all-time high (see chart). While this is a record-breaking statistic, the S&P 500 has also experienced more than 50 all-time highs in 2021. Prior to this year, there are only six other calendar years with at least 50 record closes (2017, 2014, and 1995 are the most recent years).

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As a result of these market highs, we have noticed heightened concerns about a looming market crash. Because what goes up, must come down?? The two most common concerns we hear are:

1. “I know the market is at an all-time high. I want to sell my investments today and reinvest these dollars when the market crashes in the coming months”. See chart 2 for our typical response.

2. “I know the market is going to crash. I want to move all my money into something safe like cash or bonds. What do you think I should do?”

If you are someone that is worrying about your investments (maybe it’s something entirely different from the two concerns listed above), please reach out to our team so we can listen to your concerns and build an investment strategy for you going forward. To be frank, the timeline for spending 401(k) dollars impacts the advice we give. For example, we would give different advice to someone planning to spend their 401(k) savings soon than to someone in their mid-forties with no intentions of spending their 401(k) soon.

2: What About This Looming Market Crash?

If you have setup a 401(k) account, then you are investing your dollars every single pay period. This phenomenon is called dollar-cost averaging and it works really well for most retirement accounts. If you have a 401(k) account, we recommend leaning into dollar-cost averaging, setting up annual account rebalancing, and assessing your account strategy periodically. Of course, this strategy is not one-size-fits-all. Some investors prefer to intervene with their investments if they are predicting an upcoming market crash.

That being said, we recently found this article by Nick Maggiulli that compares gradually investing a consistent dollar amount (like per paycheck 401(k) contributions) to saving dollars up to buy a market dip. Please take the time to read the whole article, but if you want the cliff notes here you are:

• The article points out that stockpiling cash in anticipation of a market crash is an unlikely strategy to win out in the long run.

• Trying to buy the dip usually fails because large dips are rare. As a result, the strategy turns into stockpiling cash which is not a good idea for the long-term.

• If you do want to try and buy the dip, think about getting your cash invested in the stock market as soon as possible.

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For some help interpreting this chart, here is the text directly from Nick Maggulii’s blog post. “This chart shows that there is roughly a one in four chance of beating DCA when using a Buy the Dip strategy with a 10%-20% dip threshold. If you were to use a 50% dip threshold, the chance of outperforming DCA increases to nearly 40%. But this doesn’t come without a cost. Because while you are more likely to outperform DCA when using a bigger dip threshold, you also underperform by more (on average) as well.”

3: Monthly Child Tax Payments

July 2021 was the beginning of the monthly child tax credit payment for parents. Did you see our 20-minute webinar about the child tax credit, why it matters, and some financial planning considerations for parents?

Flash-forward a few months, and we have found a study of 1,514 American parents who received the monthly child tax credit payments. As you can see, most parents have saved their payments for emergencies which is a disciplined usage of the excess cash.

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4: Vanguard Announces Lower Fees for Target Retirement Funds

In late August, Vanguard announced they are lowering the expense ratio (the cost) of their target-date funds by February 2022. We believe this is good news for all investors using Vanguard target retirement funds!

Vanguard will lower the expense ratio to 8 basis points meanwhile they are committed to maintaining the same glidepath methodology and asset allocation.

To articulate the cost savings, we assembled a table showing the potential impact for someone invested in a Vanguard target retirement fund with the updated expense ratio. For someone with $100,000 in a Vanguard target retirement fund, this lowered expense ratio means immediate annual savings. Just to be clear, the $90 vs $80 are annual fees which add up to be meaningful cost savings for you over a long period of time. Cheers!

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5: Be Careful who you Get Advice From

How many self-proclaimed market savants are sharing their opinions with the world? So many! Be careful who you listen to. We couldn’t help but include some humor in this post. Feel free to relish in the ridiculousness of this chart.

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That concludes our Charts of Q3 2021 post. We will be assembling the next Charts of the Quarter post before we know it. Take care! — Your Human Investing Team

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Many of our blog articles are inspired by conversations we have throughout the week. This article on the S&P 500 stock market performance and capital gains tax increases is no exception. The question we are being asked is, "what do you think is going to happen with the market if capital gains go up?" Our recent response has been, "let us do some research and circle back to you." Here is what we found:

1. Federal capital gains tax rates are currently near 70-year lows

2. The proposed bill (House Ways & Means Committee, September 13, 2021) increases the top capital gains rate from 20% to 25% on income above $400,000.

3. The previously proposed rate was 39.6% but kicked in at $1,000,000 of income.

4. Table 1 below provides a side-by-side of the recent proposal with current capital gains rates and income brackets.

With this background on where rates have been and what is being proposed, we look to address the question, "so what happens to the market when capital gains rates go up?" Table 2 below tells an interesting story. Although there is market anxiety leading up to the proposed capital gain tax change, which results in a negative average return, the six months following the tax increase, the market is favorable. Wait, what? Excuse me for a minute while I reexamine Table 2. Ok, yes, the market is actually up after a proposed tax increase on capital gains.

As we have learned from our 25 years advising clients, anything is possible, and history does not always repeat itself. Another lesson learned from experience is that the market does not care about our charts, nor does it give a rip about our attempt to explain what might be. It is nice to know that cap gains tax hikes do not always mean turbulent markets are ahead. In fact, the market has performed above the historical average when a cap gain tax hike is put in place—at least, that is the case for the six months following the increase.

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We talk to a lot of different people about investing. A common request is something along the lines of: “I don’t want to lose anything, and I want my money to grow.” This is a challenging, if not impossible mission. The investment world is full of opportunities to grow your money. However, there is an inherent risk when you put your money in any investment.

Finance has a lot of ways of measuring risk. Standard deviation is used to try to show a range of the possible returns. Max drawdown displays your worst-case scenario. Sharpe ratio provides a risk-adjusted measure of performance. However, very few investors ask about standard deviation, max drawdown, and Sharpe ratios. The people we talk to are most likely to ask “What are the odds of losing money” because they don’t want to see their current savings drop in value.

How strong is your purchasing power?

An important consideration when talking about losing money is purchasing power: the ability to buy goods with your money. Inflation has consistently pushed prices up over time, reducing the purchasing power of a single dollar. Wanting to avoid losing money is completely understandable. The danger of keeping your money under your mattress or sitting in cash is that inflation is constantly reducing your purchasing power.

When concerned with losing money, many investors are focused on nominal returns. Nominal returns are the raw return values, unadjusted for inflation, and are simple to calculate and digest. I would argue that most investors should be focused on real returns: returns adjusted for inflation. Real returns are a more accurate measure of your change in purchasing power. Ultimately, very few outside of Scrooge McDuck want a giant pile of money. Most people want to spend that money on goods, like food, travel, or a home, therefore purchasing power is likely what investors really care about.

Real return = (1+Nominal Return) ÷ (1+inflation rate)

Historically, stocks deliver positive returns, and those returns are in your favor. However, stocks are down (i.e. lose money) more frequently than bonds. The safety bonds offer also means they provide lower returns. What blend of stocks and bonds is most likely to protect your purchasing power (i.e. produce a positive real return)?

inflation is dwindling BOND power

To try and answer this question, I looked at the Stocks, Bonds, Bills, and Inflation (SBBI) data from the CFA Institute from 1926-2020. This data included monthly and annual returns; the annual data is for each calendar year. For stocks, I used the Ibbotson SBBI US Large-Cap Stocks total return.

For Bonds, I used the Ibbotson US intermediate-term (5 year) Government Bonds total return. I looked at several different portfolios which include a variety of stocks and bonds. Specifically, I blended the stocks and bonds in 10% increments, from 100% stocks, to 90% stocks 10% bonds, to 80% stocks 20% bonds, and so on to 0% stocks 100% bonds. I also assumed the portfolios were rebalanced at the start of each return period (i.e. the weights were reset at the start of each month for monthly data, and the start of each calendar year for annual data).

I took these different stock/bond portfolio mixes, and I calculated the nominal and real returns from 1926-2020 for both monthly and annual (calendar year) returns. I then calculated what percentage of returns were positive to measure the chance of losing money (nominal returns) or purchasing power (real returns). I’ve graphed the nominal vs real returns for monthly and annual returns below.

You’ll notice the nominal monthly returns paint a clear picture. If you want positive nominal returns more often, you want to own more bonds, hence the steady upward trend to the graph. If you look at the annual nominal returns and want to maximize your chances of a positive nominal return, you actually want a 10/90 portfolio (10% stocks, 90% bonds). As risky as stocks seem, having at least a sliver of stocks actually increases the chances of a positive nominal return

The real returns tell a slightly different story. For the monthly real returns, the stock/bond mix is almost irrelevant for producing a positive return, and hovers right around 60%. There is a drop off after 10/90 (10% stocks, 90% bonds), indicating owning even just 10% stocks in your portfolio helps increase your chances of positive real returns better than owning 100% bonds.

For the annual real returns, you can see that your odds of a positive real return are better with at least some bonds in the portfolio. Interestingly, the 70/30 portfolio and the 20/80 portfolios produce the highest chance of a positive real return. The all bond portfolio, 0/100, has the worst chance of maintaining your purchasing power (i.e. producing a positive real return).

Stocks can seem risky, and the loss of value can make many investors shy away. Even just a small amount of stocks can protect your purchasing power better than owning only bonds. There are still many considerations for how you should invest including your risk tolerance, time horizon, and holistic financial plan. If you’re interested in talking to an advisor, please reach out to us at hi@humaninvesting.com or 503-905-3100.

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Transitioning into retirement can be an exciting time. For many it can also be a daunting reality. We hope the following Pre-Retirement Checklist is a helpful tool as you intentionally prepare for your retirement years.

5-10 years out 

• Create a plan to pay down debt.   

• Maintain Emergency Fund – Emergencies still happen in retirement.  

• Familiarize yourself with Social Security, Pension, and/or Defined Benefit options.  

• Consider Long Term Care (LTC) options – LTC Insurance vs Self-insuring using other assets.  

• Maximize all tax-advantaged savings accounts – 2021 Contribution Limits.  

• Review your investment strategy to make sure your retirement accounts are in line with your risk tolerance and timeline.   

• Strategize how to divest from company stock.  

2-4 years out 

• Devise a retirement spending plan:   

  • Identify your retirement spending goals – basic needs, travel, one-time needs, etc.  

  • Take inventory of assets and consolidate as needed.

  • Retrieve Social Security estimates and create a strategy for taking your social security.

  • Determine and clarify your retirement paycheck replacement strategy.  

  • If you are retiring early, figure out how you will bridge spending needs prior to Social Security income, Medicare coverage, and accessing retirement accounts at age 59.5. 

  • Review deferred compensation distribution strategies.  

• Begin developing a plan for a fulfilling retirement (goals, purpose, health).  

• Practice being retired – take a long vacation in the location you plan to retire and live within your retirement budget. 

• Retirement Living Plan:  

  • Evaluate downsizing a home or relocation and the associated tax implications.  

  • If a mortgage is required, relocate while you still have the income to qualify for the mortgage preapproval process. 

• Formulate a plan to exercise your stock options. 

• Review insurance needs – potentially to cancel or lower life/disability insurance.  

< 1 Year out 

• Formulate a health care plan:   

  • Investigate Medicare, Medigap, and Medicare Advantage plans.  

  • Compare Individual Insurance policy or COBRA if you are younger than age 65.  

  • Enroll in Medicare 3 months before age 65.  

• Apply for Social Security benefits 3-4 months before you want benefits to start.  

• Determine how much monthly income you need from your portfolio to cover your expenses.   

• Analyze your retirement income plan.

• Consider a HELOC while you still have the income to qualify.  

• Update estate plan documents with retirement changes.  

• Take advantage of employer medical plans.   

Download this as a printable one-sheeter.

Planning for retirement should be exciting. Please reach out if our team of credentialed experts can help you navigate the road to retirement.

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Summer is here! We hope you are enjoying the extended daylight and are spending time with family and friends throughout the upcoming months. To recap the past quarter, we are sharing some topical charts with you.

INFLATION

Recently, the US inflation rate reached a 13-year high. As a result, there has been an exhausting number of headlines published about inflation recently. Unfortunately, inflation buzz creates a lot of noise from people trying to predict something that is not predictable. Will interest rates rise? Will there be a surge in US spending or saving? Will more production occur inside the US? As the chart indicates, inflation itself is always fluctuating. Due to the unpredictable nature of inflation, we do not recommend making financial decisions based on headlines.

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Source: The NY Times

THE RISE OF GASOLINE PRICES

Remember when oil producers had to find places to store their oil during the early stages of the pandemic? Since then, the price of gasoline has been steadily rising. If you get sticker-shock from filling up your car’s tank of gas, remember that there are many factors that affect oil and gas prices. For example, seasonal demand, commodities speculation, and the value of a dollar all impact gas prices. To reduce the amount of money you spend on gas this summer, we recommend inflating your tires to increase fuel efficiency or simply riding a bicycle this summer!  

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Real Estate Prices are Soaring

We included a chart about housing prices in our Q1 Charts post, and for homebuyers there hasn’t been much great news since then. Real estate prices are still surging. For a visual, see the chart comparing the rise of home prices in Portland, Seattle, San Francisco, and the National Case-Shiller index since 2018.

Real estate prices are a result of inventory issues, the heightened cost of lumber for new construction (see chart below), and many people relocating their residency since the pandemic. If you haven’t experienced it yourself, we all know someone who has been outbid on several houses making the home buying experience feel impossible.

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The Child Tax Credit Revamp

The Biden Administration revamped the child tax credit for 2021. The updates include a larger credit amount, monthly payments, more age eligibility, and a fully refundable credit. Overall, this is good news for parents. Like most tax code updates, this child tax credit will certainly cause some confusion. These two visuals should help outline the general updates as well as an example of how the updates would impact the fictitious Mohamed family of four.

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As you can see, the Mohamed family is expecting to receive both more money and money sooner than they did last year. However, they will receive a $3,000 credit at the time of their tax return compared to $4,000 in 2020. Given the complexities of the new child tax credit, our team will continue to publish information on this topic in the coming months.

Robinhood Reveals Revenue

Robinhood recently publicized their financial statements in preparation for their Initial Public Offering. In their S-1 public filing, Robinhood disclosed that more than 50% of their users are first-time investors. That comes as no surprise given their reputation of being a democratizing platform. Over the past several months, our team at Human Investing has fielded more commentary about investing with Robinhood than ever before.

Prior to the release of the S-1 public filing, it was easy to imagine the average Robinhood investor as someone with a few extra dollars and a desire to buy/sell individual stocks. However, once Robinhood disclosed the breakout of their revenue we can see that most of their earnings (at least in Q1’21) is derived from investors trading options trading options as opposed to buying/selling individual equities.

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Source: @rexsalisbury

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Source: Robinhood’s S-1

That concludes our Q2 2021 Charts, and we look forward to sharing more charts with you in the coming months.

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