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When Jill and John Smith purchased their life insurance policies ten years ago, they based their coverage on their anticipated obligations and needs. They made policy decisions, taking into account the mortgage on their home, projected college education costs, and living expenses. Well, that was then – and this is now.
Recently, the Smiths reevaluated their insurance needs and were surprised to discover their insurance coverage was inadequate. How could this be? The answer is really quite simple – inflation.
Because inflation affects future purchasing power, it also affects future life insurance needs. For couples like the Smiths, inflation means that life insurance coverage, which may have been adequate several years ago, may no longer be sufficient. With this in mind, consider three of the more common life insurance needs that may be affected by inflation.
Until recently, it seemed that many people who bought their homes lived in them for most of their lives. Today, Americans are increasingly mobile. Changing employment opportunities, the work-from-home movement, along with dual incomes, have altered the dynamics of family finances.
In many cases, a growing family may now be able to afford to pay a mortgage on a lot more “house” than at any time in the past. Does this trend minimize the reality of inflation and the rising costs of homeownership? Not at all.
The fact is, escalating real estate prices have translated into larger mortgage loans. Therefore, if you have recently purchased a home, you may need to consider increasing your life insurance to help cover your new mortgage.
If you are planning on sending your children to college, you are probably concerned about the escalating costs of higher education. And, rightfully so.
The average cost of college in the United States is $35,720 per student per year. The cost has tripled in 20 years, with an annual growth rate of 6.8%. The average in-state student attending a public 4-year institution spends $25,615 for one academic year.
To be prepared, factor inflation into your college savings strategies. Make sure you have adequate life insurance to help provide financial protection in the event of an untimely death, and consider increasing your coverage so that it best reflects the future cost of education.
Shopping at the grocery store. . .pizza on Friday nights. . .taking your children to the movies. . .filling up your gas tank. . .purchasing a new car. Over the course of time, the costs associated with these necessities and “treats” of everyday life are affected by inflation.
As a result, your family’s future lifestyle could be affected too. By basing your life insurance needs on your current income and today’s cost of goods and services, you are potentially shortchanging your family’s future. Be sure to account for increases in the cost of living as you insure your family’s current and future financial security.
Determining your current life insurance needs is one thing. But, figuring out how much coverage you’ll need in the future requires you to pay careful attention to inflation and how it can affect your lifestyle.
Regular reviews of your insurance coverage can help you keep pace with inflation and your changing needs. Make the necessary updates before you need them.
Strong Valley was pleased to support the recent Gala of Wishes in Fresno. Hosted by the Central California chapter of the Make-A-Wish Foundation, this annual gala raises money to grant wishes for children battling critical illnesses. Since the chapter was founded in 1983, it has granted more than 9,000 wishes for children across Central California. The event kicked off at The Painted Table with a cocktail reception and raffle, followed by a dinner prepared by Chef de Cuisine.
Some of us may remember the “good old days,” when gasoline prices were as low as 25¢ per gallon. Others may recall when a can of soda cost 15¢. But prices tend to rise over time – sometimes steadily and sometimes abruptly. In the years ahead, inflation will most likely decrease the purchasing power of your money, which means that during retirement, your dollars will buy less than they do today.
It is easy to misinterpret inflation as the rise in price of individual goods and services. However, inflation is the increase in the averageprice level of all goods and services.
For example, the price you pay for oranges may rise during the winter due to unseasonably cold temperatures in Florida. On the other hand, the average price of other items in your local supermarket, like peanut butter and paper towels, may remain relatively level. So, the increase in the price of oranges is not a result of inflation but, rather, a function of supply and demand.
Inflation can result when either:
Note how, as inflation is defined here, the supply and demand for oranges alone would have no effect on inflation. However, changes in supply and demand on a broader scale can result in inflation.
Consider the following economic scenario: suppose business is booming, unemployment is low, and the average worker’s wages are increasing. As a result, consumers have more disposable income available and may therefore be able to purchase more goods and services. Average prices tend to rise under these circumstances due to the increase in demand for all goods and services.
In another scenario, suppose the economy is suffering. As unemployment rises and wages remain stagnant, consumers may be unable to purchase additional goods and services. Production may then slow down, with prices going up to minimize the losses. In this cycle, average prices tend to rise due to a decrease in the supply of all goods and services.
It is important to keep in mind that individual consumers are not the only participants in the market that can affect the economy. Businesses, government agencies, and foreign markets also spend billions of dollars on U.S. goods and services. Their spending, or lack thereof, can equally influence increases or decreases in supply and demand that, in turn, can result in inflation.
To a certain extent, some inflation may be a sign of a healthy economy. In fact, one of the economic policy goals of the U.S. government is to maintain an inflation rate ranging from 0% to 3% per year (2% is the stated goal). Too much inflation or no inflation at all can be a sign of troubling economic times. So one of the greatest challenges facing policymakers is making decisions that lead to the optimum level of inflation.
Two Federal economic policies are used in an attempt to control the economy. Fiscal policy, which falls under the auspices of Congress, uses taxation and spending to reach full employment, stabilize prices, and boost economic growth. In contrast, monetary policy, which is controlled by the Federal Reserve Bank (the Fed), manipulates the money supply and short-term interest rates in an attempt to spur growth or control inflation.
Congress, and especially the Fed, looks at the Consumer Price Index (CPI) when making policy decisions. The CPI is considered by many to be one of the best measurements of inflation. The CPI gauges the average change in prices paid by urban consumers for a fixed market basket of goods and services over a period of time. The CPI represents all goods and services purchased by urban consumers. Each month, the CPI is calculated, and constant fluctuations in the CPI will ultimately result in Congress or the Fed taking appropriate measures to regain control of inflation. Note that the Fed has the ability to react quickly. However, Congress must pass legislation, which requires debate and time, before its fiscal decisions can be carried out.
In addition to creating higher costs for goods and services, inflation creates depreciation in currency values. So, as prices increase, the purchasing power of your income – dollar for dollar – decreases. During sound economic times, price increases will usually be accompanied by wage increases that are equal to, or greater than, inflation. However, during economic downturns, when wages remain level, the cost of living increases as your purchasing power diminishes.
Regardless of what state the economy is in, one of your greatest long-term financial challenges may be planning for your retirement savings to outpace inflation.
Therefore, it is always important to consider inflation, not only as you save, but also as you make purchasing decisions.
Your financial advisor can help you plan.
The Internal Revenue Service announced that the amount individuals can contribute to their 401(k) plans in 2022 has increased to $20,500, up from $19,500 for 2021 and 2020.
From the IRS website:
“The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased to $20,500, up from $19,500.
The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver's Credit all increased for 2022.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or the taxpayer's spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor the spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.)
Here are the phase-out ranges for 2022:
The income phase-out range for taxpayers making contributions to a Roth IRA is increased to $129,000 to $144,000 for singles and heads of household, up from $125,000 to $140,000.
For married couples filing jointly, the income phase-out range is increased to $204,000 to $214,000, up from $198,000 to $208,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The income limit for the Saver's Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $68,000 for married couples filing jointly, up from $66,000; $51,000 for heads of household, up from $49,500; and $34,000 for singles and married individuals filing separately, up from $33,000.
The amount individuals can contribute to their SIMPLE retirement accounts is increased to $14,000, up from $13,500.
The limit on annual contributions to an IRA remains unchanged at $6,000. The IRA catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $6,500. Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan who are 50 and older can contribute up to $27,000, starting in 2022. The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE plans remains unchanged at $3,000.”
As you can see, there are a lot of rules, deadlines and contribution limits that change from year to year. Further, many of these might be helpful to your situation – but many might be inappropriate too.
Talk to your financial advisor as you consider your 2022 financial plans.
Source: irs.gov
Bear markets happen. Bull markets happen. Just stick to your financial plan, and stay calm and disciplined. When the market sours or slumps, don’t believe talk that this time it is different. It is not.
History shows this is true. Here is a simple chart of the performance of NASDAQ for the 20-years ending March 7, 2022 (NASDAQ officially entered bear market territory on this day). This covers the decline and recovery from the last U.S. recession as well as the last bear market (the COVID-bear).
NASDAQ Over 20-Years
What does this chart show? When markets decline, they do so rapidly and painfully. The subsequent recovery is slow and uneven.
But it does inevitably happen. If you take the longer 20-year view of this chart, it’s clear that markets grow past previous highs after a dip.
Although the S&P 500 is not yet in a bear market, since it is “only” off 12% YTD and a bear market is defined as being off at least 20%, let’s examine historical bear markets as measured by the S&P 500.
There have been 26 bear markets and 27 bull markets in the S&P 500 Index since 1928. In addition:
Think you can figure out when the market is turning – either up or down and trade accordingly? Well, before you think that you should get out of the market now and wait this bear out, consider this:
In other words, the best way to weather a downturn could be to stay invested since it’s difficult to time the market’s recovery.
There are no investment strategies that give you the market’s ups and help you avoid the downs, save for luck. Fear and greed are irrational emotions that easily lead to bankruptcy if they influence your investment decisions.
Of course, it is hard to stay patient and hold when Wall Street analysts, investment gurus and financial TV pundits spout endless gloom and doom at the troughs and exuberant optimism at market peaks. Short-term thinking like this only guides you to do the wrong things at the wrong time.
This is why it helps to work with an advisor – someone to cool your head when irrational exuberance strikes, and convince you to stick to your plan in the face of uncertainty.
Although it can be difficult to watch your portfolio dip with the market, it’s important to keep in mind that downturns have always been a temporary part of the process.
No matter what the markets are doing, assure yourself that this time is not different.
The stock market in 2022 has seen large declines, beginning with a January drop, followed by a down February, and so far a declining March. Naturally, this volatility makes investors nervous.
At the center of this volatility has been the price of oil. Oil prices skyrocketed over 50% in 2021 and in the first week of March, leapt a staggering 25% in a single week (the week ended Friday, March 4th).
Consumers and businesses are spending more money on fuel, which drives inflation (cost to get goods to places has to be covered by someone). On the flip side, energy companies are making more money when oil prices rise (Marathon Oil is up over 92% over the past year).
What should consumers and investors expect?
As we have all seen, gas costs a lot less than it did a year ago. In March of 2021, a gallon of gas in the U.S. cost about $2.70. We’re seeing that same gallon of gas cost over $4.00! Remember back when filling your car’s tank cost over $35?
Will the price of oil and gas stay higher than it was last year or will it continue to rise?
Why does the price of oil change so much? The price of oil is affected by so many factors and so many uncertainties. Oil supplies are down, but demand has risen dramatically, so prices are higher. The weather, transportation costs (via ship, truck, pipeline, etc.), and taxes also play a big role in oil prices.
The oil market has been uncertain for several reasons. For one, the U.S. is producing less oil, due to a change in our political landscape. International factors also influence the price. Oil producers have been concerned about the health of the massive Chinese economy, with its high oil demand. Strife in the Middle East, with ISIS, the Syrian war, and conflict in Iraq, among other things, has caused uncertainty. And now Russia has invaded Ukraine.
In a more practical sense, how does the price of oil affect the cost of gasoline? Pretty directly. Any change in the price of a barrel of oil directly affects the price of a gallon of gas.
Barrel of oil. A barrel of crude oil holds 42 gallons. From this barrel will come about 12 gallons of diesel fuel, 4 gallons of jet fuel, and smaller amounts of propane, asphalt, motor oil, and various lubricants, along with about 19 gallons of gasoline. So it takes a barrel of oil, on average, to come up with about 1.5 tankfuls of gas in your average, non-diesel car.
Considering all the oil products, each person in the U.S. consumes an average of about 2.5 gallons of crude oil per day, according to the Department of Energy. As a result, the price of a barrel of oil affects each us beyond the pump, too.
The price of oil has been a major economic factor for years. The cost of energy affects virtually every aspect of the economy and the market, including our investments.
The supply of oil will eventually increase, especially as new producers come online and oil-producing countries change their plans.
Your financial advisor will monitor all of these developments and is best source for information about their effect on your investments.
With so much going on in the world these days, it's easy to overlook the developments in the precious metal markets. Even as governments continue to devalue currencies, central banks across the globe have been accumulating gold. Should investors start considering a small allocation in precious metals as well?
How much you should invest in precious metals, of course, depends on your portfolio and other factors.
In the current global economic environment, precious metals might look like a good short term-investment. Simply put, precious metals may be a good hedge for investors facing the myriad of problems associated with the present economic environment, especially raging inflation.
Many will suggest that a diversified portfolio of tangible assets such as gold or silver could equal about 5% (and sometimes more) of your portfolio. And it’s hard to argue against that being considered a prudent asset-diversification strategy. That is especially true in today's uncertain political and economic environment, there are many (and very sound) reasons to consider investing in precious metals to diversify your holdings.
But keep in mind, precious metals are not like other asset allocations. For example, putting money in precious metals is very different than investing in the stock market.
Even the word "investment" seems a bit out of place here. Gold doesn't pay dividends; gold doesn't pay interest. It's a metal that has historically been used as money. Throughout the world, gold continues to be recognized as money.
As such, it can offer long-term protection as currency is devalued for investors looking to be able to maintain their lifestyles 20 to 30 years down the road.
Most have often wondered about the answer. The answer may not be "absolutely nothing," as in the Edwin Starr song, but it is a lot less than you might think.
The yellow metal has reacted meaningfully during only two incidents in the 44 years since Nixon closed the gold window on August 15, 1971: the 1970s inflation/oil crisis and the 2000s rise of China/financial crisis/debt deflation.
If you looked at a 100+ year historical chart depicting the price of gold, you’d realize that there were really just two significant spikes in the gold price.
The first occurred at the end of the 1970s. It followed the great inflation and two oil shocks and dissipated in the wake of Volcker’s tightening of monetary policy.
Spike two came with the rise of China and the run up of commodity prices in its wake. It continued into the financial crisis. So, gold could have provided a counterbalance to your portfolio during two ugly incidents in financial markets. What about the myriad other crises we have been through over the past four decades?
What did gold do during:
The answer is precisely nothing.
Gold has done well when safe assets, like US treasuries, offer negative real returns. It is only at such times that an asset which earns nothing and may cost you (or the ETF provider) something to store is worth holding.
We are beyond the Fed starting to move away from its zero interest rate policy – that started a while ago. Remember, the all-time low was 0.25 percent, which is effectively zero.
Real rates are likely to be higher across the curve over the next few years. That has turned gold into just another commodity; it will likely remain that way for many years. Someday, when the imbalances have added up and policy makers misjudge events, gold will once again have a moment in the sun.
At best, gold is a useful tactical asset in situations where returns on safe assets turn negative. Those incidents have been relatively rare.
Gold should probably not be a perennial in your portfolio if you live in a place with developed financial markets and the rule of law. It earns no income and serves little purpose.