Client Newsletter 4Q21
Dear Ambassador Family,
2021 has been a bumpy ride, and I shared why in my last newsletter. As we head into the fourth quarter, I want to give you access to new strategies, address inflation, and speculate what’s to come after the holiday season. Let’s dive in.
Are You Looking for a Unique Strategy?
You know my heart and approach to developing holistic relationships with each of my clients.
In the same way, we look at managers with unique strategies that can increase prospects to help our clients meet their goals. We believe many of you might benefit from owning strategies outside of traditional US stocks and bonds.
Over the years, we have been building relationships and allocating portions of client assets into managers with strong niches. Examples include Japanese stocks, long-short equities, commodities, and managed futures.
One of our managers closed their strategy to new, outside investors. However, all existing and future clients of AWM still have access to these strategies because of our long-term relationship with the manager.
If this sounds intriguing to you, come talk with us to see if it’s a good fit for you and your family.
Inflation Will Impact Your Family
Unfortunately, your investments are not the only thing going up. Anyone who has recently gone for a drive, enjoyed a meal out, vacationed, or bought a house knows that things don’t cost what they used to, especially in the Pacific Northwest.
Filling up your gas tank is 40% more expensive compared to a year ago. Food prices are up over 4%. Restaurant prices are up 7%. Some companies are even charging higher prices for smaller portions of food. No one is likely to forget that home prices have risen over 13% in the last year.
These are all examples of inflation. As you can imagine, inflation can take a real bite out of your standard of living.
Big Raises Are Coming
Social Security and SSI benefits for roughly 70 million Americans will increase 5.9% in January of 2022. This is the largest increase since 1982.
New Full Retirement Age (FRA)
Full retirement age is going up from 66 and 1o months to 67. This means waiting an additional 2 months to qualify for 100% of benefits.
Earned Income Threshold
In 2022, the maximum taxable earnings cap is rising from $142,800 to $147,000. High earners could pay more in taxes in the upcoming year.
Monthly Payouts
The monthly maximum payout is increasing by $197 a month, totaling $3,345.
Disability Income
Disabled workers will be able to earn slightly more in 2022 without losing their benefits. The allowed amount is increasing from $1,310 to $1,350 per month.
Qualifying for Retirement
To qualify for Social Security, workers must earn 40-lifetime work credits. In 2022, one credit is earned for every $1,510 in earned income. The cap remains at 4 credits per year.
Inflation Might Be Here to Stay
We’ve heard some say, “Well, this is transitory. Gas prices won’t rise 40% again! They should eventually go back down as they pump more oil.” This news can be difficult to hear, but we think many of the gains are here to stay and might even continue to rise in other areas.
What’s our reasoning? Here are a few things to consider:
- Many commodity companies are cautious on spending capital expenditure to produce more goods even with higher prices. (The oil company Chevron recently forecasted minimal high spending on boosting oil production even with higher prices. Farmers in many parts of the world have had poor harvests, which will limit supply again in 2022.)
- There is a global shortage of computer chips. Have you wondered why it is so hard to buy 2021 car models? It’s because they have many chassis, but unfinished interiors or engines because they lack the electronics! Several observers fear the shortage will last well into next year.
- Labor shortages in a number of industries have caused supply bottlenecks and price spikes. For example, railroads and truckers have seen an exodus of workers, some due to retirements without sufficient hiring of young workers. Notice the plethora of “Help Wanted” signs, particularly at restaurants.
- The shortage of shipping containers is an issue for global trade, especially for economies like the US that heavily rely on cheaper imports from Asia. Just look at the record-high backlog of container ships that create delays to unload for West Coast ports.
- Remember, taxes might also rise due to either changes in tax laws that we have highlighted in past letters or simple inflating asset values. For example, higher home values lead to higher property tax assessments.
You Can Fight Back Against Inflation
You can’t avoid inflation, but there are some steps you can take to help alleviate it.
First, budget. Focus on the expense side. Do you know how much you are spending on gas, food, and going out? When you understand where your money is going, how much you are spending, it’s easier to prioritize non-discretionary expenses (needs) over discretionary expenses (wants).
Next, prioritize. When staring in the face of inflation, you must decide what is most important to you and your family.
- You can maintain your current lifestyle and spending habits (which will rise so long as we remain in an inflationary environment) but at the expense of future income generated by savings and investments. Or,
- You can look for ways to control your spending by adapting your lifestyle, maintaining your current savings and investment strategies, and recognizing that taxes might be a bigger concern for your family.
It’s also important to understand that your investments and assets are working for you and have the potential to keep up with inflation.
Lastly, take action. Work with your team of trusted professionals to collaborate with you on a game plan and carry it out. Your plan does nothing for you unless it’s put into action. Also, remember to check in from time to time to review and make necessary adjustments to your plan.
Most individuals list their spouse as the primary beneficiary for their IRA. It matters how the surviving spouse treats their inherited IRA. Let’s use Bob and Brenda as an example.
Inherited IRAs
If Bob passes and Brenda (45) needs money to live on right now, the best solution for Brenda is to establish an inherited IRA. She will be able to use those funds without any penalties.
Spousal Rollover
Once Brenda reaches age 59½, she can roll over her inherited IRA into her personal IRA. Doing so beforehand will trigger a 10% penalty on all distributions before 59½.
RMDs
A spousal inherited IRA could either benefit you or harm you, particularly from a tax perspective. One of the biggest factors to consider is the age of the deceased spouse and the current age of the surviving spouse.
Each situation is different, which is why it’s important to get proper advice before deciding how to proceed.
The Bottom Line: Now Is the Time to Prepare for 2022
Start this last quarter of 2021 with a fresh perspective on your investment strategies and financial planning.
I hope the tools in this letter will help you as we continue to navigate through these challenging months. Know that I and my team are a resource for you and your family. Please let us know how we can help.
Sincerely,
Petr Burunov, CFP®
President / Wealth Strategist