Recession or Growth Scare? Your Guide

I’m hearing a lot of mixed messages these days about the economy. Some headlines say we’re already in a recession; some say one is looming. Others hint that we’ll avoid a recession and have a soft landing. It makes you wonder who’s in charge of putting a label on the economy.

I did a little digging on the topic, and here’s what I found.

The National Bureau of Economic Research (NBER) is the official arbiter of recessions. A recession is a “significant decline in economic activity that is spread across the economy and lasts more than a few months.” You may be surprised that the NBER no longer defines back-to-back quarters of negative Gross Domestic Product growth as a recession–that’s considered old-school economics.

While the current economy includes inflation and rising interest rates, it’s also creating jobs. This economy created over half a million jobs in July alone. Given that indicator, I think it’s safe to say that our economy is expanding, not receding.

An old saying goes, “Don’t worry about the horse. Just load the wagon.” It’s a good time to stay focused on your goals and not worry too much about what you can’t change.

Three Ways the Inflation Act Could Impact You

Have you heard? The Inflation Reduction Act was signed into law on Tuesday, August 16. While the $430 billion package includes many provisions, I thought I’d highlight three key areas where you may benefit the most.

1. Tax credits for energy-related home improvements – The bill includes a 30% tax credit for installing energy-efficient windows, heat pumps, or newer appliances. There’s another tax credit for installing solar panels, and up to $14,000 worth of rebates for upgrading to new, energy-efficient appliances.
   
   
2. Expanded EV tax credits – If you have an electric vehicle, you’re in luck! New tax credits are immediately available, with up to $4,000 offered for used EVs and up to $7,500 for new EVs. There’s also a tax credit for installing an electric charger in your home (just read the fine print to ensure you qualify).
3. Prescription drug caps – Some changes don’t take effect right away. For example, insulin payments will be limited to $35 per month for Medicare Part D beneficiaries starting next year. In 2024, overall out-of-pocket drug costs will be limited to $4,000 annually, dropping to $2,000 in 2025.

New legislation can come with benefits as well as new complexities. If you have questions that we can help answer, please feel free to reach out.

‘Smart Money’ on Interest Rates

Have you ever heard the expression, “What’s the smart money doing?”
“Smart money” is an expression that often refers to experts and suggests that well-informed people have a better perspective on current events and what actions to take. However, there’s little evidence to suggest that “smart money” performs any better.

Still, some “experts” can be confident enough to take action based on their beliefs or opinion. The table below shows what the smart money zeitgeist thinks the Federal Reserve will do during its upcoming meetings on interest rates.

As a reminder, the current target Federal Funds rate is 2.25% to 2.5%. At this point, smart money appears to favor a 0.5% increase over a 0.75% bump at the September 21 meeting. But remember, these percentages can change as quickly as the fluctuating economy.

The Meeting Probabilities table is one of many data points I look at when considering what’s next for markets. But for you, the smartest move is to make sure you’re on track with the investment goals we’ve already outlined.

Strategies For Managing Student Loan Debt

If college were a party, then student loans are the hangover.

Unfortunately, the “hair of the dog” won’t cure this headache, but here are some ideas for managing your student loan debt.

The programs listed are not intended as tax or legal advice. They may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The programs are for informational purposes only, and should not be considered a substitute for a more comprehensive student loan evaluation.

Income-Driven Repayment Programs — There are four different types of income-driven repayment choices that may help to manage your monthly federal student loan payments:¹

• Revised Pay As You Earn Repayment Plan (REPAYE Plan)
• Pay As You Earn Repayment Plan (PAYE Plan)
• Income-Based Repayment Plan (IBR Plan)
• Income-Contingent Repayment Plan (ICR Plan)

You may be eligible for one or more of these payment choices depending on the types of student loans you have, your family size, your income, and certain other factors.

Under these income-driven repayment plans, any remaining loan balance may be forgiven at the end of the payment period. Payment periods vary depending on the payment option you enroll in, but typically range between 20-25 years.

A financial professional may help you to determine which of these income-driven repayment choices you might be eligible for.

Public Service Loan Forgiveness — Certain federal loans may be forgiven after 10 years of qualifying payments if you take a job with federal, state, or local government; a non-profit; or certain other public service organizations.

Volunteer — There are a number of programs, such as AmeriCorps, Peace Corps, and the military, in which service may accrue a benefit that reduces an outstanding loan balance in an amount that varies depending upon the program.

Pre-Pay Principal — Pre-payment of principal may help lower the lifetime interest costs of a loan. To raise cash to fund pre-payments, one idea is to ask that birthday and holiday gifts be cash to put toward pre-payments. You could also direct any raises, bonuses or overtime pay to pre-payments. If you do pre-pay principal, be sure to target the loans with the highest rate of interest.

Loan Consolidation — You can consolidate your federal loans through the Direct Loan program, or through a private lender if you have private loans. However, this may only make sense if you can obtain an overall lower interest rate.

Separating the Signal From the Noise

What kind of role can a financial professional play for an investor?

The answer: an important one. While the value of such a relationship is hard to quantify, the intangible benefits may be long-lasting.

There are certain investors who turn to a financial professional with one goal in mind: the “alpha” objective of beating the market. But even Wall Street’s brightest money managers can come up short.

At some point, these investors realize that their financial professional has no control over what happens in the financial markets. They come to understand the real value of the relationship, which is about strategy, coaching, and understanding.

A financial professional can provide guidance about today’s financial climate, determine objectives, and assess progress toward those goals. Alone, an investor may find it difficult to do any of these tasks. Moreover, an investor may make self-defeating decisions. Today’s steady stream of information can prompt emotional behavior and may lead to blunders.

No investor is infallible.

Investors can feel that way during a great year when every decision seems to work out well. But overconfidence may set in, and the reality that the markets have challenging years can be forgotten.

A financial professional can help an investor commit to staying on track.

Through subtle or overt coaching, the investor can learn to take short-term market volatility in stride and focus on the long term. A strategy is put in place based on the investor’s goals, risk tolerance, and time horizon.

As the investor-professional relationship unfolds, the investor begins to notice the intangible ways the professional provides value. The professional may help explain the subtleties of investment trends and how potential risk often relates to potential reward.

Perhaps most importantly, the professional helps the client get past the “noise” and “buzz” of the financial markets to see what is really important to their financial life.

The investor gains a new level of understanding, a context for all the investing and saving. The effort to build wealth and retire well is not merely focused on success but also significance.

Retiring Wild: National Parks and You

For many older adults, finding time to experience nature can be one of the greatest pleasures in retirement. And what better place to take in America’s splendor than one of our over 400 National Park Service sites? For over a century, generations of retirees have explored these stunning landscapes, marveled at the diverse wildlife, and discovered the physical benefits of a retirement spent in the great outdoors. But recent research suggests that the mental benefits could be even more important for retirees. Read on to learn more.¹

The Cortisol Connection

Have you ever had a stressful day? One that left you tired and irritable? Those feelings are most likely caused by the stress hormone, cortisol. Cortisol serves an essential purpose in the human body of helping to regulate your mood, motivation, and fear. However, when someone experiences sustained stress, their elevated levels of cortisol may greatly increase their risk of heart disease, depression, and even negatively impact their memory. Luckily, multiple studies show that connecting with nature for at least 20 minutes each day may be correlated to significantly lower cortisol levels. But the benefits don’t stop after 20 minutes. In fact, longer durations spent in a natural environment may further enhance feelings of peace and wellbeing as well as increased mental performance.^2,3

A Thrifty Option

The American National Park system is considered by some to be one of the healthiest and financially smart ways to vacation in retirement. After all, of the 417 current National Park Sites, roughly 300 allow free admission. For those who want access to everything the National Park Service (NPS) offers, the Lifetime Senior Pass ($80) or the Annual Senior Pass ($20) are both a steal. Regardless of which you purchase, remember that:^4,5

• The Senior Pass may provide a 50 percent discount on some amenity fees, such as those related to camping, swimming, and specialized interpretive services.
• The Senior Pass generally does NOT cover or reduce special recreation permit fees or fees charged by concessioners.
• There may be a service fee depending on how you purchase your pass. For more details, including the most recent ticket prices, visit the National Park Service website before planning your next trip.

A Prescription for Nature

Even though locations like Yellowstone, Yosemite, and Zion are the most-popular destinations for retirees, many communities benefit from smaller parks and nature preserves as well. For those who haven’t hiked or camped much, these local areas can be a great way to get started. Even those with more than a few years of national park experience stand to benefit, both physically and mentally, from visiting one of their local wildlife areas. So, before you pack your bags and load up the camper, do yourself a favor and look into what your home offers. You may discover that one of the best ways to stay happy, healthy, and sharp is closer than you think.

Managing Money as a Couple

When you marry or simply share a household with someone, your life changes—and your approach to managing your money may change as well. The good news is it’s usually not so difficult.

At some point, you will have to ask yourselves some money questions—questions that pertain not only to your shared finances but also to your individual finances. Waiting too long to ask (or answer) those questions might have some consequences.

First off, how do you propose setting priorities? One of your first priorities should be simply setting aside money that may help you build an emergency fund. But there are other questions to ask. Should you open joint accounts? How should you title assets that are owned by both of you?

How much will you spend & save? Budgeting can help you arrive at your answer. A simple budget, an elaborate budget, or any attempt at a budget can prove more informative than you realize. A thorough, line-item budget may seem a little over the top, but what you learn from it may be truly eye-opening.

How often will you check up on your financial progress? When finances affect two people rather than one, statements can become more important. Checking in on these details once a month (or at least once a quarter) may keep you both informed, so that neither one of you have misconceptions about household finances or assets. Arguments can be avoided when money misunderstandings are resolved through check ups.

What degree of independence do you want to maintain? Do you want to keep some money separate? Some spouses need individual financial “space” of their own. There is nothing wrong with this approach.

Can you be businesslike about your finances? Spouses who are inattentive or nonchalant about financial matters may encounter more financial trouble than they anticipate. So watch where your money goes, and think about ways to pay yourself first. Set shared short-term, medium-term, and long-term objectives.

Communication is key to all this. Watching your progress together may well have benefits beyond the financial, so a regular conversation should be a goal.

Is a Variable Annuity Right for Me?

For the casual observer, it sometimes seems that variable annuities are either “terrible” or “wonderful.”

Commentators in the financial media seem to occupy a polarity of opinions we might see in politics. What gets lost when these commentators collide is “the individual.” Unfortunately, the discussion is rarely centered on whether a variable annuity is relevant and useful to you and your set of needs.

Before considering investing in a variable annuity, you may want to make sure that you are exhausting the contribution limits of your 401(k), IRA, or other qualified retirement plan.

Variable annuities are sold by prospectus, which contains detailed information about investment objectives and risks, as well as charges and expenses. You are encouraged to read the prospectus carefully before you invest or send money to buy a variable annuity contract. The prospectus is available from the insurance company or from your financial professional. Variable annuity subaccounts will fluctuate in value based on market conditions, and may be worth more or less than the original amount invested if the annuity is surrendered.

At the end of the day, however, variable annuities are really a value judgment.

Do you value the guarantees and predictable income that annuities can provide?

Are the fees charged worth the price of mitigating the risk fluctuating markets can have on your financial security in retirement?

Only you can be the judge of what constitutes value to you. Leave the punditry on variable annuities to others and focus on whether they make sense for you.

The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Remember variable annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits.

Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies). Annuities are not guaranteed by the FDIC or any other government agency.

Do Our Biases Affect Our Financial Choices?

Investors are routinely warned about allowing their emotions to influence their decisions. However, they are not often cautioned about their preconceptions and biases that may color their financial choices.

In a battle between the facts & biases, our biases may win. If we acknowledge this tendency, we may be able to avoid some unexamined choices when it comes to personal finance. It may actually “pay” to recognize blind spots and biases with investing. Here are some common examples of bias creeping into our financial lives.

Letting emotions run the show.

How many investment decisions do we make that have a predictable outcome? Hardly any. In retrospect, it is all too easy to prize the gain from a decision over the wisdom of the decision and to, therefore, believe that the findings with the best outcomes were the best decisions (not necessarily true). Put some distance between your impulse to make a change and the action you want to take to help get some perspective on how your emotions affect your investment decisions.¹

Valuing facts we “know” & “see” more than “abstract” facts.

Information that seems abstract may seem less valid or valuable than information related to personal experience. This is true when we consider different types of investments, the state of the markets, and the economy’s health.¹

Valuing the latest information most.

The latest news is often more valuable than old news in the investment world. But when the latest news is consistently good (or consistently bad), memories of previous market climate(s) may become too distant. If we are not careful, our minds may subconsciously dismiss the eventual emergence of the next market cycle.¹

Being overconfident.

The more experienced we are at investing, the more confidence we have about our investment choices. When the market is going up, and a clear majority of our investment choices work out well, this reinforces our confidence, sometimes to a point where we may start to feel we can do little wrong, thanks to the state of the market, our investing acumen, or both. This can be dangerous.²

The herd mentality.

You know how this goes: if everyone is doing something, they must be doing it for sound and logical reasons. The herd mentality leads some investors to buy high (and sell low). It can also promote panic selling. The advent of social media hasn’t helped with this idea. Above all, it encourages market timing, and when investors try to time the market, it can influence their overall performance.³

Sometimes, asking ourselves what our certainty is based on and reflecting on ourselves can be helpful and informative. Examining our preconceptions may help us as we invest.

The Fed’s Inflation Nowcasting Tool

Does waiting 30 days for a government report seem a bit unreasonable? After all, we live in a world of instant messages and real-time quotes. Why should we wait a whole month between updates on the Consumer Price Index to see what’s going on with inflation?

Well, you don’t. If you’re an economics geek like me, here’s a secret tool you may not know. If economics is not your thing, know that I’m keeping close tabs on this stuff.

The Cleveland Fed has a tool called Inflation Nowcasting, which provides daily updates on inflation. Much like the Atlanta Fed’s GDPNow forecasting model, it provides a real-time snapshot of gross domestic product.

For July, the Inflation Nowcasting forecasts that prices will rise 0.27% from a month earlier. That would be the smallest month-over-month gain since January 2021. For August, it’s showing an increase of 0.32%. How will the financial markets react if inflation starts to trend lower?

It’s important to point out that forecasting tools are based on assumptions and subject to revision without notice. In some instances, they may not materialize at all.

Real-time reports are nothing new, but it’s great to see that the Fed is starting to get more instant updates on the economy. And it’s information that’s available to all of us. You have to know where to look.