NEW YEAR'S MESSAGES
Congratulations are in order for Sharon Balestra, our Annuity Service Representative, who retired on 12/31/2021. Sharon joined Horizon in February of 2001 and was a valued employee for nearly 21 years. Though she will be missed, we are pleased to announce that Darcy McVay, who has been with us since 2003, will assume her responsibilities. Since Darcy is very familiar with our clients and our operations, we are confident the transition will be a smooth one.
The IRS tables used to calculate Required Minimum Distributions ("RMDs") from IRAs have changed beginning in 2022. The change is minimal. The tables were adjusted to reflect longer life expectancies and lower annual required distributions. However, the RMD calculation is based on both remaining life expectancy as well as the IRA account balances. Therefore, if your IRA account values increased last year, your 2022 RMD will likely be higher, not lower.
Social Security recipients will receive a 5.9% increase in their monthly benefit in 2022. This represents the biggest annual increase to benefits in 40 years. Why? The Social Security Administration adjusts recipients' benefits each year based on inflation. Those adjustments are based on a formula tied to the consumer price index (CPI), which is a metric used to measure inflation. Because the CPI was much higher last year, it resulted in a substantial increase in benefits. Unfortunately, the standard premium for Medicare Part B also increased quite a bit from $148.50 to $170.10 per month. However, the increase in Social Security benefits should cover the increase in Medicare Part B premiums for most.
One of the top news stories in 2021 was "The Great Resignation", a term coined to describe the voluntary exodus of people who began quitting their jobs due to the pandemic. The highest quit rates were in hospitality and food services, followed by retail. Workers left their jobs in search of better pay and benefits, as well as over concerns with the continued spread of COVID. Then stimulus payments, increased child tax credits paid in advance to families, and enhanced unemployment benefits put many Americans in a much better financial condition and not as motivated to return to the workforce. Also, a significant number of baby boomers chose to retire, many earlier than originally planned. All of this resulted in a substantial labor shortage, causing a disruption to the supply chain of goods and services.
Despite these conditions, the U.S. economy grew in 2021 at a rate of roughly 5.6% (as measured by GDP), much higher than the past 60-year average of slightly less than 3.0%. Last year was also another good year for investors, as many earned double-digit rates of return in their portfolios due to healthy gains in the stock markets. But the powerful economic recovery, fueled by massive stimulus and the continued supply chain issues and labor force shortages, caused inflation to come roaring back. Last year inflation came in at 7%, the highest rate seen in nearly 40 years. This was one of the top news stories to close the year and lead us into the new year.
Presently, inflation is the focus of economists, money managers, advisors and investors. Why? Inflation is a decrease in the purchasing power of money reflected in a general increase in the price of goods and services. As a result, inflation will worsen the current employment and supply chain issues, both of which threaten economic growth. It is also unsettling for investors because inflation can erode a company's profits and, ultimately, investors' returns.
To combat the forces of inflation, the Federal Reserve is expected to begin increasing interest rates this year. For 2022, inflation will likely remain high but should eventually retreat. Darrell Spence, an economist with Capital Group, explains that "when stimulus-induced demand met COVID-restricted supply, it created distortions in the economy. That fueled rapidly rising prices whenever there were bottlenecks". Because of this, he and Fed officials expect for supply and demand to come back into balance and inflation to moderate later this year.
For now, the hope is that 2022 will be a year of transition toward more normal levels of employment, corporate earnings, supply of goods and services, and economic growth. Until then we need to deal with government stimulus going away and rising interest rates. On a positive note, U.S. consumers have seen an increase in overall household wealth and continue to show signs of a pentup demand to spend money. It is reported that U.S. consumers now have over $2 trillion sitting in checking accounts and other short-term accounts. Additionally, U.S. corporate balance sheets are generally in strong shape with high liquidity and low debt ratios. A move toward sustainability and "greenification" will require companies to spend money. Therefore, economists are forecasting solid GDP growth for 2022 of roughly 4%, higher than usual but less than 2021, as the economy begins to return to normal.
In the end, it's not one factor alone that drives the markets. What still matters is corporate earnings. Though corporate earnings are still healthy and growing, they will come down from their lofty 2021 levels. The markets will react to lower earnings and make us, as investors, feel uncomfortable in the meantime. Rob Lovelace, Vice Chair and President of Capital Group, feels that some type of correction is likely. He feels that a correction could be what the markets need to get stock valuations back to healthier levels. When asked about the coming year he commented, "I'm buying a raincoat, but I'm not putting it on yet".
As always, diversification is key. Sebastien Page, Chief Investment Officer and Head of the Global Multi-Asset Division of T. Rowe Price, believes that asset allocation could be especially crucial for managing risk going forward. This may require adjusting the types of stocks and bonds held in a portfolio and a more dynamic diversification approach. But with diversification, we, as investors, don't always have to own the best performing stocks, bonds or mutual funds . To illustrate the point, look at the Russell 3000 index. It has increased more than 73-fold from 1980 until 2020. During that time 40% of the companies in the index were failures. But the 7% that performed extremely well were more than enough to offset the failures. Morgan Housel, the author of The Psychology of Money, writes that "good investing isn't necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can't be repeated. It's about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That's when compounding really kicks in".
INFLATION AND ITS AFFECT ON INVESTORS
As mentioned in our "Market Outlook" article, inflation is now running at its highest level in nearly 40 years. Prior to the pandemic, the 5-year average rate of inflation was roughly 1.7%. It's now coming in at roughly 7%. What caused this to happen? What impact could this have on us as investors? Most importantly, what can or will be done to control it?
After decades of low inflation, what caused inflation to come roaring back? COVID-19 certainly played a large role, but it was several factors that resulted in the perfect storm. The Federal Reserve, who sets monetary policy in the U.S., kept interest rates very low for many years, creating an "easy" supply of money. This was done to help stimulate the economy after the "Great Recession" of 2008. Then came the global pandemic. To help Americans who lost their jobs, businesses who were forced to close, and to help the economy in general, the Federal Reserve pumped a lot of money into the economy. The U.S. money supply saw an unprecedented increase of $4 trillion over the last year between all the various COVID-19 relief packages. Consumers had money in their pockets and pent-up demand to start spending. But high demand and low supply due to labor shortages and supply chain issues made it harder to buy goods and thereby drove up prices. For example, workers, who were in short supply, demanded higher wages and got them. A shortage of semiconductors meant fewer automobiles available to meet consumer demand, which also drove up car prices. A rapid global economic recovery meant more demand for energy, which pushed energy prices higher. With prices increasing in so many sectors of our economy, the end result was inflation.
What impact will increased inflation have on us as investors? Inflation is a result of a growing economy, so a certain amount of inflation can be a healthy sign. It can actually be healthy for companies because it allows them to raise prices and enhance profitability in a way they haven't been able to do in recent years. But too much inflation hurts corporate profits and ultimately corporate earnings, which is the primary driver of stock prices. However, even during times of higher inflation, stocks and bonds have generally provided solid returns. It's mostly at the extremes, when inflation remains above 6% or is negative, that financial assets have tended to struggle.
What can be done to control inflation? Increasing interest rates is one of the primary monetary tools in the Federal Reserve's arsenal to stabilize inflation. Therefore, the Federal Reserve is expected to raise interest rates this year. In fact, we should expect several rate hikes in 2022. Will increasing rates control inflation or will inflation continue to soar? Sustained periods of elevated inflation are rare in U.S. history. Some price increases (i.e. to wages and rents) will likely be more "sticky". But the Federal Reserve believes, at this point, that inflation is "transitory". Should the supply chain issues and labor shortages improve by the second half of this year, inflation could ultimately recede and end the year between 2.50%-3.00%. The biggest risks would be that either the Fed gets it wrong and doesn't adjust monetary policy in a timely manner and/or the Omicron variant doesn't crowd out other COVID mutations as hoped by many in the medical community.
In the short run and until inflation appears to simmer down, the stock and bond markets will tend to be jittery. Recent research by the ClearBridge/FranklinTempleton team shows that, historically, stocks often rise in the three- to six-month period headed into the first rate hike. After an initial hike there is typically a period of choppiness when stocks have historically fallen 3 months following a hike then gain in the 12 to 18 months after rate hikes. In the end, stock market returns during historical rising rate environments as far back as 1962 have often proven to be positive in nearly all of those periods.
UPDATE ON THE ACQUISITON OF TD AMERITRADE BY CHARLES SCHWAB
In our January 2021 newsletter, we reported to you the acquisition of TD Ameritrade by Charles Schwab in October 2020. We are sharing this information because many of the investment accounts we manage for clients are held at TD Ameritrade. At the time the merger was announced, it was anticipated the process of bringing the two firms together would take another 18 to 36 months.
Over these next two years, we will update you on developments of the conversion. Integration of TD Ameritrade into Charles Schwab will begin in the second half of 2022 with final conversion to be in the second half of 2023. What will that mean to our clients? We are told that the conversion will be a "paperless" one. In other words, no paperwork should be needed or action on your part. Eventually, we will see changes to account numbers, statements, and the client website. However, you will not see any change in the service and advice we provide you. If you have questions on the merger, please don't hesitate to contact us.
The following are CURRENT tax rules and limits for the 2022 tax year. This information can be used to help you plan for the new year. However, this is all subject to change with upcoming negotiations scheduled for Congress.
The tax rates for 2022 are the same as last year, but the income ranges have increased slightly. They are:
Tax Rate SINGLE FILERS Taxable Income Between MARRIED FILING JOINTLY Taxable Income Between 10% $0—$10,275 $0-$20,550 12% $10,276-$41,775 $20,551-$83,550 22% $41,776-$89,075 $83,551-$178,150 24% $89,076-$170,050 $178,151-$340,100 32% $170,051-$215,950 $340,101-$431,900 35% $215,951-$539,900 $431,901-$647,850 37% Over $539,900 Over $647,850
The standard deduction for 2022 rises to $25,100 for married filers (plus $1,350 for each spouse age 65 or older), $12,550 for single filers (plus $1,700 if age 65), and $18,800 for heads of household (plus $1,700 if age 65).
The limit for contributions into a 401(k), 403(b) and 457 INCREASES to $20,500 (plus a $6,500 "catch-up" for those age 50 or older). The limit for contributions to a SIMPLE IRA also INCREASES to $14,000 (plus a $3,000 "catch-up" for those 50 or older).
The limit for contributions into a Traditional or Roth IRA REMAINS THE SAME. The limit is $6,000 for those under age 50 and $7,000 for those age 50 or older. Also, there is no longer an age limit to contribute. You can contribute at any age as long as you have EARNED income.
Taking the deduction for Traditional IRA contributions may be limited for those who participate in an employer-sponsored retirement plan. The AGI income phase-out increases to $109,000-$129,000 for marrieds, $68,000-$78,000 for singles, and $0- $10,000 for married filing separately. Where only one spouse is active in a plan, the phaseout increases to $204,000-$214,000 but remains $0- $10,000 for married filing separately.
The income limit for making Roth IRA contributions also increases slightly with the phase-out at $204,000-$214,000 for married filers, $129,000-$144,000 for single filers, but $0- $10,000 for married filing separately.
The 0% tax rate on capital gains and qualified dividends still exists. It applies to married filers with income less $83,350 and to single filers with income less than $41,675. After that, the 15% capital gains tax rate applies until income exceeds $517,200 for married filers and exceeds $459,750 for single filers at which time the 20% rate applies.
The Social Security wage base for this payroll tax INCREASES to $147,000 for 2022.
Those collecting Social Security before full retirement age (who are between the ages of 62 and 66 and 4 months) can earn $19,560 in 2022 without losing benefits. But individuals who reach their Full Retirement Age during 2022 can earn up to $51,960 IN THE MONTHS BEFORE reaching FRA without losing benefits.
As a reminder, alimony payments to an ex-spouse for divorces beginning in 2019 and later are no longer deductible when paid but are also no longer taxable income to the recipient. (Divorces prior to 2019 are grandfathered under the old rules, whereby alimony payments are deductible and income received is taxable.)
For individuals who pass away in 2022, the Federal estate and gift tax exemption increases to $12,060,000.
The annual gift tax exclusion INCREASES to $16,000 per recipient.
Required minimum distributions from IRAs can still be made as contributions to charitable organizations without being considered taxable income. The distribution must go directly to the charity.
For 2022, the child tax credit is scheduled to revert back to $2,000 per eligible child who is UNDER age 17. However, this is a hot topic for Congress and may change back to the higher credits given in 2021.
The American Opportunity Education tax credit holds at $2,500 PER STUDENT for qualifying expenses made within the first four years of post-secondary education. The credit phases out for married filers with income between $160,000—$180,000 and single filers with income between $80,000-$90,000. For those not eligible for the American Opportunity Credit, the Lifetime Learning Education tax credit offers a maximum credit of $2,000 PER RETURN. It phases out for married filers with income between $160,000-$180,000 and single filers with income between $80,000-$90,000.
The contribution limit to Health Savings Accounts ("HSAs") increases slightly to $3,650 for single coverage and $7,300 for family coverage. HSA owners age 55 or older can contribute an additional $1,000. As always, you can make the contribution only if you have a "highdeductible health plan", which now means having insurance coverage with an annual deductible of at least $1,400 on single coverage and $2,800 on family coverage. In addition, the out-of-pocket maximum threshold is now $7,050 on single coverage and $14,100 on family coverage. Please be aware that distributions cannot be made to pay for insurance premiums unless for they are paid under COBRA, while receiving unemployment, or if age 65 or older.
The additional Medicare tax continues. An additional tax of 0.90% applies to compensation that exceeds $250,000 for married filers and $200,000 for single filers.
PROTECTING YOUR CONFIDENTIAL INFORMATION
It's important to remind you, as our valued clients, to do what you can to protect your confidential information. Examples of confidential information are social security numbers, account numbers, account statements, a photocopy of a driver's license, or forms that contain personal information. DO NOT SEND SUCH INFORMATION VIA EMAIL UNLESS IT'S DONE SECURELY. To send information to us securely, contact our office. We'll then send you an email with a code to get into our SECURE PORTAL.
All Sources: Capital Group/American Funds; T. Rowe Price; Marketwatch; Kiplinger; The Psychology of Money; US News & World Report; Social Security Administration; National Association of Tax Professionals; Internal Revenue Service.
Disclaimer: The opinions expressed herein do not necessarily reflect those of Trustmont Financial Group/Trustmont Advisory Group. Additionally, the information contained herein has been obtained from sources believed to be reliable but the accuracy of the information cannot be guaranteed. Lastly, reference to any product, service or concept in no way implies that it is suitable for everyone. There may also be risks and costs associated with any product, service or concept mentioned herein. Where applicable, a prospectus should be read for complete details. The material presented here is neither an offer to sell nor a solicitation of an offer to buy any securities.