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Tax Rates
Debit Cards for 401(k)???
Behind on Retirement Savings?
Banking Index New Low
$435 Billion
Inflation Phase II
Outlook
Tax Rates
With the elections coming up in the fall, I thought it would be a good time to take a look at some of the tax rates
in the United States. The combination of huge budget deficits, a need for more fiscal stimulus during a
recession and the possibility of Barack Obama being our next president leads to the conclusion that taxes will most likely
move higher. The present 2008 tax brackets for married couples filing jointly are as follows:
Income
Tax Rate
Less than $16,050
10%
$16,051 to $65,100
15%
$65,101 to $131,450
25% $131,451
to $200,300 28% $200,301 to $357,700
33% $357,701
and above
35%
The income bracket you fit into is known
as your marginal tax rate - that is, for every dollar more you earn this is your tax rate. If you use the
IRS tax tables your tax rate will seem lower because it takes in all brackets. The important number is
your marginal rate; any additional monies you earn will be taxed at that rate.
Capital Gains Tax
The long-term
capital gains tax is currently 15 percent if you are in the 25 percent tax bracket (see above). The long-term
capital gain tax rate is 5 percent if your bracket is 10 percent or 15 percent. Long-term capital
gains are defined as investments held one year or more. If your investments are bought and sold in less
than one year, you have short-term capital gains and these are taxed as ordinary income according to your bracket rate.
Therefore, we can see that the long-term capital gains tax rate is a big tax break for most people.
The long term capital gains tax has been as high as 39.9 percent as recently as 1978; in 2003 it was reduced to 15
percent. This rate is the lowest since 1933, when the rate was 12.5 percent. It was
raised to 39 percent in response to the Depression in 1934.
Both Barack Obama and Hillary Clinton are calling for an increase in the capital gains taxes. Obama
has called for an increase in the rate to 28 percent. Living in Houston, Texas we have been very fortunate
and have substantial capital gains in many energy and commodity stocks. Investors should consider the possibility
of a capital gains tax increase with the new administration, regardless of which party wins. At the present
time, capital gains taxes are at an historic low.
Dividends
Dividends are taxed at the same rate as
long-term capital gains – at 15 percent with rate reductions for those in the under-25 percent tax brackets.
With this low tax rate, companies that have good dividend yields represent a good value in the stock market.
It is interesting that many of the stocks MaxOut Savings Advisors currently hold pay dividends with higher yields than
money market rates. Speaking of money markets, the dividends from money markets are taxed as ordinary income,
not as dividends, because they represent interest. The same holds true for bond interest; it is taxed as
ordinary income, not dividends.
Annuities
Annuities are something that we get a lot
of questions about on the MaxOut Savings Show on 1070 KNTH. Annuities are taxed at your ordinary income
rate when you take a distribution from the annuity. One of the disadvantages of annuities is that you do
not get capital gains treatment. You are, in effect, converting and losing your capital gains and dividend
tax advantages to ordinary income when you invest in an annuity.
Stocks
One of the reasons we
have gone through this exercise is to show the value of investing in common stocks. The taxation treatment
of long-term capital gains and dividends at a rate of 15 percent or lower is a real advantage over the long term.
Given the possibility of tax hikes on capital gains if you are thinking of selling highly appreciated assets, now may
be a good time to sell before a possible tax hike in 2009 or 2010.
Debit Cards for 401(k)?????
In
one of the worst ideas since the introduction of the Ponzi scheme, Reserve Solutions, a division of the money market fund
company The Reserve Funds, has introduced a debit card for 401(k) plans. Once the “savers”
sign up with their employers and establish a maximum to withdraw, they are free to debit out money from their 401(k) plan
whenever they want. The company claims this will encourage retirement savings by ensuring employees
will have easy access to the money when they need it??? The whole idea of a 401(k) plan is to make it hard
to get the money out so you save for a future retirement. John Gannon of Finra called it “close
to predatory lending” according to Bloomberg News. We will see more of this as financial firms seek
to convince people to take money out of their retirement plans to benefit the financial firms. This should
be outlawed at once by Congress and the sanctity of the 401(k) should be protected.
Behind on Retirement?
If you have not saved enough for retirement one of the best ways to boost your retirement income is to delay retirement.
The math involved is much more positive than most people realize. Let’s take a look.
If we assume that you are age 62 and want to retire with $500,000 in retirement savings, that scenario will generate
about $25,000 in income if we assume a simple 5% withdrawal rate. Let’s see what happens if we delay
retirement four years to age 66 and save an additional $8000 per year and earn 8%.
AGE
IRA Additional
Savings Income
62
$500,000
$25,000 63
$548,000
$8,000
64
$599,840
$8,000 65
$655,827
$8,000 66
$716,293
$8,000
$35,814
43% Increase
Now, at age 66, we have $716,293
in our IRA that will generate $35,814 plus social security. This is an over 43 percent increase in income
by delaying your retirement four years.
Also, remember
that if you hold off taking social security, your monthly benefits will increase dramatically. In one case
we considered, your Social Security will move up from $18,794 to $25,732 - an increase of almost 37 percent. Remember,
a delay in retirement will lead to big jumps in income available very quickly because you are growing your money at its peak
amount and are continuing to save additional monies versus withdrawing monies for living expenses. When it comes to retirement:
delay now to play more another day.
Banking
Index New Low
The banking index hit a new low
today of 71.94, breaking under the mid-March lows of around 73. The March lows were hit when the investment
bank Bear Stearns failed and had to be rescued be the Federal Reserve. This is important in that it shows
the depths of the problems in the financial sector. For the year, the Banking Index (BKX) is down 18 percent.
As the chart of BKX shows below, the index continues to break to new lows.
Deleveraging the Debt Bubble
The banks, investment banks and credit card companies have real problems from two sides.
Their loan losses are increasing as heavily indebted consumers and companies have problems and the financial firms
themselves are over-leveraged. We have continued to urge caution in the financial sector’s common
stocks as hundreds of billions of dollars of write-offs and dilution continue to take their toll while the sub-prime crisis
and record debt levels work through the system. Before this is over, worldwide, the write-offs could total
$500-$1,000 billion and dilution through stock issuance should hit $300 billion. This will result in a
deleveraging process that will slow lending across the United States that will further slow the economy. We
feel like the better way to invest in the sector is cautiously through the debt side.
$435 Billion
According
to AP writer Jeannine Aversa, the Federal Reserve has provided a total of $435 billion in short-term loans to help the banks
since December. The Federal Reserve appears to have lent out about half of their balance sheet.
If the financial system continues to have problems the dollar could decline as a result of pressure from Asian and
Arab countries. We would have thought that $435 billion would have bought them more than two months before
the problems surfaced again, which is a concern we will watch closely!
One of the reasons for the fall of the BKX is Lehman Bros. (LEH). We have written for
well over one year about the dangers of the investment banks’ debt levels. Here is what James De
Porre wrote on his blog today,
“Lehman Brothers
(LEH ) and several other banks, particularly in Europe, are now calling into the question whether their capitalizations
are adequate. The big problem is that there is just too much leverage out there.”
Let's
consider the Lehman Brothers’ balance sheet. As of the end of February, Lehman had assets of $786
billion and liabilities of $761 billion, which leaves net equity of $25 billion. In other words, the company
is leveraged at around 31-to-1. It may even be far worse than that if the valuation of assets is as aggressive
as many think it is.
To see how dangerous this
is, consider what happens if an individual investor used this sort of leverage. Say you have $50,000 in
equity that you leverage at 30-to-1. That gives you $1,500,000 in capital. What happens
if you are fully invested and then suffer a fairly minor loss of just 3.5 percent? You lose $52,500 and
your entire equity of $50,000 is wiped out. You are now broke.
Even the best and most conservative investors in the world are very likely to suffer a loss of
3.5 percent or more just from the normal volatility in the stock market. Now, what happens if you are an
investment bank that has been buying very risky debt instruments that are leveraged beyond the 30-to-1 you are already leveraged?
It becomes increasingly likely that a minor amount of volatility in the debt market will wipe out your
equity.
That in a nutshell is the problem the financial
sector is facing right now. It is overleveraged, and volatility in the debt market threatens to wipe out
its equity if it doesn't raise more capital. Even if the banks raise more capital, the extent of the
leverage is so great that more write-downs will once again quickly impair balance sheets. This is why even
after $35 billion in Federal Reserve loans we still have a problem. We feel like the better way to invest
in the sector is cautiously through the debt side.
Inflation
Phase II
With sky-high oil and food prices we
could see commodity inflation slow as oil, in particular, pulls back some after a huge run from $70 to $134 over the last
year. Inflation will now take a different form and enter a new phase. Inflation will
now move through the economy in the form of higher finished goods costs and higher wage price inflation. With
gas and food prices as high as they are workers are going to be more assertive about pay raises. We believe
we will see additional wage price inflation it the United States in the near future. We are now in the finished goods and wage price phase of inflation.
Worldwide Inflation
Over the last 15 years, wage and finished goods inflation have been held down by a strong dollar and outsourcing
jobs overseas. This era has come to an end, as we will now see inflation imported from overseas.
There are several reasons for this development. One is that most of the jobs have now been sent
overseas and wages are currently rising everywhere in the world. Overseas, it is now harder to find workers
and inflation has soared, leading to wage inflation abroad. The dollar has also declined against most currencies
in the world - making products more expensive to import into the US. We no longer have the wind of a strong
dollar and cheap wages overseas to keep inflation down in the United States.
In a recent report by Bill Gross, he pointed out
that ISI and Ed Hyman have calculated that inflation has averaged 7 percent for the last 10 years in major countries
outside the United States. This compares with a claim of 4 percent by the United States.
Why is inflation higher overseas? Most economists believe that the US is low-balling inflation
by adjusting the CPI and PPI numbers to give a lower reading. But as can be seen from the following chart
inflation is moving up worldwide.
Outlook
At MaxOut Savings Advisors our outlook continues to be one of caution going forward.
We believe that the consumer will continue to slowdown as the year progresses. We
expect the problems in the financial sector to continue and to spread from Wall Street to the consumer. Under this scenario,
we would look for value in the markets in companies with strong balance sheets (high cash & low debt), overseas business
growth and low price-to-cash-flow ratios. We want to take advantage of the growth of the middle class in
developing markets around the world. We would avoid financial sector stocks, REITs, real estate,
utilities, high-yield debt, high debt companies and any company that will be hurt by tightening credit conditions in the United
States. We would also be careful on commodity funds as some commodities may have peaked. We continue
to like the gold and silver sector and think we will see higher prices later this year. We continue to think that cash
is an asset that will continue to outperform the equity markets as it has done so far this year. Who is MaxOut Savings Advisors LLC?
In these volatile times, investing your retirement funds can be difficult and time consuming. Why
not hire the MaxOut Savings Advisors team to manage your money or IRA rollover? MaxOut Savings Advisors
is a registered, fee-only investment advisor based in Houston, Texas. Ted Geoca has over twenty years investment
experience managing clients retirement assets. We invest in stocks, bonds and mutual funds for our clients using a value analysis
strategy that we have developed over the last twenty years.. We use Fidelity Investments as the custodian
for our client’s assets. If you would like MaxOut Savings Advisors to manage your retirement investments using our value
methodology, I would be happy to meet with you. To schedule an appointment please give us a call at 713-627-0400
or email me at ted@maxoutsavings.com.
Remember Save Aggressively and Invest Conservatively!
Ted K Geoca
President
MaxOut Savings Advisors, LLC Houston, Texas ted@maxoutsavings.com
713-627-0400 Remember to catch: The MaxOut
Savings Show with Ted Geoca Houston’s leading retirement specialist on Saturday at 11:00am on KNTH 1070AM! The MaxOut Savings Show and Report does
not give out financial advice. Any recommendation or idea may not be suitable for all investors.
Moreover, although information contained herein is believed to be reliable, its accuracy cannot be guaranteed.
MaxOut Savings Advisors, LLC may or may not have positions mentioned herein. MaxOut Savings Advisors LLC is a Registered
Investment Advisor with the SEC. You should always make investment decisions based on your own financial situation.
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sign up a friend for our free MaxOut Savings Report or to remove your name off
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