Client Update

When millions of Americans leave work, they also leave behind the comforts of a paycheck.  Suddenly, in retirement, they are exposed to a chore that they last experienced in their 20s and 30s—managing a budget that might feel tight.  Chances are, it was not a pleasant experience back then, and they are not looking forward to it now.

The concept of budgeting has a limiting feel to it, with a dash of guilt mixed in.  You are supposed to limit your expenditures below a threshold that may be set by outside influences (the press, so-called ‘experts’) and in extreme cases, you are told that your future financial success depends on giving up coffee in the morning or the now-famous frivolity: avocado toast.

In the past, there was the added hassle of tracking where your money went, but today there are a variety of tools that will do this for you, linking to your bank and credit card accounts and putting each expenditure into its proper category.  Yes, you have to tweak the categories to customize them, but after that, you have the numbers part of it pretty much tamed.

The most recent approach to budgeting takes some of the guilt and much of the limit out of the process.  You might have heard of the 50/30/20 framework, which is as simple as it sounds.  The first 50% is allocated to your needs—that is, your basic expenditures like food, housing, transportation etc.  The next 30% is allocated to ‘wants’—things like dining out, travel, buying gifts.  Under this formula, the last 20% is allocated to savings and debt repayment—but of course retirees are generally not repaying their student loan debts and probably haven’t racked up unpaid credit card debt.  Nevertheless, that 20% can become a kind of safety net for various unplanned expenditures, like car repairs and potential healthcare expenses.

But retirees are not getting a regular paycheck, which means they have to calculate how much to apply that budget to.  There are a variety of ways to calculate how much sustainable income can be derived from a retirement portfolio, some of them quite sophisticated, and all of them dependent on future assumptions that may or may not come true.  One way to start is to tote up all the basic living expenses, and lock those down.   Take Social Security, pension, or other stable income, and allocate that to the ‘needs’ bucket, and see how much of the needs are still uncovered.  Those extra dollars become the amount that the retired couple would have to take out of the retirement portfolio simply to avoid sleeping under a bridge.

You probably know that diamonds are created when buried pieces of organic material (carbon) is subjected to tremendous pressures and heat deep underground for long periods of time, fusing the atoms together into a bright, clear (or mostly-clear) crystalline form.  If you want an absolutely pure diamond, you would pay top dollar for it.  Or you would have someone manufacture it for you.

The controlled laboratory processes that produce synthetic diamonds are now surpassing the real thing in terms of clarity and purity, but most of the demand is still coming from industry.  Synthetic diamonds are produced at roughly $800-$1,000 per carat, which is dirt cheap considering the price of perfectly pure natural diamonds sold at auction at Sotheby’s and other houses, or sometimes worn on royal crowns at certain state coronations.  Yet despite their purity, synthetic stones make up less than 1% of the global demand for diamond jewelry, compared with an estimated $14 billion market by various industries who need access to the hardest material known to science.

Synthetic diamonds are used in the manufacturing of computer chips and electronics; CVD diamonds are a component of high-performance loudspeakers, and research centers use synthetic diamonds in their detectors of high-energy particles.  Diamonds are used in abrasion and polishing, stone cutting, surgery, astronomy and electric insulation, and most drilling equipment uses the world’s hardest substance to slice through layers of rock.  Ironically, synthetic diamonds are also used in gem exploration drilling equipment.

All of this is relevant because of sales pitches from unscrupulous investment brokers who are touting diamonds as the ultimate store of wealth.  These pitches ignore other facts as well: the fact that diamonds are actually the least rare gemstone in the world in terms of inventory, but a cartel (the De Beer organization) controls sales and therefore prices, and there is really no liquid market for diamonds like there is for, say, stocks or bonds.

As synthetic diamonds take over the industrial marketplace, global demand is comparably reduced.  And as people begin to realize that synthetic diamonds are actually real stones, but are more reliably pure and dramatically cheaper than what comes out of the ground after millions of years of random processes, the jewelry market could shift as well.

The competition is largely invisible to the average financial consumer, but large brokerage firms like Merrill Lynch and Goldman Sachs have been engaged in a fierce competition for customers with smaller independent advisory firms for the past three decades at least.  The brokerage firms have the advantage of enormous marketing budgets and brand names that everyone recognizes, and they generally have much higher profits per customer because their representatives are encouraged to sell investment products that are most lucrative to the firm.  The independent advisory firms have the advantage of making a different, more attractive offer: as a matter of business routine, they give advice that is in the best interests of their clients, and generally offer more personal service extending beyond investments to helping their clients meet their personal and professional goals.

Generally, when companies can buy Super Bowl advertisements with their pocket change, they have to be considered the favorite to beat out the smaller competition.  But in fact, over time, the opposite has happened.  As more consumers start realizing the difference between a sales offer and an advice offer, their loyalties have gradually shifted from the bigger entities to the smaller firms.  Over the most recent ten-year period where statistics are available, the Financial Industry Regulatory Authority (which regulates sales activities of brokerage firms) reports that the total number of wirehouse/brokerage firm representatives declined from 669,794 in 2012 to 612,457 in 2021.  This continues a long-term decline going back to the 1980s.

But consumers still have to look hard to find an advisory firm that will give advice in their best interests.  According to the Securities and Exchange Commission (which regulates financial advisory and financial planning firms) the number of independent advisory firms has grown, since 2012, from 27,131 to 31,669.  These firms generally experience much smaller profits (the difference between sales and advice) and, where they have them at all, have marketing budgets that would provoke derisive laughter from corner offices on Wall Street.  David won’t drive Goliath off the market any time soon, but this incremental shift in market share suggests that a better offer can sometimes overcome a bigger brand name and advertising expenditure.

This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice.

Many of you have been inundated with offers to install solar panels on your house, where the advertisements, fliers and email messages tout generous tax benefits and zero-cost electricity.  Whenever you see aggressive advertising, there is usually a catch somewhere.  So, what is the truth about solar tax credits?

The recently passed Inflation Reduction Act has authorized a 30% tax credit for any energy-saving equipment (including solar panels generating electricity and the battery that stores the electricity as long as it exceeds 3 kilowatt hours) that you install in tax years 2022 through 2032.  The credit applies to all the costs of installation, including equipment and reasonable labor costs.

That is a credit, not a deduction; you file IRS Form 5695 as part of your tax return, and take 30% of the cost of the installation directly off of what you owe the federal government.  To qualify, the installation must be on your home, houseboat, mobile home or condominium, but the credit cannot be claimed (for some reason) on rental property you own, and vacation homes qualify for the credit only for the time you spend there.

The tax credits are nice, but what about those offers?  If the offer is for ‘free’ solar panels, then you’re probably being offered a chance to enter into a solar lease or power purchasing agreement with the installer—usually for the next 25 years.  You pay no up-front fee, but you lease the system on your property, paying a monthly fee to the installer at a flat rate or per kilowatt-hour.   And here’s the kicker: the installer gets to claim the Federal Tax Credit.  You miss out on the largest financial incentive for supporting renewable energy.

Your best option is buying your solar system outright, but here again there are complications.  Many installers will charge for their labor and add a 50% to 100% markup on the equipment, over what they paid for it.  Solar installers are entitled to make a profit, but some are taking advantage of an uninformed customer base to take all the financial benefits that you might otherwise gain from installation.

You might wonder what all the hoopla is over the proposal, in Congress, to impose a national sales tax on everything we purchase.  After all, 45 of our 50 states collect sales taxes.  And 170 different countries collect something similar: a value-added tax, which is assessed on different purchases across the supply chain for manufactured articles and digital services, which is ultimately passed on to the consumer.

The proposal, codified in something called the Fair Tax Act that was introduced in the House of Representatives on January 10, would eliminate all income taxes, payroll taxes and corporate taxes, and incidentally also eliminate the Internal Revenue Service.  It would replace those lost revenues with a tax on every item sold in the U.S., which has variably been reported to be 23% or 30%. 

There are several challenges to implementing a national sales tax.  One of them is the practical aspects of it.  The bill would have each state make the actual collections on sales within their boundaries (including, of course, the five states that do not administer a sales tax), but only provides one quarter of one percent of the collected revenue for the trouble.  Instead of an IRS, you would have 50 states with their own collection bureaucracies.

The political challenge is probably more problematic.  The headlines today are talking about the high cost of goods and services and the overall inflation rate.  Making things more costly for consumers in a highly-visible way—right there on the price tags—might not be a popular idea at this time.  Moreover, the 23% rate that the sponsors are pushing is not entirely accurate.  The proposal would impose a $30 national sales tax on every $100 that you spend, which, if you don’t have a calculator handy, comes to a 30% price increase, and should probably be referred to as a 30% tax.  The 23% figure comes when someone says that $30 is just 23 percent of the $130 amount that the consumer is paying, which seems to be a sly mathematical sleight of hand.