Just seven months ago the Fed was predicting it would raise rates several times in 2019. The Federal Reserve seemed to feel that the economy was strong and it was concerned about excessive inflation. Interest rates rose in anticipation of the expected rate increases. However, Chairman Jerome Powell has indicated a probable reversal. Not only has the Fed failed to raise rates several times as suggested, but they are now expected to lower them.
President Trump has been calling for the Federal Reserve to cut rates for several months. Chairman Powell, in testimony before Congress, acknowledged significant economic and political concerns “including trade developments, the federal debt ceiling, and Brexit.” Additionally, global growth has slowed partly due to the ongoing trade wars. Moreover, Powell acknowledged that inflation is still less than expected. The Federal Reserve typically attempts to manage expectations about the future of short term interest rates.
There are a couple of reasons why the stock market tends to rally when rates are cut. First, if it’s cheaper for a business to borrow money, it is in a better position to expand, increase profits and hire more employees. This helps the economy grow. Secondly, if interest rates fall it becomes less attractive to own bonds and money tends to move from the bond market to the stock market in search of better returns. Investors should keep in mind that the stock market’s reaction to interest rates is generally immediate, whereas the actual economy takes many months to see any widespread effect.
Investors are expecting a cut of a quarter percentage point at the Fed’s end-of-the month meeting. There is also sentiment that an additional quarter point cut could come later in the year, if not sooner. Rates have already dropped, and stocks have rallied in anticipation. Bonds have also rallied recently as interest rates have fallen. If Powell surprises and does not announce a rate cut, investors would be very disappointed, and the stock market would likely reflect that disappointment.
Most taxpayers have an instinct to delay paying taxes to the last possible minute. We want to hold on to our money and let it “work” for us. However, there is one exception to that notion. Most of us pay our property taxes as early as possible. Why? Because there is a discount for paying those taxes early. Well, the same may now be true for income taxes.
With the recent tax law changes, taxes are now historically low. However, they are scheduled to go up when the current tax law sunsets in 2025. Moreover, there is always uncertainty about what changes Congress will make to tax rates in the future. Given the country’s enormous debt and the current demographics of the baby boomers reaching retirement who are now becoming eligible for Social Security and Medicare, the government will likely need to either increase revenue or cut spending. Voting to slash benefits is typically hazardous to a Congress.
Therefore, we are recommending to our clients, they attempt to position significant assets into strategies that produce tax-free income such as Roth IRAs and overfunded cash value life insurance. As far as Roth conversions, we are typically recommending gradual partial conversions while attempting to keep clients out of the top tax bracket. For couples filing jointly the tax bracket is only 24 percent for income up to $168,400 and 32 percent up to $321,450. When tax rates go up in the future or when your kids — who may be subject to additional state income taxes — inherit your IRA, these rates will seem like a bargain.
For non-qualified assets, according to Bloomberg, several prominent wealth management firms have been repositioning billions of dollars into specially designed life insurance contracts for their high net worth families to allow for tax-free growth and future tax-free income. There are many factors to consider when doing long-term tax planning, so it’s prudent to consult with your adviser before implementing any long-term tax reduction strategies.
Once we reach age 65, most of us are eligible for subsidized health insurance through a government program called Medicare. Part A, which covers hospital care, is free. Part B, which is available for purchase for an extra fee (depending on your income), covers doctor visits, outpatient therapy, medical equipment and preventative services. Many people acquire Medicare Advantage or Part C, which includes prescription drugs as well. These plans are guaranteed issue. Open enrollment is between Oct. 15 and Dec. 7 each year.
Medicare Advantage plans are typically relatively inexpensive, but they come with high co-pays and other out-of-pocket expenses. Moreover, majority of care must be obtained in network like an HMO. Therefore, these plans are not ideal for those who like to travel and choose their own care providers regardless of the network.
For more flexibility, many people acquire Medicare supplements called Medigap. Medigap policies are sold by private insurance companies and help pay some of the health care costs basic Medicare doesn’t cover, such as co-payments, co-insurance and deductibles. In order to acquire a Medigap policy, you pay an extra premium in addition to the standard Medicare premiums. This is in contrast to the Medicare Advantage Plan premiums, which include the total cost of Medicare benefits. Medigap policies are guaranteed renewable even if you have health problems. This means the insurance company can’t cancel your Medigap policy as long as you pay the premium. Medigap policies generally do not cover prescription drugs and you will need to get a drug plan (Part D) to cover those expenses. Neither Medicare nor Medigap covers long-term care expenses.
It’s wise to review your plan each year with an expert to make sure it’s consistent with your needs. Based on the drugs you are taking, the doctors you are seeing and where you will be spending most of your time, you may be able to modify your plan selection to reduce your costs and maximize your benefits.
Ready to Take
The Next Step?
For more information about any of the products and services we provide, schedule a meeting today or register to attend a seminar.