Bob’s Journal for 11/14/19

Some Notable Events That Grabbed My Attention This Week

President Trump announced that he and the First Lady have shifted their official state of residence to Florida.

This news came hard on the heels of the October issue of Retirement Watch, which discussed the benefits of changing your state of residence or domicile and, more importantly, listed the actions you need to take to ensure the change is accepted by state taxing authorities.

In addition to potential tax advantages, Florida also provides more protection from creditors than most other states do.

Here’s hoping that the President and First Lady are following the checklist to ensure their intended domicile change is successful.

RMD Relief is on the Way

Retirees might receive some relief from required minimum distributions (RMDs) in the near future.

Most people must take RMDs from IRAs and other qualified retirement plans after age 70½. The RMDs are based on the IRA owner’s life expectancy.

Tables issued by the IRS are used to determine life expectancy. The tables currently in use were issued in 2012. An executive order from the president issued in August 2018 required the IRS to review the tables and determine if they should be updated.

After that review, the IRS determined that life expectancies have increased since 2012 and the tables used for RMDs should be updated. On Nov. 12, the IRS issued proposed regulations that, when they take effect, replace the current life expectancy tables.

Under the current tables, a 70-year-old IRA owner would use a life expectancy of 27.4 years to compute the first RMD. Under the proposed tables, a life expectancy of 29.1 years would be used.

Or a 75-year-old surviving spouse would use a 13.4-year life expectancy under the current tables but would use 14.8 years under the proposed tables.

The new life expectancy tables aren’t in effect yet. First, the public must comment on the proposed regulations. After the IRS reviews the comments and makes any necessary changes, final regulations can be issued. The IRS expects the new regulations will be in effect for distribution years beginning January 1, 2020.

Medicare Premiums are Eating Social Security Increases

The annual inflation increases in Social Security benefits and Medicare premiums have been announced. As is often the case, the rise in Medicare premiums exceeds the Social Security increase.

The basic Medicare Part B premium increases 6.7%, or $9.10, for 2020 to $144.60. The Social Security cost of living allowance (COLA) is 1.6% for 2020. After the increases, Medicare premiums will take about 10% of the average Social Security benefit of $1,484.

From 2000 to 2019, Part B premiums increased 198%, while Social Security benefits rose just 50%. The Senior Citizens League asserts that Social Security benefits have lost 33% of their buying power since 2000 because the inflation formula understates the actual inflation retirees experience.

These numbers don’t include the Medicare premium surtax that is imposed on higher-income Medicare beneficiaries.

Vehicle Prices are Roaring Higher

A few years ago, I told a few friends that car companies would face a reckoning when interest rates started to rise. The vehicle manufacturers used the Federal Reserve’s zero interest rate policy to increase steadily the sticker prices of new vehicles, pushing the prices up faster than inflation and incomes.

The price increases could work because near-zero interest rates allowed the manufacturers to provide subsidized loans and leases. But at some point, prices can’t rise faster than incomes, especially when rates rise.

An article in The Wall Street Journal last week indicated we might have reached that point.

The article said about 33% of people who trade in their cars now owe more on the vehicle loans than the vehicles are worth. The average underwater amount now is $5,000. Many can’t afford to pay off the loans, so they roll the outstanding balance into the loans on their latest purchases. The article described one man who bought a $27,000 used car in 2017 by taking out a $45,000 loan.

In addition, another article in the Journal reported that many car loans now last seven years or longer. When I bought my first car many years ago, the conventional advice was that a car loan shouldn’t exceed three years.

The lenders make a lot of money on all these loans. The article said car dealers now make more profit through their role in arranging financing than on the cars.

It is no wonder that car sales have peaked and default rates on vehicle loans are rising. The vehicle loan situation also keeps the borrowers from becoming homeowners.

The Data

Consumer credit increased in September, but the increase was in student and vehicle loans. Credit card debt, which finances most household day-to-day purchases, declined for the second consecutive month. In the third quarter, credit card debt increased at an annualized 2.2% rate, compared to 5.2% in the second quarter.

Consumer sentiment, as measured by the University of Michigan, increased slightly to 95.7 from 95.5. About 25% of respondents to the survey said tariffs were an important concern for the economy.

The Small Business Optimism Index from the National Federation of Independent Business (NFIB) increased to 102.4 in September from 101.8 in August. Eight of the 10 components of the index climbed. But earnings trends sharply decreased.

Inflation showed some life in October, with the Consumer Price Index (CPI) rising by 0.4%. But excluding food and energy, the Consumer Price Index rose only 0.2%. For the past 12 months, the measures increased 1.8% and 2.3%, respectively. Once again, inflation isn’t giving the Fed any reason to tighten monetary policy.

Rent is a major factor in the CPI, and rent has been declining lately. That’s especially true in some of the major cities that had soaring rents and housing prices until recently.

The Producer Price Index also found some inflation in October. The headline index increased 0.4% for the month, compared to a 0.3% decline in September. The core index, excluding food and energy, increased 0.3%. But during the past 12 months, the two measures have increased only 1.1% and 1.6%, respectively.

New unemployment claims jumped by 14,000 to 225,000 for the week. But more states than usual submitted estimates, so the increase might be revised to something lower in the next week or two.

The Markets

The S&P 500 rose 0.65% for the week ended with Wednesday’s close. The Dow Jones Industrial Average increased 1.18%. The Russell 2000 lost 0.05%. The All-Country World Index (excluding U.S. stocks) declined 0.77%, while the emerging market equities fell 2.29%.

Long-term treasuries lost 1.07% for the week. Investment-grade bonds fell 0.55%. Treasury Inflation-Protected Securities (TIPS) gave up 0.50%. High-yield bonds declined 0.09%.

In the currency arena, the U.S. dollar increased 0.41%.

Energy-based commodities declined 0.19%. Broader-based commodities fell 1.53%, while gold lost 1.82%.

Bob’s News & Updates

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