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Your Debt is About to Cost You More Money!


The Fed’s Interest Rate Announcement & the Market’s Response

Here at Nelson Financial Planning, we’ve been saying for months that the data makes it hard to justify keeping interest rates where they are. Just consider the current inflation rate. The Consumer Price Index (CPI) was at 5% for the 12-month period ending May 31, 2021, the highest rate since 2008. In fact, the CPI has only been above 5% for a rolling 12-month period three other times in the past 30 years.

Low and behold, the Federal Reserve now projects raising the interest rate from essentially 0% to around 0.6% by the end of 2023. Here’s the kicker as recently as March, the Federal Reserve said they would hold interest rates steady through 2023. And interestingly, seven of the 1 8 Fed officials expect to raise rates even sooner—by the end of 2022. That’s only 18 months away.

Interest rate increases often negatively affect the economy. After all, higher interest doesn’t add to the economic system—it simply eats away at the money consumers and businesses would otherwise have to buy new things. Debt represents old purchases, so when interest rates go up, the extra money you pay ultimately goes toward previous economic activity.

Needless to say, the market doesn’t respond well when the Fed talks about raising interest rates The announcement marked the worst week for the market since October 2020. For some perspective, consider that the broad-based markets were only down 2%. So nothing terribly dramatic has happened yet, but this is certainly a story we’ll keep our eye on.

The US Dollar vs. Cryptocurrency

Despite what cryptocurrency fans say, the US dollar is not going anywhere anytime soon. After all, 60% of the world’s foreign exchange reserves are in US dollars. The Euro comes in second place at 20%. This showcases the US dollar’s incredible breadth and depth as a substantial source of cash holdings around the globe.

The US dollar is also incredibly stable. Its value certainly fluctuates, but it stays within a relatively narrow range. On the other hand, cryptocurrency fluctuates all over the place. It also happens to be the leading means of exchange for criminals and terrorists. In fact, 46% of all Bitcoin transactions between January 2009 and April 2017 were for illegal activity.

Ironically, that’s the allure of crypto—it’s all confidential. Of course, this means you don’t know who’s on the other end of a transaction, so you could be funding a criminal or terrorist group and not even know it. Plus, from an investment perspective, there’s nothing behind cryptocurrency. Its success is solely based upon the greater fool theory, which works wonders until you run out of fools.

This is why, at Nelson Financial Planning, we believe that these investments are not appropriate for our clients. Cryptocurrency simply doesn’t represent our core values and who we are as a company. Perhaps one day, if it becomes more regulated than it currently is, crypto will be an investment strategy we can participate in. But until then, we frankly don’t want to be a part of a system that contributes to illegal activity.

Required Minimum Distributions

RMDs are back for 2021. Does your required minimum distribution seem significantly higher than it was in 2019? Remember, if you took last year off, three things have happened:

l . The account is larger than it would have been if you had taken money out in 2020.

  1. The market did pretty well last year, so the balance may be higher than it was in 2019.
  2. You are two years older than the last time you took an RMD, which lowers your life expectancy factor that much more.

All three factors drive up your required minimum distribution for 2021. This may have you wondering “What’s the best way to get my RMD out of my account?” You have two primary options:

  • Take out the money as part of your monthly income.
  • Take out the money as a lump sum.

Both options are equally effective as long as you withdraw the full required minimum distribution before the end of the year. Be sure to use an auto-calculation which you can learn more about on the IRS website—to make sure you’re taking the correct amount out based on your account balance at the end of the previous year and your life expectancy factor. If you don’t, you’ll be taxed 50% on whatever amount you don’t take out, making this one of the most costly penalties in the tax code.

Financial Myths

Here are three of the most common financial myths out there and how to overcome them.

I can project my exact retirement savings using the right calculations.

This myth underscores the concept of a projection, which estimates your savings, but doesn’t pinpoint it down to the dollar. Still, to help make your projections as accurate as possible, remember to consider inflation and your withdrawal rate.

Medicare is free and will cover all my healthcare costs after retirement.

The only part of Medicare you get for free is Part A (hospitalization). Part B (doctor’s services, outpatient care, etc.) and Part D (prescription drugs) have additional costs. You can also expect to pay out of pocket when visiting the eye doctor, dentist, and other providers. Keep in mind that the average retiree pays $300,000 in healthcare costs—or $ I ,250 per month—over the course of a 20-year retirement.

My taxes will automatically lower when I retire.

This depends largely on how you set up your retirement accounts. The best way to make this myth a reality is to set up after-tax accounts. This means you pay taxes on all your contributions now, leaving you with lower taxed capital gains when you retire.

For help securing the most stress-free retirement possible, please contact Nelson Financial Planning at 407-629-6477. We’ll help you invest your money in all the right places while managing things like rising interest rates, required minimum distributions, and healthcare costs.