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Month: July 2022

Inflation 101: Understanding the ‘why’ behind today’s inflation

Posted on by Scott M. Peterson, ChFC®

The Bureau of Labor Statistics just reported a whopping 9.1% year-over-year increase in the inflation rate. This is the highest in forty years and many economists suggest that inflation will get worse before it starts to get better. To put a 9.1% inflation rate in perspective, one million dollars today has only $909,000 worth of purchasing power compared to just one year ago.

Americans are facing higher prices for food, fuel, and housing and are grasping for answers about what is causing inflation. How long it will last, and what they should personally be doing to combat its effects.

There are no easy answers or painless solutions when it comes to the inflation problem. Before we jump into how long it will last and what can be done to resolve it, we need to define how inflation is caused.

What is Inflation?

Stated in its simplest terms, “inflation happens when too many dollars are chasing after too few goods and services”. So, inflation is really a supply and demand problem. When there is an equilibrium between the supply of goods and services and demand (money available to spend), inflation is in check. When the demand outpaces the supply of goods and services, inflation accelerates. Once this concept is understood, we can dissect what is limiting the supply of goods and services and what is driving demand.

The Supply Issues Impacting Inflation

A couple of events have contributed to the limited supply of goods and services:

First, the COVID pandemic in early 2020 led to lockdowns and numerous restrictive measures by governments around the globe to stop the spread of the virus. These government-imposed lockdowns disrupted the global supply chain as factories were shut down and maritime ports were closed. Currently, COVID continues to affect worldwide supplies as China, the world’s largest manufacturer, is still troubled by shutdowns as they try to get on top of the COVID pandemic still plaguing their nation.

Second, the United States went from being energy independent just a couple of years ago to once again being forced to purchase oil in the world markets.  U.S. production has decreased while our consumption has increased. The inevitable result of this supply/demand imbalance is inflated oil prices. Higher oil prices serve as a catalyst to higher prices in all other parts of the economy as higher energy prices increase the cost to produce and ship goods.

The Demand Issues Impacting Inflation

Consumers are spending big. When the pandemic started, the personal saving rate in the United States was sitting at an all-time high. With large amounts of savings on hand, the federal government sending out relief checks to individuals and businesses, and employees sitting at home with shopping at their fingertips, the U.S. consumer spent a lot of money. And the spending spree isn’t over, with unemployment numbers sitting at all-time lows, employees are either finding better paying jobs or are requiring higher wages from existing employers. These higher wages continue to encourage high demand for the limited goods and services available.

Additionally, with the pandemic mostly behind us, there is a pent-up demand from people looking to travel and vacation once again. If you have traveled recently, you would have noticed the inflated prices of airline tickets, rental cars, hotel rooms, restaurants, and more.

So, how long will high inflation rates be with us?

There are thousands of economists attempting to answer this question, all with different opinions. So, how long this recent inflation acceleration might last is anybody’s guess. However, there is a consensus on how the inflation supply/demand equilibrium will be brought into balance. The inflation rate will decrease as consumer spending slows down, or in other words, when the demand for goods and services is reduced. Two of the main ways demand is reduced is either by raising interest rates, by the economy suffering a recession, or both.

Raising Interest Rates

The Federal Reserve has the responsibility to monitor the economy and implement policy to maintain the equilibrium between supply and demand, in other words, keep inflation in check. The Federal Reserve is raising interest rates to slow consumer demand and subsequent price growth. This policy response means that the economy will surely head for a slowdown. We have already seen how higher interest rates and higher borrowing costs have begun to cool off the housing market. The question — and big uncertainty — is just how much federal action will be needed to bring inflation under control.

Having A Recession

A recession is when the economy shrinks. This is a more painful and less desirable way to slow consumer demand, but it can work towards taming inflation. During a recession, the overall economy struggles, corporations make fewer sales and become less profitable. Workers are laid off and unemployment surges.

The hope is that the Federal Reserve can raise interest rates just enough to slow consumer demand without throwing the country into a recession. This optimistic scenario, often called a soft landing, is difficult to orchestrate and despite the best efforts by the Federal Reserve board, can still end up throwing the economy into a recession.

In our current environment, the so-called soft landing is especially challenging. As the Federal Reserve tries to reign in demand with higher interest rates, they have zero control on the supply side of the equilibrium. If supply chain shortages persist, the Federal Reserve will be required to raise interest rates more drastically. This will slow the demand enough to bring higher prices under control. It’s an economic tightrope, we will see if the Federal Reserve can walk it.

What will not help inflation?

Currently, there is talk on Capitol Hill of sending out additional stimulus checks to help the U.S. consumers pay for high gas prices and other goods. This is indeed a noble thought, but terribly misguided. The demand side of the equilibrium is already out of balance. In other words, there is already too much money chasing too few goods and services. Going into more debt, to throw more money at a problem caused by too much money pursuing too few goods and services is not the answer. We cannot spend our way out of inflation and any attempt to do so, will only result in higher inflation.

Conclusion

We have addressed the causes of inflation and talked about how inflation rates will be reduced. In our next blog we want to get personal. We will be going over the personal dos and don’ts of managing higher interest rates and making good decisions concerning your investments during recessionary times.

If you have questions, concerns, or would like to review your personal retirement situation, please click here to schedule a complimentary consultation.

Health insurance options for the early retiree

Posted on by Alek Johnson, CFP®

Entering retirement can be both thrilling and intimidating at the same time. The thought of “hanging up the cape” and permanently leaving the workforce behind can be viewed as unburdening and relieving to one individual, but completely frightening to another. Regardless of the viewpoint you have on retirement, it will undoubtedly come with new challenges and troubles to overcome. Among the different problems to solve for retirement, one of the biggest challenges is that of health insurance options for the early retiree.

For those age 65 and older, or certain younger individuals with disabilities, Medicare has you covered. Medicare is the country’s health insurance program managed by the federal government. Once you enroll, there is very little management that you have to do throughout retirement.

But what about those who retire earlier than age 65? An early retirement is certainly achievable, but requires careful planning, especially when it comes to your healthcare. This article will enlighten you on the different healthcare options available for early retirees, with a focus on the Marketplace. If you are not familiar with what the Marketplace is, don’t worry, we will get to the details soon.

Health insurance options for the early retiree (pre-age 65)?

If neither you nor your spouse will be covered through an employer plan, fear not! There may be more options than you think. Below is a brief summary of a few options. I highly recommend speaking with your financial advisor about which route makes the most sense for you.

COBRA – A law that allows employees and their dependents to keep their group coverage from their former employer’s health plan. This coverage can last for 18 months after termination from the employer, but beware, this can be very costly.

Medicaid – Though unlikely for some retirees to qualify due to the low-income requirements (i.e., in Utah, coverage is available for those with household incomes up to 138% of the federal poverty level), this may be the cheapest option for those that do qualify. However, many doctors don’t accept Medicaid, so you may have to change your primary providers if you qualify for coverage.

Christian Healthcare Ministries – This is not traditional insurance, but rather a Christian-based method of sharing the costs with others around you. Each member pays a monthly premium and those funds are used to help other members cover their healthcare costs.

The Marketplace – Finally, we have the Marketplace, which tends to be the route most early retirees take. For this reason, I want to expound upon how the Marketplace insurance really works.

The Marketplace – What is it?

In March of 2010, the Affordable Care Act (sometimes called Obamacare) was passed with the goal of making health insurance more affordable. The law provides individuals and families with government subsidies (otherwise known as premium tax credits). This helps lower the costs for households with an income between 100% and 400% of the federal poverty line. As a reference, in 2022, 400% of the federal poverty level for a retired couple is $73,240. The federal government operates the Health Insurance Marketplace, or “the Marketplace” for short. This is an online service that helps you enroll for health insurance. You can access the Marketplace at HealthCare.gov.

How does the Marketplace work?

First and foremost, I recommend you work with a trusted, licensed health insurance agent to help you navigate the waters of the Marketplace. Especially if you’ve only ever received health insurance through your employer. There is no additional cost to you to use an agent – they will be compensated by the insurance company directly. You can then tell the agent any specifics you are looking for with your coverage (such as certain doctors, hospitals, etc.). They can help narrow the available plans down to your liking.

That being said, let’s look at how this actually works.

You can enroll in health insurance during open enrollment, which generally runs from November 1st – December 15th. This is for coverage starting January 1st of the following year. You also have the option to enroll during a special enrollment period. This is based upon major life events, such as a change in household or residence.

You’ll be rewarded a special enrollment period when your looking for health insurance options as an early retiree. Don’t feel like your retirement date needs to line up with the open enrollment period. During this special enrollment, you’ll have a 60-day window to enroll through the Marketplace.

During enrollment, you will fill out an application with basic personal information. Included with this application, you will give them your best estimate on what your income will be for the coming year. The Marketplace uses your Modified Adjusted Gross Income – MAGI – to define “income.”

Please note that the Marketplace does not use your previous year’s income, but rather your projected income for the next year. This is an important distinction for retirees. If your projected income falls between 100% – 400% of the federal poverty level, you will qualify for a government subsidy to help cover the premiums associated with your insurance. If your income is above the 400% level, you will not qualify for a subsidy and will have to pay the entire premium yourself. For 2021 and 2022 ONLY, as part of the American Rescue Plan Act (ARPA), the subsidies were extended to those with income beyond the 400% poverty line. Unless more legislation is passed to extend these benefits, starting in 2023, the law will revert back to pre-pandemic rules.

What happens if your income isn’t exactly what I put on the application?

The answer is that you will reconcile any differences when you file your taxes.

If your income was less than what you projected, you’ll get a credit as you qualified for more of a subsidy throughout the year. If your income was more than what you projected, you will have to pay some of that subsidy back. Generally, this isn’t that big of an issue unless you projected your income to be less than 400% of the poverty level but it was actually more. In this case, you are required to pay back the entire subsidy. Even if your income was only $1 more than the threshold.

For this reason, I suggest consulting with your financial advisor to pinpoint what your income will be through your early years of retirement.  I also suggest you speak with your advisor on potential planning strategies available to control your Modified Adjusted Gross Income, as there are certain strategies that can help you qualify for a subsidy while enjoying the income you desire throughout retirement. For an example of how this might work, Mark Whitaker wrote an article in 2020 describing a case study that explored these strategies.

As far as the plans that are available, the Marketplace ranks them in four different categories. These categories are Bronze, Silver, Gold, and Platinum. The Bronze plans typically tend to have the lowest premiums, but they are also more catastrophic plans. This means they have high deductibles and out-of-pocket maximums. Gold and Platinum plans typically tend to be better plans as far as coverage but have higher premium costs. Again, working with an agent can help you navigate which plan is best for you.

Conclusion

There is more to the Marketplace and the other health insurance options for the early retiree mentioned than can be discussed in this article. Hopefully, this provides you with a framework of the options you have as an early retiree. Early retirement is achievable for those who are prepared and understand how their healthcare needs can be met.

Learn more about how we can help you prepare for retirement, or schedule a free consultation.