From the Desk of Joe Rollins
No subject that I have written about in these postings has garnered more attention than my last, regarding generational wealth. Everyone has that subject on their mind, but they really do not know how to address it. We are entering into a period where the transfer of wealth from the Baby Boomer’s generation to their children is unprecedented and will change the value of investments in the future for all. It is possible that the United States will become the second wealthiest country in the world over the next 25 years.
The stock market pulled back modestly in April, but that certainly was no surprise. I guess you would have to say that it was a humble pullback, given that the market was ahead 26% for all of 2023 and was up a full 10.6% for the first quarter of 2024. Given that extraordinarily hot increase in the markets, a modest pullback should not have been unexpected by anyone. In this post, I will discuss what is likely to happen during the rest of 2024, given the incredibly positive presidential cycle trends from the past. People seem to forget that this is a presidential year and what you see in presidential years is positive stock market performance.
For this posting, I will discuss a great deal about generational wealth, the economy in general and, of course, what I expect for the rest of the year. I will also comment on the extraordinarily negative sentiment regarding stock market performance and the remarkable performance contrary to the negative editorial comments out of Wall Street. Before I discuss all those interesting subjects, I must reflect on the performance of the stock market during the month of April.
The Standard & Poor’s Index 500 stocks were down 4.1% for the month of April but continues to be up 6% for the year 2024. For the one-year period, that Index is up a very satisfying 22.7%. The NASDAQ Composite was down 4.4% during April and is up 4.5% in the year 2024. The one-year performance of that Index is 29.1%. I do not think anyone could argue with that positive performance. The Dow Jones Industrial Average was down 4.9% in April and is only up 0.9% year-to-date in 2024. That Index is up 13.3% for the one-year period ending April 30, 2024.
I always like to add in the Bond Index so that you can have a comparison between equity investing and bond investing. For the month of April, the Bloomberg Barclays Aggregate Bond Index was down 2.5%. For the year-to-date during 2024, that index is down 3.2 % and the one-year performance of that index is down 1.4%. As you can clearly see, all three major equity indexes are up double digits for the one-year period ending April 30th, but the Aggregate Bond Index is negative for that one-year period. If you are investing all your retirement money in bonds expecting to fund your lifestyle in retirement, you are clearly making a mistake given these performance results.
Something very interesting happened during the month of April. The Indexes were performing very well through most of April, but towards the end of the month there was a major sell-off. In fact, on the last day of April, the NASDAQ Composite was down a full 2% in one day. It was clear that during this time, the market traders were trying to embarrass the Federal Reserve Chairman, Jerome Powell. Many believed on Wall Street, a combination of a negative stock market and a major increase in interest rates in bonds could force the Chairman to immediately reduce interest rates on the Federal Funds Rate.
I have seen this many times in the past where traders team up and do everything within their power to embarrass the Chairman, hoping they can force his hand. As you know, even though he is appointed by the sitting President, the Chairman of the Federal Reserve is not political. Fortunately, this Chairman has not yielded to the whims of Wall Street and continues to do his job based upon current events.
It has received very little publicity, but I thought the Chairman’s comments after his last news conference were very telling. He basically promised that they would not increase interest rates. If you look at his actual statement, what he said was, “I think it's unlikely that the next policy rate move will be a hike.” You can get no more emphatic than that statement. Basically, what he is saying is that he is guaranteeing that the next move by the Federal Reserve almost assuredly will be a downward movement.
The job numbers for the month of April were not spectacular, but they were very encouraging. The month of April reported an increase in employment of 167,000 jobs. That is certainly below the hot number we have had for the last several months. However, a moderate increase in jobs is very welcome. As we well know, the labor market has been extremely tight for the last several years, and any easing of that pressure in the job market will almost assuredly result in a reduction of interest rates going forward.
Wall Street has proclaimed that due to inflation, which has partly failed to respond to the Federal Reserve tightening, there will be no rate increases during 2024. I am in the opposite camp. It is fairly clear that the pressure that higher interest rates are putting on the economy is slowing the expansion of the economy and, therefore, is hurting future growth. In my opinion, I think that the Federal Reserve will cut interest rates prior to the end of the year, most likely after the Presidential election.
No Federal Reserve Chairman would ever want to be deemed political, and to impact a Presidential election would be a disaster. People forget that Jerome Powell was appointed by then President Donald Trump, but he has made it very clear that any monetary policy decisions would be made based on what’s right for the economy, without regard to politics or any outside considerations.
There is another reason rate decreases are going to occur. Suddenly, we are seeing a strengthening dollar around the world. This is not unusual when interest rates are as high as they are here in the United States. But we have recently seen in Japan that the yen has exceeded 150 to the U.S. dollar. That is the weakest it has been in generations. Also, we are seeing that the dollar's strength is impacting the ability of China to control and keep their currency level with the U.S. dollar. There is so much negative that would go on with a strong dollar that it is most likely that the Federal Reserve will have to cut interest rates regardless of inflation to slow down the gains in the U.S. dollar against the rest of the currencies in the world.
As I mentioned in my last post, I discussed the transfer of wealth in the United States to the next generation, creating generational wealth. Probably no subject I have ever written about has received more comments from the people reading my newsletter so I thought maybe I would go back and discuss it in greater detail. Whatever you believe in the way of transferring wealth that may occur in the U.S., you will not believe the actual numbers.
Economists now estimate that something like $84 trillion will be expected to pass from the older generations between now and the year 2045. Even more interesting is that roughly $16 trillion will take place over the next 10 years. Many things lead to this transfer of wealth. Obviously, the rapid increase in real estate values and the historically long bull market have led to substantial assets that will be passed down to the younger generation. However, one of the largest and most significant contributors to this wealth has been the transfer from defined benefit pension plans to the so-called 401(k) and IRA retirement accounts.
When I was growing up, the Cadillac of investing was the pension you would receive from large companies like General Motors and the government retirement pensions that would go on for the rest of your life. The unfortunate part of these pensions is that when you died, the amount stopped and there was no money to transfer to your children. Basically, it provided a guaranteed income during your lifetime, but nothing was leftover to pass on to the younger generation.
I vividly remember, as a child, when the insurance agent would come by our house once a month to pick up a check for my father’s life insurance. He would often show up during a family meal, and either my father or mother would write a check to cover the insurance premiums. Being an impressionable child and not having any idea of the reality, I just assumed that my father had millions of dollars of life insurance in the case of his death.
In fact, when my father died, we found that he had three $1,000 whole-life policies. It was the standard during his lifetime that you would pay into life insurance your entire lifetime and then when the time came to retire, you would annuitize the cash value of those life insurance policies to create a retirement income stream for you. That is where the term to annuitize came from, and now it relates to all retirement income streams. It was certainly sad to all of us to see that he had paid for his entire lifetime just for a cash value of $3,000 to support my mother.
I was already practicing accounting when they first introduced the IRA law in the 1970’s. Everyone was skeptical at that time that these would work, and that the government would not get involved or try to intervene on the IRA’s. Over time, it has proven that they are highly successful, and it is now viewed today to be enormously utilized by the younger generation.
The success of advantage savings accounts and IRA’s can be demonstrated by the growth in these values. In 1995, it was estimated that the entire retirement market was $7 trillion. In 2023, it is estimated that the value of the retirement market is $38.4 trillion. As you can see, the growth in this market has provided a substantial number of assets that will be transferred to the younger generation over time.
As we see in our business, many investors have substantial 401(k) plans that they have no need to touch since they have other income. The vast majority of these 401(k) plans will be passed down to their second generation, and hopefully, that generation will pass it on to the third generation. What I am trying to emphasize is there will be such a huge transfer of wealth to the next generation that it will significantly improve the standard of living for most Americans due to the spending opportunity that the substantial wealth will offer to the economy in the future.
People do not understand or fail to realize that there is a substantial issue producing Estate tax over the next several years. Currently, the Estate tax exemption is roughly $13.8 million for each person alive. For a married couple, that is roughly $28 million. Given that enormous Estate tax exclusion, virtually no one qualifies for Estate taxes at the current time. In fact, in all of 2023, only 4,000 estate tax returns were filed in the United States, and only 2,000 of those owed Estate taxes. Rest assured that those who owed Estate taxes were taxpayers who did not receive tax advice since there are so many ways to avoid this. What is interesting is that if you assume that only 4,000 Estate tax returns are filed and divided by the attorneys practicing Estate and Gift law, you can see the issue of that overcapacity.
If the current administration is re-elected, they have assured everyone they have no intention of continuing to allow the income and Estate tax laws that President Trump passed which will expire at the end of 2025. If they do not allow these Estate tax limits to move forward, the exemption will drop from $13.8 million to approximately $7 million. Therefore, for a married couple, the exemption falls from $28 million to roughly $14 million. Suddenly, many people who thought they were outside of the Estate tax will fall within it. For more than any other reason, this emphasizes the importance of transferring wealth during your lifetime to a younger generation to avoid Estate tax.
Many of my clients express a desire to understand and participate in generational wealth, but they often feel unsure about how to do so. The good news is that you do not need to do much to achieve this goal. As I often advise my clients, it is quite straightforward to fund your child’s Roth account, even though they have meager earnings from a summer job. If you were to calculate a Roth account for an 18-year-old child, accumulating from age 18 to 65, you would be amazed at the significant wealth transfer you could initiate with minimal contributions.
Upon reaching age 73, many of my clients are reluctant to take their Required Minimum Distribution payments. They often feel they have no need for money at that stage of their lives. One effective strategy could be to take the required minimum distributions and gift them to your children or grandchildren. There are numerous ways to transfer wealth while maintaining control over your money. For instance, consider placing a vacation home in an LLC and transferring the minority interest to your children. This way, wealth can be transferred to the second generation without relinquishing control of the money. I strongly advocate for helping your children prepare for their own retirement. Contributions to an IRA or Roth to those children are substantial ways of moving wealth to the second generation. This helps your children build wealth while not hurting your pockets.
Another significant transfer of wealth is through charitable contributions. Through a donor-advised fund, you can contribute money annually even though you have no specific charitable entity in mind for the transfer. I encourage people to contribute over five to 10 years to a donor-advised fund and accumulate a relatively large amount of money that can contribute in the future to a charitable cause. This is a way to move substantial assets from your name into a charitable cause that does worthwhile activities. The fact that you can move substantially appreciated securities without paying income taxes on those securities is another reason to make these transfers.
As these numbers indicate, there is going to be a significant transfer of wealth over the next 20 years. To give you an example, it is now believed that $84 trillion in real estate, stocks, cash and other assets in the United States alone will be transferred. Of this amount, roughly $6.6 trillion sits in 401(k) plans that will need to be transferred over the next few years. This transfer of wealth will forever change the U.S. economy due to the spending power of the people who receive this money. It is highly likely that over the next couple of decades, the U.S. will become the second wealthiest country in the world, second only to the oil cartel in the Middle East. One of the last things you want to do is hold on to your wealth without attempting to transfer it to the next generation as you sit back and allow the Estate tax exclusion to catch you after 2025.
After they reported the GDP for the March-ending quarter of 2024, there was much handwringing by economists and Wall Street. That report indicates the GDP is 1.6% for the 1st quarter of 2024, well below the anticipated percentage. I have studied this number and compared it with earlier projections, and almost assuredly, this amount will increase. It does not look like they had the full and complete inventory totals on the first read, and when the final numbers come in, I expect that percentage to be closer to 2% rather than 1.6%. Regardless of the actual numbers, 1.6% was still a satisfying number and a welcome amount given that we wanted to see a less hot economy, so that we might get lowered interest rates in the future.
If you actually believe that the economy was weak, you are not currently reading all the information available. The Federal Reserve of Atlanta projects that the GDP growth of the 2nd quarter of 2024 will be at 3.3%. That would be basically double the reported rate of the 1st quarter of 2024. I saw so many so-called Wall Street experts predicting that the fall in earnings due to a weakening economy would occur in the 1st quarter of 2024 and would bring down the stock market. Just so you understand the magnitude of the numbers, I thought I would give you the earnings of the five major tech-like stocks.
For the first quarter of 2024, Microsoft reported net after-tax earnings of $22 billion; Apple reported $24 billion; Alphabet (Google) reported $25 billion; Amazon reported $10 billion; and Meta, the old Facebook reported $12 billion. It does not seem like the earnings were diminished in the first quarter since all these companies’ earnings reports are near the all-time best in their history. In addition to the earnings, Apple announced they would buy back $160 billion of their own stock. That is the largest announced buyback ever in the history of American finance.
The numbers we are talking about are so large, they border on science fiction. To give you an example of how large they are, Warren Buffett announced his company, Berkshire Hathaway, is currently sitting on $169 billion in cash. If you can believe those numbers, the interest income earned by that cash investing in treasury bills yields interest income to the company of over $8.5 billion per year. Just think of the earning power generated by $8.5 billion of idle cash attributable to that company.
It is clear that the economy continues to be on solid ground, and corporate earnings continue to be extraordinarily good. Even though the market pulled back in April, I would anticipate that the rest of 2024 will be good. Typically, during the Presidential election year, the markets bounce around through June and, from July to November, tend to be positive. This, unfortunately, leads to what happens with incumbent Presidents. If you want to enhance your ability to be reelected, you will use the massive spending power of the government to enhance the possibility of being reelected. In order to have the best opportunity to be reelected, you want the economy to be good and everyone to have a job so that all outward appearances during your Presidency were positive. However, you do not want to do anything that will be detrimental to the economy beyond your term.
Unfortunately, that is exactly what is happening now. It appears now that the government is going crazy spending taxpayers’ money that will, in the long term, be a detriment to the U.S. economy. If you think I am exaggerating, read the exact numbers. Over the last year, there has been an increase in manufacturing jobs in the U.S. of a mere 20,000 jobs. Manufacturing jobs lead to a higher and better economy and prove that the industrial backbone of America is strong. That number is only a fraction of the number of jobs created in healthcare, which is a whopping 765,000. The worst number is the number of governmental jobs created in the last year of 618,000. Another number is the social assistance number of 267,000, which includes household healthcare workers often supported by government programs such as Obamacare and Medicare. As you can see, the current administration has loaded up the economy and government with jobs to keep unemployment low and improve their reelection chances. The sad part of these numbers is that, unfortunately, all of us will be stuck with the number of government workers that are hard to get rid of and a drain on the real economy, and taxes to pay for these jobs that are probably unnecessary. At a time when we need to cut government jobs to reduce the out-of-control Federal budget, why on earth would we be increasing the number of government employees? This year, we are anticipating a Federal deficit of $2 trillion, and yet we have added 618,000 new employees to the payrolls and jobs that provide substantial benefits in positions that are nearly impossible to terminate.
There is not much anyone can do to control the Federal deficit other than elect officials who would be more responsible with taxpayer dollars. It just does not seem that the average taxpayer knows the facts and, therefore, misinterprets the readily available information.
I just wanted to revert back to generational wealth to point out something obvious to everyone. The Federal Reserve data shows that the average net worth in 2022 of people between the ages of 65 and 74 was $1.8 million. That number clearly is exaggerated by the wealth of a few people as compared to the average. The average wealth of those people is only $410,000. While it sounds like a relatively small amount, when rolled down to the next generation, it provides a good starting point in life and a substantial increase in assets they have as compared to the assets inherited by their parents. Like most people in the boomer generation, I received no assets from inheritance, but I will pass down assets to the next generation. I suspect most of the people reading this posting will be in a similar situation. This passing down of assets will change your children's lives and, hopefully, their children in the generations to follow. My one piece of advice here is do not make your children wait until your death to share some of your successes with them.
I was taken aback when I read the headlines that the unemployment report went from 3.8% in March to 3.9% in the month of April. A 1/10th increase in unemployment seemed highly unlikely, given the shortage of employees available to be hired everywhere. So, I looked up where these figures were coming from and determined what was correct. April’s jobless rate was 3.86%, while the jobless rate in March was 3.83%. Therefore, the March unemployment rate was downgraded to 3.8%, and the April amount rounded up to 3.9%. As you can see, statistically the numbers were almost identical, but the headlines assumed something negative because the unemployment rate increased. I hope that if you get nothing else from reading my postings, you will learn to take what the mainstream media and Wall Street give you and better understand what the numbers mean and how easy it is to misconstrue them.
As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
No subject that I have written about in these postings has garnered more attention than my last, regarding generational wealth. Everyone has that subject on their mind, but they really do not know how to address it. We are entering into a period where the transfer of wealth from the Baby Boomer’s generation to their children is unprecedented and will change the value of investments in the future for all. It is possible that the United States will become the second wealthiest country in the world over the next 25 years.
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| Pretty sneaky! Mia and the entire Musciano clan surprised her wonderful parents (40-year clients of RF) with a vacation to their old condo at the beach! |
The stock market pulled back modestly in April, but that certainly was no surprise. I guess you would have to say that it was a humble pullback, given that the market was ahead 26% for all of 2023 and was up a full 10.6% for the first quarter of 2024. Given that extraordinarily hot increase in the markets, a modest pullback should not have been unexpected by anyone. In this post, I will discuss what is likely to happen during the rest of 2024, given the incredibly positive presidential cycle trends from the past. People seem to forget that this is a presidential year and what you see in presidential years is positive stock market performance.
For this posting, I will discuss a great deal about generational wealth, the economy in general and, of course, what I expect for the rest of the year. I will also comment on the extraordinarily negative sentiment regarding stock market performance and the remarkable performance contrary to the negative editorial comments out of Wall Street. Before I discuss all those interesting subjects, I must reflect on the performance of the stock market during the month of April.
The Standard & Poor’s Index 500 stocks were down 4.1% for the month of April but continues to be up 6% for the year 2024. For the one-year period, that Index is up a very satisfying 22.7%. The NASDAQ Composite was down 4.4% during April and is up 4.5% in the year 2024. The one-year performance of that Index is 29.1%. I do not think anyone could argue with that positive performance. The Dow Jones Industrial Average was down 4.9% in April and is only up 0.9% year-to-date in 2024. That Index is up 13.3% for the one-year period ending April 30, 2024.
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| Cameron thinking maybe he was meant for the tux life, after all… |
I always like to add in the Bond Index so that you can have a comparison between equity investing and bond investing. For the month of April, the Bloomberg Barclays Aggregate Bond Index was down 2.5%. For the year-to-date during 2024, that index is down 3.2 % and the one-year performance of that index is down 1.4%. As you can clearly see, all three major equity indexes are up double digits for the one-year period ending April 30th, but the Aggregate Bond Index is negative for that one-year period. If you are investing all your retirement money in bonds expecting to fund your lifestyle in retirement, you are clearly making a mistake given these performance results.
Something very interesting happened during the month of April. The Indexes were performing very well through most of April, but towards the end of the month there was a major sell-off. In fact, on the last day of April, the NASDAQ Composite was down a full 2% in one day. It was clear that during this time, the market traders were trying to embarrass the Federal Reserve Chairman, Jerome Powell. Many believed on Wall Street, a combination of a negative stock market and a major increase in interest rates in bonds could force the Chairman to immediately reduce interest rates on the Federal Funds Rate.
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| Good friends Lloyd King and Scott Zakheim enjoying great seats at the Predators game. |
I have seen this many times in the past where traders team up and do everything within their power to embarrass the Chairman, hoping they can force his hand. As you know, even though he is appointed by the sitting President, the Chairman of the Federal Reserve is not political. Fortunately, this Chairman has not yielded to the whims of Wall Street and continues to do his job based upon current events.
It has received very little publicity, but I thought the Chairman’s comments after his last news conference were very telling. He basically promised that they would not increase interest rates. If you look at his actual statement, what he said was, “I think it's unlikely that the next policy rate move will be a hike.” You can get no more emphatic than that statement. Basically, what he is saying is that he is guaranteeing that the next move by the Federal Reserve almost assuredly will be a downward movement.
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| Sweet little Penny with what might be the only Easter Bunny we’ve ever seen that doesn’t look terrifying! |
The job numbers for the month of April were not spectacular, but they were very encouraging. The month of April reported an increase in employment of 167,000 jobs. That is certainly below the hot number we have had for the last several months. However, a moderate increase in jobs is very welcome. As we well know, the labor market has been extremely tight for the last several years, and any easing of that pressure in the job market will almost assuredly result in a reduction of interest rates going forward.
Wall Street has proclaimed that due to inflation, which has partly failed to respond to the Federal Reserve tightening, there will be no rate increases during 2024. I am in the opposite camp. It is fairly clear that the pressure that higher interest rates are putting on the economy is slowing the expansion of the economy and, therefore, is hurting future growth. In my opinion, I think that the Federal Reserve will cut interest rates prior to the end of the year, most likely after the Presidential election.
No Federal Reserve Chairman would ever want to be deemed political, and to impact a Presidential election would be a disaster. People forget that Jerome Powell was appointed by then President Donald Trump, but he has made it very clear that any monetary policy decisions would be made based on what’s right for the economy, without regard to politics or any outside considerations.
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| Amazing! Josh and Carter in front of the beautiful red rock walls of Sedona. |
There is another reason rate decreases are going to occur. Suddenly, we are seeing a strengthening dollar around the world. This is not unusual when interest rates are as high as they are here in the United States. But we have recently seen in Japan that the yen has exceeded 150 to the U.S. dollar. That is the weakest it has been in generations. Also, we are seeing that the dollar's strength is impacting the ability of China to control and keep their currency level with the U.S. dollar. There is so much negative that would go on with a strong dollar that it is most likely that the Federal Reserve will have to cut interest rates regardless of inflation to slow down the gains in the U.S. dollar against the rest of the currencies in the world.
As I mentioned in my last post, I discussed the transfer of wealth in the United States to the next generation, creating generational wealth. Probably no subject I have ever written about has received more comments from the people reading my newsletter so I thought maybe I would go back and discuss it in greater detail. Whatever you believe in the way of transferring wealth that may occur in the U.S., you will not believe the actual numbers.
Economists now estimate that something like $84 trillion will be expected to pass from the older generations between now and the year 2045. Even more interesting is that roughly $16 trillion will take place over the next 10 years. Many things lead to this transfer of wealth. Obviously, the rapid increase in real estate values and the historically long bull market have led to substantial assets that will be passed down to the younger generation. However, one of the largest and most significant contributors to this wealth has been the transfer from defined benefit pension plans to the so-called 401(k) and IRA retirement accounts.
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| Joe (age 5) doing his best James Dean impression |
When I was growing up, the Cadillac of investing was the pension you would receive from large companies like General Motors and the government retirement pensions that would go on for the rest of your life. The unfortunate part of these pensions is that when you died, the amount stopped and there was no money to transfer to your children. Basically, it provided a guaranteed income during your lifetime, but nothing was leftover to pass on to the younger generation.
I vividly remember, as a child, when the insurance agent would come by our house once a month to pick up a check for my father’s life insurance. He would often show up during a family meal, and either my father or mother would write a check to cover the insurance premiums. Being an impressionable child and not having any idea of the reality, I just assumed that my father had millions of dollars of life insurance in the case of his death.
In fact, when my father died, we found that he had three $1,000 whole-life policies. It was the standard during his lifetime that you would pay into life insurance your entire lifetime and then when the time came to retire, you would annuitize the cash value of those life insurance policies to create a retirement income stream for you. That is where the term to annuitize came from, and now it relates to all retirement income streams. It was certainly sad to all of us to see that he had paid for his entire lifetime just for a cash value of $3,000 to support my mother.
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| Huldah Bewley with her sweet granddaughter, Baby Georgia. Congrats to Katherine – she’s adorable! |
I was already practicing accounting when they first introduced the IRA law in the 1970’s. Everyone was skeptical at that time that these would work, and that the government would not get involved or try to intervene on the IRA’s. Over time, it has proven that they are highly successful, and it is now viewed today to be enormously utilized by the younger generation.
The success of advantage savings accounts and IRA’s can be demonstrated by the growth in these values. In 1995, it was estimated that the entire retirement market was $7 trillion. In 2023, it is estimated that the value of the retirement market is $38.4 trillion. As you can see, the growth in this market has provided a substantial number of assets that will be transferred to the younger generation over time.
As we see in our business, many investors have substantial 401(k) plans that they have no need to touch since they have other income. The vast majority of these 401(k) plans will be passed down to their second generation, and hopefully, that generation will pass it on to the third generation. What I am trying to emphasize is there will be such a huge transfer of wealth to the next generation that it will significantly improve the standard of living for most Americans due to the spending opportunity that the substantial wealth will offer to the economy in the future.
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| Cameron + friends looking stylish at the pre-prom picture party while counting down the hours until the after-party. |
People do not understand or fail to realize that there is a substantial issue producing Estate tax over the next several years. Currently, the Estate tax exemption is roughly $13.8 million for each person alive. For a married couple, that is roughly $28 million. Given that enormous Estate tax exclusion, virtually no one qualifies for Estate taxes at the current time. In fact, in all of 2023, only 4,000 estate tax returns were filed in the United States, and only 2,000 of those owed Estate taxes. Rest assured that those who owed Estate taxes were taxpayers who did not receive tax advice since there are so many ways to avoid this. What is interesting is that if you assume that only 4,000 Estate tax returns are filed and divided by the attorneys practicing Estate and Gift law, you can see the issue of that overcapacity.
If the current administration is re-elected, they have assured everyone they have no intention of continuing to allow the income and Estate tax laws that President Trump passed which will expire at the end of 2025. If they do not allow these Estate tax limits to move forward, the exemption will drop from $13.8 million to approximately $7 million. Therefore, for a married couple, the exemption falls from $28 million to roughly $14 million. Suddenly, many people who thought they were outside of the Estate tax will fall within it. For more than any other reason, this emphasizes the importance of transferring wealth during your lifetime to a younger generation to avoid Estate tax.
Many of my clients express a desire to understand and participate in generational wealth, but they often feel unsure about how to do so. The good news is that you do not need to do much to achieve this goal. As I often advise my clients, it is quite straightforward to fund your child’s Roth account, even though they have meager earnings from a summer job. If you were to calculate a Roth account for an 18-year-old child, accumulating from age 18 to 65, you would be amazed at the significant wealth transfer you could initiate with minimal contributions.
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| Joe, age 7- all he’s missing is his briefcase and Sharpie (which, fun fact, wasn’t invented until 1964) |
Upon reaching age 73, many of my clients are reluctant to take their Required Minimum Distribution payments. They often feel they have no need for money at that stage of their lives. One effective strategy could be to take the required minimum distributions and gift them to your children or grandchildren. There are numerous ways to transfer wealth while maintaining control over your money. For instance, consider placing a vacation home in an LLC and transferring the minority interest to your children. This way, wealth can be transferred to the second generation without relinquishing control of the money. I strongly advocate for helping your children prepare for their own retirement. Contributions to an IRA or Roth to those children are substantial ways of moving wealth to the second generation. This helps your children build wealth while not hurting your pockets.
Another significant transfer of wealth is through charitable contributions. Through a donor-advised fund, you can contribute money annually even though you have no specific charitable entity in mind for the transfer. I encourage people to contribute over five to 10 years to a donor-advised fund and accumulate a relatively large amount of money that can contribute in the future to a charitable cause. This is a way to move substantial assets from your name into a charitable cause that does worthwhile activities. The fact that you can move substantially appreciated securities without paying income taxes on those securities is another reason to make these transfers.
As these numbers indicate, there is going to be a significant transfer of wealth over the next 20 years. To give you an example, it is now believed that $84 trillion in real estate, stocks, cash and other assets in the United States alone will be transferred. Of this amount, roughly $6.6 trillion sits in 401(k) plans that will need to be transferred over the next few years. This transfer of wealth will forever change the U.S. economy due to the spending power of the people who receive this money. It is highly likely that over the next couple of decades, the U.S. will become the second wealthiest country in the world, second only to the oil cartel in the Middle East. One of the last things you want to do is hold on to your wealth without attempting to transfer it to the next generation as you sit back and allow the Estate tax exclusion to catch you after 2025.
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| Josh and girlfriend, Kasten, celebrating the end of tax season with a Braves game! |
After they reported the GDP for the March-ending quarter of 2024, there was much handwringing by economists and Wall Street. That report indicates the GDP is 1.6% for the 1st quarter of 2024, well below the anticipated percentage. I have studied this number and compared it with earlier projections, and almost assuredly, this amount will increase. It does not look like they had the full and complete inventory totals on the first read, and when the final numbers come in, I expect that percentage to be closer to 2% rather than 1.6%. Regardless of the actual numbers, 1.6% was still a satisfying number and a welcome amount given that we wanted to see a less hot economy, so that we might get lowered interest rates in the future.
If you actually believe that the economy was weak, you are not currently reading all the information available. The Federal Reserve of Atlanta projects that the GDP growth of the 2nd quarter of 2024 will be at 3.3%. That would be basically double the reported rate of the 1st quarter of 2024. I saw so many so-called Wall Street experts predicting that the fall in earnings due to a weakening economy would occur in the 1st quarter of 2024 and would bring down the stock market. Just so you understand the magnitude of the numbers, I thought I would give you the earnings of the five major tech-like stocks.
For the first quarter of 2024, Microsoft reported net after-tax earnings of $22 billion; Apple reported $24 billion; Alphabet (Google) reported $25 billion; Amazon reported $10 billion; and Meta, the old Facebook reported $12 billion. It does not seem like the earnings were diminished in the first quarter since all these companies’ earnings reports are near the all-time best in their history. In addition to the earnings, Apple announced they would buy back $160 billion of their own stock. That is the largest announced buyback ever in the history of American finance.
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| Ava’s long-time love of horses “mounted” after meeting these beautiful Icelandic ponies |
The numbers we are talking about are so large, they border on science fiction. To give you an example of how large they are, Warren Buffett announced his company, Berkshire Hathaway, is currently sitting on $169 billion in cash. If you can believe those numbers, the interest income earned by that cash investing in treasury bills yields interest income to the company of over $8.5 billion per year. Just think of the earning power generated by $8.5 billion of idle cash attributable to that company.
It is clear that the economy continues to be on solid ground, and corporate earnings continue to be extraordinarily good. Even though the market pulled back in April, I would anticipate that the rest of 2024 will be good. Typically, during the Presidential election year, the markets bounce around through June and, from July to November, tend to be positive. This, unfortunately, leads to what happens with incumbent Presidents. If you want to enhance your ability to be reelected, you will use the massive spending power of the government to enhance the possibility of being reelected. In order to have the best opportunity to be reelected, you want the economy to be good and everyone to have a job so that all outward appearances during your Presidency were positive. However, you do not want to do anything that will be detrimental to the economy beyond your term.
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| Never too young for a bucket list - Ava and her classmate enjoying the Northern Lights in Iceland! |
Unfortunately, that is exactly what is happening now. It appears now that the government is going crazy spending taxpayers’ money that will, in the long term, be a detriment to the U.S. economy. If you think I am exaggerating, read the exact numbers. Over the last year, there has been an increase in manufacturing jobs in the U.S. of a mere 20,000 jobs. Manufacturing jobs lead to a higher and better economy and prove that the industrial backbone of America is strong. That number is only a fraction of the number of jobs created in healthcare, which is a whopping 765,000. The worst number is the number of governmental jobs created in the last year of 618,000. Another number is the social assistance number of 267,000, which includes household healthcare workers often supported by government programs such as Obamacare and Medicare. As you can see, the current administration has loaded up the economy and government with jobs to keep unemployment low and improve their reelection chances. The sad part of these numbers is that, unfortunately, all of us will be stuck with the number of government workers that are hard to get rid of and a drain on the real economy, and taxes to pay for these jobs that are probably unnecessary. At a time when we need to cut government jobs to reduce the out-of-control Federal budget, why on earth would we be increasing the number of government employees? This year, we are anticipating a Federal deficit of $2 trillion, and yet we have added 618,000 new employees to the payrolls and jobs that provide substantial benefits in positions that are nearly impossible to terminate.
There is not much anyone can do to control the Federal deficit other than elect officials who would be more responsible with taxpayer dollars. It just does not seem that the average taxpayer knows the facts and, therefore, misinterprets the readily available information.
I just wanted to revert back to generational wealth to point out something obvious to everyone. The Federal Reserve data shows that the average net worth in 2022 of people between the ages of 65 and 74 was $1.8 million. That number clearly is exaggerated by the wealth of a few people as compared to the average. The average wealth of those people is only $410,000. While it sounds like a relatively small amount, when rolled down to the next generation, it provides a good starting point in life and a substantial increase in assets they have as compared to the assets inherited by their parents. Like most people in the boomer generation, I received no assets from inheritance, but I will pass down assets to the next generation. I suspect most of the people reading this posting will be in a similar situation. This passing down of assets will change your children's lives and, hopefully, their children in the generations to follow. My one piece of advice here is do not make your children wait until your death to share some of your successes with them.
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| Bows and bling, it’s a cheer thing!! Go Caroline!! |
As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.
This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future. These statements are not guarantees, and undue reliance should not be placed on them. Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.
