Welcome to Pension Attention, the best show for first responders who want to take control of their finances.
After advising Los Angeles city firefighters for over 12 years, financial advisor, Brad Barrett now shares how you can grow your wealth, build your legacy and enjoy a life of freedom. And now here's your host, Brad Barrett. [00:19.9]
Brad: Welcome to Pension Attention, the show for you, first responders who want more out of their deferred compensation and pension plan. My goal with this podcast is to reach you where you are, at whatever stage in your career you are in, in order to provide my nearly 15 years of experience working with both active and retired service members on their investment and retirement planning. My team of fiduciary advisors here at ONE Fire and Police are dedicated to ensuring you take control of your finances and build the life you deserve.
To find out more about myself or any of my team members here at One Fire and Police, you can go to our website PensionAttention.com or you can give us a call at (805) 409-8150 and as always big shout out to each of you listening here each week to the Pension Attention podcast. Very grateful. And if you haven't already done so you can go to our website again, PensionAttention.com. Thank you. And if you haven't already done so you can go to our website and there on the media tab at PensionAttention.com, you can click and download and subscribe the Pension Attention podcast. (01:22)
You can also download and subscribe the podcast on any platform where you would normally listen to a podcast, whether it's the apple app on your phone, Google podcast, SoundCloud, or Spotify. And again, leave us a review, leave us a comment, let us know how we're doing. It's always good to get feedback. And as I say each week, if you liked the show, tell someone you like, if you don't like the show, I guess tell someone you don't like.
Because today we're gonna talk about a pretty important topic. Something that's definitely been in the news, President Biden. Now, without going political. I just want to talk about some of the things that are most important to the tax implications in his infrastructure conversation he's having. And some of the things for us to, to look at now, I want to start off with a little story. (02:04)
You know, I like to do contrary to popular belief and honestly many children's stories, quite frankly, bears don't go into deep sleep slumber each winter. Yeah, I'm talking about bears. Didn't see that coming, did you? So Grizzlies and Black Bears, for example, they intern what's called Torpor where body temperatures are lowered and heart breathing and metabolic rates are all slowed and it allows the conservation of energy. Now they may wake or stir or stretch around and either wander out, especially if they sense danger or their den is flooded now in torpor, or again, light hibernation as it's called Bears are able to live off stored fat inside their caves are these claw-dug dens, and they can avoid the harsh elements and the dearth of food that's around. Now in essence, why am I bringing this up? The bears are largely staying inside, trying to survive until sunny days arrive. Pretty much exactly what the United States and most of the world have been doing since COVID hit, especially in North America. (03:08)
Now I would say one envious difference is Bears lose weight, but very little muscle during their largely sedentary periods. I don't think many of us did. I know I'm talking to myself here. Now, when bears finally started to emerge the entry phase called walking hibernation, they don't immediately become a ferocious beast right out of the gate. But rather eaten bits and droughts while allowing their bodies to adjust, which feels a bit like the early part of this year. Wouldn't you agree? When many of us were cautiously reentering society as vaccines, you know, began to roll out and the pandemic “curbed”. Now when “ walking hibernation” ends, the bears are ready for normal behavior. Feel familiar now and stay with me here. I promise it’ll make sense. Okay. This brings me to inflation. I talked about this a couple of weeks ago on the episode titled Inflategate, the rising costs of goods and services, otherwise known as inflation. (04:08)
Now, currently gas prices, depending on where someone lives are up 15 to 23%. Rental cars, by the way, those costs have skyrocketed to an astronomical 293%. Now, according to the latest federal reserve monthly stats, use cars or up nearly 80%, beef milk and beer all rows, 32%, 30% and 13% respectively. Why? Because we're a massive ravenous bear anxious to consume the pleasures denied by lockdowns and shutdowns, obviously. And for the time being there are only so many seats in a plane, concert hall or restaurant. Cars are available to rent or purchase and houses are on the market. So a big part of the problem is that months upon months of laid off workers, shut down factories and canceled orders have all caused massive bottlenecks in supply chains. Now, understandably, perhaps, most industries weren't in a position to suddenly meet this sharp demand of a quickly reopening economy. (05:14)
Now add to this, the artificially tight labor markets we've been seeing. Pushing up wages and leading to more disposable income for these guys and services. So compound that with the government dispensing essentially Trillions in unemployment benefits and infrastructure spending and attempting to elevate employment and wages even further. The result here we are annual inflation levels above 4% for the first time, since the USSR dissolved and Schwarzenegger made the Hasta-la-vista baby. Ubiquitous catchphrase, right? 30 years ago, if you can believe that are ending hibernation and emerging into this barren marketplace is lightening our wallet. It's a difficult phase. Yes, I'm with you on this. The good news is it's just that it's a phase. Soon enough, we believe the landscape will be bountiful. Now as federal reserve chair, drone Powell told Congress in late June, just a few weeks ago, the current price gains are largely due to those afore mentioned bottlenecks, which are temporary. The chairman pointed to used cars, airplane tickets, and hotel rooms, which again, make up a huge part of the gains as industries were caught essentially off guard by these skyrocketing demand from a rapidly reopening economy.
The vehicle sector in particular provides a good look at the chairman's point. So during the pandemic fears over public transportation, caused an increased demand for new cars. So that combined with the shortage of the microchips needed to manufacture them, drove folks over to the used car market. So who else is bidding in that market rental car companies, many of which sold their fleets at the beginning of the pandemic and suddenly needs to meet a furious demand of people not being able to travel. So you don't need a degree necessarily in economics to know how that's going to play out. Now, Powell said, and I quote “those things that we would look to to stop going up and ultimately start to decline as the situations resolve themselves”, he starts off again and says they don't speak to a broadly tight economy. (07:25)
The kind of things that has led to high inflation over time. And he added, again, these effects have been larger and may last a little longer than the fed expected, but, and I quote, he quoted “the incoming data are very much consistent with the view that these factors will wane over time and inflation will then move down towards our goal”, which again is 2%. So we here at one capital management and in my topic today around Biden's tax hikes and those conversations. I’ll be moving over from the federal reserve side into the presidential, the executive branch side here in a second. But I want to start this off because I want to say something for many conversations, I've been having with clients we've had with our investor calls and things like that. You know, we're in the camp of believers that the higher-than-expected inflation will indeed last longer. (08:12)
I think, we think than central banks predict that is what we feel now. Also, there should be really no fear of this leading to a recession. There's no comparison as some have made to the late seventies or early eighties, when again, a global oil crisis had the economy reeling and economists basically thought higher inflation could grow employment. The whole Phillips curve, anyone who's an econ major will see that. And this kicked off a couple months ago with the pipeline disruption. And it started kicking off these fears from again, the seventies and eighties. So again, we're in the camp that there really isn't a fear of a leading recession based on some of the data that are comparisons to that time period. Now for almost 20 years, inflation has run right around 2%. The stated goal of North American central banks, 2% number. And with a little bit of time, we'll start heading there. Global economies are opening exponentially and there is a palpable demand for normal behavior. We would say. So the temporary rise in inflation, won't derail growth in our opinion. Interest rates, they may move a bit higher, but even if they doubled essentially a hit to long term bond investors, the 10 year government bond yields in the U S and Canada, by the way, all north America will be right around 3%. Pretty awfully cheap by historical standards. And just slightly above inflation, which is ideal to the current price spikes are not a reason for panic. (09:39)
Do you know how much you should be contributing to your deferred compensation plan? Are you getting the most out of your current investment options? Looking at entering or about to exit the DROP program? Go to www.pensionattention.com to find out how we can help. [9:54]
I want to start off today's Pension Attention podcast around this, as we head into. What I also think isn't something for us to panic about, which is Biden's discussions around tax hikes. I mean, they're an indication that the economy is healing. If you think about it and on the cost of being able to fuel even more expansion to meet the demands of a growing world. So come fall, which is not that far away, which is crazy to say bears back to my wonderful bears in preparation for the winter, we'll enter into hyperphagia, a state or a stage of massive consumption with now. Again, supply chain kinks being worked out, production ramping up and inflation trending downward. The global economy will likely be in the same stage. So we want to really focus on some of the things that we look at here internally. And a lot of this writeup came from our recent folio. So for those clients who have gotten their quarterly reports and have seen our writeup. It was interesting dynamic as we looked at here internally on our investment committee and heading into my conversation today, which is a perfect one-two punch when it comes to some of the central bank theories that we've all been talking about, about inflation. (11:03)
And what we're seeing is we're getting to as open economy. while also having an open economy we’re also having a new president. So let's talk about that for a second. Now, as you'll notice, I titled this week's episode, don't sweat the Biden tax hikes, and you're probably thinking, well, maybe when Brad, he's going to raise taxes, why would I not sweat that? So I want to walk through that a little bit for each of you listening here. Because again, what I always try to do is take what we can read out there in the world, the information that we can now glean from pretty much anywhere we look at this point. And bring it into your world. And what we see as advisors for each person who's listening today as first responders. And in the recent article of Kiplinger's, there was an article in there done by a guy named Rocky Mangle that I was reading. (11:44)
And I really wanted to use this to talk about some of the things that I've been thinking about in writing for todays in this week's episode. So in talking about president tax hikes, the American families plan, as it's called, it offers, look this long list of “social infrastructure programs”. Basically, you know, free preschool and community college. It's got caps on childcare expenses, training, and pay for childcare workers. It also has guaranteed family and medical leave, enhanced unemployment benefits and tax breaks for basically lower- and middle-income families. Now to pay for this $1.8 trillion package, by the way, Biden wants to why we're talking about this, raise taxes on upper income Americans. Now you can probably imagine that setting off alarms for a lot of people, mainly those you thinking about this right now. So, I want to go and dispel some of these things and what we want to look at when we're going through that. (12:40)
Now, in addition to the anxiety over probably your own personal finance that we're seeing a lot. Many Americans are worried about the impact on the U S economy. So it's both personal and general in nature because we're talking about inflation. Potentially. We just talked about that, right? And why that matters from a central bank theory. And that could also be followed by higher interest rates, slow growth, which are some concerns for many Americans. But again, how we see it is a little bit different. So I want you to hear that from us today, but if you're looking for ways to bring your anxiety level down and why I wanted to bring this up today, here are three reasons why you shouldn't fear. Biden's proposed tax increases.
Number one, this is going to sound crazy, but myself included, we're not rich. pretty bold statement. I know I apologize, but I'm just gonna come out and say it. (13:25)
Some of these things that we're talking about, really, we have to look at the specifics inside of there. The revenue raisers are clearly aimed at the country's highest earners. I have my own personal opinions on that, frankly. And we'll talk about that a little bit, but let's just talk about the facts for a second. It is aimed at higher earners and that's who it ended up paying the bigger tax bill and the vast majority. So let me give you an example of exactly what the proposal to increase the top income tax is. It's going from 37% to 39.6% reportedly. Now that would apply to only single filers with taxable income over $452,700. And married couples, those of us married, it would apply with only taxable income over $509,300. That's not us. Now even the highest capital gains tax rate goes from 20% to 39.6% (14:17)
It would impact only households earning $1 million or more. So the plan to eliminate the step up in basis for inherited property would apply only, again, only to gains of at least $1 million. So, you're probably thinking, well, Brad, you doesn't sound like you're you're opposed to it. Of course, I am. I don't necessarily believe that taxing those out there that have worked their tail off, taxing them more. I'm not necessarily in that camp. Okay. So, but I want to be very clear about this as we're talking about each of us on this show today, and as what we talk about in our practice, we want to relate what's going on in DC to each of our client's specific situations and from my clients with the first responders world, this tax hike on a personal level may not impact you as much as you think. That's number one. (15:03)
Number two, increases aren't imminent. Even if you're wealthy enough, okay, let's say I'm wrong on number one. Even if you're wealthy enough to have these affected by the proposed tax increases. We really, I personally don't expect it to take effect until 2022 at the earliest. Now while Biden. He hasn't said when he wants the proposed tax increases to take effect, there's no indication that they would be applied retroactively to the 2021 tax or something that's been said, but it has not been discussed. So, if the economy doesn't fully recover soon, any tax increases could be pushed even further down the road. Raising taxes, any stall, the economy is risky even for a knucklehead like Biden. So again, increases our imminent. Number two.
Number three, Congress. The way our founding fathers set up our country is brilliant. Three branches. Congress may block them. That's number three. (16:01)
Congress might block him. Hopefully he does. It's tough hiking taxes on anyone, much harder than raising taxes on corporations. And there's certainly a chance that President Biden won't get the tax hike he's proposing. Or they could be cut down from where they currently stand or many different negotiations could happen. Congress could also come in and come up with a whole new slate of tax increases that don't affect you, or they could shelve the entire plan. Republicans in particular, aren't going to support tax hikes at all. That means Democrats will have to go it alone, probably using the “Budget reconciliation process”. That means they'll need all 50 democratic senators to pass tax legislation. If just one box we're looking at you, Senator Manchin, then the whole plan could collapse. So number one, we're not necessarily rich, so it's not necessarily affecting us. Those that are listening right now, if it does the number two, remember increases aren’t imminent. (17:02)
And number three, in my opinion, most importantly, what he's trying to propose has a really tough road to getting in there. Doesn't mean we have to put it aside and not think about it. Trust me, us here at one Capitol management at One Fire and Police for our advisors here for you listening, we're thinking about it constantly understanding how that impacts inflation, which we talked about at the top of the show. How that impacts central banks decision-making and ultimately how corporations and those that are employers out there, how tax increases can affect how they view their companies, which ultimately affect those that are working for those companies. And then all in all ends up affecting how people spend their disposable income. So, yes, it's important to remember three things. One doesn't necessarily pertain to you. Number two, if I'm wrong on number one, they aren't imminent the increases aren't imminent. (17:56)
And number three, Congress may block them again, big shout out big thank you to our founding fathers for how they designed this country, because we do have checks and balances. Very important as we go into a discussion like this and seeing these things. No, none of us like hearing this guy talk. I mean, when he can, and to know we don't like hearing him talk about taxes being increased. No one likes to hear that, but then we need to go into the granular. That's my job to make sure I articulate that well for each of you listening, who are clients, for those of you who are listening and heard of this podcast, it's important to know what an advisor should be looking at for you. Because yes, taxes involve retirement plan discussions, taxes involve investment plan discussion. So these are important. And why I'm saying let's not sweat the Biden tax hikes. (18:42)
Those are my three reasons. Number one may not pertain to us. And number two, if I'm wrong, a number one increases there aren’t imminent necessarily. And number three, Congress may block them. So it's important to make sure if you have questions on this reach, reach out to us, let us know we happy to go through it. There are bigger and more macro discussions to be had. Yes. And also if you're a client, I would take a look at our folio, our recent summer 2021 post that we write up every quarter. It's a really good write-up on what to discuss about inflation a little bit more in depth on some numbers.
And if you haven't already done so you can go to our website at PensionAttention.com. And again, you can subscribe to our website. You can schedule some time with myself or Toby Rodriguez or Nick McDonald or any of our advisors here serving our LAFD and LAPD active and retired members. I want to thank you for listening to Pension Attention, and as always before acting on anything discussed today, remember speak with a financial advisor near you about your specific situation. Or again, if you'd like our help, you can visit us at PensionAttention.com or give us a call (805) 409-8150. Next week on pension attention, we're gonna be talking about the theory around changing allocations as we age. I'm looking forward to it until then stay safe.
The information in this podcast is educational and general in nature and does not take into consideration the listeners personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.
To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [20:21.3]