Monday Night Finance- Volume 72

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The Most Important Concept in Retirement Planning

We all want to retire someday. In fact, I’m guessing most of us would retire tomorrow if we won the lottery. However, most of us can’t retire until we’re in our late 60’s or 70’s. Depending on when you plan on retiring and how much money you make, there are a lot of potential paths towards retirement savings. Most of us have access to a 401(k) or 403(b) plan at their job. And even more Americans are eligible to contribute to an Individual Retirement Account (or IRA). These accounts often come in two “flavors”- Roth and Traditional both with their own types of tax advantages. However, trying to figure out which account is optimal for your individual situation is a difficult question to answer.

Tax rate arbitrage is the most important concept in retirement planning.You must understand tax rate arbitrage to buy the government out of your retirement. When should you harvest/accelerate income, and when should you avoid/defer it?

~FI Physician

In fact, FI Physician calls this tax planning around retirement accounts the most important concept in retirement planning. Tax management is complicated by the fact that in the United States we have a progressive tax system so that the marginal tax rates increase with the amount of income. Therefore, by reducing income when it is high by contributing to a traditional 401(k) can be especially attractive. However, if you build up too high of a balance in your 401(k), you may face very high future taxes when you are required to withdraw the money in your 70’s. While you may have read general rules about what types of accounts are better, FI Physician points out just how complicated this math is. In fact, they recommend that you evaluate your situation ever year. If you haven’t thought deeply about your tax situation recently, you might want to check out this article to start your planning.

How the Fed Screwed Up the Housing Market

Have you tried to buy or sell a house since the start of the pandemic? If so, you’ve probably experienced some headaches. There have been numerous articles/podcasts/new stories about people who have tried to buy a home at 110% of the list price but were beat out by an even higher all cash offer. Housing inventories are at historic lows which has caused a rapid run-up in the prices of homes. Ultimately, this dysfunction in the housing market is causing a lot of pain for nearly everyone.

The Fed deserves some blame for what’s going on in the housing market. I think the past few years are going to screw things up in housing for a long time. There are a number of different factors that played a role in the huge move up in housing prices — the pandemic, the switch to remote work, low mortgage rates, demographics, etc. So it’s not all on the Fed.But look at how long they let that run-up in prices past

Ben Carlson

If you’re searching for an explanation for this pain, Ben Carlson of A Wealth of Common Sense suggests that you need to look no further than the Federal Reserve. While housing prices depend upon a variety of factors, the Federal Reserve has a unique impact on the housing market as it sets the Federal Funds rate which affects mortgage rates. The interest rate on a 30 year mortgage essentially doubled from January 2022 to September 2022. In fact, they are higher than they’ve been in a decade. This sharp decrease in affordability is causing there to be less construction on new houses, which is exacerbating the already low inventory of housing in the US. If you are interested in a deeper look at what’s going on in the housing market, this article has lots of interesting graphs and data.

Warren Buffett’s Railroad Investment

Warren Buffett is famous for being the wisest and most successful investor in our lifetime. Unlike most billionaires who struck it rich by building their own companies, Buffett built his empire through buying companies that were undervalued. Many people dream of becoming the next Buffett and have studied all of his investments to understand what lessons they can learn from one of our generation’s greatest investors.

Buffett’s buy of BNSF highlights three of his favorite reasons for investing: pricing power, competitive moat, and fair price.

Dave Ahern

In this article, Dave Ahern discusses Warren Buffett’s investment in the railroad company BNSF in 2007. While the 2000’s saw the rise of technology companies such as Meta (Facebook), and Alphabet (Google), Buffett was drawn to one of the US’s oldest industries. While railroads seem old and outdated, they are unique in that they are one of the only modes of transportation that own all of the infrastructure surrounding it. (UPS may own its trucks, but it drives on an Interstate owned by US taxpayers). In contrast, BNSF owns its infrastructure outright which gives them a strong position to price goods shipped along their rail lines. If you want to be like Buffett, I strongly recommend giving this article a read to see how this investment worked out for Buffett and what you can learn from this great investor.