dsmWealth: December 21, 2023

University of Iowa sophomore dominates investing contest
BY STEVE DINNEN
The Dow Jones Industrial Average has chalked up an OK year so far, rising about 12.5%. The S&P 500 Index stocks have fared better, rising 22.9% percent, while the NASDAQ Composite Index verged on great, climbing 39.8%.

And then there’s Ryan Spaeth, up 1,186%. The name is not an index, and the number is not an error. Spaeth is a University of Iowa sophomore who turned a $100,000 stake into an astounding $1,186,463 in a three-month span ending in mid-November. If only those were real dollars!

The finance and business analytics major was participating (with phantom dollars) in the HawkTrade investing contest run by students in the university’s Tippie College of Business. The periodic contest challenges students to deploy the investing acumen they’ve accumulated during their time on campus.

This was Spaeth’s third run at HawkTrade. He placed third after his first attempt, before he won the whole thing on his second try, when he turned that $100,000 into $800,000. Not too shabby.

“Ryan is widely regarded as the GOAT of paper trading competitions,” said Credence Wernke, a fellow Tippie student who helped administer the HawkTrade contest.

Spaeth’s interest in investing started in high school in suburban Chicago after he injured his hand and could no longer compete in football or play the guitar. He started reading issues of the Wall Street Journal that were lying around the house and became intrigued by the facts and figures he gleaned about the stock prices of various companies. Soon enough, he entered a stock picking contest (again with phantom dollars) and topped a field of 3,000 competitors.

He honed his trading skills once he got to Iowa and entered the HawkTrade contests. He sharpened his vision to specialize on shorting shares — betting a company stock will fall in value. “It’s easier to predict when a company is overvalued,” he said. “I find little bubbles, little inconsistencies.”

Timing is key. Finding just the right moment to buy and sell has been key to his success. Without giving away secrets, he said his timing worked perfectly with Tempest Therapeutics Inc. (ticker: TPST), a startup working to cure cancer. It suddenly shot up on some news. “I shorted it around $6.25 and covered around $3.90, profiting around $160,000,” Spaeth said.

He has two more years at Iowa — and two more cracks at the HawkTrade. And after that?

“I’m planning on going into investment banking or private equity,” he said.

That might be his smartest decision of all.

With CDs, you can bank on bank interest rates — for now
BY STEVE DINNEN
In April, I bought a certificate of deposit at my bank, and when it matured last month, I collected 4.25% interest. Just this week, I “laddered” six CDs, with maturities of three, six, and 12 months, with interest rates of 4.5%, 4.85% and 5%. I may buy more.

These days, for the first time in many years, bank interest rates are benefiting savers. Thank the Federal Reserve, which raised its federal funds target rate 11 times in the past 18 months in its bid to cool inflation. That dragged along interest rates paid by borrowers (bad for them) as well as rates paid to savers (good for us).

The current rate of inflation is slightly above 3%. So if you can get a CD for 5%, you’re ahead of the game a bit.

Over the long haul, cash will lag behind stocks or bonds. But for now, at least, you can get an honest return — and one that doesn’t gyrate, like the market. As Kent Kramer at the West Des Moines financial planning firm Foster Group said when discussing CDs, cash doesn’t have bad days.

The Fed could start to lower interest rates in 2024. CD rates likely will fall, so that might be a good time to lock in some longer duration CDs, to milk that positive return just a little longer.

A shock for retirees: Social Security benefits can be taxed
BY BRIAN J. O'CONNOR FOR THE NEW YORK TIMES

Jennie Phipps, a semiretired writer and editor, had once been married to a certified public accountant. When she retired, she thought she was well prepared for any taxes she might face.

Phipps, 72, said that her annual income consisted of money withdrawn from an individual retirement account, about $50,000 from Social Security and $20,000 from a pension. She also earns some money from part-time work. But when she first started drawing Social Security benefits, she got a shock: Federal income taxes were due on 85% of those benefits.

“It’s not that I didn’t know about the tax, but in my head I didn’t calculate it,” she said. “I’m always surprised at the end of the year by how much tax I owe.”

Phipps, of Punta Gorda, Florida, isn’t the only one who has been caught off guard.

“A lot of people who don’t work with a financial adviser are very surprised to find out that Social Security benefits can be taxable,” said Luis Rosa, a certified financial planner in Los Angeles. “Then they have to take more money out of their IRAs to compensate for the difference, and it becomes a never-ending cycle of taking money out to pay taxes and then paying taxes on that money. It’s not good.”

Social Security benefits weren’t taxed at all until 1984. Then in 1993, Bill Clinton signed legislation that expanded tax thresholds, making up to 85% of benefits taxable for recipients with combined incomes of more than $34,000 ($44,000 for joint filers). Those who earn less could be subject to taxes on up to 50% of their benefits. Combined income consists of a filer’s adjusted gross income, untaxed interest (such as from municipal bonds) and half of one’s annual Social Security payments.

Over the past 39 years, both Social Security payments and federal income tax brackets have continually shifted upward to compensate for inflation — but the income thresholds that result in a retiree’s benefits being taxed have not. When the tax took effect in 1984, during the Reagan administration, it was estimated to affect about 10% of Social Security recipients. By 2022, 48% of recipients were paying tax on some of their benefits, and paid $48.6 billion that year, according to the Social Security Administration. Most states do not apply state income taxes to Social Security benefits.

“Because the cutoff isn’t benchmarked to inflation, more and more beneficiaries are subject to the tax,” said Anqi Chen, assistant director of savings research for the Center for Retirement Research at Boston College. One consolation is that even at higher income levels, some portions of benefits aren’t taxed at all, with the rest taxed at the filer’s ordinary tax rate, Chen said. That produces an average effective tax rate of about 6.6%, she said, “which is not nothing, but it’s also a small percentage.”

The result is that a single filer collecting the average $1,844.76 monthly benefit could be taxed on up to half of her Social Security benefits if her annual total earned income — from wages, a pension, withdrawals from taxable retirement accounts, interest payments, gambling winnings, or any other taxable source — was just below $14,000. Add another $9,000 of income, and that filer would face taxes on up to 85% of her benefits. For joint filers, the tipping point is about $9,900 to hit the 50% tax threshold, and it’s a bit less than $22,000 for the 85% threshold.

For a clearer picture of the tax liability that they could face, retirees can refer to the calculator called “Are My Social Security or Railroad Retirement Tier I Benefits Taxable?” on the IRS website.

For example, imagine a single retiree with $1 million in combined qualified retirement accounts, such as IRAs, and $500 in nontaxable interest who receives the $1,844.76 average monthly Social Security benefit. If she followed the standard advice to withdraw 4% of the balance of her accounts during 2022, she would pay taxes on $18,816 of her annual Social Security income.

Jeremy Shipp, a certified financial planner in Richmond, Virginia, said a majority of his retiree clients were likewise caught unaware that their Social Security benefits were taxable.

“People sometimes still manage their money as if they’re living in the Great Depression because that’s how their parents handled things,” Shipp said. “That speaks to the way financial mindsets are passed down through generations. Grandpa and Grandma and Mom and Dad never paid taxes on their benefits, so they’re very surprised.”

Avoiding the tax is possible, but it becomes harder once a Social Security recipient turns 73 and must start taking required minimum distributions from IRAs and other tax-deferred accounts. The required distribution for a 73-year-old with $370,000 could be enough to activate the tax on 50% of her benefits. Federal workers receiving full pensions often don’t need any other income to hit the tax threshold, Shipp said, and the interest portions of annuities also are counted in the income calculation.

Shipp and other financial planners said that shifting income to postpone taking Social Security benefits while spending money from retirement accounts would be one approach to avoiding the benefit tax. Converting a traditional IRA to a Roth IRA could also work, because Roth withdrawals don’t count as taxable income (but that conversion requires paying taxes, too).

For homeowners, planners said, another strategy would be to leave any IRAs or similar accounts untouched for heirs (if one can afford to) and use a reverse mortgage for income (though these mortgages are complicated and not for everyone). Proceeds from loans, like a reverse mortgage, a home-equity loan or line of credit, or a cash-out mortgage refinancing also provide income that isn’t included in the combined income calculation.

“Like any government program, there’s nothing simple about it,” Shipp said. “You almost need a 20-page manual to calculate what’s going to be taxable.”

Despite significant changes to retirement accounts in the Secure 2.0 Act, passed last year, there hasn’t been any effort to change the laws governing taxes on Social Security benefits. In fact, keeping income limits fixed was part of the original plan, according to the Social Security Administration, to shore up the Social Security Trust Fund against a potential shortfall. Taxes paid on Social Security benefits go to the fund, making up 4% of its 2022 income, according to the administration.

With or without any changes to the way Social Security benefits are counted, taxes in retirement can have a significant effect on how much money retirees can spend and how long their money lasts. The best approach is to make a retirement income plan that fully accounts for any potential tax bite.

“Normally, when we take taxes into our retirement planning it’s not a huge shock because you’ve planned for it, so you can have a little bit of control,” Rosa said. “You may need more money or to work a little longer if you’re going to be facing taxes. The key is knowing ahead of time.”

Knowing ahead of time wasn’t much comfort to Phipps. “I didn’t take Social Security until I turned 70, to maximize my benefits, and 85% of that is taxed. It’s no surprise, but it’s a chunk of tax,” she said.

For her 2023 tax return, however, that chunk will shrink somewhat.

“I’m getting married to a man whose taxable income isn’t huge,” Phipps said. “It makes being married and filing jointly very appealing.”

Do this simple 'psychological' exercise to develop strong money habits in 2024
BY AMANDA BREEN FOR ENTREPRENEUR

If you're planning any major life purchases in 2024 — maybe a first home or new car — it's time to take a good look at your finances to make sure you're in the best position to spend without overextending your budget.

Although the purchasing process will vary depending on someone's individual financial circumstances, most Americans (more than half, to be exact, per CNBC) are living paycheck to paycheck — and will have to take on debt to afford some of life's biggest buys this year.

Entrepreneur sat down with Chelsea Fagan, CEO and founder of cross-platform media company The Financial Diet, to learn more about how people should weigh those major purchasing decisions.

Fagan's own personal finance journey helped her become an expert on the subject. When she landed her first salaried job, she vowed to mend her "very negative relationship with money" and "ruined credit score." So, in 2014, she used the platform she already had as a writer to document the experience on her blog, ultimately growing it into the company she helms today.

According to Fagan, there are some important steps to take when considering a significant buy. First, get a sense of the long-term value of the investment. "We all have to make different major purchases, but they're not all created equal," Fagan said. For example, a home is likely to appreciate in value, but a car is not.

But you also have to consider the flexibility you want in your budget — and how the purchase will affect that going forward, especially in high-cost-of-living areas.

"A lot of people don't think about their big monthly expenses as fitting into an overall budget," Fagan said. "They think of it as a standalone number. But it's extremely important to remember that each additional hundred or whatever amount of money is going to that big initial purchase is going to have a huge impact on the rest of your spending."

Using a budgeting app that maps 100% of your spending, like Kelley Blue Book My Wallet, can be a great way to stay on track and keep your big-picture budget in mind.

Additionally, Fagan notes that "every single purchasing decision is a trade-off." A slightly less expensive home could be farther from work, which means a longer commute and more money spent on gas.

Education is another major purchase some people might be navigating in 2024 — and Fagan cautions young people against investing in a program without analyzing its potential return in full.

"I don't think that young people are taught to interpret the value of a given degree in the way that they would another investment," Fagan said. "If you're going to buy a home, for example, you're typically going to go through like, What area is it in? What are the historical trends? What's my interest rate? How much am I likely to gain in equity over the next five, 10, 15 years? But usually, because it's teenagers making these decisions, people don't typically make those same analyses when it comes to their education."

Fagan and her team don't subscribe to the belief that you shouldn't spend on anything until you're debt-free but stress that any purchase — big or small — should align clearly with your values. And a simple exercise can help you accomplish that: Go through all of your spending on credit card and bank statements for the last three months and highlight any purchases you don't remember making.

"A lot of us typically spend on things that don't have value to us, especially when it comes to ride-sharing, food delivery, going out for drinks, shopping for fast fashion, buying random stuff at the holidays," Fagan says. "There's so much mindless consumerism that works its way into our spending that we don't even notice is happening. And when you think about the purchases and the spending habits that are actually valuable to you versus the ones that you don't even remember, it's always a huge wake-up call to look at our purchases and say, ‘I spent $65 on that — I literally don't even remember it.’"

The activity is a sort of "psychological practice" that can help lay the foundation for healthy money habits in the long term, Fagan says — setting you up for financial success in 2024 and all of the years to come.