Category Archives: Spending

The Magic Number Rises

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More Americans say they don’t feel financially secure…rising inflation and incomes that aren’t keeping pace get most of the blame. ~ Northwestern Mutual

The “magic number” for retirement has surged in recent years thanks to high inflation. According to Northwestern Mutual’s 2024 Planning & Progress Study, Americans now believe they need $1.46 million in savings and investments to retire comfortably.

Yet, this number reveals more about Americans’ anxiety than precise planning. We often overestimate our financial needs

This ‘magic number’ figure has leaped 15% in a year and an astonishing 53% since 2020. Meanwhile, retirement savings have dwindled to a mere $88,000.

The “Silver Tsunami” of retirement approaches, with millions of Baby Boomers riding the waves into retirement.

Track and prioritize your spending is vitally critical. This involves prioritizing the spending that’s most important to you and letting things that are less important fall off. You’re saying no to some things so that you can say yes to others. You might even want to employ loud budgeting.

Loud budgeting gives you permission to say no to social engagements by saying you don’t have the money for it. To put loud budgeting to work, you commit yourself and share that you’re doing it. Loud budgeting lets you spend money on true priorities while skipping things that won’t really provide or align with your values and priorities.

Loud budgeting can be a simple way to push back when you’ve spent too much. But it works best when it starts with a solid budget and a financial plan that helps you balance future goals with what you need for today. The idea isn’t to say no to everything, but loud budgeting should help you say no when needed.

Ultimately, your financial goal is to have more income coming in each month than expenses going out.

But make sure that you’re thoughtful about your spending so that you feel good about what you’re getting when those dollars leave.

Source:

  1.  https://news.northwesternmutual.com/planning-and-progress-study-2024
  2. https://www.northwesternmutual.com/life-and-money/what-is-loud-budgeting/

Federal Fiscal Deficit vs. National Debt

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Democrats spend money when they don’t raise taxes; and, Republicans cut taxes when they don’t decrease spending. Tax and spending reforms are needed desperately.

“The government has basically three gigantic programs and it’s the US military, Social Security, and Medicare,” Marc Goldwein, a senior policy director at Committee for a Responsible Federal Budget (CRFB) said. As Nobel-Prize-winning economist Paul Krugman once wrote, the US government is “best thought of as a giant insurance company with an army,” and increasing interest payments.

If the government wants to get serious about its fiscal spending and reducing the national debt, all government spending would have to be reduced by 27% to get budgets balanced in the next decade — and, if tax increases, defense spending, Social Security, and Medicare are all off the table, 78% of federal spending would have to be cut, according to CRFB.

The federal deficit vs. Debt — they’re two separate concepts.

  • The deficit is the difference between the money that the government makes and the money it spends during a fiscal year. If the government spends more than it collects in revenues, then it’s running a deficit.
  • The federal debt is the running total of the accumulated deficits.

The combination of spending increases, tax cutsc, and increasing interest expenses on the debt inflates deficits. While the rise in spending tends to be bi-partisan, tax cuts tend to be enacted by Republicans.

Reference:

  1. https://news.yahoo.com/want-balance-budget-without-raising-100000676.html
  2. https://www.politifact.com/factchecks/2019/jul/29/tweets/republican-presidents-democrats-contribute-deficit/

50/15/5 Budget for Saving and Spending

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Key takeaways

  • Consider allocating no more than 50% of take-home pay to essential expenses.
  • Try to save 15% of pretax income (including any employer contributions) for retirement.
  • Save for the unexpected by keeping 5% of take-home pay in short-term savings for unplanned expenses.
  • Budget. The 50/15/5 rule is Fidelity’s simple guideline for saving and spending: Aim to allocate no more than 50% of take-home pay to essential expenses, save 15% of pretax income for retirement savings, and keep 5% of take-home pay for short-term savings.

50/15/5 Budget is an easy plan for managing your saving and spending

50/15/5 Rule Budget are simple guidelines for saving and spending and managing your money. Track your money using 3 categories:

  • Allocate no more than 50% of take-home pay to essential expenses,
  • Save 15% of pretax income for retirement savings, and
  • Keep 5% of take-home pay for short-term savings.

Fidelity Investment’s research found that by sticking to these guideline, there is a good chance of maintaining financial stability now and keeping your current lifestyle in retirement.

Essential expenses: 50%

Some expenses simply aren’t optional—you need to eat and you need a place to live. Consider allocating no more than 50% of take-home pay to “must-have” expenses, such as:

  • Housing—mortgage, rent, property tax, utilities (electricity, etc.), homeowners/renters insurance, and condo/home association fees
  • Food—groceries only; do not include takeout or restaurant meals, unless you really consider them essential, i.e., you never cook and always eat out
  • Health care—health insurance premiums (unless they are made via payroll deduction) and out-of-pocket expenses (e.g., prescriptions, co-payments)
  • Transportation—car loan/lease, gas, car insurance, parking, tolls, maintenance, and commuter fares
  • Child care—day care, tuition, and fees
  • Debt payments and other obligations—credit card payments, student loan payments, child support, alimony, and life insurance
    • Keep it below 50%: Just because some expenses are essential doesn’t mean they’re not flexible. Small changes can add up, such as turning the heat down a few degrees in the winter (and turning your AC up a few degrees in the summer), buying—and stocking up on—groceries when they are on sale, and bringing lunch to work. Also consider driving a more affordable car, carpooling, or taking public transportation.
    • Consider a high-deductible health plan (HDHP), with a health savings account (HSA) to reduce health care costs and get a tax break. If you need to significantly reduce your living expenses, consider a less expensive home or apartment. There are many other ways you can save. Take a look at which essential expenses are most important, and which ones you may be able to cut back on.

Retirement savings: 15%

It’s important to save for your future—no matter how young or old you are. Why? Pension plans are rare. Social Security probably won’t provide all the money a person needs to live the life they want in retirement. In fact, we estimate that about 45% of retirement income will need to come from savings. That’s why we suggest people consider saving 15% of pretax household income for retirement. That includes their contributions and any matching or profit sharing contributions from an employer. Starting early, saving consistently, and investing wisely is important, as is saving in tax-advantaged retirement savings accounts such as a 401(k)s, 403(b)s, or IRAs.

How to get to 15%: If contributing that amount right now is not possible, check to see if your employer has a program that automatically increases contributions annually until a goal is met. Another strategy is to start by contributing at least enough to meet an employer match, and then if you get a raise or annual bonus, add all or part of these funds to your workplace savings plan or individual retirement account until you have reached the annual contribution limit.

Short-term savings: 5%

Everyone can benefit from having an emergency fund. An emergency, like an illness or job loss, is bad enough, but not being prepared financially can only make things worse. A good practice is to have enough put aside in savings to cover 3 to 6 months of essential expenses. You can start with $1,000 or a month’s worth of expenses, and then gradually build up to 3 to 6 months’ worth. Think of emergency fund contributions as a regular bill every month, until there is enough built up.

While emergency funds are meant for more significant events, like job loss, we also suggest saving a percentage of your pay to cover smaller unplanned expenses. Who hasn’t been invited to a wedding—or several? Cracked the screen on a smartphone? Gotten a flat tire? In addition to those, there are certain categories of expenses which are often overlooked; for example, maintenance and repairs of cars, field trips for kids, copays for doctor’s visits, Christmas gifts, and Halloween costumes, to name a few. Setting aside 5% of monthly take-home pay can help with these “one-off” expenses.

It’s good practice to have some money set aside for random expenses so you won’t be tempted to tap into your emergency fund or pay for one of these things by adding to an existing credit card balance. Over time, these balances can be hard to pay off. However, if you pay the entire credit card balance every month and get points or cash back for purchases, using a credit card for one-off expenses may make sense.

How to get to 5%: Having this money automatically taken out of a paycheck and deposited in a separate account just for short-term savings can help a person reach this goal.

50/15/5 Budgeting guidelines serve as a starting point

Our guidelines are intended to serve as a starting point. It is important to evaluate your situation and adjust these guidelines as necessary. If you’re close to the 50/15/5 target spending and saving amounts, good job. And for those staying within the guidelines, any remaining income is theirs to save or spend as they would like.

Some ideas: First, pay down high-interest debt. For other goals, like paying for a child’s college or wedding, you could use the remaining income to save for them. And finally, for those who want to retire early or haven’t been saving diligently, putting it toward retirement savings may make sense.

The good news is that it isn’t about micromanaging every penny. Analyzing current spending and saving based on our 3 categories can give you control—and confidence. Most everyone’s financial situation will change over time. A new job, marriage, children, and other life events may change cash flow. It’s a good idea to revisit spending and saving regularly, particularly after any major life events.

References:

  1. https://www.fidelity.com/viewpoints/personal-finance/spending-and-saving

Producer Price Index (PPI)

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The Producer Price Index (PPI) came in higher than expected:

  • Expectations: 7.2%
  • Actual: 7.4%

Producer Price Index (PPI) came in above estimates on both headline (7.4% vs 7.2% estimate) and core (6.2% vs 5.9% estimate), comments Liz Young, Chief Investment Officer, SoFi. The Producer Price Index measures inflation at the wholesale level, which acts as kind of a leading indicator.

Inflation remains high, but is trending down, because the main driver of inflation is not interest rates. Instead, the main driver of inflation is excessive fiscal deficit spending and loose monetary policy.

Although, PPI is still falling moderately on a year-over-year basis, but any future upside surprises don’t bode well for upcoming Consumer Price Index (CPI) numbers which will be released next week.

The Producer Price Index (PPI) measures the change in the price of goods sold by manufacturers. It is a leading indicator of consumer price inflation, which accounts for the majority of overall inflation.

How the Economy Works by Ray Dalio

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“Credit is important because it means borrowers can increase their spending. This is fundamental because one person’s spending is another person’s income.” Ray Dalio

Ray Dalio is one of most successful hedge fund managers and founder of Bridgewater Associates. He credits much of his success to guiding principles that he has used to make decisions both in his professional and in his personal life.

How the Economic Machine Works – “The economy is like a machine. At the most fundamental level it is a relatively simple machine, yet it is not well understood,” explains Ray Dalio.

Economic principles discussed:

  • Economy – The economy is simply the sum of all transactions repeated again and again over a long period of time. Money and credit account for the total spending in an economy.
  • Transactions – the exchange of money or credit between a buyer and seller for goods, services or financial assets.
  • Markets – “All buyers and sellers making transactions represent the market. For example, we have wheat markets, stock markets, steel markets, oil markets and so on.The combination of all of these sub-markets is the entire market, or the entire economy.” Ray Dalio
  • Governments – the biggest buyer and seller of goods, services and financial assets. The government consists of two parts: the central government that collect taxes and spend money; and, the central bank which controls the amount of money flowing through the economy. It does this by influencing interest rates and printing more money.
  • Central Bank – The Central Bank can only buy financial assets, not goods and services. To support the economy, the Central Bank buys Government bonds which gives the Central Government the ability to buy goods and service.
  • Price – the result of total spending / quantity sold.
  • Credit – Credit “is the most important part of the economy because it is the biggest and most volatile part”. Credit can be created out of thin air — in fact, in 2016, the US$50 trillion of the US$53 trillion in the economy was credit, as opposed to ‘real’ money. Credit is important because it means borrowers can increase their spending. This is fundamental because one person’s spending is another person’s income. Credit is bad when it finances over-consumption and borrowers are unable to pay the debt back.
  • Lenders – lend money to make more of it. When lenders believe borrowers will repay, credit is created.
  • Borrowers – borrowing is pulling spending forward which relates to borrowing money to buy something you can’t afford, such as a house, a car, a business or stocks. Borrowers promise to repay the amount borrowed (the principal) with interest. Borrowing creates cycles.
  • Debt – Debt allows you to consume more than you produce when it is acquired, and forces you to consume less when you have to pay it back. “When credit is issued it becomes debt. It’s a liability for the borrower, and an asset for the lender. It disappears when the transaction is settled.
  • Interest Rates – When interest rates are high, borrowing is low. When interest rates are low, borrowing is high.
  • Spending – one person’s spending is another person’s income. Total spending is the sum of money spent plus of credit spent.
  • Income – one person’s spending is another person’s income
  • Monetary Cycles – economy expansion and recession cycles.
  • Inflation – inflation is when prices rise. When spending is faster than the production of goods, it means that we have more demand than supply, which results in inflation.
  • Deflation – when spending decreases, prices tend to decline.
  • Expansion – growing markets and increasing transactions
  • Recession – Economic activity decreases, and if unchecked this can lead to a recession.
  • Bubbles – when the price of assets far exceed the value of the assets
  • Debt Burden – When incomes grow in relation to debt, things are kept in balance. But a debt burden emerges when debt growth exceeds income growth. This debt to income ratio is the debt burden.
  • Productivity – innovation and hard working raises productivity, which equates to the amount of goods and services produced.

Three rules of thumb for life

Source: Ray Dalio

According to Dalio, there are “three rules of thumb” with which to navigate the economy, be it in your own businesses, organisations you work at or your personal finances.

  1. Don’t have debt rise faster than income (because debt burdens will eventually crush you).
  2. Don’t have income rise faster than productivity — it will eventually render you uncompetitive.
  3. Do all you can to raise productivity — in the long run that’s what matters most.

References:

  1. https://www.nofilter.media/posts/ray-dalios-economic-machine-12-minute-summary
  2. https://www.amazon.com/gp/product/1501124021/ref=as_li_qf_asin_il_tl_nodl?

U.S. Middle Class Owns Few Financial Assets

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U.S. Middle Class Households Have Few Financial Assets, According to New Analysis from the National Institute on Retirement Security (NIRS)

New analysis finds that across generations, middle class households in the U.S. own few financial assets and the median amounts held fall far short of the assets needed to fund a secure retirement.

In 2019, middle class Millennials owned only 14 percent of their generation’s financial assets. The numbers are even worse for middle class Gen Xers and Baby Boomers, which owned eight percent and six percent, respectively, of their generation’s financial assets.

“In America, the middle class can no longer afford retirement. Middle class Americans face sharp economic inequality, with ownership of financial assets highly concentrated among the wealthy,” explained Tyler Bond, National Institute on Retirement Security (NIRS) research manager. “Now that we have a retirement system largely built around the individual ownership of financial assets in 401(k) accounts, middle class Americans are struggling to accumulate sufficient financial assets during their working years. This means the retirement outlook for many in the middle class is bleak at best.”

The research also finds low numbers when examining the mean and median financial assets owned.

  • For middle class Millennial households in 2019, the mean financial assets owned were $17,802, and the median was $7,800.
  • Middle class Generation X households had mean financial assets of $62,944, and median financial assets of $39,000 in 2019.
  • For middle class Baby Boomers, the mean amount of financials assets held was $93,298 in 2019, while the median was only $51,700.

Baby Boomer households are retired or near retirement, but their assets fall far short of what’s required to finance a secure retirement,” Bond explained. “A nest egg of $51,700, the median amount middle class Boomers hold, would generate only $2000 of income annually over 30 years. This means that many middle class Boomer households may struggle in retirement and could face a sharp reduction in their standard of living.”

The research indicates that implementing pragmatic fiscal policy solutions can help middle class households get on a better path to saving for retirement including strengthening and expanding Social Security; protecting defined benefit pensions; and ensuring access to a retirement savings plan through an employer.

For this research, the middle class is defined as those between the 30th and 70th percentiles of net worth, or the middle 40 percent. The research is based upon data from the Federal Reserve’s Survey of Consumer Finances (SCF). It examines financial asset ownership, a broader category than retirement assets.

According to the SCF, the category of financial assets consists of liquid assets, certificates of deposit, directly held pooled investment funds, stocks, bonds, quasi-liquid assets, savings bonds, whole life insurance, other managed assets, and other financial assets. It does not include physical assets such as a home or a car.

The data for this research is for households rather than individuals.

References:

  1. https://www.nirsonline.org/2021/10/middle-class-u-s-households-have-few-financial-assets/

Sequence of Returns Risk in Retirement

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A stock market pullback can pose a risk early in retirement.

Retirees face many risks when investing for retirement. Markets crash, inflation can eat into your returns, you might even worry about outliving your savings. And, there’s another big retirement risk: Sequence of returns risk.

Down markets can pose significant “sequence of returns” risk in the early years of retirement. Sequence risk is the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available to the investor, according to Investopedia.

A “sequence of returns” risk is basically about how the order, or sequence, of stock returns over time — combined with your portfolio withdrawals — can impact your balance down the road.

Once you start withdrawing income, you’re affected by the change in the sequence in which the returns occurred. During your retirement years, if a high proportion of negative returns occur in the beginning years of your retirement, it will have a lasting negative effect and reduce the amount of income you can withdraw over your lifetime.

Timing is everything. Sequence risk is the danger that the timing of withdrawals from a retirement account will damage the investor’s overall return. Account withdrawals during a bear market are more costly than the same withdrawals in a bull market.

“If there’s a big loss in the market and you’re taking withdrawals, you could be taking more from your portfolio than what it can make up for,” said certified financial planner Avani Ramnani, managing director at Francis Financial in New York. “If that happens early in retirement … the recovery may be very weak and put you in danger of not recovering at all or being lower than where you would have been and therefore jeopardizing your retirement lifestyle.”

One of the basic rules of investing is that a long-term strategy is self-correcting. And, for long-term investors — those whose retirement is many years or decades away — such market drops matter less because there’s time for their portfolios to recover from this risk before they need to start relying on that money for cash flow in retirement.

Retirement is a long game.

Since running out of money in retirement is the primary concern for most retirees, fortunately, there are options for mitigating the risk:

  • Plan to spend more conservatively since the less you spend consistently, the less you have to withdraw overall.
  • Withdraw and spend less when your portfolio performance is suffering. 
  • Reduce the risk in your portfolio by creating a low stock allocation early in retirement but increase it over time, or use bonds for short-term expenses and stocks for long-term ones.
  • Set aside assets outside your investment portfolio that can support your spending needs when stocks are underperforming.

You may simply be able to meet your goals without taking on the risk that comes with stocks.

Key Takeaways

Sequence of return risk is basically the risk that market declines in the early years of retirement, paired with ongoing withdrawals, could significantly reduce the longevity of your portfolio. Thus, timing is everything, and in retirement early market declines, particularly if they are paired with rising inflation, can have a huge effect on how long a nest egg can sustain you in retirement.

The recommended way to mitigate sequence of returns risk when you can’t predict future market performance or future rates of inflation is by managing spending and/or keeping a portion of your portfolio in liquid assets, such as cash or bonds, to ride out the market downturn.

When market returns are high and inflation is low, retirees can distribute more from their portfolios, according to Forbes Advisor Staff Editors Rob Berger and Benjamin Curry. When market returns are negative and inflation is higher than expected, retirees reduce the amount of their annual distributions.

Remember, no one can forecast market performance or economic inflation. Yet, by managing your spending, you can adjust annual withdrawal amounts to reflect inflation and market returns.

References:

  1. https://www.investopedia.com/terms/s/sequence-risk.asp
  2. https://www.thebalance.com/how-sequence-risk-affects-your-retirement-money-2388672
  3. https://www.cnbc.com/2021/09/21/stock-market-pullback-is-a-big-risk-early-in-retirement-what-to-know.html
  4. https://www.forbes.com/advisor/retirement/sequence-of-returns-risk/

Loss of Purchasing Power: Is $1 million enough for retirement?

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“One million dollars doesn’t buy as many Cadillac Escalades as it used to.”

Today, $1 million no longer buys as many McDonald’s Big Mac sandwiches or Rolex Submariner watches or Ford F150 trucks as it once did thirty years ago.  There’s a good reason for that called ‘loss of purchasing power’ which is a byproduct of inflation. That’s because $1 million of purchasing power in 1970 was the equivalent of nearly seven million dollars today, according to Motley Fool. And as recently as 1990, a million dollars has lost half its buying power since then, meaning you’d need two million today to have the same buying power as you did in 1990.

As a result of normal inflation and loss of purchasing power, $1 million retirement nest egg today definitely will not offer you as comfortable a retirement lifestyle as it did a few years ago or a few decades ago.

Retirement is not an age, but a number

Financial preparedness is more important than reaching a certain retirement age. And, to answer the question of whether $1 million or any amount of money is enough for retirement, the answer depends on what you want your retirement to look like.

It’s important to ensure you have enough savings and income to sustain your spending and lifestyle in retirement. If you don’t have enough money set aside to pay for your retirement, then you may have to delay retiring. And no matter where you are on your retirement journey, you can make your financial number. No matter how little you have or how much time you have left until you want to retire, you can always improve your financial situation. Getting started and creating a retirement plan can carry you a long way.

A 2018 Northwestern Mutual study found that one in three Americans has less than $5,000 saved up for retirement, and 21% of Americans have no retirement savings at all. Overall, Americans are feeling underprepared and less confident regarding the financial realities of retirement, according to the data.

Despite these findings regarding the woeful retirement savings rate by Americans, it’s still not too late to enjoy the kind of life you’ve worked so hard for… and the retirement you deserve.

One of the most important goals for Ameriocans facing retirement is knowing that they can sustain their desired level of spending and lifestyle throughout their lives, with a sense of financial peace of mind and without the fear of running out of money.  For our purposes, financial peace of mind is the knowledge that, no matter your level of savings or degree of market volatility, you are confident that you are unlikely to run out of money during retirement to support your level of spending and  lifestyle.

Taking the financial road less traveled

Conventional wisdom recommend that older Americans should reduce their stock allocation in retirement and move into more safe investments such as bonds and cash.  Although this may seem the less risky road to take in your retirement years, a few experts do not agree.  If you expect to maintain your purchasing power into future, you must stay invested in stocks.

“The idea that a 60-year-old retiree should be investing primarily in conservative investments is an antiquated way of approaching personal finance”, says Jake Loescher, financial advisor, at Savant Capital Management in a 2017 U.S. News article. “Historically, the rule of thumb stated that an individual should take the number 100, subtract their age, which will define the amount of stocks someone should have in their portfolio. For a 60-year-old, this obviously would mean 40 percent stocks is an appropriate amount of risk.”

“A better approach would be to perform a risk assessment and consider first how much risk an individual needs to take based on their personal circumstances,” Loescher says.

According to the article, there are five circumstances when retirees should eskew conventionl wisdom:

  1. The likelihood you’ll live into your 90s or beyond. Since life expectancy is much longer these days and in today’s low-interest environment, you face an increase risk of your nest egg not keeping up with inflation over the long haul.
  2. If you don’t have enough cash for retirement. If you didn’t accumulate enough retirement assets to sustain an expected lifestyle, it becomes essential to decide how much capital in a retirement portfolio you’re willing to risk for the potential upside appreciation.
  3. When interest rates are low. Low interest rates makes the capital risk seem greater than the value bonds might provide due to a loss of purchasing power.  Taking a total-return approach, using low volatility, dividend-paying stocks to replace part of our typical bond component seems the best approach.
  4. If you have estate planning needs. If you don’t depend totally on your investments for income, then your money may be providing a bequest for charity or an inheritance for children.
  5. For historical purposes. The stock market has outperformed all other asset classes over the last century.

In retrospect, retirees will need to allocate a certain portion of their assets to higher-return equity investments to achieve long-term retirement objectives – be it longevity of assets, a desired level of sustainable income, the ability to leave a legacy, etc.

Essentially, the stock market has outperformed all other asset classes over the last century. And studies continue to show that unless you are within three years of retirement, the average variability of stocks relative to their returns is superior to that of Treasurys, municipal and corporate bonds.  Thus, the right course of action is for older Americans to stay invested in the stock market past age 60 which will provide you at least 20 years, on average, to ride out the long-term volatility inherent in equities.

References:

  1. https://www.fool.com/ext-content/is-1-million-enough-for-retirement/
  2. https://www.pimco.com/en-us/insights/investment-strategies/featured-solutions/worried-about-retirement-pimcos-plan-to-help-retirement-savings-last-a-lifetime
  3. https://money.usnews.com/investing/articles/2017-07-24/5-reasons-to-stay-in-the-stock-market-in-your-60s
  4. https://www.pimco.com/en-us/insights/investment-strategies/featured-solutions/income-to-outcome-pimcos-retirement-framework
  5. https://money.usnews.com/money/blogs/on-retirement/2011/03/22/why-retirement-is-not-an-age

The National Study of Millionaires

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“Anyone in America can build wealth. The only thing holding you back is you. Get out of debt. Save consistently. Keep your spending in check. Let time and compound interest do their magic. If you’re willing to work hard and keep the long-term goal in mind, you’ll reach the million-dollar milestone.” Chris Hogan

Summary

  • “The National Study of Millionaires” is the largest survey of millionaires ever with 10,000 participants.
  • Eight out of ten millionaires invested in their company’s 401(k) plan.
  • The top five careers for millionaires include engineer, accountant, teacher, management and attorney.
  • 79% of millionaires did not receive any inheritance at all from their parents or other family members.

The National Study of Millionaires by Ramsey Solutions concluded that millionaires successfully accumulated wealth through consistent investing, avoiding debt like the plague, and smart spending. No lottery tickets. No inheritances. No six-figure incomes.

Thus, according to the survey, there is positive news for Americans who may have lost hope that they can ever accumulate wealth. “The people in the study became millionaires by consistently saving over time. In fact, they worked, saved and invested for an average of 28 years before hitting the million-dollar mark, and most of them reached that milestone at age 49.”

The study’s results demonstrated a dramatic difference between how Americans think wealthy people get their money and how they actually earn and spend their money.

In a nutshell, regular, consistent investing over a long period of time is the reason most of the people in the survey successfully accumulated wealth. And, even when millionaires don’t have to worry about money anymore, they remain careful about their spending. Ninety-four percent of the people studied said they live on less than they make. By staying out of debt and watching expenses, they’re able to build their bank accounts instead of trying to get out of a financial hole every month.

61% of Americans Paid No Federal Income Tax in 2020 | CNBC

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By Robert Frank, CNBC Wealth Reporter and a leading authority on the American wealthy

“The hardest thing in the world to understand is the income tax.” Albert Einstein

  • More than 100 million U.S. households, or 61% of all taxpayers, paid no federal income taxes last year, according to a report from the Tax Policy Center.
  • The pandemic and federal stimulus led to a huge spike in the number of Americans who either owed no federal income tax or received tax credits from the government.
  • The main reasons for the spike — high unemployment, large stimulus checks and generous tax credit programs.

More than 100 million U.S. households, or 61% of all taxpayers, paid no federal income taxes last year, according to a new report.

According to the Urban-Brookings Tax Policy Center, 107 million households owed no income taxes in 2020, up from 76 million — or 44% of all taxpayers — in 2019. The main reasons for the spike — high unemployment, large stimulus checks and generous tax credit programs — will largely expire after 2022, so the share of nontaxpayers will fall next year.

“The COVID-19 pandemic and the policy response to it led to an extraordinary increase in the number of American households that owed no federal individual income tax in 2020”, writes Howard Gleckman, Senior Fellow at the Urban-Brookings Tax Policy Center.

The share of Americans who pay zero income taxes is expected to stay high, at around 57% this year (2021), according to the Tax Policy Center.

“Congress can raise taxes because it can persuade a sizable fraction of the populace that somebody else will pay.” Milton Friedman

In contrast, the top 20% of taxpayers by income paid 78% of federal income taxes in 2020, according to the Tax Policy Center, up from 68% in 2019. The top 1% of taxpayers paid 28% of taxes in 2020, up from 25% in 2019.

In 2021, Congress increased the size of the child tax credit, the earned income tax credit, and the child and the dependent care tax credit — all of which erased the federal taxes owed for millions of American families.

Twenty million workers lost their jobs. Many were low-wage workers who were paying very little income tax before the pandemic hit. Effectively, no household making less than $28,000 will pay any federal taxes this year due to the credits and tax changes, according to the Tax Policy Center. Among middle-income households, about 43% will pay no federal income tax.

Federal income taxes do not include payroll taxes. The Tax Policy Center estimates that only 20% of households paid neither federal income taxes nor payroll taxes. And “nearly everyone” paid some other form of taxes, including state and local sales taxes, excise taxes, property taxes and state income taxes, according to the report.

“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” Winston Churchill

“There is a dichotomy between how capital is taxed in this country and how labor is taxed. That seems wrong to me, to have these two sources of wealth that are taxed so differently”, according to Billionaire philanthropist John Arnold.

References:

  1. https://www.msn.com/en-us/money/markets/61-25-of-americans-paid-no-federal-income-taxes-in-2020-tax-policy-center-says/ar-AANt4dJ?ocid=uxbndlbing
  2. https://www.taxpolicycenter.org/taxvox/covid-19-pandemic-drove-huge-temporary-increase-households-did-not-pay-federal-income-tax