The Inflation Reduction Act: How It Could Impact You
by SGL Financial
Our 2 Cents – Episode #108
The Inflation Reduction Act: How It Could Impact You
On this week’s podcast episode, Steve and Gabriel give a synopsis of the proposed Inflation Reduction Act of 2022 and how the various innerworkings of the Act could potentially impact you.
Next, they’ll discuss times that they’ve found themselves “going against the grain” in terms of their financial planning advice. Join us now for this discussion!
- The Inflation Reduction Act of 2022:
- Will the effects be felt immediately or longer term?
- Expanding ACA subsidies and the impacts on premium tax credits
- Prescription drug pricing reform and Medicare costs
- IRS funding and tax enforcement
- Plus more!
- Going Against The Grain:
- Using life insurance in retirement planning
- Never having any debt
- Have 6 months worth of cash for emergencies
- Buying an annuity
Tune in now to join us for this discussion!
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Announcer: You’re listening to Our Two Cents with the team from SGL Financial. Building wealth for life. Steve Lewit is the president of SGL Financial and Gabriel Lewit is the CEO. They’re here to discuss all the latest in financial news, trends, strategies, and more.
Gabriel Lewit: Hey, everybody. Welcome back to Our Two Cents. Gabriel sense and Steve sense.
Steve Lewit: The other-
Gabriel Lewit: We’re here for you.
Steve Lewit: The other sense is here.
Gabriel Lewit: We are excited to talk to you here today. We’ve got, of course, a great show lined up for you. And can you believe it’s already August?
Steve Lewit: No, I can’t. I wrote the date down yesterday and I’m writing August 2nd, I think it was yesterday, or the third. And it’s like, “Are you kidding me? There’s football tonight?”
Gabriel Lewit: Well, the Bears preseason starts, I think, in a week and a half or-
Steve Lewit: Right. It’s like-
Gabriel Lewit: … two weeks.
Steve Lewit: … gosh, darn. Man-
Gabriel Lewit: … which is awesome even though our offense is going to be terrible.
Steve Lewit: Well, who cares about the Bears?
Gabriel Lewit: Everybody cares about the Bears.
Steve Lewit: Of course.
Gabriel Lewit: Who cares about the Giants?
Steve Lewit: I care about the Giants.
Gabriel Lewit: Folks, we have a Giants fan in our midst, Chicago land.
Steve Lewit: I’m also a Bears fan. I give them equal time. The Giants are horrible. They’re worse than the Bears.
Gabriel Lewit: I will bet you the Bears could rival them for who will be worse this year.
Steve Lewit: Well, for a long time, maybe, right?
Gabriel Lewit: Oh gosh. Well, I hope you’re doing great. And enjoying the last waning weeks of your August summertime here before kids go back to school and grandkids go back to school and all that good stuff, but we’ve got some interesting things coming from the news-
Steve Lewit: Oh my gosh.
Gabriel Lewit: … recently.
Steve Lewit: Yeah. A big Inflation Protection Act.
Gabriel Lewit: No.
Steve Lewit: Inflation. Oh, you did that. You did that to me.
Gabriel Lewit: Sorry, folks. I’m laughing because before the show we were talking about the Inflation Reduction Act that we’re going to talk about here and I accidentally called it the Inflation Protection Act.
Steve Lewit: And I picked up on it. Right. Folks, you see the influence my son has over me. He puts words-
Gabriel Lewit: Oh my goodness.
Steve Lewit: He puts words right into my mouth.
Gabriel Lewit: Well, we’re going to talk about the Inflation Reduction Act-
Steve Lewit: Thank you.
Gabriel Lewit: … that’s being proposed and maybe voted on here very soon. And then we’re going to talk to you a little bit about going against the grain with financial advice. And should you, should you not, those kinds of questions.
Steve Lewit: Or should you maybe.
Gabriel Lewit: Should you maybe. And what are the grains that you can go against?
Steve Lewit: We’re really off to a bad start
Gabriel Lewit: No, we’re off to a great start today, I think. All right, so let’s go ahead and dive in. July 27th was the day here, just about a week ago, that the Democrats, Senate Democrats, I should say, released legislative text for the Inflation Reduction Act of 2022 that they’re looking to get passed. And they’re hoping to schedule a vote for that here in the first full week of August, which is … Well, actually by the time you receive this podcast, it will be the first full week. So we’ll find out if they vote on it this week or if it’s going to be next week.
Steve Lewit: Yes.
Gabriel Lewit: But what is this thing, Dad? This is a big piece of legislation That’s being proposed with a lot of ranging impacts from … Naturally, if you hear the title, the goal is inflation as one of the goals, but there’s other things packed in there. Actually very wide ranging. It could have some serious impacts for you as a retiree in some positive ways. And, folks, I just want to comment because we always aim to be politically neutral on our show, so we’re not coming at this from a political angle in any way, shape or form, but we do want to talk to you about the things that could very much impact you, whether you’re a fan of this or not a fan of this, I don’t care about that. I just want you to know if it does get passed how might it impact you.
Steve Lewit: Well, the interesting thing about the Inflation Reduction Act is that … I got it right.
Gabriel Lewit: You got it.
Steve Lewit: I keep wanting to say protection. Is that it’s projected to actually increase inflation through the year 2024 and then reduce it.
Gabriel Lewit: I wouldn’t say the Democrats would agree with that, the ones that proposed it, but there’s been some independent studies already on the projected impacts of this and some are saying, you might see a slight increase. We’ll get back to that followed by more permanent decrease.
Steve Lewit: Yeah. The best study I’ve seen is from the Wharton school, Penn State, Wharton. I forget what they call it, PW something, something.
Gabriel Lewit: I think you’re referencing the Penn Wharton Budget Model.
Steve Lewit: Yeah. I like that. Wharton always comes out. And they’re politically neutral, so I like what they write and they gave a good summary. Folks, this is an extremely complicated act. It’s very hard to understand what’s going on even. It’s even harder to understand how they’re going to implement it, but it’s got the extension of the ACA.
Gabriel Lewit: Yeah, so-
Steve Lewit: I’m talking in my microphone.
Gabriel Lewit: You keep leading away from it.
Steve Lewit: Folks, can you hear me, okay?
Gabriel Lewit: I can hear you.
Steve Lewit: Everybody vote in. So extend the ACA and that’s a good thing. They do some things with small businesses. They’re supposed to raise enough revenue and spend less so that they actually reduce the federal budget, which would really be something different for a change. But it is very complex. The one that caught my attention was they’re going to tax book income and corporations. Now, folks, a lot of big corporations like Amazon and Nike do not pay federal income taxes. What they do is they book income into their statistics at the end of the year, but there are no taxes on it because it’s undistributed income. So this act says we’re going to tax that. And the effects of that are really unknown at this point but, to me, that’s a very big deal.
Gabriel Lewit: Yeah. So let’s walk through in some detail here. That’s a very good initial synopsis there, Pops, and we’ll dive in into some of these step by step here to just unpack those a little bit. I thought it was interesting as I was reading through this, that there didn’t seem directly … Despite the title being the Inflation Reduction Act, it’s a little unclear how it directly aims to reduce inflation, but we’ll talk a little bit about some of the things that, at least in theory, are supposed to do that, but let’s pick one of these first. I think the biggest one, especially for you out there being pre-retirees of retirees is the extension of the expanded ACA subsidies. This is a big deal.
Steve Lewit: Big deal. Yes.
Gabriel Lewit: Okay. So folks, what is this? Well, you may or may not be aware that if you’re on the ACA plan, the Affordable Care Act plan for healthcare, that there are things called PTCs, premium tax credits, that you can qualify for depending on your income. Now, prior to the pandemic, you could not qualify for premium tax credits if your income was above a very hard 400% above the poverty line level cliff. If your income was above that, you got zero credits. It wasn’t a phase out. It wasn’t a little less, little, less, little less. It was nothing.
Steve Lewit: All or nothing.
Gabriel Lewit: Okay. You’re either in that phase out or a range or none. Well, so then the pandemic came around and they actually extended that cliff to a more gradual phase out for much higher levels of income so it could impact a tremendously wider range of people. And this turned out to be very popular.
Steve Lewit: Very. Very popular.
Gabriel Lewit: You don’t have to worry about being one dollar over the cliff and getting no credits. You can be a slightly higher income earner still earn some credits. And so I have many, many clients. I just had a meeting yesterday with a couple that’s 57 years old and looking to retire and worried about the prices of their healthcare. And they would not qualify for the premium tax credits if this cliff was re-enabled. So this could directly save them tens of thousands of dollars-
Steve Lewit: Thousands of dollars.
Gabriel Lewit: … over six, seven years of being on the ACA plan.
Steve Lewit: Yep.
Gabriel Lewit: So, this is a really big deal, this one. And I think it benefits everybody, regardless of political affiliation, if you like saving money on your healthcare.
Steve Lewit: Yes. And in that to an addendum to that. How do I say that? An addendum or a continuation?
Gabriel Lewit: Piggyback.
Steve Lewit: A piggyback on that would be that they have finally, and this is really incredible to me, they finally allow Medicare to negotiate drug prices. It’s like before they couldn’t negotiate a drug price. It’s like, “How are you in business and unable to negotiate a drug price?” And that’s another big deal. I’m curious to see what the effects of that are. I think it’s going to be big time on helping people save quite a bit of money.
Gabriel Lewit: Well, this is a new point. This isn’t related to the … You’re talking not about the premium tax credit subsidy you’re just saying another point-
Steve Lewit: Another point-
Gabriel Lewit: … of the Inflation Reduction Act.
Steve Lewit: … in the Inflation Reduction Act.
Gabriel Lewit: So, the prescription drug price reforms is key point number two here. Which you said to reiterate, Medicare can now negotiate the price of certain prescription drugs and limits Medicare and commercial price growth of certain drugs to inflation. In other words, they can’t jack up the prices way above the rates of inflation. They’re going to have some caps on how much prices can increase in cost and relate … Let’s see, I’m not even 100% percent familiar with what this is, but repeals the implementation of a rebate rule that was scheduled to increase drug-related outlays beginning in 2027. So they’re getting rid of that.
Steve Lewit: So somebody was getting a rebate that would add to the prices.
Gabriel Lewit: Yep. Yep. So it also helps cap out-of-pocket costs.
Steve Lewit: It wasn’t you or me by the way.
Gabriel Lewit: No, it wasn’t.
Steve Lewit: It wasn’t any of you out there either.
Gabriel Lewit: Yeah. And it says it’s redesigning the Medicare part D benefit formula to cap out-of-pocket costs for beneficiaries.
Steve Lewit: Yes.
Gabriel Lewit: Okay, so right out the gate, guys, you’ll see these first two things. A Little less about inflation. I mean, some benefits there to lower the rates of cost increases on certain medications, for example, but these are valuable benefits, I would argue, for all retirees out there, lowering your Medicare costs. And giving you subsidies for the ACA plan if you’re thinking about retiring prior to being on Medicare.
Steve Lewit: Yes. One of the things they stuck in here was an un-benefit. And is that the right word? An un-benefit. Because they portioned out $80 billion over the next decade for IRS enforcement.
Gabriel Lewit: All right. Point number three. IRS enforcement. Yes. You may or may not worry about this. Hopefully, you’re one in the camp that you’re not worried about this. If you have to worry about the IRS enforcing tax regulation on you, then you probably won’t be a fan of this bill because they’re adding $80 billion over the next decade to enhance IRS enforcement activities, including hiring more auditors, modernizing the IT system and helping with taxpayer services.
Steve Lewit: Well, I hope they can get some tax refunds out while they’re at that. So many people are still waiting to get their refunds.
Gabriel Lewit: Well, they’re understaffed.
Steve Lewit: Exactly.
Gabriel Lewit: Yeah. They need this in some ways.
Steve Lewit: In some ways.
Gabriel Lewit: But the idea here is that this would generate approximately $80 billion or more obviously to cover more than the costs that they’re going to put into this in made up tax revenue that’s missing. So I think there was another study here that said, hold on one second. I’ve got it somewhere. Because I’ve got some sheets here on this. I don’t have it all memorized folks. All right.
Steve Lewit: I’m very disappointed.
Gabriel Lewit: Here we go.
Steve Lewit: I’m disappointed.
Gabriel Lewit: They expect that the 80 billion they put into the IRS enhancements, enhanced enforcement, would generate approximately $124 billion in revenue. Wow. That’s, that’s good.
Steve Lewit: That is good.
Gabriel Lewit: Right. So spend 80 to make 124?
Steve Lewit: It’s kind of a rock and a hard place. We don’t want to see taxes go up, but if taxes don’t go up, the deficit goes up and things don’t get done. And like it or not, there are many loopholes in the tax system. And what they’re trying to do is close those loopholes and find the people that are frauding the American public.
Gabriel Lewit: Well, when you say taxes go up, I think that’s one of the things to mention here is that the tax increases here being proposed on, by and large, according to the official memorandum, as well as what you’re reading out there, folks, should not impact you if you are well under $400,000 of income or don’t own a business. These are things that are designed to impact hedge funds, predominantly impact giant corporations that are not paying income taxes sufficiently or find all sorts of loopholes to evade paying those taxes. So what are some of the counter arguments? Well, some people say, “Well, they’re just going to find ways of increasing prices then.” If they have to pay more in taxes, they’ll just increase their prices and that’ll actually increase inflation. There could be some truth to that. I mean, there’s a giant ripple effect with everything here. And if you know you have to pay more in taxes, you might raise your prices. But remember, folks, prices are still driven by supply and demand, right? Just because a company raises their prices doesn’t mean you automatically are going to just agree with it and pay for everything. They’ve got a factor in will someone buy this good or service if I raise the prices?
Steve Lewit: Yeah. That’s a great point. I was thinking that too. Everyone thinks, “Well, I’m a big company and I’ve got a tax increase, so I’ll just pass that on to my client.”
Gabriel Lewit: Yeah. They have target profit margins, but if a consumer won’t pay the price of the item, because they want to keep their profit margin, they have a decision to make whether or not they-
Steve Lewit: Exactly. So at the end of the day, although we don’t feel that way, but we’re in control on what we buy and what we don’t buy. And it’s kind of like voting for the president. We feel our vote might not count, but it does count. And in the corporate world, you can drive what corporations do or don’t do through your buying habits. And I know some people that are really serious about that. I mean, they won’t buy anything that kills a cow or they won’t buy [inaudible 00:14:33].
Gabriel Lewit: Yeah. I mean, it’s kind of like too, on the aggregate, you may not feel like if you recycle it does much, because it’s just one tiny little bin. But if millions and millions of people recycle their tiny little bins, it starts that up and so interesting. There’s another key provision here. There is a holdout on this. If you were reading the news with Senator Manchin about climate and energy provisions. Well apparently they figured that out. According to this, there will be some tax rebates and credits to lower energy costs for households, tax credits, research loans, and grants to increase domestic manufacturing capacity for wind turbines, solar panels, batteries, and other essential components of clean energy, production and storage. And then some tax credits to reduce carbon emissions and programs to reduce the environmental impact of agriculture and more.
Steve Lewit: Folks when Gabriel says, figure this out, that’s code for they made a political deal of some kind.
Gabriel Lewit: We don’t know what that is-
Steve Lewit: We don’t what the deal is.
Gabriel Lewit: … but they figured it out.
Steve Lewit: But he was dead set against this and all of a sudden, he’s dead set for it, so there’s some deal that took place.
Gabriel Lewit: Yep. So there’s lots going on here. And, like we said before, the Penn Wharton Budget Model here is projecting that the Inflation Reduction Act as written would reduce the deficits by 248 billion, a little less than the 300 billion being promoted. And then they’re projecting, this is what you were mentioning earlier, predicting a slight increase in inflation increase until 2024 and then would decrease inflation thereafter.
Steve Lewit: Yeah. So the Fed has a lot to say about that too, because if the Fed keeps raising interest rates that will temper that inflation. However, the problem with there is it could slow the economy, which is what a lot of people are talking about today. Are we really in a recession or aren’t we really in a recession?
Gabriel Lewit: Yeah. Well, and I think you got to be a little cautious of the formal talking points here. I mean, I’m looking at the formal ones from the Democratic party here. Historic deficit reduction to fight inflation. Well, the deficit reduction itself may or may not have that big of an impact on inflation. But I do think things like capping medical cost increases trying to create alternative sources of energy could lower the dependence on oil, which could help to fight some of the pain at the pump. But that’s exactly why they’re saying this could take some time because these aren’t things that are going to happen immediately.
Steve Lewit: And look this has very controversial elements to it. There are a lot of people that don’t believe in climate change. They say that the earth is just going through a cycle and all these dry spells … And I was reading what river is it is almost empty and there’s stopping commercial traffic. Did you read that?
Gabriel Lewit: I did not.
Steve Lewit: Some big famous river. It wasn’t the Mississippi. But climate has changed and whether that’s a cycle in the life of the earth or that’s something that we can control, a lot of people don’t know.
Gabriel Lewit: Yeah, and that’s true. How would we?
Steve Lewit: So, they see this in the bill, and they say, “I don’t want to vote for that.”
Gabriel Lewit: In the span of a few billion years of this planet being around, our 2000-plus human history is a very small blip on the radar.
Steve Lewit: So, I was looking at the pictures of the web telescope. Have you seen any of those-
Gabriel Lewit: I have not.
Steve Lewit: … of the outer … Oh my gosh. The other telescope was the Hubble where we got great pictures, but this one is all the way out in outer space. And you got pictures of the universe in outer space. Different constellations and you can see them all as like 100s of them. We think we’re the center of the universe and, well, we’re not center the center of the universe. I don’t know why I’m telling you this.
Gabriel Lewit: I don’t know either, in fact.
Steve Lewit: But there’s a connection here somewhere, folks.
Gabriel Lewit: Folks, if I could jump in, it’s funny, because sometimes when Steve, we have team meetings in the office and Steve’s claim to fame is if he joins the meeting somehow in the midst of that meeting we’re going to start talking about the universe.
Steve Lewit: Well, here’s why. You talked about time. You talked about time. So I’m looking at a picture of the light took 13 billion years to get here. So I’m looking at a picture of something that’s 13 billion years old today. And because you were talking about time.
Gabriel Lewit: That is very cool.
Steve Lewit: I mean, it’s like, “Are you kidding me?”
Gabriel Lewit: I’m a big fan of the Popular Mechanics magazines because you always-
Steve Lewit: Do they still have them?
Gabriel Lewit: Oh yeah. They say all sorts of cool stuff in there.
Steve Lewit: I didn’t know it was even still in-
Gabriel Lewit: Oh, yeah. I love that. It’s one of my favorites.
Steve Lewit: Really?
Gabriel Lewit: Mm-hmm. Mm-hmm.
Steve Lewit: Mm-hmm.
Gabriel Lewit: All right, guys. Well, that gives you a little update on the Inflation Reduction Act of 2022 that’s proposed. We’ll see what happens or we’ll know what happens by the time you listen to this if it gets voted in. And there’s still some uncertainty because there’s obviously likely to be party line votes. And it’s pretty tight race as to whether or not it’ll get passed, but stay tuned, guys. Because if it does get passed, we’ll circle back and we’ll reconfirm how this will impact you and when. But certainly if you are a retiree out there that’s not making more than $400,000 a year, there are some distinct benefits in here that could actually be very positive for you. Not financially, all other things aside.
Steve Lewit: Even for folks that are making more money. I mean, if they can reduce the budget, if we can help climate, if you believe in that those are ancillary benefits for everybody.
Gabriel Lewit: Yeah. so that’s our first topic here for today. If you have questions on that, how it might impact you or anything, give us a call at 847-499-3330 or go to sglfinancial.com, click contact us. And we can, of course, always help you with anything related to your planning or your retirement or investing. But we are not done yet for today.
Steve Lewit: No. And I just want to add, Gabriel, folks that this was boring for you because you’re not a technical person, look up the pictures on the web telescope. It will blow your mind. Gabriel-
Gabriel Lewit: Are you even paying attention or are you just-
Steve Lewit: Actually, you just gave-
Gabriel Lewit: … thinking of universe pictures?
Steve Lewit: You just gave the phone number and said, everybody should call. I get it. I get it. But let’s have fun too.
Gabriel Lewit: Of course. All right. Well, moving on to our next focus here for today. We’ve got, as we hinted earlier, a short segment about whether or not you should go against the grain. What is the grain first and foremost? These are things that you may hear about from a financial perspective that you’re not sure you should or shouldn’t do. Maybe goes counter to common knowledge or logic or things that you commonly hear about. So let’s talk about some of those and whether or not they make sense for you.
Steve Lewit: Well, first well, the grain is doing what everybody else is doing.
Gabriel Lewit: That is the grain.
Steve Lewit: That is the grain. It’s like follow it’s called in-
Gabriel Lewit: Follow the pack.
Steve Lewit: Herd mentality.
Gabriel Lewit: The herd.
Steve Lewit: Herd mentality. Everybody else is doing it so I’m going to do it too.
Gabriel Lewit: You get to be the black sheeper. Sure.
Steve Lewit: You could. You could get to be the black sheeper. All right, start us off, Gabriel.
Gabriel Lewit: I meant to say sheep. I don’t know why I said sheeper. All right. So let’s talk about one I hear the most often, which is when we talk about life insurance in retirement planning. The first words, everybody, almost everybody, not everybody, but almost everybody says is, “Oh, I don’t need life insurance. I’m my kids are grown and out of the house.”
Steve Lewit: Actually, the first thing that happens is they roll their eyes upwards. And then they say, “What? I don’t need life insurance.”
Gabriel Lewit: What? So what is the grain here? The grain here is the common thought that life insurance is only for death benefit when you have kids and for family protection. And the grain says that you no longer need that when you’re in retirement.
Steve Lewit: Simple. Yeah, what do I need life insurance for?
Gabriel Lewit: Right. That’s the grain. So, Steve, why would you go against that grain?
Steve Lewit: Well, life insurance has two benefits. The death benefit, which you always get with life insurance. The second benefit is that life insurance, if it’s structured properly is the most tax efficient vehicle that I know.
Gabriel Lewit: Tax-free.
Steve Lewit: Tax-free. Everything passes to your kids, to your heirs tax-free and has internal growth rates that are really pretty high.
Gabriel Lewit: But I think you said the key thing that’s going against the grain is that it’s not about the death benefit when you’re in retirement. It’s about tax-free income potential that an appropriately structured life insurance policy could actually provide for you.
Steve Lewit: Yeah, so folks, it’s very simple. You can buy life insurance with high death benefit and low cash value. You can buy life insurance with high death benefit, no cash value. That’s called term insurance. Or you can design a life insurance policy to have high cash value and a lower death benefit. So in retirement, we want to build as much of that cash into the life insurance that can be used by you or your kids or when you die you get the death … You don’t get it, your kids get the death benefit, but that can be used by you for tax-free income in the future.
Gabriel Lewit: Yeah. So that’s a very common one folks. And today is just talking about the grain and why you should go against it, not a deeper dive into all these things, but we’re a big fan of tax-free life insurance in retirement. And it’s a way to diversify your assets and investments. And it’s a way to create much, much, much more favorable, to say enough muches there. Much, much, much more favorable or tax-free income in retirement. So, if that’s a big deal for you, that’s one of the major sources that you need to take a look at.
Steve Lewit: Well said, don’t let the grain take you down. It’s like being in a river. The rapids take you down and you don’t look back. Don’t let the rapids take you on a lot of the things that we’re going to talk about.
Gabriel Lewit: Yeah. So that was grain number one. Grain number two, you should not ever have debt, right?
Steve Lewit: Well I, yes, no. Are you asking me or is that-
Gabriel Lewit: No, I’m saying that’s the grain.
Steve Lewit: That’s the grain?
Gabriel Lewit: The grain the common wisdom you hear out there is never ever have debt, pay off your mortgage as soon as you possibly can make sure you never use any debt for any purposes. Just be debt free is the most common grain that you hear.
Steve Lewit: Well, that sounds good. And it’s good to be debt free.
Gabriel Lewit: It’s not a bad set of advice by and large.
Steve Lewit: It’s not necessarily the best business decision. Might make you feel better. People say to me, “Well, why should I have a mortgage on my house? I feel better because I don’t have a mortgage on my house.” Well, if you’re paying two and a half percent on a mortgage and you can invest that money at a guaranteed four and a half percent, why would you pay off your mortgage?
Gabriel Lewit: Yeah. So, the thought here folks is if you follow the grain, then by no way, shape or form, should you carry a mortgage into retirement, should you have any debt. And the question is maybe you should just buy your cars out in cash and never take out a new car loan or lease. There’s lots of forms of debt, not necessarily … Now credit card debt, that’s the grain that I can get on board with. It just crushes you. You want to get that nasty stuff out of there. But the other kinds of debt can sometimes be positive.
Steve Lewit: Well, see what happens is that we get conditioned while we’re growing up by our parents, by all the gurus out there, saying no debt, no debt, no debt, no debt. So it’s hard to make a business decision when you have that percolating in your head like a tape playing. You shouldn’t have debt.
Gabriel Lewit: Yeah. So, sometimes for example, I will say if you get a car loan and they’re out there that pays zero percent or charges you zero percent over five years or six years for that brand new car. Well, some people say, “Well, I’m just going to take out a big chunk for my IRA and pay that down in cash.”
Steve Lewit: W0hy?
Gabriel Lewit: I’ll ask them, I’ll say, “Well, why would you do that?” Well, I don’t like debt. I’m not supposed to have any debt in retirement. I say, “Okay, well, let’s unpack this a little bit.” Well, if I need 60,000 for a car and it’s in my IRA or 401k, I’ve got to take out what? 80,000, because I’ve got to withhold money for taxes to get my net 60. And then I lose the future earnings power over the next five or six years of that 60, actually $80,000. All of that, just so I can pay off the car in one lump sum.
Gabriel Lewit: But the loan is not charging you any interest.
Steve Lewit: But, wait, there’s a reason they paying it. They feel better. So it’s an emotional decision rather than a business decision.
Gabriel Lewit: Yeah. Now if you truly have a zero percent financing option and you took that 60 or 80 grand and you put it in even just a fixed rate account that’s earning you four percent over five years while you’re taking out the money for the payments-
Steve Lewit: Four and a half, actually.
Gabriel Lewit: … you’ll come out much further ahead financially.
Steve Lewit: Yeah
Gabriel Lewit: So that’s the grain, folks. Again, we won’t get into crazy detail here, but just keep that in mind. Sometimes you want to go against the grain. So we probably have time for another grain or two. What do you think?
Steve Lewit: I’m trying to think of something clever to say, like I’m grained for it. No, that doesn’t work. Yeah, I’m in, I’m in.
Gabriel Lewit: You’re here.
Steve Lewit: I’m in.
Gabriel Lewit: Okay. Well, grain says you should have in retirement … Well, before retirement, you should have six months of expenses and emergency funds always sitting in cash. Now some people carry that grain into retirement and they think they need to have oodles and oodles of money sitting in cash in their retirement plans. what are your thoughts on how much cash one should have in retirement?
Steve Lewit: As little as possible.
Gabriel Lewit: As little as you’re probably comfortable with, right?
Steve Lewit: Yes.
Gabriel Lewit: Yeah. So what happens is in working years, when you lose your job, you need money to cover that, right? That’s where the emergency fund idea comes into play. But in retirement, the goal is to draw from your money-
Steve Lewit: Which is why you save it.
Gabriel Lewit: … which is why you had to saved in the first place. So do you still need such an extensive emergency fund sitting in cash if all your funds are your available resources, once you’re in retirement anyways?
Steve Lewit: Again, this is so emotional. These are emotional decisions that people are making about finances. And the rule is you don’t make financial decisions emotionally People just like to see that … I have a client who’s got $200,000 sitting in her cash fund for an emergency. Now I can get her $200,000 and 10 days from her investments. All right. But, oh, but I love seeing the cash in there. And I understand that it’s like, “Wow, I got 200 grand just sitting there waiting for me.” But she has a lot of money sitting there waiting for her. She just can’t see it.
Gabriel Lewit: Yep. Yeah, so that’s one of those big ones, guys, is the rules change a little bit, and you may still be thinking of an outdated grain of thought that you carry through your whole savings career that may no longer be applicable for you when you get into retirement. So that’s another way that sometimes these can work against us. We’ll do one last one here for today, which is a very common one as well, which is people have this grain of thought that they should never buy an annuity.
Steve Lewit: Oh, that’s an old one.
Gabriel Lewit: Okay. And you still hear that from time to time.
Steve Lewit: How much billion … Gabriel, you looked this up, you were about it the other day.
Gabriel Lewit: Well, because I was doing an income workshop and talking about annuities as an option there, but it’s a 250 billion per year-
Steve Lewit: But nobody should buy them?
Gabriel Lewit: … industry. And so folks, the tapes that you’re hearing is throughout your career, working and saving, especially in probably 20, 30 years ago, you hear from your parents, “Oh, don’t buy annuity.”
Steve Lewit: And if it was an old-time annuity, I agree with you.
Gabriel Lewit: So, the grain is don’t buy annuity. And you still hear people today saying, “You shouldn’t buy those things,” right? “They’re terrible.” Well, what I would argue guys is to think against the grain. That’s this whole segment. and keep an open mind to things that could actually be very, very good for you
Steve Lewit: Or question the grain.
Gabriel Lewit: Or question the grain. In the form of annuities, they’re very popular. We have clients that love their annuities. And you know this, we’re holistic, we do market portfolios, we do annuities, life insurance tax planning, you name it. I mean, we don’t care what you buy, but we want you to find something you really like. And some of our clients love their annuities. And 250 billion a year of people like them too.
Steve Lewit: They all can’t be-
Gabriel Lewit: They can’t all hate them.
Steve Lewit: … hate them or be dumb or something like that.
Gabriel Lewit: Right. So think about that. And this isn’t an annuity pitch and we won’t go into detail here. But if you want guaranteed safe income growth options, that’s what that product class is for. Could be worth your exploration and attention. All right, so that’s our show here for today, guys. We talked a little bit about the Inflation Reduction Act of 2022. We’ll see what happens with that. We talked about some common grains here you should pay attention to. Should you use life insurance? That was one. Should you be totally debt free? That was two. Should you avoid annuities? That was three. And then-
Steve Lewit: Don’t forget the web telescope.
Gabriel Lewit: … how much cash?
Steve Lewit: Wait a sec. Don’t forget the web telescope.
Gabriel Lewit: And of course, go check out this new … You don’t even know what it’s called.
Steve Lewit: It’s the web telescope.
Gabriel Lewit: The web telescope?
Steve Lewit: Yeah. Got to look at those pictures.
Gabriel Lewit: Go look at those pictures. Let us know what you think. If you have questions, call us. 847-499-3330. Book a 15 minute meeting if you’ve been on the fence. Hey, I should call these guys. Do it. Give us a call. We’re fun to talk to. We’ll spend some time together getting to know one another and see how we may be able to help. Or you go to our website, sglfinancial.com, click contact us. Write in your questions and we will go from there. Have a wonderful day and a wonderful week.
Steve Lewit: Stay well, everybody.
Gabriel Lewit: All right. Talk to you soon.
Steve Lewit: See ya.
Announcer: Thanks for listening to Our Two Cents with Steve and Gabriel Lewit. For any questions about your finances, give SGL a call at 847-499-3330. Or visit us on the web at sglfinancial.com. And be sure to subscribe, to join us on next week’s episode.
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