May Retail Sales, Annuities, New Car Sales and Social Security Earnings Limit

May Retail Sales

May retail sales showed the economy is continuing to decelerate, which is exactly what I think we need to see. The release showed retail sales were up 0.1% compared to last month, which missed the estimate of 0.2%. When looking at May 2023, retail sales were up 2.3%. While this doesn’t show a booming economy, I still believe it is a healthy level. Nonstore retailers continued see strong growth as sales were up 6.8%. It appears as the comparisons have gotten more challenging sales growth at food services and drinking places is slowing as sales were up 3.8%. It appears we have seen a turn in electronics and appliance stores as sales were up 1.8%, but furniture and home furnishing stores (-6.8%) and building material and garden equipment and supplies dealers (-4.3%) remained the two weakest groups in the report. Overall, I think this report should provide further evidence that a rate cut by the Fed should be warranted as we exit the year. 

Annuities

I have always cautioned people when it comes to annuities. Over my 40 years of financial experience, I have seen annuities sold to people by companies that later went through bankruptcy and insolvency. Two companies come to mind, Baldwin United and Executive Life Insurance Company. After these bankruptcies some policy holders only received 2/3 or so of their investment and no interest at all. I was curious how some annuities were paying high yields over the last few years with interest rates so low. Thanks to an investigative team from Barron’s, they discovered a report from the Federal Reserve Bank of Chicago dated June 3rd that life insurers are relying more heavily on private placements and generally higher yielding securities that are exempt from federal reporting requirements and are lacking an active secondary market. According to the report, private placements now are about 20% of all life insurance bond holdings, which is up from 15% just five years ago. I believe holders of these annuities have no idea that their annuity is backed by private loans from soccer teams, film financing, and even sports broadcast rights. They are definitely far riskier than the old insurance companies that would invest in good quality equities along with highly rated bonds. Consumers need to be aware because in the brochures that are given by the sales people who have no idea what’s in the portfolio, they’re still saying these are as safe as CDs, savings bonds, money markets, and treasury bills. Unfortunately, that is not the case and I believe down the road we could be reading about seniors who were depending on these annuities for their retirement and they have stopped receiving income from the annuity and/or have lost some of their principal. My recommendation is to understand what you’re investing in and make sure the investment advisor you’re dealing with is knowledgeable about the investments and not just selling you a product for a big commission or a trip to Australia or Morocco as some annuity companies have given as an incentive to their brokers with the best sales. It’s always best to deal with an investment advisor who is 100% a fiduciary. 

New Car Sales

Maybe you’re driving around in a car that is six- or seven-years old thinking gosh my car is old, perhaps I should replace it with a new one. Well don’t be in too much of a hurry. The age of your car is well below the average vehicle on the road which is currently 12.6 years as reported by S&P Global Mobility. That Is up from the average age of 11.2 years just 10 years ago. This is caused by many factors, not just the average cost of a new vehicle which is around $47,000. You also have higher interest rates, your registration will be higher, and insurance premiums could increase by double digits with a new car. There are some people who just don’t want the hassle of going to buy a new car and having to deal with the car sales person that could put a lot of pressure on them. Some people flat out just don’t like the new cars and they miss the old buttons and easy access to turn things on and off as opposed to the new touchscreens and technology that can take hours and hours to learn. New car sales have done well over the last few years and probably will continue to stay strong for years to come, but there are a few people out there that are just resisting the technology and will stay with their current vehicle for many more years to come.

Navigating the Social Security Earnings Limit

Social Security can be collected between the ages of 62 and 70, but if you apply before your “full retirement age”, which is usually 67, you will be subject to an earnings limit. This rule states that for every $2 of earned income, such as wages, you have above the annual limit of $22,320, $1 of your Social Security will be withheld from you. This limit does not include retirement income like pensions, interest, capital gains, dividends, or IRA withdrawals. Also, once you reach your full retirement age, this rule no longer applies meaning you can continue to work without any benefit reduction. If you do have Social Security benefits reduced due to this earnings limit, once you reach age 67, you will receive a credit for the benefits you did not receive and your monthly payments will be permanently increased to compensate for it. In other words, the benefits are not totally lost, just deferred until your full retirement age. This might happen if you retire and return to work, or simply apply for Social Security before you retire. Most people retire partway through the year, so it is common for wages in the first half of the year to exceed the $22,320 limit. However, there is a second component to this earnings rule which states if you apply for Social Security in the same year you retire, as long as your monthly earnings are less than $1,860 once you begin Social Security, there will be no reduction. It is also important to note that this earnings rule is the main reason your “full retirement age” is significant. It is a misconception that it is better to wait until full retirement age to collect when in reality every month you wait beyond age 62 up until 70 your benefit amount increases. If you are retired, your full retirement age is irrelevant as the earnings limit will no longer apply.  

 

Stocks Discussed: Dave and Busters (PLAY), Airbnb (ABNB) and Rivian (RIVN)