Paul Winkler: Welcome to “The Investor Coaching Show.” I’m Paul Winkler, here with Evan Barnard, and Ira Work. Okay, so there’s a lot of things going on in the world of finance. Did you guys see that 401(k) limits are going up significantly?
Evan Barnard: I missed that news.
Contribution Limits
PW: It’s the biggest move ever in 401(k) contribution limit increases. A $2,000 increase is set to occur in 401(k) contributions bringing it to $22,500. And then the catch-up contribution is going to go to $6,500.
That’s the thing I was really happy that they did, because at least it’s a round number. IRA limits are going up as well to $6,500 from the current $6,000.
If you’re over age 50 and want to put a little bit more in, that’s still going to be a $1,000 limit. So they’re not being quite as nice and making that a round number.
If you’re working for a company and you want to put 401(k) money away, you have limited amounts of money that you can put into IRAs.
Well, they changed those cutoffs too.
They were $68,000, and they increased the numbers to $73,000. So about $5,000. So basically if your income is above that second number, you’ve got a 401(k), but if you’re single, you can’t put the money in a traditional IRA as well and deduct it.
EB: You can put it in.
PW: That is technically correct, yes. You just can’t deduct it, which would be, for me, a deal breaker if you can’t deduct it. Unless you’re going to do a backdoor Roth IRA, and then you’ve got to worry about whether you’ve got another IRA someplace else and you’ve got to aggregate them and all that blah stuff.
Then, for couples married finally jointly, if one spouse makes an IRA contribution, they’re covered by a workplace plan. Then the deduction is phased out for taxpayers with income between $116,000 and $136,000. And that goes up from $109,000 to $129,000. So basically this is more financial planning, job security numbers coming right at you.
EB: Did the Roth numbers go up as well?
PW: Yeah. Well, the Roths would be in tandem with the IRA. Yes.
IW: They’ve also increased the floor for income tax. So let’s say you make the same $75,000, you’re going to actually pay less money in 2023 than you will for this year.
Income Limits and Social Security
PW: Are you talking about the tax brackets changing?
IW: Yes.
PW: Yeah. I didn’t didn’t look at that. Okay.
IW: Yeah. They increased it by about $1,500 at the first level, from $20,550 to $22,000.
PW: I have not seen anything regarding the social security number. Have you guys seen anything about that? Social security, what you’ve got to pay taxes on as far as…
EB: Oh, the income limit?
PW: Yeah, the income limit was $140,000. Yeah, that’s exactly what I was going to say. But I don’t know if they came out with anything regarding that.
Numbers for contribution and income limits have risen.
IW: Yes, they’ve increased it to $160,000.
PW: There you go. You get to pay social security taxes for another $20,000. See how lucky you all are out there?
IW: I can underfund another $20,000 of a pension plan.
PW:. Yeah, because they were talking about actually going and making you pay social security taxes on income up to $140,000. And then it was going to go for up to like $300,000. You were able to get away with not paying anything on income up to $300,000 or something like that.
Then you were going to pay taxes on everything after that, because they knew that the number of people that were above that limit, there weren’t enough of them to vote them out of office.
EB: I was going to say, that the people making above $300,000 is not a huge lobby for congress
PW: Yeah. And unfortunately they are the people that employ other people, so the reality of it is it has a negative impact, and hopefully they don’t do that.
IW: Well, they did increase the SEP-IRA contribution, $61,000 to $66,000.
PW: I saw that the SEP went up pretty significantly as well.
EB: That’s because of the income limit.
PW: Yeah, $66,000.
IW: So that was about 9%.
EB: It’s all tied to the same number, isn’t it? The $160,000 that you max out for social security?
PW: I don’t know that it’s actually effective.
IW: I don’t know. You’re the enrolled agent around here.
EB: Let me see. What is that? $415,000 or something like that.
A Question about ESG Infiltration
PW: Okay, so there was a question. And we have a way to ask questions for the show, paulwinkler.com/question. Jerry asked a question regarding ESG.
He said he’s interested in the impact on ESG infiltration into the energy sector and others. So these funds factor in environmental, social, and governance considerations.
EB: What R words can I use?
PW: Yeah, exactly. What R words can I use? Recession, interest rates, reelection.
EB: Reelection.
PW: Reelection. And then there was revelation. Let’s see. Russia was another one. And I can’t even think of the last one. That’s pathetic.
EB: Risk something, maybe.
PW: Oh, it was responsible investing. That’s what we’re talking about.
And this idea that I’m going to do good with my money. I said, “Okay, let’s see about doing good with our money. How well it does for you.” And I’ve talked about that before.
There are articles about how you can do good but you don’t necessarily do well.
Responsible investing is the idea of doing good with money. However, you can do good without necessarily doing well with your money.
But in just virtually every time period. And when I went and screened for ESG and just did a broad spectrum screening for ESG, are these funds being marketed or are they passing some test as far as being environmentally, socially, or governance responsible so to speak?
You had lower returns in virtually every time period. And it wasn’t just large U.S. stocks. Now, I only talked about large U.S. stocks in the workshop, but other asset categories as well. It wasn’t so good. But here’s an interesting question that Jerry’s asking, because the issue is, is this problematic for companies?
And the answer is actually yes. I also asked Scott to do some research on it, and what he found was that there was indeed a U.S. SIF Foundation 2020 report on U.S. sustainable and impact investing trends.
As of the year 2019, $1 out of every $3 under professional management is being managed according to sustainability metrics. So basically one in three investors are getting hosed with bad returns.
Okay, so 1 to 3. Now take that a step further and say, “But how does this impact…?” So we’ve already established that the returns have been lower with the ESG funds.
The Problem with ESG Scores
This tells us that a lot of people are getting sucked into this. Now, it says, “The study found that companies with high ESG scores experienced lower costs of capital, lower equity costs, and lower debt costs compared to companies with poor ESG scores.”
So in essence, what we’re seeing is that these companies, if they want to use your money, if they don’t measure up to the standard, they actually have to pay more to use your money.
So from an investing standpoint, you get higher returns. But that is problematic for a company because if you are a company, you want access to capital as cheaply as you can get it to operate your business. But it’s interesting. You look at this and go, “What kind of a problem is this?”
Well, the problem really comes down to, yes, they’ve got to pay more to use your money, but they are not having to jump through the hoops that other companies are having to jump through.
So therefore, it might just be that it’s worth it for companies to pay the extra money to use people’s money because they can be more profitable since they’re not having to do stupid stuff and jump through hoops to be compliant with these ESG standards.
And these standards, if we have a change in congress or a change in presidency a couple years from now and it all changes back, then you won’t need to go through all of these hoops anymore.
It might just be that it’s worth it for companies to pay the extra money to use people’s money because they can be more profitable
When you think about it, if you have the ability to say, “Oh, I’m an oil company.” Yeah, you know what? Why aren’t the oil companies producing oil? It’s not because their cost of capital is higher.
It’s just because they’re looking at it and going: Why do it if we are going to get penalized for producing oil? Why would we go through the effort of pulling oil out of the ground and doing everything that we can do to lower the cost of energy when all we’re going to do is get penalized?
Cost of Capital
Companies put money into capital, into structures, and into research, and into putting together all the infrastructure that it takes to drill and bring oil out of the ground and bring it to the consumer. Why would they do that if they are going to be told later on, once the election is over, that they can’t do it anymore? It doesn’t make any sense.
EB: Well, I look at that more as an operational cost because we don’t talk about this a lot. We use the term cost of capital. And that’s what you need to have to have a return expectation for your investment, whether it’s a stock, bond, or whatever.
PW: You’ve got to pay to use other people’s money.
EB: Correct. But I’m buying your stock in an energy company. I’m not buying stock from Exxon and Exxon is trying to change something. As an individual investor, I’m looking at: what’s the risk of you making money with all of these ESG issues?
So if I build that in for myself. That doesn’t necessarily change anything. Let’s just use Exxon as an example. I don’t think it changes a lot of their metrics looking at the cost of capital from that standpoint.
PW: I agree. And the only place it might be is in the debt or the bond area.
So that’s all I’m talking about. So if you look at that, yes, you’re correct. The stock price will be a little bit lower. It may be artificially lower. I’ll build in the gain for the risk that they could get punished for being unwoke. Yeah.
EB: Yeah, that’s absolutely correct.
PW: This would be an interesting thing: I wonder if there is, I’m going to call it a breakeven because I can’t think of a better term right now. Almost like a curve of, okay, at what point do I have a percentage of being ESG and I give up X amount of revenue?
Okay, here’s the efficient frontier of sure social investing.
I’m willing to pay more because I can make more money and I can easily make those debt payments.
EB: Sure. I can make more money, so therefore I’m willing to pay more to use your capital through your bonds.
Losing Profitability
PW: But if I go too far, then I’m going to start losing money.
EB: Now I’m losing profitability.
PW: Yeah, then it’s just bad business. Then you’re dealing with legislative issues at that particular point.
So it’s an interesting question, Jerry. It’s hard to put a number on that, but as an investor, I guess one of the things that you could say is that it does not drive my investing behavior.
It’s not going to change my investing behavior if companies have to pay more to use my money.
Like Evan said, when we’re talking about stocks, the stock price will just be artificially low right now for the extra risk that investors are looking at that they have to take in that particular area will cause them to require a higher expected return.
And the only way you do that is reduce the price that you’re paying for every dollar of earnings. Therefore it’s already built into the mix right now, because ESG’s have been around for a long, long time.
But as an investor, what I’m not going to be doing is I’m not going to be using the type of bonds that would be affected by this anyway, which you would find more in junk bonds or high yield bonds. I wouldn’t be using those types of bonds in an investment portfolio. So it’s a non-issue when it comes to the bond portfolio, in my mind.
EB:To me there’s another element in Jerry’s question. If you talk a lot about the human desire to have a prediction about the future. We just desire that.
And so if you get the answer to that question is, “Oh, okay. Maybe I should get in or get out of energy stocks because fill in the blank.” Whatever the effect is, it’s already in the price.
So whether we had a number we agreed on, the other 8 billion people that are participants in the market have factored in whatever they think it’s going to be, and it’s already in the price. There’s no advantage to coming up with that number.
PW:Yeah, exactly. That’s a good point.
All right. Thanks for that question. If you’ve got a question and you want to hear us philosophize on the air about it, you can go to paulwinkler.com/question and send it to us.
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