Personal Finance

What that means for you

Published

20 hours ago

December 13, 2024

What to expect from next week's Fed meeting

The Federal Reserve is expected to lower interest rates by another quarter point at the end of its two-day meeting on Dec. 18. That would mark the third rate cut in a row — altogether shaving a full percentage point off the federal funds rate since September.

So far, the central bank has moved slowly as they recalibrate policy after swiftly hiking rates when inflation hit a 40-year high.

“This could be the last cut for a while,” said Jacob Channel, senior economic analyst at LendingTree.

The Fed might choose to take “a wait-and-see approach” because there is some uncertainty around President-elect Donald Trump’s fiscal policy when he begins his second term, he said.

In the meantime, high interest rates have impacted all sorts of consumer borrowing costs from auto loans to credit cards.

The federal funds rate, which the U.S. central bank sets, is the rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.

A December cut could lower the Fed’s overnight borrowing rate by a quarter percentage point, or 25 basis points, to a range of 4.25% to 4.50% from its current 4.50% to 4.75% level.

That “will exert some margin of easing of financial pressure,” said Brett House, economics professor at Columbia Business School — but not across the board.

“Some of the most important interest rates that people face don’t benchmark off the Fed rate,” he said.

From credit card to car loans to mortgages, here’s a breakdown of how it works:

Credit cards

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. In the wake of the rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to 20.25% today, according to Bankrate — near an all-time high.

Even though the central bank started cutting interest rates in September, the average credit card interest rate has barely budged. Card issuers are often slower to respond to Fed decreases, said Greg McBride, Bankrate’s chief financial analyst.

“The rate will go a step lower but with a lag up to three months,” Mc Bride said.

A better move for those with credit card debt is to switch to a 0% balance transfer credit card and aggressively pay down the balance, he explained.

“Interest rates are not going to fall fast enough to do the heavy lifting for debt-burdened consumers,” he said.

Mortgage rates

Because 15- and 30-year mortgage rates are fixed and mostly tied to Treasury yields and the economy, they are not falling in step with Fed policy. And since most people have fixed-rate mortgages, their rate won’t change unless they refinance or sell their current home and buy another property.

As of the week ending Dec. 6, the average rate for a 30-year, fixed-rate mortgage is 6.67%, according to the Mortgage Bankers Association.

Those rates are down somewhat from the previous month, but well above the 2024 low of 6.08% in late September.

“Going forward, mortgage rates will likely continue to fluctuate on a week-to-week basis and it’s impossible to say for certain where they’ll end up,” Channel said.

Auto loans

Auto loans are fixed. However, payments have been getting bigger because car prices are rising and that has resulted in less affordable monthly payments.

The average rate on a five-year new car loan is now around 7.59%, according to Bankrate.

While anyone planning to finance a new car could benefit from lower rates to come, the Fed’s next move will not have any material effect on what you get, said Bankrate’s McBride. “Sticker prices are high and the amounts being financed by borrowers are very, very high,” he said — around $40,000, on average.

“Even at very low rates, that is a budget-busting monthly payment.”

Student loans

Federal student loan rates are also fixed, so most borrowers won’t be immediately affected by a rate cut. However, if you have a private loan, those loans may be fixed or have a variable rate tied to the T-bill or other rates, which means as the Fed cuts rates, the rates on private student loans will come down as well.

Eventually, borrowers with existing variable-rate private student loans may also be able to refinance into a less expensive fixed-rate loan, according to higher education expert Mark Kantrowitz.

However, refinancing a federal loan into a private student loan will forgo the safety nets that come with federal loans, he said, “such as deferments, forbearances, income-driven repayment and loan forgiveness and discharge options.”

Additionally, extending the term of the loan means you ultimately will pay more interest on the balance.

Savings rates

While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.

As a result of the Fed’s string of rate hikes in recent years, top-yielding online savings account rates have offered the best returns in decades and still pay nearly 5%, according to Bankrate’s McBride.

“This is still a good time to be a saver and a good time for cash,” he said. “The most competitive offers are still well ahead of inflation and that’s likely to persist.”

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Personal Finance

This is the best tax bracket for a Roth IRA conversion, advisors say

Published

15 hours ago

December 13, 2024

Business Finance News

Eleganza | E+ | Getty Images

The best tax brackets for Roth conversions

When crunching the numbers for a Roth conversion, you’ll want to consider how the transfer impacts your current tax bracket, according to Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

If you can stay within the 12% tax bracket or lower, “that’s a no-brainer, 99% of the time,” he said. But anything above the 12% is “situational,” depending on a client’s goals and other factors.

Ryan Losi, a certified public accountant and executive vice president of CPA firm Piascik, also uses a “rule of thumb” to greenlight Roth conversions.

“If we can convert and still stay in the 24% bracket or lower, I’m a thumbs up,” he said. But bumping into the 32% bracket or higher prolongs the “recovery period” to recoup upfront taxes.

Of course, these benchmarks can change depending on a client’s unique circumstances, such as estate planning goals, experts say.

Weigh rebalancing in lower-income years

When completing a Roth conversion, advisors typically aim to fill a specific tax bracket with income without spilling into the next one.

But you could miss other planning opportunities by focusing solely on Roth conversions, Lucas said.

For example, if you’re sitting on a large brokerage account with sizable gains, you could leverage your lower tax brackets to rebalance your portfolio, he said.

The strategy, known as “tax gain harvesting” involves strategically selling profitable assets during lower-income years.

For 2024, you may qualify for the 0% long-term capital gains rate with a taxable income of up to $47,025 if you’re a single filer or up to $94,050 for married couples filing jointly.

These figures would include assets sold from your brokerage account.

Roth conversions on the rise: Here's what to know

Personal Finance

Here’s how to retire a millionaire, according to finance pros

Published

16 hours ago

December 13, 2024

Business Finance News

Goran Babic | E+ | Getty Images

Building a $1 million nest egg may seem an impossible feat.

However, amassing such retirement wealth is within reach for almost anyone — provided they take certain steps, financial advisors say.

“You might think that, ‘Well, I have to become a Silicon Valley entrepreneur to become rich,'” said Brad Klontz, a financial psychologist and certified financial planner.

In fact, you can be a fast-food worker your whole life and amass wealth, said Klontz, a member of the CNBC Financial Advisor Council and the CNBC Global Financial Wellness Advisory Board.

The calculus is simple, he said.

Every time you’re paid a dollar, save and invest a percentage toward your “financial freedom,” Klontz said.

With this mindset, “you can work almost any job and retire a millionaire,” he said.

It’s not necessarily a ‘Herculean task’

Saving $1 million may sound like a “Herculean task” but it “might not be as hard as you think,” Karen Wallace, a CFP and former director of investor education at Morningstar, wrote in 2021.

How to retire with $1 million if you're making $65,000 per year

The key is to start saving early, perhaps in a 401(k) plan, individual retirement account or taxable brokerage account, experts said. This allows investors to harness the magic of compound interest over decades. In other words, you “let your investments do as much heavy lifting as possible,” Wallace wrote.

About 79% of American millionaires say their net worth was “self-made,” according to a Northwestern Mutual poll published in September. Just 11% said they inherited their wealth, while 6% got it from a windfall event like winning the lottery, according to the survey of 4,588 U.S. adults, fielded from Jan. 3 to Jan. 17, 2024.

There were 544,000 Americans with 401(k) balances of more than $1 million as of Sept. 30, according to Fidelity Investments, which is the largest administrator of workplace retirement plans. There were also more than 418,000 IRA millionaires.

In fact, the number of 401(k) millionaires grew by 9.5%, or 47,000 people, between the second and third quarter of 2024, largely due to stock-market gains.

How to get to $1 million

Wera Rodsawang | Moment | Getty Images

Winnie Sun, a financial advisor, provides an example of the math that links $1 million of wealth with consistent saving.

Let’s say a 30-year-old makes $60,000 a year after tax. If they were to save $500 a month — or, 10% of their annual income — they’d have $1 million by age 70, assuming average market returns of 7%, she said.

This doesn’t account for financial factors that might boost savings over that period, like a company 401(k) match, bonuses or raises.

You can work almost any job and retire a millionaire.

Brad Klontz

financial psychologist and certified financial planner

“In 40 years, you’ll have over $1 million, and that’s doing nothing else but $500 a month,” said Sun, co-founder of Sun Group Wealth Partners, based in Irvine, California, and a member of CNBC’s Financial Advisor Council.

It’s also important to avoid debt, which is probably the “biggest cavity” for building savings, and try not to increase expenses too much, Sun explained.

Timing is more important than being perfect, Sun said.

She recommends starting with a low-cost index fund — like one tracking the S&P 500, which diversifies savings across the largest publicly traded U.S. companies — and building from there.

“Even waiting a year can make a dramatic difference in reaching that $1 million point,” Sun said. “Stop and take action.”

What is the right amount of savings?

Damircudic | E+ | Getty Images

Of course, $1 million in retirement may not be the right amount for everyone.

An oft-cited rule of thumb — known as the 4% rule — indicates a typical retiree can draw about $40,000 a year from a $1 million nest egg in order to safely assume they won’t run out of money in retirement. (That annual withdrawal is adjusted annually for inflation.)

For many, this sum would be supplemented by Social Security.

Fidelity suggests a savings goal based on income. For example, by age 67 a worker should aim to have saved 10 times their annual salary to ensure for a comfortable retirement.

Ideally, households would aim to save 15% to 20% of their income, Sun said. This is a rule of thumb often cited by financial planners.

How much wealth you want — and how quickly you want to be rich — will determine the percentage, Klontz said.

He’s personally aimed for a 30% savings rate, but knows people who’ve shot for close to 90%. Saving such large chunks of one’s income is a common thread of the so-called FIRE movement, which stands for Financial Independence, Retire Early.

How do they do it?

“They didn’t move out of their parents’ house, they minimized everything, they don’t buy new clothes, they take the bus, they shave their head instead of paying for haircuts,” Klontz said. “There’s all sorts of hacks you can do if you want to get there faster.”

How to enjoy today and save for tomorrow

Of course, there’s a tension here for people who want to enjoy life today and save for tomorrow.

“We weren’t meant to only survive and save money,” Sun said. “There has to be that good quality of life and that happy medium.”

401(k) plans opening to more part-time workers

One strategy is to allocate 20% of household expenses toward the thing or things that are most important to you — perhaps big vacations, fancy cars, or the newest technology, Sun said.

Make some concessions — i.e., “scrimp and save” — on the other 80% of household costs, she said. This helps savers feel like they’re not reducing their quality of life, she said.

Personal Finance

Why egg prices may soon ‘flirt with record highs’: supplier

Published

2 days ago

December 12, 2024

Business Finance News

A customer walks by a display of fresh eggs at a grocery store on Sept. 25, 2024 in San Anselmo, California.

Justin Sullivan | Getty Images

It’s déjà vu for grocery shoppers, as the price of those Grade A eggs has spiked in recent months, just two years after egg prices soared to record highs.

The average retail price of eggs in the U.S. has risen 38% since November 2023, according to consumer price index data issued Wednesday. Prices rose 8% last month alone.

A carton of a dozen large Grade A eggs cost $3.65 in November, up from $2.14 a year earlier, according to the U.S. Bureau of Labor Statistics.

There are two primary reasons for the surge: bird flu, which has reduced egg supply, and the strong consumer demand that’s typical around the winter holiday season, according to economists and market analysts.

“There’s a very real chance we could flirt with record highs” for prices, said Brian Moscogiuri, vice president of Eggs Unlimited, an egg supplier.

Egg prices on the rise: Here's what to know

Grade A egg prices peaked at $4.82 a dozen in January 2023, having jumped from $1.93 in January 2022.

At a time of high pandemic-era inflation, eggs were a standout, with an annual inflation rate of 60% in calendar-year 2022, according to CPI data. They even entered the zeitgeist: Pop star Taylor Swift told comedian Trevor Noah at the Grammy Awards in February 2023 that her fans would “get on it” to help lower egg prices.

How a ‘serious’ bird flu outbreak is affecting egg prices

Now, as in 2022-23, highly pathogenic avian influenza — better known as bird flu — is a big culprit.

Bird flu is a highly contagious and lethal disease among birds, including chickens. The U.S. is in the midst of a “serious outbreak,” Moscogiuri said.

The disease entered the U.S. in late 2021 and has lingered, experts said. Prior to that, the last time bird flu had impacted egg-laying chickens at commercial farms was in 2015, Moscogiuri said.

About 33 million commercial egg layers have been killed by bird flu in 2024, according to data from the Centers for Disease Control and Prevention.

That has “caused an egg supply shortage,” said Ryan Hojnowski, an egg analyst at Expana, an agricultural market research firm.

Roughly half of the commercial egg layer deaths for 2024 — about 15 million birds — have occurred since Oct. 15, according to CDC data. Wholesale egg prices are up 97% since mid-October, according to Expana.

“If you have one infection, chances are that d— near all the birds are infected, or will be infected in a very short time,” said Andrew Novakovic, a professor of agricultural economics at Cornell SC Johnson College of Business.

Thanksgiving, Christmas holidays raise egg demand

The egg supply shortage is also running headlong into peak season for consumer demand.

“Q4 is when we typically see the strongest demand for eggs as consumers tend to bake around the Thanksgiving and Christmas holidays,” Hojnowski said.

High demand and reduced supply have combined to lift prices, experts said.

“When we get past this holiday effect, I think we’ll see some [price] softening,” Novakovic said.

Karrastock | Moment | Getty Images

But the trajectory is difficult to predict, experts said.

For one, bird flu’s staying power is unclear. There have been recent outbreaks in U.S. dairy cows, and “several recent human cases in U.S. dairy and poultry workers,” the CDC said. As of Dec. 11, the current public health risk was “low,” however, the CDC website said.

The U.S. Department of Agriculture on Friday issued a federal order requiring testing of U.S. milk supply for bird flu, to help track and contain the virus.