RSWA » Latest Articles
05.10.2024 by Donovan Ingle

Lessons From Buffett and An Update on Social Security

Berkshire Hathaway, the multinational conglomerate led by Warren Buffett since 1965, held its annual shareholder meeting this past Saturday. Nicknamed “Woodstock for Capitalist,” investors flock to Omaha, Nebraska, each year to hear what the “Oracle of Omaha” has to say. Here are a few lessons I took away from what Mr. Buffett had to say at this year’s meeting: 

Retirement is not for everyone: Buffett is currently 93 years old (set to turn 94 in August) and is still CEO of Berkshire. His long-time partner, Charlie Munger, passed away in November at 99 and was still involved with the company until his passing. While we are a firm that helps many individuals retire, it is worth remembering that it isn’t for everyone. At a reported net worth of $139 billion, I think his financial plan would say he could retire (and could have a long time ago). Buffett truly loves what he does and is happy to continue doing it for as long as he can. Whatever path we take as we age, I think we can all agree that being able to do what you love and makes you happy for as long as you can is the ultimate goal. To our clients: don’t expect to see me in the office 66 years from now. 

Stock picking is hard: Buffett’s long-term investing track record is amazing. There is certainly a reason why he is widely considered to be the greatest investor of all time. But even the greatest of all time can’t win them all. In this year’s meeting, Buffett took responsibility for the firm’s $2.6 billion stake in Paramount Global that went south. Berkshire sold their entire stake in Paramount and “lost quite a bit of money.” Fortune This outcome brought more attention to Berkshire’s $354 billion stock portfolio, which has underperformed the S&P 500 mightily dating back to 2014. Financial Times 

image-png-Mar-10-2022-08-08-08-52-PMCash is king: With its first quarter earnings release, Berkshire announced their current cash position to be a whopping $189 billion. That is a big number, and many shareholders have been urging them to put it to use or return some to the shareholders, but it’s really nothing new. That cash represents roughly 17% of Berkshire’s total assets. In 2004, Berkshire only had $40 billion in cash, but this represented 21% of their total assets at that time. Buffett has always preferred to hold onto some cash to provide flexibility and take advantage of potential investment opportunities. 

Social Security Funding Shortage Update: On Monday, the Social Security Board of Trustees released their annual report on the financial status of the Social Security Trust Funds. Social Security Administration In the report, the Board announced that the current asset reserves are projected to cover all scheduled benefit payments until 2035. This is a positive change, as previous projections showed the shortfall occurring in 2034.  

This may seem like a small win, and it is, but given the fact that Social Security’s Annual Cost-Of-Living Adjustments have been 3.2%, 8.7%, and 5.9% over the previous three years, it wouldn’t have been a surprise to many if the shortfall was projected to happen sooner. Martin O’Malley, Commissioner of Social Security, pointed to strong economic conditions, wage growth, historic job creation, and a steady, low unemployment rate being the reason for more people contributing to Social Security. “So long as Americans across our country continue to work, Social Security can — and will — continue to pay benefits,” said O’Malley. 

So, now the big question: What happens after 2035? Based on current projections and assuming Congress does nothing to address the shortfall, there would be sufficient income to cover 83% of scheduled benefits. Call me over-optimistic, but I remain in the camp that this problem will be addressed at some point before this happens. Social Security paid out $1.379 trillion in benefits in 2023. If these benefits were cut by 17%, about $235 billion less income would come in for individuals and families receiving retirement and disability. This would have major implications for the US economy, and I find it hard to believe that any politician wants to take responsibility for causing that harm to the economy. But this is Congress we are talking about… 

Some Economic Bad News, Which Is Actually Good News? For much of the past 2+ years, investors have focused on two factors: inflation and interest rates. The two have worked hand in hand to create a lot of the volatility we have experienced since the start of 2022. This has put investors in a weird spot in hoping for a strong economy while simultaneously hoping for cooler economic data to bring down inflation rates, which in turn will likely lead to the Fed cutting rates, which would lead to better economic data. This trend has continued over the past two months, with a high inflation report and strong economic reports for March causing concern that the Fed will take longer than expected to begin lowering interest rates, thus leading to a ~5% pullback in US stocks. A weaker-than-expected US jobs report was released last week Invesco, and you guessed it, US stocks rallied on the news. The circle continues. 

Financial Planning/Investment Strategy Corner: 

Risen Real Estate Values – How to Take Advantage: If you own any type of real estate, there is a good chance it has risen in value (and probably fairly substantially over the past 3-4 years). With the illiquid nature of real estate, it can be hard to realize this increase in value. Especially without selling the property and incurring major capital gains taxes. Here are a few strategies you can consider and some tips to look out for: 

Primary Residence:  

  • Downsizing: This strategy is usually the first one that comes to most retirees’ minds. This is certainly a viable option for those willing and able to sell, but there are some limitations: 
  • Finding a place to move to: The housing supply is still low & the price of the new place has likely risen in value as well.  
  • Taxes: They can still be a factor when selling your primary residence. Single tax filers get a home-sale exclusion of up to $250,000 when selling their principal residence, and married couples filing jointly get $500,000 (these amounts haven’t changed since 1997). If you have been in your house for a significant amount of time, there is a realistic chance that your gain exceeds the exclusion. WSJ  
  • Reverse Mortgage: This strategy usually gets a gasp and feels as if someone just cursed when it is first mentioned. However, for retirees looking to stay in their homes but want to realize some of their built-up net worth from their house, a reverse mortgage can be a very useful tool. A few drawbacks: 
  • Closing costs: appraisal fees, counseling fees, or origination fees 
  • Amount available: dependent on the value of the home, how much equity you have in the home, interest rates, & the age of the youngest borrower 
  • Repayment: due when the second borrower passes or leaves the house. This usually leads to the home being sold to pay off the loan. 

Investment Properties and Second Homes:  

  • 1031 exchange: For investment properties, there are a few strategies for deferring capital gains tax, the most popular being a Section 1031 Exchange Investopedia. In short, a 1031 exchange is a swap of one real estate investment property for another that allows capital gains to be deferred. These exchanges can be very helpful but also complex. It is highly recommended that you work with a 1031 exchange specialist and/or an accountant. Some limitations include: 
  • Timing: Sellers have 45 days from the sale of their property to find and designate a property they want to acquire in place of the one they just sold. Sellers must also close on the new property within 180 days of the sale of the old property. 
  • Tax deferral, not elimination: If done correctly, there will be no capital gains tax due at the time of a 1031 exchange, and there is no limit on how many times you can utilize an exchange. However, it is important to know that you are deferring the tax, not eliminating it. If you plan to sell a property in the future without exchanging it, you’ll be required to pay the taxes on all of the deferred growth. Many individuals end up passing the exchanged properties to their heirs who get a step up in basis and may be able to sell the property without any taxable gains. 
  • Identifying a qualified property: The new property must be “like-kind,” but the rules are fairly liberal. The biggest challenge usually becomes finding a property that the individual actually wants to invest in or purchase during the time constraints. 
  • Delaware Statutory Trust (DSTs): DSTs are entities that hold investment real estate that are designed to ease the 1031 process Kiplinger. A property held in a DST will qualify as a like-kind exchange to meet the 1031 process and take out the hassle of finding a property of your own and identifying and closing in time. DSTs are usually professionally managed and allow real estate investors to diversify their holdings among multiple properties.  

Quick Hits 

  • Mystik Dan won the 150th running of the Kentucky Derby this weekend in likely the most exciting finish ever Washington Post 
  • And, of course, what is horse racing without a little drama Courier Journal 
  • The Giro d’Italia (Italy’s version of the Tour de France) is winding its way through Italy. Here are some of the beautiful Italian landscapes the Peloton will be racing through Visit Italy 
  • I recently came across a stat that said 95% of adults over the age of 30 never sprint again in their lives. It was on Twitter, so it had to be true. Whether it is totally accurate or not, it got me thinking, what are the potential health benefits of sprinting? Here are some answers: AFT Coaching Primal Play  

Happy Mother’s Day! No final article from me this week. I just want to wish a Happy Mother’s Day to my mom and all moms reading this. You all are truly the best. (Sorry, Dad) 

Quote: “A mother is your first friend, your best friend, your forever friend.” Amit Kalantri, Wealth of Words 

Thank you for reading RSWA Financial Advisor Insights! We welcome feedback, and please forward this to a friend! Be well, take care, and stay safe! 


We're sharing our market and economic insights & helping you with retirement!

Subscribe to our Weekly Newsletter and receive our Quickstart Guide to Retirement Planning!