Access ≠ Action

Nate breaks down 401(k)s, Bennet explores whether the Fed is fighting inflation or finding it, Jon examines Gen Z’s money mindset and how it breaks the mold.

01. How a 401(k) works

From Nate Hoskin, Founder & Lead Advisor

401(k)s are by far the most common employer retirement plan, chances are you have one or will have one at some point.

Here is a quick rundown of how they work:

Eligible employees can contribute up to $22,500 per year pre-tax. This number increases with inflation every few years. This money is pre-tax, so if you are in the 24% marginal tax bracket, maxing out your 401(k) will save you up to $5,400 this year.

If you are over age 50, you can contribute an additional $7,500 per year as a catch-up contribution.

Saving into your 401(k) is usually step three of Saving for Financial Independence, unless your employer matches your contributions. Most employers will match your contributions up to 5% of your salary to satisfy the Safe Harbor requirements. If your employer offers a match, getting that free money is the number one priority on your savings waterfall after you have a $1,000 cash buffer.

The goal of a 401(k) is that you don’t touch the money until you turn 59 ½. That said, you can access either 50% of your account value or $50,000 (whichever is lower) in the form of a 401(k) loan. You’ll have to pay back the loan over 5 years unless you use the loan for a home purchase. Any interest you pay is added to your account since you are technically borrowing from yourself!

That $22,500 number is only the amount you are able to contribute pre-tax. You can actually contribute as much as $66,000 to a 401(k)!

It looks like this:

Employee pre-tax contribution

+ Employer match

+ Profit-sharing distributions

+ After-tax contributions

= $66,000 or 100% of your income

After-tax contributions are exactly what they sound like: contributions without the tax benefit. In a traditional 401(k) these are pretty useless, but they can then be rolled into a Roth 401(k) or Roth IRA to do a Mega-Backdoor Roth.

You may be able to do this, but you will have to talk to HR to make sure the contribution does not impact the non-descrimination testing for the 401(k) program.

As always, it’s worthwhile to talk to an advisor to see if this is an option for you. One appointment could save you hundreds of thousands of dollars.

Let’s Discuss your 401(k)

02. Fighting inflation or finding inflation?

From Bennett Fees, Economic Research Associate

When we think of how the Fed “fights” inflation it’s easy to miss the equally important question of how the Fed “finds” inflation. On November 30th, Powell broke up core inflation into three categories: core goods inflation, housing services inflation, and inflation in core non-housing services or NHS. After the most recent CPI print, we can estimate where each of these areas stand.

Core goods - Despite the .1% uptick in January, which most analysts have treated as unreflective of future trends, this category is the most straightforward with broader declines stemming from normalizing supply chains and pandemic goods demand shifting back to services.

Housing inflation - It is too early to make sense of the .7% monthly increase because of inherent lags, but Powell expects it to increase for a bit and come down later in line with rents.

NHS - This is where Powell has spent most of his time and is also what makes him the most uneasy. In short, NHS inflation has not decreased substantially and there needs to be much more progress in this area before Powell declares victory.

So what does this mean looking forward?

Here is Powell’s operating approach: he doesn’t anticipate cutting rates this year. His base case includes more rate hikes and reacting as more information becomes available. Combining this with the bond market’s corrected rate cuts for 2023 and hotter inflation data due to seasonal adjustments, this reactive approach has spelled trouble for everyone.

You can read my full workup for free below.

Read the Article

03. Gen Z believes what?

From Jon Scott, Lead Author

The internet is kind of a crazy place. At any time you can come across something you didn’t intend to see. That happened moments before I started writing this contribution to the newsletter. Some recent findings about Gen Z adults from an Intuit Blog study definitely surprised me:

• “Nearly 3 in 4 Gen Zers say they would rather have a better quality of life than extra money in the bank. In fact, experiences matter more than money to Gen Z, as 66% say they are only interested in finances as a means to support their current interests.”

• “Two-thirds say they know how to make a budget and track their income, but haven’t done it (66%).”

• “Two-thirds know it’s important to invest, but they don’t know how (64%).”

I could write a whole pamphlet on my feelings on these topics (and if you want me to I will!). However, I want to focus on why Hoskin Capital exists.

The Intuit study correctly stated:

“Gen Z has more access to financial information than any other generation, but this doesn’t always translate into decision-making. From financial tips on TikTok to Reddit forums on investing, the survey illustrates that Gen Z is frequently paralyzed by conflicting advice…”

I couldn’t agree more.

At Hoskin Capital, we are here to help guide you along your financial journey, whether that be working with an advisor, subscribing to our Knowledge Base, or just reading this newsletter and watching our Tik Toks. No matter which way you interact with us, we are here to increase your financial acumen, so you can live your best life—free from the worries of not having enough money at any point in your life.

The findings of this Intuit study is why we are here, and why we will continue to be your source for financial information you can actually act on.

Part of that commitment includes our Knowledge Base, which added four more articles over the past 2 weeks:

1. Technology In FinanceThis article addresses the psychology of being financial literate. It is a wide ranging bird’s eye view that covers making money, saving money, and how to invest money–aspects the Intuit study says Gen Z is struggling with the most. This article is a great first step before getting into some of the more in-depth, specific articles.

2. How Taxes Work: Capital GainsWhen does it make sense to sell a stock? And if you do, how do those sales affect your taxes? This article explains the rationale behind these decisions so at tax time you can keep more money in your pocket.

1. How to manage debtThis article breaks down good versus bad debt. In addition, this article gives you guidelines on how much debt you should have, and helps you determine whether or not it is a good idea to take on additional debt.

1. How the rich borrow against their moneyThis one is a secret, subscribe to Knowledge Base to find out.

Subscribe to the Knowledge Base

“It is not that we have a short time to live, but that we waste a lot of it."

- Seneca

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