Bob’s Journal for 11/7

IRS Announces 2025 Inflation Adjustments for Retirement Plans

Inflation increased the amount people can contribute to 401(k) plans in 2025 and changed other limits for retirement plans.

The maximum tax-deferred contribution by an employee to a 401(k) plan in 2025 will be $23,500, up from $23,000 in 2024. The additional catch-up contribution for those ages 50 and older will be unchanged at $7,500.

The limit for total contributions for an employee to a 401(k) or similar plan increases to $70,000 in 2025 from $69,000 in 2024. This number includes tax-deferred employee contributions, employer matching contributions and after-tax contributions made by employees in excess of the tax-deferred limit of $23,500.

This adjustment increases the amount that can be deferred through the backdoor Roth IRA strategy discussed in the December 2023 issue of Retirement Watch.

The maximum IRA contribution is unchanged at $7,000 for 2025. The limit applies to traditional IRAs and Roth IRAs. A taxpayer who contributes to both types of plans can contribute $7,000 in total to both types, not to each type of IRA.

The additional IRA catch-up contribution for those 50 and older is unchanged at $1,000, though it now is indexed for inflation.

Contributions to traditional IRAs are fully deductible for single taxpayers until adjusted gross income reaches $79,000 and are eliminated when the income is above $89,000.

For married couples filing jointly, the contributions are fully deductible when adjusted gross income is $126,000 or less and eliminated when AGI reaches $146,000. Conditions in addition to the income limit must be met for contributions to traditional IRAs to be deductible.

Contributions to Roth IRAs are eliminated when adjusted gross income reaches $165,000 for single taxpayers and $246,000 for married couples filing jointly. The contributions are phased out beginning when adjusted gross income reaches $150,000 for singles and $236,000 for married couples filing jointly.

Details and additional inflation adjustments are in IRS Notice 2024-80.

Why the Federal Government Might Fear Bitcoin

The government can implement a policy of permanent primary deficits over the long term, according to research published by the Minneapolis Federal Reserve. But the plan won’t work if bitcoin exists.

The paper is long and can be technical. But the primary argument of the authors is that, contrary to the arguments of some economists, it is possible for the government to run permanent deficits without causing inflation and interest rates to spike.

But the authors also say the strategy won’t work if bitcoin exists. The authors define bitcoin as “useless pieces of paper (bitcoin for short) that can be traded.”

I won’t go into the details of the argument, but the authors say the existence of bitcoin creates a “balanced budget trap” that would force the government to balance its budget.

The paper says that if the government wants to implement a strategy of permanent primary deficits, it must either prohibit bitcoin or tax it at a rate that won’t interfere with a permanent deficit strategy.

The Exceptional Performance of U.S. Equities

U.S. stocks outperformed all other stock markets in the world by a wide margin beginning around 2011 and 2012. Investors need to look at the reasons for this outperformance and ask how long the exceptional returns can continue.

The compounded return of the S&P 500 since 2010 is close to 580%. Japan’s market has the closest returns, delivering only a 150% compounded return. China has returned only 37%.

Another way to look at it is that U.S. stocks outperformed all other markets by at least 5% per year for 15 years.

One way to understand the outperformance is to look at the factors that contributed to it.

Earnings of the S&P 500 companies increased by about 7.6% annually over the period. That compares to a 4.7% earnings increase for companies in all other developed world markets.

Earnings per share increased 8.3% for U.S. stocks and 4.1% in the rest of the developed world.

Revenues of U.S. companies increased 4.5% annually, while revenues of companies in other developed markets rose 3.0% annually.

Profit margins rose 3.1% annually in the United States but only 1.7% in the rest of the developed world.

Part of the excess return in the United States was due to investors placing a higher value on U.S. stocks, as indicated in the price-earnings (P-E) ratio. The P-E ratio for U.S. stocks increased about 3.6% annually while the ratio rose only 1.4% annually for non-U.S. developed stocks.

Breaking the numbers down, about two-thirds of the outperformance of U.S. stocks was due to the increase in earnings per share, while one-third was due to a combination of expanding price-earnings ratio and dividend accruals.

About one-third of the increase in the U.S. P-E ratio was due to changes in long-term growth expectations.

Two-thirds of the P-E ratio increase was from a change in the risk premium, roughly meaning investors each year were willing to pay more for each dollar of profits earned by U.S. companies or the expectations of future profits.

Technology was the fastest-growing stock sector and has been a higher percentage of the U.S. index than in other countries’ indexes. But that shouldn’t be overstated. U.S. companies in most sectors delivered higher earnings and profit margins than counterparts in other countries.

That history is interesting, but it should be used to estimate how long the outperformance can continue.

It is important to note that at the start of the period, interest rates were very low in the United States. They aren’t nearly as low now and probably won’t return to the 2010 levels.

In addition, valuations of U.S. stock were fairly low coming out of the financial crisis. In contrast, today U.S. stock valuations are near historic highs.

Plus, U.S. companies steadily purchased their own shares during the period, reducing the number of shares available. The reduction in shares increases earnings per share. In fact, the number of shares outstanding in the United States decreased during the period, while shares outstanding increased in other developed countries.

Investors need to ask whether the markets will continue to assign higher and higher risk premiums to the United States. Will they bet that U.S. companies will continue to have high earnings growth, and that growth will be higher than for global counterparts?

Since a large part of U.S. stock returns in the last 15 years was the result of higher P-E ratios, the P-E ratios must continue to rise for U.S. stocks to deliver the same level of returns.

Keep in mind that interest rates were low and declined for most of the period. P-E ratios tend to rise when interest rates are falling. But P-E ratios tend to fall when interest rates are higher than expected.

Another factor is that U.S. stocks were about 50% of the global indexes at the start of the period but now are close to 70% of the indexes. Will global investors continue to be comfortable putting 70% of their capital in the United States?

U.S. companies also benefited from the U.S. economy growing faster than the rest of the world. That needs to continue for U.S. stocks to continue to outperform.

None of this data makes the case that U.S. stocks have to fall and have a long bear market. But they do indicate that in the next 15 years, U.S. stocks are unlikely to duplicate the extraordinary returns of the last 15 years. Investors should incorporate that into their investment strategies and expectations.

The Data

The Federal Reserve’s preferred measure of inflation, the core Personal Consumption Expenditure (PCE) Price Index, increased by 0.3% in September after rising 0.2% in August. The measure increased 2.7% in the 12-month periods ending in September and August.

The regular PCE Price Index, which includes food and energy prices, rose 0.2% in September and 0.1% in August. Over 12 months, the index increased 2.1% through September and 2.3% through August.

Personal income increased 0.3% in September and 0.2% in August. Compensation advanced 0.5% in both September and August. Income from assets declined in both months.

Consumer spending rose 0.5% in September after increasing 0.3% in August. Spending increased across-the-board on services, durable goods and non-durable goods.

The ISM Manufacturing Index fell to 46.5 in October, the worst level since July 2023, from 47.2 in September.

The ISM Services Index increased to 56 in October from 54.9 in August.

The PMI Services Index for October was 55.0, down from 55.2 in September.

The PMI Composite Index for the economy was 54.1 at the end of October compared to 54.0 at the end of September.

The PMI Manufacturing Index rose a little to 48.5 in October from 47.3 in September and 47.8 in mid-October. September’s level was a 15-month low.

Only 12,000 jobs were created in October, according to last week’s Employment Situation reports. There were 223,000 jobs created in September. The small number of new jobs was attributed to strikes at Boeing as well as effects from recent hurricanes.

The biggest job losses were in temporary help services and manufacturing.

Average hourly earnings rose 0.4% in October, an increase from 0.3% in September. Weekly hours worked were stable at 34.3, and the labor force participation rate dropped to 62.6% from 62.7%.

Factory orders fell 0.5% in September after dropping 0.8% in August. After excluding the volatile transportation sector, factory orders increased 0.1% in September, following a 0.2% decline in August.

New unemployment claims fell by 12,000 to 216,000 in the latest week.

Continuing claims, which lag a week behind new claims, decreased to 1.862 million from 1.888 million.

The Markets

The S&P 500 lost 0.87% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 0.05%. The Russell 2000 increased 1.12%. The All-Country World Index (excluding U.S. stocks) added 0.14%. Emerging market equities advanced 0.38%.

Long-term treasuries gained 1.12% for the week. Investment-grade bonds increased 0.34%. Treasury Inflation-Protected Securities (TIPS) fell 0.08%. High-yield bonds gained 0.11%.

In the currency arena, the U.S. dollar declined 0.68%.

Energy-based commodities increased 3.36%. Broader-based commodities rose 0.61%. Gold declined 1.05%.

Bob’s News & Updates

A recent review on amazon.com of my latest book said, “Carlson is a unique national Asset while alive! Get the book, dude!” Look for “Retirement Watch: The Essential Guide to Retiring in the 2020s” (Regnery Capital: 2023) at amazon.com, barnesandnoble.com, booksamillion.com and regnery.com.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on amazon.com or Regnery.com.

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A recent five-star review of my book, “The New Rules of Retirement” on amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

P.S. I will be holding a subscribers-only teleconference on Nov. 14 at 2 p.m. EST entitled “What the Election Means for Social Security, Medicare, Taxes and More.” It is free to attend, but you must register here. Don’t miss out!