Another good year keeps the Social Security system on life support

Contrary to popular belief, the Social Security System actually makes money….sometimes. The only things the trust fund assets are allowed to invest in is treasury securities which they refer to as “interest bearing special issue” bonds. So when interest rates go down, the value of these bonds and notes go up therefore raising the value of the Social Security trust fund. It has happened fairly often in the 10 years or so which typically adds more time to the D-Day moment of when the benefits may have to lowered without some kind of legislative intervention. If the “special issue” bonds go up in value, it generally means the system can stay solvent for another year.

The Social Security Administration comes out with their annual report every year around this time and according to the newest report the above mentioned is exactly what’s happened. They give the prognosis for the program for the next 10 years and the next 75 years using a host of different economic numbers and stats like wage growth, population, mortality and immigration to try to get a handle on how many future claimants there will be.

The harbinger of bad things to come is what’s they call the “net-cash outflows” which means after everything that comes in and costs are taken out, the administration had to dip into the trust fund reserves to cover the shortfall. Recently they’ve been warning that this could happen but at the end of 2018, 3 billion of unexpected income made it profitable.

For 2019, the margin was a little slimmer. At the beginning of 2019, the total was $2,895,174, 945,000(almost 2.9 trillion) and it ended the year at $2, 897, 492, 826, 000 — $2.3 billion higher. So the system didn’t have to dip into reserves to cover the 64 million checks it issues to it’s recipients. However as positive as that is, it was the lowest gain since 1982. What about 2020?

Well I ‘m glad you asked. The Administration’s projections for 2020 not so rosy. A lot of people blame Social Security’s woes on the baby boomers but they might be just part of the problem. Here are some other contributors:

1) People are living longer. The system was never meant to pay people for 20 yrs after retirement. More 80 yrs olds out there than ever.

2) Immigration is down. Usually the people who are immigrants are typically younger and will pay into the system longer ergo supporting more of the older recipients.

3) Birth rates are down. People are not having as many babies as they did in the past. Younger workers pay into it and the older workers’ payments stay funded.

4) More high earners collecting more. These beneficiaries are getting a higher payout than the system has ever paid. And they usually live longer.

There’s a Connecticut democrat named John Larson who introduced legislation that would raise the payroll taxes from 6.2 % to 7.4% and added other rules about any beneficiary with income under $49,000 would not have to report their Social Security income. That was back in 2013– there’s been calls to vote on whether to vote on it(yes that’s really how it works in Congress) to no avail. Social Security has been a 3rd rail for politicians but with the upcoming shortfalls acting sooner than later would be advisable.

That’s all for now. More to come in this brave new decade.

January 16, 2020 0

7 ways you can sabotage your retirement

So you’re approaching your “golden years”….you’re out raking the leaves or driving somewhere and it hits you— this will be a major lifestyle change for you. You would are absolutely correct about that. You will have a lot of time on your hands so you may need some money and it will have to last you for the next 20 to 40 years. No matter how much money you have or have saved there are some really bad decisions you can make that could make your retirement a disaster of epic proportions! Here’s just a few:

Firstly – a late in life divorce can cost you both in money and emotional hardship. My client Tom after his divorce became a bit of a recluse and was not terribly interested in having a relationship with anyone but his dog. The betrayal he felt from his ex wife’s extra curricular activities and the way friends and family received the news of his divorce has weighed pretty heavy on his psyche not to mention his 401K which now looks like a 201K comparatively. The Pew Research Center reported in 2017 that the divorce rate for those over the age of 50 has doubled since the 1990’s. Further, for those 65 and older, the divorce rate tripled from 1990 to 2015. Suddenly Tom had to move out of his home that he paid for over the last 30 plus years and his income took a hit as his ex wife got a portion of his assets. Depressed and broke is no way to go through retirement.

Second– Helping your children financially is a tough one because most parents want to help their children if they need something like a few thousand. But when it comes to ten thousand or 50K or higher, it of course can compromise your lifestyle in retirement. If you’ve got a child livig on the street somewhere or they go through a divorce or they need bail money–these are all very tricky propositions. You want to help but at what cost to you and your personal happiness?

Third– Taking Social Security at the wrong time is a killer. If you take it early with out regard to your life expectancy and how not waiting could effect your benefits. The Social Security website is much improved and there are calculators to use to estimate benefits and when to apply for them. Also have you paid into the system long enough? You need 35 years paid into Social Security to get your full benefits. If you don’t have 35 years paid in then you have zeros on some years which can pull down your monthly benefit in a very bad way.

Fourth– Taking your Social Security at the wrong time can be very detrimental to you but also not including your spouse can lead to missing out of some of the very useful benefits that could lead to a Social Security check coming in the household with the opportunity to allow some portion of another spouse’s benefits to increase over time. All while collect something in the meantime. Even if you’re divorced, the spousal benefits can be available.

Fifth– Having big debts going into retirement. How nice is it to have the mortgage paid off and no car payments? Are those payments going to go away if you decide to retire? You call the mortgage company and tell them you’re retired and you’re not going to pay them anymore? How would that go over? Are they going to say, “oh ok yeah well don’t worry about it then. Enjoy your retirement!” Probably won’t go that way. Saving for retirement is important but having no debt is a part of a successful retirement.

Sixth– Not paying attention to income taxes. Distributions from your retirement plan are taxable as ordinary income. In retirement many folks lose a lot of their tax preference items; that is to say the mortgage interest, children at home, business deductions etc may not be available to write off against one’s income making taxes higher. There are ways to structure your income on your non-qualified assets to pay much less in income tax which could be very beneficial.

Seventh — Not having adequate health insurance. According to a study done by Fidelity the average couple will spend $285,000 on health care in retirement(not including long term custodial care costs). Just as a reminder Medicare only covers about 80% of retirement healthcare costs. Plan to purchase supplemental insurance or be prepared to pay the difference out of pocket. Most people pay a supplemental policy commonly called a Medicare Advantage plan or a Medigap policy to cover the costs.

Of course there are plenty of other ways to sabotage your retirement. Spend all of your money investing in swampland somewhere, lose all of your money in the stock market, lend money to people who will never pay you back, living to high, etc. There are plenty of ways to NOT sabotage your retirement too. I hope this list was helpful. More to come. So long for now.

October 31, 2019 0

What are the 3 most crucial things you should do BEFORE you take your Social Security benefit?

What do they say…a pound of prevention is worth 100 pounds of cure? Sound advice I’d say. This old axiom goes a long way with regard to Social Security. Some simple planning looking forward to what could happen is very important. Remember this is a lifetime benefit so you want to get it right.

Number one– Retiring without considering how that effects your benefits. What happens if you don’t have enough quarters paid into the system? Your check is going to be less. At age 62 they will look at your top 35 years that you’ve paid into the program; they call it your AIME or average indexed monthly earnings. Does the government like to abbreviate things? Yeah just a little bit. If you haven’t paid in for 35–doesn’t have to be consecutive- then you can get a zero for the years in which there were no payments. This brings the average down in a most punitive way costing you potentially many thousands in income. If you don’t pay in 10 years or 40 quarters then you don’t get any retirement benefits at all from Social Security. Ouch! Even if you’ve paid in the whole 35 years what if there’s some years that are lower amounts like when you were 22 and worked at Dairy Queen? Could those numbers be easily replaced even with a part time job in this day and age? Most certainly they could and that would make your benefit higher.

Number 2 — The government is always right aren’t they? How about NOT! Can they make mistakes? Of course they can because the US government is made up of people and people aren’t perfect and they do screw up sometimes. So is it possible they can make a mistake on calculating or reporting your earnings record that’s considered for your Social Security payments? Of course it’s very possible. So go to the website and get your statement. They will proof you vigorously during this process which is good. Then take a look at the 3rd page. This is your earnings record. Sit down, get a drink, some place quiet preferably and really think about what you were doing for a job in 1994 or 1988. Try to go back in your mind and remember what you got paid etc. Are the numbers right? If they aren’t the onus is on you to change them…old w2’s or old 1099’s etc. and old tax returns. These numbers reflect what you paid in and can ABSOLUTELY effect your monthly check so they must be corrected if they are wrong.

Number 3 — Make sure to take advantage of spousal benefits if possible. If you take you benefits early for example at age 62 your reduction in benefits is 75% and if you were born after 1960 the reduction is 70% but if you wait until your full retirement age which is 66 yrs old if you were born before 1960 and 67 after which your benefit check would be higher. If you wait until your are 70 the amount grows at 8% simple interest –these are called delayed credits– which would lead to a higher income in your golden years.

You can however if you plan ahead of time with your spouse by coordinating benefits, the lower earning spouse could take benefits early so there’s a least one check coming into the house while a higher earning spouse lets their benefits build up with delayed credits and then the spouse that filed earlier can switch over. When they switch over to the higher spousal benefit, it’s half of whatever the amount was at the higher earning spouse’s full retirement age as the delayed credits are not eligible for the spousal benefit. When the higher earning spouse takes their benefit and the lower earning spouse switches to the higher check, its a nice pay raise for everyone. A very happy 70th birthday indeed!

If you have never been married then just skip this section as you aren’t eligible for any of it. However if you are divorced, then a version of the same aforementioned benefits can be filed for by you. If you were married for at least 10 years, then you can get spousal benefits. This will not reduce your ex’s check in any way nor will it reduce the checks of their other ex’s or their current spouse. Moreover they will never know you’re doing it either unless you tell them. You both have to be 62 or older and if you’ve been divorce for over 2 years you don’t have to wait for them to file individually. If you were separated and not divorced, that time would count toward your eligibility as its the date on the decree that counts here. But you must remember if you get married again, you will lose these benefits. How does the old saying go “First time for love, second time for money.” Important words to live by.

October 7, 2019 0

What’s one of the biggest mistakes you can make it retirement that no one talks about?

Jean and David had been planning their retirement for many years. They both had pensions at their jobs, had saved a lot in their 401k plans and had paid down their mortgage to the point where they almost owned their home. They had friends and hobbies that they both were looking forward spending more time on when they finally stopped working.

However, David had been playing out with his band at various bars and weddings which is probably where he met his new lady friend. Jean found out and after much drama, they got divorced. Now this new reality threw a major monkey wrench in their well thought out retirement plans.

This is the new reality for so many seniors these days. The Pew Research Center reported in 2017 that the divorce rate for those over the age of 50 has doubled since the 1990’s. Further, for those 65 and older, the divorce rate tripled from 1990 to 2015. A late-in-life divorce create massive challenges financially. Why is this happening?

1) Its easy for couples to grow apart. Maybe both people work 40 plus hours or travel for business where there’s overnights involved. Now suddenly these 2 strangers are living together with all this time on their hands. Either they reconnect or maybe they’ve grown apart so much that they don’t really have anything in common anymore. My client Joan lived in the same house with her ex husband for years because neither could afford to move out. He lives on the second floor that has a private entrance and pays her a small amount of rent to cover the expenses. They still live like this now after 20 years of retirement.

2) No more children at home . A lot of retirees start to figure out they were a “couple” based on the lives they created around their children. Once they become “empty nesters” spouses can realize that’s all they had in common and may feel distant.

3) Retirement. “My husband is driving me crazy” is something you may hear from the wife who has been spending time by themselves and her newly retired husband is disrupting that life at home or leisure. The normal routine is not so normal anymore and life is so different now.

4) Health issues. Maybe a spouse’s health has gone downhill and the “in sickness and in health” vow that was taken is not so important anymore. Maybe someone wants to trade in the old model for a newer one. This can lead to lifestyle differences in which someone wants to go out an do things– hiking, biking, tennis etc while the other is ok with being home and relaxing in front of the computer or Netflix.

5) Mid life crisis. We all have regrets in our lives. Now that you are free and have lots of time on your hands in retirement you may not want to spend the next 20 years tethered to someone who makes you unhappy or isn’t experiencing the same life changes you are. Standing looking back at your life you realize you’ve been living for just work or just family and you’ve had enough. The next 20 years are going to be different and you may feel you need to live more for you. So you get a new hairstyle and a convertible because you’re free free free! There may be a cost to that as a late in life divorce can gut your 401K plan or split that rich pension payment you’ve worked hard for. That beach house with the water view you dreamed of living in when you retired is a condo with a view of the highway.

Do most couples plan on divorce? Usually no. But now there’s alimony to pay, your IRA has been divided up, and you have to find an apartment or another place to live. The amount of income you thought you were going to get has been compromised. Not only that where do you spend the holidays? How do your kids feel about this? Maybe they side with one spouse or the other. Harsh reality but very true.

My client David ended up marrying his new lady friend which led to another divorce. Statistics show that second marriages are less stable than first ones. Now he’s got a new job because he needs the income and seems OK but there’s an unhappiness to him that wasn’t there before. Also there’s a lot of his money that isn’t there anymore either.

Jean on the other hand , has devoted herself more to grandchildren and family and seems to feel like the divorce was a good new beginning to the rest of her life. She spends time with her friends more than she did when she was married so sometimes these things work out. She sold the family home and used the money to generate an income for herself . But once again there’s an underlying feeling of loss that neither she or David ever planned for. As their financial advisor I have to admit I never saw it coming either.

Sorry gentle reader not all of these blogs have a happy ending. I have another client named Stuart-always full of sage advice– who is fond of saying “no matter who you marry, you want to make sure they love you just a little more than you love them.” I will sign off with that choice bit of wisdom.

October 1, 2019 0

How will workplace automation effect the employee’s retirement?

It’s all around us, isn’t it? Machines are taking the place of humans from the most menial repetitive tasks to the most dangerous, it seems machines are replacing us quicker than ever. Computers do taxes, payroll, fly planes and cars. Robots run by their machine brother computers manufacture everything from hot dogs, mining, underwater jobs at depths to deadly for human beings, even fairly invasive surgery. How many of us have lost a job to a machine? Its happening at a rate that can jeopardize our retirement lives. If you lose a job in your peak earning years to a robot, it could be impactful to your retirement savings; but this is nothing new. Our forefathers faced similar plights throughout time.

What happened the first time someone brought in the horse to pull a log across a meadow or a plow through a field to plant crops in Stone Age times? He had to learn another skill. He had to understand this animal in essence this new machine that just took his job. He had to learn how to control it, maintain it and the extra bonus–how to get it to propagate.

What about when someone found a way to put 2 circular discs on a travois making it a wagon? Now a 10 year old child could pull a load that formerly was dragged along by a full grown man who had the strength to do it. Now it would take less effort and power so a child could or an elderly person. Now the full grown adult had to learn how to maybe make wheels, or mount them or implement them in other tasks like grinding flour instead of using a blunt instrument to pound wheat into powder. The printing press, water pump, etc all made people change their way of doing things.

Then comes the industrial revolution with all of the manufacturing wisdom of the ages and once again you had to learn a new skill. If you were producing cloth and clothes the old fashioned way with a loom or processing it by hand suddenly it was a brave new world. Maybe you could learn how to maintain the machine, or build them or sell them. The entrepreneurs who started these large mills in the UK and New England as a lure to change from the agrarian economy to an industrial one, offered the common uneducated folk a chance to not became old and broken physically from manual labor or the dangers of fishing in the ocean in open boats. Urbanization–piles of historical books about this 19th century phenomenon wherein everyone left the countryside and crammed into the cities because that’s where the jobs were- made London the biggest city in the world throughout the 1800’s or at least the one with the fastest growth.

In terms of retirement the industrial revolution helped the common uneducated person immensely as it allowed them to get into a pension if they lived long enough. It also allowed them to eventually get into labor unions and benefit from collective bargaining agreements which gave them the 5 day work week, health insurance, pensions and a break room. It allowed the living standards of thousands of regular unskilled laborers to grow. However uneducated as they may have been they had to come out of the grain fields and learn a new skill. Could the success of implementing robotics into manufacturing in this modern world be history just repeating itself? There’s evidence to suggest it is.

What if you can’t or won’t learn new skills? Some say the older worker of today may be less inclined to learn how computer assisted tasks like CAD-CAM. My client Bob was and still is an outstanding illustrator but when CAD-CAM(computer aided drafting) came along, he kind of resigned himself to retirement because of the intimidation of trying to pick up this way of doing his job. He was truly gifted when he had a pencil and a ruler in his hands but “those damn machines” compromised what made him great. All throughout history, the older highly skilled person was replaced directly or indirectly by the machine especially in manufacturing.

Even animals are not exempt from the effect of machines on their reality. The automobile and locomotive made the horse obsolete and only something the wealthy own nowadays. Even the usefulness of dogs and cats in working environments as we have different ways of herding sheep and catching mice. Dogs can still sniff out drugs, weapons and some police work but the widespread job market of yesteryear for our 4 footed friends has faded decades ago.

The effect of machines in the workplace certainly can be impactful on that senior employee who wanted just another couple of years to pad his 401k account. The younger worker even as young as 50 has already seen their job/role probably change a few times in the last decade or so and could be more comfortable than the senior employee. The mobility of 401K and 403B plans with rule changes in the past 20 years underscores that narrative.

However gentle reader, experts say it takes at least 10 years for such changes to really be implemented so there’s no need to hit the panic button just yet. You may even be able to ramp up your retirement savings before the machines take over. Maybe you remember when calculators that would do the simplest of math were the size of a phone book– mid 1970’s maybe? It took a while for such a useful device to become the size of a credit card….maybe 1994? So there’s still time.

August 3, 2019 0