Tag Archives: financial advisor

Can You Afford to Live Longer?

retirement-exit-2My Comments: Many of you know that I’ve recently started a series of workshops that focuses on how the Social Security system works. It’s an attempt to help those who will soon become eligible, or are already eligible, better understand a very complex and not user friendly institution in American life.

One assumption that is new to me, but but critical to the planning process, is to assume everyone will live to be 100. Obviously that’s not going to happen, but it’s a conservative approach to making the necessary decisions about your future life style and how you are going to pay for it.

This article from Casey Dowd might be helpful if any of you think this applies to you.

By Casey Dowd, Published June 16, 2016

According to the National Institute on Aging, in 1950 a man retiring at age 65 could expect to live another 13 years and a 65-year-old woman another 15 years. Today, according to data from the Society of Actuaries, there is a 43 percent chance that retirees could live to at least age 95.

Allianz Life conducted a study with the Stanford Center on Longevity to explore the topic of longevity, what it means for retirement planning and how advances are leading people to consider alternative life-path possibilities.

“As Americans come to terms with the fact that they’ll likely live an extra 30 years, they have the opportunity to look back and evaluate their past decisions and consider the newfound possibilities for the future afforded by time,” said Katie Libbe, Allianz Life Vice President of Consumer Insights.
While it’s good news that you can expect to live longer in retirement, can you financially afford it? Libbe discussed with FOXBusiness.com what you need to know.

Boomer: How can Baby Boomers plan for living 30 more years in retirement, both socially and financially?

Libbe: We found that people are incredibly optimistic about longevity and also that they have interest in alternative life paths that differ from the traditional and linear “school-work/marriage/kids-retirement” track that has been the de facto life template for generations. When asked to design their ideal longer life, nearly half of Americans said they would prefer a nontraditional model that is unique to their interests – where they might work, take career breaks, go back to school, volunteer and try different things in no set order.

Although boomers may not have as great an opportunity to make widespread changes to their life path as younger generations, they can still use the conversation about longevity to consider new possibilities for their retirement years, including encore careers or continuing education. As they explore these new possibilities, they should also think about their financial plan and what it may take to build a strategy that supports an alternative to a traditional retirement.

Boomer: What regrets are boomers finding about chances not taken and dreams not realized?

Libbe: Although the topic of longevity was met with extreme optimism by the majority of boomers – 94% were positive on the prospect of living 30 extra years – the process of thinking about longer life caused many boomers to look back and identify some regrets about choices made and opportunities missed.

Nearly 20% of boomers noted they would “take more risks in life,” a common theme among the one-third of Americans who said they regretted many of their major life decisions. Included among those top regrets for boomers are not following their dreams, not taking risks with their career and not taking risks with their lives in general (new jobs, going back to school, etc.). Nearly a third also said they wish they’d been more gutsy in their choices and done things they really wanted to do.

Boomer: How does this change traditional retirement planning?

Libbe: For many Americans, including boomers, having more time opens the door to new opportunities. Boomer respondents confirmed a desire to explore different life paths: pursuing a dream like starting a new business, having a second career doing something they truly enjoy, volunteering/supporting the environment, or retiring later by working fewer hours but for more years overall. Nearly half of all respondents feel a longer life can enable a totally different view of how and when major life choices are made.

While many Americans expressed interest in embracing the possibilities of a longer life, they also understand the need for better planning in order to fund those different goals/life paths. More than nine in 10 boomer respondents agreed that people will need to be more thoughtful about how they plan for longer lives, and nearly the same percentage agreed that major changes would be needed in how people think about funding longer lives. In addition, a full 94% of boomers agreed that, with 30 extra years, it’s not enough to just put aside money for retirement – people would need a much broader, more goal-specific plan – a longevity plan, that falls outside the confines of traditional financial planning.

Boomer: Is our parents’ “traditional” retirement gone forever?

Libbe:
Traditional retirement is not gone forever, but new conversations about longevity are forcing people to consider whether a traditional retirement is truly right for them. Of course, if you prefer spending time on a beach or at the golf course, there is nothing wrong with developing a plan to help you achieve those more traditional retirement goals. But it’s important to understand that there are many other possibilities that come with longer life – from extending your working years doing something you love, to taking a sabbatical now in order to pursue a passion project while you still have the time and energy to make it a reality.

It certainly takes careful planning to achieve these objectives, and most Americans seem to understand that a new paradigm is needed to think about, plan for and fund a longer life. A good first step is to meet with a financial professional and discuss how you may be able to achieve different short- and mid-term goals while saving for retirement, opening up the freedom to try different things, pursue passions and explore alternative life plans.

Brexit: Why Most Commentaries Miss The Point

Brexit-4My Comments: I found this a couple of days ago and it really helped me understand what happened in Great Britain the other day. If Brexit concerns you, this might help. It appeared in a news feed I follow written by a Tom Dispatch, if I have his name correct.

06/26/2016

Economist Robert Kuttner has a particularly judicious summary of and analysis of the Brexit decision, what lay behind it, and what it means. I’ve reproduced the whole essay below and recommend it for everyone puzzled by what just happened and what to make of it. Tom

What was the narrow British vote to leave the European Union really about? In recent days, you have read commentaries with variations on the following themes, ad nauseam. All of them contain pieces of the truth, but all miss the basic point:

Irrational Racism. This vote was a mostly racist reaction on the part of Brits who resented dark skinned foreigners in their midst, and mistakenly blamed the E.U. Britain actually has more control over its borders than most E.U. members, since London never signed the 1985 Schengen Agreement, which got rid of border controls for travelers throughout most of the Union. Before entering Britain, Europeans must still go through passport control, just like Syrians or Americans.

Scapegoating the E.U. for Economic Frustrations. Britain actually has a better deal than most E.U. nations. For starters, it retained its own currency, and controls its own monetary and fiscal policy. But as a member of the E.U., Britain does get to send tariff-free exports to the continent and London operates as a major European financial center. All of this now at risk.

The E.U. Had It Coming. Brussels is a remote, unaccountable bureaucracy, imposing regulations beyond democratic control. The vote, rightly or wrongly, was a yearning for lost national sovereignty.

Rejecting Liberal Internationalism. Britain has grown at a good clip since joining the E.U. in 1973. Globalization is here to stay. The people who voted for Brexit, are badly informed flat-earth types, failed to understand that they were shooting themselves in the foot.

What’s wrong with these commentaries? All fail to grasp that there is more than one brand of liberal internationalism. The kind represented by the E.U. since the 1990s (and Thatcherism since the late 1970s) has been operated largely by and for financial elites.

When the original institutions that later became the E.U. were created in the 1940s and 1950s, the international system was designed on the ashes of depression and war to rebuild an economy of full employment and broad based prosperity. The system worked remarkably well.

In the 1980s, as a backlash against the dislocations of the 1970s, Margaret Thatcher came to power in Britain (and Ronald Reagan in the US). Their policies returned to a dog-eat-dog brand of capitalism that benefited elites and hurt ordinary people. By the 1990s, when the European Economic Community became a more tightly knit European Union, it too became an agent of neo-liberalism.

Policies of deregulation ended in the financial collapse of 2008. The austerity cure, enforced the gnomes of Brussels and Frankfurt and Berlin, is in many ways worse than the disease.

Rising mass discontent has failed to dethrone the elites responsible for these policies, but it has resulted in loss of faith in institutions. The one percent won the policies but lost the people.

So, yes, the Brits who voted for Brexit got a lot of facts and details wrong. And Britain will probably be worse off as a result. But they did grasp that the larger economic system is serving elites and is not serving them.

The tragedy is that we are further away from a reformed EU than ever. A progressive EU, more in the spirit of 1944, is not on the menu. The exit of Britain will give even more power to Angela Merkel’s Germany, architect and enforcer of austerity.

The rest of Europe will become more like Greece economically and more like the British rightwing politically. there will be more far-right populist movements for other nations to quit the EU. This has already begun in France and the Netherlands, two of the founding nations of the European Community — and ones that also benefit, on balance, from the EU.

What about race? Didn’t race play a big role in this vote. Is surely did — and not just a backlash against just recent influx of refugees and economic migrants. Since the 1950s, when Britain rebranded its empire as the Commonwealth, Britain has had a relatively liberal immigration policy for its former colonies—one part carrot to promote allegiance, one part guilty conscience.

In the 1960s, the rightwing Tory Enoch Powell was already campaigning against immigrants and slogans appeared, “If you want a Ni—-r for a neighbour, Vote Labour.” By 2001, fifteen years ago, Britain was already 8 percent nonwhite. As traditional industry declined and living standards crashed, non-white populations increased, creating resentments against both economic misfortune and racial change. But the history of rightwing populism is invariably a mix of economic factors and nativist ones. In the 1960s, when Europe had full employment, there was little backlash against foreign “guest-workers.” Anti-Semitism was never far below the surface in Europe, but it took the German economic collapse of the 1920s and early 1930s to produce Hitler.

Rightwing revolts are always substantially irrational, as was the vote for Brexit. But when downwardly mobile Brits grasp that the EU and the larger model of neo-liberalism aren’t exactly on their side, they are grasping a truth.

What makes this vote so tragic is the absence of enlightened leadership, either in Britain or on the continent, to propose something better. Prime Minister David Cameron, who proposed the reckless gamble of a referendum as a tactical feint to paper over an intra-party schism, may now be responsible for the dissolution of two unions — not just the EU, but the UK, as Scotland secedes. He will be remembered as the worst British prime minister ever, a near-tie with Neville Chamberlain. The Labour leader, Jeremy Corbyn, who said he opposed Brexit but refused to actively campaign against it, was not much better.

Britain’s two major parties are now both in disarray. I can think of one possible silver lining. The referendum was not legally binding, and Article 50 of the Lisbon Treaty — withdrawal — still needs to be voted by the House of Commons. And a majority of British M.P.’s oppose Brexit.

Now that the implications of Brexit are clearer, including the likely breakup of the United Kingdom itself, it’s possible that the Commons could refuse to approve Article 50. Rather, Britain could have an early election, and maybe even a partisan realignment, with one party pledged to keep Britain in the EU but to modernize the EU to better serve regular Brits, and the other party standing for narrow nationalism. My bet is that the modernizers would win.

Absent this sort of recasting of politics and political choices, we are in for a grim era in which ultra nationalists and neo-fascists keep gaining ground.

Robert Kuttner is co-editor of The American Prospect and professor at Brandeis University’s Heller School. His latest book is Debtors’ Prison: The Politics of Austerity Versus Possibility.

How to Invest in Mutual Funds

InvestMy Comments: Mutual funds have been around for about 100 years. Some genius decided to create a new investment model, a stand alone investment. With one investment you now could own shares of hundreds of stocks, in smaller amounts. And the rest is history.

Today there are more funds to choose from than you can imagine. Some have good records and some not so good. None of them are free; employees and rent has to be paid, and that ultimately comes from whomever owns shares of the fund. But the costs you think you pay are only those costs that the regulators determine must be reported. There are costs that escape disclosure which you can only guess about. Buyer beware.

This is a useful overview for anyone with money in the markets that is not just X shares of company A or Y certificates issued as a bond by company B or government C. If you are a relatively conservative investor or working with money that has to support your retirement, you have to first decide how much money you can lose in any given year and not have heartburn. Only then can you begin to decide if a fund choice will be a good option for your money.

by Matthew Frankel – The Motley Fool – June 25, 2016

The best mutual funds to invest in are those that fit your investment objectives without charging high fees. When choosing funds, you should look for:
1. Funds that meet your objectives.
2. No-load funds.
3. Low expense ratio — companies like Vanguard and Fidelity offer some extremely cheap funds.
4. Good Morningstar and/or Lipper ratings.
5. Strong performance history.

Decide what you want to invest in
There are mutual funds that invest in all types of stocks, bonds, CDs, commodities, and more, so the first step is to decide what you want to invest in. And there are two main types of mutual funds to choose:
• Passively managed funds track a certain index, such as the S&P 500 or the Russell 2000. These simply invest in all of the companies in an index, and don’t require too-much effort on the part of the fund’s managers. Because of this, these funds tend to come with relatively low fees.
• Actively managed funds have a manager who chooses its investments, and decides when to buy and sell. Because the main goal of actively managed stock funds is to beat the market, and because of the additional effort required, actively managed funds usually have higher fees than passively managed ones.

Lower costs = more money in your pocket
When looking for mutual funds, I automatically narrow my search to “no load” mutual funds — which means that the fund doesn’t come with a sales charge or commission. In most cases, your brokerage will clearly differentiate no-load mutual funds.

The most-important number you should look at when comparing mutual funds is known as the expense ratio. This tells you the total ongoing cost of investing in the fund on a yearly basis as a percentage of your assets.

For example, an expense ratio of 1% tells you that, if your investment is worth $10,000, you’ll pay $100 in various fees. If you’re interested, here’s a thorough discussion of what makes up an expense ratio; but for most investors, it’s sufficient to know that a lower expense ratio means a “cheaper” fund.

You may see two different expense ratios listed for a particular fund: gross expense ratio, and net expense ratio. Net expense ratio can be lower, as it includes any discounts or temporary reductions in fees. The gross expense ratio is the permanent amount, and is the primary number to pay attention to.

Small differences in expense ratios can have a big impact
It’s important to emphasize that seemingly small differences in expense ratios can make a big difference over long time periods. As a simplified example, let’s compare two hypothetical mutual funds, both of which track the same index. The only major difference between them is that the first charges an expense ratio of 0.75%, while the second charges a cheaper 0.5%.

If you invest $10,000 in each fund, and the underlying index produces average annualized returns of 8% per year before expenses, after 30 years, the first investment will be worth $81,643. Your investment in the cheaper second fund would grow to $87,550. If you ask me, a difference of more than $5,900 is well worth the effort of shopping around for a cheaper option.

This isn’t to say that a fund with a lower expense ratio is automatically better than a more-expensive one in all cases. For passively managed funds, comparing expense ratios can be a highly effective practice. However, with actively managed funds, a higher — but still reasonable — expense ratio can be justified by a strong track record of market-beating performance.

What those fund ratings mean
Two of the most-frequently used ways of rating mutual funds are the Morningstar and Lipper ratings. Morningstar ratings use a five-star system to rate funds, and take into account the fund’s past performance, the manager’s skill level, risk- and cost-adjusted returns, and consistency of performance. Five stars is best, and only 10% of the funds evaluated get the coveted rating. Regarding the rest, 22.5% get four stars, the middle 35% get three stars, the next 22.5% get two stars, and the bottom 10% get one star.

Lipper uses five criteria: consistency, preservation of capital, expense ratios, total return, and tax efficiency. With this information, the funds in a given category are broken down into quintiles — in other words, 20% get the highest rating, 20% get the next highest, and so on.

Both ratings are calculated over different time periods — three-year, five-year, and 10-year periods, respectively. These can be useful in your research; just remember that these ratings are based on past performance, and are not necessarily a guarantee of future results.

Past performance doesn’t guarantee future results, but…

Just because a mutual fund has performed well in the past doesn’t necessarily mean it will do the same in the future. In fact, mutual funds tell you this themselves — it’s generally written right near the historic returns section on each fund’s prospectus.

However, that doesn’t mean you should ignore that section, especially when it comes to actively managed funds — those that don’t simply track a specific index. Consistently strong fund performance over the years is one sign of good management, and a smart strategy. It’s also important to look at a fund’s performance during tough economic t After all, if you look at a fund’s performance over the past five years, take the information with a grain of salt. The S&P 500’s total return was 83% during that time, and it’s not difficult to make money in markets like that. Instead, it’s a good idea to also take a look at how the fund did during, say, 2008, in order to get an idea of how the fund’s investments hold up in bad markets.

The bottom line on mutual funds
Shopping for mutual funds can certainly be intimidating — after all, there are literally thousands to choose from. However, by determining your investment objectives, considering highly rated funds, comparing expense ratios, and evaluating past performance, you can narrow down the selection, and find mutual funds that are right for you.

Claiming Social Security at Full Retirement Age is Often a Mistake

SSA-image-2My Comments: The headline above should probably read ‘Sometimes’ instead of ‘Often’. It depends to some extent on when you die.

Since that date is completely unknown, the only solution is to play the odds, and my recommendation these days is to assume you will live to be 100. That’s the conservative approach.

Unless you plan to die soon, you’ve going to need money from somewhere, and for many of us, our Social Security payments will make up the bulk of our retirement income. So it might make sense to spend down what little you’ve saved and then rely on a larger check from Social Security when you reach age 70.

Mike Piper June 13, 2016

Imagine for a moment that I am an insurance company, and you are a married retiree. And, as an insurance company, I offer to sell you either (or both) of two annuities:
• With Annuity A, for every $100 of the annuity you purchase, I promise to pay you $7 per year for as long as you or your spouse is alive.
• With Annuity B, for every $100 of the annuity you purchase, I promise to pay you $7 per year for as long as both you and your spouse are still alive.

But I will only sell you, at most, $10,000 of either annuity.

There would be a number of reasonable decisions you could make here. You might purchase $10,000 of each annuity. Or you might purchase neither. Or you might purchase $10,000 of Annuity A and $2,000 of Annuity B. And so on.

But you wouldn’t, for instance, purchase $10,000 of Annuity B and $2,000 of Annuity A. Nor would you purchase $5,000 of each. And that’s because Annuity B is worse than Annuity A.

In short, you wouldn’t spend a dime on Annuity B unless you had already purchased the maximum amount of Annuity A and you still wanted to purchase more annuities.

What Does This Have to Do with Retirement Planning?

In our hypothetical example above, Annuity A is essentially what you get when the higher earner in a married couple delays claiming his/her Social Security retirement benefit. And Annuity B is what you get when the lower earner in a married couple delays claiming benefits. The percentages are slightly off, but the concept is the same — delaying the benefit of the spouse with the higher primary insurance amount increases the amount the couple receives as long as either spouse is still alive, while delaying the low-PIA spouse’s benefit increases the amount the couple receives while both spouses are alive.

In our example above, it doesn’t make sense to buy any of Annuity B unless you’re already buying the maximum amount of Annuity A. And, with Social Security, the low-PIA spouse shouldn’t be doing any waiting unless the high-PIA spouse is already planning to wait until 70.

Unfortunately, it’s common to see couples in which both spouses start taking Social Security at full retirement age (or close to it), despite the fact that there would have been a strictly-superior strategy available to them.

Earnings Don’t Support A Continued Rally In U.S. Stocks

roller coasterMy Comments: Many ordinary investors, people who one way or another have retirement money invested in the markets, are worried. And they should be. I’m worried about my money.

The tide is going to turn, and it’s probably not going to be a pretty sight. There are things you can do to protect yourself, but it’s going require you take proactive steps and even then, you may suffer.

But if you do nothing, I can almost guarantee you’re going to be unhappy.

by Daryl Montgomery, June 12, 2016

Summary

  • S&P 500 GAAP earnings peaked in 2014, although Pro Forma earnings have increased.
  • GAAP Earnings tend to peak the year before or the year of a stock market peak.
  • So far, the S&P 500 price high has been in May 2015.
  • Currently, earnings don’t support a move higher. A fall to the lower end of the current trading range is more likely.

There is a considerable amount of negative opinion on U.S. stocks as the S&P 500 approaches its all-time closing high of 2,130.83 reached on May 2, 2015. The index came close to this value on June 7th with its last trade recorded as 2,119.12. The S&P 500 has actually been trading in a range between approximately 1,800 and 2,130 for over two years now and needs to decisively break either above or below this level to indicate a new up or down trend has begun. Until this happens, the index should be considered as moving sideways in a 300+ point trading band.

S&P 500 Trading History 2011-2016

SP500 trading history

 

 

 

 

 

There are a number of arguments as to why the market is very overvalued and should be going down instead of up. Some of these include a very high price to earnings ratio, a very high price to sales ratio, a very high market cap to GDP ratio, a very high percent of NYSE stocks trading above their 200-day moving average, etc. The best measure of the direction of stock prices, however, is earnings. For the stock market to keep moving forward, earnings must be increasing, and not just any measure of earnings, but GAAP (Generally Accepted Accounting Principles) earnings.

GAAP earnings are consistent and comparable over time, whereas the alternative, pro forma earnings, are fairly arbitrary, vary by industry, and can change from year to year. The basic idea behind pro forma earnings is that unusual events don’t count, so they should be ignored when calculating earnings. This is like an individual claiming that they really have much more money in their checking account than the bank claims because they had to write a number of checks for unusual expenses last month and those shouldn’t have been deducted from their balance.

Pro forma earnings held up until 2015 (we’ll have to wait to see what happens in 2016) thanks to companies becoming increasingly fanciful with their accounting practices. S&P 500 GAAP earnings, however, peaked in 2014 and have been heading down since. They were $100.20 per share in 2013, $102.31 per share in 2014, but only $86.47 per share in 2015 (a significant drop). GAAP earnings in 2011 and 2012 were $86.95 and $86.51 respectively, almost exactly the same as in 2015, yet the price of the S&P 500 has moved much higher. When pro forma earnings and GAAP earnings move in opposite directions, market analysts describe this as a decrease in the quality of earnings (this allows them to avoid using generally accepted obscenities to more graphically state what is occurring).

GAAP earnings tend to peak the year before or the year of a stock market peak. Previously, they topped out in 2006 and the U.S. stock market hit a high in October 2007. It then subsequently fell off a cliff in the fall of 2008. Prior to that, GAAP earnings hit a high in 2000 along with the market. So far, GAAP has peaked in 2014, fallen 15% in 2015 and it doesn’t look like 2016 is going to be a great year for earnings, either (they’re down approximately 5% in Q1). There are estimates for sizeable earnings increases in the second half of the year, however. Realistically, these could come from improved earnings in the beaten down energy and materials sectors, if they indeed do occur.

Investors should be wary of projections for improved earnings once a substantial decline has taken place in GAAP earnings. Projections are made with the underlying assumption that the economy is growing and there will not be a recession. If there is a recession, S&P 500 GAAP earnings can decline by 50% to 75% or more year over year. For instance, in 2007, GAAP earnings were $66.18 per share, but in 2008, they were only $14.88. It’s been seven years since the last U.S. recession. In the post-WWII era, the longest period between U.S. recessions has been 10 years. The average time between them has been only five years. We are already overdue, so a recession beginning as early as the fall of 2016 or any time in 2017 is very possible.

When earnings are deteriorating, but stock prices are going higher, there are two possible explanations. Either a big jump in earnings is being anticipated by the markets or central banks are injecting liquidity into the financial system by more than enough to compensate for the potential decline in stock prices. If the S&P 500 is to break out and go higher, it will be currently be dependent on the Fed maintaining or increasing liquidity, which means no rate increase from them. Any increase, would likely immediately put a damper on an incipient rally.

Currently, risk is more likely to the downside with a return toward the bottom of the trading range. Investors, though, need to pay close attention to price moves. The market will decide where it wants to go. A close that is 2% above the upper end of the trading range, or about 2170 or higher, would indicate a new rally is beginning as long as price stays above that level. Investors can use ETFs such as SPY or DIA to trade the U.S. stock market.

5 Myths About U.S. Government Debt

My Comments: I’m not fond of debt. But over the years, I’ve certainly had my share. But that is personal debt which is very different from institutional debt. My dynamics are finite ( I will die some day ) and defined by micro-economic rules; institutional debt is not necessarily finite and if you are speaking about the US government debt, is defined by macro-economic rules.

You should not confuse the two. I’m reminded of a friend who decried the personal actions of Bill Clinton while in the White House. He asserted that this was someone he would never hire to baby sit his kids. My response was to the effect that I would never want someone whose skill set included being a good baby sitter to sit in the White House with his/her finger on the nuclear button.

Debt is a very useful financial tool. The trick is to know how to manage it.

By Samantha Azzarello , J.P.Morgan Asset Management

As we approach a rising rate environment, the scale of U.S. federal debt has some investors concerned about the sustainability of government finances in the coming years. In this article we consider the most common myths about the government’s debt and discuss how investors can position their portfolios to withstand what we believe are manageable headwinds related to the federal debt burden.

Myth 1: The U.S. will default on its debt

Although much hype surrounds the possibility of a U.S. debt default, the likelihood is infinitesimally small.

One of the reasons the U.S. has been – and continues to be – a traditional safe haven for global investors is that investors know very well that the U.S. has nearly unlimited taxing power and a huge asset base. The federal government could – if needed – force liquidation of these assets to pay its entire stock of debt nearly 10 times over before defaulting. This is before even considering increasing taxes on the private sector.

Myth 2: The U.S. debt is out of control

The U.S. debt is at somewhat elevated levels, but the current debt-to-GDP ratio is quite manageable.

In absolute terms, U.S. government debt, measured as total debt held by the public, is $13 trillion – a record high (as of March 31, 2016). The debt-to-GDP ratio stands at approximately 74%; an elevated level, but hardly a record. The Congressional Budget Office (CBO), a non-partisan government organization, projects only a slight increase in net debt as a percentage of GDP – from 74% in 2015 to 77% in 2025.

Considering government debt from the vantage point of the annual federal budget, the federal budget deficit has declined steadily from 9.8% of GDP in fiscal year 2009 to an estimated 2.7% of GDP in 2015. It is forecasted to hover near 4% for the next few years, as shown in the chart.

Myth 3: Rising rates will explode the debt

While rising rates would certainly cause the government’s net interest expense – its cost to service the debt – to increase, it won’t cause it to explode.

Any rise in interest rates would almost assuredly be the result of a healthier economy and inflation expectations. This matters a lot, because if both GDP and the debt rise in lockstep, the debt-to-GDP ratio does not actually grow. In addition, much of the U.S. government debt that was issued in the past seven years was done so at record low rates. This cheap debt has locked in coupon payments, which will not increase as interest rates rise.

Myth 4: The budget problem cannot be fixed

The truth is that the budget problems facing our country are not difficult to solve from a mathematical perspective. The bigger challenge is finding the political will and the level of compromise and collaboration that would be required to make progress.

For example, according to a 2015 report from the Medicare Trustees, the trust fund supporting a significant part of Medicare costs is projected to be depleted by 2030. However, the present value shortfall over the next 75 years could be entirely covered if Medicare payroll taxes were increased by just 68bps, from 2.9% to 3.6%. Changes in the age of eligibility or the amount of benefits received are other feasible tweaks to handle the shortfall.

Myth 5: The biggest risk to investors is the federal debt

As the preceding arguments have made clear, the federal debt is far from the biggest risk facing investors. Nevertheless, investors should establish a plan to address a few manageable debt-related investment headwinds. These include:
• Solving for growth: For investors, getting an investment portfolio to grow in an era of slower overall economic and profit growth is an important consideration. While specific debt levels and their associated costs remain hotly contested issues among economists, it stands to reason that at a certain point, government spending on productive endeavors like investment spending on physical capital can be crowded out by increasing net interest expense.

• The income drought: Depressed interest rates are not directly related to the debt burden, but are rather a knock-on effect from slower growth and lower inflation. One of the serious consequences of low interest rates is that the traditional sources of investment income earned by investors and retirees have all but dried up. We do not expect interest rates to revert to pre-2008 levels anytime soon. For investors, it remains critically important to have a diversified approach to generating income without being overly concentrated in any single asset class.

Although none of these factors would necessarily mandate a change in core asset allocation strategy, they do suggest tilting to equities (and, in particular, growth-oriented equities), looking at alternative sources of income to counter low rates and utilizing tax-efficient strategies, where applicable. Investors should not be distracted by wild and misguided prophesies of debt Armageddon.

What Are the Odds the IRS Will Audit Your Tax Return? And What Should You Do If It Does?

income taxMy Comments: There is a significant difference between avoiding taxes and evading taxes. Not less an authority figure than a former Supreme Court justice expressed that “…there is no obligation to pay more in taxes than absolutely necessary”. But evading taxes will perhaps land you in jail.

That being said, the IRS is NOT going to tell you about every loophole or allowable strategy in the play book to help you pay less tax. Their job is to make sure that everyone earning money files a tax return and if a tax is dues, was it paid on time.

It’s up to us to figure out what we can do to avoid paying extra money in taxes than is absolutely necessary. One can argue that pushing the envelope is OK until you are caught. I’m not going to go there, but what follows is one element in the games we play.

By Kevin McCormally, May 31, 2016

Tax audits are in the news more than usual this year, since Donald Trump says the fact that he’s being audited by the IRS prevents him from releasing his returns as part of his quest for the presidency.

But if being audited blocked the release of a tax return, we never would have seen Barack Obama’s or George W. Bush’s or Bill Clinton’s or any other recent president’s. Even Richard Nixon released his returns while they were being audited (the fact that that return led to the House Judiciary Committee approving an Article of Impeachment against Nixon is another story).

Why? Because when it comes to the odds of being audited, one thing is crystal clear: If you’re living in the White House, your odds are 100%. The returns of the president (and the veep) get the going over every year, as required by section 4.2.2.11 of the Internal Revenue Manual.

As the head of the IRS, John Koskinen, told us earlier this year, “So, you know, anyone running for president or who’s going to be president can look forward to having their tax returns audited every year.”

Assuming you’re not aiming to run the free world, though, what are your odds of being audited . . . and what should you do if you are?

This is the quintessential good-news/bad-news story.

The good news: If you’re worried that the tax return you just sent to the IRS will be audited, breathe easy. Koskinen is telling anyone who will listen that budget cuts have severely limited the agency’s ability to review returns for accuracy. Audit rates for individual tax returns fell last year to the lowest level in a decade … and will fall even more this year.

The bad news: If you’re an honest taxpayer, you’ll be disappointed to learn that the IRS says that every $1 it spends on audits and other “enforcement” activities brings in $4 to the U.S. Treasury. Falling audit rates mean dishonest taxpayers will be allowed to keep billions of dollars they ought to be paying in taxes.

But just what are the chances you’ll be audited, that your Form 1040 or 1040-A or 1040-EZ will be plucked from the 140 million-plus returns for a going over?

Clearly, the odds are reassuring. The vast majority (more than 99%, in fact) of individual income tax returns skate safely past the IRS audit machine.

Better news: The 1-in-119 chance of being called on the carpet vastly overstates the severity of the situation. More than three-quarters of all audits are handled by mail, not by mano a mano combat with an IRS agent during an office examination or a field audit. And if your return doesn’t include income from a business, rental real estate or a farm, or employee business expense write-offs or earned income credit, the basic 1-in-119 chance of being challenged dwindles to about 1-in-330.

Another piece of rarely reported good news: Each year, tens of thousands of taxpayers walk out of an audit with a check from the government. In 2015, for example, almost 40,000 audits resulted in refunds totaling nearly $1.1 billion. And 9% of field audits and 12% of correspondent audits end with the conclusion that everything is hunky-dory: no change in what the taxpayer owes Uncle Sam.

The 1-in-119 chance of being audited is the overall average from last year. As noted above, there’s an even smaller chance this year. But in any year, your personal odds turn on the kind of return you file and the type of income you report.

Our calculator, based on official IRS data on returns audited in 2015, will give you a good idea of the odds that your personal Form 1040 (or 1040-A or 1040-EZ) will be selected for review—either by mail or in person. And, remember, even if it is, there’s a decent chance you’ll walk away unscathed or be one of the lucky ones whose audit results in a refund.

With few exceptions, of course, the IRS doesn’t randomly choose which returns to audit, although random reviews are used to help the IRS calibrate the computers that identify the juiciest targets.

Over the next few months, the IRS will be plugging data from more than 140 million 2015 tax returns into a computer that scrutinizes the numbers every which way and ponders how the picture you paint of your financial life jibes with what it knows about other taxpayers. The computer tries to spot returns that are most likely to produce extra tax if put through the audit wringer. The computer’s choices are reviewed by a human being who can overrule them if, for example, an attachment to your return satisfactorily explains the entry that set the computer all atwitter. Short of such a veto, your name will go on the list.

Even if your return survives the computer’s scrutiny, you’re not necessarily safe. You may have listed an investment in a tax shelter the IRS is particularly interested in, for example, or the agency might decide to take a closer look at your return because it smells of the latest scam du jour identified by the IRS.

And there’s always the chance that someone has fingered you as a tax cheat. The IRS encourages such tips and even pays a bounty for leads that pay off in extra tax.