Tag Archives: financial advisor

One Of The Most Overbought Markets In History

My Comments: As someone with presumed knowledge about investing money, my record over these past 24 months has been pathetic. I’ve been defensive, expecting the markets to experience a significant correction “soon”…

I lived through the crash of 1987, the crash in 2000, and then the Great Recession crash in 2008-09. I saw first hand the pain and chaos from seeing one’s hard earned financial reserves decimated almost overnight.

Only the crash hasn’t happened. But every month there are new signals that one is imminent. And still it doesn’t happen.

I’ll leave it to you to decide if what Mr. Bilello says makes any sense. I’m not sure it does.

by Charlie Bilello, October 22, 2017

The Dow is trading at one of its most overbought levels in history. At 87.61, its 14-day RSI is higher than 99.999% of historical readings going back to 1900.

(Note: Developed by J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30. Signals can also be generated by looking for divergences, failure swings, and centerline crossovers. RSI can also be used to identify the general trend. TK)

Sell everything?

If only it were that simple. Going back to 1900, the evidence suggests that such extreme overbought conditions (>99th percentile) are actually bullish in the near term, on average.

Come again? In the year following extreme overbought readings, the Dow has actually been higher roughly 70% of the time with an average price return of 14.2%. From 5 days forward through 1-year forward, the average returns and odds of positive returns are higher than any random day. While the 3-year and 5-year forward returns are below average, they are still positive.

Does that mean we’ll continue higher today? No, these are just probabilities, and 30% of the time the Dow is lower looking ahead one year.

What it does mean is that one cannot predict a market decline based solely on extreme overbought conditions. Declines can happen at any point in time and “overbought” is neither a predictor nor a precondition of a bear market to come.

If one is going to predict anything based on extreme overbought conditions (and I would advise against doing so), it would be further gains. I realize that doesn’t conform to the conventional narrative of “overbought = bearish,” but the truth in markets rarely does.


DOL fiduciary rule won’t help some 403(b) retirement plans

My Comments: You should read this If you are an employee of a public school district, or a charity, or a foundation, or a church based enterprise.

Under the Obama administration, rules from the Department of Labor (DoL) were proposed that imposed what is known as a fiduciary standard on any individual or company engaged in advice with respect to ‘retirement plans’.

A fiduciary standard means that any such advice must be in the clients best interest. Absent a fiduciary standard, advisers are free to recommend stuff that might or might not be appropriate. It’s a much lower standard.

As you might expect, major Wall Street companies and insurance companies were opposed to this from the beginning. They didn’t and don’t want to be held accountable for bad behavior by their agents.

The rule was supposed to go into effect nationally last April 10th. However, the Trump Administration said the rule was onerous and would be delayed if not removed.

Despite all this, a little known feature or exemption to the DoL rule was that it didn’t apply to some 403(b) accounts. These are ‘retirement plans’ that apply to employees of public schools, and other not-for-profit enterprises like charities, churches, and foundations.

Know that your advisor may claim to be a fiduciary and acting in your best interest. And as such, that makes him/her a fiduciary. But also know his/her employer is NOT and if you subsequently have a problem, you may have to collect proven damages from the agent, because his/her employer is not bound to a fiduciary standard. Many agents are not technically ’employees’ but are instead independent contractors. The company in the background is further removed from accountability.

Oct 21, 2016 By Greg Iacurci

The plans in public school districts — often a “laissez-faire” type of arrangement exposing teachers to high-fee products — won’t be helped by the new regulation

Through its fiduciary rule, the Department of Labor is attempting to rein in conflicted investment advice and reduce costs for retirement savers.

However, there’s a corner of the retirement market plagued by the sort of high fees and sales practices the DOL is attacking that won’t be touched by the regulation: public school districts.

403(b) plans, a type of defined contribution plan for public schools, tax-exempt organizations and ministers, are notorious among advisers and industry practitioners as being a sort of free-for-all environment with multiple vendors, high-fee investment products and brokers who can camp out in a school cafeteria to try to make a sale.

“It’s almost laissez-faire,” Marcia Wagner, principal at The Wagner Law Group, said. “The teachers can be marketed by people who are very good providers to the marketplace and people who aren’t, and it’s a problem.”

Public K-12 plans aren’t subject to the Employee Retirement Income Security Act of 1974, and are therefore immune from the DOL rule, which raises investment advice standards in most retirement accounts.

When the rule goes into effect in April, brokers to ERISA retirement plans, such as 401(k)s, will be held to a fiduciary standard of care when providing investment advice for compensation. The same will not be true of brokers to non-ERISA plans, meaning it can be business-as-usual.

“It’s kind of like the Wild, Wild West,” according to Jania Stout, practice leader and co-founder of the Fiduciary Plan Advisors group at HighTower Advisors. “Teachers are really at the mercy of whoever’s sitting in the cafeteria they’re walking into that day. It could be a good representative. Or they’re trying to put them in a product that’s two or three times more expensive.”

403(b) plans for the public K-12 market aren’t the only non-ERISA plans. Plans among public higher-education institutions, government plans such as state and federal DC plans, and some church plans don’t fall under ERISA’s purview.

Aside from these cataegories, plans can also be structured to skirt ERISA by limiting employer involvement. Such plans, for example, can’t have an employer match. That’s how some private K-12 school districts are able to avoid adhering to the statute.

However, advisers and other industry practitioners say other types of non-ERISA 403(b) plans and governmental 457 plans don’t experience the same issues on a widespread scale.

“It is culturally unique to K-12,” said Joshua Schwartz, president of Retirement Plan Advisors, who works almost exclusively with non-ERISA plans.

Even though these plans are subject to state law, the tort bar hasn’t gotten very involved with litigation in this realm, Ms. Wagner said.

Non-ERISA 403(b) plans hold roughly 57% of the $900 billion in the 403(b) market, according to a joint report from the Investment Company Institute and BrightScope Inc.

Of course, not all public-school-district DC plans are plagued by poor investments and potential misconduct. But the way they’re set up, often with little employer involvement, creates an environment where abuses can thrive.

“What you have is technically an employer-sponsored retirement plan with no oversight,” Mr. Schwartz said. “As a result you have a range of business practices from the different providers, and you also lose any economies of scale.”

Some school districts have an “open access” arrangement, whereby they allow all interested vendors to offer 403(b) products, provided they meet certain criteria, according to a National Bureau of Economic Research report published in July 2015 that analyzed retirement plans among North Carolina school districts.

Indeed, it’s not uncommon to see 10 or more providers, and some districts have over 100, according to Mr. Schwartz. That could yield thousands of potential investment options.

Further, sales representatives sell products directly to employees at school districts, the report says, allowing for providers to enter into individual contracts with teachers. Contrast that with employers sponsoring 401(k) plans, who vet providers, serve as a central conduit controlling access to employees and whittle down a limited investment menu.

Such decentralized investing and record-keeping makes data difficult to come by. However, a 2010 report published by the TIAA-CREF Institute shows the sort of pricing disparity that occurs among “open-access” school districts.

In California and Texas, two “open-access” states, the average asset-based fee was 211 basis points and 171 basis points, respectively. By contrast, the average in Iowa and Arizona, two “controlled access” states that use a competitive bidding process to whittle down providers, was 87 and 80 basis points, respectively.

Variability among fees is greater, too — in California, roughly two-thirds of asset-based fees fall between 89 and 333 basis points. In Iowa, the range is between 50 and 123 basis points.

“What you tend to see is high-fee programs, frequently with surrender periods,” said Mr. Schwartz, who said investments tend to be annuities and mutual funds with sales loads.

In California and Texas districts, average back-end loads are 163 basis points and 233 basis points respectively; average surrender charges are a respective 419 basis points and 877 basis points.

“In any open-vendor environment, you’re establishing a competitive environment for selling, and not a cooperative environment” to help save for retirement, Mr. Schwartz said.

Even though the DOL fiduciary rule won’t directly affect these DC plans, the regulation could put pressure on employers, even if their plans aren’t governed by ERISA, to take them more seriously, Ms. Wagner said.

“This is like an area of pensions that’s been left behind, and we’re waiting for this inevitable groundswell [from the fiduciary rule],” Ms. Wagner said. “It could take time. And in the meantime, people could be hurt” by poor investments.

Retirement Planning Strategies for Clients in Their 50s

My Comments: If you are already retired, don’t bother with this. If you haven’t yet retired, there may be something here for you.

Waiting for retirement is like watching grass grow, or watching a car rust. You lose interest in a hurry. The problem is it’s going to happen, whether you pay attention or not.

Retirement is much the same for someone with many years left to work. But unless you die first, it will arrive. Count on it.

And when it does, it really helps if you’ve paid some attention to it along the way.

By Tahnya Kristina | February 23, 2017

No one knows how long they’re going to live. What we do know is that over the last 50 years the average life expectancy has increased. According to the World Bank the average life expectancy in 1960 was 70 and in 2014 it was 79. Thanks to medical advancements and the surge of healthy living awareness, people are living longer. That’s great for people, but it also means they need to plan for retirement savings to last longer – maybe longer than expected.

How does a financial advisor help clients plan for life during retirement? There are a lot of questions that need to be asked, including where will the retirement income come from to how long will retirement savings last? If clients have been saving, but not planning for retirement it’s never too late to get started. Here are three ways financial advisors can help 50-somethings plan for retirement.

1. Maximize Retirement Contributions

Ideally, this is the time in a client’s life when they are at their highest earning potential and that presents a big opportunity for retirement planning. With a high salary and low amount of debt (because the mortgage is paid off or close to being paid off) clients can take advantage of maximizing their retirement contributions.

If you’re in your 50s and have unused contribution room in an IRA, now is the time to take advantage. If employers offer a 401(k) plan, employees should increase their contributions to take advantage of any matching contributions. This will help boost retirement savings in the years leading up to retirement. Clients can also inquire if their employer offers non-registered group savings plans such as stock plans to help boost their savings and maximize their contributions.

2. Find a Balance Between Growth and Preservation

Retirement planning in your 50s poses an interesting challenge. On one hand, this age group wants to squeeze as much growth out of their investments as possible during the last of their contribution years. At the same time, they might now want to take a lot of risk with their accumulated retirement savings because in a few years they will need to live off the income. That’s where the assistance from a professional financial advisor comes in.

As a client’s planned retirement date approaches, it’s important to rebalance their retirement portfolio – or at least review their goals and asset allocation on a yearly basis to determine if rebalancing is needed. When 20-somethings invest for retirement they have many years to recover from market downturns. Unfortunately, that is not the case for retirement planning in your 50s. Reviewing investments to ensure clients are comfortable with the level of risk and the time horizon is still on track is crucial for successful retirement planning in your 50s.

3. Start Thinking About Lifestyle in Retirement

For 50-somethings retirement can be anywhere from five to 15 years away. The best way for financial advisors to help clients plan for retirement in their 50s is to ask clients to think about the lifestyle they want to have in retirement. The key to successful retirement planning is to be realistic.

Clients should consider factors such as where they want to live, if they want to travel, will they have dependents and how they plan to spend their time. From there advisors can create a retirement projection based on current and future savings, income sources and monthly obligations such as debt and living expenses.

Thinking ahead about estate plans and future tax brackets also plays an important role when planning for retirement in your 50s. These are all discussions financial advisors should have with their clients to help set realistic retirement goals and create an attainable retirement plan.

PS – I’m building an internet course called The SECRET(s) to a Successful Retirement. I’ll touch on all of this and dozens of other retirement planning issues, all wrapped in a convenient package that someone can reference year after year. Watch for it to be launched in the coming weeks. Tony

Are You Ready to Take Social Security Benefits?

My Comments: Today is Tuesday so today I talk about Social Security. These comments by Dan Caplinger may be old news, but for those of you just starting to think about retirement, know that Social Security is a fundamental income component for millions of people.

Chances are, you’ll be in that group. The sooner you get your arms around this idea, the happier you will be.

by Dan Caplinger on Sep 17, 2017

There are some things you need to be aware of before you file for retirement benefits from Social Security.

Social Security helps support tens of millions of Americans in retirement. Because of how important Social Security benefits are, you can’t afford to make any mistakes about how the program works and how you can get the most out of it that you can. In particular, these must-know facts about Social Security are often misunderstood, leading to critical errors that can result in getting lower benefits than you’re entitled to receive.

1. Social Security payments vary depending on when you take them

Most people understand that you can claim your Social Security as early as 62 or as late as 70, and when you claim can have an impact on how much money you get. Yet even though the mechanics are simple, many people don’t understand them. For starters, know that your “primary insurance amount” is the monthly benefit you’re entitled to receive if you claim Social Security at your full retirement age, which for those retiring now tends to be between 66 and 67. The Social Security Administration calculates your PIA based on your lifetime earnings and the year of your birth.

If you claim benefits early, then you lose a certain percentage of your PIA based on how early you claim. Up to 36 months early, you’ll lose 5% of your benefits for every nine months that you’re early, while shorter periods result in pro-rated decreases. If you claim more than 36 months early, then you’ll lose an additional 5% for every 12 months that you’re early in claiming them. That makes the maximum possible benefit reduction 35% (for those whose full retirement age is 67 and who claim at 62).

Those who claim their own retirement benefits late get a bonus of 2% for every three months that they wait beyond their full retirement age. That comes to a maximum bonus of 32% (for those whose full retirement age is 66 and who claim at 70). These bonuses aren’t available for spousal benefits but only for benefits paid on your own record. By understanding these provisions, you’ll be better able to calculate the impact of various options on your finances.

2. Your claiming decision can affect benefits for your entire family

Your family members may be entitled to Social Security based on your work history under certain circumstances. This is most common for spouses: If you’re married, your spouse may be eligible to receive up to 50% of your primary insurance amount as a spousal benefit. However, other family members, such as children or parents, may also be entitled to benefits.

In order for these family members to claim their benefits, you usually must file for and receive your own retirement benefits. In the past, alternative strategies allowed workers to file for benefits but then suspend them, opening the door to spousal and family benefits while letting the worker put off their benefits and thereby earn delayed-retirement credits. With the repeal of the file-and-suspend rule, that’s no longer an option, so families have to weigh the impact of having a worker delay benefits against the ability of other beneficiaries to get payments.

3. The government can take away some of your Social Security benefits in some cases

The laws governing Social Security provide for several instances in which benefits can be lost. If you claim Social Security before reaching full retirement age and while you’re still working, then you may start forfeiting part of your benefits if you earn more than $16,920 per year. Those who worked for public employers with their own pension programs can end up losing money because of the provisions of the Government Pension Offset and Windfall Elimination Provision.

The government may also take away part of your benefits indirectly through taxation. If you receive Social Security benefits, and the sum of half of those benefits plus your other sources of income exceeds certain thresholds, then a portion of your Social Security income is treated as taxable income and therefore boosts the amount of tax you’ll owe. It sometimes makes sense to defer taking Social Security benefits if you know that claiming them now will leave you open to losing some of those hard-earned monthly checks.

Be ready for Social Security

Claiming your Social Security benefits at exactly the right time can be tough, especially if you don’t have extensive financial assets to supplement those benefits. Nevertheless, it’s worth the effort to learn what you can about the program and the strategies that will help you get the most from it.

The Middle-Class Squeeze Isn’t Made Up

My Comments: Are you a middle-class American? I used to be and may still be, but those like me are a dying breed. The economic devastation now engulfing a huge portion of Texas is going to reverbrate across the nation. Apart from the humanitarian crisis, it will add to the unseen crisis affecting middle class America.

Economic inequality led to the downfall of the Democratic Party last November. It’s manifest by the lower economic expectations of those who live in rural America, by those whose education is no longer enough to get ahead, and still pervasive social discrimination against those not white enough. To Trumps credit, he saw the problem and built a movement, even if he is likely to waste the opportunity.

Like many ‘economic’ essays, this may be hard for you to get through. But to the extent you want to preserve the underlying goodness of this nation, and protect yourself along the way, you would benefit from a better understanding of the problem.

By Barry Ritholtz / Feb 15, 2017

Benjamin Disraeli is reputed to have said “There are three type of lies: lies, damn lies and statistics.”

Today let’s address the third component of Disraeli’s formulation in the context of a recent National Review article with the headline, “The Myth of the Stagnating Middle Class.” The article observes that “more Americans have easier lives today than in years past.”

To regular readers, this is a variant of the assertion that “common folk live better today than royalty did in earlier times,” a claim we debunked two years ago. The current argument is more nuanced in that it: a) relies on a few statistical twists; b) contains statements that are true but don’t support the main claim; and c) is an argument against Donald Trump’s populism from the political right. It all has the general appearance of plausibility until you start digging.

This is where we come in.

Let’s begin with the claim that more Americans have easier lives today than in years past. This is true and almost always has been. Progress is humanity’s default setting ever since our ancestors climbed down from the trees and began walking upright on the African savanna.

Thus, it should come as no surprise that the standard of living for all Americans has been rising for many years, mainly because of technological advances. However, the main issue under discussion is actually about how the economic benefits of the U.S. economy get apportioned across the populace.

In other words, how the wealth is distributed. The National Review engages in a statistical sleight of hand that distracts from this.

For further insight I spoke with Salil Mehta, who teaches at Columbia and Georgetown, and is perhaps best known for his role as the top numbers-cruncher in the federal government’s $700 billion TARP bank bailout plan in the financial crisis.

Mehta made short work of the article:
The article is a peculiar mixture of motivating facts and fantasy logic, which is what makes cherry-picking statistics unsafe for policy conversation. The main issue with the piece is that that it continuously mixes and matches data to fit a fated narrative.

Mehta further observed that the National Review argument included in some cases various classes of Americans (such as minorities and immigrants), while excluding them at other times in statistics. This kind of data cherry-picking is always a red flag.

Consider for a moment how the Pew Research Center did its big research report, “The American Middle Class Is Losing Ground”: The report, which actually figures in the National Review article, analyzed the Current Population Survey from 1971 to 2015. It used data drawn from the Bureau of Labor Statistics, which has well-established standards for managing data and making empirical comparisons.

Maybe it’s best to make the point with two of the more telling charts in the report. Here’s the first one, showing that income growth for the middle class has trailed that of the upper class:

The second chart (below) shows that the wealth gap between the upper and middle classes also widened significantly (even after the losses from the financial crisis):

Best practice in these circumstances is to go to the original data source, cite it and analyze it in a way that is consistent, regardless of whether the outcome supports your conclusion.

As I’ve said before, there are many reasons to dislike this economic recovery: it has been lumpy and unevenly distributed by geography, by industry and by level of educational attainment. Much of that has harmed people who were once considered middle class. Add to this the decades-long impact of automation, globalization and the decline in labor’s bargaining power, and it adds up to economic stagnation for the middle class.

But wage and wealth stagnation alone don’t account for the full measure of middle-class angst. Inflation and its components also play a part. Prices for things we want have been deflating, while the cost of things we need have been going up. Mobile phones, computers and flat-panel TV are better and dollar-for-dollar cheaper than ever. The same is true for cars, which in a few years will likely be self-driving.

But those are mostly wants. When it comes to needs, it’s a different story. Housing, even after the 2008-09 crack-up, is expensive. Rentals have gone straight up as home ownership has fallen. The costs of education have skyrocketed and show no signs of slowing. Medical and health-insurance costs are among the fastest-rising of all consumer expenses.

The National Review article concludes by saying, “Government can’t fix that problem, because that problem doesn’t really exist.”

Wishing that a problem doesn’t exist doesn’t make it vanish. But it does offer some insight into why the Republican Party was blindsided by the rise of Donald Trump and his populist appeal. It isn’t that the party elite was myopic, but that it actively fabricated a bubble into which no contrary information was allowed entry. The troubling thing is that the GOP is still at it.

Middle-class anxiety has been building for more than a decade and it mixed in the last election with a general sense of frustration with America’s leadership class. No wonder the middle class feels squeezed — because it is.

This is how much fees are hurting your retirement

Thursday = Retirement Issues

My Comments: Value is in the eye of the beholder. When we need something, and for whatever reason, choose not to do it by ourselves, we spend money. If you are selling advice, or pork chops, or cars, people are going to spend money when they have to.

As a self-styled expert on retirement planning, what you pay for financial advice can run into several percentage points every year. What is your frame of reference that determines if you are getting value in exchange for what you are paying?

Aug 17, 2017 Craig L. Israelsen

This article is reprinted by permission (?) from NextAvenue.org.

The importance of keeping your investment portfolio costs low should be self-evident. They come directly out of your pocket. But you may be surprised to see how much it matters to stick with low-fee mutual funds and Exchange-Traded Funds (ETFs). I’ve run the numbers.

The two primary portfolio costs consist of what’s known as the “expense ratio” of the funds or ETFs (the annual fee charged as a percentage of assets) and the “advisory fee “(if there is a financial adviser involved).

The average expense ratio among all mutual funds is roughly 100 basis points or 1.0% (one basis point is one hundredth of 1%). Assuming an annual advisory fee of 100 basis points, or 1%, the total portfolio cost is 2% (or 200 basis points). At that level, for a diversified fund portfolio with a starting balance of $1 million, the average annual withdrawal for a retiree between age 70 and 95 is about $126,426 (assuming the retiree makes the government’s Required Minimum Distribution or RMD). Remember: this is an average withdrawal figure over a 25-year period; the actual RMD will vary each year based on your portfolio’s performance during the prior year and each year’s RMD percentage.

If the cost of funds in the portfolio is cut in half by using mutual funds or ETFs with lower expense ratios, the overall portfolio cost can be reduced from 2% to 1.5%. By doing so, the average annual withdrawal then increases to $136,218, meaning the retiree will have roughly $10,000 more income each year. That works out to a “raise” of about $830 a month during retirement.

$32,000 more a year in retirement

But you can do even better. It is now possible, by using low-cost ETFs, to build a diversified retirement portfolio for as low as .10% (or 10 basis points). If the advisory fee were reduced by a mere 10% down to .90% (or 90 basis points), the overall portfolio cost could be lowered to 1.0%. At that level, the retiree can withdraw an average of $146,853 each year — or an additional $10,000 annually.

Finally, if the adviser lowered his or her fee to .40% and the fund expenses amounted to .10%, the total portfolio cost would be just .50%. At that level, $158,407 would be the average amount withdrawn each year.

All together, by slashing fund expense ratios from 1.0% to .10% and the advisory fee from 1% to .40%, the retiree could receive $32,000 additional annual retirement income — or roughly $2,600 more each month between the ages of 70 and 95. Clearly, the impact of portfolio costs is huge.

A modern diversified portfolio

Here’s how to put together a low-cost, diversified portfolio that I call the 7Twelve® portfolio. If you use low-cost, actively managed funds from various fund families, the overall fund expense can be as low as .54%. If you use ETFs from various fund families, the cost can drop to .16%. And if you use just Vanguard ETFs, the overall fund expense ratio can be as low as .10% (I have no affiliation with Vanguard; they’re just an investment company specializing in keeping costs low).

The idea of building a diversified portfolio for as little as .10% is not theoretical. It is a reality and can and should be considered.

Craig L. Israelsen, Ph.D., teaches in the personal financial planning program at Utah Valley University in Orem, Utah. He is the author of “7Twelve: A Diversified Investment Portfolio With a Plan” and his website is 7TwelvePortfolio.com.

Will This Happen to Social Security?

Tuesday = Social Security comments

Concern about the continued viability of our Social Security system if very justified and real. The solutions to the problem are reltively simple and if started soon, will be absorbed by the economy with relative ease.

But Capitol Hill is the wildcard here. The crisis is far from dramatic. Yet. Elected representatives in both houses of Congress operate on an election cycle timeframe. If the crisis isn’t within the current cycle, the response is essentially “Not my problem!”.

But the issues does give each and everyone of us the opportunity to explore the current thinking of every single candidate as they go through the election process. Without that kind of pressure, they won’t act until the ball is about to drop.

Sean Williams \ Aug 7, 2017

According to the June 2017 snapshot from the Social Security Administration, nearly 61.5 million people were receiving a monthly benefit check, of which 68.2% were retired workers. Of these 41.9 million retirees, more than 60% count on their Social Security to be a primary source of income. That’s huge, and it demonstrates just how important Social Security is for current and future generations of seniors.

Is Social Security doomed?
Of course, as you’re also probably aware, the program isn’t on the best footing. A number of demographic changes are expected to wreak havoc on Social Security and throw its future into limbo. These include the retirement of, on average, more than 10,000 baby boomers per day, which is pushing the worker-to-beneficiary ratio lower, and the lengthening of life expectancies, which has allowed seniors to pull a benefit from the program for an extended period of time.

The result, according to the latest Social Security Board of Trustees report issued last month, is that benefits could be slashed for current and future retirees by up to 23% in 2034 should Congress fail to act. It’s not exactly the best outlook for a program that means so much to our nation’s retirees.

But there’s an even more glaring figure to most Americans: Social Security asset reserves. The Trustees report predicts that asset reserves could touch $3 trillion by 2022, implying the program is expected to remain cash flow positive through 2021. However, beginning in 2022, and each year thereafter through 2091, Social Security will be paying out more in benefits than it’s generating in revenue, resulting in a $12.5 trillion cash shortfall between 2034 and 2091.

Social Security’s bankruptcy is almost certainly a myth
Some Americans view this imminent cash shortfall as the end for Social Security — especially millennials. When surveyed in 2014 by Pew Research, 51% of millennials believed that Social Security wouldn’t be there for them when they retired. Thankfully, though, this worry turns out to be nothing more than the program’s most pervasive myth.

Social Security will almost certainly be there for many future generations of retirees for one key reason: the payroll tax.

The payroll tax is a 12.4% tax on earned income between $0.01 and $127,200, as of 2017. This maximum taxable earnings figure often increases on par with the Wage Index. Also, it’s worth noting that most workers only pay 6.2% of their earned income into Social Security, with employers picking up the tab on the remaining 6.2%. In other words, as long as people keep working, the payroll tax will keep getting collected, generating income for Social Security to disburse to eligible retirees. Since the payroll tax comprised a whopping 86.4% of income collected in 2015, there should still be plenty for the Social Security Administration to disburse. Unfortunately, this doesn’t mean that current payment levels are sustainable, which is why the Trustees are suggesting cuts could be imminent within two decades.

This is the only way Social Security could possibly go bankrupt
Of course, when we’re talking politics, we can never say anything with 100% certainty. While Social Security currently can’t go bankrupt thanks to the payroll tax, legislation on Capitol Hill could always change that.

Earlier this year, a Republican lobbyist had tinkered with the idea of reducing or eliminating the payroll tax in its entirety, according to Fox News. Assuming the average household generates about $50,000 in income annually, and that most people work for an employer, we’re talking about an average of $3,100 in extra income in the pockets of households each year. Since we’re a consumption-driven economy, this extra cash could fuel spending or bolster personal saving and investment. At least that’s the idea on paper.

The reality of the plan is that it would potentially end the primary source of funding for Social Security. Interest income only provided 10.1% of revenue in 2015, with the taxation of benefits kicking in another 3.4%. If payroll taxes are eliminated, Congress would need to find a way to generate at least $800 billion in annual income. One idea floated around was a value-added tax (VAT) on consumption, which is purportedly capable of generating $12 trillion in revenue over the next decade. However, a VAT could also reduce consumption, and it makes revenue generation very lumpy given natural economic cycles and the regular occurrence of recessions and economic slowdowns.

In short, it’s not a very good idea, in my opinion. However, if Congress were to move forward with a plan to reduce or eliminate the payroll tax, then, and only then, would it be possible for Social Security to go bankrupt.

A silver lining, but you need to remain proactive

Breathe a sigh of relief, folks, because Social Security isn’t going anywhere. If there is a silver lining, it’s that you will receive income during retirement, as long as you’re eligible.

Nevertheless, the Trustees report serves as a genuine wake-up call that working Americans need to turn their attention to saving and investing in order to reduce their reliance on Social Security. After all, Social Security is only designed to replace about 40% of your working wages, but quite a few seniors are leaning on the program for much more.

This all starts with formulating a budget and saving more. The May personal savings rate was a paltry 5.5%, per the St. Louis Federal Reserve. Financial advisors suggest saving 10% to 15% of your paychecks if you want to retire comfortably, and the only way to do so is to better understand your cash flow. Formulating and reviewing a budget can often be done in around 30 minutes each month, and it can be done online, making it easier than ever to save money.

Likewise, even though the stock market goes through bouts of volatility, it’s shown time and again that it’s among the best wealth creators over the long term. Historically, the stock market has appreciated at a pace of roughly 7% per year, inclusive of dividend reinvestment. Proactively saving more and investing wisely is a good, but simple, formula to reduce your reliance on Social Security once you retire.