Tag Archives: social security benefits

6 Retirement Lessons

My Comments: My professional efforts these days are focused on helping people make good decisions about their retirement. My grey hair lends itself to this demographic.

So my posts tend to favor ideas and thoughts that are relevant to many people either starting to navigate these transitional waters to retirement, or are already there.

Nov 4, 2016 | Andrea Coombs

Are you a retirement “do-it-yourselfer,” convinced you can plan for your own retirement without paying for a financial adviser? That’s all well and good, but given that money managers work with people in a variety of financial situations, their experiences with the problems that prevent people from retiring can offer insights into how to overcome those challenges.

I spoke to a few experts to find out how they handle that difficult situation: a client who wants to retire but whose financial picture suggests she shouldn’t yet do so.

Ideally, of course, advisers want people to seek financial advice early on, years before they plan to retire. “Then we have the ability to help you work towards your goals over a period of time and make adjustments as things change,” said Nancy Skeans, managing director of personal financial services at Schneider Downs Wealth Management Advisors in Pittsburgh, Penn.

But sometimes people don’t show up at the adviser’s office until they’re eager to leave the workforce for good. In those cases, she said, advisers sometimes are forced to deliver bad news.

“We just had that situation with an individual and his wife,” Skeans said. “He’s thinking about retiring in two to three years. It was very obvious to me when I looked at his balance sheet, coupled with what I backed out as to their spending, that if they retired immediately they would put themselves into a precarious situation.”

One red flag was that this couple hadn’t accounted for their retirement tax bill. “All of their assets were in tax-deferred accounts,” Skeans said. “Every dollar they spend is going to be a dollar plus the taxes. That means, if you’re trying to support a standard of living after tax, you’re going to have to gross that money up.”

So, one lesson is to remember that the government is going to take a bite out of your retirement account. Here are more lessons financial advisers say they’ve been forced to teach new clients:

1. Be disciplined about a budget

In 2008, Skeans said, a client who was about 64 years old was laid off. “He decided he wasn’t going to look for other work,” she said. “We ran the projection. Obviously, at that point in time the portfolios were down because of the market and I was deeply concerned.

“Fortunately the guy was a finance guy, a controller for a small company. He heard us loud and clear that the biggest thing he and his wife needed to do was stay within a budget,” she said.

At the time, Skeans talked with the couple about how to stabilize their finances through reduced spending. “He was very adamant he did not want to go back to work,” she said. “We were able to help him and his wife structure a budget and they have stuck to it and continue to do so.”

And now? “Eight years later, their portfolio is just slightly below where it was eight years ago,” Skeans said.

2. Take a practice run

People sometimes underestimate what they’ll spend in retirement, especially in the early years when they suddenly find themselves with plenty of free time and energy, said Tripp Yates, a wealth strategist at Waddell & Associates in Memphis, Tenn.

“I’ve seen it where people do a budget for retirement and they tell me, ‘OK, we’ve done all the numbers and we can live off $50,000 a year,’” Yates said. Too often, that’s a bare-bones budget that doesn’t take into account travel and other activities. “The first five to 10 years of retirement, people are probably going to spend more rather than less, because they’re in fairly good health and want to enjoy that time,” he said.

One way to get a good handle on your spending is to test-run your retirement budget, he said. In one recent conversation with a couple, he told them: “Maybe one spouse who really wants to retire can. The other spouse continues working and maybe we take six months to a year and try to live on that budget, practice, see if it’s actually doable before both husband and wife call it retirement,” Yates said.

3. Don’t focus on the market

Given the media’s attention on the market’s every move, it’s no surprise that people seeking help from an adviser often fret about what happen next. That’s the wrong focus, said Robert Klein, president of the Retirement Income Center in Newport Beach, Calif. (Klein is also a writer for MarketWatch’s RetireMentor section.)

“People read so much in the media about performance and that’s naturally their focus until you show them on paper it’s all about your goals and planning for those and controlling what you can control,” he said. While investors must make sure their investments are diversified, there’s no way of knowing when the market might take another steep plunge.

“You have to control what you can control and develop prudent strategies that are going to work no matter what the market does,” Klein said.

4. Be clear about your goals

Retirement planning is about more than “just having X dollars in income,” Klein said. Figure out what you want retirement to look like, and then work from that. “It’s about a lifestyle in retirement. What are they going to be doing day-to-day in retirement?” he said. “Then you can focus on the finances: ‘What is it going to take so I can do that?’”

For some people, a hard look at a retirement lifestyle leads them to choose to work longer, Klein said. “A lot of people are better off working longer even if they can afford to retire. They just don’t have the hobbies. It’s a whole different routine when you retire,” he said. “Phased retirement is really good for a lot of those people, so they can take baby steps into retirement,” he added.

5. Use software that provides a picture

If you’re planning your own retirement, are you using financial software that will create projections as a chart? “Most people don’t communicate with numbers, they communicate pictorially,” said Kimberly Foss, founder of Empyrion Wealth Management Inc. in Roseville, Calif.

Foss said she shows clients a simple chart depicting how long their money is likely to last if they retire now. In some cases, she might produce a second chart that shows how spending less might make their outlook improve, and then talk with the client about options, such as downsizing the house or refinancing, working longer or delaying the purchase of a new car.

For one couple, seeing those pictures and having that discussion made all the difference, Foss said. They wanted to spend the same amount of money in retirement that they’d been spending while they worked, but the size of their savings account didn’t support that goal. So, they switched from the country club to a lower-cost health club, refinanced into a cheaper mortgage and started cooking at home more rather than eating out.

Reducing those costs and others preserved their portfolio for the long haul. Said Foss: “It created the income so that they could retire.”

6. Get real with your adult children

In some cases, people retire but unforeseen expenses put their financial security at risk. Skeans said one client unexpectedly found herself supporting her adult daughter and grandson, who live in her home, even as she herself recently entered a care facility.

“She’s taken out enormous amounts of money to help her daughter and grandson,” Skeans said. “She’s supporting their household and she’s paying the cost of assisted living. I said, ‘If you continue at this pace, this portfolio is going to be gone in five years.’”

Skeans said if the client sells her home—that is, asks her daughter to find her own place—that money would bolster her finances. “She should be able to make it and still leave something to this daughter in the end,” Skeans said. “She said, I’m going to talk to my daughter about that.”

How Timing Impacts Your Retirement Portfolio Longevity

My Comments: Many a client has asked “How long will my money last?” and the only rational, unsatisfactory answer is “It depends”.

Unfortunately, luck plays a major role in our lives. If you’re alive and well today, chances are you’ve had at least some good luck. In answering the above question, much depends on timing, which is typically something over which we have NO control. Little more than deciding the date of your birth.

Follow these thoughts by Kevin Michels to get some additional insights.

Kevin Michels, CFP® February 20, 2017

How long will your retirement nest egg last? This is an intricate question to answer and many factors come into play such as rate of return, the value of your savings, annual withdrawals, inflation, etc.

However, one factor that is very important and is largely not spoken of is the timing of when you retire. In fact, the timing of when you retire is so important it can make the difference between running out of money in retirement or leaving a multi-million dollar inheritance to your children and grandchildren.

A Retirement Example

Let me explain by example. Let’s take 10 imaginary couples and pretend they have each saved $1 million for retirement. Each couple invests the full $1 million in the S&P 500 for the duration of their retirement, which we’ll assume lasts for a period of 30 years. Each couple also plans on withdrawing $100,000 per year from their portfolio and will increase that amount by 3% per year to account for inflation. The only difference between each couple is the timing of their retirement. The first couple retires in 1977, the second couple in 1978, the third couple in 1979, and so on and so forth.

All else being equal, aside from the timing of each couple’s retirement, how will they each fare over a 30-year period? The disparity between the longevity and value of each couple’s retirement portfolio is staggering.

Three out of the 10 couples actually ran out of money before the 30-year period ends, simply because they chose to retire one year too early or one year too late, while the other seven couples end the 30-year period with balances ranging from $500,000 to $3.2 million.

The three couples that ended up running out of money (1977, 1981, 1986) all had something in common. The first five to 10 years of their investment returns were subpar. The perfect storm for a short-lived retirement portfolio is created when you pair investment losses with withdrawals in the first five to 10 years of retirement. You get so far behind, that it becomes impossible to catch up. This is known as “sequence of returns risk.”

To put this into perspective, take a look at the table below regarding the most successful couple, who retired in 1979 and ended with $3.2 million, compared to the least successful couple who retired in 1977 and ran out of money in 20 years.

Couple

Longevity of Retirement Nest Egg

Average Annual Return of S&P 500 for 30-Year Period

Average Annual Return of S&P 500 for First 5 Years of Retirement

1977 – 2006

$0 after 20 years

12.48%

8.13%

1979 – 2008

$3.2 million after 30 years

11.00%

17.36%

Although over the long term the S&P returned 1.48% more per year in 1977 to 2006 than 1979 to 2008, the couple that retired in 1979 will leave a multi-million dollar estate largely because in the first five years of retirement they have superior investment returns than the couple who retired in 1977.

Safeguards to Protect Retirement Investments

Fortunately, we can put safeguards into action to mitigate the sequence of returns risk.

1. Don’t invest your entire portfolio in the S&P 500 or any other one asset class.

For the most part, it is good for retirees to be invested in stocks. This protects against inflation risk and low yields in the bond market as we’re seeing now. But volatility comes with stocks so it’s also important to include some bonds or bond funds in your portfolio as well, to smooth out returns.

2. Always keep at least the next two years of expected withdrawals in cash or short-term bonds.

In our example, each couple planned on withdrawing $100,000 per year and increasing that amount by 3% a year for inflation. So in their first two years of retirement, they could have liquidated $203,000 ($100,000 for year one and $103,000 for year two) and kept it in cash to safeguard against short-term volatility. This would have saved the couples who retired in 1977 and 1981. Both of those couples started their retirement with negative returns.

3. Rebalance your portfolio annually.

Rebalancing is simply the practice of selling high and buying low. If your portfolio is invested in 70% stocks and 30% bonds and the stock market underperforms the bond market for a year or so, naturally the stock portion of your portfolio will decrease while the bond portion will increase. If at the end of the year your portfolio is now made up of 65% stocks and 35% bonds, you can sell the 5% of bonds to reinvest in low-priced stocks or to keep in cash for future withdrawals.

4. Aim for a lower withdrawal rate in the first five years of retirement.

Your withdrawal rate is calculated by dividing your total withdrawals for the year by your total portfolio value at the beginning of the year. In our example, the withdrawal rate for our retirees starts at 10% ($100,000/$1 million), which is high for the first five years of retirement. As previously stated, the longevity of your retirement portfolio is greatly affected by your returns and withdrawals in the first five years of retirement. If each one of these couples would have started with a lower withdrawal rate, even 9%, they all would have had money left over at the end of the 30-year period. Try to start with a lower withdrawal rate and then increase it as your portfolio grows.

In the end, the decision of when to retire isn’t as important as the plan you have in place to ensure your retirement capital lasts the duration of your life. Before you begin living the golden years, make sure you work with your spouse and potentially a financial planner to have a plan in place that will provide peace of mind during those years of market turmoil.

3 Secrets to a Comfortable Retirement

My Comments: These lists are usually somewhat pathetic. Why just 3 secrets; why not 5? And these are not really secrets. But I needed something to try and catch your attention today so here are 3 Secrets!

I think it’s very possible that the next 30 years are going to be far less ‘profitable’ than were the last 30 years. So if you are in your 40’s and have enough presence of mind to know that there’s a high chance you’ll live into your 90’s, what follows makes a lot of sense. But I can tell you that when I was in my 40’s, having enough money to enjoy retirement never crossed my mind.

Walter Updegrave  |  January 17, 2017

The main goal of retirement planning is to be able to maintain roughly the same standard of living after your career as during it. But achieving that goal can a challenge. For example, the latest Transamerica Retirement Survey of Workers found that 40% of baby boomers expect their standard of living to fall during retirement, 83% of Generation Xers believe they’ll have a harder time achieving financial security than their parents, and only 18% of millennials say they’re very confident about their retirement prospects.
So how can you avoid having to ratchet down your lifestyle after calling it a career? Here are three ways:

1. Live below your means during your working years. This simple concept is something that many people have difficulty pulling off. Indeed, a 2016 Guardian Life survey on financial confidence found that nearly two-thirds of Americans say they’re not good at living within their means, let alone below them. But this is critical for two reasons: By saving consistently, a portion of your earnings today will be available for future spending when the paychecks stop. And the lifestyle you will be trying to continue in retirement won’t be as costly as what it might have been without the saving.

Granted, some people face such difficult financial circumstances that they have little choice but to spend all they earn. The issue for most of us, however, is finding a way to turn the resolve to save into actual dollars in a retirement account. The best way to tilt the odds in your favor is to make saving automatic, such as by enrolling in a 401(k) or other workplace retirement plan that moves money from your paycheck before you can even get your hands on it.

Generally, you want to set aside 15% or so of pay each year (including any money your employer kicks in), although you may need to step it up a bit if you’re getting a late start. If you can’t hit your target right away, you can work up to it gradually by boosting your savings rate a percentage point or so each year you receive a raise. If a 401(k) or similar plan isn’t an option where you work, you can sign up for an automatic investing plan and have money transferred each month from your checking account into an IRA at a mutual fund company.

Putting your savings regimen on autopilot allows you to bypass the chief obstacle to saving—you, or more accurately, your natural impulse to spend. It makes it more likely that the money you intend to save actually ends up getting saved. Further, if, say, 10% to 15% of your paycheck is going into your 401(k), then you pretty much have to arrange your life so that you’re able to live on the remaining 85% to 90%. In other words, you’re effectively forced to live below your means.

This approach isn’t foolproof. You can always sabotage yourself by running up lots of credit-card or other debt in order to overspend. But if you avoid piling on debt, save consistently and track your progress periodically—which you can do with a good retirement calculator like this free version from T. Rowe Price—you’ll reduce the chance that you’ll have to live a more meager lifestyle than you’d envisioned in retirement.

2. Learn to take pleasure in small things. Preparing for a secure and comfortable retirement is certainly important, but you don’t want to focus on saving and controlling spending so much that you don’t enjoy life. Fortunately, you don’t have to live large to be happy. On the contrary. Research shows that the pleasure you receive from spending even on major expenditures and big luxuries quickly fades. So indulging in more small, less-expensive purchases may actually lead to greater happiness than splurging on high-price items.

For example, in a paper titled “If Money Doesn’t Make You Happy, Then You Probably Aren’t Spending It Right,” researchers exploring the relationship between spending and happiness note that “if we inevitably adapt to the greatest delights that money can buy, then it may be better to indulge in a variety of frequent, small pleasures—double lattes, uptown pedicures, and high-thread-count socks—rather than pouring money into large purchases, such as sports cars, dream vacations, and front-row concert tickets.”

Clearly, you’re not going to eliminate all big-ticket expenditures during your life. But to the extent that you can find less costly yet still effective ways to treat yourself, you’ll free up more money to save for retirement and be better able to manage your spending after you retire without forcing yourself to live like an ascetic.

3. Get a bigger investment bang for your savings buck. Saving regularly by living below your means is the surest way to avoid seeing your standard of living fall in retirement. But another form of saving—reducing the amount you shell out in investment costs and fees—can also help. How? Simple. Morningstar research shows that lower costs tend to boost returns, which allows you to build a larger nest egg during your career and can lower your risk of depleting your savings prematurely after you retire.

The easiest way to reap the benefits of lower investing costs is to invest your savings as much as possible in a broadly diversified portfolio of index funds or ETFs, many of which you can find with annual expenses of 0.20% or less, vs. 1% to 1.5% for many actively managed funds. Low-cost index funds and ETFs can also bestow an advantage beyond their cost savings—namely, the more you stick to a straightforward mix of stock and bond index funds, the less likely you are to fall for gimmicky or exotic investments that can make it more difficult to manage your retirement portfolio and possibly drag down long-term returns.

I can’t guarantee, of course, that following these three guidelines will allow you to maintain your pre-retirement standard of living throughout your post-career life. But I can say that doing so should definitely tilt the odds in your favor.

Walter Updegrave is the editor of RealDealRetirement.com.

The Big Problem With Democrats’ and Republicans’ Social Security Proposals Is They’re Both Right

My Comments: We long ago decided as a society that letting huge swaths of our population, the elderly, suffer and die early was not in our best interest. This premise has been part of the fabric of every society for millions of years.

In the 1930’s it was decided that it was not enough to hope it would happen, but that society should formalize the premise at the Federal level. What resulted was the Social Security Administration and today we have over 41 million people getting financial help every month.

There are now those in leadership positions at the Federal level that want to make fundamental changes. Many feel the burden on society that benefits elderly members of that same society are onerous. Never mind we’ve long accepted the premise of looking after the elderly. Perhaps it’s a matter of degree, but whatever the case, a vigorous debate is necessary.

So, sometime in the next 20 years, structural changes will be made to Social Security in this country. Demographics will demand it, along with the many millions of Americans who have been paying into the system their whole working life. That is, unless we are now willing to ignore the elderly, push them out into the streets, and wait for them to die.

Sean Williams \ Mar 11, 2017 at 9:35AM

The importance of Social Security for America’s retirees simply can’t be overstated.

As of January, the Social Security Administration’s (SSA) monthly snapshot showed that nearly 41.4 million retired workers were receiving monthly payments averaging $1,363. This may not sound like a lot of money, but the SSA’s data from 2016 shows that 61% of all retired workers receiving benefits relied on their monthly Social Security checks to account for at least half of their income. Without this money, there would presumably be a considerable poverty problem among seniors.

Both solutions work — that’s the problem

But America’s most sacred social program is caught in a tailspin. Two ongoing demographic shifts — the retirement of baby boomers and the steady lengthening of life expectancies over the past couple of decades — are expected to push Social Security to the brink, so to speak. While the program is in no danger of going bankrupt (as long as people are working, payroll taxes will be collected, and payments made to beneficiaries), the current payout rate may not be sustainable.

According to the Social Security Board of Trustees report from 2016, the more than $2.8 trillion in spare cash currently held by Social Security should be depleted by 2034, at which point an across-the-board benefits cut of up to 21% may be needed to sustain the program through 2090. While there are numerous proposals on the table to fix Social Security, doing nothing and cutting benefits when the Trust burns through its spare cash is essentially the least favorite “fix” among the public.

Perhaps the greatest irony here is that solutions aren’t the issue. Well over a dozen separate fixes for Social Security have been proposed. The crux of the problem is that Democrats and Republicans on Capitol Hill can’t agree on a plan.

The way I see it, the real issue with the Democrat and Republican proposals is that they’re both right, which makes compromising extremely difficult. While both approaches clearly have downsides, both the Democrat and Republican solutions would extend the life of Social Security for retired workers. In other words, both plans work.

How Democrats would fix Social Security

Let’s begin by taking a generalized look at the three ways Democrats often propose to fix Social Security. We won’t be looking at any bill in particular; just the general concepts that most lawmakers in the Democratic Party tend to agree on when it comes to Social Security reform.

1. Raise the payroll tax earnings cap

Pretty much every Democratic proposal involves increasing Social Security’s payroll tax cap. As it currently stands, 12.4% of your pay between $0.01 and $127,200 is taxed as 12.4%. However, most Americans don’t pay the full 12.4%. They’re responsible for half (6.2%), with their employer picking up the tab for the other half (6.2%). Any earned income above and beyond $127,200 in 2017 is free and clear of the payroll tax.

As the argument goes, since roughly 90% of Americans are paying into Social Security with every cent they earn, it’s not fair that the wealthy are only paying tax on a smaller percentage of their income. Select payroll tax proposals have suggested providing a moratorium between the wage-indexed cap ($127,200) and, say, $250,000, then taxing all earned income above $250,000 at the 12.4% rate, or removing the maximum earnings cap completely. Removing the cap completely would go a very long way to narrowing Social Security’s more than $11 trillion budgetary shortfall.

2. Tie COLA to the CPI-E
Second, Democrats would like to stop using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as the determinant of the annual cost-of-living adjustment (COLA) and replace it with the Consumer Price Index for the Elderly (CPI-E). The CPI-E strictly factors in the spending habits of households with persons aged 62 and up, meaning it would emphasize medical and housing expenditures more, and de-emphasize less important expenditures, such as education, entertainment, apparel, and transportation.

The Senior Citizens League has estimated that if the CPI-E were used in place of the CPI-W, seniors would have been paid an aggregate of $29,600 more over the past 25 years.

3. Give low-income workers a raise
Lastly, Democrats would like to see low-income retirees earn more. While there are minimum monthly benefits in place, this doesn’t mean seniors are necessarily earning enough annually to move above the national poverty income threshold. Democratic solutions to fix Social Security often include measures to boost payouts to low-income workers, women, and/or older Americans (i.e., those in their 80s or 90s).

Obviously, this plan isn’t perfect. It requires the rich to pay more without compensating them any more when they retire and begin claiming benefits. It also boosts payouts by using the CPI-E and giving low-income workers a raise, which is counterproductive to the current budgetary shortfall for Social Security.

The Republican solution for Social Security

Just like the Democrats, Republicans have a three-pronged approach to solving Social Security’s budgetary woes. Once again we’re not focusing on any specific bill here; we’re just examining the basic tenets of most Republican Social Security proposals.

1. Raise the full retirement age
Hands down the most popular solution for Republicans in Washington involves raising the full retirement age. Your full retirement age, which is determined by your birth year, is the age at which you become eligible to receive 100% of your monthly payout. Claim benefits before reaching this age, and your monthly payout is permanently reduced. Wait until after your full retirement age to claim benefits, and your monthly payout is even higher.

The various Republican proposals have suggested increasing the full retirement age from 67, which will be reached in 2022, to 68, 69, or even age 70. Raising the full retirement age would presumably coerce healthy seniors to remain in the workforce, ultimately adding more payroll tax revenue into the program. It would also account for lengthening life expectancies.

2. Tie COLA to the Chained CPI
Republicans also have a strong tendency to want to abandon the CPI-W. However, their proposal usually involves switching to the Chained CPI, not the CPI-E.

The difference between the Chained CPI and the CPI-W is that the Chained CPI takes into account a buying habit known as “substitution.” In other words, if the price of a good or service increases in cost by a lot, the Chained CPI assumes the consumer will trade down to a less expensive good or service. The CPI-W does not factor in consumer substitution. As a result, the Chained CPI would result in lower annual COLAs than the CPI-W, which according to Republicans would more accurately represent the inflation that seniors are facing.

3. Means-test for benefits
Finally, Republicans often suggest means-testing seniors for benefits. In short, means-testing would be an arbitrarily chosen annual income level at which well-to-do retired workers would receive a reduced benefit, or perhaps no benefit at all.

As a completely arbitrary example, if a Social Security-eligible senior were earning $200,000 a year, he or she might be deemed ineligible for benefits based on means-testing since the income provided by Social Security is essentially not needed to live comfortably and pay bills. Republicans believe means-testing will save money by eliminating unnecessary payouts.

The Republican plan isn’t perfect, either. Raising the retirement age and relying on the Chained CPI means a benefits cut for future retirees, along with lower annual COLAs. Seniors would either need to wait longer to file their claims, or be willing to accept a steeper reduction in monthly payouts.

While neither party’s plan is perfect, they both make fiscal sense and achieve the task of getting Social Security back onto stable ground. The real question at this point is whether Democrats and Republicans can work together on a joint plan when both of their current plans make sense. Only time will tell.

The 5 Worst Possible Shocks To The Economy; From Washington, D.C.

My Comments: Fixing what ails us ain’t going to be easy. Especially when the two political parties are more intent on having the other fail than doing what we hired them to do in the first place.

My future is limited while that of my children and grandchildren has decades to run. Economics, despite it being hard for most of us to understand, is at the heart of a credible financial future for the vast majority of us. What follows are five things that must not happen.

Stan Collender, Forbes Contributor / Mar 5, 2017

What had been widely expected to be sure bets and slam dunk policy changes has quickly turned into multiple missteps and infighting as the White House and congressional GOP find it difficult to shift from opposing and resisting to legislating and governing.

Yes…as it planned…Congress did adopt a fiscal 2017 budget resolution in January. But that first (and by far easiest) step in the Trump/GOP economic strategy is the only one it has completed. The January 27 deadline Congress set for itself on the Affordable Care Act has long since been passed with no action by either the House or Senate and none expected anytime soon.

Meanwhile, the ACA repeal and replace saga is about to run smack into a series of economic events and requirements that will force the White House and Congress to devote their time, energy and political capital to other issues. This includes the soon-to-expire suspension of the national debt ceiling, the Trump fiscal 2018 budget that presumably will be released the middle of March (we’ll see), a continuing resolution that if not dealt with by April 29 will cause a government shutdown and a 2018 congressional budget resolution fight that could greatly complicate both repeal and replace/repair/rename and tax reform.

In a bout of irrationally optimistic expectations, investors and their advisors still seem to be assuming (or is it wishing and praying?) that it somehow will all come together. And the Trump/GOP economic policies may indeed all still happen even if they don’t occur as originally planned.

But in light of the unexpected that’s already happened, several new possibilities need to to be added to Wall Street’s calculus.

There are 5 economic policy-related events that aren’t currently being priced in by investors that will send severe shockwaves through the markets if they occur. Instead of a wrench, any of these 5 will throw a nuclear bomb into the GOP’s economic policymaking efforts.

1. No Tax Reform
As I’ve posted before, the corporate tax reform that seemed to be such a sure thing right after the election is now in trouble substantively, conceptually, procedurally and politically. It’s already hard to see it being enacted and going into effect in 2017, and it may still may not be in place in 2018. If the GOP loses House seats in the 2018 election, tax reform may have to wait until after 2020.

2. OMB Director Mick Mulvaney Resigns Or Is Fired
Trump’s budget plans are at odds with the preferences of the House Freedom Caucus, the group of 30-50 ultra fiscally conservative House Republicans who have the power to stop the president’s economic plans dead in their tracks. Before becoming Trump’s OMB director, Mick Mulvaney was a HFC leader and his at least tacit approval of the spending, tax and deficit changes the president wants will be one of the biggest reasons they’re enacted.

But as a member of Congress, Mulvaney specifically rejected much of what Trump is going to propose. If those plans or the compromises needed to get them adopted become more than he can stomach, it’s not hard to imagine Mulvaney leaving the cabinet. That would give the House Freedom Caucus license to oppose the president’s economic agenda.

3. Congress Refuses To Raise The Debt Ceiling
As noted above, the current suspension of the national debt ceiling expires shortly…on March 15. The Bipartisan Policy Center said last week that the Treasury will be able to manipulate the federal government’s cash balances until sometime this fall. What happens then, however, is anyone’s guess.

The common assumption is that congressional Republicans, who routinely opposed debt ceiling increases during the Obama administration, will hold their noses and vote to increase it this time when it’s needed. But that’s anything but certain, especially if the House Freedom Caucus feels that it has given up enough on everything from repeal and replace to tax cuts and military increases that aren’t offset with spending reductions elsewhere.

And just to complicate the situation further, OMB Director Mulvaney (see #1) steadfastly opposed raising the debt ceiling when he was a member of Congress.

4. An Annual $ Trillion Deficit
It’s both conceivable and likely that, in spite of the guarantees given during the campaign, the Trump economic and budget policies coupled with the now seemingly inevitable tightening of monetary policy by the Federal Reserve will lead to an annual budget deficit of $1 trillion or more as early as fiscal 2019. The total increase in the national debt during the first 4 years of the Trump administration could range between $4 trillion and $5 trillion.

5. A Downgrade Of U.S. Debt By The Rating Agencies
The last time the federal government’s credit rating was downgraded was in August 2011 when Standard & Poor’s said it was taking the action because the U.S. needed to raise the debt ceiling and have a “credible” plan to deal with long-term debt. S&P also said the government had become less effective or predictable.

Since then the U.S. debt held by the public has increased by about $4 trillion. And all of the same factors that convinced S&P to downgrade in 2011 will be present again in 2017.

Social Security Taxes

My comments: Social Security is under threat. It’s running out of money. Sort of.

Back in 1983, under President Reagan, Congress made some changes as, like now, the future of the program looked cloudy. They increased the age at which you qualified for full benefits, they increased the percentage of earned income you paid into the system and they raised the threshhold for how much of your earned income was subject to the FICA tax.

This is a good explanation of what it going on now.

By William Perez October 31, 2016

The Social Security tax is a tax applied to income related to labor. All employees and self-employed entrepreneurs pay into Social Security through the Social Security tax, which is also known as Old-Age, Survivors, and Disability Insurance (OASDI).

The Social Security tax functions very much like a flat tax. A single rate of 12.4% is applied to wage and self-employment income earned by a worker up to a maximum dollar limit.

Half of this tax is paid for by the employee in the form of payroll withholding. The other half of this tax is paid for by the employer. Self-employed persons pay both halves of the Social Security tax since they are both the employee and the employer.

Social Security tax rates

Employees pay 6.2% of their wage earnings, up to the maximum wage base.

Employers pay 6.2% of their employee’s wage earnings, up to the maximum wage base.

Self-employed persons pay the combined rate of 12.4% of their net earnings from self-employment, up to the maximum wage base. This is calculated as part of the self-employment tax on Schedule SE.

The Math Behind the Social Security Tax

All wages and self-employment income up to the Social Security wage base in effect for a given year is subject to the Social Security tax.

Social Security Wage Base by Year
2017 $127,200
2016 $118,500
2015 $118,500
2014 $117,000
2013 $113,700
2012 $110,100
2011 $106,800
Source: Social Security Administration, Contribution and Benefit Base

Earnings up to the Social Security wage base amount have the Social Security tax applied. Earnings over the wage base amount do not have the Social Security tax applied.

The math works like this:

  • If wages are less than $127,200 in the year 2017, then wages times 6.2% is the amount the employee pays and wages times 6.2% is the amount the employer pays.
  • If wages are more than $127,200 in the year 2017, then 127,200 times 6.2% is the amount the employee pays and this is also the same amount the employer pays.

What is the Social Security Tax For?

Unlike income taxes, which are paid into the general fund of the United States and can be used for any purposes, Social Security taxes are paid into special trust funds that can be used only to pay for current and future Social Security retirement benefits, benefits for widows and widowers, and disability benefits.

Historical information about Social Security Taxes

Special Rate Reduction for 2011 and 2012

Back in the years 2011 and 2012, the Social Security tax rate paid by employees is 4.2% instead of the normal 6.2%. Employers still pay the full 6.2% rate. Thus for 2011 and 2012, the combined Social Security tax rate is 10.4%. Self-employed persons will pay this 10.4% combined rate on their earnings. This special payroll tax holiday was enacted as part of the Tax Relief Act of 2010, then extended through February 2012 by HR 3765, and then further extended through the end of 2012 by HR 3630.

The reduced Social Security tax rate was not renewed for 2013 as part of the American Taxpayer Relief Act. For 2013, the Social Security tax reverts to its normal tax rate of 6.2% for employees, 6.2% for employers, and 12.4% for self-employed persons.

Thus for 2011 and 2012, we substitute 4.2% for 6.2% in the above math formulas for the amount paid by the employee. At the maximum wage base of $106,800 for 2011, this translates into a tax savings of $2,136, as follows:

  • Social security tax at the normal rate: 106,800 times 6.2% = $6,621.60
  • Social security tax at the reduced rate for 2011: 106,800 times 4.2% = $4,485.60

At the 2012 maximum wage base of $110,100, this translates into a tax savings of $2,202, as follows:

  • Social security tax at the normal rate: 110,100 times 6.2% = $6,826.20
  • Social security tax at the reduced rate for 2012: 110,100 times 4.2% = $4,624.20

You can plug in your own salary level to determine your own personal savings from the payroll tax holiday. If your earnings from wages and self-employment are less than the wage base, simply multiply your earnings by 2% to find your savings. If your earnings are more than the wage base, you receive the maximum savings of $2,136 (for 2011) and $2,202 (for 2012).

What Happens to the “Missing” Social Security Funds from the 2-Year Tax Rate Reduction?

To prevent Social Security from losing tax revenue, Congress mandated that revenues be transferred from the general fund to the Social Security trust funds to make up for the tax reduction. This is provided for in section 601 of the Tax Relief Act, which reads in part, “There are hereby appropriated to the Federal Old-Age and Survivors Trust Fund and the Federal Disability Insurance Trust Fund established under section 201 of the Social Security Act (42 U.S.C. 401) amounts equal to the reduction in revenues to the Treasury by reason of the application of subsection (a). Amounts appropriated by the preceding sentence shall be transferred from the general fund at such times and in such manner as to replicate to the extent possible the transfers which would have occurred to such Trust Fund had such amendments not been enacted.”

5 Ways to Protect Your Money in Retirement

My Comments: OK, #5 may be a bit of a stretch for me. I’ve had a black thumb all my life; anything I plant dies immediately.

There are now millions of us in retirement, or what for some of us is semi-retirement. And whether you believe it or not, the rules underlying economics and finance have not suddenly become invalid.

No, the world is not about to end, though some would have you believe it might. But it will be different and there are always unintended consequences. The level of uncertainty right now is troubling to me, so these steps you might take are informative.

Martin A. Smith, CRPC®, AIFA®, RPS® February 27, 2017

Retirement is a celebrated event for obvious reasons. You have worked 30 to 40 years hopefully doing what you love and made a positive impact on society, within your church, and for the legacy and name of your family. Despite these noteworthy accomplishments, if you are not careful your “golden years” might not be quite as golden as you have hoped.

There’s almost nothing worse than finally arriving at your desired destination in life only to have the rug snatched from under you because of some mistakes that could have been avoided. That is what I am here to help you accomplish today…before you retire. Or, if you are already retired, then I urge you to consider the first of five ways retirees should protect their money during retirement. Truth is, you really do have a lot to lose, so let’s not risk it!

Here are five ways retirees should protect their money during retirement:

1. Invest in a Good Cybersecurity System

Cyber fraud is on the rise and retirees and the elderly are among the most vulnerable targets for cyber criminals. In many cases, being a victim of this type of crime can be avoided. Learn how to take measures to secure your personal data, such as sending secure emails with files that are encrypted when communicating with your financial advisor.

2. Understand What Your Retirement Money Is Invested in and Why

Financial literacy is a challenge for many. While many retirees are familiar with investment vehicles such as mutual funds, stocks and conceptually speaking, bonds, there are fewer who are able to explain how their portfolio is invested, what type of asset classes their portfolio is comprised of and how the economy will impact their portfolios.

In addition, I have found that a number of investors simply have the wrong notion in their minds about the pros and cons of investing in the stock market during a recession. Investment portfolios will fluctuate throughout the economic cycle (peak, recession, trough recovery expansion and peak).

3. Buy Long Term Care Insurance (LTC)

If you are like most people you expect to live a long time. Innovations in medical science and biotechnology mean that people are living longer. In fact, according to the National Institute on Aging’s “Global Health and Aging” report, “The dramatic increase in average life expectancy during the 20th century ranks as one of society’s greatest achievements. Although most babies born in 1900 did not live past age 50, life expectancy at birth now exceeds 83 years in Japan—the current leader—and is at least 81 years in several other countries.”

What does this mean for someone who is retired? While it is mostly good news, the bad news is that living longer comes with a price tag and an expensive one at that. That price tag is what we refer to as needing nursing care (i.e. long-term care), whether it’s in-home care or a nursing home facility.

The average daily cost of Long Term Care in most states exceeds $200 per day, in today’s dollars. Just image what the future inflation-adjusted cost will be. Long-term care is definitely a conversation that you want to have with your financial advisor.

Unless you have enough money saved to self-insure, a person who is retired can watch the value of their estate diminish considerably if they are uninsured and forced to spend their retirement savings to provide for their own nursing care needs, or the needs of an uninsured elderly parent.

4. Steer Clear Of Items That Depreciate

Many things will depreciate in value faster than you can say, “I love my retirement!”

I cannot say enough about “impulse buying,” especially for those who may suffer from an impulsive spending disorder. If you truly love your retirement, then don’t jeopardize your quality of life in retirement with wasteful spending. One example that comes to mind is casinos. According to http://www.casinowatch.org, there are 1,511 casinos in the United States that rake in $71.1 billion in annual revenues.

5. Plant a Vegetable Garden. Yes, I Am Serious!

You can’t enjoy your retirement fully if you are not in the best physical shape, right?

According to the Centers for Disease Control and Prevention (CDC), moderate-intensity level activity for 2.5 hours each week can reduce the risk for obesity, high blood pressure, type 2 diabetes, osteoporosis, heart disease, stroke, depression, colon cancer and premature death. The CDC considers gardening a moderate-intensity level activity, and can help you to achieve that 2.5 hour goal each week.

So, perhaps now would be a good time for you to engage in an activity that requires you to kneel, squat, use your arms, shoulders, back and leg muscles more vigorously.
Gardening is one of the best ways for retirees to gain exercise without having to spend money on a gym membership. In addition to the benefit of just being able to enjoy the outdoors and gain peace of mind as you feel the wind blowing, you can also save money by growing your own food.

Furthermore, how comfortable are you with the idea of pesticides, certain chemicals and “orgenetically engineered foods” that have been genetically engineered in some laboratory? I’ll pass! You should enjoy your retirement, therefore I hope you consider these suggestions.