Tag Archives: social security benefits

Retirement Roulette

My Comments: I’ve been known to place a bet now and then. But Las Vegas, for me, is nothing more than a place to visit from time to time. But it takes all kinds, and if you are one who enjoys the uncertainty of your financial future, here’s an article for you to consider. Thanks Dirk.

April 19, 2017 / Dirk Cotton

Phyllis loves to play roulette at the casinos. She knows there are games with better odds but there’s something about the large spinning wheel and the big green table with its field of many bets that she finds irresistible.

Phyllis has a roulette strategy – she calls it a “system” – that she adheres to rigorously. Because a fair roulette game is totally random and the odds favor the house her strategy isn’t statistically profitable but that isn’t something that concerns a typical gambler. Watching a YouTube video of a roulette game, I heard one player say he watches for trends in the random winning numbers (humans are really good at seeing trends, even when they don’t exist) and I hear another say that he seems to win a lot with the number 26.

Phyllis’ strategy is to place several small bets on the first spin of the wheel and to double the bets each time she loses. After a winning bet, she bets the same amount on the next spin.

She places a bet on red, another bet on 36, a corner bet, and a street bet for each spin. (Watch a few minutes of this YouTube video if you’ve never seen a roulette game. Notice the multiple bets placed by each player at each spin of the wheel.)

After each spin, she calculates the revised amount of her bankroll and places another set of bets on the next round. Her strategy is to stop playing should she double her initial bankroll and, of course, she will stop playing when she is ruined.

At this point, you may wonder what Phyllis and her roulette strategy have to do with financing retirement. The answer is that the mechanics of her roulette game are somewhat analogous to the way in which retirement should be played. Visualizing retirement funding as a roulette game can demonstrate the process as a whole as opposed to seeing a set of related but independent strategies for income generation, asset allocation, annuitization, and the like.

We start with a grand strategy, hopefully one that is more profitable than a roulette strategy, and play one year at a time in the same way that Phyllis plays one spin of the roulette wheel at a time. We stop playing retirement when no one in our household is still alive.

It’s not a perfect analogy. Phyllis stops playing roulette when she runs out of money but, unlike roulette players, we can’t stop being retired when we go broke. We have to figure out how to continue playing retirement until the end, perhaps getting by on Social Security benefits alone – not a pleasant prospect2.

Now, let’s play a game of Retirement Roulette. Over my working life, I have accumulated wealth that I can use to pay for retirement. That wealth is represented by the three stacks of chips in front of me that constitute my “bankroll.”

My financial capital (pink), social capital (red) and human capital (blue) at retirement. (Image from designinstruct.com)

The first stack of chips represents my financial capital. It represents my wealth held in taxable accounts, retirement accounts, home equity, etc. The second stack of chips represents my human capital, my ability to generate income from labor. Perhaps I can retire as a college professor and still teach a couple of classes each semester for a few years. This stack of chips will shrink over time whether or not I use it as my ability to generate income from labor diminishes.

The third stack of chips represents my “social capital” and includes my Social Security benefits and a small pension I earned from a previous employer. I have three chips. The first represents my pension, the second represents my wife’s Social Security benefits and the third chip represents my own Social Security benefits.

My social capital.

On the “Retirement Roulette” table in front of me lies a broad array of potential retirement bets including:
• a bet on a retirement date
• a bet on an amount to spend this year
• a bet on stocks
• a bet on bonds
• a bet on cash
• a bet to claim or delay Social Security benefits
• a bet to purchase an annuity
• a bet to purchase long-term care insurance
• a bet on a legacy for our heirs
I refer to these as “bets” because each has a cost, each has a payoff, and each payoff is uncertain.

I use my strategic retirement plan to guide my bets in much the same way Phyllis uses her strategy to place roulette bets. That plan identifies my strategic objectives – the long-term financial retirement goals I’m trying to achieve. I now need to identify the best tactical moves I can make in the present round (this year) to further those long-term objectives. For example, I have a strategic goal to not outlive my savings so perhaps a good tactic for the current round is to not claim my Social Security benefits, yet.

First, I bet that I have enough retirement resources to retire this year at age 65.

I decide to wager the pension bet immediately because I am 65 years old and, unlike postponing Social Security benefits, delaying my pension claim has no financial benefit. The payoff for this bet is $1,000 of income monthly for as long as I live.

I have determined that the optimal Social Security claiming strategy for our household is for my wife to claim at age 66 and for me to claim at age 70. Since she is now 66, I will bet her Social Security benefits chip now and save mine for the year I turn 70. Of course, I can decide to bet my chip sooner should I need the money.

The payoff for this bet is some immediate income from my wife’s benefit and maximum lifetime retirement and survivor benefits for both of us should we live longer than an average life expectancy at the claiming age.

I won’t bet the home equity chips right away in case I need those for an emergency later in retirement.

My strategic retirement plan calls for a floor-and-upside retirement strategy so I will add a small pension bet to my wife’s Social Security benefits to create the floor. I move chips from my financial capital pile to the pension bet.

After calculating the income from my floor bet, I decide that I will need to spend 3% of my remaining portfolio balance on expenses for the coming year. I move that amount of chips to the spending bet on the table.

I count the number of chips left in my financial assets pile and decide on an asset allocation. I move 5% of the chips remaining in that pile to the cash bet on the roulette table, 35% to the bonds bet, and 60% to the stocks bet. All of my chips are now on the table on eight different bets and they look something like this:

I am actually making 12 bets, not eight, because not buying Long-term Care Insurance (LTCi), for example, is also a bet. It’s a bet that I won’t need the insurance in the coming year and that I will have both the resources and the health to enable me to make that bet a year from now should I so decide.

I win this “non-bet” when I don’t need to claim LTCi in the coming year and the payoff is a year of typically substantial premiums. I lose this non-bet when I do need to make a claim but don’t have insurance or when my health deteriorates to the point that I can’t qualify for the insurance in the future. I would lose a purchase bet if the insurer raises my future premiums so much that I am forced to let the policy lapse before I need it. And, of course, I lose the bet if delaying the purchase results in significantly higher premiums when I eventually do buy. Retirement bets can be very complicated and understanding them in their entirety is critical.

In Retirement Roulette, we bet all of our chips every year and we make every bet even if the bet is that we should wager nothing on it.

I “spin the wheel” and nature takes its turn. A year later the results are in.

The payoff on my stock bet will be about 8% with a standard deviation of about 12%, meaning that about two-thirds of annual returns will fall between a 4% loss and a 20% gain. The payoff on my bonds bet will be about 3% with a standard deviation of about 3%. My cash bet will return about the rate of inflation, or about zero in real dollars.

My pension bet will pay off $12,000 and my wife’s Social Security benefit will pay off about $20,000. My cash will increase by about the rate of inflation but decrease by about the 3% I planned to spend. Of course, expenses are unpredictable and I may actually spend more or less. The “payoff” for the spending bet will be about a 3% loss.

My life expectancy and that of my wife have decreased by a little less than one year. (Life expectancy is a key factor in many retirement decisions.)

And so ends round one.

To prepare for round two I must evaluate the results of all my bets, changes in my life expectancy and my wife’s, changes in our health, our expectations for the financial markets going forward, and other critical factors to decide which if any of my bets I should change for the coming round.

How will I bet in future rounds? I won’t know for certain until I see how retirement unfolds between now and then, but my plan is to play my Social Security chip when I reach 70. My spending next year might go up or down a little depending on this year’s market returns. I may move some chips from the stocks bet to the bonds bet after a really good run for stocks, or vice versa after a poor run, but only if the percentages get seriously out of whack. Most years I will tweak my bets just a little and spin again.

The game will continue as long as one of us survives. Unlike roulette, our game doesn’t end if we deplete our bankroll, though our lifestyle is likely to be severely curtailed in that event.

The important perspectives of the roulette analogy are:
• Like roulette, retirement funding has a very large element of uncertainty. This includes the length of our careers, how long we will live, market returns, interest rates, annuity payouts, inflation, discretionary spending and spending shocks, which is to say all of the critical factors are uncertain. Even households who generate retirement income completely with “risk-free” assets will be exposed to expense risk.
• Like roulette, retirement funding is a series of “rounds”(typically years) during which the retiree makes a series of decisions (bets) and the universe responds. These first two characteristics define what game theorists refer to as a sequential stochastic game against nature.5
• Retirement ends with death; roulette ends when the gambler decides to walk away or is ruined. Retirees can’t walk away but they can lose their standard of living.
• Unlike roulette, a retiree plays all her wealth every round. Some bets, like cash, will have very little risk. Bets we don’t make are as important as those we do.
• A “round” typically involves multiple bets that are separate, yet the ultimate result of the round is the sum of the bets won less the sum of the bets lost.
• Critical factors can change from one round to the next and these must be considered when placing next year’s bets. Retirement funding is dynamic, not set-and-forget.

Here’s the source article link: https://seekingalpha.com/article/4063573-retirement-roulette

 

When to Start Social Security

My Comments: A very serious question, and one that requires some thinking about. We’ve talked about this before, but if you’ve not yet signed up, here are five questions you can ask yourself to get a better answer.

Chuck Saletta – May 19, 2017

Your lifetime Social Security retirement benefit is expected to be about the same no matter when you start collecting. Still, when you start collecting matters when viewed in the context of your end-to-end retirement plan.

You can start your Social Security retirement benefits any time between age 62 and 70, and the longer you wait within that window, the larger your monthly check will be. The trade-off between the age you start and the benefits you receive is such that, actuarially speaking, you’re likely to get around the same lifetime benefit amount no matter when you start in that window.

Even so, depending on your personal life circumstances, it may make more sense for you to start earlier in that window, later in that window, or somewhere in between. Here are five key things for you to consider when it comes to determining when to start your benefits.

No. 1: Are you still working?

If you’re still working and below your full retirement age (somewhere between age 66 and 67 for those who haven’t reached it yet), it generally makes little sense to collect your Social Security benefit. That’s because you’re penalized as much as $1 for every $2 you earn above $16,920 in the year.

Even if you’ve reached full retirement age, you may want to hold off collecting Social Security until age 70 if you’re still drawing a paycheck and that paycheck is enough to allow you to make ends meet. That’s because your Social Security check increases by 8% per year you wait past your full retirement age, up until age 70, to start collecting, and an 8% guaranteed increase like that is very hard to come by.

No. 2: How long will you live and stay active?

Aside from spending on healthcare, people’s spending tends to drop off the deeper into retirement they get. While you may technically get more money overall by waiting until age 70 if you survive long enough, how much of that extra money will come after you’re no longer able to make much use of it? As my Foolish colleague Todd Campbell recently pointed out, the crossover age happens somewhere between 79 and 81 years old, depending on when you start claiming.

Even if you do live long enough to receive more money from Social Security by waiting to collect, ask yourself how active you really see yourself being in your 80s and beyond. There’s value in getting the money sooner, while you’re more active and better able to enjoy it. If you reach the later part of your golden years regretting the things you didn’t get done because you didn’t have access to more money younger, there’s no do-over option at that point in your life.

No. 3: What other sources of financial support do you have?

If taking your Social Security check early makes the difference between surviving and starving, by all means, take it. If, on the other hand, you’ll be receiving temporary retirement income such as from a structured sale of your business or an employment severance agreement, it may make sense to wait. If you don’t need the money right away, waiting for the bigger check might make a whole lot of sense.

Remember, too, that your Social Security benefit itself can become taxable if your income is high enough. According to Social Security, as much as 85% of your Social Security benefit can be considered part of your taxable income. All it takes is $34,000 in combined income if you’re single or $44,000 in combined income if you’re married filing jointly, and 85% of your Social Security benefit becomes taxable income to you. Almost everyone filing as married filing separately will see their benefits taxed.

Social Security defines your “combined income” as your adjusted gross income plus your non-taxable interest income plus half your Social Security benefit. Because it includes your non-taxable income and half your Social Security benefit, it can be easy to reach that level even if your otherwise taxable income is low.

If your other sources of income are longer term in nature, such as a pension, rental income, or investment income, then it makes less sense to wait. After all, you won’t be avoiding the tax on your Social Security benefit by postponing taking that benefit, and the sooner you start Social Security, the less you have to depend on your other income for support in those early years. That could enable you to keep more invested more aggressively for longer, potentially improving your overall retirement income.

No. 4: How big are your Traditional 401(k) and Traditional IRA balances?

Once you turn 70 1/2, you’re generally required to start taking distributions from your Traditional IRA and Traditional 401(k) plans. While the distributions start off fairly small — around 3.6% of your balance — they grow as a percentage of your account balance every year after that until age 115. While you can’t avoid those required distributions, you can get your money out earlier and potentially at a lower tax rate.

Once you turn age 59 1/2, you can start withdrawing money from your traditional 401(k) and Traditional IRA plans without facing a tax penalty . If you have a substantial Traditional IRA and/or Traditional 401(k) balance, you can start taking that money out to cover your living expenses before you start your Social Security. By holding off on Social Security while you take those withdrawals from your Traditional 401(k) and/or Traditional IRA, you can keep your income and tax down while drawing down those balances.

If you get your Traditional 401(k) and Traditional IRA balances low enough, then you won’t face as steep required minimum distributions later in your retirement years. In addition, any money you took out of those plans and didn’t spend remains yours to use as you see fit. By leveraging those factors over time, the combination can give you the opportunity to keep your overall taxes lower in retirement without really affecting your overall retirement lifestyle.

No. 5: Do you plan to convert your Traditional IRA and/or Traditional 401(k) to a Roth IRA?

Similar to the previous point, you can convert your Traditional IRA and 401(k) balances into your Roth IRA, paying taxes on the conversions along the way. Roth IRAs are not subject to required minimum distributions for the original account holder, and thus once the money is in your Roth IRA, you can keep it in that account as long as you are alive.

There are three key differences between this point and the previous one, though. First, you can convert your Traditional plans to your Roth IRA starting at any age, not just at age 59.5. Second, remember that money you convert to your Roth IRA isn’t available for you to pay the conversion taxes on, unless you subsequently withdraw that money from your Roth IRA. Third, money you are required to withdraw from your traditional plans after age 70.5 must be withdrawn, and can’t be part of a Roth conversion.

That combination of factors means that when it comes to Roth conversions, it’s useful to have another source of money to cover the taxes associated with the conversions as well as your costs of living. As a result, it may make sense to start taking your Social Security to have a source of money to cover those costs while converting your Traditional IRA and Traditional 401(k) plans into your Roth IRA.

Make the right Social Security choice for you

Social Security serves as a cornerstone for the retirement plans of millions of Americans. As with any cornerstone, it works best when it’s part of an end-to-end structure designed around a useful purpose, in this case, your retirement. By understanding how these five key factors interact with your choice on when to start taking Social Security, you can design an end-to-end retirement plan that better suits your needs with the resources you have available. And that’s a recipe for retirement success.

Growth Is Not Dead, But It Is Dying

My Comments: My post on May 26th last about Demographics and Money suggested reasons why economic growth in long established nations will be nothing to brag about going forward. Despite the current Administration suggesting a return to not just 3% annual growth for the US economy, but wait for it, 4% annual growth, it’s just not going to happen.

The tax plan outlined by the White House the other day makes the basic assumption that with high growth, tax revenues will grow to pay for everything. What is not said is that without significant growth, the hole we are in now will simply get deeper.

Right now the Federal deficit is almost $20T. That’s a staggering amount. Pretty soon, the annual cost to service that debt will be $1T per year. That money has to come from tax revenues, which means you and I. Are you prepared to pay your share when the top 1% get more tax breaks?

I’m far from a pacifist, but do we really need to keep paying more annually for our military than the next seven nation’s combined spending? Yes, some of that spending filters back into the economy and functions as a stimulus, but the Administration wants to spend more than we do now.

May 28, 2017 Lorenzo Fioramonti

Growth is dying as the silver bullet for success. Why this may be good thing

The idea that the economic “pie” can grow indefinitely is alluring. It means everybody can have a share without limiting anybody’s greed. Rampant inequality thus becomes socially acceptable because we hope the growth of the economy will eventually make everybody better off.

In my new book “Wellbeing Economy: Success in a World Without Growth” I point out that the “growth first” rule has dominated the world since the early 20th century. No other ideology has ever been so powerful: the obsession with growth even cut through both capitalist and socialist societies.

But what exactly is growth? Strangely enough, the notion has never been reasonably developed.

For common sense people, there is growth when – all things being equal – our overall wealth increases. Growth happens when we generate value that wasn’t there before: for instance, through the education of children, the improvement of our health or the preparation of food. A more educated, healthy and well-nourished person is certainly an example of growth.

If any of these activities generate some costs, either for us individually or for society, we should deduct them from the value we have created. In this logical approach, growth equals all gains minus all costs.

Paradoxically, our model of economic growth does exactly the opposite of what common sense suggests.

Negative values of growth

Here are some examples. If I sell my kidney for some cash, then the economy grows. But if I educate my kids, prepare and cook food for my community, improve the health conditions of my people, growth doesn’t happen.

If a country cuts and sells all its trees, it gets a boost in GDP. But nothing happens if it nurtures them.

If a country preserves open spaces like parks and nature reserves for the benefit of everybody, it does not see this increase in human and ecological wellbeing reflected in its economic performance. But if it privatises them, commercialising the resources therein and charging fees to users, then growth happens.

Preserving our infrastructure, making it durable, long-term and free adds nothing or only marginally to growth. Destroying it, rebuilding it and making people pay for using it gives the growth economy a bump forward.

Keeping people healthy has no value. Making them sick does. An effective and preventative public healthcare approach is suboptimal for growth: it’s better to have a highly unequal and dysfunctional system like in the US, which accounts for almost 20% of the country’s GDP.

Wars, conflicts, crime and corruption are friends of growth in so far as they force societies to build and buy weapons, to install security locks and to push up the prices of what government pays for tenders.

The earthquake in Fukushima like the Deep Water Horizon oil spill were manna for growth, as they required immense expenditure to clean up the mess and rebuild what was destroyed.

Disappearing growth

Against this pretty grim depiction, you may ask yourself: where is the good news? Well, the good news is that growth is disappearing, whether we like it or not. Economies are puffing along. Even China, the global locomotive, is running out of steam.

And consumption has reached limits in the so-called developed world, with fewer buyers for the commodities and goods exported by developing countries.
Energy is running out, particularly fossil fuels, and even if polluting energy sources were endless – as some supporters of shale gas, or fracking, suggest – global agreements to fight climate change require us to eliminate them soon.

As a consequence, mitigating climate change forces industrial production to contract, thus limiting growth even further. What this means is that, on the one hand, growth is disappearing due to the systemic contraction of the global economy. On the other, the future of the climate (and all of us on this planet) makes a return of growth, at least the conventional approach to industry-driven economic growth, politically and socially unacceptable.

Window of opportunity for change

Even the International Monetary Fund and mainstream neoliberal economists like Larry Summers agree that the global economy is entering a “secular stagnation”, which may very well be the dominant character of the 21st century.

This is a disastrous prospect for our economies, which have been designed to grow – or perish. But it is also a window of opportunity for change. With the disappearance of growth as the silver bullet to success, political leaders and their societies desperately need a new vision: a new narrative to engage with an uncertain future.

In my new book, I argue that as we begin to recognize the madness behind growth, we start exploring new paths. These include: forms of business that reconcile human needs with natural equilibria; production processes that emancipate people from the passive role of consumers; systems of social organisation at the local level that reconnect individuals with their communities and their ecosystems, while allowing them participate in a global network of active change makers.

This is what I call the “wellbeing economy”. In the wellbeing economy, development lies not in the exploitation of natural and human resources but in improving the quality and effectiveness of human-to-human and human-to-ecosystem interactions, supported by appropriate enabling technologies.

Fulfilling lives

Decades of research based on personal life evaluations, psychological dynamics, medical records and biological systems have produced a considerable amount of knowledge about what contributes to long and fulfilling lives.

The conclusion is: a healthy social and natural environment. As social animals, we thrive thanks to the quality and depth of our interconnectedness with friends and family as well as with our ecosystems. But of course, the quest for wellbeing is ultimately a personal one.

Only you can decide what it is. This is precisely why I believe that an economic system should empower people to choose for themselves. Contrary to the growth mantra, which has standardised development across the world, I believe an economy that aspires to achieve wellbeing should be designed but those who live it, in accordance with their values and motives.

Source article: http://theconversation.com/growth-is-dying-as-the-silver-bullet-for-success-why-this-may-be-good-thing-78427

Social Security Changes Coming

My Comments: We all know Social Security is here to stay, right? Well, maybe not.

What was started in 1935 has undergone a few revisions, the last significant one in 1983. That was because it was going broke fast, and the baby boomers and their impending retirement were on the horizon.

Well, it’s time for another major revision, but right now there is no political will to make it happen. However, like it or not, some changes are on the near horizon and you need to know about them.

Sean Williams | May 22, 2017

Social Security is, for many retired Americans, a financial foundation that they’d struggle to live without.

A study conducted by the Center on Budget and Policy Priorities (CBPP) found that the elderly poverty rate inclusive of Social Security benefit payments is 8.8%. Without these payments, the CBPP estimates that senior poverty rates would shoot above 40%! Based on the more than 41 million retired workers receiving a monthly benefit as of March, we’d be talking about an increase in the elderly poverty rate of more than 12 million people. That’s no insignificant figure, and it demonstrates the importance of this program.

There’s a big Social Security change that’s just three years away

But as many of you may have heard by now, Social Security is on a collision course with disaster. According to the Social Security Board of Trustees 2016 report, the Trust’s more than $2.8 billion in excess cash will be completely exhausted by 2034. Once this money is gone, the Trustees have estimated that across-the-board benefit cuts of as much as 21% may be needed to sustain payouts through the year 2090.

What you may not realize is that a big change that’ll precipitate this cash downfall is right around the corner. Beginning in 2020, per the Trustees’ estimates, Social Security will begin paying out more in benefits than it’s generating in revenue. In other words, the switch will officially be flipped, and the more than $2.8 trillion spare cash pile will begin to dwindle.

Why, you ask? There’s no one specific reason. Rather, it’s a confluence of factors that include:
• The ongoing retirement of baby boomers, which will lower the worker-to-beneficiary ratio
• Lengthening life expectancies, which allows people to claim benefits for an extended period of time
• The rich, who are living noticeably longer than lower-income folks and are able to draw a (large) benefit payment for a longer period of time
• America’s poor saving habits, which coerce workers and seniors to be extra reliant on Social Security during retirement
Say goodbye to over $90 billion in annual program revenue

Yet, there’s another issue not mentioned above.

Social Security has three means by which it generates revenue:
• Payroll taxes
• Interest income on its spare cash
• The federal taxation of benefits

Payroll tax helps funds Social Security at a rate of 12.4% of earned income between $0.01 and $127,200, although most workers only pay 6.2%, with their employer covering the other half. This maximum taxable income figure of $127,200 changes in step with the average wage index most years. In 2015, payroll taxes accounted for 86.4% of the $920.2 billion in revenue collected for Social Security.

The federal taxation of benefits amounted to about 3.4% of total revenue in 2015. Social Security recipients with incomes above $25,000 or joint filers with income above $32,000 are subject to having at least half of their benefits exposed to federal taxation.

The final 10.1% (the numbers don’t add to 100% due to rounding) is comprised of interest income from its more than $2.8 trillion in spare cash. This cash is invested in special issue bonds designed for trusts and, to a far lesser extent, certificates of indebtedness. In 2015, nearly $93 billion in revenue was generated by this spare cash.

But beginning in 2020, this spare cash will start to dwindle — and as it dwindles, so will the interest income generated for the program. Higher interest rates could help ebb the pain a bit since it will mean higher yields on the aforementioned special issue bonds, but it’s not going to do enough to prevent the program from running out of excess cash by 2034.

The two most popular Social Security solutions are at opposite ends of the spectrum

Now, this is where things get interesting. It’s not as if Congress doesn’t have effective ways to fix Social Security’s more than $11 trillion, 75-year budgetary shortfall. It does. The issue is simply that Democrats and Republicans both have an effective fix, and neither wants to cave in to the other party’s solution.

The Democrats’ thesis is that the wealthy should shoulder more of the load. As noted above, the maximum earnings cap as of 2017 prevents the payroll tax from being applied to earned income above $127,200. Democrats have suggested lifting this earnings tax cap to a figure between $250,000 and $400,000 (essentially giving earned income between $127,200 and $250,000-$400,000 a free pass, then reinstituting the payroll tax), or even removing the cap altogether and taxing all earned income.

Removing the payroll tax earnings cap altogether would only impact about 10% of the population, which is what makes it such a popular choice among the public. It would also completely eliminate the program’s cash shortfall.

At the opposite end of the spectrum, Republicans have been pushing the idea of raising the full retirement age, or FRA. Your FRA, which is determined by your birth year, is the age at which you become eligible to receive 100% of your retirement benefit. The FRA began increasing by two months per year in 2017 from 66 years, and it’ll continue to do so until it hits 67 years by 2022.

Republicans have proposed further increasing the FRA to 68, 69, or 70 years to account for increased longevity. Raising the FRA forces seniors to wait longer to get 100% of their due benefit or to claim early and accept a steeper cut in benefits. This solution fixes Social Security’s shortfall, too.

In order for Social Security to be fixed for the long term, we’re probably going to need to see compromise with both sides meeting in the middle. But one thing is for certain: The longer Congress waits, the direr the situation could be for seniors.

Source article: https://www.fool.com/retirement/2017/05/22/a-big-social-security-change-is-coming-in-2020-and.aspx

Investing Defensively

My Comments: I posted recently that we had better revise our investment expectations downward if we are planning to use our retirement savings to sustain our standard of living for the next twenty years or so.

I attributed the likelihood of lower growth and investment return numbers on demographics and a rising interest rate environment. http://wp.me/p1wMgt-1Qz

The article below by James Hickman is long, full of charts, and technically ripe. You may easily get lost. But he echoes the same message as mine but mostly for those of you who are OK with playing the markets by yourself. If that’s not you, there are other ways to be defensive.

Below is his introduction to Part I of II. If you click on his name, you’ll also find Part II.

May 31, 2017 \ James Hickman

Retired Or Retiring In Next 15 Years? Better Get Defensive (Part I Of II)

Summary

  • Market timing is sensible in certain circumstances – like reducing US equities exposure now.
  • Always passively invest in public equities and fixed income – not alternatives – but asset allocation still requires active approach.
  • Financial healing power of “the long-term” is no remedy for max drawdowns in the retirement plan homestretch.
  • Portfolio implications of 3% ROI for another decade, 2% US GDP forever.

“Market timing is a loser’s game” is a misleading marketing slogan peddled by the long-only mutual fund machine. The mass cash movements in and out of public equity markets that cause market timing failure are rarely driven by disciplined, value-based decisions about asset allocation but rather by emotional investor capitulation to protracted trends at precisely the wrong times. The trite phrase is invariably trotted out when markets are most over-valued and risky – when investors should be selling but rarely are. Now is one of those times.

Recognizing that you should always use low-cost, passive vehicles in certain asset classes and pay for skill in others is not news. But the more important question is: How much should be allocated to each asset class? Asset class and investment strategy exposures, beyond just equities and fixed income, is critical to portfolio diversification and return variation (Brinson, Hood and Beebower – 1986; and Xiong, Ibbotson, Idzorek and Chen – 2010). But can asset classes be timed? The answer is yes.

The professional investment industry has always been animated by failed attempts to systematize alpha generation – to create a better mousetrap for delivering repeatable outperformance of the market and justify higher active management fees. Active managers continued their interminable streak of underperforming the broader markets in 2016. According to S&P Dow Jones Indices’ SPIVA US Scorecard for 2016, “Over the 15-year period ending Dec. 2016, 92.15% of large-cap, 95.4% of mid-cap, and 93.21% of small-cap managers trailed their respective benchmarks.”

CBO: Conservative Bulls**t Obliterator

My Comments: I am relatively powerless as one of some 325M people living in these United States of America. But I have a voice and at least a few people read my blog posts.

I’m disturbed by 45’s apparent glee in ceding global economic and moral leadership to China and Germany and other nations. I’ve concluded he’s actually Our Man in DC. That is, Moscow’s Man in DC.

Universal health care is becoming the accepted norm among these 325M Americans. We are a wealthy nation, and our values, developed over 250 years and more suggest it’s appropriate to take care of our elderly, our children, our less fortunate brethren.

But there are those in 45’s inner circle whose expressed values significantly contradict my values. I’m happy there exists a potential Bulls**t Obliterator to help draw attention to this.

By Jon Perr \ Sunday May 28, 2017

This past week was a very big one for some very big promises from Republicans in Washington. It didn’t go well for them.

Three weeks after House Republicans voted to pass a new version of their “American Health Care Act,” the nonpartisan Congressional Budget Office (CBO) weighed in on high-profile pledges from President Donald Trump and House Speaker Paul Ryan. While Trump guaranteed “insurance for everybody” that is “much less expensive and much better,” Ryan insisted the revised AHCA “protects people with pre-existing conditions.” Not content to rest there, HHS Secretary Tom Price boasted that Trumpcare’s $880 billion in cuts to Medicaid will “absolutely not” result in millions losing coverage.

Meanwhile, the Trump administration also unveiled its fiscal year 2018 budget proposal. With its draconian spending cuts to the social safety net programs, the White House blueprint was proclaimed “dead on arrival” even by some Republicans. But more embarrassing to Donald Trump was its double-counting of $2 trillion in revenue for Uncle Sam magically generated by “sustained, 3 percent economic growth.” As Treasury Secretary Steven Mnuchin declared a month ago, “the plan will pay for itself with growth.”

Unfortunately for the White House and GOP leaders on Capitol Hill, the CBO demolished all of those Republican myths. Again. That’s because whether the issue is health care, taxes, job numbers, or the impact of the President Obama’s 2009 economic stimulus, the acronym “CBO” doesn’t just stand for “Congressional Budget Office.” It’s also shorthand for “Conservative Bulls**t Obliterator.”

As it turns out, in recent years that’s been true even when Republicans have their hand-picked choice running the agency.

Consider, for starters, the decades-old GOP myth that “tax cuts pay for themselves.” In January 2015, the new Republican majorities in the Senate and House selected former Bureau of Labor Statistics chief Keith Hall to lead CBO. But by that August, Hall had some bad news for the Red team: “No, the evidence is that tax cuts do not pay for themselves. And our models that we’re doing, our macroeconomic effects, show that.”

Of course, it’s not just a question of economics models, but more than 40 years of economic history. Almost from the moment that Arthur Laffer first sketched his now-famous curve on a napkin in 1974, right-wing pundits, politicians, and propagandists have declared as an article of faith the belief that tax cuts incentivize so much economic growth that revenues to Uncle Sam will be at least as high as they would have been without the reduction in rates. Unfortunately for the American people, four decades of supply-side snake oil have produced only mushrooming national debt and record-high income inequality. Far from paying for themselves, the Reagan and Bush tax cuts delivered a windfall only for the wealthy while unleashing oceans of red ink from the United States Treasury. It’s no wonder why every economist surveyed by the University of Chicago Booth School of Business in 2012 and again in 2017 disagreed with the claim that “a cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut.”

As former Obama administration economist Austan Goolsbee put it:
Moon landing was real. Evolution exists. Tax cuts lose revenue. The research has shown this a thousand times. Enough already.

But the CBO is hardly finished in debunking the rubbish being shoveled by Messrs. Trump, Mnuchin, and Mulvaney. Candidate Trump didn’t just promise average annual economic growth of 4 percent during the campaign. The White House web site currently pledges “to get the economy back on track, President Trump has outlined a bold plan to create 25 million new American jobs in the next decade and return to 4 percent annual economic growth.” No President since JFK and LBJ ever achieved that target. When Mulvaney and Mnuchin promised 3 percent GDP growth over the next decade, their rosy scenario represented a 1.1-point gap over CBO’s forecast of 1.9 percent.

Dangerous Retirement Myths

My Comments: Myths, risks, assumptions, variables. What’s your poison? Retirement is both a frightening and exciting time to be alive. Frightening as it quantifies the start of the end and exciting because, if done right, it creates new opportunities for life.

Wendy Connick \ May 26, 2017

Don’t put your retirement dreams at risk by falling for these retirement myths.

Ideally, retirement is an idyllic time during which you can relax and do all the things that you’ve always wanted to do. But getting to the point where you can pay for the retirement you want isn’t easy; it requires hard work and sacrifice during your working years. And if you fall for any of these common retirement myths, then all that effort you put into saving over the years may be for naught.

1. 65 is the right age for retirement
Once upon a time, 65 was considered “full retirement age.” This was the age when many people both retired and filed for Social Security benefits, because they were now entitled to receive the full benefit amount for which they were eligible. However, as the average lifespan has climbed, the Social Security Administration has pushed the full retirement age forward a bit. If you were born between 1943 and 1954, your full retirement age is 66. For those born in the following years, retirement age creeps up by two months per year, meaning that someone born in 1955 would have a full retirement age of 66 years, two months. Everyone born after 1959 has a full retirement age of 67. If you claim Social Security at age 65 under the mistaken belief that that’s the best time to file, your benefits will be permanently reduced because you claimed them before your actual full retirement age. And without the help of Social Security benefits, most people wouldn’t be able to afford retirement at age 65 without putting a dangerous strain on their retirement savings.

2. Stocks are too risky for retirement investments
Stocks are definitely a riskier investment than, say, government bonds or bank savings accounts. However, stock investors are rewarded for taking on risk by getting a comparatively high average return over the long haul. Without the help of that high average return, you’d need to save much, much more money during your working life to get enough retirement savings built up. For example, let’s say you’ve saved $1,000 per month (which adds up to $12,000 per year) and put it in government bonds, getting an average annual return of 2%. At the end of 30 years, you’d have $496,553 saved up — which is nowhere near the amount the average retiree needs. On the other hand, if you’d put that same $1,000 per month in stocks and gotten an average annual return of 7%, you’d have $1,212,876 saved up after 30 years. That’s enough to finance a very comfortable retirement indeed. The most significant risk factor with stock investments is their volatility: while they show terrific returns over the long term, in any given year they can climb or fall dramatically in value. Thus, as you approach retirement, it’s wise to shift most of your retirement funds over to bonds instead. That way you can have your cake and eat it too: enjoy the high returns of stocks, yet enter your retirement with a much safer portfolio of bonds in hand.

3. I don’t need retirement savings, I can live on Social Security
Social Security is tremendously helpful for retirees, there’s no doubt about that. However, few retirees can reduce their expenses to the point where they can comfortably live on nothing but their Social Security benefits. As of January 2017, the average monthly Social Security benefit is $1,360. Could you really live on that much money and still enjoy the retirement you want?

4. Medicare will cover all my healthcare costs

Like Social Security, Medicare is a wonderful program — but it’s not a cure-all. Original Medicare will cover some hospital and doctor related medical expenses, but there are large gaps in its coverage. For example, Medicare will only pay for the first 100 days in a nursing home. If you need to stay longer than that, you’d better be prepared to pay a great deal of money; according to AARP, the average cost for a nursing home is over $50,000 per year and about 1/3 of nursing home residents pay all of it out of their own pockets. And that’s just one example of where Medicare can fall short. Plus, several components of Medicare require you to pay monthly premiums, including Medicare Part B. It’s important to set aside part of your retirement budget to cover the (inevitably increasing) medical costs you will incur.

5. Once I retire, I won’t have to worry about taxes
You’ve probably heard the saying about death and taxes. As long as you live, the federal government — and possibly your state as well — will continue to present you with an annual tax bill. But once you retire, you won’t have an employer to take that money out for you every month and send it to the IRS. You’ll be responsible for calculating and paying your taxes yourself. This means that your tax challenges will likely increase rather than decrease once you retire. And you should definitely budget for the taxes you’ll be paying on part if not all of your retirement income.

6. I can keep working as long as I have to
Anyone who’s ever been through an unexpected layoff knows that job security isn’t what it used to be. The days when someone could expect to work for the same company for their entire career are long gone. And if you think that hustling up a new job on short notice during your 30s and 40s is tough, think how hard it would be when you’re in your 60s. Even if your employer doesn’t kick you out of the nest, you could run into health problems or other challenges that would require you to leave your job earlier than you anticipated. Thus, it’s wise to plan for a retirement date somewhere in your 60s and save accordingly. If all goes well, you may indeed end up stretching out your working years into your 70s and beyond — but if all doesn’t go well, you’ll have the funds to take care of yourself.

Keep calm and carry on
Preparing for retirement can be a challenge, but it’s not as difficult or as complicated as you might believe. If you’re setting aside around 15% of your income in retirement savings every month and are investing the funds in a reasonable way, you should be fine once retirement time finally rolls around.