Social Insecurity?

This is not your parents’ Social Security Program; literally! In fact, the fundamental economic dynamics impacting savings and retirement planning with respect to the most talked-about strand of the social safety net are dramatically different today than they were even a decade or so ago. In 2000, the average monthly benefit to Social Security recipients was $840 per month. With a 5-year treasury yield of just over 6%, it would have taken a little less than $163,000 to generate that equivalent monthly sum. Today, however, yields are at around 1%, and with the average monthly benefit now $1,181, it would take about $1.4 million to get that kind of return. That is an enormous change from just 12 years ago, and the implications for retirement planning are profound. It has become more important than ever to maximize income streams. It is not necessarily about simply finding the highest yield–it’s about income planning: taking a strategic approach that involves what might have been considered some unorthodox decisions not too long ago. One of those decisions might be to defer Social Security payments until the age of 66. Everyone always takes Social Security as early as possible, simply because they can; but that doesn’t always make sense. If you defer payments for 4 years, perhaps making up the difference with funds from your IRA, you will then be entitled to the $2,000 monthly payment that comes with full retirement age. The $800+ monthly difference could make a significant difference over the long haul. And in times like these, the long haul is where you want to devote your retirement and financial planning resources.

 

Tags: financial planning, IRA, retirement age, social security payments, social security program, treasury debt, treasury yield

Uncertain Times

Unfortunately, while there have been a few lonely bright spots with regard to macroeconomic news, the overwhelming majority of the latest data continues to paint a pretty grim picture. Notably, the Federal Reserve is now forecasting that economic growth will be slower through 2012 than previous estimates, and that unemployment will be higher than earlier forecasts had predicted. The news was underscored by statements from Federal reserve Chairman Ben Bernanke, who said that “the pace of progress is likely to be frustratingly slow” and that there “are significant downside risks to the economic outlook”. Bernanke cited worries about European debt and volatility and generalized uncertainty in what are increasingly interconnected global financial markets. While this big-picture stuff can feel somewhat removed from the day-to-day concerns of the average investor, the result is that slower growth will likely mean weaker market returns. Investors, particularly those individuals approaching retirement age, should proceed with caution. Because, taken together with the recent string of news stories about the seeming inability of the debt and deficit “Super Committee” to come up with any real or lasting solutions, the climate of uncertainty and pessimism regarding our national (and your personal) finances is not particularly confidence inspiring. The best way to counteract that kind of uncertainty is with certainty. Control what you can control. Make and stick to a plan that reduces your exposure but still provides for your retirement needs. You can’t control global finances, but if you establish a strategic plan for yourself that deals with known factors and doesn’t rely on unknowns and uncertainties, you can certainly control your financial future–no matter what scary headlines hit the paper tomorrow.

Tags: ben bernanke, economic growth, european debt, federal reserve, global finances, macroeconomics, retirement, unemployment

Basic(s) Training

One of the frustrating ironies of a recessionary cycle is the way in which very natural and very human–and in some cases very necessary–responses to lean economic times can have an adverse impact. Actions that would be questionable investment decisions even in a booming economy can be particularly harmful during a downturn, and therefore it is always a good idea to take the time to remind yourself of the basic bedrock rule of investing: Buy Low and Sell High. Because when you pull money out of a struggling market to live off of in a downturn, you are engaging in behavior that is precisely the opposite of what would be recommended under buy low/sell high fundamentals. It is also important to remember that while long-term trends are important, what those trends mean for you is all that matters with respect to your financial well being. If you look at a chart of stock market performance throughout the 20^th Century, things look great: some ups and downs, but an overall climb. Here’s the problem though: you aren’t going to be retiring for 100 years, and you don’t want to be caught out in one of the 20-year cycles where there is a dip in the trend line. If you are close to retirement, the simple facts are that your options are also more limited, as you just don’t have the time to make up a big loss. Just as you should remember to buy low, sell high, and avoid overreacting, it is also important to remember to reduce your exposure and get more conservative with your investing as retirement age approaches.

 

Tags: booming economy, buy low sell high, economic downturn, investing, recession, recessionary cycle, retirement, stock market performance

Ex marks the spot

Beware of the ex-dividend date! No, it’s not some kind of evil creature from a childhood fairy tale, but the results on your tax bill might be pretty scary in their own right if you fail to exercise some basic–but unfortunately often overlooked–planning. The ex-dividend Date is relevant for anyone who is mulling the purchase of a mutual fund. With plenty of investors likely looking to take advantage of a market dip during these volatile times, that kind of reallocation can be a popular choice. But if you aren’t careful, you might wind up with a costly and unexpected tax bill if you are not careful. The ex-dividend date is defined by the IRS as “the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment”. That’s a backhand way of saying that the ex-dividend date is the official cutoff point where owners of record are both eligible for dividends on their holdings and liable for tax payments on those same holdings. The popular phrase is that you want to try and avoid “buying the tax liability”. What that means for new investors is that if you purchase shares in a fund before they pay these out, you might be saddled with a tax bill and see the value of your per-share investment reduced. If you buy 1,000 shares at $25/share…and the fund declares a distribution of $1.50/share, you will get more shares, sure, but you also might get a 1099 for $1,500 in the mail. Not an appealing trade-off. The ex-dividend date for many funds is toward the end of the year, so do your research and be smart about timing. When it comes to investing, Caveat Emptor–buyer beware–always applies.

Tags: dividends, investing, IRS, market dip, mutual fund, tax liabiity, tax payments

Political Drama and Economic Paralysis

We are currently about a month and a half out from the 1^st of August, a date that seemed to start a chain reaction of political debate and legislative gridlock surrounding the debt ceiling controversy. While a last-minute compromise was eventually reached, the national and international fallout from two political parties’ very public struggle to agree on terms to raise the national debt limit has had a significant impact on the financial markets. The political struggle was followed by the S&P ratings downgrade, and a subsequent stock market nosedive. While we have gained back some of what we lost in the marketplace since then, the volatility has been noticeable. One of the things I have noticed over the years is that when the markets take a dive, people tend to fall victim to a kind of deer in the headlights paralysis. There is a general sense that if you simply wait things out, things will improve over time as the market recovers. Unfortunately, we have been essentially saying that same thing since 2001. The lesson for savvy investors is that the uncertainties of the current political and economic climate mean that a “wait and see” attitude might not do the trick this time. The consequences of inaction, particularly for those families and individuals approaching retirement age, can be damaging, and, with more uncertainty on the horizon, a failure to protect yourself could be very costly.

Tags: debt ceiling, economic climate, financial markets, national debt, political debate

My Big Fat Greek Debting

Unfortunately, the news from across the pond seems to continue to get worse. Europe, already mired in a deep economic slump related to uncertainties surrounding debt crises in Greece, Ireland and Spain, got more bad news as Italy, one of the Eurozone’s largest economies, saw their credit rating downgraded by Standard & Poor’s. We have already seen significant public unrest across Greece, and it has begun to spread to Italy and other countries. The markets are already basically pricing in a 100% certainty of a Greek default: short-term interest rates on Greek debts are close to 100%. Greek’s national debt, currently at 140% of GDP, will be at 180% by the end of the year. They simply cannot make their interest payments. Without some form of a significant and ongoing series of bailouts, Greece will default. The big question is not if, but when…and what. Because a default would do serious damage to the Greek economy, there is serious discussion about Greece exiting the Euro and devaluing its currency; an option that would accelerate a pan-European financial crisis and is generally considered to be even less desirable than a large-scale bailout package. The bottom line is that this is not going to end well. And while many Americans might believe that European financial challenges are remote and will not impact them personally, the unfortunate reality is far from the truth. European and American economies are intimately connected, and a crisis over there will increase the chances of a crisis here at home.

Tags: debt overseas, financial crisis, Greece economy, short-term interest rates, standard & poor's, turmoil overseas

Location Location Location?

I have seen the argument made that, in the context of some significant economic stress points around the globe, the United States is sort of like the good looking house in the bad neighborhood. We have our own financial issues right now, to be sure, but nothing as bad as what is going on in Europe – or so goes that line of thinking, anyway. The nice house/bad neighborhood analogy is an apt comparison, particularly because, as in real estate, the value of any one home is inextricably connected to the value of the larger neighborhood. The problem is, if they neighborhood goes downhill, the value of our house is going to be significantly reduced. Just because other countries look worse right now does not mean that we are safe. In an increasingly connected global marketplace, ripples can turn into tsunamis in very short order. As a result, it is not enough to be comparatively strong or economically sound relative to other struggling economies around the world; we need to be strong on our own terms. Unfortunately, the danger of a larger financial crisis is real enough that American investors need to be very conservative right now. I myself went to cash last week in several of my accounts. I am certainly not advising everyone to do the same, but I am suggesting that these are worrying times for our economic “neighborhood”, and it is important to stay informed and to understand the extent of the issues we face. Above all, do not put your head in the sand.

Tags: financial crisis, global marketplace, real estate market, turmoil overseas, U.S. economy

IRA

With all the talk about big-picture financial concerns, one thing that can get lost is what these economic ebbs and flows means for your savings and investments – particularly 401(k)s and other individual retirement accounts. With regard to Social Security and retirement accounts, we are seeing certain investment products getting sliced because of low bond yields. 10-Year Treasury notes are at historic lows, and, as a result, the insurance industry is having a harder time making money and is being forced to trim benefits. The danger is that lighter returns and rising commodity prices will force people to pursue riskier assets in the stock market. And at a time when market volatility is high, that’s a worrying proposition; particularly for those investors approaching retirement age.

One important IRA calendar note: October 17^th is the deadline for those individuals who wish to recharacterize if they performed a Roth IRA conversion in 2010. A recharacterization – moving assets back to a traditional IRA – is a no-brainer if your account decreased in the past year. Why would anyone want to pay taxes on money they no longer have? Where it gets tricky is if your account has increased slightly. Because if there is a double-dip recession or extended period of economic unrest in our future (as many analysts are predicting) you do not want to miss an opportunity by failing to recharacterize and end up paying taxes on the larger sum of money that you used to have. Talk to your financial advisor or wealth management specialist to determine a course of action that makes sense for you.

 

Tags: 401k, double dip, retirement, retirement accounts, social security

Bumping up against the debt ceiling

You don’t have to be a news junkie to know that the debt ceiling is the political and financial hot topic du jour. Debate over the debt ceiling–should we raise it, how can we address long-term structural deficits–has been dominating print, TV and online media for weeks; if not months. While there is some debate over the impact of a default, there is general agreement that, if some kind of an agreement to raise the debt ceiling is not reached, the resulting default will have a pretty significant adverse impact on the marketplace. Given the potential pitfalls, if this political stalemate persists, it does seem likely that some kind of agreement will be reached – and, like almost all compromises, neither side will be totally thrilled with the outcome. But all the back and forth between both ends of the political spectrum (Republicans want to cut spending and avoid higher taxes, Democrats want to close tax loopholes and increase revenue) is really missing the big point: there is an elephant in the room…and he’s wearing a stethoscope. Entitlements are an enormous financial obligation for this country, and by far the biggest debt on the balance sheet going forward is health care: Medicare and Medicaid. At the end of the day, the question we have to ask ourselves is how much health care do we want and how are we going to pay for it. Polls show that people overwhelmingly (and understandably) don’t want to give up their government subsidized health care, but at some point we are going to have to make some very hard decisions with regard to health care spending.

Tags: debt ceiling, government health care, health care spending, medicaid, medicare, national debt, spending cuts, tax increases

The only certainty is uncertainty

Back when the recession was at its peak in 2008, the government responded with a large and much-discussed stimulus package. Whether you agree or disagree with that approach, the subsequent follow-up to that stimulus spending should leave all of us somewhat concerned. It’s worth noting that much of the short-term impact from the stimulus package came about as a result of growth of government itself: new and expanded programs, more government infrastructure and overhead. What’s worrying is that means that the stimulus was implemented in such a way that it was–and still is–difficult to scale back. And now that the economy is once again in a vulnerable place, the consequences of some much-needed fiscal austerity measures would be even more damaging in the short term. Options are limited now, as rolling back stimulus spending would be, in effect, a negative stimulus. The same goes for tax hikes. This whole incident demonstrates some of the dangers of excessive government economic intervention, and reinforces the lesson that we can’t spend our way out of debt. All of this has contributed to a political climate and a financial outlook that are full of uncertainty. Businesses and investors are nervous, and figures from all sides of the political spectrum–from Steve Wynn to George Soros–have expressed concern, with some publicly criticizing the President’s handling of these issues. And now with Europe in dire straits and U.S. firms on the hook for insuring those bonds, our economic vulnerability has been ratcheted up even further. There are growing rumblings about the potential for another significant recessionary cycle in the next 12 to 18 months. And while it might not happen, the fact that this is even being discussed is a real concern.

Tags: European economy, George Soros, government stimulus, national debt, Steve Wynn, tax increases