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.

 

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.

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.

 

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.