Where the money is....

When Willie Sutton bank robber was asked why he robbed banks he said "Because that is where the money is". How things have changed.

The banker's Bank the Federal Reserve is now robbing savers with near zero interest rates. Why? Because that is where the money is. It is a hidden tax. No law was passed. Still you are having the your money stolen through near zero interest rates to restore bank's balance sheets. If you had $300,000 in an IRA (or 401k) earning 5% in 2007 ($18,000 a year with nearly no risk) you are lucky if you earn half that today. That is a $9,000 or more of hidden taxes.

I hope to expose these types of actions and others by the FED and government. Boomers need to be vigilant - because their savings is where the money is. I will also delve into other areas of finances of interest to Boomers.

Friday, December 31, 2010

Increase you savings in 2011

Want to save more in 2011? Where to start? Start with a budget. You know - that list of your income and expenses. Then decide what is necessary and what is not. That is your starting point.

1. Eliminate unnecessary expenses. Do you have a premium cable TV plan with dozens of channels you never watch? Maybe you need a cheaper plan that better fits your viewing habits. This could save you $20-30 or more a month. Got a premium cell phome plan and land lines at home. You might save money by getting a cheaper land line plan (or eliminate it entirely) with just local service. This could save you $15-20 a month. Something like Magic Jack might save you even more. Maybe you have multiple cell phone plans (one for you and one for the spouse). Combining cell phone plans for the spouse (and children) and getting a "family plan" could save your $40-50 or more a month. Those lattes at Starbucks - are they necessary? Buy a thermos and make your own. Go through you list of expenses - without too much trouble you will find $150-200 a month of savings.

2. Eliminate expensive debt. Are you carrying debt on credit cards costing you double digit interest while you have money in savings? Why? Take some savings and pay off (pay down) high cost debt. You are earning very little on those savings and paying dearly for that debt. Keep in savings only what you need for emergencies (3 months of income).  Pay off that credit card debt or expensive car loan. It could give you $50, $100, $200 or more depending on your debt level to increase savings. The money you spend to pay off this debt can be replaced in very little time from the savings.

3.Are you running all over town to grocery shop, go to the dry cleaners, go to the bank, go to the post office, etc. Why? With gasoline over $3 a gallon this can get expensive fast. Try and use grocery stores, bank branches, dry cleaners, etc located in close proximity to each other and consolidate trips. You will be surprised at how much you save. It could be $20-30 a month or more on gasoline. Consider car pooling or public transportation to commute to work and save another $30-40 a month. For a 2 car family this could easily free up another $100 or more a month to save.

4. Getting a $2-3,000 income tax refund? Why? Adjust you W-4 (and state equivalent form) and increase your cash flow $150-250 a month. This is money that can be used to pay off high interest debt or added to savings. If you have a 401k at work you may be able to contribute an extra $200-350 to your 401k (or IRA if you qualify) .

5. That boat (jet ski craft, RV, motorcycle, off road vehicle) you use 4-5 time a year.... Are they worth the money they cost to keep up (insurance, repairs, finance costs, etc). Sell them and use the money to pay off high cost debt and/or save the money. You may save $500-1,000 a year or more on insurance alone. If you want to take an RV vacation - rent one..... That time share - how much is the monthly maintenance fee each year? More than 2 weeks rental at a resort? Unload that turkey and save that monthly cost.

These are only a few ideas of mine. I feel certain most of you can increase savings $500-1000 a month without too much trouble. Do this and in 5-10 years you will have enough to pay off that mortgage BEFORE you retire.

If you have other ideas please add them as comments. Have a healthy and prosperous New year.

Monday, December 27, 2010

The lies, the spin and the truth

If you believe the spin, it sounds like the extension of the 2003 tax cuts is a decrease in taxes. It is not. Taxes remain the same. It is the lack of a negative, not a positive. So how does that increase spending and consumption or in any way change the economic outlook?

You were told that the health care act did not contain a death panel. Why is it that Medicare will now pay for end of life counseling? Another lie from the government?

Extension of unemployment benefits - sounds like (if you don't investigate) they were extended 13 months to up to 3 years. Not true. They were kept at 99 weeks for those who had not reached 99 weeks of benefits. And even this varies by state depending on unemployment rates in that state. The number of 99ers will continue to increase making the UIC (Unemployment Insurance Claims) fall even if unemployment increases. See this: http://blogs.wsj.com/economics/2010/12/23/how-long-is-each-states-unemployment-extension/

Under the so-called payroll tax holiday, employees who normally pay 6.2 percent in Social Security taxes out of each paycheck will pay just 4.2 percent in 2011 on wages up to $106,800. But, the "Making Work Pay" provision, which was part of the 2009 Recovery Act, is set to expire Dec.31 and will not be renewed. The credit was worth $400 to taxpayers making $75,000 or less ($800 to couples earning less than $150,000). These two will mostly offset.

Stay aware, don't believe the spin or the lies.

Saturday, December 25, 2010

Merry Christmas from the folks at Social Security

Retirees will no longer be able to get an interest-free loan from the Social Security trust fund, the Social Security Administration announced today. Effective on December 8, retirees will not be able to pay back benefits already received in exchange for higher Social Security payments going forward.

Free loans eliminated

Little-known provisions of Social Security law previously allowed individuals to begin payments at age 62, pay back all the benefits received at age 70 without interest, and then reclaim at a higher rate due to delayed claiming.

Now this probably affects only the more affuent (who could afford at age 70 to pay back any benefits received).  Still it is a change making Social Security more restrictive.  I expect it is not the last change either.  Expect those changes to be through adminstrative changes (as this was) or through changes by Congress.

What could be the next change?  It would not surprise me if that change is in how COLA payments are calculated.  Now $5-10 less per month in benefits  may not seem like much, but when you multiply it by 50 million recipients 12 times a year it is serious money.  And if we get high inflation (as seems possible with the FED printing presses running full bore) such a change could be very destructive.

Be very vigilant, get involved and make sure your Senators and Representative  know what you think.

Friday, December 24, 2010

How much do you need to save for retirement?

If you are like me you have probably gone online and used a retirement calculator to try and figure our - how much do I need to retire? And you were floored by the numbers these calculators spit out. Your first reaction may have been there is no way I can accumulate that much, so I may as well forget retiring.   So I decided to do my own research and analysis.  I have a degrre in Math -  so I can do the math.

For example: If you earn $50,000 a year at retirement many of the calculators will tell you that you need $1 million or more to replace your pre-retirement income. That is 20 years of earnings (and at retirement that is probably peak earnings). Your Social Security benefits may reduce that by 25% at age 62. Still, even $750,000 is a lot of money for the normal person to accumulate. Now if you started saving at 22 and managed to save every year for the next 40 years you may achieve that goal. But, if you were like me there were years when you barely earned enough to pay the bills (forget saving for retirement). So if you managed to save in 25 of those 40 years you did better than average.

So let's say you earn $50,000 a year at retirement. After income tax with holdings (Federal, state, local), FICA, Medicare, and 7% into a 401k your take home will be around $2,800 a month. This amount may vary depending on state and local income taxes and the number of dependents. Let's say pre-retirement your mortgage is $600 a month but it will be paid off by retirement. That means $2,200 a month should give you the same spending power as pre-retirement. You may also save on commuting costs, business clothing, lunch at work, etc. Let's also say Social Security will give you $1,200 a month at age 62. That leaves $1,000 to be made up from retirement savings (IRA, 401k or a retirement pension).

If we look at an immediate annutiy calculator we see that it takes about $17,000 to buy for a male age 62 a $100 a month income for life. So to supply that additional $1,000 a month of income will cost you about $170,000. This does not allow for inflation. Your Social Security benefits should be inflation adjusted (COLA - Cost Of Living Allowance) based on inflation. So let's say you need another $50,000 to cover inflation costs over your remaining lifetime or a total of $220,000 in retirement assets other than Social Security. Also, see post on living without Social Security.

This makes no allowance for long term care in a nursing home or hospice. Still it is a lot more achievable than $1 million or more. So that leaves you at risk if you encounter an extended care situation. Also, If you are married then simliar analysis applies to your spouse's situation.

So let's summarize - Social Security will furnish $1,200 a month and that is worth about $204,000 (12 x $17,000). Your retirement savings supply $1,000 a month ($170,00) and has a buffer for inflation ($50,000) for a total of $220,000. So the value of retirement assets including Social Security is around $425,000. To have an income of $2,800 (pre-retirement income) would require another $100,000 or so or about $525,000 in total.

So half $1 million of retirement assets (including the value of Social Security payments) should provide for you at retirement. If your are married and your spouse does not work he/she can draw 1/2 your Social Security as a spousal benefit (say $600) at age 62. If he/she works then to replace his/her income he/she will need retirement assets similiar to those described above. Depending on your income all or most of you Social Security income may be untaxed. See prior post on the Social Security marriage tax penalty.

To simplify this - your retirement assets (including the value of your Social Security benefits) need to be about 10 times your income at retirement. More is better. I would suggest 12 times your retirement income. So if your retirement income is $50,000 that would be $600,000 of retirement assets. If you are married and your spouse earns $50,000 also then you need 10 X $100,000 or $1 million or more (around $600,000 net of Social Security benefits).

Hope this has simplified a very complex subject for you.

Tuesday, December 21, 2010

Is Social Security Solvent?

I'm glad I asked that question. Suppose your spouse found that $200 stash you had hidden in your sock drawer and took it and spent it and left you an IOU. Is that money good? Can you take it out and spend it? Of course you can't. The only way you can spend it is if your spouse makes good on that IOU. The only way your spouse can make good on that IOU is if they have a source of income.

What I have described above is the Social Security "lock box" on a much smaller scale. The money paid by you for future Social Security benefits has been SPENT. All that is left is a bunch of IOUs (treasury bonds and notes) issued by the government. And those bonds/notes are only money good if the government has a stream of income to pay off these IOUs. All that is in the "lock box" (your sock drawer) is a bunch of IOUs (stored somewhere in West Virginia). Those IOUs are only as good as the ability to pay them off. And to pay them off the government depends on current incoming revenue ( there is the problem).

Now the Payroll Tax (FICA) is supposed to be the source of revenue to fund the payoff of those IOUs. We are at (or fast approaching) the point where those monthly payroll taxes are less than the amount being paid out each month. This means general government revenues will be required to make up the difference. This gap will grow and grow as more and more boomers retire.

So when the government or others tell you Social Security will be solvent for the next 25-30 years they are lying. It is currently near break even (income vs payout). Evidently the politicains and spinners in Washington thinks you are an idiot and will believe their lies. Don't. Demand that the politicians fix this before it is totally out of control.

If you are a boomer (as I am) you should recall that the last time we faced this was in the early 1980s. The solution then was to increase the payroll tax and the promise was made that the money would be ther when you retired. Well, you were lied to - the money is not there.

The House and Senate are asylums populated with insane people. Unfortunately, the inmates run the asylum. Proof of this is the inmates just approved a temporary reduction in the payroll tax exactly when they should be looking at reforming Social Security and possibly increasing that tax. They are NUTS in Washington I tell you - totally NUTS.

If you agree - Email this to your Senators and Representative. Lets stop the insanity.   Provide me hundreds/thousands of comments so I can send them to my Senators and Representative.

Monday, December 20, 2010

Can you survive retirement without Social Security?

Something you might consider in your planning.....

If your Social Security payments are scaled back, or worse, what would it cost you to buy something similar in the private sector?

We can do some math.

According to ImmediateAnnuities.com, a 66-year-old man would have to pay $128,000 for an annuity providing him with income of $10,000 for life. A 66-year-old woman would have to pay even more, about $138,000.

That's for an income of $10,000 a year. If you think you'll need $40,000 a year to live on, naturally you'd need to set aside four times as much, or about $550,000.

And this would only be for a straight annuity, with absolutely no inflation protection at all.
Few life insurers provide inflation-protected annuities. New York Life offers something close: an annuity that increases payments by a certain percentage each year. This won't protect you from runaway inflation. But at least an annual increase of, say, 3% will give you some cushion.

I asked the company how much a 66-year-old would have to pay for an annuity paying $10,000 a year, with a 3% annual increase.

The answer? About $180,000. It's about the same for men and women.
Right now, the average retiree is getting about $14,000 a year from Social Security. To buy a similar income stream on the open market, a 66-year-old would have to pay about $250,000. Someone getting the maximum benefit, $28,000 a year, would need to pay about $500,000.


Sunday, December 19, 2010

The cost of ignorance - $540 a month

Psychologists say that many people will talk about anything, even sex, before they'll talk about their finances. Why is it so difficult for us to talk about money? Perhaps because money symbolizes different things to different people: power, control, security, or love, for instance.

It's been estimated that money issues are the driving force in 90% of divorces, but you CAN live happily ever after, financially speaking, if you work at not letting financial issues come between you and your partner.

In the world of personal finaces the waters are teeming with sharks. There is the FED keeping interest rates near zero. There is the Government and the IRS. There are con men. There is even your spouse. Ignore any or all of these at your own peril.

When a spouse is secretive about their individual finances there is a reason. If they are unwilling to sit down at least once a year and discuss current status and future plans and goals there is a reason. Been there and experienced that. She wanted her own checking account and separate credit cards. Her accounts were hers, and mine were ours. Why? Because she knew I would not approve of her spending habits. There were her credit cards that got run up (and yes I ended up paying them off). But I digress.

We all have heard her say "I defer to him on major financial decisions", or "I don't understand taxes, he handles that". Show me a marriage where that is the basis for finances and I will show you a husband who uses finances to control and manipulate, and even take advantage of the spouse.

Let me tell you of one case I saw. I have no idea how often this happens. Sue Ann and Jim Ed Mattison were both white collar professionals. It was around 2003 and each earned around $50,000. Sue Ann told me she took home around $2,200 a month after deductions for Federal, State and local income taxes, FICA, Medicare, and 7% into a 401k.

Not to go into great detail, but $2,200 is not consistent with a gross income of $50,000. Here is a pay check calculation from http://www.paycheckcity.com/:

As you can see Sue Ann is over with holding about $540 a month (about $6,500 a year). That is a lot of refund!!!! If you want you can do the tax calculations - you will find the withholding above consistent with an expected half of taxes on a $100,000 combined income.

Susie also told me that they got $4,000 in tax refunds. She was clueless that it should have been 50-60% more based on just the amount she over withheld. She was thrilled to get $4,000 in refunds. I suggested she may want to file and amended W-4 (and state equivalent) form with her employer. Susie did nothing.

I continued to hear about their struggles to pay college for the children. So I suggested that they have that financial talk and put all the cards on the table. Susie did nothing. I even suggested there was something not right going on. Susie still did nothing. You cannot help someone who won't act. They choose to remain ignorant because they are afraid to face reality.

So let's summarize. Susie was over withholding about $6,500 (which reduced her take home pay about $540 a month). Susie and Jimmy filed married jointly and only got $4,000 in refunds. So what happend to the $2,500 ($6,500 overage - $4,000 refund = $2,500). The only possible answer is Jimmy under withheld $200+ a month thereby increasing his take home pay. Jimmy was taking $200+ a month from Susie using tax withholdings. Did they split the $4,000 in refunds? I suspect they did which transferred additional funds from Susie to Jimmy.

Susie once told me she often "deferred" to Jimmy on major decisions. She also told me she didn't understand taxes so he handled that. Clearly a situation where Susie was almost asking to be taken advantage of.

It is 7 years later and I haven't spoken to Susie in years, but I believe Susie and Jimmy are still married. I have no reason to believe anything has changed. They split the bills, maintain their own accounts and never discuss the joint financial situation that exists and Jimmie continues to take and Susie continues to give (even if she doesn't know it).

You may know a Susie and Jimmie? I have no idea how often this happens. I do know that chosing ignorance cost Susie $540 a month in her paycheck.

Saturday, December 18, 2010

Retired, married and receiving Social Security - marriage penalty

You thought that the Bush tax cuts in 2003 did away with the marriage penalty.  Admit it you thought that.  Well it did for working couples, but it didn't for older people receiving Social Security who have substantial other income.  Why does the government discriminate against older people being married?  Are we supposed to spend our sunset years alone?

Here is how it works:

For a quick computation of your potential tax liability, add one-half of your Social Security benefits to all your other income.

In this calculation, you must also take into account any tax-exempt interest you earned, as well as exclusions from income such as savings bond interest, work-provided adoption benefits or foreign-earned income.

If this amount is greater than the base amount for your filing status, a part of your benefits will be taxable.

Base amounts for figuring possible tax liability on benefits are:

  • $25,000 for single, head of household, or qualifying widow or widower with a dependent child. 
  • $25,000 for married individuals filing separately and who did not live with their spouses at any time during the tax year. 
  • $32,000 for married couples filing jointly. 
  • Zero for married persons filing separately who lived together at any time during the tax year.
Notice the base amount for a married couple with substantial "other" income is $32,000 (not 2x$25,000) and $25,000 for a single person.  Should boomers retired on SS get a divorce and just live together?  It depends on income split and other factors.  The point is that a marriage penalty exists for older citizens.  It is unfair and should be eliminated.  Contact your Senators and Representative....

For those of you not retired and receiving Social Security benefits this may alter when you decide to activate those benefits. 

FED pickpockets savers

Let's face it - boomers are the group most likely to have savings.  They have paid off the house (or nearly so).  They have sent the kids through college.  Now they are at peak earning years and without a mortgage or saving for college they can finally think of their own future and needs for retirement.  Or, like me if they are an older boomer they are retired or will be soon.  They are unlikely to be the ones defaulting on mortgages and taking on debt.  But, they are being forced to pay for the problems caused by others after years of bahaving responsibly to get to this point in life. Call it covert TARP. I call it hidden taxes. How does it work?

Millions of Americans are paying a high price for a safe place to put their money: extremely low interest rates on accounts and certificates of deposit. The elderly and others on fixed incomes have been especially hard hit. Many have seen returns on , C.D.’s and government bonds drop to niggling amounts recently, often costing them money once inflation, fees and taxes are considered.

“Open a Plus Account today and get a great rate,” read an advertisement in the Dec. 16 Newsday for Citibank, which was then offering 1.2 percent for an account. (As low as it was, the offer was good only for accounts of $25,000 and up.)

This is laughable. Banks can easily invest the money in those accounts in Treasury bonds and see a profit without taking any risk – no lending required.  If you want to know why Treasury rates won’t rise, this as a major reason.

Clearly the Fed is more concerned with bailing out the banks who lent recklessly and depleted their capital than grandma living off her social security check.  But, of course, this policy is not going to induce any deleveraging. Ultimately, at the next sign of economic distress, the day of reckoning will come; and the problem will be even worse.

How do we change this?  We can't vote for Federal Reserve members.  We need to demand more oversight and changes to how our monetary system is being run.  Hopefully Ron Paul will have some power to do so in his new finance comittee chairman position.