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.

Sunday, February 27, 2011

Retirement doesn't mean no tax planning

Retirement and tax planning

You are over 62 and no longer earning big dollars - drawing SS.  So you no longer need to spend time tax planning - do you? If you answered yes then you may be right if SS is your main source of income and you have little or no money in retirement plans (IRAs or 401Ks) or a future company pension that will activate in 2-3 years. If you have sources of income (now or later) that are taxable - tax planning may be as important or more so than at any point in your life.

Let's say you are married and your spouse still works (that darn taxable income!!!). Maybe you are due a pension. So do you want to activate your pension now or wait? If you have investment or savings where taxes are already paid (or will be taxed at low rates) you may want to use part of that savings and wait to activate sources of taxable income.

Why is that? One reason is SS benefits are not taxable in all or part depending on other taxable income. For a single person the line in the sand is $25,000. Above that line SS income starts to be taxes (up to 85% of your SS income - talk about double taxation because you paid taxes on SS deposits as you worked). You take 50% of your SS benefits and other taxable income. If you are single and that is over $25,000 then part of your SS benefits become taxed. For example if you get $18,000 a year in SS benefits and have less than $16,000 of other income then SS benefits are not taxable. If you are married - the line is $32,000 (not 2 X $25,000).

So if your spouse still works almost surely some of your SS benefits will be taxed. The more money you receive from a pension or take out of your IRA/401K the more of those benefits get taxed. Hence, you may want to postpone taking money out of a 401K or IRA until a later date. If you are below the line ($25,000 single, $32,000 Married) you may want to take enough money out of your 401K or IRA to reach that line. If you don't need the extra money to meet current expenses set up a Roth IRA and do a transfer from your regular IRA (or 401k) in an amount to reach the limit.

 The 70 1/2 tax trap

At 70 1/2 you have no choice except to take money out of your IRA (401k). You will need to refer to the appropriate IRS publication to compute the amount. In general thou it is around 5% of your total IRA/401K account value. So if you have a substantial amount in these retirement accounts you have to figure out - do I pay more if I wait to do the required amounts or is it better to draw down the accounts over the next few years until you are 70 1/2. If you feel incapable of figuring this out you may need the help of a capable financial advisor (just avoid those that want to manage your money for a fee unless you need help in that capacity also).

The point is - if you have substantial amounts - at age 70 1/2 you could face some hefty tax bills unless you plan to minimize that bite. Suppose you have $500,000 of retirement assets and have to withdraw $25,000 at age 70 1/2. If single then probably 85% of your SS benefits will become taxable. If you are married you have to consider combined incomes. Say each of you have $500,000 in retirement assets and each have to take a 5% distribution at 70 1/2. That is a total of $50,000. So surely most of your SS benefits will be taxes.

If possible you want to avoid this tax trap. One way is to die and leave the assets to a beneficiary. Then it becomes their problem. Of course it is probably not the preferred solution.

What should you do?

Without knowing your individual situation I cannot answer that question. If Married you could always get divorced and just live together (that way each of you get a $25,000 line in the sand). Not recommending that - just commenting on it.

My personal situation is such that (I am single) that I am under the $25,000 line. So I am able to transfer some funds to a Roth IRA (I don't need it for current living expense) each year and pay taxes at a 10% Federal Income Tax Rate. I doubt I will totally avoid the 70 1/2 tax trap, but I will have minimized the effect.

But as you should see by now - just because you are retired it does not mean you can quit staying on top of your personal financial situation (and tax planning). Good luck in your efforts. A session with a capable financial planner may be necessary to come up with a personal plan.

The pension lie that is Social Security

In truth, almost all pensions are a lie.

The pension that comes to mind for most of us in the US is Social Security. A tax is deducted from our paychecks to fund the pension. By law, when the program takes in more than it pays out (as it did from 1982 thru 2009), it has to loan the excess to the federal government. The federal government is obligated to pay this amount back with interest when the program faces a shortfall. In 2010, it faced a shortfall. It is expected to face a shortfall in 2011. In addition to all its other debt, the federal Government now owes the Social Security Trust Fund (the account to which surpluses are loaned) some $2.5 trillion dollars. Surpluses are projected to return for the next few years but then from 2015 on, the program is expected to face deficits. Social Security payouts will then depend upon government injections but by 2037, the Social Security Trust Fund will be zeroed out. I think we all know where a government already deeply in debt will come up with the money. They will either borrow it, print it, or tax it. We can all debate a fix, but the program is a Ponzi scheme and it is built on lies. In true Ponzi fashion, there are 3 people working to support 1 beneficiary. Forty years ago that ratio was three times as wide and in looking forward, the ration will tighten even further.


Thursday, February 24, 2011

Where the money is update 1

I told you that the FED/Govt is going after your savings and retirement funds by keeping interest rates low.  It is official policy to rob those who have behaved responsibly to bail out those who haven't.  This has to stop!!!
I am not alone in thinking this:  http://www.financialsense.com/contributors/daniel-amerman/cheating-investors-as-official-government-policy

But, don't worry they have a plan that is even worse.  It is called inflation and we are starting to see that plan emerge as food and oil prices surge.  The only thing going down is home prices and your income to pay higher prices for every day essentials.

Others see this too:  http://www.safehaven.com/article/20094/food-price-inflation-calculator  IMO, do not lock up your assets in long term bonds, CDs, annuities, etc as in the near future interest rates will soar and you want to wait for those before extending the maturity of fixed rate investments.

The FED/Government policy to get your money evil (pure evil) and it will take your utmost attention and efforts to avoid their traps.

Thursday, February 17, 2011

The cruelest thing of all

You can talk about "death panels" or insufficient medical coverage, but the cruelest thing of all for those retired (or ready to retire) can be inflation.  For the second year in a row there was no COLA increase for SS recipients.  Yeah - OK- there was an oversized increase due to a spike in oil prices 3 years ago, but that has been more than offset by an increase in medical and food prices the past 2 years.

Insufficient medical coverage may mean you die quickly.  Insufficientt income means you live in misery as you can not afford food or other necessities such as heat or air and die slowly.  Which is worse?

So, if you have extra income you may want to save it instead of taking that expensive cruise or a week gambling in Nevada.  Or, spend a weekend in Nevada and an inexpensive 3 day cruise and save the difference.  Things are going to get worse not better when it comes to inflation.  The FED is pumping money into the system.  Because the velocity (turnover) of money is low the full impact of these actions have not been felt yet (but they will).  The FED claims they can draw down the money supply in time to prevent this inflation.  Yeah, right.  If they are so darn good why didn't they prevent the housing bubble by tightening credit conditions in 2005 or 2006?

If you are just in the planning to retire stage - you need to insure you have enough income that will allow you to continue to save and build your retirement base for the next 5-10  years (maybe more) so you don't end up in poverty and dire straits at the end of your life.  Work an extra year?  Maybe.  Sell that McMansion and downsize to less expensive housing and invest any extra proceeds?  Maybe.   I do not know your individual situation so I can only advise in a general way.

At this time my basic living costs are about 50% of my available income.  Am I concerned?  You better believe I am.  I am taking or planning to take actions to minimize my income needs.  By mid year I will have at least 6 months of extra food in the cupboard.  I am  looking to buy some land so I can raise a good portion of my own food (potatoes, onions, corn, beans, tomatoes, cucumbers, etc)/. Plant some fruit trees (apple, peach, plum, pear, cherry).  Also, have grape vines, berry plants, strawberry plants, etc.  Buy a good sized freezer for keeping food.  Raise some chickens for eggs and meat?  Buy a pressure cooker for canning.  In other words - become as self sufficient as possible in ways that do not depend upon income.

Now I know not all of you have the health, desire or knowledge to do these things.  But, you need to make preparations.  Build up a stash of food that will last a few months at least.   Otherwise, start collecting recipes for Alpo.


Prepare to see to your own needs.  The government is BROKE and you cannot expect them to do so.