Tracking a Boomer's finances

Financial planning is not something you look at every 3-4 years. It is an ongoing process you consider every day in how you manage your income and spending. Buying an expensive item on a whim is the opposite planning. Paying $50 a month to have a cell phone for emergencies on the road is wasteful and the opposite of maximizing the value of your dollars.

You can tell a lot about a person's planning (or lack of) by looking at something simple like their mortgage and refinancing record. Every time the financial situation got tough did they use the home as an ATM? If they did then they have no financial plan.

I have no training or credentials as a financial planner, yet I have achieved goals I set when some thought I was nuts because of the approach I took. Yes, I got fed up with being a salary slave to "the" man and quit working for the man at 55. It resulted in some financial sacrifices, but freed me being a slave to other's demands and whims. I have not one time regretted that decision. Through detailed planning I determined I could buy a place even though I was unemployed. I had some savings earning very low rates and my analysis led me to believe I would be better off investing part of those savings in real estate - which I did.

So for 4 1/2 years I lived off savings, interest income and rental income from the property I bought. By then (59 1/2) the property was 50% paid off. At age 59 1/2 I took $12,000 out of an IRA account and at age 60 I activated a pension account to bridge income to age 66. At age 62 I signed up for Social security. By age 63 the property was paid off (as well as replacing things like the heat pump and hot water heater). I now have excess income, have rebuilt 50% of what I had in savings at 55 and have let my retirement IRAs grow. I did this on what many would consider a poverty level budget the first 5 years (but I did it according to MY financial plan).

Yes, at times the financial situation was tight - but not once did I ever consider refinancing and extracting equity from what was to be my home - which is now paid for and most of the updates and improvements finished (I have spent something like 10-12% of the original cost on this). What is it worth? Probably at least what I have in it - maybe a little more. Not that that matters as I have to live somewhere and if I decided to sell and move I probably can get at least as good a deal on a place somewhere else.

Now in contrast take someone who purchases a home in the early 1990s for around $165,000 with about $140,000 mortgage. In 2001 they extract about $31,000 in equity (the oldest daughter is in college so one would assume it was for that, although I suspect there was a credit card debt problem as well). Supposedly there was something like $35,000 in savings between husband and wife of college savings. So one wonders - why the hell would you tap home equity before you absolutely have to do so. That $35,000 should have paid 2+ years of college. It was an instate college and tuition and room and board was around $15,000 a year. The student had some scholarships and grants at least part of the first two years and worked part time and served as an RA for two years which should have reduced the total out of pocket costs at least $3,000 a year on average
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So in all likelihood $35,000 college savings would have covered at least 3 years of college. Also, consider supporting the student at home when in high school had to cost at least $3,000 a year and that money could have gone to support while in college. This is why there is reason to suspect that the home refinancing in 2001 was related to something like paying off excessive CC debt. So in 2001 the mortgage is back up to $150,000. NOTE: due to low interest rates at the time of under 5% the home probably should have been refinanced (not to withdraw equity), but to reduce the monthly payments and free up money to help pay for college.

So let's examine this. The student through grants, scholarships, working contributed let's say $3,000 a year to their college expenses. If the same support that was provided as when the student was at home in high school was applied to college expenses that is another $3,000 a year. If refinancing the home would have saved $100 a month in interest that is $1,200 a year. That is $7,200 a year. The student took 5 years to finish college so the total cost was around $75,000. But the offsets detailed above amounted to about $36,000 leaving $39,000 or so not covered. Supposedly there was college savings accounts that should have covered most of that. The one thing not accounted for was the purchase of a new auto for the student. This was probably over-the-top as a good low mileage used car surely would have sufficed.

It appears none of this was considered and analyzed in planning for payment of college expenses or there were other issues such as CC debt..... There seems to have been little reason to extract home equity to pay for college for the oldest child otherwise.

In 2004 the second daughter started college. The home was refinanced again pushing the mortgage back up to $150,000 again (extracting something like $10,000 or so in equity). Now supposedly the wife and husband still had most of the savings for college left ($35,000?). Why would someone not use up savings first before even considering home refinancing to extract equity? It make no sense. Still this presented a new scenario of financial planning as there were now 2 children in college at a cost of around $35,000 a year (for 1 year).

Let's say that the support at home to support the second child was applied toward college expenses ($3,000) and that the child through grants, scholarships, working was able to contribute $3,000 a year. That covers the first $6,000 each year of college expenses. The second child went to an out-of-state college so it was more expensive (around $22,000 a year). This left about $16,000 of costs not covered ($1,400 a month).

That is a tough nut - which is why meticulous financial planning is required, but the couple earned $100,000 a year or more so it should not have been impossible (That should equal around $6,000 a month of take home pay). There was the $4,000 or so a year in tax refunds.  It would have taken 15 minutes to file the forms to adjust with holdings increasing monthly cash flow by $330 a month. That leaves about $1070 a month not covered. There was the car payment for the older child going away by the second year freeing up say $260 a month. That would have left about an $800 a month gap (years 2-4). Then there was a car payment for one parent going away by the 3rd year of college freeing up another $400 or so a month. So the gap in the last 2 years would have been around $400 a month.

I suppose home equity at that point was one option. To me though home equity is sacrosanct. I believe that up to $500 of cuts in living expense could have been found by things like eliminating expensive cell phone plans, a more basic cable TV plan, etc. I suspect there were other options. I would probably have opted for student loans with the promise to help pay them after graduation rather than tapping home equity.

The point is with some planning taking equity out of the home probably could have been avoided. Instead in 2007 another $50,000 lien was placed (second mortgage, Equity line of credit, Equity loan) against the home. This probably pushed liens against the home above $160,000 (more than the cost in the early 90s). Recently that lien seems to have been combined with the first mortgage (which should have been down to around $87,000) leaving something like $137,000 owed on the home. So over about 20 years the mortgage amount is about the same as it was 20 years ago!!!

With appropriate planning the mortgage amount would now be in the $50,000 range and after 3 years of no college payments a large portion of any student loans retired.

This is an actual case - the mortgage liens/refinancing are recorded in public records.  I believe it illustrates how many Boomers have failed to plan and manage their finances.  In this case you have 2 people looking to retire in less than 10 years, but probably can't as long as they have this large mortgage hanging over them.  I am sure you know of cases as bad or maybe even more extreme.

The year ahead - 2012

With the economy (and I am speaking of the world economy not just here in the US) things probably get worse before they get better. More job losses definitely seem likely over the next 2-3 years as countries (like Ireland and Greece) default and more people default on mortgages and bankrupt. Tough times also will lead to more corporate defaults (what the talking heads on TV say about corporate cash reserves is all fiction - according to the latest numbers corporations have about $30 trillion of debt) . Bank failures will increase. Insurance companies and other financial entities may not be able to pay the promised pension payments.

Now most people will tell you that the Federal Reserve will print more money and this will lead to inflation. This is wrong. We know from the Great Depression systemic economic failure leads to deflation not inflation. Or, look at the housing market. The Federal Reserve has added about $3 trillion to its balance sheet (much of it GSE debt of Fannie and Freddie) and housing prices have still deflated. You don't have to be a rocket scientist to figure this out - all you have to do is look at what is happening in the housing market. This proves that the Federal Reserve is powerless to stop deflation once you get systemic failure.

As countries fail the banks in Europe have to take huge write offs on their government bonds collateral and make related adjustments to the asset side of their balance sheet. This results in reduced assets and the ability to loan. Less money (reduced loans) and reduced velocity of money leaves Central Banks like the Federal Reserve powerless. They can print all the money they want, but they are powerless to put it into circulation if there is no demand for it. The result is deflation (not inflation).

With deflation those who have debt have to pay with dollars that are worth more over time so it becomes harder to service that debt. Inflation is the debtor's friend and deflation is the debtor's enemy.

Think it can't/won't happen. Watch the news. Japan just cut their projected growth rate in half for 2012. Japan/China just announced an agreement to trade priced in each other's currency rather than dollars (they know what is likely to happen). It appears likely China may hit a wall as economies slow and exports falter. Europe is probably already in a recession. The US seems to be at a stall point (note the stock market which often is a predictor and is about unchanged over the past 12 months) as 3rd qtr GDI was at .3%.  The US government is a mess - and I see no one (DemoRat or RePukeCon) with a long term plan to address the existing issues. I probably could go on and on, but you should get the picture.

So your best plan is to be/get debt free and build your cash reserves (some gold/silver may be advisable). Invest in real assets (land on which you can grow your own food?). Precious metals and land may deflate, but will probably do so at a rate slower than assets such as stocks, credit paper, etc.

The K-Wave winter is starting. Prepare.  Good luck.

Fixing jobs, housing, auto sales, social security, medicare

There recently was an article in the St. Petersburg , Fl. Times. The Business Section asked readers for ideas on: "How Would You Fix the Economy?" I think this 80 year old guy nailed it!

Dear Mr. President, Please find below my suggestion for fixing America's economy. Instead of giving billions of dollars to companies that will squander the money on lavish parties and unearned bonuses, use the following plan. You can call it the "Patriotic Retirement Plan": There are about 40 million people over 50 in the work force. Pay them $1 million apiece severance for early retirement with the following stipulations: 1) They MUST retire. Forty million job openings - Unemployment fixed. 2) They MUST buy a new AMERICAN Car. Forty million cars ordered - Auto Industry fixed. 3) They MUST either buy a house or pay off their mortgage - Housing Crisis fixed. It can't get any easier than that!! P.S. If more money is needed, have all members in Congress pay their taxes..   Mr. President, while you're at it, make Congress retire on Social Security and Medicare. I'll bet both programs would be fixed pronto!

Tired of the lies about Medicare

If you're wealthy or you receive Medicare, President Obama's proposal to cut the federal deficit could very well either raise your taxes or cut your benefits. There's no winning if you're both rich and a Medicare beneficiary.

Barry tells you he is the protector of Social Security and Medicare.  The facts say differently.  The fact is Obamacare took $500billion away from medicare to fund this program.  Now his new Kill Jobs and Tax program could hit Medicare again.  Where is the protection of Medicare with sensible reforms?  Barry refuses to address the problem and keeps slicing funding for Medicare.

Unspinning the fair tax

Make sure you understand what has been proposed (and may be again this election cycle) before you support it.   What you don't understand can hurt you.

The "Fair" Tax supposedly would replace Federal Income taxes, FICA, Medicare, inheritance taxes and other federal taxes. It would be a consumption tax.

In an article on the second GOP debate (2007), Gov. Mike Huckabee as well as Reps. Tom Tancredo and Duncan Hunter supported the FairTax. The bipartisan Advisory Panel on Tax Reform had "calculated that a sales tax would have to be set at 34 percent of retail sales prices to bring in the same revenue as the taxes it would replace, meaning that an automobile with a retail price of $10,000 would cost $13,400 including the new sales tax." Some pointed out that H.R. 25, the specific bill mentioned by Gov. Huckabee, calls for a 23 percent retail sales tax and not the 34 percent used by the Advisory Panel on Tax Reform. That 23 percent number, however, is misleading.....
　

　
Analysis

A 23-percent (of the tax-inclusive sales price) sales tax is imposed on all retail sales for personal consumption of new goods and services.


How to Make 30 Look Like 23
  First consider the way in which sales tax is normally figured. A consumer good that carries a $100 price tag might be subject to a 5 percent sales tax. That means that the final bill for the item is $105. The 5 percent figure is the amount of tax that is charged on the original purchase price. But now suppose that instead of pricing the item at $100, the shop owner simply priced the item at $105, then sent $5 directly to the state. The $105 price would be a tax-inclusive sales price. But $5 is just 4.8 percent of $105. That 4.8 percent number, however, is relatively meaningless. You are still paying exactly the same 5 percent tax on the item.

The 23 percent number in H.R. 25 is the equivalent of the 4.8 percent in the previous example. To calculate the real rate of the sales tax, we have to determine the original purchase price of an item. We can begin with the same $100 item, keeping in mind that a price tag that reads $100 has sales tax already built in. If our tax rate is 23 percent of the tax-inclusive sales price, then of the $100 final price, $23 of those dollars will be for taxes, meaning that the original pre-tax price of the item is $77. To get $23 in taxes on a $77 item, one must impose a 30 percent tax. In other words, a 23 percent sales tax on the tax-inclusive sales price is equivalent to a 30 percent tax on the actual price of the item.

FairTax proponents object to the 30 percent number, claiming that critics use the larger number to frighten people. Americans for Fair Taxation claims that it uses the tax-inclusive number to make it easier to compare the FairTax to the income tax that it will replace (since most of us think of income tax rates on an inclusive basis). But we are not accustomed to thinking of sales taxes inclusively. The result is that many FairTax supporters (about 15 percent of those who wrote to us, for example) do not understand that the 23 percent figure is tax inclusive.

Analysis of the FairTax used a figure of 34 percent as the basic exclusive tax rate. As someone pointed out that our number was at least 10 percentage points "higher than [the FairTax] is" because we calculated it as an addition to retail prices. But our 34 percent number is not 10 percentage points higher than the legislation. A 34 percent exclusive number is equivalent to a 25 percent tax inclusive rate – only 2 percentage points higher than the FairTax bill. We think that, intentional or not, the use of the tax-inclusive 23 percent rate has misled a lot of FairTax proponents.

Flat tax or senior screw job?

Now for the higher income seniors a flat tax may be good, but for your average senior (say with an income of $30,000 per person) may be a another way to put the burden on those who already struggling to maintain a decent life style.  RepukeCon Cain is proposing a flat tax of 9% which I believe includes payroll taxes like FICA and Medicare.  For the bottom end this is a tax increase, for the more affluent this is a tax decrease (Payroll taxes for FICA and Medicare is 7.65% and 9% is greater than 7.65% and I would assume no EIC).

From the discussion of the flat tax I have heard it would eliminate exemptions and deductions.  This means you would pay taxes on the first dollar of income. 

Let's suppose you are single and drawing $18,000 in Social Security benefits.  In addition you receive about $12,000 of income from your retirement funds (company retirement or IRA).  Your total income is around $30,000.  Now if 1/2 your Social Security ($9,000) and other income ($12,000) is less than  $25,000 your Social Security benefits are not taxable.  In this case $9,000 + $12,000 is less than $25,000 so your Social security benefits are not taxable.  Your income subject to tax is $12,000.  Your personal exemption and the standard deduction total is around $8,500 so that leaves $3,500 taxable at a 10% rate.  Your federal income tax is around $350.

Under a flat tax of 9% your taxes on $30,000 ($18,000 Social Security + $12,000 other income) would be about $2700 or almost 8 X your current taxes.  Even if Social Security was excluded if you tax $12,000 from the first dollar the tax  your tax would be over $1,000 or almost 3 X your current tax.

I can't answer for you, but I have planned my future based on the current tax rules.  I say leave them alone!!!  Also, Cain is proposing a 9% sales tax.  This guy is a nut case IMO.

Isn't the lack of interest you are (interest not received) enough of a hidden tax?  How much do they think they can push on to seniors with limited income.  I did warn you early on though they would come after the money you had put aside for your retirement (because that is where the money is). 

Is Social Security a Ponzi scheme?

Perry seems to have started quite a discussion.  Whether it is a Ponzi or not the way the government has run it (treated it as a source of general revenue funding) is a fraud.  There is no Social Security reserve fund, it a bunch of Government IOUs.  Today the income from FICA payroll deductions is less than what is being paid out each month.  To make matters worst in typical DC think they have cut the FICA payroll tax which makes the problem worse.

If a private company treated pension funds the way the government has Social Security some body would go to jail.  There are requirements on private companies regulating the security of pension funds and funding levels. 

more information on the subject:

http://www.financialsense.com/contributors/bruce-krasting/2011/09/13/is-social-security-a-ponzi-scheme-i-think-so