Hurting seniors

By: Dock Treece | Fri, Jan 24, 2014

 During the tough economic times of the past six years, steps have been taken to stabilize the US financial system. Some may disagree with what, but virtually no one denies that something had to be done. During that time the Federal Reserve, in soon-to-be-former-Chairman Ben Bernanke's words, "provided liquidity to the financial system." By "the system," Bernanke is referring to banks - big banks.

The Fed's preferred method for "providing liquidity" over the past several years has been a combination of several steps. First, interest rates were pushed down to artificially low levels - and kept there. Second, the Fed provided liquidity through asset guarantee programs. Most recently, several rounds of quantitative easing provided more direct injections of "liquidity" to our nation's financial system. (Note: The substitution of "financial system" for "economy" is intentional, as liquidity was provided to one but most certainly not the other.)

These steps, as many readers will note, have been discussed in this space numerous times. However, at the risk of sounding repetitive, let us summarize previous articles by saying that none of these steps was taken to benefit the American public; nor were they taken to benefit America as a nation. They were taken to help big banks.

In fact, this process has actually done a great deal to hurt Americans - most especially seniors. Most retired Americans provide for themselves through fixed income solutions; be they CDs, bonds, pensions, old 401ks, annuities, or any one of a number of various products. The majority of these structured products are tied to interest rates and consumer prices. When interest rates are higher, investors holding bonds are paid more on their investment - in other words, their incomes are higher. Most structured fixed income products behave according to this general principle.

This all means that, as a direct result of the Federal Reserve's low-interest-rate policies, American seniors have suffered from a significant lack of income over recent years. For many who encountered losses, first in the tech bubble of 2000, then the more recently calamity of 2008, this income shortage has translated into a lifestyle change - and not for the better.

Mind you, this sacrifice by our nation's seniors might have been avoided; or it might at least have been justifiable - if any of the problems which solved it had actually been resolved. Unfortunately, that's not what happened. The policies listed above (and others which have surely been overlooked) were supposedly instituted to resolve the problems on big bank balance sheets.

Instead, the Fed didn't fix the problem - they just made it bigger; they magnified it. In many regards, the American financial system today is more dangerous than it was in 2008. In 2008 we learned the system (as it was then) was too big to fail; now it's almost too big too hiccup.

And what insight is to be gleaned from these unfortunate developments? Our best hope - what seems to be highest and best use (although still sad) use for all the suffering which has been endured - is that people finally learn that their votes matter. Whether on a local, regional, or national ballot, votes have consequences which go far beyond the immediate, foreseeable future.

In many ways, seniors today are facing problems (and will likely continue to face problems) due in part to votes cast decades ago. Just as Jimmy Carter's policies led to runaway inflation and the unnecessary explosion of asset prices, George W. Bush's foreign conquest spurred federal spending which grew the national debt and involvement in unstable regions.

Many of these policies have been continued by President Obama, but combined with a new progressive social agenda at a time when our country can least afford it.

Our country - and our seniors - will get through these problems. This is not the end of America, or of our economy. Nor is it the last of our debacles. All we can hope is to learn from our mistakes going forward, so that, perhaps instead of repeating those mistakes, we can move on to make new ones.

The Government has eyes on your IRA

I  told you  over 2 years ago that the government would go after IRA/401k money.  I guess ZIRP  (Zero Interest Rate Proceeds - robbing you of a reasonable return) is not enough.  Be sure when interest rates go up there will be a push by the government to force retirement program funds into government securities at sub par rates.

Here is an article on this:  http://www.economicpolicyjournal.com/2012/12/how-government-is-coming-after-your-ira.html?m=1

Enjoy

Raiding SS OASI for Disability Income payments

Every politician in America knows that Social Security (SS) is a third rail. Any Pol who tries to mess with the country’s largest and most popular entitlement program is going to have the likes of the AARP coming after them. It’s not possible to win an election on a platform that advocates cutting back SS.

With that in mind, I find it interesting to report that a very credible source is now predicting that Obama AND Congress will take action over the next 24 months that will substantially undermine both the long and short-term health of SS. The legislative raid on SS will certainly total in the hundreds of billions, it could top $1T over the next fifteen years.

So who is this “credible source”? And just how is this raid going to happen? The source of this information is the Congressional Budget Office (CBO); the following is how it will play out:
SS consists of two different pieces. The Old Age and Survivors Insurance (OASI) and Disability Insurance (DI). Both entities have their own Trust Funds (TF). OASI has a big TF that will, in theory, allow for SS retirement benefits to be paid for another 15+ years. On the other hand, the DI fund will run completely dry during the 1stQ of 2016. By current law, the DI benefits must be cut across-the-board by 30% on the day that the DI TF is exhausted.

This would mean that 11 million people (most of whom are very sick) would get slammed from one day to the next. There is no one in D.C. who wants this to happen. I don’t think the American public wants this outcome either. So what are the fixes?
1) Increase income taxes on +$250k of income to pay for the DI shortfall. Maybe, but this will not happen with the current Republican controlled House.
2) Increase Payroll taxes to cover the DI shortfall. I see zero political support for a permanent Payroll tax increase.
3) Cut benefits by 30%. This would be insane – it will not happen with Obama running the show.
4) Kick the can down the road and raid the OASI TF for the annual shortfalls at DI.
Of course #4 is the path that will be taken. #s 1, 2 and 3 are not politically feasible. I have been wondering what will happen with the DI conundrum. I was surprised to see that the CBO spelled out what will happen in its report on the Budget and Economy – SS Trust Funds. The report has this footnote:

CBO projects that the DI trust fund will be exhausted during fiscal year 2016. Under current law, the Commissioner of Social Security may not pay benefits in excess of the available balances in a trust fund, borrow money for a trust fund, or transfer money from one trust fund to another. However, following rules in the Deficit Control Act of 1985 (section 257(b)), CBO’s baseline assumes that the Commissioner will pay DI benefits in full even after the trust fund is exhausted.

The “loophole” to drain the OASI insurance is already law – so Congress doesn’t have to do anything to raid the retirement fund. The “do nothing” plan is always the best option in D.C.
The footnote goes on to provide an estimate for the size of the raid:

For illustrative purposes, below are the cumulative shortfalls in the DI trust fund beginning in 2016. Those shortfalls do not include interest expenses.

DI Trust Fund Cumulative Shortfall
($s in Billions)
2016 -15
2017 -55
2018 -94
2019 -133
2020 -173
2021 -215
2022 -260
2023 -307

Wow! At this rate the raid tops $1T in 2029. This is is a big dent in a Trust Fund of $2.8T.
There is an import “tell” from the CBO. In the footnotes it highlights the fact that there is a discrepancy, and uses this an excuse to avoid establishing an adjusted end date for the OASI Trust Fund. (It’s not a complicated calculation)

What the CBO fails to state is that the raid on OASI will result in a significant reduction in the End Date for the retirement Fund. In its report to Congress last year SS forecast that the Retirement fund would be exhausted in 2033. The DI drain (and other negative revisions by CBO) will bring the End Date to below 2030 in the upcoming SS report to Congress. That would be a very significant development. The CBO does not want to be the one who puts a new SS end date “out there”. To me, this was a cop-out by the CBO.

Given that discrepancy between the trust funds’ operation and the baseline’s assumption, CBO is not providing DI or combined trust fund totals for the year of exhaustion and thereafter.

The timing of this story is interesting. The question in my mind is will the “fix” come before or after the bi-election. If Obama was a gambler, and he believed the Democrats could re-take the House in 2014, then he might defer action on DI until 2015. This scenario creates the opportunity for option #1, a tax on the rich to supplement DI. Of course that is gambling, and there would be a small window of time to push through a new income tax to save DI.

Then there is the Republicans. Do they want to push this before, or after 11/2014? I could argue both ways, but in the end, it gets back to the fact that no one wants to “do” anything with SS. It’s better to do “nothing”; that makes #4 the most likely outcome.

I hope that some of the big Defenders of SS pick up on the information from the CBO regarding the coming raid on the retirement fund. This is a huge constituency (60m beneficiaries – 150m contributors – every politician in the country – all of the Press). If that group catches on to what is about to happen to the retirement fund, there will be a great chorus of, “Don’t you dare touch my money!”

I’m trying to stir the pot on this one. I want DI’s terminal condition to come onto the table sooner versus later. I’m hoping that if and when it does come up for discussion, it opens the door on the broader issue of what the hell America is doing with entitlements. Basically, I’m trying to pick a big fight. For the good of the country, wish me luck.

Source: BruceKrasting.blogspot.com

Taking your retirement funds

With disturbing trends taking place here and abroad, Michael Ross asks, "Are tax-exempt savings in IRA and 401(k) plans a tempting target for a bankrupt government?"...

Retirees, investors, business owners, and countless others are becoming increasingly concerned by the growing debts of governments worldwide. As Japan slips into its third decade of an ever-deepening recession, observers also point to the United States, whose national government indebtedness is now the largest of any in human history. Consider these facts:

• In 2001, the US federal debt was less than $6 trillion. By the end of the 2012 fiscal year (September 30), it had topped $16 trillion [source: Treasury Department].
• It increased more during President Obama's first three years and two months in office than it did during the eight years of his predecessor's two terms [CBS News]. By the end of Obama's first term, the debt had increased by $5.8 trillion, which is greater than the total debt accumulated under all the presidents from George Washington through Bill Clinton [CNS News].
• The US government is responsible for more than a third of all the government debt in the world, which itself is now well past $40 trillion [Huffington Post].
• The ratio of US federal debt to the country's entire GDP is almost 75 percent, and the country's external debt relative to its GDP has reached 103 percent [Trading Economics], making it the second worst major country, and putting it in the fiscally disreputable company of Ireland and Portugal.
• The US government debt is increasing by about $150 million every single hour. It now exceeds $52,000 per citizen, and is almost $146,000 per taxpayer [US National Debt Clock].
• The first trillion of debt took two centuries to accumulate, while the most recent trillion was racked up in only 286 days [Sovereign Man].
• This is the official debt, and thus merely the tip of the iceberg of unfunded obligations of Social Security and Medicare, estimated at an astounding $222 trillion, by economics professor Laurence J. Kotlikoff [Real Clear Policy].

With Keynesian economists claiming that indebtedness is not only benign but economically beneficial, and American politicians asking every voter to trust that they will somehow balance the books in the future, we should ask ourselves how this is going to end. If history is any guide — and it invariably is — then it all may end quite badly. Every major political power in the past — even the mighty Roman Empire — could not sustain these levels of indebtedness forever. In the meantime, it is a worsening drag upon the American economy. Economists Carmen M. Reinhart and Kenneth Rogoff (authors of This Time Is Different: Eight Centuries of Financial Folly) have shown that government debt exceeding 90% correlates with a decline in economic growth of approximately one percentage point each year. More disturbing is Professor Reinhart's observation that hitting the debt wall is typically an unexpected and nonlinear event [Wall Street Journal]. (Anyone who wishes to learn more about the US national debt can view the documentary "I.O.U.S.A." or a condensed version.)

There is ongoing debate as to how long the United States can continue to sustain these growing levels of federal debt. Based upon analysis conducted by The Comeback America Initiative, a deficit watchdog group, the Sovereign Fiscal Responsibility Index [Wall Street Journal] indicates that the US government is on target to default within 16 years.

Saviors at the Ready?

Will foreigners, including the central banks of China and Japan, continue purchasing US debt (primarily for maintaining currency stability with the US dollar for mercantilist purposes)? That trend appears to be ending, as those banks have started the process of slowly but surely reducing their exposure to US Treasury securities [Business Insider]. In fact, the Federal Reserve is now compelled to purchase 90 percent of all new Treasury bonds, a.k.a. "monetizing the debt " [Bloomberg].

Will American state governments be able to bail out the feds? That is unlikely, since most of them are deep in hock as well. The profligacy of the California state government is well-known, but more fiscally conservative states are similarly increasing their debt and tax burdens. For instance, in Texas, since 1993, local sales taxes and property taxes have increased by 170 percent and 188 percent, respectively [Mish's Global Economic Trend Analysis], but none of that has prevented the combined state and local debt in 2011 from reaching $233.2 billion, which is $8,950 for every one of the 26 million Texans.

Will the federal politicians be able to rein in spending? Social Security consumes 20 percent of the budget [NBC News], and is already running large deficits that are projected to increase dramatically [The Heritage Foundation]. Those costs will be exceeded by those of Medicare in the decades ahead [The Heritage Foundation]. Combining all forms of entitlement spending, the total will nearly double by 2050, after 78 million baby boomers have retired and their health-care costs have skyrocketed [The Heritage Foundation].

Could we see sizable cuts in the national military budget? Probably not. It too accounts for 20 percent of the federal budget. The United States spends more than the rest of the world combined on its military, and has over 660 bases in over 38 countries [PolitiFact], with more than a quarter million troops stationed overseas [Global Research]. Ever since the attacks of 9/11, new bases have been added in seven countries. Military spending consumes more than nine percent of the country's GDP, and that is increasing [Zero Hedge], as we now deploy additional troops into African nations.

Overall, total federal spending is increasing rapidly. In 2012, it broke through the level of $30,000 per household, and is expected to exceed $34,600 by 2022 [The Heritage Foundation]. In fact, it is growing 12 times faster than the US median income [The Heritage Foundation]. Even halfhearted attempts to reduce future spending — such as the "Super Committee" — have failed [Casey Research]. The trends are undeniably clear and worrying in the series of charts referenced above [Business Insider].

Will tax increases solve these fiscal problems? According to data from the Internal Revenue Service, in 2009 (the latest year for which data has been provided), the top one percent of earners paid more than 36 percent of all federal tax revenues collected, the top five percent paid more than 58 percent, and the top 10 percent paid more than 70 percent of income taxes [National Taxpayers Union]. What are the odds that the feds will be able to successfully squeeze even more money out of the business owners and others who create and manage the wealth? At the other end of the spectrum, roughly half of all Americans paid no income tax [The Heritage Foundation], and that is unlikely to change given the current political environment. We now have only 115 million Americans paying income taxes, but 120 million receiving government entitlements, and it is growing at a rate of more than six percent every year [Richard Russell].

Foreign Precedents?

Nonacademic Americans are often criticized for not understanding basic macroeconomics. But at a personal level, they cannot help but feel the impact of government spending on their own financial well-being. They may not know the exact numbers or the prevailing forces at play, but they must have a sense of it all, as they struggle to make ends meet, despite working longer hours. In 2012, working Americans lost 197 days of earnings as a result of all government costs, and the trend is worsening every decade [Cost of Government Center]. In effect, 54 percent of US workers' income is consumed by government.

Americans of all income levels will naturally adjust their behavior to try to minimize the negative impact of increasing taxes and fees, and this often includes deferring income taxes by contributing a portion of their paychecks and self-employment revenues to tax-deferred accounts, such as 401(k)s and IRAs. Government officials, mainstream financial planners, tax attorneys, and financial commentators constantly urge Americans to maximize these contributions. But are those funds safe?

A growing number of European nations have seized private and public old-age funds that retirees assumed were off-limits to confiscation. In March 2009, the government of Ireland took 4 billion euros out of their National Pensions Reserve Fund (NPRF) in order to prop up their insolvent banks during the financial crisis. In March of the following year, government officials stole the remaining 2.5 billion euros to bail out the rest of the country [Christian Science Monitor]. In May of 2011, the government began raiding the private pensions, with a special tax [Business Insider].

In November 2010, the French parliament decided to pay off debts in their massive welfare system — specifically, the social debt sinking fund Cades — using the 36 billion euros in the Fonds de Réserve pour les Retraites (FRR), their reserve pension fund [Financial News].

Also during that November, the government of Hungary decided to reverse the pension reform it wisely initiated in 1997, by forcing the private pension funds back into the national pay-as-you-go system, effectively taking 2.7 trillion forints ($13.5 billion) owned by 3 million people who had counted upon that money being available when they retired [Wall Street Journal]. Less than two years later, the Hungarian Cabinet had spent about 1.5 trillion forint of the assets buying back government debt. The remaining assets declined in value to 591 billion forint ($2.6 billion), another reminder of governments' abilities to manage assets [Bloomberg].

The Bulgarian government tried to pull off something similar, when they attempted to transfer $300 million of private early retirement savings into the state pension system, but snagged only 20 percent of the money because of protests by trade unions [Christian Science Monitor].

That Christian Science Monitor article points out that the United Kingdom appears to be moving in a similar direction, in the form of a minimum pension for up to 11 million workers, with automatic enrollment.

That same source also notes that the government of Poland nationalized one third of future contributions to individual retirement accounts, moving the funds over to the national social security system. That government scheme has no assets; consequently, the money will disappear into the state treasury, and savers will lose about $2.3 billion per year. Earlier, the government tapped their Retirement Reserve Account for current funding in 2010 [Zero Hedge]. Another article indicates that the confiscated amounts were much higher, at 5.6 billion euros [Zero Hedge].

In southern Europe, the insolvent government of Greece decided to freeze pensions, cut public bonuses, and raise several taxes, to comply with demands from the EU as part of their bailout deal [RFI].

Many of these government officials may have gotten the idea from Argentina, which in 2008 nationalized $30 billion in private pension funds [New York Times]. Other sources suggest that the value of the assets had dropped to $24 billion, by the time President Cristina Fernandez de Kirchner euphemistically termed the takeover as a "recovery of the administration of the workers' resources" [Bloomberg].

In several African nations, such as Uganda, instances of government officials raiding public pension funds, are so numerous as to be almost expected from each administration that takes what it can while in office.

Pension funds can even disappear as a result of the actions of other countries. For instance, the Palestinian Authority lost two-thirds of its entire revenues when Israel froze the money in bank accounts [IMEMC News].

United Seizings of America?

As early as August 2010, some American retirees learned of disturbing proposals in Washington DC that many sources characterize as eventual confiscation of private retirement assets. This would be accomplished by forcing Americans to invest their tax-deferred monies in government bonds, which is effectively confiscation through monetary inflation, as the real value of those funds are depreciated through currency debasement. Specifically, the US Departments of Labor and the Treasury held joint hearings, during which was discussed government plans to eventually take control of all assets in IRAs and 401K accounts and replace them with US government “Treasury Retirement Bonds”, whose 3% rate of return would be less than the actual increases in the cost of living [Coin Update].

That article also notes that, at the end of 2008, there were an estimated $3.613 trillion of assets in IRAs and $2.350 trillion of assets in 401K plans. Those tax-deferred accounts represent a juicy target for a bankrupt federal government, and arguably could have their rules changed at any time, since the monies have not yet been taxed. Economist Teresa Ghilarducci is one of many who testified in Washington DC and called for a federal government takeover of private retirement plans, in a plan so radical that even a mainstream media source termed her the most dangerous woman in America [U.S. News & World Report].

Could something like that happen in the "land of the free"? In a sense, it is already beginning. The US government started with a more compliant target, namely, their own federal workers. In May of 2011, Treasury Secretary Timothy F. Geithner, in response to the federal debt approaching the debt ceiling, began borrowing from the retirement funds of federal employees [Washington Post]. in January of the next year, this act of desperation was repeated [Reuters]. Even the U.S. Consumer Financial Protection Bureau is thinking of "helping" Americans manage their $19.4 trillion in retirement savings [Bloomberg]. The feds appear to be implementing this step-by-step, to see at what point Americans start pushing back.

The government is already contemplating another mandatory retirement system, called the "Automatic IRA", which would force businesses that do not have retirement plans, to fund accounts that would be forced into investing in Treasury bonds — thereby taking even more money from an estimated 40 percent of American workers and "investing" it into US debt [Money and Markets].

Simon Black commented, "The US government is $16.4 trillion in debt, and will be running $1+ trillion deficits for five years in a row. And the pool of retirement savings is irresistible. [...] they'll launch new regulations funneling a substantial portion of US retirement savings to 'the safety and security of government bonds'" [Sovereign Man].

How much longer until the top-level federal employees decide that it would be better to raid the much larger retirement funds of non-federal workers? Why should Americans presume that our government will behave any differently than those of other fiscally desperate countries? When, not if, US bondholders decide they have had enough IOUs and other empty promises, the feds may find our retirement savings to be too tempting a target.

Copyright © 2013 Michael J. Ross, website developer. All rights reserved.

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
.
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!