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

Punish the savers

Barry has a plan to do a mega refinance of mortgages and he plans to end run the congress.  It will take from savers to give to the borrowers.  Here are the details:

http://www.financialsense.com/contributors/bruce-krasting/2011/09/12/more-on-the-mega-refi

Hold on to your wallet

I told you in one of my very first posts - If you are retired (or soon will be) and have funds for that - that they would come after you - because that is where the money is. 

Here is a long and detailed article telling you how.  It is long, but worth the read:

http://www.financialsense.com/contributors/daniel-amerman/2011/09/12/the-2nd-edge-of-modern-financial-repression

Benanke impoverishes seniors

“A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank.” - Ron Paul

The Fed has told us interest rates will remain exceptionally low for an extended period.  This is bad for those seniors whose savings are invested in CDs and savings at the bank.  The banksters who created this mess are being bailed out on the backs of seniors who can least afford it.  How does Bernanke sleep at night knowing what he is doing.  Yes he knows, but he seems to be void of humanity.

This data sets the scene for the crime of the century committed by Ben Bernanke and his co-conspirators on the Federal Reserve Board. The easiest way to understand how Ben has impoverished seniors and savers to pay off his Wall Street and K Street benefactors is to use a real life example.

A seventy five year old widow living in her paid off row home, bought in 1955, gets by on her annual social security income of $17,000 and the income generated from the $125,000 in retirement savings left from her husband’s forty years working as a truck driver. She is a child of the Depression, financially unsophisticated and risk averse. This describes most senior citizens. The widow and her late husband were only comfortable investing their money in CDs and money market funds. In 2007, before the Wall Street created financial collapse, savers and risk averse senior citizens could earn 5% in a money market fund, 5.5% in a 2 year CD and 6% in a 5 year CD. The widow could supplement her meager social security income with an additional $6,000 of interest income. This money was used to pay the ever increasing real estate taxes, medical insurance premiums, upkeep on the old house, and necessities like food, fuel, insurance and heating.

Fast forward four years to 2011. Savers and seniors are getting average interest rates on 6-month CDs this week of 0.58% nationwide, according to Bankrate.com. Rates on one-year CDs fell this week to 0.86%, while 5- year CDs fetched 2.04%. Money market funds are paying a pitiful 0.16% on average. The widow that was able to generate a risk free $6,000 only four years ago has only been able to generate less than $500 per year for the last three years. In addition, the government manipulated CPI, as calculated by the drones at the Bureau of Labor Statistics, was used to deny senior citizens an increase in their Social Security payments for the last two years. Meanwhile, the prices of food, fuel, clothing, insurance, medical care, and local taxes have been skyrocketing due to Federal Reserve created inflation. Do you think the number of Americans on food stamps surging from 26.3 million in 2007 to 45.8 million today has anything to do with Bernanke’s zero interest rate, inflationary policies?

http://www.financialsense.com/contributors/james-quinn/2011/08/15/bernanke-impoverishing-grandmothers-to-benefit-wall-street-bankers

Dec 20 I asked - can you live without Social security?

I told you this was something to consider in your survival planning.  Now I know most have not had time to implement any plan, but in 3 days you may get a trial run at what it could be like if there was no Social Security payments coming in or if they came in at at lower levels or not every month. 

Do I have a crystal ball?  No, I don't.  But, when you look at SS and its financial situation you know. There is NO trust fund - that is just another Government lie.  If business did what the government does somebody would go to jail.

So while the RePukecons and DemoRats put on Kabuki theater many people may not be able to buy groceries or meds come August 3.  Yet the DemoRats are telling you how they are protecting you from the RePukecons.  Give me a break!!!  What good is a solvent SS system if you can't get you meds and die next week because of political gamesmanship?  Not a damn bit of good to you.

So figure out a way (some way) to set aside some money for situations like this.  Bum it from the children?  Hell - if you have to bum it on the street corner and have it when you need it.

http://boomerfinancialsurvival.blogspot.com/2010/12/can-you-survive-retirement-without.html

Stop wasting money - 5 big wasters

Lottery Tickets
Going to win the lottery? If you doin't play you can't win. That's the pitch. So let's say you spend just $5 a weeki on the Super Mega Power Ball because you want to be a multi-millionaire. Well, I got news for you - the states love lotteries because of all those winners. NOT!!! They raise millions every week based on all the losers. The chances of winning the lottery is right up there with "Rapture" happening at 6PM on Saturday May 21.

So save that $5 a week, $22.50 a month or $260 a year.

Informercial Impulse Buys
Those gadgets are soooo tempting. That sealant will seal anything. They should have used it on the levees in New Orleans during Katrina. Let's face it - most of the things depicted on Informercials are never used (or at most used once or twice). Older people seem especially suspect to Infomercials. Learn to say NO. Change the channel. That $10-20 a month could be a nice meal out every month.

Brand Name Groceries
Sure Kellogs corm flakes tase better than the generic brand (or do they?). Truthfully, I have never been able to tell the difference. Does Del Monte can cream corn tase better than the generic brand? Not that I can tell.

OK, maybe you are picky about your food - how about paper products, cleansers, etc - you don't eat them.

You can find many generic substitutes for products you use every day. Often they are 10-20% cheaper than the name brand. So where acceptable substitute generics for name brand products. and save.

Unused Gym Memberships
Have trouble finding time to getting to to the gym. The bill will still come in every month. Maybe it is time to cancel that membership, use the money to buy some weights, etc that are there in the rec room at home when you find 5-10 minutes to exercise. Just a thought - It could save you $300-400 a year.

Bundled Cable, Internet and Phone Services
 You know a good deal when you see it. That cable/internet/phone bundle at $100 is a steal. Or, is it. You rarely use the phone services because you have a great cell phone service. So maybe that phone service is a waste of money?

And all those cable channels - most of which you never watch - maybe you are overpaying for what you need. A basic service may cost less than the bundled price.

And that superfast internet service. Do you use the internet at home that often? Maybe a cheap dial up plan is more suitable based on you use habits.

So how good a deal is that bundled cable/internet/phone service?

The house is on fire - pour gasoline on it to put it out

That seems to be the thinking of politicians in Washington.  Here is the headline:  Social Security TF – “We lost $1.1 Trillion last year!”.  What this means is the Social Security trust fund is $1.1 trillion dollars more underfunded that it was 1 year ago.  They use something called NPV (Net Present Value - a finance term) to determine how many $s is needed today to meet future obligations.  And Social security is $1.1 trillion worst off that it was a year ago as boomers are retiring in larger numbers than anticipated (IMO - largely due to the economic situation).

So what do the DemoRats and RepukeCons do?  They give workers a holiday on the payroll (translated FICA/SS) taxes.  That is the gasoline they are using to put out the fire.  The number of idiots per thousand people in Washington must lead the nation.  I suppose it is a good thing that many of the members of congress got fired in November.  We will see - the new crop may be as big idiots as the old crop.

Retirement tax planning

Tax season is over. No time like now (while the facts are fresh) to look at what you paid in taxes and the source of those tax hits. What should retirees (or soon to be retirees) consider? Time to plan and implement strategies for 2011 and the future.

Can you answer this question: Will you get a refund or not next year? I won't (but then I plan it that way - I won't owe a lot either). If you don't know the answer now is a good time to answer that question. You can owe up to $1,000 without penalties so you want to make sure that you meet that threshold (make quarterly payments if needed). Be proactive. Look at last year's return. Where did all your tax liability come from? Stop being a victim to taxes and take control of how you pay your taxes to Uncle Sam. Make sure next April is not a huge surprise.

If you feel incapable of analyzing your return maybe it is time to consult a financial planner to go over your most recent tax return and explain in detail where all the tax liability originates. You want to make your cash flow as tax efficient as possible.
　
We spend a lifetime planning and accumulating funds for retirement and little or no time in planning the distribution of those funds. Do you have a pension? Are you collecting or planning to collect Social Security? How much additional cash flow are you going to need to draw from your assets to maintain an acceptable lifestyle?

What assets are making you Social Security mare taxable? You need to look at sources that are taxable and assets that are non-taxable. For example you pension is probably taxable in part (or all). Withdrawals from regular 401Ks and regular IRAs are taxable. Withdrawals from Roth IRAs (Roth 401Ks) are not taxable. Money from savings (IE CDs) are not taxable (the interest is). So maybe you want to draw down savings generating taxable interest (not that that is a problem with current low interest rates - another reason you may want to reduce the assets in this bucket) . Maybe you have investments you can turn into cash with little or no taxes (sell losers to offset gainers?).


You may want to tap sources of cash flow that will limit the taxes on your Social Security benefits. See prior posts on tax planning and Social Security:


http://boomerfinancialsurvival.blogspot.com/2011/02/retirement-doesnt-mean-no-tax-planning.html

Other strategies may be to take advantage of tax credits by installing solar panels or a wind turbine to generate a tax credit (and reduce future utility costs). Or you need to replace a washer or dryer get one that qualifies for an energy savings tax credit?


Whether to file itemized (or standard deduction) may depend in large part on medical expenses. Planning those expenses into one year to maximize them is a strategy to maximize the benefit especially if a procedure is needed but optional.


This is not meant to be a complete tax guide, but a starting point. At age 70 1/2 you face RMD (Required Minimum Distributions) from IRAs and 401Ks. This RMD needs to be considered in your tax planning today - especially if that minimum is substantial. It might make sense to transfer a sum each year to a Roth and pay the taxes now?

Medicare has more holes than Swiss Cheese

For those of you nearing 65 and can qualify for Medicare you need to do some research. We are hearing a lot of talk about Medicare and how it is sacrosanct to the older retired population.  Well, to begin with it is not a free ride.  It will cost you about $100 For Medicare Parts A & B ( hospitalization and doctor's visit).

To begin with there is a $1,132 copay for hospitalization and $162 copay for physician visits.  So even for a short hospital stay and a couple of visits to the physician you will pay another $1200 (or $100 a month). 

After 60 days in the hospital Medicare  - for days 61-90 you pay $283 a day (that is $8,490).  For days 91-150 you pay $566 a day ($33,960).  So for a 150 day hospitalization you could pay  $43,582.  After 150 days medicare pays nothing!!!

Also, during hospitalization Medicare pays only 80% of physician expenses.  For a $60,000 physician bill that would leave you owing $12,000 or more for an extended hospitalization.   So an extended hospitalization could cost you over $50,000.

If you are not sick enough to be hospitalized then it is not much better.  Medicare pays 100% of approved costs for the first 20 days in a skilled nursing facility , all but $141.50 a day for days 21-100  and nothing after 100 days.  If you become disabled (say a stroke leaves you incapable of caring for yourself?) you are screwed.  You will end up broke and on Medicaid (have seen it happen in my own family).  Insurance cost for extended care is very expensive and may not be affordable.

My point is - Medicare is not the solution many think it is.  So you will want supplemental insurance to help cover the hospital and physician costs not covered by Medicare.  A good hospital/physician supplemental plan will probably cost $200-250 a month.

So even if you remain healthy you can expect topay  $350 or so a month (over $4,000 a year) for health insurance ($100 for Medicare and $250 for supplemental insurance).  This is before drug coverage.  Drug coverage cost will vary based on the plan you select and your need for drugs.

So it is amazing how politicians play on fears of the elderly and misrepresent the actual benefits of Medicare.  Like I said to start off this post - if you are nearing 65 you need to do some research so you can select the appropriate supplemental insurance plans.  Medicare is not the "be all" many of you think it is.  A voucher system to purchase your own insurance (ie Medicare Advantage that Obama's health care plan wipes out) may be superior to the current mess know as Medicare. One would have to see the details and costs of insurance.  Don't wait until the last minute to do start your research - this is much too important and the wrong decisions can be financially catastrophic.

Boomers and divorce

You see the news.  Al Gore, Tony Danza,  and many many more high profile boomers going through divorces.  Is it just high profile people?   No it isn't.  While the overall divorce rate has decreased recently it has doubled for boomers in their 50s.  This means 300,000 divorces this year for those in their 50s.

Divorce at any age can be rough to handle emotionally.  But for younger people with few assets and no children it is simpler.  Those in their 50s often have accumulated assets and this makes it not only emotionally  tough, but handled poorly it can be financially disastrous.  If you are in your 50s you have little time to recover for a severe financial setback, so it is critical you compartmentalize the emotions, the anger and focus on the financial implications and make the best deal you can.  I am not talking about being unfair - but about making sure you consider all parts of any financial settlement. 

Say there is a $300k house paid for and there is $350k in 401k/IRA asset plus some cash savings ($100k in a CD).  I am keeping it simple for the sake of illustration (your situation is probably more complicated).  She wants the house and  half the cash savings  and $25k IRA that is in her name (total $375k).   You get your  retirement savings ($325k)  and half the other cash savings ($50k) or $375K of assets. 

Sounds fair - doesn't it?  Wait a minute - hold your horses.  Most of the assets you get don't yet have taxes paid on them.  So that $325k of retirement assets may be worth only $250k (or less) net of  taxes.   So as you can see it can get complicated and you may need professional help in achieving an equitable settlement. 

If there are under age children involved this adds considerably to the complications (in most states there are guidelines and forms similar to tax forms to figure out what each partner should contribute to support),  This at least provides a good negotiating starting point. 

If alimony is involved then Social Security benefits should not be ignored,  if you were married at least 10 years the spouse is able to collect on the other spouse's earning record if it results in a higher level of benefits.

I am sure I have only scratched the surface.  Having gone through this process in my late 40s I can assure you reaching an agreement may take time.  My advice to you is not let the emotional aspect override your common sense.  Don't do as many I have seen do (go on a spending spree with the credit card or start hanging out and keeping late hours at the local bar and letting your career suffer).  It will be a tough slog but you will handle it better if you compartmentalize, focus on your career and get through each day and each week without making any bad decisions.

What if EXXON had earned $81.7 billion last year?

Do you remember the last time oil prices spiked and Exxon earned about $30 billion.  It was the talk of the media as they demonized Exxon.  They were accused of price gouging.  There was talk that there should be an excess profits tax.  What if Exxon had earned more than twice as much ($81.7 billion)?  As an Exxon stockholder you would probably like that.  As a gasoline consumer you probably wouldn't.

Now if I told you there was an organization that earned that much last year - could you name that organization.  Probably not - there has been little mention of it by the media.  Furthermore , this organization doesn't fill your gas tank, doesn't stock your food pantry, doesn't manufacture the latest electronic gizmo.  It supplies nothing you consume.  Yet, you paid and paid dearly to create these earnings.

I bet you thought the FED was a non-profit organization.  Well, it isn't.  As an operating entity it provides many services to banks.  A large percent of the transfers of money go through the Federal Reserve system (3 very large computer systems located in New Jersey,  Richmond  (Va), and Dallas (Tx)).  The Federal  Reserve charges banks for each of these transactions involving hundreds of billions of dollars every day.  So even as an operating entity the Federal Reserve makes money. 

By controlling the interest rates the Federal Reserve has turned a sow's ears into silk.  Many of the assets that the Federal reserve took on during the financial crisis for pennies on the dollar are now being sold at double or triple what the Federal Reserve paid for them - all because low interest rates and increased liquidity has restored some value to these assets.   And who paid the price for all this?  If you have savings (401k, IRA, pension, CDs) you did because insanely low interest rates robbed you (hidden tax - see prior posts on this)  of the return you should be receiving on those savings.

So now we see the extent of this hidden tax.  We don't get a quarterly report from the FED, but by law they must turn over to the US Treasury (remember - these are taxes) most of whatever they earned each year.  So we know that in 2009 the FED turned over $47.4 billion to the treasury.  This is about 1.5 times what Exxon earned in their best year.  Yet, the media is silent.  In 2010 the FED returned over $79.3 billion (they earned  $81.7 billion) or about 2.5 of what Exxon earned in their best year.  Still nothing from the media.  In short The FED averaged about double what Exxon earned in their best year the past 2 years.  Now you know.

So what do you get for all your largess to the Federal Reserve,  You get sub par returns on your savings.  You get higher prices.  You get a devalued dollar.  Sounds like a bargain at any price.  As a bonus you probably get stagflation later (because the velocity of money - how quickly a dollar changes hands - is anemic).

Don't you ever believe the FED is independent of the government.  It isn't.  It is a tax collector for the government.  Furthermore, its very existence is probably unconstitutional.  The Constitution empowers the government to coin money not some agency like the FED.  But since when has the banksters and power brokers cared about a minor thing like being constitutional?

http://www.financialsense.com/contributors/barry-ferguson/dumb-and-dumber-and-dumberer

http://bmfinvest.blogspot.com/p/feds-furtive-filching.html

Also see the Federal Reserve statistical release year 2010 'Flow of Funds Accounts of the United States' page 118 ( http://www.federalreserve.gov/releases/z1/current/z1.pdf )

Tax Social Security like other Defined Benefit Pension Plans?

Sounds like a plan to me.  Forget you paid taxes once on that money when it was contributed to Social Security - Uncle Sam Wants Your Money!!!  Think this is crazy?

The Congressional Budget Office came out with a thick report titled:

In here were potential expenditure reductions and revenue enhancers.  This is the one you are going to love if you are receiving Social Security (or expect to in the near future):

Tax Social Security the Same Way That Distributions from Defined-Benefit Pensions Are Taxed = +438b

Be vigilant, raise hell with your congressional representatives.

Lies, damn lies, DC lies

Saw a poll that a large percent  of folks believe we can balance the budget by cutting out waste and unnecessary spending.  Now to listen to the talking heads on TV you would think this is crazy.  But is it?

There are lies - like when you child says they picked up their room.  There are damn lies.  Like when the wife says that outfit cost half of what it really cost, or he tells the wife they spent the evening at a sports bar watching "sports"  (that was no sports bar  sport and  lap dancing is not a sport).  Then there are DC lies.  The deficit is 1.5 TRILLION for this fiscal year and 42 cents of every dollar spent is borrowed and we are being told it is a Medicare or Social Security spending problem. 

So who is right - the common folks or the DCers?  In 2007 the deficit was under $200 billion.  We can do the math - that is $1.1 trillion less than this year's deficit.  There is no way that Medicare and Social Security account for that huge an increase in spending.   There is only on conclusion - spending is out of control in DC and needs to be reined in (back to 2007 levels).  There is a lot of money being spent irresponsibly as wells as waste and fraud. 

The RepukeCons want to cut $61 billions and the DemoRats less than $10 billion between now and Oct (end of the fiscal year).    DC - we are not that stupid - the deficit is $1.1 TRILLION more than 2007.  Now the "folks" may be wrong that the problem can be fixed solely by reducing spending and elimination of waste  but they are  80% right.  And who knows - we get the government off business's back maybe growth would bridge the other 20%. Once we fix that 80% we can talk about fixing the other 20% (Medicare, Social Security, taking troops out of Europe, Japan, South Korea and closing half of the 800 overseas bases).

Trust the common sense of the folks.  It beats the politician "intelligence" in DC every time.

Let your Senators and representatives know - GET WITH THE DAMN PROGRAM OR WE WILL FIRE YOU.   It doesn't matter which party you are affiliated with - we will FIRE you!!!!

  

The Endgame - We have seen the script

You want to see the likely future outcome and what lies ahead.  You have seen the script - it is Japan and the last 20 years. 

"I think a long-term chart of the Nikkei says it all. There was a massive bubble in stocks and real estate that began in 1982 and climaxed in 1989. While stocks quickly corrected to flush excesses out of the system, the government elected to take the "easy" way out of the debt bubble, lowering interest rates to insane levels in the hopes that inflation would cause the debt bubble to evaporate. Or to say it another way, they stole from savers in order to bail out gamblers who lost their bets."

http://www.financialsense.com/contributors/carl-swenlin/a-bug-in-search-of-a-windshield

To understand the future you need to understand history.   In Japan - by 1990 we had a situation very much like what we see today in the US.  The  monetary authorities here have lowered interest rates to insane levels  (just like they did in Japan).  Instead of flushing the crap out of the system they continue to extend and pretend.  Soon we will be in Phase II - pray and delay.

It is time to demand your elected officials do the right things not the easy things.  It won't be pretty, it won't be easy, but it is the right thing - let the economy flush.

I can't live on Social Security Benefits due at 62

How can I afford to retire now?

I will be 62 soon, but I am a minimum wage earner. Never earned much more than minimum wage. I take home about $1,100 after deductions for FICA/Medicare and health insurance. My Social Security will be only $815 if I retire at 62 and I barely pay my bills as it is. I have no retirement savings. I see no way I can retire at 62. Please advise. Won't I need to wait until I get the maximum benefit to retire?


There is good news and there is bad news. You probably cannot afford to retire at 62 if you need $1,100 a month to pay basic living expenses. So you keep working. Now for the good news - working does not bar you from drawing Social Security benefits starting at 62.


According to WWW.SSA.GOV here is how it works:

　"How earnings affect your benefits:

You can continue to work and still get Social Security retirement benefits. Your earnings in (and after) the month you reach your full retirement age will not affect your Social Security benefits. However, your benefits will be reduced if your earnings exceed certain limits for the months before you reach your full retirement age. (The full retirement age is 66 for people born in 1943-1954 and will gradually increase to 67 for people born in 1960 or later.)

If you are younger than full retirement age, $1 in benefits will be deducted for each $2 in earnings you have above the annual limit ($14,160 in 2010).

In the year you reach your full retirement age, your benefits will be reduced $1 for every $3 you earn over a different limit ($37,680 in 2010) until the month you reach full retirement age. Then you get your full Social Security benefit payments, no matter how much you earn.

If you are younger than full retirement age and some of your benefits are withheld because your earnings are more than $14,160, there is some good news. When you reach full retirement age, your benefits will be increased to take into account those months in which you received no benefit or reduced benefits.

Also, any wages you earn after signing up for Social Security may increase your overall average earnings, and your benefit probably will increase."

The Analysis:

So you can receive benefits and work. In general the minimum wage is $7.25 an hour. A work year is about 2080 hours - so your earnings are around $15,080 a year. You are allowed to earn $14,160 with no reduction in benefits. So you will exceed that by $960. This will result in a decrease in your benefits of $480 a year (or $40 a month on average). So you continue bringing home $1,100 a month from work and get around $775 in benefits each month.

Finally you may be able to save something to fund retirement for that day when you are no longer able to work if you manage your finances carefully. If you are married and your wife is of age she may also receive benefits (spousal benefits if she has no work history).

Taking benefits at 62 may reduce your benefits somewhat at full retirement age around 66 (maximum benefits at age 70), but since you continue to contribute to FICA by working the hit will not be as substantial as might seem since benefits will be adjusted upwards based on your continued contributions.

So to answer your question - should you wait until you can receive maximum benefits to start receiving Social Security benefits. Absolutely not. Apply for benefits as soon as possible and continue working. Handle the extra money carefully and save some for when you finally do quit work. If you don't start and die before you could draw maximum benefits - the money evaporates (it is gone). If it is in your bank account at least your spouse or children can benefit from it. 


I can think of no reason for you to wait. The fact you have no retirement savings is a good reason to start receiving benefits as soon as possible. Of course for others earning more (say $10-12 an hour) the analysis may differ and you probably should talk to an advisor and run the numbers. . .

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.

http://www.financialsense.com/Contributors/Barry-ferguson/pension-lies-lead-to-riots

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.

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.

http://finance.yahoo.com/focus-retirement/article/112138/good-bad-ugly-inflation-for-seniors?mod=fidelity-managingwealth&cat=fidelity_2010_managing_wealth

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

Drink the DC koolaid and shutup - there is no COLA for you

For 2 years now you have received no increase in your SS benefits.  They tell us there is no inflation.  Why is it you cannot afford gas for the car to go to the grocery store?  It is just as well - you can't afford the prices at the grocery store anymore.  They tell us because of the decline in housing prices that housing costs less.  If you are like me  - the house is paid for and you don't care if the market price is $75,000 or $150,000 - it costs you the same to live there.  In other words - there has been no decrease in your housing costs.   Or, you don't care if it costs less for a car or some electronic gadget - you can't afford it anyway.

So regardless of what the government says - you fuel costs, electric bill, food and all the things you buy and consume regularly go up every month.  There needs to be a change in what is measured to make COLA adjustments.  This is a conversation you need to have with your Representative and Senators.

And if this wasn't bad enough - they give working people a tax break using funds that should be funding SS.  Now it is a given that some of these people can use the money.  But what about the people making $50,000, $75,000 or more a year?  Many of the people getting this tax cut are well-to-do and could get along quite nicely without an extra $20-40 a week. 

Does this seem warped to you.  Well it does to me.  A conversation to have with your Representative or senators?  Finally the SS Adminstration is initiating adminstrative changes.  None of which benefit you IMO.  Read this: http://finance.yahoo.com/focus-retirement/article/111849/social-security-changes-in-2011;_ylt=AjveKxclr3PjXATAyJUQ4ra7YWsA;_ylu=X3oDMTE1ZG5nbHMzBHBvcwMzBHNlYwNmaWRlbGl0eUZQBHNsawM0c29jaWFsc2VjdXI-?mod=fidelity-readytoretire&cat=fidelity_2010_getting_ready_to_retire

If you don't speak up starting now the changes will continue and you will not be happy with them.  Expect major chances in Medicare over the next 2-3 years.  Think these changes will cost you less?  Not a snowball's chance in hell they will cost you less.

If you don't speak up no one will. Let your elected officals know - they screw you then you will FIRE them.