Aug 10

It’s already election season, and we have 15 months to look forward to our politicians each jockeying for position, name calling, debating, all the way to the final two (or three?) we can choose from in November 2016. I am a personal finance blogger, and do my best to stay non-partisan, but when I hear proposals that will affect our tax code or cause me to change my advice on investing, I’m going to analyze it here.

Today, it’s Chris Christie’s proposal to cut social security benefits. First, he’d like to push the age for full retirement benefits from the current 67 to 69. For this part of his proposal, I’d like to address the elephant in the room. The fact that this impacts black men disproportionately from whites.

From the CDC, “In 2011, life expectancy at birth was 78.7 years for the total U.S. population, 76.3 years for males, and 81.1 years for females. Life expectancy was highest for Hispanics for both males and females. In each racial/ethnic group, females had higher life expectancies than males. Life expectancy ranged from 71.7 years for non-Hispanic black males to 83.7 years for Hispanic females.”

BlackWhiteLifeExp

In other words, on average, a 67 year old black man has 4.7 years left to live, and a white man, 9.3. This cuts the benefit by 42% for black men, but only 21% for whites. I read his proposal and didn’t have to search too long to find government number for life expectancy. Yet, in all the media I consume, all the articles on the Christie proposal, I have yet to see this addressed by anyone. (To my readers – This observation opens a discussion of a far larger issue, health care. In the long term, instead of tinkering with Social Security benefits, we need to close this gap.)

Next, we have his plan to reduce benefits for that he believes simply don’t need the money. How much is that? He would phase out the benefit for those with incomes from $80K to $200K. For a single person, that’s quite the range. In the last election, I recall $250K/yr being considered rich. And we discussed the difference between rich income vs rich wealth. It’s possible to make $250K and blow through every dime, and it’s also possible to make $100K and save your way to a $2M retirement fund. But here, we’re talking about retirement, and the connection between $80K and the wealth it represents is best thought of via the 4% rule. In other words, assuming I spent a lifetime of work saving to my 401(k) and IRA, pretax, it would take $2M of wealth to let me withdraw $80K per year. This takes an above average wage (or wages for a couple, but if one person passes early than the other, we still have a single person dealing with this money) but nowhere near what we consider “rich.”

At $80K taxable, we’ll ignore deductions for this discussion. This person might have as much as $40K in Social Security benefits. The furnace breaks, the roof needs replacing, a child needs help sending your granddaughter to college. Whatever the reason, $60K extra is withdraw from the 401(k). The tax rate this year would be 28%, netting $43,200 to pay a year’s tuition. But Christie would add an effective tax of $20K (i.e. confiscate half the SS benefit) and the net result is $23,200 from that $60,000 withdrawal. This results in a marginal rate of 61.3%.

What I find most troubling is the Catch-22 in which we all seem to find ourselves. Social Security feels like a retirement plan. From the time I started working, I’d get an annual statement, basically telling me that if I kept working to a certain age, 62,65,70, I’d expect a certain benefit. Yet, as many have noticed, the statement have a warning.

Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2033, the payroll taxes collected will be enough to pay only about 77 percent of scheduled benefits.

This, and the warning that it’s really not a retirement plan, but an insurance, leaves us all encouraged to save all we can, 10-15% of our income being ideal. In my example above, it was more about how the retiree saved than how much. In hindsight, had the savings been post tax, subject to a 25% margin rate, the accumulation might be $1.5M instead of $2M. The tax on dividends would be 15%, as would cap gains. But withdrawals wouldn’t be considered income, and Christie’s horrific proposal could be moot. To be clear, his proposal doesn’t just hit the wealthy, but those who simply saved what they could in a responsible way.

More to come on the topics raised here. What do think about Christie’s proposal? If you agree with him, what am I missing? If not, how would it impact you? Last do you feel that Social Security is a “Entitlement” or do prefer to call it an “Earned Benefit”?

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Jul 09

I was listening to my local news station when a segment came on, a 5 minute bit of money advice with a local author and financial planner, Jonathan Pond.

I like his conservative approach. What’s unfortunate is that a quick few minutes to discuss any financial topic is going to miss some important details. In this case, the host asked what one should do with their 401(k) when they leave a job. Jon’s answer was to not leave it languish in the old account, to move it to an IRA. I hope listeners took that advice as “don’t forget about the 401(k), get more information.” I often say that it’s called personal finance  for a reason. Not all situations are identical. Let’s review 3 situations where leaving the account where it is would be best:

  • You were 55 or older when you left the company. Did you know that if you retire at 55, and try to take an IRA withdrawal before age 59-1/2, you’ll pay a 10% penalty? Yes there are some workarounds, a Sec (72t) withdrawal for instance. The simplest thing, however is to leave the funds in your 401(k) where you can withdraw with a 20% tax withholding, but no penalty, if you separated at 55 or older.
  • Your old 401(k) had great investing options. It’s possible. My old company 401(k) uses a Vanguard S&P fund that has a .02% annual expense. This is a $200 fee for every $million invested. The typical 401(k) expense is 1% or .02% per week.
  • Last, you’ve been doing well, well enough that you can’t make a pre-tax IRA deposit. Still, each year, you can do the back door Roth. Deposit to the IRA and immediately convert to Roth. Easy, right? Yes, but if you transfer your 401(k) to an IRA, and then try this maneuver, you’ll be in for a headache and tax bill. Conversions to Roth are prorated, all your IRA money is considered. So if you had $95K in your IRA and then deposit $5K to convert, 95% of the conversion will be taxable. Keeping the funds inside the 401(k) is the way to keep these funds segregated.

Are you making this decision right now? What factors have been part of your thought process? Have friends or family been giving you advice to go one way or the other?

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Nov 03

This post has been in the works for some time, nearly two years. Talk about a bit of writer’s block!

Attending FinCon14 (The Financial Bloggers Conference) gave me a chance to share my story, and hear so many people encourage me to write and share it with my readers as well.

Two years ago, shortly after my 50th birthday, my wife and I were both let go in a company layoff. 30 years, working for the same company, had come to an end. We both had our eye on our number and we had already agreed that she could retire as soon as she was ready to. The numbers all pointed to me taking a bit of an early retirement by 55 or so. Our jobs were in high tech sales, and I started out really liking it, but the last 10 years or so, I grew to dislike it more and more. So much so, that when I got word I was getting let go, I had a sense of relief. The real question is why I stayed so long at a job I grew to hate. And a great question that is. The money was good, but any lateral move in the industry would have replaced the salary. In fact, depending on the economy, there were times I could have landed a higher paying job. Familiarity. Fear of change. Stockholm syndrome?

Regardless of why I stayed, it was over. On the ride home, I told my wife it was time to move on, and do something completely different. Neither of us were in too big of a rush, as the severance and unemployment benefits were enough to float us for a full year without needing to tap our savings. Many times in life, one observes that timing is everything, the layoff was in late 2012, and in 2013 the market had its best year since 1997, returning over 32%.

SP2013

S&P Oct’12 – Dec’13

Had the movement of the market been different, I might have felt pressure to go in another direction. As 2013 moved along, our number seemed much closer to achievement. We sat down with our money manager software online, reviewed our budget, and found that our spending was a comfortable 50% or so of our last few years’ income. On a side note, the rules about 80% replacement rate are rules of thumb and little more. What really counts is what you spend, not what your final gross income was.

One interest I’d always considered was a career as a math teacher. I took the qualification exams for both middle and high school math. Despite what they say about the lack of teachers, in my area, every position had a line of dozens of teachers applying. If I were hiring, I’d look for someone with experience, too. Just as I was pondering the idea of simply being retired, I was contacted about a position as a math aide. The job was part time, just 2 days a week, and the responsibilities included giving exams to students, tutoring students to help them catch up on missed classes, and helping them study for upcoming exams. The key things missing were any required interaction with parents, prep for lectures, and any paperwork. Even for this position, there were multiple candidates. Whatever I said during the interview must have made an impression. A combination of fondness for my own study over 3 decades ago, sharing how I was helping my daughter, an 8th grader at the time, and feeling that I could make a difference in his department. The next night, I had an email saying the job was mine.

By coincidence, a neighbor was expanding his own business as a real estate investor and developer. He approached me and asked if I’d like to come work for him. I started both jobs the same week and within two months, I had my real estate license. Both jobs started as trial positions, and as it turned out I am having a blast in both fields. Both of my bosses asked me when I planned to work for them full time. For now, the two jobs are ideal for me. I’ll share some stories of my days at both jobs, and why I wake up with a smile at 5:15 AM when I swore I wasn’t a morning person. I’m also investing in real estate again, an endeavor I’d given up on over 20 years ago, but I’ve now been given a second chance.

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Jan 28

It’s possible, of course, but is it really common? From a number of recent articles, you’d conclude that we are now a nation of savers. In early December, I read, “Could You Be Oversaving for Retirement?” on Yahoo Finance. (To give you a hint as to how rare I thought this was, the word oversaving wasn’t in my speck check dictionary till now.) A couple weeks later, Jean Chatzky wrote You may be saving too much for retirement for CNN Money.  I like Jean’s writing, and she was kind enough to cite the source for this wave of ‘saving too much’ articles that have sprung up. It was a paper by the Head of Retirement Research at Morningstar, David Blanchett. Estimating the True Cost of Retirement dispels, sort of, the notion that one will need 80% of their pre-retirement income post retirement. I say ‘sort of’ because one’s earnings aren’t linear, nor is one’s lifestyle, and there are too many variables to project 40 years out with any level of confidence. The 80% number is as good a rule of thumb as any especially when considering the alternatives. If, instead you plan for 60, and as you near retirement, realize that in those final years your lifestyle has crept up a bit, more vacations, a second home, any number of things, it will be tough to catch up to where you should be. But if you plan for 80%, and, with 5 years to go till retirement, you realize you have more than you need, it’s a simple matter to retire early, or just enjoy the fact that you have an extra cushion.

David’s paper makes excellent points, and is a worthwhile read, but it doesn’t discuss one thing, the amount we are actually saving. The average retirement savings for those 55-64 is $69,127. If you understand how averages and median compare, you know that for every saver with a million dollar retirement account, a hundred people will be $10K less than that average to balance out. This forces the median, the halfway point, far lower than the average. In fact, the same report cites that 39% of those age 55 and older have less than $25,000 in their retirement accounts. To be clear – No, we are not saving too much, not by a longshot.

There’s a point to be made that a reasonable retirement goal might be more motivating than one that appears so far out of reach. It’s also safe to say that retirement spending is better correlated with preretirement spending than with preretirement income. This is tougher for a younger person to analyze. I got married at 32, bought my first ‘real’ house at 34, and became a dad at 36. At 40, I had a real grown up budget, 20% to the mortgage, 10% to the college account, 15% to retirement, etc. Not tough to see the math show that 45% of our income was budgeted to things that would be gone when we retired.

In the end, the question isn’t about averages or rules of thumb, it’s about you. Only you can calculate your Number.

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Nov 07

As exciting as the new tax table was for me, the retirement limit announcement produced a hollow thud.

You see, for 2014, the 401(k), 403(b), 457, and Government TSP are all unchanged at $17,500 limit, with a $5,500 catch-up provision for those 50 and older.

The IRA limit is also unchanged at $5,500 with a $1,000 catch-up for 50 and older. The phaseout for IRA deductibility for a single filer covered by a workplace retirement plan is between $60,000 and $70,000, and for married filing joint, between $181,000 and $191,000. The AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly.

For those in that phaseout range, these numbers are important. Above or below them, and you’re not impacted at all.

This lack of an increase comes thanks to a low CPI inflation rate, which is either good, or if you are a conspiracy theorist, is purposely understated to keep Government programs COLAs from increasing too much. Either way, the numbers are out.

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