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”?

written by Joe \\ tags: , ,

Apr 16

I’d always thought, and advised others, that to retire, one should have their mortgage paid in full. And that was always my own plan. But, anyone who knows finance knows that you can’t plan on an exact stock market return, you can’t plan on your own health being excellent, nor your marriage outlasting your mortgage. In our case, these things actually all are going pretty well, thank-you. What changed was our income which I posted about a few months back. While we were working, we saved, over 20% per year on average. We topped off the 401(k)s and IRAs, and put aside money for our daughter’s college tuition. In hindsight, we could have saved a bit less, and aggressively paid off the mortgage, and I know there are people who are in the Dave Ramsey “debt is evil” camp who will agree, but I have no regrets. I’m a numbers guy and as rates fell, I was a serial refinancer. We entered our retirement phase with a fresh 15 year 3.5% mortgage.

When we lost our jobs, the balance was $265K, and I did the math to see what it would have taken to have no loan on that day. Our average interest rate was 6.0% over the prior 15 years. An extra $935 per month for that time and we’d have no loan. Keep in mind, the market was interesting during that 15 year stretch from 1998-2012. A 3 year slo-mo crash with a cumulative 38% market loss. A 2008 loss of 37%. The compound growth during this stretch was 4.4%. But didn’t I just say my average loan rate was 6%? Yes. The difference was going into our retirement accounts. Not the matched portion, although that would certain tip the numbers in my favor. Just the regular pretax savings. And even with that disparity between my mortgage rate and the low market return, the 401(k) had $349K extra vs our $265K mortgage. What’s interesting to note here is that the money went into our retirement account at a marginal 28% tax bracket most years. But now, the withdrawals are at 15%. At a current rate of 3.5%, the mortgage payment is $1966, and if you do the math, it takes $2313 from the 401(k) to make this payment.

Two years have since passed, and the market in 2013 and 14 was very rewarding. A gain of over 50%. We ended 2014 with the mortgage at $233K and the calculated 401(k) extra funds at $453K. The interest deduction wasn’t part of my math, although it helps my numbers a bit. Instead of the whole payment being subject to the 15%, the first $8,000 is interest and, with some good planning, keeps us from hitting the 25% bracket.. No one should keep a mortgage “for the deduction” of course, paying a dollar to save 25 cents makes no sense. From where I sit, it simply means my 3.5% mortgage is actually 2.6%.

The fact that we hit our number while taking the mortgage payment into account, and not counting on social security which is still quite a few years away, is what lets me really sleep at night. Right now, I can’t say whether the mortgage will be paid off before we decide to move. Either way is fine by me. Paid off, our number drops, freeing up our savings for other endeavors.  A move would drop our cost of living, as we’re currently in one of the higher expense parts of the country.

The bottom line? 2 crashes over a 15 year span and the results are still in my favor. The key thing was that the difference was put into savings, not just absorbed into the spending portion of our budget. No regrets.

written by Joe \\ tags: , , ,

Jun 03

Today’s guest post is from Noreen Ruth –

Warning signs are everywhere with some so downright hilarious that the seriousness of the issue is lost in the hilarity. For example, “Not intended for human consumption” was a warning on a bottle of bubble bath. Or this one found on the packaging for a set of earplugs, “These ear plugs are nontoxic but may interfere with breathing, if caught in windpipe.” Or this warning on a hairdryer, “Warning: Do not use while taking a shower.” Well, duh!

While we may get a little chuckle from these seemingly silly warnings, their intent to protect is serious business. Consider the consequences of simply ignoring any of these warnings. In the same way, signs that point to poorly managed finances have dire consequences, if you don’t take them seriously.

Ignoring the Wisdom of Others
One reason some people are surprised to find themselves in financial trouble is that they were indifferent to the clues that were clearly on display. Inexperience and arrogance often go hand-in-hand when troubles are left unresolved. Wise advice is considered irrelevant or out-dated for the situation. Those who step up to point out clues to trouble ahead might include family and friends who have more experience to draw from. They offer their help so that you might avoid pitfalls that they may have gone through – perhaps because they ignored the signs.

The right attitude about money is vital to establishing and maintaining excellent financial management skills. If you still rely on parents or friends to support your way of living, you need to resolve your dependency or miss wonderful opportunities for growth and personal success. Money is a means to an end and should be thought of as a tool to be used to build and live a sustainable life.

To write about all of the warning signs of a poorly managed financial lifestyle would fill a book. For our purposes and with word count restraints in place, the most common warning signs are included in this checklist.

  • Has Little or No Savings: The target to shoot for is a minimum of six months worth of savings to cover any unexpected job loss or emergency. Without this safety net, you’ll be inviting disaster. A recent survey shows that nearly half of Americans have less than $500 in the bank.
  • Doesn’t follow a Budget: Anything well managed incorporates a plan to reach their goals; and so it goes with finances. Without one there’s no direction and will be easy to get off track.
  • Insufficient Income/Poor Job Performance/Outdated Job Skills: These issues are interrelated with one impacting the other two and vise versa. Begin by learning a new skill and being more responsible on the job and the income will resolve over time with a new job or a pay raise.
  • Uses Payday Loans: Using one of these is an act of self-imposed desperation. Not only are you borrowing on your own future income, you’ll be paying interest to someone else to borrow your own money.
  • 5+ Year Car Loan: Pushing an auto loan beyond 60 months is a warning sign that the loan is too much to handle in your current situation.
  • Denied a Loan or a Credit Card: If lenders consider you too high risk to approve additional credit, this is a warning sign that you already have too much debt in relation to your income.
  • Uncontrolled Credit Card Spending: Credit cards should never be used as supplementary income. Never use one to purchase everyday necessities – do without until cash is available. Eventually it all needs to be paid back to the lenders, a bumpy road for sure when you’re overwhelmed by credit card debt on multiple accounts.
  • Agreeing to Debt Consolidation while Continuing to Use Credit: This strategy will backfire, as you will basically be standing still while incorporating a plan that would normally help lower debt. Consolidating all your debt into one account can be a great way to dig your way out of debt, but not if you keep using your available credit.

Personal reasons unrelated to finance that may be triggers to future financial problems, include a lack of or insufficient insurance coverage on your health, car and home. Disputes and disagreements between couples about money are the most common relationship problem. Sometimes one partner lies or hides the truth about how they’re spending the couple’s money. Issues like these need to be addressed and worked on until a joint agreement has been reached.

By keeping alert to the warning signs of poor financial management and correcting your course when one crops up will free up funds to invest in college for the kids or to pad your investments set aside to secure a carefree financial future for your retirement years.

Identifying the warning signs is the first step; the second is equally important. You need to take action to resolve the issues to protect your financial integrity and future in the best interest of yourself and your loved ones.

About The Author: Noreen Ruth is a staff writer for www.asapcreditcard.com, a site that provides credit tips, news, credit card comparisons and reviews. She is interested in educating consumers about using credit responsibly and taking actions that will affect their ability to borrow the money they may need in the future.

written by Joe \\ tags: ,

Jan 27

Let’s start this week with The Embarrassment of Having a Check Denied at the County Clerk’s Office. Kevin at No Debt Plan shared some details that may have been embarrassing, but also should serve as a great lesson to the rest of us. Read the whole article and think twice before you turn up in person with a check.

At Lazy Man and Money, a guest author gave us Easy Things You Can Do to Save You Money. Just shy of a ‘Top Ten’ list, Sara Masterson offered some nice ways to find some extra money at the end of each month.

patella

Len Penzo explains Why a Million Apples a Day Couldn’t Keep the Sellers Away. As part of Len’s view of the world he posts weekly, Len discusses politics, the economy, and more. This week he offered some numbers regarding Apple, such as they sell 1 million products per day. Looks like they are oversold right now, and I’ll bet they’ll be back to record territory by the end of this year.

I’m pretty good keeping up with financial news. New tax code? I often know the details within a few hours of the details breaking. Which is why it’s great to find a gem of information I was unaware of. At 20 Something Finance, GE Miller explained the New Federal “Pay As You Earn” Student Loan Repayment Plan Now Available. It’s just like it sounds, a plan that lets workers pay off their loan at a rate based on a percent of their income. Glad to see this option has become available.

We’ll close this week with 4 Things You Should Know about Filing Your Taxes in 2013. I’ll admit it – I only went 3 for 4, so I’m glad I read Miranda’s article.

Now, about that Luxating Pattela. My little friend’s knee has been dislocating and causing him some discomfort. Yes, that’s a tail you see in his X-ray, it’s my 1 year old puppy. The first time this happened was a few weeks back, scared the heck out of me, he screamed and held his leg off the ground. Fortunately, I figured out what was going on and was able to pop it back in, but the issue is recurring and the Orthopedic vet advised surgery was indicated.  It’s not going to be cheap, but fortunately, we have insurance that should cover this with a 10% copay. His surgery is tomorrow.

written by Joe \\ tags: , ,

Jan 25

I was going to title this post something like, “My Daughter, The One Percenter.” I know each of us thinks our own child is special, but it never hurts to get some extra validation. Independent data that proves it beyond a doubt. A brief story from CNN talking about kid’s allowance and savings was interesting to me –

kidsavings

First, Jane2.0’s allowance happens to be the $15 average. We started giving her the number of dollars to match her age, at about 7 or 8. Now, at 14, I round up, so $15 it is. It’s the 1% that surprised me a bit. In the age of gadgets and electronics, a week’s allowance isn’t enough to buy much, and I’d have imagined more kids would be savers. When J2 wanted a MacBook laptop for her birthday, we said that $1000 was more than we were planning to spend on a 12 year old’s birthday present. We agreed to pay for half, and she would take the other half from her savings. We felt this served as a good lesson, the benefit of saving her allowance and money she started to earn babysitting, and it would also prompt her to be more responsible with the laptop.

Enough bragging, she’s off to a good start, understanding the value of money and learning that the cost of a purchase can be converted to the number of hours of babysitting or week’s worth of allowance to buy the item. How about the 99%? All of the kids who are getting an allowance but spend it as fast as it comes in? It seems this snippet of a story may be the preface to the longer tale of the low saving rate in the US, and why at the back end so many have failed to prepare for retirement.

written by Joe \\ tags: ,