Archive for the ‘Personal Finance’ Category

When Will Social Security Go Broke?

Saturday, May 14th, 2011

When will the Social Security system run out of money?  Well, the US Treasury Department announced recently that 2011 will mark the first tipping point for Social Security since we emerged from the last protracted recession in 1983.  That is, more benefits will be paid out in 2011 than will be collected by the Treasury Department.  Fortunately, this is expected to be a short-lived phenomenon (for now).  An ultra-high unemployment rate approaching 10% has resulted in a substantial reduction in wage tax collections in recent months.  The current shortfall is expected to last for a couple of years at which point the Treasury predicts we will return to a surplus situation for a few more years as the economy picks up some steam.

But beginning in 2015 and thereafter, an enormous wave of Baby Boom Retirees will push the Social Security plan into a permanent death spiral – where payouts to retirees will overwhelm incoming wage taxes to the point that the surplus that has been built up over decades of time will begin to be drawn down at an increasingly rapid rate.

So what is the end game?  For starters, if the most recent actuarial statistics are accurate, the Social Security surplus fund, which currently stands at about $2.5 Trillion will run out of money and be completely depleted by 2036 – a year sooner than earlier estimates.  Of course, this so-called $2.5 trillion dollar surplus is not real money mind you, but an IOU from Uncle Sam who has already spent the money with a promise to repay it.  Once the “surplus fund” is depleted, the Social Security system will rely completely on new tax revenues to pay for an increasing level of benefits.  Unfortunately, as the Administration looks into its crystal ball it expects that wage tax revenues will only generate enough to cover about 75% of the demand for benefits after 2036.  Someone will have to go without…

So how worried should you be? To some degree it depends on when you were born — and how long you expect to live.  With a retirement age currently set at 67 for the latest generation of baby boomers and assuming an average lifespan of approximately 78 years (based on latest published averages), if you were born in 1958 or before you are home free (assuming you have any faith at all in the current system).  For those born in 1959 and beyond, the outlook is murkier.  In all likelihood the Federal Government will make good on its commitments to Social Security beneficiaries – in the same way it will make good on its obligations to investors and foreign countries that fund our ongoing deficits by purchasing US Treasury Bonds.  Of course “making good” may come at a high cost in terms of potential inflation, which will serve to erode the real value and purchasing power of any benefits received.

Another thing to keep in mind is that there is a lot of attention focused on trying to fix the soon to be defunct social security system prior to D-day. This may mean some combination of increasing the retirement age for younger workers, reducing benefits to retirees, and increasing the social security wage tax rate in an effort to right the ship before it sinks.  Stay tuned!

Social Security Benefits: The Case Against Early Retirement

Thursday, May 12th, 2011

The  United States Social Security Administration has posted a list of official retirement ages. The Full Retirement Age is important as it determines when an individual will qualify for full social security retirement benefits. The Full Retirement Age (FRA) for receiving Social Security Benefits has been increasing gradually since Social Security benefits became effective. The FRA – Full Social Security Retirement Age began at age 62 and has increased to age 67. It is virtually certain that the Social Security FRA will continue to creep up as financial resources continue to become strained under the burden of a rapidly growing elderly population. As it currently stands, those born in 1960 or later will have to wait till they reach the age of 67 before they qualify for a full social security retirement benefit.

Of course it is possible to qualify for an early retirement benefit at a younger age – and in truth, with the state of the economy, many individuals approaching retirement have been taking advantage of this opportunity to get benefits now rather than delaying them until they reach the full retirement age.  In fact, according to Social Security Administration statistics, about 70% of all individuals who qualified for early retirement benefits last year chose to take the early retirement benefit - settling for a likely overall reduction in total benefits paid over the course of their lifetime.

In a few cases taking less money now may make more sense than waiting for the higher payout.  For example, if you are in poor health and/or are stretched beyond your current financial means you may feel it advisable or even necessary to sacrifice future earnings potential for a lower payout beginning today.

Either way, there is no getting around the fact that by opting for an early benefit stream today, the total benefit you will receive over the balance of your life will most likely be substantially reduced. I say most likely because we never really know when it will be our time to go. Someone who delays taking benefits and then passes on unexpectedly before reaching the magic Full Retirement Age will be out of luck.  Of course it is always wise to keep in mind that a surviving spouse may be entitled to a higher survivors benefit the longer you wait.  But let’s look on the bright side and assume that you will live well past your Full Retirement Age – a pretty valid assumption in most cases.

From a purely financial perspective then, it is generally not advisable to begin drawing social security benefits at an early age – if it is at all possible to avoid it. By claiming your social security retirement benefits early you stand to forfeit thousands or even tens of thousands of dollars over the course of your remaining life.

According to the Social Security Administration you can expect to lose a whopping thirty percent of your monthly income by beginning to draw retirement benefits 5 years ahead of schedule. So, for example, if you are scheduled to draw retirement benefits at age 67 but choose instead to file for social security benefits at the age of 62, then you will receive benefits – but at a level that is 30% less than what you would have received by waiting till your FRA Full Retirement Age. If you file 4 years ahead of schedule you can plan to receive a 25% reduction in your benefits. A three year early retirement will cost you 20% of your income, and so on. It makes a lot of sense to wait till you reach your Full Retirement Age before you file for Social Security Benefits.

Conversely, if you are in a position to delay your filing for social security benefits until some years after you qualify for full benefits, you will enjoy an even higher level of monthly and yearly income for the balance of your life. Call it delayed gratification… For this reason, some retired individuals choose to continue to work past the age of 70 in order to make ends meet so they can delay filing for social security benefits past their Full Retirement Age.  By following this strategy, they ensure a higher level of social security income  and attendant standard of living through their remaining retirement years.  And as our health care expenses tend to increase over time, those later years may be the years we need that extra income the most.

Avoiding Financial Catastrophe

Tuesday, April 5th, 2011

The best way to avoid financial catastrophe is to eliminate debt and spend within your means. Debt elimination may mean downsizing or getting rid of some things. Take a hard look around you.

Then take this quick financial self-assessment:

  • Do you have one or more expensive cars with high payments each month?
  • Are you living in a house that is really more expensive than you can afford?
  • Are you eating out frequently?
  • Do you have expensive cell phone plans for everyone in the family?
  • Is your cable TV plan loaded up with premium movie channels?
  • Do you carry credit cards that you use indiscriminately?

The first question to ask is: Are any of these things a matter of life and death?

Certainly we all need to eat and we all need basic shelter and transportation, but almost all of us fall into the trap of rationalizing the purchase of items that far exceed the requirement of satisfying the basic need.

The second question to ask is: How can I get out from under these excessive or unnecessary expenses and right size my financial obligations?

The answer in some cases may be surprisingly simple.

  • Cancel the cable.
  • Stop eating out.
  • Eliminate or cut back on your cell phone plans.
  • Cut up your credit cards.

The answer in other cases may require more work. Like most people you have probably taken on debt and other financial obligations that are not easy to get out of.  You may have to work harder to eliminate some of these other things from your life.

Put your house up for sale and move into a less expensive one. In the current economy this may be more difficult than you would like it to be, but it is often doable. If you owe more than the house is worth then you may need to visit with your bank about accepting a short sale offer. Make sure that your agreement is one that doesn’t put you on the hook for any deficit in the future. Many banks are willing to accept short sale prices (an amount less than what is owed) and call it good. Others may accept the price but want you to be obligated to the difference. This is not a good outcome for you. Be careful to ask about this.  Either way, you will want to get out from under the burden of financial debt associated with our extravagant and excessive house payment.  Some creditors will also allow you to restructure your loan and make interest only payments or otherwise reduce your monthly outgo, at least for a time while you are trying to sell the house.

Put your cars up for sale. Again, you may find that you owe more than they are worth. It may mean another trip to the bank to explain your situation and ask them to work with you. They may restructure your loan or allow you to turn the car back in.  The key is to get rid of these enormous financial burdens and then replace them with something sensible. Maybe a smaller, reliable, used car that gets good gas mileage and doesn’t come with a huge payment. If you can pay cash for a used car that would be the best possible thing.

Just get out there and do it. Gaining control of your financial future starts with making ONE good financial decision – no matter how small. You will be surprised at how much better you feel just by calling the cable company and cancelling the cable. It may not mean that much to your bottom line but it is the start of a new financial path that will lead to financial peace of mind and an ability to live within your means into the future.

7 Simple Laws for Financial Success and Peace of Mind

Friday, April 1st, 2011

In these tumultuous times, it is easy to fall into a financial tailspin.  However, with a little thought and perseverance, we can avoid the devastating mistakes that can result in years of financial misery. Here are 7 suggestions that almost anyone can achieve.  Following these 7 simple financial laws will allow you sleep at night and avoid financial calamity.

1. Spend Less Than You Make. This is the most fundamental and important of all of the seven laws. If you can not or will not abide by this law then please read no further. It doesn’t matter if you earn $1,000 per month or $20,000 per month. You can always live beyond your means. Conversely, you can almost always live within your means, no matter how modest.  If you can’t live on $3,000 per month without overspending your budget every month then you won’t be able to do it at higher levels of income either. This is a fact. Because the true measure of financial success begins and ends with the ability to generate a surplus each and every month. End of story.  For more help on making this happen read on.

2.  Know Where Your Money is Going. To achieve true financial success you need to know where virtually every penny is going each month. This may seem like a tedious and stingy mentality. The reality is that if you are like most households, you fritter away hundreds of dollars each month that you are completely unaware of. At the end of the month you scratch your head and wonder where it all went. After all, it was just a few dollars here and a few dollars there.  Guess what? By the end of the month it adds up to real money. By knowing exactly where each dollar is going, you are in a position to take control of your day to day financial decisions. Cut back on those discretionary expenditures that suck up large amounts of money without your realizing it. They are sabotaging your ability to comply with Rule #1 above. You must get to the point where you bring your spending in line with your income and generate a surplus for investment. This is the ultimate financial magic bullet.

3.  Pay Yourself First. Taking some money off the top of your paycheck and squirreling it away into a safe investment each pay period is the surest way to get ahead. When the money comes out before you see it (and more importantly before you get the chance to spend it),  you are forced to live on a modestly lower income. One of my favorite tricks is to put a larger portion of each raise I receive into this automatic savings plan because again, it is new money – money you will not miss if you (and your spouse) never see it. Automatic 401K deductions work nicely for this. It helps if there is a matching feature attached to your employers plan. You should always get in the habit of maxing out the matching options offered by your employers. This is free money and a quick way to increase your nest egg.

4.  Limit Yourself to One Credit Card and Pay off the Entire Balance Each Month. This is absolutely critical to your financial solvency. Maintaining a hoard of credit cards increases the likelihood that you will begin to max out all of the balances and find yourself in a highly leveraged financial situation.  A credit card should ONLY be used as a convenience – not as a loan vehicle.  Consumer debt is the enemy of financial freedom.

5.  Pay Cash for Everything Except Your Home. Even Cars? Yes! Especially cars! This may sound like a heresy, but if you begin by purchasing a modest used car for $3,000-$4,000 and then sock away the money you would have put into a car payment into a special account just for auto expense, you will be surprised at how quickly you will be able to save enough to buy a nicer car.  Oh and don’t trade in your used one. Either keep it or sell it yourself,  you will get a lot more for it than a dealer will ever give you.

6.  DO NOT TAKE OUT A SECOND MORTGAGE ON YOUR HOME! This practice has been the kiss of death for millions of Americans. This is a great time to buy a cheap home. There are abundant foreclosures and short sales for record low prices.  In many cases these homes are selling for far less than it would cost to replace it. You can do the math but it won’t be long before the prices will go back up to at least replacement value. It is a no brainer to buy now if you DON’T OVERDO IT.  Like our car example above, buy something you can afford NOW. Don’t take on a burdensome debt (if you are wondering if you can afford a particular home, refer back to Law #1!!).   With interest rates at historic lows, you should be able to get into a home purchase for about what you would pay for rent. You get instant equity, a tax deduction, and a home of your own. Over time you will pay down your loan and end up with a free and clear home!! Now that is the ultimate Freedom and still a big part of the American dream. And it is totally within your reach.  Just resist the temptation to EVER add a second mortgage to your home.  This will cripple you for life!

7. Establish an Emergency Fund. This is one of the things that will bring you the most peace of mind as you navigate through an uncertain economic environment. Having three to six months worth of income set aside in a safe interest bearing account will do wonders for your stress levels, peace of mind and overall financial and emotional well being.  This will obviously not come overnight, but it can be done if you set an aggressive goal to add to an account a little each paycheck.

There you have it. This is not rocket science. Most people who get into financial distress (which includes almost everyone at one time or another) do not realize that these very simple financial laws are so easy to follow. It just takes a little resolve to set yourself apart from the crowd.  Good luck!