Monday, August 31, 2015

The give and take of Social Security, 80 years later

In case you missed it, the nation’s Social Security system program turned 80 on Aug. 14. It was controversial when President Franklin D. Roosevelt launched the program and it remains hotly debated to this day.

One extreme compares the program to a Madoff-type Ponzi scheme while the other end of the spectrum believes it’s not only a great public program but also that its benefits should be expanded. In other words, even after 80 years the Social Security controversy remains unsettled.

Yes, I have concerns about Social Security, essentially because of the underlying mathematics. People are living much longer today and roughly 10,000 people retire every day. That means there are going to be a tremendous number of benefit checks going out even as wages remain somewhat stagnant for those still working.

Meanwhile, active workers today receive a statement that informs them there will only be enough money to pay 77 percent of projected benefits. Is it any wonder so many younger people have doubts about the program?

A recent AARP poll shows that 73 percent of people doubt Social Security will be able to pay promised benefits. So, while the big picture of the program continues to be debated, I have two comments about the program that seldom make the headlines.

One concern is that many people overlook the fact that up to 85 percent of their Social Security benefits are subject to income taxation when they’re retired and receiving benefits.

I find this to be quite bothersome. During your working years you‘re paying income tax on the money withheld from your paycheck that goes into Social Security. Then you’re taxed again when you collect Social Security. That is double taxation, plain and simple. It wasn’t always this way, but in an effort to strengthen the program the Greenspan commission suggested this provision and it was signed into law in 1983.

My other concern is the seldom-discussed fraud that Social Security attracts. We’ve all read about identity theft. It’s a real issue in our society. In fact, a lot of sensitive personal information was recently stolen from the IRS coffers.

The Office of the Inspector General is finding out that identity theft is even a problem for the deceased. As a society, we generally celebrate the elderly, and rightfully so. The Gerontology Research Group recently concluded there were fewer than 50 people over the age of 112 worldwide.

Yet, from 2006 to 2012, nearly 67,000 individuals filed tax records where the names on the earnings report didn’t match the names associated with the social security numbers. For the same time period, more than 4,000 employers made E-Verify inquiries using nearly 3,900 Social Security Numbers that belonged to someone born before 1901. Clearly, criminals are using Social Security numbers of the deceased for fraudulent purposes.

Fraud is not just a problem for households and corporate America; it’s also an issue for Uncle Sam and the Social Security program. The statistics prove it.

As the debate intensifies over how to strengthen the program, I hope improving the record keeping and monitoring cash outflow is part of the discussion. A more efficient program could result in more income for retirees or lower taxes for workers.

As a nation, we want our elderly to be able to live their lives with dignity. Although it’s controversial, the Social Security program is part of the equation. But when life ends, Social Security numbers need to be permanently retired and kept from being used fraudulently.

Monday, August 24, 2015

What in the world is going on? Financially, you need to know

From an economic perspective, there’s no question that when a rock falls into the water halfway around the world, the ripple effects can be felt here in the U.S. And a lot of rocks have been falling.

The easing of economic sanctions in Iran, the debt issues in Greece and Puerto Rico and the recent devaluation of China’s currency, all to a certain degree, have an impact on your nest egg.

For example, with Iran re-entering the world’s oil market, there’s almost certainly going to be an impact on the price at the gas pump. The devaluation of the Chinese renminbi and the rather drastic slowdown of their economy is going to make it much more challenging for American companies like McDonald’s and our own auto companies to do business and make a profit in China.

This is important because many American companies rely on the Chinese market for a significant portion of their sales. And if you own stock in any of those companies, the impact on your nest egg could be considerable.

What’s happening overseas is also partly responsible for the drop in the price of commodities like oil, silver and gold. Some might even call it a price collapse. Your nest egg is also affected by the daily fluctuations in stock prices and interest rates. What happens throughout the world often causes those fluctuations.

As a financial adviser, I want to stress to clients and readers that, in this day and age of instantaneous news, there’s always something unsettling occurring that might cause us to worry about our money.

I can’t tell you not to worry, but I can say that investors need to have an iron stomach in addition to a strategy. For most investors, a strategy means diversification, which in turn means don’t put all your eggs in one basket.

Does diversification mean you’ll always get the highest returns? Of course not. For example, in 2013 investors who only invested in U.S. stocks generally outperformed those in diversified portfolios. Keep in mind, however, that they also shouldered more risk.

A diversified portfolio isn’t just domestic stocks. To be truly diversified, you should think globally. That means international stocks as well, plus bonds, cash, and perhaps some additional assets such as real estate and commodities.

In the investment world there will always be something to worry about. Some people believe they can avoid the worry by simply depositing everything into the bank.

True, bank deposits are “guaranteed” by FDIC insurance, but there’s also a downside. With today’s low interest rate environment, the purchasing power of dollars in the bank decreases as prices throughout the world increase. I’ve heard many retirees complain they can’t afford price increases because they’re on a fixed income. It’s a valid complaint.

Yes, investors can always find something to worry about. But, as an investor, it’s imperative you have a strategy. You may have to tweak it over the years, but it shouldn’t be abandoned at the first sign of bad news.

Your money has to work especially hard when you no longer work. Since retirement can easily represent a third of your life, it’s important that you have a long-term strategy. And because it has an impact on your financial well-being, be sure to think globally.

Tuesday, August 18, 2015

Excuse me, is that your $1,300 on the table?

I know of very few retirees that couldn’t use an additional $1,300 per year. But to a certain degree, a lot of young people today are throwing away the opportunity to do just that.

Their failure to take advantage of what is essentially free money is putting them in a position where they’ll have much less during their retirement years than they would have if they just made one simple decision during their working years.

Let me explain.
A recent study by the well-respected financial firm, Financial Engines, estimated that nearly one out of four participants in 401(k) programs do not contribute enough into their program to receive the maximum employer match.

Financial Engines estimated that, by not contributing enough to receive the maximum employer match, Americans leave a staggering $24 billion on the table each and every year.

That averages out to $1,300 per person for those employees who are not taking full advantage of the employer match. As I said, I don’t know too many retirees who couldn’t use that extra cash.

Retirement plans can vary from company to company, but with a typical 401(k) retirement plan, the employer matches the employee’s contribution dollar for dollar up to a maximum percentage. Generally the maximum is 5 percent of the employee’s pay.

So if an employee earned $30,000 and he or she contributed 5 percent of their pay, their annual contribution would be $1,500. Throw in the $1,500 employer match and you’ve got $3,000.

Using this example, if the employee only contributed $1,000 over the course of a year, the employer would only match $1,000. In other words, the employee failed to collect an extra $500 of “free” money. Unfortunately, nearly 25 percent of employees are failing to participate to the max and are therefore leaving dollars on the table.

But the study didn’t stop there. It also determined that more than 40 percent of those who miss out on the match earn less than $40,000. That’s unfortunate, but understandable. Those earners likely need every possible dollar for the cost of living.

What really shocked me, however, was that 10 percent of those who don’t take full advantage of the match earn in excess of $100,000 annually. Even sadder was that the largest segment of those missing out on the match are under 30.

Why aren’t younger employees participating? Well, perhaps retirement seems like a lifetime away. Maybe they’re burdened by college loans. Or it could just be a lack of financial education.

That being said, the bottom line is the financial services industry has to do a better job helping young people understand the importance of saving early in their careers.

But families also need to discuss money issues. Families need to lay the foundation for good and prudent money management at an early age. In my experience, many are reluctant to discuss financial issues with their adult children.

Talking to adult children about money is one of the topics I’ll discuss at the Healthy, Wealthy and Wise program sponsored by the Society for Lifetime Planning this coming Tuesday. For details and reservations, call 248-952-1744.

During your working years, leaving employer-matched money on the table is a mistake. During your retirement years, not discussing money issues with family members can also lead to poor money decisions by your children, even into adulthood.

Monday, August 10, 2015

The second most difficult conversation you may never have

Recently, I was trying to unwind after a day filled with client meetings and a sad phone call notifying me that a longtime client had passed away. Although I thoroughly enjoy my profession, there are certain days that just take the wind out of my sails.

When I get home after an unusually busy day, I just plant myself in front of the television and mentally escape for a while. One evening, within the span of a few hours, I was bombarded with television ads that were either visually suggestive or actually dealt with the topic of sex. It was a revelation.

It reminded me of the most difficult conversation my wife and I had while raising our children. The age-old discussion about the birds and the bees. Then, from my experience as a financial adviser, it occurred to me that second most awkward discussion that many parents have with their children comes much later in life. The discussion about end-of-life money issues, desires and goals.

Of course, most people designate who they want to be beneficiary of their investments. For example, with an IRA you can name your spouse as a primary beneficiary and surviving children equally as contingent beneficiaries.

Many people often take the time to draw up a will and a trust. Parents might choose to name one of their adult children as trustee and designate that child to distribute their nest egg to other surviving family members. They could also designate a family member to make end-of-life health care decisions.

It might all look good from a legal standpoint, but from my viewpoint, many parents never really have a detailed discussion of their goals and desires. They just leave it for their one designated trustee to sort out the details long after they are gone.

Don’t get me wrong; having your legal affairs in order is important, but I think most families would be better served simply by having a more detailed discussion with family members.

Since we’re in a Woodward Dream Cruise mindset, who’s going to get the family’s collectible car? Or mom’s family heirloom and dad’s coin collection? Do the trustees know who is supposed to get what?

I often hear family members say that dad would have wanted a certain person to get this, or that mom would have wanted a certain thing to happen. But when I press as to whether there were written instructions or even a conversation, more often than not the answer is no.

A friend recently pressed her mom about end-of-life wishes. Her mom was shocked that her daughter didn’t know about the list that detailed all of her end-of-life wishes including what hymns were to be played at her funeral. My friend simply had no idea such a list even existed.

So, even though it’s uncomfortable, the birds and the bees topic is eventually discussed, but detailed sharing of money-related issues and concerns is seldom shared or discussed. It’s usually up to a son or daughter to guess what mom and dad wanted. I suggest you take the time to have the discussion.

And finally, I will be one of the speakers at the healthy, wealthy and wise workshop at the Troy community center on Aug. 18. For details and reservations, please call 248-952-1744.