Social Security - An Update

According to the Social Security Administration, nearly 62 million Americans are receiving some type of benefit from the program as of April 2012.  There is much speculation as to where the program is headed in the future.  Unfortunately, there’s little more to report on long term changes than mentioned in my July 2011 blog on just that topic.  The broken record remains the same.  If you’re over 55, you’re likely to see your full benefit.  How that benefit is taxed, whether or not it is means-tested in some fashion and what’s to come of the program for the rest of us remains to be seen.
 

That said, there are sufficient changes surrounding Social Security in the here and now that justified an update. 

Analytical Tools Multiplying

With 10,000 baby boomers reaching age 65 every day, it’s no surprise that a large number of tools have started to sprout up promising to help analyze how to maximize your benefit.  These tools vary in their level of sophistication, but most ultimately come down, as all financial planning does, to making educated guesses about a number of variables.  Despite much of what’s written out there, the decision as to when to draw social security is often much more than just picking age 62, 66 or 70.

The basic rule of thumb is simple.  If you expect to live past age 80 or so, depending on some other factors, it’s best to wait as long as you can to draw your benefit.  But, that comes with a number of caveats.  It’s impossible to touch on them all, but the biggest gap we see in these tools is the ability to translate what’s best purely from a Social Security standpoint to how the timing of your benefit impacts the overall portfolio.  

Does drawing later for a higher benefit cause too much strain on your portfolio in the early years of retirement?  Is giving in to the emotional pull of starting benefits sooner costing you potentially hundreds of thousands of dollars in benefits down the road?  We have the ability to look at these tools as they relate to your overall plan and help make that decision about when to turn on benefits as educated a choice as possible.

No More Statements

As you may have heard, an effort to reduce spending on postage, paper and impact to the environment has led the Administration to cease mailing out annual statements.  In response, they’ve added a new online offering called “My Social Security”.  The program allows you to create your own login and retrieve the same information reported on your annual statement at any time.  The website can be found here, or we’d be happy to walk you through the process in our next meeting.

No More Paybacks

Another slightly older bit of news that wasn’t very widely covered is the closing of the “payback” loophole.  In the past, you could elect to start your benefit early and then, at any time before age 70, “cancel” your election, payback what Social Security had paid you to that point and then restart your benefit at the new, higher rate.  This was essentially an uncollateralized, non-interest bearing loan from the government.  That option has since been removed and is no longer a tool to use in determining the best outcome for you and your benefit. 

Unintended Benefits 

Stories continue to emerge about various other Social Security “loopholes” that are likely to be closed as Congress continues to find every way they can of extending the program without upsetting the electorate.  One story that’s arguable an illustration of what’s wrong with the system was one I recently came across in Investment News.  Dependent children under a certain age are eligible for benefits of up to ½ the amount of the recipient.  This rule was largely intended for parents receiving Social Security for disability or widow/widowers’ benefits or for those having to care for dependent grandchildren.  The unintended consequence is that, in this day and age, more and more fathers in their sixties have young children.  Until the loophole is addressed, Mary Beth Franklin of Investment News recommends anyone eligible take the benefit and use it to fund the child’s 529 plan.  She coins the strategy “The Viagra College Fund.” 

We’ll continue to monitor this and all the topics we cover here that can have a meaningful impact on your life and financial goals.  If you have any questions or wish to discuss further, don’t hesitate to contact us via the links below.

Thanks and have a great week!

Chip Workman, CFP®

cworkman@taaginc.com

www.taaginc.com

Facebook Fever

As I write this blog, Facebook is set to begin trading any minute, with the estimated 11:15am start time approaching.  The fact that web sites are breathlessly reporting the status of the stock’s IPO on a minute-by-minute basis speaks volumes about the public’s interest in the company.

Facebook is a great example of the emotional side of investing.  It’s fun to own a company that everyone’s talking about, that you use personally, or you see jumping up in value the way Apple Computer did over the past 2 years.   We all want to be associated with a winner because it makes us feel like winners too - nothing wrong with that.  But IPOs can be tricky investments based on their history of spiking in the short term, then dropping significantly in price when insiders are permitted to cash out later.  One of the best overviews of the pros/cons of investing in the company actually came from a tongue-in-cheek letter from the Founder and CEO, Mark Zuckerberg, posted on the Borowitz Report.   

The better lesson to take from Facebook, Apple and others is how technology is driving innovation in the US; and we probably won’t know where the next big thing will come from until it’s already here.  In a Wall Street Journal op-ed published May 17th, The Future is More Than Facebook, the publisher of Forbes pointed out the time to make big returns in social media has passed, but there are newer, more exciting technology breakthroughs in the works: Google’s robotic driven car, robotic manufacturing, and high-tech horizontal oil drilling. These technologies will drive down the cost of providing goods and services, improve our quality of life, and create wealth.  But the path to get there will be messy.  How many companies begin with a great idea, but can’t find a way to make money with it?  Or make lots of money at first, then get run out of business by the next competitor who figures out a way to do the same thing, only better (remember Compaq computers?)  It’s impossible to consistently predict the winners in advance. 

But if you own a diverse portfolio of companies, odds are you will participate in the next big thing.  If a few of them collapse on their path to greatness, your retirement dreams will not be crushed in the process, but you’ll still participate in the overall growth of the economy.   It’s not as exciting as buying Facebook on the day of its IPO, but it’s a better plan to get rich. 

If you really, really want to own shares of Facebook just to be a part of it, wait until all the hoopla dies down, because the price will probably be lower then.  On the other hand, you could simply print out the stock certificate published by MAD magazine, and keep yourself broadly diversified in a wide range of companies, knowing the ‘next big thing’ is probably already on its way to your portfolio.

Jeannette A. Jones, CPA, CFP®

jjones@taaginc.com

www.taaginc.com

The Real Reasons Why You Buy

(from Carl Richard's New York Times' Bucks blog, 4/16/2012 - click here for the original post. Carl is a Certified Financial Planner in Park City, Utah. His sketches are archived on the Bucks blog and on his personal Web site, www.BehaviorGap.com.) His new book The Behavior Gap is on shelves now.

Before we buy something we tell ourselves stories.

We are particularly fond of the story that goes like this: We have researched all the options, and the decision we have made represents that best one we could make given the facts. Just the cold, hard facts.

Of course, that story isn’t really true.

And we make up other stories as well, many of which have absolutely nothing to do with the actual facts. We create these stories to help ourselves feel good about a decision we have already made.

For instance, many times we actually reverse the process. We decide what we want, often for emotional reasons, and then we go looking for evidence to support the decision. As we are gather the evidence, we carefully omit anything that doesn’t fit into the story we’re writing.

This is so easy to do you could say that it’s natural to us. We don’t really have the time to consider every single option. If you did, you would never get past your closet in the morning. So we take shortcuts. We decide what we want and then gather a few facts to prove to ourselves, our spouse and our family or friends that we did the right thing.

When it comes to spending money, one of the stories we like to tell ourselves is that we aren’t just spending. This item is actually an investment. It’s an investment in ourselves and our quality of life, or an investment that will actually save us money over the long run.

So we run the numbers, or more likely we read about someone who ran the numbers. Then if the narrative matches, we use that as evidence that we’re doing the right thing.

It seems easy. A simple case of addition or subtraction.

Things get complicated pretty quickly, however, when we start using the argument of saving money as a Trojan horse to hide the real reasons we’re doing something. Let’s take the case of whether to buy a hybrid or electric car.

If you decided that you want a hybrid, it’s pretty easy to find evidence to support that decision, but be careful if you’re telling yourself that it will save you money.

Except for two hybrids, the Prius and Lincoln MKZ, and the diesel-powered Volkswagen Jetta TDI, the added cost of the fuel-efficient technologies is so high that it would take the average driver many years — in some cases more than a decade — to save money over comparable new models with conventional internal-combustion engines … Gas would have to approach $8 a gallon before many of the cars could be expected to pay off in the six years an average person owns a car.

To be clear, there are plenty of legitimate reasons to buy a more fuel-efficient car. Unfortunately for the buyers relying on the numbers argument, one of them isn’t saving money in the short term unless you buy specific models.

So why do we hide behind saving money?

It’s easy to point to the price of gas. It’s harder to explain why the environment benefits from one more person driving an electric car. And it’s harder still to explain why driving a hybrid just makes you feel good.

And few people want to admit to adult peer pressure. How could you live with the story that you actually bought that Prius because you wanted a cool spot to put your Apple sticker?

Obviously cars aren’t the only thing we try to make the saving-money logic stick to. How about the recent argument at Slate that you should run out and “buy, buy, buy” a house if you are currently renting? This is a classic case of using tons of “evidence” to tell a nice little story while ignoring the data that might not fit nicely in the narrative.

Based on the facts presented in this particular story, it looks like it might actually be cheaper to buy than rent, but it states that any consideration of where prices might be headed is “irrelevant.” It’s just one more example of how far we can go in our storytelling exercises.

And it’s not that simple, as you’ve probably guessed. What if prices fall 10 percent and you have to relocate for another job? What if you know you’re moving in three years and prices stay the same?

You may be very hard pressed to break even after you consider the costs associated with buying and selling the house (e.g., real estate commissions, closing costs, moving costs and taxes). With a little honesty, there goes that nice, clean “time to buy” story.

While cars and houses might require the most complex stories, we often tell ourselves little ones about things like vacation “deals,” using a rewards credit card and buying in bulk. Often they get brushed with the halo of saving money. In each instance, saving money may be one of the reasons you’re doing something, but you can rarely say that it’s the only reason.

And that’s the point.

We tell ourselves stories about why we’re buying something, and saving money is a good story.

But I think one of the best conversations you can have with yourself, your spouse or your family is about the real reasons behind why you spend money. Be honest, even if it means having to admit that you’re buying something only because you simply want it. Blurring our reasons for our decisions around spending money is a slippery slope that can lead to a lot of financial headaches.

The Magic Number

One of the questions I am often asked by clients is “how much money do I need to retire?”  Advertisements on TV and in magazines would have us believe that when we have accumulated this “magic number” we are ready to stop working.  What the ads fail to mention is that this is just one of the important numbers you need to know to ensure a successful retirement.   Just as critical in your planning is a realistic estimate of how long you will live.

In my last blog, A Different Angle, I wrote about the tendency of clients to put off their estate planning.  One reason for their procrastination I’ve heard from more than one person is if they delay drawing up their documents, they will delay their death as well.  This is usually said in jest.  The irony is, when we are working on their financial plan and I want to assume a mortality rate in their 90s, they tell me they are not going to live that long!

Ron Gebhardtsbauer, who heads up the Actuarial Science Program at the Sheal College of Business at Penn State University estimates that a 65-year-old man has a 30% probability of living to 90, while a 65-year-old woman has a 40% chance.  A married couple who is 65-years-old has a 60% chance one of them will live until at least age 90.

So, what mortality assumption should you use in your retirement planning?  I was recently made aware of a tool called The Longevity Game on Northwestern Mutual’s website that takes factors such as your health, behavior and family history into account when producing your average life expectancy.  You should play - the results might surprise you.  It says I could live to age 98, so it looks like I have a few more decades of work ahead of me!

Christine Carleton, CFP®

ccarleton@taaginc.com
www.taaginc.com

The Changing Role of Grandparents

A recent AARP survey of grandparents showed that 36% of those asked felt that “spoiling grandchildren by buying them too much” was part of a grandparent’s financial role.  This result isn’t all that surprising. Spoiling grandchildren has been a time-honored right and tradition for grandparents for many generations.  AARP has done similar studies many times with fairly consistent results. 

What’s changing, perhaps, is the definition of spoiling.  You’ve likely seen examples in your own life or through the media of spoiling taking on extremes.  This occurs for a variety of reasons, but the most common are the relative young age of the average grandparent , their proximity to their grandchildren and the highly involved role they play in their day to day care. 

When I was growing up, getting spoiled by my grandfather meant occasionally getting slipped a few dollars, or, if we were really behaving, a little chocolate syrup in our milk.  Perhaps the biggest prize was the chocolate mints (specifically, Andes) that were kept in the small silver bowl on the living room coffee table.  Were they my favorite candy?  Not really, but for some reason getting the ok from Grandpa to have one made them taste better than any candy bar out there.  These were very occasional, relatively small things that meant the world to me.   

Per the same AARP study, today 1 in 6 grandparents provide daycare services for grandchildren.  Nearly 40% have provided such care on occasion.  More than 10% have a grandchild actually living with them.  When a grandparent plays an active role in providing day care, regular babysitting or other support, what can be seen as a little harmless spoiling can become an expectation and way of life to an impressionable child.  It is important that parents and grandparents evaluate sweets, fast food, cash, toys and other gifts to make sure that the occasional treat doesn’t become a full derailing of well intentioned plans to raise a healthy child. 

Helping with education, medical bills or other living expenses is certainly another story, and one that should be decided on a family by family basis.  Here again, though, special attention should be paid by the grandparent to how the support affects their own personal goals.  With life expectancy creeping up each year, portfolios can be heavily strained by regular gifting to support a grandchild.  Make sure you discuss with your financial planner how your gifting impacts your long term goals and be sure to set realistic expectations with family members. 

As with so much in life, balance is the key.  Ever-increasing pressures to give this and want that, if they go unchecked, can wreak havoc with future generations and our own financial goals.  While the spoiling may be what makes you and your grandchild feel the best in the moment, it’s the life lessons and memories that can help frame a child’s long term perspective that they’ll really value in the long run.

Have a great week!

Chip Workman, CFP®

cworkman@taaginc.com

www.taaginc.com