“The bankers and Wall Street traders. Just because
you showed ridiculous incompetence in lending doesn’t mean that you, and the hideously exposed
like me, don’t deserve a second chance. God bless America! And its hard-working backbone! And
there’s still their pensions for next time!”
Joke attributed to George W Bush
This is ad-hoc bibliography collected mainly from mainstream (you can call it "yellow", if
you wish ;-) financial press. All recommendations expressed on this page should treated very critically.
Please read section about retirement
scams first !!! This is real danger for those close to retirement and all people already in retirement.
Sometimes scamsters represent "reputable" Wall Street companies; sometimes they are seniors
themselves and can even live in the same community and/or attend the same church. See this
short clip which provides a 6 minutes course on what is really 401K is about:
Representatives of "reputable" Wall Street firms often are peddling
some disastrous new financial instrument, the instruments that brings high fees to the institution.
If the investment it too good to be true is usually is. Stories of retirees who lost one million of
more due to financial scams promoted by slick financial advisers recently became popular topic in major
newspapers so the size of the phenomenon is probably substantial.
Published cases suggest that abuse of elderly by financial crooks is more like a rule
then exception. After all financial companies badly want fees and want to sell high fee product oblivious
to the personal circumstances and consequences of their actions on your financial wellbeing.
In any case please understand that we cannot be all robbers, there should be some victims too.
But
the natural balance between robbers and victims was distorted after Reagan due to reregulation and later
rolling back the Great Deal. Robber barons returned and they returned in quantity that will amaze future
historians. For all practical purposes 401K is taxable account, the only difference is that it is taxed
by Wall Street, not by the government. At some point the share of financial firms profits in S&P500 above
40%: we talk about crisis of overpopulation among robbers ;-)
Robert Shiller in the past made several pretty accurate forecasts of major economic events and it
might make sense to read his columns.
20100423 : time-to-replace-the-4-rule ( What a f*#cking retards those guys are. Did they ever suspect about the existence of Excel and longevity estimators? )
"It is well enough that people of the nation do not understand our banking
and monetary system, for if they did, I believe there would be a revolution before tomorrow
morning."
"Over the past five years, the S&P 500 stock index has more than doubled. For the past
10 years, it has nearly quadrupled," says Orman. "If you have left your portfolios on
autopilot, that could likely mean that you now own more stock than you intend to, or
should."
Left to their own devices, your increasingly valuable stocks may have started to account for
an even larger portion of your account
... ... ...
Orman cites a recent analysis from Fidelity Investments on the retirement plans the company
handles. Fidelity estimates about 20% of savers own more stock than they'd recommend for
someone of their age.
Retirees who have the most money pay the most in taxes, according to a
recent
working paper
, but they're not necessarily rich.
"Most of the tax burden is carried by the top quintile of households,"
Anqi
Chen
, co-author and assistant director of savings research at the Center for Retirement Research at Boston College, told
Yahoo Money. But "it's important to keep in mind that when we think about the top quintile of households -- the top 20% -- they're
not the super wealthy."
Those in the highest quintile are mostly married couples with average combined Social Security benefits of $50,900, 401(k)/IRA
balances of $325,400, and financial wealth of $441,400. When annuitized, those assets and retirement accounts earn account
holders roughly $3,000 per month -- or $36,000 per year -- ostensibly making them middle-income earners, Chen said.
"That's some money but not a ton of money," Chen said, "and these households will have to pay about 11% [in taxes]."
(Photo: Getty)
The highest quintile pays 11.3% on their retirement income, while the top 5% is taxed at 16.4%, and the top 1% is taxed at 22.7%,
according to the analysis. Overall, retired households pay 6% in federal and state taxes on their income.
Researchers used income data from 3,419 individuals and 1,907 households included in the Health and Retirement Study, a
nationally representative longitudinal survey of older Americans. The analysis assumes the retirees follow the required minimum
distributions for their retirement accounts and consume only interest and dividends from their assets.
The heavy tax burden carried by well-off retirees demonstrates that even those who enter their golden years with the most money
are still short on savings, an ongoing problem for many Americans. Roughly 40% of the top quintile of savers are at risk of
maintaining their standard of living, meaning "taxes will make the goal even more difficult to attain," the study said.
For the majority of retired households, "taxes are negligible," Chen said, paying 0% to 1.9%. But they are far from lucky.
Those in the "bottom two-thirds of the income distribution don't have a lot in financial assets" that yield material income in
retirement, she added.
Yahoo Money sister site Cashay has a weekly newsletter.
Stephanie is a reporter for Yahoo Money and
Cashay
,
a new personal finance website. Follow her on Twitter
@SJAsymkos
.
"... If you're married and your spouse is covered by a workplace-based retirement plan but you're not, you can deduct your full IRA contribution as long as your joint AGI doesn't top $196,000 for 2020. You can take a partial tax deduction if your combined income is between $196,000 and $206,000. ..."
"... Spouses with little or no earned income for 2020 can also make an IRA contribution of up to $6,000 ($7,000 if 50 or older) as long as their spouse has sufficient earned income to cover both contributions. The contribution is tax-deductible as long as your household income doesn't exceed the limits for married couples filing jointly. ..."
There's still time to make a 2020 IRA contribution and lower your tax bill.
by:
Sandra
Block
January 13, 2021
As you get ready to tackle your 2020 tax return, make sure you haven't overlooked one of the best ways to cut your tax bill
and secure your future -- funding a traditional IRA. (There is no upfront tax break for funding a Roth IRA.)
You can actually make an IRA contribution for the 2020 tax year up until the time you file your tax return, which is due April
15, 2021. But why wait? If you have some extra income – say, from a
stimulus
check
– go ahead and deposit it into an IRA account now before you forget. You'll also give the money a little more time
to grow, which you'll appreciate when you retire.
And what about those tax savings? Well, depending on your income, you may be able to deduct your IRA contribution on your 2020
return. To contribute to a traditional IRA, you or your spouse must have earned income from a job. But, otherwise,
you
may be able to deduct contributions
to an IRA even if you or your spouse are covered by another retirement plan at
work. Plus, starting last year, seniors age 70½ and older with earned income can contribute to a traditional IRA, too.
Here's some more good news: The IRA deduction is an "above the line" adjustment to income, meaning you don't have to itemize
your deductions to claim it. It will reduce your adjusted gross income (AGI) dollar-for-dollar, lowering your tax bill. And
your lower AGI could make you eligible for other tax breaks, which are tied to income limits.
Who Qualifies
If you're single and don't participate in a retirement plan at work, you can make a tax-deductible IRA contribution for 2020
of up to $6,000 ($7,000 if you're 50 or older) regardless of your income. If you're married and your spouse is covered by a
workplace-based retirement plan but you're not, you can deduct your full IRA contribution as long as your joint AGI doesn't
top $196,000 for 2020. You can take a partial tax deduction if your combined income is between $196,000 and $206,000.
But even if you do participate in a retirement plan at work, you can still deduct up to the maximum $6,000 IRA contribution
($7,000 if you're 50 or older) if you're single and your income is $65,000 or less ($104,000 if married filing jointly). And
you can deduct some of your IRA contribution if you're single and your income is between $65,000 and $75,000, or if you're
married and your income is between $104,000 and $124,000.
Spouses with little or no earned income for 2020 can also make an IRA contribution of up to $6,000 ($7,000 if 50 or older) as
long as their spouse has sufficient earned income to cover both contributions. The contribution is tax-deductible as long as
your household income doesn't exceed the limits for married couples filing jointly.
Double Tax Break
Some low- and moderate-income taxpayers get an extra break for contributing to an IRA or other retirement account.
In addition to the usual IRA deduction, you may qualify for a Retirement Savers tax credit of up to $1,000 for contributions
to an IRA or other retirement tax plan. (A tax credit, which reduces your tax bill dollar-for-dollar, is more valuable than a
deduction, which merely reduces the amount of income that is taxed.)
The actual amount of the credit depends on your income. It ranges from 10% to 50% of the first $2,000 contributed to an IRA or
other retirement account. To be eligible, your 2020 income can't exceed $32,500 if you're single; $48,750 if you're the head
of a household with dependents; or $65,000 if you're married filing jointly. The lower your income, the higher the credit. But
you can't claim the Retirement Savers credit if you're under 18, a student, or can be claimed as a dependent on someone else's
tax return.
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@ Grieved | Dec 19 2020 6:01 utc | 135 with the rant about the Dems and Medicare for
All
The US government has been financialized like the majority of the Fortune 500. Since the
1970's the trajectory in the US has been to reduce government spending on social safety net
programs and privatize the Social Security Insurance program. While SSI was raped by
Reagan/Greenspan/Congress and taken from the independence of actuaries and made a political
budget football including false claims of being and "entitlement" program the safety net
social programs fared worse. In the early 1970's, when I was familiar with the planning for
and provision of social services like for developmental disabilities, alcoholism, mental
health, job search help, infancy care (WIC) and drug abuse, the concept of continuum of care
helped the different agencies collaborate and really help folks. Then the Fed stared changing
the rules of the way money was to be spent that developed columns of services that don't
interact/coordinate with each other as well as reducing overall low income support.
I also want to add to what you wrote earlier that humanity use to make other than the
throw-away-to-churn-the-money-mill products that were both designed and built better/to last.
It fits with our throw away food system with all that packaging and none of it refillable,
seemingly by design.....
....
....
because as I continue to write here, its all about the God of Mammon instead of the support
of the masses social structure with the underpinning of the God of Mammon way of life is
controlled by the global private financed owned elite and the support of the masses way of
life is exampled biggly currently by China.
For eight-and-a-half decades, most Republican legislators (and some Democrats) have been
trying to get rid of Social Security .
The first step in Trump's assault on Social Security's funding took effect Sept. 1st.
On Trump's orders, the IRS ordered corporations to stop withholding Social Security
contributions from paychecks, through the end of the year.
Speaking on Fox Business recently, Trump advisor Larry Kudlow said that later this year
Trump will order the IRS to continue the deferral indefinitely.
Social Security's chief actuary wrote that if Social Security is defunded, some benefits
will be reduced next year, and that benefits will disappear entirely by the end of 2023.
If you are, or if you know someone on Social Security, please pass the word!
I'm 52, won't live past 80 and have $1.6 million. 'I am tired of both the rat race and workplace
politics.' Should I retire?
More
I don't have much in savings and feel lost. What can I do? Dear Wondering in Alamo, You bring up a question I
think a lot of people have been asking themselves lately.
https://s.yimg.com/rq/darla/4-2-1/html/r-sf.html
Start survey
U.S.
Your retirement distributions won't be taxed in these states: AARP
Ann Schmidt
,
Fox Business
•
July
31, 2020
There are 12 states that won't tax your distributions from
401(k)
plans,
IRAs or pensions, according to a recent report from
AARP
.
Of those states, nine -- Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas,
Washington and Wyoming -- don't have state income taxes.
Some states only partially tax retirement distributions, AARP reported. In Colorado, taxpayers over 65
can remove
$24,000
from
their federal AGI for their state taxes, according to AARP.
Other states have policies for taxes on retirement distributions that depend on your occupation before
retirement. For example, in Connecticut, teachers can subtract 25 percent of their retirement income from
federal AGI.
There are also 29 states that don't tax
military
retirement
income at all, AARP reported. Those states include Alabama, Arkansas, Connecticut, Hawaii, Idaho,
Illinois, Kansas, Louisiana, Maine, Massachusetts, Missouri, New Jersey, North Dakota, Ohio, Oregon,
Pennsylvania, Rhode Island, South Carolina, West Virginia and Wisconsin.
The remaining 21 states tax some or all of military retirement income, according to AARP.
One exception is in Virginia, where only recipients of the Congressional Medal of Honor are exempt from
taxes on their military retirement income, AARP reported.
"... "By the Department of Labor's own admission, these are investments that are more complex, more opaque, less liquid, more difficult to value, with often higher costs than the investments that are traditionally offered through retirement plans," Roper said in an interview with Yahoo Finance. ..."
Managers of 401(k) plans now have the ability invest in private equity. In other words, your
401(k ) could soon take stakes in private companies.
The goal, according to Labor Secretary Eugene
Scalia is to allow investors to "gain access to alternative investments" and "ensure that ordinary people investing for retirement
have the opportunities they need for a secure
retirement
." The Department of Labor laid things out in a
letter that says putting 401(k) money into private-equity funds would not "violate the fiduciary's duties" of certain retirement
plan sponsors.
But some experts see a big downside.
Barbara Roper, the Director of Investor Protection
at the Consumer Federation of America, said the "significant risks" associated with private equity investments haven't been adequately
addressed.
"By the Department of Labor's own admission, these are investments that are more complex, more opaque, less liquid, more
difficult to value, with often higher costs than the investments that are traditionally offered through retirement plans," Roper
said in an interview with Yahoo Finance.
You 'could do much, much worse'
The DOL letter means that a 401(k) manager could now decide to invest in private-equity funds that previously were not accessible.
These funds traditionally have been reserved for the wealthiest traders and institutional investors. They typically come with higher
risk since private companies are not required to disclose nearly the same about of data with the SEC as public companies do.
The new rule could be tempting for average savers who may now have a roundabout way to get a piece of a company – like SpaceX
or AirBnB – that's still private. The American Investment Council, which represents the private equity industry, has
lauded the change , saying it will strengthen Americans' retirement security.
One thing that remains up in the air is how quickly the managers of the big retirement plans will embrace their new options. Companies
like Vanguard and Fidelity have not yet offered comment on the new guidelines. Another
outstanding question is whether these plans would list private-equity funds among the options for savers to choose from, or whether
private equity would simply be mixed into existing funds.
Alexis Leondis, an opinion columnist for Bloomberg,
recently asked if the move is worth the risks. “Many plan sponsors don't have the sophistication or background in alternatives
to fully understand the complicated structures of many private equity funds," she wrote.
Roper said that “the dispersion of returns in the private-equity fund space is huge, much broader than it is in the public markets.”
And while the returns for over-performing private equity funds can, indeed, beat the public markets, “if you get in a below average
fund, you could do much, much worse," she said.
An example of a big downside in private equity fund is SoftBank’s Vision fund. That fund
recently announced losses of $24 billion
after failed investments in WeWork and OneWeb.
According to
a 2018 study by the Stanford Center on Longevity, about half of American workers are saving money through a retirement plan at
work. Access to and participation in 401(k)s is much lower among younger workers.
A report from the National Institute on Retirement Security found that two-thirds of working millennials have nothing saved for
retirement.
A second rule change, over financial advice
A second change is coming soon and is expected to relax restrictions on the advice financial professionals give about their retirement
investments.
The change,
passed by the SEC last year with a compliance deadline of June 30, says brokers must act “in the best interest of the retail customer
at the time the recommendation is made, without placing your financial or other interest ahead of the retail customer’s interests.”
SEC Chairman Jay Clayton has said that the change is part of "raising the standard of conduct for broker-dealers," while he has
discussed in interviews how the best interest standard is different than a fiduciary standard.
According to the Consumer Federation of America, the move could lead to an understanding that investment advisers are not true
fiduciaries. A fiduciary is someone legally obligated to act in the best financial interests of the clients they are advising.
Roper
says that this potential new rule gives broker-dealers and investment advisers “virtually unlimited ability to act as advisers,
while simultaneously failing to regulate them accordingly.” They can now “mislead their customers into believing they are getting
trusted, best interest advice when they are actually getting investing recommendations biased by toxic conflicts of interest,” she
said.
Roper appeared as part of Yahoo Finance’s ongoing partnership with the
Funding our Future campaign, a group of organizations
advocating for increased retirement security for Americans.
Consumer Federation of America is an association of non-profit consumer organizations. More than 250 groups – from local agencies
like the New York City Department of Consumer Affairs to private groups across the country – participate in the federation.
All of these changes may not be noticed by certain savers who are often encouraged to take a “set it and forget it” approach to
their retirement.
If their 401(k) provider does end up getting involved in private equity, advocates like Roper say that "the promise of improved performance
is not necessarily met by the reality."
Ben Werschkul is a producer for Yahoo Finance in Washington, DC.
Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan
account owner must withdraw annually starting with the year that he or she reaches 72 (70
½ if you reach 70 ½ before January 1, 2020), if later, the year in which he or
she retires. However, if the retirement plan account is an IRA or the account owner is a 5%
owner of the business sponsoring the retirement plan, the RMDs must begin once the account
holder is age 72 (70 ½ if you reach 70 ½ before January 1, 2020), regardless of
whether he or she is retired.
Retirement plan participants and IRA owners, including owners of SEP IRAs and SIMPLE IRAs,
are responsible for taking the correct amount of RMDs on time every year from their accounts,
and they face stiff penalties for failure to take RMDs.
When a retirement plan account owner or IRA owner, who dies before January 1, 2020, dies
before RMDs have begun, generally, the entire amount of the owner's benefit must be distributed
to the beneficiary who is an individual either (1) within 5 years of the owner's death, or (2)
over the life of the beneficiary starting no later than one year following the owner's death.
For defined contribution plan participants, or Individual Retirement Account owners, who die
after December 31, 2019, (with a delayed effective date for certain collectively bargained
plans), the SECURE Act requires the entire balance of the participant's account be distributed
within ten years. There is an exception for a surviving spouse, a child who has not reached the
age of majority, a disabled or chronically ill person or a person not more than ten years
younger than the employee or IRA account owner. The new 10-year rule applies regardless of
whether the participant dies before, on, or after, the required beginning date, now age 72.
The RMD rules apply to all employer sponsored retirement plans, including
profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply
to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.
The RMD rules also apply to Roth 401(k) accounts. However, the RMD rules do not apply to
Roth IRAs while the owner is alive.
You must take your first required minimum distribution for the year in which you turn age 72
(70 ½ if you reach 70 ½ before January 1, 2020). However, the first payment can
be delayed until April 1 of 2020 if you turn 70½ in 2019. If you reach 70½ in
2020, you have to take your first RMD by April 1 of the year after you reach the age of 72. For
all subsequent years, including the year in which you were paid the first RMD by April 1, you
must take the RMD by December 31 of the year.
A different deadline may apply to RMDs from pre-1987 contributions to a 403(b) plan (see FAQ
5 below).
Return
to List of FAQsHow is the amount of the required minimum distribution
calculated?
Generally, a RMD is calculated for each account by dividing the prior December 31 balance of
that IRA or retirement plan account by a life expectancy factor that IRS publishes in Tables in
Publication 590-B ,
Distributions from Individual Retirement Arrangements (IRAs) . Choose the life expectancy
table to use based on your situation.
Joint and
Last Survivor Table - use this if the sole beneficiary of the account is your spouse and
your spouse is more than 10 years younger than you
Uniform
Lifetime Table - use this if your spouse is not your sole beneficiary or your spouse is
not more than 10 years younger
The Decade in Retirement: Wealthy
Americans Moved Further Ahead https://nyti.ms/34pZAbD
NYT - Mark Miller - Dec. 14
... In 2010, the economy was just beginning to recover from the worst recession and
financial crisis in recent memory. The unemployment rate was high, the stock market was
coming back and millions of workers were worried that their retirement plans were ruined.
Since then, a robust economic rebound has put some Americans back on solid footing for
retirement, but progress has been uneven. Despite the gains made in employment, wage growth
has only recently begun to recover -- and remained flat for older workers. Retirement wealth
has accumulated almost exclusively among higher-income households, while middle- and
lower-income households have only held steady or lost ground, Federal Reserve data shows.
Trends in Social Security and Medicare also are troubling. The value of Social Security
benefits -- measured by the share of pre-retirement income they replace -- is falling, and
the cost of Medicare is rising.
For members of the baby boomer and Gen X generations, the odds of success are mixed. The
Employee Benefit Research Institute has developed a model that simulates the percentage of
households likely to have adequate resources to meet retirement expenses, considering
household savings, home equity and income from Social Security and pensions.
The model shows that the highest-income households have seen their odds of a successful
retirement improve sharply during this decade, and have very high odds of success.
Middle-income households, meanwhile, have seen some gains, but still have only 50-50 odds of
success. And the lowest-income households have seen their retirement prospects diminish
sharply -- among these boomers approaching retirement, their odds of success have fallen
during the decade from 26 percent to 11 percent.
"Retirement prospects improved significantly for higher-income workers who were fortunate
enough to work for employers that sponsor retirement plans," says Jack VanDerhei, the
organization's research director.
Let's consider how the retirement landscape has changed during the decade now ending.
Retirement savings: Up for the affluent
The stock market bottomed out in March 2009 -- and it has more than quadrupled since then.
Most retirement savers did not abandon equity markets during the crash, says Jean Young,
senior research associate with the Vanguard Center for Investor Research. "Some did, but the
vast majority stayed the course."
But the recovery has seen retirement wealth accumulate almost exclusively among affluent
households that had access to workplace retirement plans and the means to make contributions.
For example, Vanguard reports that the average balance for plan participants with incomes
over $150,000 in 2018 was $193,130, compared with just $22,679 for workers with income of
$30,000 to $50,000. ...
Humans have an amazing capacity to suspend disbelief, a trait that novelists, Hollywood and,
sadly, criminals, have used to notable effect. Here are some typical frauds.
Wire transfer scams: A retired businessman in his 80s was contacted by people who claimed
they wanted to do business with him. Thinking he was back in the game and investing in a real
deal, he wired them $400,000. When he discovered he'd been defrauded, he complained to the
scammers, who then passed him along to new crooks who said they could get his money back if
he would wire them $400,000 -- which he did.
Third-party scams: Some victims play an unwitting role in facilitating scammers' attempts
to defraud a third party. For example, a gentleman in his 80s gave scammers between $600,000
and $1 million from his bank accounts. After the fraud was discovered by his family and
financial institution, he lost access to his funds. But that didn't stop the scammers. They
set up a PayPal account under his name and Social Security number, convinced him to go to
TitleMax® and borrow money using his car as collateral, then had him put the funds in the
PayPal account to which they had access.
Gift card scams: Gift cards can be used to launder money without even having to
physically send the cards anywhere. A scammer convinces the victim to go to a store, get one
or several cards, and load each one up with money. Then, they have the victim scratch off a
protective strip on the back of the card to reveal its code number, take a picture of the
number, and then text the picture to a cellphone number.
Computer-hacking scams: A common ruse aimed at seniors involves a contact from someone
claiming to be a Microsoft employee. The fake Microsoft rep claims the senior's computer has
a virus or some other problem, which they're happy to fix. The senior simply needs to click
on an email link or download an attachment the rep sends them -- and pay a fee. With one
click by the victim, the scammer gains control of the victim's computer. One victim paid
about $300 -- over and over -- to the same scammers, who kept "fixing" her computer since
they could break it as often as they chose. The victim had no idea what was happening.
Door-to-door scams: A fraudster knocks on a senior's door and says her trees need to be
trimmed or gutters need to be cleaned. I know of two people who each paid a crook $30,000 to
trim the hedges at their house. No trimming took place; the criminal just hung out for a
while and reappeared to help the elderly client write a check for their services.
Transaction settlement scams: A scammer claims they need someone to act as an agent or
middleman to help settle a transaction, such as a divorce or property settlement. The victim
receives a check that looks legitimate, deposits it in their own account or a trust account,
then wires the money to the scammer. Of course, the check was fake, but the victim's real
money is gone.
Family member financial abuse: I could devote a whole article to this type of abuse.
Financial frauds within a family can be difficult to resolve. Is an elderly parent
voluntarily giving real gifts to a family member? Or is fraud involved? Without proper
documentation, financial fraud within a family can devolve into a he said/she said conflict
among siblings and others.
Even if the timing remains vague and the conditions uncertain, the government does seem to
have decided to launch a vast reform of the retirement pensions system, with the key element
being the unification of the rules applied at the moment in the various systems operating
(civil servants, private sector employees, local authority employees, self-employed, special
schemes, etc).
Let's make it clear: setting up a universal system is in itself an excellent thing, and a
reform of this type is long overdue in France. The young generations, particularly those who
have gone through multiple changes in status (private and public employees, self-employed,
working abroad, etc), frequently have no idea of the retirement rights which they have
accumulated. This situation is a source of unbearable uncertainties and economic anxiety,
whereas our retirement system is globally well financed.
But, having announced this aim of clarification and unification of rights, the truth is that
we have not said very much. There are in effect many ways of unifying the rules. Now there is
no guarantee that those in power are capable of generating a viable consensus in this respect.
The principle of justice invoked by the government seems simple and plausible: one Euro
contributed should give rise to the same rights to retirement, no matter what the scheme, and
the level of salary or of earned income. The problem is that this principle amounts to making
the inequalities in income as they exist at present sacrosanct, including when they are of
mammoth proportions (under-paid piece work for some, excessive salaries for others), and to
perpetuating them at the age of retirement and dependency which is in no way particularly
"fair".
Aware of the difficulty, the High Commissioner Jean-Paul Delevoye's Plan stipulates that a
quarter of the contributions will continue to be allocated to "solidarity', that is to say, for
example, to subsidies for children and interruptions of career, or to finance a minimum
retirement pension for the lowest salaries. The difficulty is that the way this calculation has
been made is highly controversial. In particular, this estimate purely and simply takes no
account of social inequalities in life expectancy. For example, if a low wage earner spends 10
years in retirement while a highly-paid manager spends 20 years, we have forgotten to take into
account the fact that a large share of the contributions of the low wage earner serves in
practice to pay the retirement of the highly-paid manager (which is in no way compensated for
by the allowance for strenuous and tedious work)
More generally, there are naturally multiple parameters to be fixed to define what one
considers to be "solidarity". The government's proposals are respectable but they are far from
being the only ones possible. It is essential that a broad public debate take place and that
alternative proposals should emerge. The Delevoye Plan for example provides for a replacement
rate equal to 85% for a full career (43 years of contributions) at Minimum Wage level. This
rate would then very rapidly fall to 70%, to only 1.5 Smic (Minimum Wage) before stabilising at
this precise level of 70% until approximately 7 Smic ( 120,000 Euros gross annual salary). This
is one possible choice, but there are others. One could thus imagine that the replacement rate
would go gradually from 85% of the Smic to 75%-80% around 1.5 – 2 Smic, before gradually
falling to around 50%-60%, approximately 5-7 Smic.
Similarly the government's project provides for a financing of the system by a retirement
contribution of which the global rate would be fixed at 28.1% on all the gross incomes below
120,000 Euros per annum, before falling suddenly to only 2.8% beyond this threshold. The
official justification is that retirement rights in the new system would be capped at this wage
level. The Delevoye Report goes as far as congratulating themselves because the super-managers
will nevertheless be subject to this contribution (which will not be capped) of 2.8%, to mark
their solidarity with the older generations. In passing, once again no account is taken of the
salaries between 100,000 Euros and 200,000 Euros which usually correspond to very long life
expectancies and which benefit greatly from the contributions paid by the lower waged with
shorter life expectancies. In any event, this contribution of 2.8% to solidarity by those
earning over 120,000 Euros is much too low, particularly given the levels of remuneration;
their very legitimacy is open to challenge.
More generally it is perhaps time to abandon the old idea according to which reduction of
inequalities should be left to income tax, while the retirement schemes should content
themselves with reproducing them. In a world in which fabulous salaries and questions of
retirement and dependency have taken on a new importance, the most legible norms of justice
could be that all levels of salary (including the highest) should finance the retirement scheme
at the same rates (even if the pensions themselves are capped) while leaving to income tax the
task of applying higher levels to the top incomes
To be clear: the present government has a big problem with the very concept of social
justice. As everyone knows, it has chosen from the outset to grant huge fiscal gifts to the
richest (suppression of the wealth tax (the ISF), the flat tax on dividends and incomes). If
today it does not demand a significant effort from the most privileged it will have
considerable difficulty in convincing the public that its pension reform is well-founded.
It seems like barely a quarter goes by without Wells Fargo being exposed for some abusive
practices, like opening millions of fake credit card accounts, or selling customers of its auto
loans insurance that they didn't really need (but that the company insisted they did).
In the
latest violation,
the New York
Times
reports that Wells Fargo continued to charge overdraft and other charges to customers
even after closing their accounts for one of a myriad reasons.
The paper used Xavier Einaudi, a small business owner who banked with Wells, as its primary
example.
A few months back, the bank informed Einaudi that it would be closing all 13 of
the checking accounts he had with the bank related to his roofing company, CRV Construction.
When asked why it was closing the accounts, it replied that the issue was "confidential".
Anyway, Einaudi went to his local Wells branch and picked up a check compensating him for the
contents of the accounts. One June 27, the bank said, the accounts would go defunct, and no more
transactions would be allowed.
As it turns out, that wasn't exactly the case.
Shortly after the closure date, Einaudi realized that Wells had kept some of the accounts active
with a zero balance. Meaning that some of Einaudi's payments to vendors like his insurer and his
Google advertising accounts continued from the empty accounts. But this time, each transaction was
accompanied by a $35 overdraft fee.
By the time Einaudi realized what was going on, he had wracked up thousands of dollars
in overdraft fees.
Payments to his insurer, to Google for online advertising and to a provider of project
management software were paid out of the empty accounts in July. Each time, the bank charged Mr.
Einaudi a $35 overdraft fee
Mr. Einaudi called the bank's customer service line. He went to his local branch. Nobody
could help him. "They told me, 'The accounts are closed out - we cannot do anything.'"
This left Einaudi in an untenable position: The accounts were technically closed, but he was
still being hit with overdraft fees that nobody at the bank could make stop.
By the middle
of July, he owed the bank nearly $1,500.
Fortunately for him, Einaudi wasn't alone with this problem.
Xavier Einaudi
As it turns out, Wells has failed to address these complaints from customers and
employees, including one in the bank's debt-collection department who grew concerned
after being
hit by an estimated $100,000 in overdraft fees
over eight months.
Customers say the
bank should wipe these fees, since they were unfairly and arbitrarily charged on accounts that the
bank had deliberately closed without its customers requests.
It's not clear, exactly, how many customers have been affected by this glitch. But many angry
customers have filed complaints with the Consumer Financial Protection Bureau.
Robust discussions about the issue have continued on websites like Reddit and Quora, while some
have expressed their misgivings with Wells.
"I don't even know what happened,"
he said.
According to the NYT,
Einaudi's problem stems from the way Wells' computer system
processes closed accounts:
Accounts that customers believe to be closed can, in fact, stay
open for months past their closure date if there's a balance, even if the balance is negative (from
fees charged by the bank).
And each time a transaction involving these accounts happens, the banks tacks on a fee.
Since the financial crisis, Wells has paid more than $15 billion in settlements to resolve
investigations into its misdeeds, including the ones described above.
With more of these
scandals surfacing, who is going to step up and take the top job at Wells, particularly when you'd
be liable to be blindsided by scandals like these, that hurt ordinary Americans.
Let them bill you after you close your account. If they pressure
you to pay, or threaten your credit rating, then
sue Wells
Fargo in your local small claims court for the maximum amount
.
If you get a judgement, bill them. If they don't pay, take your
judgement to your local sheriff and have them do a "Till tap" on
them. That means the sheriff goes in and takes the money out of a
teller's drawer to satisfy the judgement.
If thousands of people do this...well, you can just imagine.
Whatever you do Brer' Rabbit,
never stick the little red
straw of a can of insulating foam into an ATM card slot!
Good advice. But with all that digitizations come so many
events that require these actions and they rely on the fact
that some people cannot spend unlimited amounts of time on
these things.
A banking ombudsman would not go astray. As
people register their stuff, patterns emerge a lot earlier and
maybe can be addressed.
Fck I hate banks, the only thing they do is move ones and zeros
around, and the can't even do that without ripping people off.
But wait till the globalists have their way and society becomes
cashless , stuff like this going to be nothing compared to what
the banksters and government is going to be able to do to your
life.
Wells Fargo can be force merged with Bank of America and dissolved
over a number of years out of public view and under Fed oversight.
There is vat over employment in the banking sector and an overall
staffing cut of 30% is long overdue.
It is the same with Commerz
and Deutsche Banks. Given the power of technology politicians are
trying to force banks to carry far more employees than can
economically be employed.
Online and robo banking will eventually lead to most branches
being closed and most employees released.
Stone walling this simply makes the crime, pain, and inevitable
dislocation ever worse.
I, too, got my money away from these thieves this year. My
annuity with my employer locked me into not being able to rollover
any of my money unless I had a break in service for and entire
year. Now that I am of a certain age, I was able to to rollover
after only eight weeks which I was able to do during recovery
after a job related surgery.
I have been waiting to do this
for four years since I found a rap sheet on these guys. If I
counted correctly, since 2000, the banks that were the
predecessors and Wells as we know it today have stolen, or been
fined and had to pay back $43bn!!!! That is 43,000 million for
****'s sake. What is it going to task to get rid of these
thieves?
I have a friend that works at Wells Fargo. She said since Warren
Buffet took control the whole place is going to hell. Buffet keeps
screaming the employees have to do better. Make more profits or
hit the door. So the management has to skin the sheeple in order
to keep their jobs.
I had a neighbor a while ago who worked in Wells' mortgage
division. I don't know what his job was called, but he was the
guy people called when they first got a foreclosure notice and
wanted to work out a way to keep their homes.
He told me
Wells kept track of who paid right at the deadline, usually the
15th of the month, rather than on or by the 1st like people do
when they aren't strapped for cash. He said when they got
payments on the 14th, say, they'd "drawer" them, or put them in
a drawer until the 16th. Then they'd enter the payments as
late, assess a late payment fee, and deduct that from the
payment. So the borrower hadn't actually made a full payment
that month; they were $35 short, or whatever the fee was.
Oh, no, they didn't tell the borrower.
So after a few years of that, the borrower would be a full
payment or two behind. And then the foreclosure would kick in,
and then these confused people would call my former neighbor.
He asked me to guess how many months, on average, the people
who called him were behind on their mortgage. I thought,
"Well, they're getting their first notice of looming
foreclosure, I'm kind of naive, uh...6 months?"
He laughed at me. "Try, 30 months," he said. I was
gobsmacked. Wells found it to their advantage to have these
people 2-1/2 years behind on their mortgage payments before
getting around to foreclosing? He said yes, it was worth it to
them to have them living in the property and taking care of it
for Wells Fargo.
Oh, I had this conversation with him while I was refinancing
my little starter home at the time.
It was 2002.
They were pulling this **** in
2002 and it wasn't new
then.
It only took what, 5 more years for the Finance
Sector to almost destroy itself and the rest of us?
If they jailed the people at Wells for this, it'd stop.
However, the fully criminalized DOJ, speaking through AG Eric
Holder, declared these people too critical to the banking system
to work under threat of arrest.
Yet another issue is that annuities can be complex financial contracts, and hard for an
average person to evaluate. How long do you pay into the annuity? When does it start paying
out? Does it pay our for a fixed period, or over the rest of one's life? Are the payouts
adjusted for inflation? How large a commission is being charged by the seller? Does the annuity
include a minimum payout if you die soon--which could be left to one's heirs? What happens if
the company that sold you the annuity goes broke a decade or two in the future? How will the
tax code treat income from annuities in the future? In the past, some annuities were not an
especially good financial deal, in the sense that someone with the discipline to withdraw money
from their retirement accounts in a slow-and-steady way have a high probability of ending up
better off than someone who purchased a life annuity.
Looking for a risk-free place to park some savings? You could open a
garden-variety savings account, but your interest might be microscopic. A
high-interest or high-yield savings account
is smarter, but an even better
option is a certificate of deposit, or CD.
While the top rates on high-yield savings accounts are currently topping 2%, you
can find CDs paying more than 3%. But to earn that kind of interest, you better
believe that you're going to have to give the bank something in return.
How CDs work
When you put your money into a CD, you agree to let the bank hold it for a
certain period of time.
So, here's the not-so-fine print with CDs: You'll have to agree to let the bank
hold on to your money for months or years. That's called the CD's term.
You might choose to stash your money away in six-month, two-year or five-year
CDs. Normally, the longer the term, the higher the interest rate.
The potential payout from a long-term CD might be very enticing. Who doesn't want
to earn better returns?
But you may have to lock your money away for a loooooooong time.
If some
financial emergency
comes along and you need to get at your money, tapping
your CDs could be costly.
You'll face penalties if you try to withdraw money from your CDs too early.
Yeah, we know -- we said at the beginning that CDs were
risk-free.
That's
true in one sense: You can put up to $250,000 in CDs and will never lose that
money as long as your account is with a bank insured by FDIC or a credit union
insured by NCUA.
But if you go back on your bargain with the institution and need to withdraw your
money early, you'll face the risk of penalties. The rules vary, but generally
you'll have to give up a chunk of your interest.
For example, if you close out a one-year CD too soon, you could say goodbye to
six months' worth of interest. If you've had the CD only two months, the penalty
would eat into your original deposit amount. Ouch!
The early withdrawal penalty for a five-year CD might be a
full year
of
interest.
Another risk is that
interest rates might rise
while you've got your money locked up, and your
savings will miss out on the opportunity to earn better returns.
A CD ladder can help you take advantage of rising interest rates.
All of that describes the workings of a traditional CD. There are other
varieties that allow you to make withdrawals more easily ("liquid" CDs) or
take advantage of rising interest rates ("bump-up" CDs).
To get some of that flexibility, you might have to accept a lower interest
rate when you open the account.
But there is a trick that can allow you to grab onto rising rates using just
plain-vanilla, regular CDs. It's called
laddering
.
You divide your investment across staggered CDs so that every year you have
CDs that are maturing.
This way, you can enjoy the higher initial interest rates from longer-term
CDs, and also have regular opportunities to invest in new CDs at even better
rates.
You can open a CD at your nearest bank or credit union.
Opening a CD is as simple as visiting your nearest bank or credit union, or
just going online.
Smaller, local banks or credit unions will give you better rates than the big
national institutions, and online-only banks can offer great deals because of
their lower expenses.
You may need to fund your CD with a minimum deposit of $500 or $1,000,
although some banks have CDs with no minimum opening requirements.
You'll want to comparison-shop for the best rates and find CDs at your sweet
spot, with a good yield and a term that's doable. How long will you want to
lock away your money?
Putting cash out of reach for years may be tough -- unless you've just got it
languishing in a low-rate savings account that you never touch. In that case,
put that money into CDs pronto!
@TomSchmidt
Social Security is not an entitlement. You pay into it, and receive a benefit. Social
Security was established as a Trust. There are legal requirements on those who manage a trust
– the trustees. Social Security has been mismanaged intentionally. There are people
receiving benefits who are not entitled to them. The US Government has raided the fund by
making it part of general revenue, instead of the Trust that it is supposed to be.
The "problems" of Social Security are a side show distraction to keep the focus away from the
real problem: the politicians and their Wall Street paymasters.
"... The CAPE aims to correct for those distortions. It smooths the denominator by using not current profits, but a ten-year average, of S&P 500 earnings-per-share, adjusted for inflation. Today, the CAPE for the 500 reads 29.7. It's only been that high in two previous periods: Before the crash of 1929, and during the tech bubble from 1998 to 2001, suggesting that when stocks are this expensive, a downturn may be at hand. ..."
"... is 36.1% higher ..."
"... Here's the problem that the CAPE highlights. Earnings in the past two decades have been far outpacing GDP; in the current decade, they've beaten growth in national income by 1.2 points (3.2% versus 2%). That's a reversal of long-term trends. ..."
"... Right now, earnings constitute an unusually higher share of national income. That's because record-low interest rates have restrained cost of borrowing for the past several years, and companies have managed to produce more cars, steel and semiconductors while shedding workers and holding raises to a minimum. ..."
"... t's often overlooked that although profits grow in line with GDP, which by the way, is now expanding a lot more slowly than two decades ago, earnings per share ..."
"... The reason is dilution. Companies are constantly issuing new shares, for everything from expensive acquisitions to stock option redemptions to secondary offerings. New enterprises are also challenging incumbents, raising the number of shares that divide up an industry's profits faster than those profits are increasing. Since total earnings grow with GDP, and the share count grows faster than profits, it's mathematically impossible for EPS growth to consistently rise in double digits, although it does over brief periods––followed by intervals of zero or minuscule increases. ..."
"... The huge gap between the official PE of 19 and the CAPE at 30 signals that unsustainably high profits are artificially depressing the former. and that profits are bound to stagnate at best, and more likely decline. ..."
"... In an investing world dominated by hype, the CAPE is a rare truth-teller ..."
For the past half-decade, a controversial yardstick called the CAPE has been flashing red,
warning that stock prices are extremely rich, and vulnerable to a sharp correction. And over
the same period, the Wall Street bulls and a number of academics led by Jeremy Siegel of the
Wharton School, have been claiming that CAPE is a kind of fun house mirror that makes
reasonable valuations appear grotesquely stretched.
CAPE, an acronym "Cyclically-adjusted price-to-earnings ratio," was developed by economist
Robert Shiller of Yale to correct for a flaw in judging where stock prices stand on the
continuum from dirt cheap to highly expensive based on the current P/E ratio. The problem:
Reported earnings careen from lofty peaks to deep troughs, so that when they're in a funk,
multiples jump so high that shares appear overpriced when they're really reasonable, and when
profits explode, they can skew the P/E by creating the false signal that they're a great
buy.
The CAPE aims to correct for those distortions. It smooths the denominator by using not
current profits, but a ten-year average, of S&P 500 earnings-per-share, adjusted for
inflation. Today, the CAPE for the 500 reads 29.7. It's only been that high in two previous
periods: Before the crash of 1929, and during the tech bubble from 1998 to 2001, suggesting
that when stocks are this expensive, a downturn may be at hand.
The CAPE's critics argue that its adjusted PE is highly inflated, because the past decade
includes a portion of the financial crisis that decimated earnings. That period was so unusual,
their thinking goes, that it makes the ten-year average denominator much too low, producing
what looks like a dangerous number when valuations are actually reasonable by historical norms.
They point to the traditional P/E based on 12-month trailing, GAAP profits. By that yardstick
today's multiple is 19.7, a touch above the 20-year average of 19, though exceeding the
century-long norm of around 16.
I've run some numbers, and my analysis indicates that the CAPE doesn't suffer from those
alleged shortcoming, and presents a much truer picture than today's seemingly reassuring P/E.
Here's why. Contrary to its opponents' assertions, the CAPE's earnings number is not
artificially depressed. I calculated ten year average of real profits for six decade-long
periods starting in February of 1959 and ending today, (the last one running from 2/2009 to
2/2019). On average, the adjusted earnings number rose 22% from one period to the next. The
biggest leap came from 1999 to 2009, when the 10-year average of real earnings advanced
42%.
So did profits since then languish to the point where the current CAPE figure is
unrealistically big? Not at all. The Shiller profit number of $91 per share is 36.1%
higher than the reading for the 1999 to 2009 period, when it had surged a record 40%-plus
over the preceding decade. If anything, today's denominator looks high, meaning the CAPE of
almost 30 is at least reasonable, and if anything overstates what today's investors will reap
from each dollar they've invested in stocks.
Indeed, in the latest ten-year span, adjusted profits have waxed at a 3.2% annual pace,
slightly below the 3.6% from 1999 to 2009, but far above the average of 1.6% from 1959 to
1999.
Here's the problem that the CAPE highlights. Earnings in the past two decades have been
far outpacing GDP; in the current decade, they've beaten growth in national income by 1.2
points (3.2% versus 2%). That's a reversal of long-term trends. Over our entire 60 year
period, GDP rose at 3.3% annually, and profits trailed by 1.3 points, advancing at just 2%. So
the rationale that P/Es are modest is based on the assumption that today's earnings aren't
unusually high at all, and should continue growing from here, on a trajectory that outstrips
national income.
It won't happen. It's true that total corporate profits follow GDP over the long term,
though they fluctuate above and below that benchmark along the way. Right now, earnings
constitute an unusually higher share of national income. That's because record-low interest
rates have restrained cost of borrowing for the past several years, and companies have managed
to produce more cars, steel and semiconductors while shedding workers and holding raises to a
minimum.
Now, rates are rising and so it pay and employment, forces that will crimp profits. I
t's often overlooked that although profits grow in line with GDP, which by the way, is now
expanding a lot more slowly than two decades ago, earnings per share grow a lot
slower, as I've shown, lagging by 1.3 points over the past six decades.
An influential study from 2003 by Rob Arnott, founder of Research Affiliates, and co-author
William J. Bernstein, found that EPS typically trails overall profit and economic growth by
even more, an estimated 2 points a year.
The reason is dilution. Companies are constantly issuing new shares, for everything from
expensive acquisitions to stock option redemptions to secondary offerings. New enterprises are
also challenging incumbents, raising the number of shares that divide up an industry's profits
faster than those profits are increasing. Since total earnings grow with GDP, and the share
count grows faster than profits, it's mathematically impossible for EPS growth to consistently
rise in double digits, although it does over brief periods––followed by intervals
of zero or minuscule increases.
The huge gap between the official PE of 19 and the CAPE at 30 signals that unsustainably
high profits are artificially depressing the former. and that profits are bound to stagnate at
best, and more likely decline. The retreat appears to have already started. The Wall
Street "consensus" Wall Street earnings forecast compiled by FactSet calls for an EPS decline
of 1.7% for the first quarter of 2017, and zero inflation-adjusted gains for the first nine
months of the year.
In an investing world dominated by hype, the CAPE is a rare truth-teller .
This is a classic, textbook example of financial astrology... You probably should read it in full to appreciate the depth of junk
science here. But this is financial casino my friends, and they try to entice you with naked girls and drinks...
A gain in January has foretold an annual gain 87 percent of the time with only 9 major errors going back to 1950, according
to the Stock Trader's Almanac.
The S&P 500 was up 7.9 percent in January, its best performance for the first month of the year since 1987.
Some market pros are skeptical of the January barometer, but Jeff Hirsch, editor-in-chief of the Stock Trader's Almanac, says
it makes sense because that's when Wall Street expectations are reset for the year.
Stocks had their best January gains in more than 30 years, and that should mean 2019 will be a pretty good year for the
market.
That's what the widely watched January barometer tells you - as goes January, so goes the year. According to Stock Trader's Almanac,
going back to 1950, that metric of January's performance predicting the year has worked 87 percent of the time with only nine major
errors, through 2017. In the years January was positive, going back to 1945, the market ended higher 83 percent of the time, according
to CFRA.
But the indicator also signaled a positive year last year, and the market suffered an unusual late-year sell-off, wiping out all
of the gains. The S&P 500 ended 2018 down 6.6 percent, despite rising 5.6 percent in January. But the S&P also defied history with
a terrible December decline of 9.6 percent , the biggest loss for the final month of the year since 1931.
This January, the S&P 500 was up 7.9 percent. The best January performance since 1987, when it rose 13.2 percent. It was its best
overall month since October 2015.
Some market pros worry the sharp snapback in stocks since the late December low means January could be stealing the gains from the
rest of the year. Some also believe there could be another test at lower levels in the not too distant future. Yet, Wall Street forecasters
have a median target of 2,950 for the S&P 500 at year end, a big leap from the current 2,704.
"I'm still struck between the contrast of a year ago and now," said James Paulsen, chief investment strategist at Leuthhold Group.
"We came in last year with nothing but optimism. At this point last year, we had synchronized global growth, confidence had spiked
to record post-war highs, and everyone knew we had this steroid-induced earnings boost coming. The thought was how could stocks lose,
and of course they did."
The market has sprung back from December's low, with the S&P gaining 15 percent since Dec. 26.
"This year, we came in with nothing but bad news - the economy was slowing down. ... The rest of the world is slowing. We have trade
wars. We have the shutdown, and analysts are revising earnings lower," Paulsen added. "We're worried about a recession and a bear
market. It's strikingly different, and yet it's kind of like how can stocks win, but they are and I think they will."
Strategists also point to the differences in the way the market traded in each January. This January has been full of volatile swings,
with ultimately larger gains than losses. Last year, the market was at the end of a long smooth glide path higher.
Last year didn't work
Stocks did well through most of January 2018, but by the end of the month, a correction started. "On January 30, in 2018, it was
the first 1 percent decline in 112 days. That was basically the start of the fall off the cliff. In terms of percent gains, this
January is similar to last, but in terms of where we've come from, it's very different. That was one of the calmest advances in history,"
said Frank Cappelleri, executive director at Instinet.
Cappelleri said it's important to put this year's market move in context, when considering the January barometer. "You have one of
the biggest snapbacks after a very bad December, so the odds were in the market's favor to do better than that. I think maybe you
have to look where we are now. You're up 15, 20 percent from the low depending on where you look. Are we going to go up that much
more for the rest of the year?" he said.
Paulsen sees the gains continuing, after a possible pause. "I think it's going to continue to be a fairly good year, and I think
we probably go up and get close to the highs or 3,000 on the S&P, and I'm not expecting hardly anything on the economy, and earnings
are going to be weak, if not flat or maybe down," Paulsen said.
He said the slowing economy and a potential U.S.-China trade deal could push the dollar down and that would be a positive for stocks.
At the same time, the Fed has paused in interest rate hikes and may even stop its balance sheet unwind.
Jeff Hirsch, editor-in-chief of the Stock Trader's Almanac, said there's another set of statistics that are in the market's favor
for a positive 2019, though they also failed last year. He said for the years when the S&P 500 was positive in the first five days
of the year, plus gained during the Santa rally period, and was up for the month of January, the S&P 500 had a positive year 27 out
of 30 times. It also had an average gain of 17.1 percent in those years, since 1950.
Nick 29 minutes ago
Job growth is solid. Unemployment remains near all time lows even while labor force participation increases. Wage growth outpaced
inflation last year. The economy is humming right along...its just the liberal media wants to bombard us with articles claiming
the Trump recession is imminent.
I'm surprised they actually published an article sayings its going to be a good year.
Parade of eminent astrologists ;-) Those financial prostitutes of casino capitlism, aka financial analysts most often are wrong
year after year, but still have a solid coverage by the neoliberal media due to the shire wieght of the companies they represent. This
bets are not connected with some kind of possible financial loss so they just talking up this firms portfolio, which of course is heavily
tilted in favor of stocks. God even Vanguard retirement 2015 fund has 40% in stock, while formula 100-age would give you less then 35%.
If this is bullish bias I do not know what is. Of course, they play with "other people money" and commissions are everything...
Notable quotes:
"... Their guesses about a great market in 2018 was kind of a miss. But they only had like 340 days so far. They still have 25 days left to turn in around. ..."
"... These guys are seldom right. I've been tracking these predictions more closely since 2014, usually 12-15 of the large financial institutions. Last year's average consensus was the SP at 2874. We closed Tuesday (Dec 4) at 2700. ..."
"... The average of the figures cited in the article is 3068. I think that is wishful thinking considering the slow downs in many sectors, slowing GDP and a flattening yield curve. ..."
"... With regard to upside potential, these all sound wildly optimistic to me. Ten years of printing money out of thin air and exploding deficits does not a future robust economy make, IMO. ..."
"... They cannot say 2500 cause people will not invest (and no commissions); they have to say equal or higher than today. To me it is screaming between the lines the index will hit 2500. ..."
"... So all of them predict the S&P will be higher then it is today even though many are saying we are already in a Bear Market...these people only make money if the market goes up so don't trust them! ..."
Morgan Stanley (Target: 2,750; EPS: $176) -- Beware tightening financial conditions and decelerating growth. (Price
target as of December 17)
Bank of America (Target: 2,900; EPS: $170) -- 'Wildcards' will make for more volatility. (Price target as of November
20)
Jefferies (Target: 2,900; EPS: $173) -- It's a 'mature, not end of, cycle.' (Price target as of December 9)
Oppenheimer (Target: 2,960; EPS: $175) -- Negative sentiment is 'setting the stage for upward surprises' (Price target
as of December 31)
Goldman Sachs (Target: 3,000; EPS: $173) -- Get defensive. (Price target as of December 14)
David
Kostin, chief equity strategist at Goldman Sachs, has a main message for investors going into 2019: Start getting defensive.
Barclays (Target 3,000; EPS $176) -- Growth will revert to trend. (Price target as of November 19)
Wells Fargo Securities (Target: 3,079*; EPS: $173) -- Sell-off will create 'double-digit opportunity' (*Note: Harvey
reduced his price target for 2019 to 2,665 and expected EPS to $166 as of December 21)
Citi (Target: 3,100; EPS: $172.50) -- Bearish sentiment makes for bullish outcomes. (*Levkovich
reduced his S&P 500 price
target for the year-end 2019 to 2,850 as of December 31, 2018)
JP Morgan (Target 3,100; EPS $178) -- A pain trade to the upside. (Price target as of December 7)
BMO (Target 3,150; EPS $174) -- Take a longer-term perspective. (Price target as of November 16)
UBS (Target: 3,200; EPS $175) -- A rough 2018 should make for a better 2019. (Price target as of November 13)
Deutsche Bank (Target: 3,250; EPS: $175) -- A while to "regain its prior peak." (Price target as of November 19)
Credit Suisse (Target: 3,350*; EPS $174) -- Bet on multiples expanding. (*Golub
reduced his S&P 500 price target
for the year-end 2019 to 2,925 as of December 18, 2018)
Joseph, 2 months
ago
So their best guess is a relatively flat to roughly a 20% gain...thanks for narrowing it down. Their guesses about a great market in 2018 was kind of a miss. But they only had like 340 days so far. They still have 25 days
left to turn in around.
M 2 months ago
These guys are seldom right. I've been tracking these predictions more closely since 2014, usually 12-15 of the large financial
institutions. Last year's average consensus was the SP at 2874. We closed Tuesday (Dec 4) at 2700.
We will need a 7% Santa Claus
rally to get there.
In 2017 the consensus was 2367; the year closed at 2673.
2016 was very close with a predicted average of 2223
and a close of 2238.
However, the market was far behind until the post-election rally.
The average of the figures cited in the article is 3068. I think that is wishful thinking considering the slow downs in
many sectors, slowing GDP and a flattening yield curve. I'll take 3068, but not going to bet a lot of money on it.
Omnipotent, 2 months ago
With regard to upside potential, these
all sound wildly optimistic to me. Ten years of printing money out of thin air and exploding deficits does not a future robust
economy make, IMO.
Linda, 2 months ago
Wall Street Strategists predicted G20 China meeting was the best news for markets and were looking for strong upside , market
tanked 800 points 2 days after. Enough said .
Gilad, 2 months ago
They cannot say 2500 cause people will not invest (and no commissions); they have to say equal or higher than today. To me it
is screaming between the lines the index will hit 2500.
PathFinder ofWhatis, 2 months ago
Not a single prediction says the market will finally have a Bear Market decline of 20%.... even after a 10 year Bull Market?
Is that called Group Think?
Todd2 months ago
So all of them predict the S&P will be higher then it is today even though many are saying we are already in a Bear Market...these
people only make money if the market goes up so don't trust them!
The first question to ask is: do those suckers need stocks at all?
That's all nice. But what if we are facing 2008 style event in a year or two?
The question here is why you need to risk retirement money in the casino? And stock market including all stock funds is a casino.
No questions about it.
Why if you are really close to, say, 65 it is necessary to take additional risk.
If you have enough money this is stupid (pure greed is often punishable, at least accounting to teaching of Prophets). You probably
can benefit from reading Other People's Money: The Real Business of Finance by John Kay first. Before jumping into this water.
If you don't -- you need to be twice more careful -- please remember that such people most often are victims of grave own errors,
and/or fraud. So the cure might be worse then the disease. May be relocation to cheaper state and cutting some expenses (one car instead
of two, one bedroom instead of two bedroom, etc) is a safer solution then gambling.
In any case, if you keep money in the stock fund despite your age (I think around 17% of old Americans have all their retirement
savings in stock funds, or individual stocks ;-) and another financial bubble burst again (and this is a guaranteed event under neoliberalism)
recovery might take much longer then you expect, and you might need to take losses to make ends meet.
So the really important question here is not what funds you need to select from a thousand of names (there are more mutual funds
then stocks, I think). That's just another variety of gambling.
They real question is whether you need to play this game or not.
What if the current decline is not just a blip is a warning that more substantial trouble lies ahead?
Neoliberal with its hypertrophied and parasitic finance industry tend to produce Minsky moments (called bubble burst for non-specialists)
with surprising regularity: savings and loan crisis (1986-1995), dot-com bubble (2000-2002), Great recession (2008-?), so there is no
guarantee that we will not have yet another similar event in the next couple of years.
Target date funds might be a safer bet if you are old and still really want to play in a casino in hope to compensate inadequate
size on your retirement portfolio. For example, its Vanguard Target Retirement 2015 Fund (VTXVX) contains 40% stocks. While classic
100-your age allocation formula for 65-year person imply 35% stocks allocation. So you see that even Vanguard is a little bit too aggressive
here.
Also if you bought S&P500 at its 2000 peak (around 1500) your return for 18 years would still be 2.5% (4.5% with dividend reinvested).
So if you are much younger then 65 it is important to compare long-term record with S&P500 and age and track record of the manager (change
of the manager in an actively managed fund often badly affects that fund performance).
Start with low costs. Cheaper funds actually tend to beat their competitors even before expenses. SEE ALSO:
The 27 Best Mutual Funds in 401(k) Retirement Plans Buy funds the managers own. If the manager(s) of a fund won't invest
in the fund themselves, why should you? Look in the prospectus for managers who put at least $1 million in their fund, as the managers
of the five recommended funds in this article have done.
Chose funds that have a good corporate culture. Does the fund firm consider you a customer to be fleeced or a partner in investing?
Figuring this out is difficult, but low costs and manager investment are two indicators. My favorite big firms are
Vanguard ,
American Funds and
T. Rowe Price .
Consider long-term, risk-adjusted returns. You can do this by looking at Morningstar's star ratings, Sharpe ratios, alphas or
Sortino ratios. All of these provide measures of risk-adjusted returns. They're all slightly different, but higher is always better.
Reduce your risk. I think the market will remain highly volatile in 2019. Standard deviation, a measure of volatility, is an excellent
predictor of how a fund will behave in unstable markets. The higher a fund's standard deviation, the more volatile it has been. It's
my favorite risk metric. Downside capture, which measures how a fund has done in bad markets, is also worth a close look.
Following are my picks for 2019 among actively managed stock funds. It's no accident that they're all either value funds or foreign
funds. My strong hunch is that a bear market next year will lead to a change in leadership among stock sectors, as is often the case
during and after a selloff. Look for growth stocks' decade-long dominance over value stocks to end, and
value
stocks to outperform . Likewise, I think foreign stocks will finally begin to outperform domestic stocks.
April 1 If you turned 70½ in 2018, April 1 is the deadline to take
your
first required minimum distribution from your IRA or 401(k). First-timers get this one-time extension on their RMD (subsequent
RMDs must be taken by December 31). To figure a first RMD due on April 1, 2019, divide the account's 2017 year-end balance by a life
expectancy factor based on your birthday in 2018. Find the factor in IRS Publication 590-B. If you turn 70½ in 2019, you might consider
taking your first RMD this year, says Bradford. By delaying the first RMD to the following year, you have to take both your first
and second RMDs in the same year.
Keep in mind that while Roth IRAs don't have RMDs for the original owner, Roth 401(k)s do have RMDs. But if you are working past
age 70½, you can skip the RMD from your current employer's 401(k) if you don't own 5% or more of the company. You'll still need to
take RMDs from your IRAs and any 401(k)s you hold from prior employers, though. ... ... ... April 1 If you turned 70½ in 2018, April
1 is the deadline to take
your
first required minimum distribution from your IRA or 401(k).
First-timers get this one-time extension on their RMD (subsequent RMDs must be taken by December 31). To figure a first RMD due
on April 1, 2019, divide the account's 2017 year-end balance by a life expectancy factor based on your birthday in 2018. Find the
factor in IRS Publication 590-B. If you turn 70½ in 2019, you might consider taking your first RMD this year, says Bradford. By delaying
the first RMD to the following year, you have to take both your first and second RMDs in the same year.
Keep in mind that while Roth IRAs don't have RMDs for the original owner, Roth 401(k)s do have RMDs.
But if you are working past age 70½, you can skip the RMD from your current employer's 401(k) if you don't own 5% or more of the
company. You'll still need to take RMDs from your IRAs and any 401(k)s you hold from prior employers, though.
You must make your RMD by December 31, and it's best not to wait until the last minute. It can take a little while for your IRA
or 401(k) administrator to process the request. Plus, you need to leave enough time for any trades to settle so there's enough cash
for the withdrawal -- especially around the holidays, when the markets are closed or close early. "We suggest moving forward in the
beginning to mid December," says Keith Bernhardt, vice president of retirement income at
Fidelity .
Find out how the administrator determines which investments to sell. Some IRA or 401(k) administrators automatically take the RMD
money pro rata from each of your investments unless you specify otherwise, and they could end up selling stocks or funds at a loss
to make your payment. You could elect a fixed percentage from a few investments or have 100% taken from cash.
If you choose the cash option, the IRA administrator may need to send you an alert beforehand in case you need to sell shares
first
Q: I am 62. Last year, I got a Social Security calculation showing that when I am
66-plus-years-old, I will receive $400-plus in Social Security benefits per month. Because of
my health, I started to work only three days a week. Will this reduce the amount of my
benefits? If l decide to quit my job, but not apply for my Social Security benefits until I'm
66-plus, will it reduce my monthly Social Security benefits?
A: Social Security calculates your monthly benefit by taking your highest 35 years of
earnings and your age, says Rick Fingerman, a managing partner with Financial Planning
Solutions. "So, if you stop working before your full retirement age or FRA, as you suggest, you
could see a lower benefit if you do not have 35 years of higher earnings already."
The same answer applies if you quit your job altogether at 62 and wait until 66 to collect,
he says.
One option, says Fingerman, could be if you were going to wait until your FRA and you have a
spouse that is already collecting on their own benefit. "You might receive a higher monthly
benefit on their record as you would get 50% of what they are receiving, which could be more
than the $400 a month under your own benefit," he says.
Of course, nobody can predict exactly how long they'll live -- the average man and woman
turning 65 today can expect to live until age 84 and 86, respectively, according to the Social
Security Administration. However, if you're facing health issues and don't expect to live that
long, it may be wiser to claim as early as possible rather than waiting until you have only a
few years left to enjoy your benefits.
... ... ...
Your
full retirement age (FRA) is the age at which you'll receive 100% of the benefits to which
you're entitled. So if your FRA is 67, and you wait until then to claim, you'd receive $1,300
per month. If you claim at 62, your benefits will be cut by 30% -- leaving you with just $910
per month.
... ... ...
If you wait until your FRA to claim, you'll receive 100% of your entitled benefits. But if
you wait beyond that age, you'll receive a bonus on top of your full amount to make up for all
the months you weren't receiving benefits at all. If your FRA is, say, 67 and you wait to claim
benefits until 70, you'll receive a 24% bonus over your full amount. So if you would have
received $1,300 per month by claiming at 67, you'd receive $1,612 by waiting until 70. (Keep in
mind, too, that this bonus maxes out at age 70, so there's no additional benefit to waiting to
claim until after that age.)
This can be a lifesaver for those who are
seriously behind on saving for retirement . If you're going to rely on Social Security to
make ends meet, it's in your best interest to maximize those benefits.
The amount you receive in benefits will be locked in once you claim. If you delay and
receive that boost, you'll continue receiving that boost for the rest of your life. Likewise,
if you claim early and your benefits are reduced, you'll receive those smaller checks for life.
So delaying can play out in your favor if you spend several decades in retirement -- the longer
you live, the more you will receive over your lifetime.
While delaying claiming benefits by a few years will result in bigger checks, you may not
actually receive more over a lifetime than you would if you had claimed earlier. Although
you're receiving more each month, that's just to make up for the years you weren't receiving
any benefits at all. If you don't reach your "break even age" -- or the age at which you've
received more over a lifetime by waiting to claim than you would have received by claiming
early -- it may not be worth it to wait.
For example, say your FRA is 67. If you claim early at 62, you'd receive $910 per month (or
$10,920 per year), and if you delay until 70, you'd receive $1,612 per month ($19,344 per
year). Here's how much you'd have received in total benefits at different ages:
Age at Death
Total Lifetime Benefits When Claiming at 62
Total Lifetime Benefits When Claiming at 70
70
$87,360
N/A
75
$141,960
$96,720
80
$196,560
$193,440
85
$251,160
$290,160
Source: Author's calculations
So in this scenario, you'll have to live past age 80 in order to "break even" and earn more
in lifetime benefits by delaying rather than claiming early. That can be a good thing if you
expect to live a long time, but if you don't expect to live past 80, it may be more
advantageous to claim earlier rather than later.
"... Currently, the S&P 500 (as of 1/18/19) is trading at 2,670 with Q4-2018 trailing reported earnings estimated to be $139.50. ( S&P Data ) This puts the 10-year average trailing P/E ratio of the S&P at a rather lofty 28.86x. ..."
I'm referring to what many retirees are most afraid of: Running out of money before they
die. An Allianz Life
survey found that far more retirees are afraid of outliving their money than they are of
dying -- 61% to 39%. This ever-present background fear is especially rearing its ugly head
right now, given the bear market that too many came out of nowhere.
Retirement planning projections made at the end of the third quarter, right as the stock
market was registering its all-time highs, now need to be revised.
The reason not to give up hope is that the stock market typically recovers from bear
markets in a far shorter period of time than most doom and gloomers think. Consider what I
found when measuring how long it took, after each of the 36 bear markets since 1900 on the
bear market calendar maintained by Ned Davis Research Believe it or not, the average recovery
time was 'just' 3.2 years."
Mark correctly used total return numbers in his calculations, however, while his data is
correct the conclusion is not.
Here is why.
While Mark is discussing the recovery of bear markets (getting back to even) it is based on
a "buy and hold" investing approach.
However, Mark's error is that he is specifically discussing "retirees" which are
systematically withdrawing capital from their portfolios, paying tax on those withdrawals (from
retirement accounts) and compensating for adjustments to the cost of living (not to mention
spiraling "health care" costs.)
These are the same problems which plague most of the "off the shelf" financial plans
today:
Faulty assumptions based on average historic rates of returns rather than variable rates
of return, and;
Not accounting for the current level of market valuations at the outset of the planning
process.
To explain the problems with both Mark's assumptions, and the vast majority of financial
plans spit out of computer programs today, let's turn to some previous comments from
Michael Kitces.
"Given the impact of inflation, it's problematic to start digging into retirement
principal immediately at the start of retirement, given that inflation-adjusted spending
needs could quadruple by the end of retirement (at a 5% inflation rate). Accordingly, the
reality is that to sustain a multi-decade retirement with rising spending needs due to
inflation, it's necessary to spend less than the growth/income in the early years, just to
build enough of a cushion to handle the necessary higher withdrawals later!
For instance, imagine a retiree who has a $1,000,000 balanced portfolio, and wants to plan
for a 30-year retirement, where inflation averages 3% and the balanced portfolio averages 8%
in the long run. To make the money last for the entire time horizon, the retiree would start
out by spending $61,000 initially, and then adjust each subsequent year for inflation,
spending down the retirement account balance by the end of the 30th year."
Michael's assumptions on expanding inflationary pressures later in retirement is correct,
however, they don't take into account the issue of taxation. So, let's adjust Kitces' chart and
include not only the impact of inflation-adjusted returns but also taxation. The chart below adjusts the 8% return structure for inflation at 3% and also adjusts the
withdrawal rate up for taxation at 25%. By adjusting the annualized rate of return for the impact of inflation and taxes, the life
expectancy of a portfolio grows considerably shorter. While inflation and taxes are indeed important to consider, those are not the biggest threat
to retiree's portfolios.
There is a massive difference between 8% "average" rates of return and 8% "actual"
returns.
The Impact Of Variability
Currently, the S&P 500 (as of 1/18/19) is trading at 2,670 with Q4-2018 trailing
reported earnings estimated to be $139.50. (
S&P Data ) This puts the 10-year average trailing P/E ratio of the S&P at a rather
lofty 28.86x.
We also know that forward returns from varying valuation levels are significantly varied
depending on when you start your investing. As shown in the chart below, from current valuation
levels, forward returns from the market have been much closer to 2% rather than 8%.
As evidenced by the graph, as valuations rise future rates of annualized returns fall. This
should not be a surprise as simple logic states that if you overpay today for an asset, future
returns must, and will, be lower.
Math also proves the same. Capital gains from markets are primarily a function of market
capitalization, nominal economic growth plus the dividend yield. Using the Dr. John Hussman's
formula we can mathematically calculate returns over the next 10-year period as follows:
(1+nominal GDP growth)*(normal market cap to GDP ratio / actual market cap to GDP
ratio)^(1/10)-1
Therefore, IF we assume that
GDP maintains, 4% annualized growth indefinitely
Which means recessions have been eliminated, AND
Current market cap/GDP stays flat at 1.25, AND
The current dividend yield remains at 2%:
We would get forward returns of:
(1.04)*(.8/1.25)^(1/30)-1+.02 = 4.5%
But there's a "whole lotta ifs" in that assumption.
More importantly, if we assume that inflation remains stagnant at 2%, as the Fed hopes, this
would mean a real rate of return of just 2.5%.
This is far less than the 8-10% rates of return currently promised by the Wall Street
community. It is also why starting valuations are critical for individuals to understand when
planning for the accumulation phase of the investment life-cycle.
Let's take this a step further. For the purpose of this article, we went back through
history and pulled the 4-periods where trailing 10-year average valuations (Shiller's CAPE)
were either above 20x earnings or below 10x earnings. We then ran a $1000 investment going
forward for 30-years on a total-return, inflation-adjusted, basis.
At 10x earnings, the worst performing period started in 1918 and only saw $1000 grow to a
bit more than $6000. The best performing period was actually not the screaming bull market that
started in 1980 because the last 10-years of that particular cycle caught the "dot.com" crash.
It was the post-WWII bull market that ran from 1942 through 1972 that was the winner. Of
course, the crash of 1974, just two years later, extracted a good bit of those returns.
Conversely, at 20x earnings, the best performing period started in 1900 which caught the
rise of the market to its peak in 1929. Unfortunately, the next 4-years wiped out roughly 85%
of those gains . However, outside of that one period, all of the other periods fared worse than
investing at lower valuations. (Note: 1993 is still currently running as its 30-year period
will end in 2023.)
The point to be made here is simple and was precisely summed up by Warren Buffett:
"Price is what you pay. Value is what you get."
This idea becomes much clearer by showing the value of $1000 invested in the markets at both
valuations BELOW 10x trailing earnings and ABOVE 20x. I have averaged each of the 4-periods
above into a single total return, inflation-adjusted, index, Clearly, investing at 10x earnings
yields substantially better results.
Not surprisingly, the starting level of valuations has the greatest impact on your future
results.
But, most importantly, starting valuations are critical to withdrawal rates
When we adjust the spend down structure for elevated starting valuation levels, and include
inflation and taxation, a much different, and far less favorable, financial outcome emerges
– the retiree runs out of money not in year 30, but in year 18.
"And, if you're retired and withdrawing from your portfolio, the 'sequence-of-return' risk
– the problem of the early years of withdrawals coinciding with a declining portfolio
– can upend your entire retirement. That's because a portfolio in distribution that
experiences severe declines at the beginning of the distribution phase, cannot recover when
the stock market finally rebounds. Because of the distributions, there is less money in the
portfolio to benefit from stock gains when they eventually materialize again.
I showed that risk in a previous
article where I created the following chart representing three hypothetical portfolios
using the '4% rule' (withdrawing 4% of the portfolio the first year of retirement and
increasing that withdrawal dollar value by 4% every year thereafter). I cherry-picked the
initial year of retirement, of course (2000), so that my graphic represents a kind of worst
case, or at least a very bad case, scenario. But investors close to retirement should keep
that in mind because current stock prices are historically high and bond yields are
historically low. That means the prospects for big investment returns over the next decade
are dim and that increasing stock exposure could be detrimental to retirement plans once
again. In my example, decreasing stock exposure benefits the portfolio in distribution phase,
and that could be the case for retirees now."
As John correctly notes, there is a case for owning stocks in a retirement portfolio, just
maybe not as much as your "run of the mill" financial plan suggests. To wit:
"Returns from cash and bonds may not keep up with inflation, after all. But stock returns
might fall short too. And if stocks do lag, they probably won't do so with the limited
volatility that bonds tend to deliver, barring a serious bout of inflation. So, if you're
within a decade of retirement, it may be time to think hard about how much stock exposure is
enough. The answer might be less than you think for a portfolio in distribution phase."
Questions Retirees Need To Ask About Plans
Importantly, what this analysis reveals, is that "retirees" SHOULD be worried about bear
markets. Taking the correct view of your portfolio, and the risk being undertaken, is critical
when entering the retirement and distribution phase of the portfolio life cycle.
More importantly, when building and/or reviewing your financial plan – these are the
questions you must ask and have concrete answers for:
What are the expectations for future returns going forward given current valuation
levels?
Should the withdrawal rates be downwardly adjusted to account for potentially lower
future returns?
Given a decade long bull market, have adjustments been made for potentially front-loaded
negative returns?
Has the impact of taxation been carefully considered in the planned withdrawal rate?
Have future inflation expectations been carefully considered?
Have drawdowns from portfolios during declining market environments, which accelerates
principal bleed, been considered?
Have plans been made to harbor capital during up years to allow for reduced portfolio
withdrawals during adverse market conditions?
Has the yield chase over the last decade, and low interest rate environment, which has
created an extremely risky environment for retirement income planning been carefully
considered?
What steps should be considered to reduce potential credit and duration risk in bond
portfolios?
Have expectations for compounded annual rates of returns been dismissed in lieu of a plan
for variable rates of future returns?
If the answer is "no" to the majority of these questions then feel free to contact one of the CFP's
in our office who take all of these issues into account.
With debt levels rising globally, economic growth on the long-end of the cycle, interest
rates rising, valuations high, and a potential risk of a recession, the uncertainty of
retirement plans has risen markedly. This lends itself to the problem of individuals having to
spend a bulk of their "retirement" continuing to work.
Two previous bear markets have devastated the retirement plans of millions of individuals in
the economy today which partly explains why a large number of jobs in the monthly BLS
employment report go to individuals over the age of 55.
So, not only should retirees worry about bear markets, they should worry about them a
lot.
The insidious and hidden tax - inflation. Retirement is mostly fantasy - it is always
being one step away from poverty. Even after decades of sacrifice and saving.
the nikkei topped out in 1989 and still hasn't recovered nearly 30 years later. most old
farts, including family members, aren't balanced, they are almost totally in stocks because
they believe that the fed guarantees the s&p only goes up. if someday it doesn't, too bad
for them.
The only way to retire [ unless you are very wealthy ] from the system is to adopt a
self-reliant lifestyle where your cost of living is way down. A single adult, in fair
condition, living a self reliant lifestyle can live comfortably on 15k per year. Thats
assuming no debt. To do that privately, you'll need about 400-600k, the right piece of land [
paid for ], and a whole mess of specific skills.
You wont be laying on your ***. This isnt your father's retirement of leisure. This is a
shifting of focus away from contribution / compensation through the system and towards
independence and literal "Self" reliance.
bull, bear who gives a ****? Only an idiot eats up the seed capital in pensions. All that
does is set down a death date you better follow thru with- With a bullet if neccesary.
Did they pick only companies that existed and survived the 30-year duration, in which case
they may not be representative of the market? Or did they use index, in which case there is
no complementary aggregate P/E ratio to account for dividends - or did they ignore dividends
altogether?
Very easy to calculate amortization of a retirement boodle. Just go online to a mortgage
amortization calculator. 1) Put in the initial amount of the retirement stake (= the amount
of a mortgage to be paid off, e.g. $1 million) 2) Punch in the projected interest rate (= the
interest on the mortgage). This will be the amount the retirement boodle pays in
interest/dividends over time as it's being drawn upon 3) Punch in the number of years the
retirement principle will have to pay out (= the number of years the mortgage is for). Crunch
these with the calculator provided and you'll get the amount the account will pay out each
month (= monthly payment of a mortgage with interest). Simple and free. The only uncertain
thing is the interest/dividend rate of the account. But one can be conservative (Say 2-3%)
and still get a very accurate monthly payout figure.
Also, nothing personal, but why should I take investment advice from someone who is still
working or paid to give it? I could never figure that one out.
If I were an investment genius, I would be rich, retired long before reaching age 65, and
avoiding people who need investment advice.
Retirees shouldn't worry about bear markets because retirees should never be in the equity
market in the first place. Especially during the times of rate normalization, where
sell-siders view every utterance by the Fed as 'dovish', and algos need ultra-volatility to
keep in business.
Assume $1 million in savings and Social Security of $25,000/yr based on a life of very
decent wages. At 4%, very easy to earn during normalized rates from fixed income, that's
$65,000/yr with NO principal reduction. Paltry for NYC or CA, but very decent for a
comfortable life almost everywhere else for an old person with no debts.
""Overall, between bank accounts and retirement savings, the median American household
currently holds about $11,700 , according to MagnifyMoney. Almost 30 percent of households
have less than $1,000 saved, MagnifyMoney finds, though the amount varies drastically by
age.Aug 28, 2018""
The article says, " For instance, imagine a retiree who has a $1,000,000 balanced portfolio, and wants to
plan for a 30-year retirement . . . "
It's not aimed at the median American household. The median American household doesn't
have a financial advisor, portfolio, or any hope for a retirement that goes beyond a $1,800 a
month Social Security check.
and to make matters worse it is becoming more and more difficult to find a reasonably
priced canned cat food that can substituted as a Decent Liver Pate. We have a high net worth
Bridge Owners party next week and the stuff we tried last month pulled the bridges right out
of their mouths.
You proved his point. You would be very concerned if you knew the true Money Power Monopolist Game of
Thrones.
===============
"Modern slaves are not in chains, they are in debt."
~Anonymous
"Let the American people go into their debt-funding schemes and banking systems, and from
that hour their boasted independence will be a mere phantom."
~William Pitt, (referring to the inauguration of the first National Bank in the United States
under Alexander Hamilton).
"The new law will create inflation whenever the trusts want inflation. From now on
depressions will be scientifically created."
~Congressman Charles A. Lindbergh, after the passage of the Federal Reserve act 1913.
"The one aim of these financiers is world control by the creation of inextinguishable
debt."
~Henry Ford
"Retirement" is a fairly new fad- prior to the 1950s it was unheard of - expect that fad
to end some point soon. The whole concept resembles a Pyramid Scheme- as long as there are
enough people at the bottom supporting those at the top everything is OK- the problem occurs
when there are not enough at the bottom contributing to support those above them - which we
have now.
the answer is simple; the math of a distribution portfolio is vastly different than that
of a portfolio NOT making withdrawals.....depending on the amount being withdrawn the
recovery point will take longer if at all.
just keep dry powder ready for when FERAL Reserve jacks discount rate up in the teens, the
geezers will make it back fast. I do not doubt I will see rates in CDs at 10%. They have to
drain 4.4 trillion of gravy from the system to protect what they stole in 2008 or inflation
will get it fast.
The legendary John Bogle passed away yesterday in Bryn Mawr, Pennsylvania. He was 89. Bogle
was the founder of Vanguard Group. In announcing his death, Vanguard said that Bogle
"introduced the first index mutual fund for investors and, in the face of skeptics, stood
behind the concept until it gained widespread acceptance; and he drove down costs across the
mutual fund industry by ceaselessly campaigning in the interests of investors."
We'll always remember Bogle for the courage he demonstrated on April 23, 2013 when he
appeared
on the PBS program Frontline . Bogle dropped the bombshell that Wall Street has
attempted to hide for half a century: If you work for 50 years and receive the typical
long-term return of 7 percent on your 401(k) plan and your fees are 2 percent, almost
two-thirds of your account will go to Wall Street.
Bogle explained the math to Frontline's Martin Smith:
Bogle: What happens in the fund business is the magic of compound returns is overwhelmed by
the tyranny of compounding costs. It's a mathematical fact. There's no getting around it. The
fact that we don't look at it -- too bad for us.
Smith : What I have a hard time understanding is that 2 percent fee that I might pay to an
actively managed mutual fund is going to really have a great impact on my future retirement
savings.
Bogle: Well, you have to rely on somebody to get out a compound interest table and look at
the impact over an investment lifetime. Do you really want to invest in a system where you put
up 100 percent of the capital, you the mutual fund shareholder, you take 100 percent of the
risk and you get 30 percent of the return?
You can check the math yourself. Access a compounding calculator on
line. Input an account with a $100,000 balance and compound it at 7 percent for 50 years. That
gives you a balance of $3,278,041.36. Now change the calculation to a 5 percent return (reduced
by the 2 percent annual fee) for the same $100,000 over the same 50 years. That delivers a
return of $1,211,938.32. That's a difference of $2,066,103.04 – the same 63 percent
reduction in value that Smith's example showed.
If you don't know the amount of fees that you're paying on the mutual funds in your 401(k)
plan, 403(b) plan, IRA or other retirement vehicle, you may be putting your ability to retire
with adequate income and dignity at risk.
Roughly a third of Baby Boomers have saved less than $25,000 while just over a fifth of all
American have no savings at all, according to a study by Northwestern Mutual.
"'The best indicator of whether someone will be amenable to being defrauded has to do with
financial insecurity,' [said] David Vladeck, the former director of the Federal Trade
Commission's Bureau of Consumer Protection."
So I wonder what the trend is on being scammed. Perhaps fairly level at the moment.
Overinvestment in stocks of retires is very common under neoliberalism.
There are several factors here: one is greed cultivated by neoliberal MSM, the second is
insufficient retirement funds (gambling with retirement savings) and the last and not least is
lack of mathematical skills an inability to use Excel for viewing their portfolio and making
informed decisions.
Notable quotes:
"... At the end of 2016, 69 percent of investors in their 60s had at least 40 percent of their 401(k) portfolio invested in stocks, up from 65 percent in 2007, according to the Employee Benefit Research Institute in Washington. ..."
"... 19 percent had more than 80 percent of their 401(k) invested in stocks in 2016 ..."
"... "We had lousy forecasts in 2008. The housing market was in a tailspin," said 76-year-old John Bauer, who worked for McDonnell Douglas and Boeing Co for 36 years in St. Louis. "Today, employment is way up. The housing market is steady and corporations are flush." ..."
BOSTON (Reuters) - Nancy Farrington, a retiree who turns 75 next month, admits to being in a
constant state of anxiety over the biggest December stock market rout since Herbert Hoover was
president.
"I have not looked at my numbers. I'm afraid to do it," said Farrington, who recently moved
to Charleston, South Carolina, from Boston. "We've been conditioned to stand pat and not panic.
I sure hope my advisers are doing the same."
Retirees are worrying about their nest eggs as this month's sell-off rounds out the worst
year for stocks in a decade, and some fear they are headed for a day of reckoning like the 2008
market meltdown or dot-com crash of the early 2000s.
Retirees have less time to recover from bad investment moves than younger workers. If they
or their advisers panic and sell during a brief downturn, they may lock in a more meager
retirement. But their portfolio could be even more at risk if they hold on too long in a
prolonged decline.
"I have no way of riding it out if that happens," said Farrington. "I can feel the anxiety
in my stomach all the time."
While many industrialized countries still have generous safety nets for retirees, pensions
for U.S. private-sector workers largely have been supplanted by 401(k) accounts and other
private saving plans. That means millions of older Americans are effectively their own pension
managers.
Workers in countries like Belgium, Canada, Germany, France and Italy receive, on average,
about 65 percent of their income replaced by mandatory pensions. In the Netherlands the ratio
of benefits to lifetime average earnings is abut 97 percent, according to a 2017 Organization
for Economic Cooperation and Development report.
The OECD says the comparable U.S. replacement rate from Social Security benefits is about 50
percent.
U.S. retirees had watched their private accounts mushroom during a bull stock market that
began in early 2009. Meanwhile, the Federal Reserve kept interest rates near zero for years,
enticing retirees deeper into stocks than previous generations as investments like certificates
of deposit, government bonds and money-market funds generated paltry income.
At the end of 2016, 69 percent of investors in their 60s had at least 40 percent of their
401(k) portfolio invested in stocks, up from 65 percent in 2007, according to the Employee
Benefit Research Institute in Washington.
Still, fewer have gone all in on stocks in recent years. Just 19 percent had more than 80
percent of their 401(k) invested in stocks in 2016, down from 30 percent at year-end 2007,
according to nonprofit research group EBRI.
"Nothing has gone wrong, but it seems the market is trying to figure out what could go
wrong," said Brooke McMurray, a 69-year-old New York retiree who says she became a financial
news junkie after the 2007-2009 financial crisis.
"Unlike before, I now know what I own and I constantly read up on my companies," she
said.
The three major U.S. stock indexes have tumbled about 10 percent this month, weighed by
investor worries including U.S.-China trade tensions, a cooling economy and rising interest
rates, and are on track for their worst December since 1931.
The S&P 500 is headed for its worst annual performance since 2008, when Wall Street
buckled during the subprime mortgage crisis. But some are not quite ready to draw
comparisons.
"We had lousy forecasts in 2008. The housing market was in a tailspin," said 76-year-old
John Bauer, who worked for McDonnell Douglas and Boeing Co for 36 years in St. Louis. "Today,
employment is way up. The housing market is steady and corporations are flush."
Still, Bauer said he is uneasy about White House leadership. He and several other retirees
referenced U.S. Treasury Secretary Steve Mnuchin's recent calls to top bankers, which did more
to rattle than assure markets. U.S. stocks tumbled more than 2 percent the day before the
Christmas holiday.
Nevertheless, Bauer is prepared to ride out any market turmoil without making dramatic moves
to his retirement portfolio. "When it's up, I watch it. When it's down, I don't," he said. And there are some factors helping take the sting out of the market rout, said Larry Glazer,
managing partner of Boston-based Mayflower Advisors LLC.
The median retirement account balance among all working US adults is $0 . This is true
even for the cohort closest to retirement age, those 55-64 years old.
The average (i.e., mean) near-retirement individual has less than 8% of one year's income
saved in a retirement account
77% of all American households aren't on track to have enough net worth to retire , even
under the most conservative estimates.
There a number of causal factors that have contributed to this lack of retirement
preparedness (decades of stagnant real wages, fast-rising cost of living, the Great Recession,
etc), but as we explained in our report The Great Retirement Con
, perhaps none has had more impact than the shift from dedicated-contribution pension plans to
voluntary private savings:
The Origins Of The Retirement Plan
Back during the Revolutionary War, the Continental Congress promised a monthly lifetime
income to soldiers who fought and survived the conflict. This guaranteed income stream,
called a "pension", was again offered to soldiers in the Civil War and every American war
since.
Since then, similar pension promises funded from public coffers expanded to cover retirees
from other branches of government. States and cities followed suit -- extending pensions to
all sorts of municipal workers ranging from policemen to politicians, teachers to trash
collectors.
A pension is what's referred to as a defined benefit plan . The payout promised a worker
upon retirement is guaranteed up front according to a formula, typically dependent on salary
size and years of employment.
Understandably, workers appreciated the security and dependability offered by pensions.
So, as a means to attract skilled talent, the private sector started offering them, too.
The first corporate pension was offered by the American Express Company in 1875. By the
1960s, half of all employees in the private sector were covered by a pension
plan.
Off-loading Of Retirement Risk By Corporations
Once pensions had become commonplace, they were much less effective as an incentive to
lure top talent. They started to feel like burdensome cost centers to companies.
As America's corporations grew and their veteran employees started hitting retirement age,
the amount of funding required to meet current and future pension funding obligations became
huge. And it kept growing. Remember, the Baby Boomer generation, the largest ever by far in
US history, was just entering the workforce by the 1960s.
Companies were eager to get this expanding liability off of their backs. And the more
poorly-capitalized firms started defaulting on their pensions, stiffing those who had loyally
worked for them.
So, it's little surprise that the 1970s and '80s saw the introduction of personal
retirement savings plans. The Individual Retirement Arrangement (IRA) was formed by the
Employee Retirement Income Security Act (ERISA) in 1974. And the first 401k plan was created
in 1980.
These savings vehicles are defined contribution plans . The future payout of the plan is
variable (i.e., unknown today), and will be largely a function of how much of their income
the worker directs into the fund over their career, as well as the market return on the
fund's investments.
Touted as a revolutionary improvement for the worker, these plans promised to give the
individual power over his/her own financial destiny. No longer would it be dictated by their
employer.
Your company doesn't offer a pension? No worries: open an IRA and create your own personal
pension fund.
Afraid your employer might mismanage your pension fund? A 401k removes that risk. You
decide how your retirement money is invested.
Want to retire sooner? Just increase the percent of your annual income contributions.
All this sounded pretty good to workers. But it sounded GREAT to their employers.
Why? Because it transferred the burden of retirement funding away from the company and
onto its employees. It allowed for the removal of a massive and fast-growing liability off of
the corporate balance sheet, and materially improved the outlook for future earnings and cash
flow.
As you would expect given this, corporate America moved swiftly over the next several
decades to cap pension participation and transition to defined contribution plans.
The table below shows how vigorously pensions (green) have disappeared since the
introduction of IRAs and 401ks (red):
So, to recap: 40 years ago, a grand experiment was embarked upon. One that promised US
workers: Using these new defined contribution vehicles, you'll be better off when you reach
retirement age.
Which raises a simple but very important question: How have things worked out?
The
Ugly AftermathAmerica The Broke
Well, things haven't worked out too well.
Four decades later, what we're realizing is that this shift from dedicated-contribution
pension plans to voluntary private savings was a grand experiment with no assurances.
Corporations definitely benefited, as they could redeploy capital to expansion or bottom line
profits. But employees? The data certainly seems to show that the experiment did not take
human nature into account enough – specifically, the fact that just because people have
the option to save money for later use doesn't mean that they actually will.
And so we end up with the dismal retirement stats bulleted above.
The Income Haves
& Have-Nots
In our recent report The Primacy Of Income , we
summarized our years-long predictions of a coming painful market correction followed by a
prolonged era of no capital gains across equities, bond and real estate.
Simply put: the 'easy' gains made over the past 8 years as the central banks did their
utmost to inflate asset prices is over. Asset appreciation is going to be a lot harder to come
by in the future.
Which makes income now the prime source of building -- or simply just maintaining -- wealth
going forward.
That being the case, it's obvious that those receiving a pension will be in far better shape
than those who aren't. They'll have a guaranteed income stream to partially or fully fund their
retirement.
Resentment Brewing
While the total number of people expecting a pension isn't tiny, it's certainly a minority
of today's workers.
31 million private-sector, state and local government workers in the US participate in a
pension plan. 3.3 million currently-employed civilian Federal workers will receive a pension;
as will some percentage of the 2 million people serving in the active military and
reserves.
Combined, that's about 25% of current US workers; roughly 13% of total US adults.
The danger here is of festering social discord. The majority, whom we already know will not
be able to retire, will highly likely start regarding pensioners with envy and resentment.
"Hey, I worked as hard as Joe during my career. How come he gets to retire and I don't?"
will be a common narrative running in the minds of those jealous of their neighbors.
This bitterness will only increase as taxes continue to rise to fund government pension
payouts, already
a huge drain on public budgets . "Why am I paying more so Joe can relax on the beach??"
Humans are wired to react angrily to perceived injustice and unfairness. This short clip
shows how it's hard-coded into our primate brains:
So it's not a stretch at all to predict the divisive tension and prejudice that will result
from the growing gap between the pension haves and have-nots.
The negative stereotypes of union workers will be tightly re-embraced. This SNL sketch
captures a good number of them:
The steady news
reports of pension fraud and abuse will anger the majority further. Any projected decreases
in Social Security (benefit payouts will only be 79 cents on the dollar by 2035 at our current
trajectory) will only exacerbate the ire, as the small governmental income the have-nots
receive becomes even more meager.
The growing potential here is for an emerging social schism, possibly accompanied with
intimidation and violence, not dissimilar to that which has occurred along racial or religious
lines during darker eras of our history.
As people become stressed, they react emotionally, and look for a culprit to blame. And as
they become more desperate, as many elderly workers with no savings often do, they'll resort to
more desperate measures.
Broken Promises
And it's not all sunshine and roses for the pensioners, either. Being promised a pension and
actually receiving one are two very different things.
Underfunded pension liabilities are a massive ticking time bomb, certain to explode over the
next few decades.
For example, many pensions offered through multi-employer plans are bad shape. The
multiemployer branch of the Pension Benefit Guaranty Corporation, the federally-instated
insurer behind private pensions, will be out of business by 2025 if no changes in law are made
to help. If that happens, retirees in those plans will get only 10% of what they were
promised.
Moreover, research conducted by the Pew Charitable Trusts shows a
$1.4 trillion shortfall between state pension assets and guarantees to employees. There are
only two ways a gap that big gets addressed: massive tax hikes or massive benefit cuts. The
likeliest outcome will be a combination of both.
So, many of those today counting on a pension tomorrow may find themselves in a similar boat
to their pension-less neighbors.
No Easy Systemic Solutions, So Act For Yourself
There's no "fix" to the retirement predicament of the American workforce. There's no policy
change that can be made at this late date to reverse the decades of over-spending,
over-indebtedness, and lack of saving.
All we can do at this time is influence how we take our licks. Do we simply leave the masses
of unprepared workers to their sad fate? Or do we share the pain across the entire populace by
funding new social support programs via more taxes?
Time will tell. But what we can bet on is tougher times ahead, especially for those with
poor income prospects.
So the smart strategy for the prudent investor is to prioritize building a portfolio of
income streams in order to have sufficient dependable income for a sustainable retirement. Or
for simply remaining afloat financially.
Sadly, accustomed to the speculative approach marketed to us for so long by the financial
industry, most investors are woefully under-educated in how to build a diversified portfolio of
passive income streams (inflation-adjusting and tax-deferred whenever possible) over time.
Those looking to get up to speed can read our recent report A
Primer On Investing For Inflation-Adjusting Income , where we detail out the wide range of
prevalent (and not-so-prevalent) solutions for today's investors to consider when designing an
income-generating portfolio. From bonds, to dividends (common and preferred), to real estate,
to royalties -- we explain each vehicle, how it can be used, and what the major benefits and
risks are.
And in the interim, make sure the wealth you have accumulated doesn't disappear along with
the bursting of the Everything Bubble. If you haven't already read it yet, read our premium
report from last week What To Do Now That 'The
Big One' Is Here .
They can try and tax to fill pension buckets that are empty, but the population is more
likely than ever to react negatively to this sort of thing.
People will not move to areas where the potential for extortion to satisfy pension
promises exists. Nor will they move to any place where there's the possibility of a big tax
increase to fill public coffers.
In my own area there's already the threat of a large property tax increase to cover
'social improvements' that are not really the responsibility of the local government, but you
can't tell them that, they extend their tentacles into everything. The county is just as bad,
with property tax increases and then handing out grants that no one monitors and no one knows
about.
If govt's would go back to doing what they're supposed to do instead of the garbage
they're involved in now we'd be better off and it would cost those who actually pay the taxes
a lot less. It's one big reason people are moving to rural areas. My muni has voted several
times now to increase local option sales tax, the people keep putting it down, the voting
costs thousands to conduct, I wish they would give it up.
It's no wonder that Chicago loses 150 people every day...not a good thing.
"The list includes a married couple -- a police captain and a detective -- who joined DROP
at around the same time and collected nearly $2 million while in the program. They both filed
claims for carpal tunnel syndrome and other cumulative ailments about halfway through the
program. She spent nearly two years on disability and sick leave; he missed more than two
years ... the couple spent at least some of their paid time off recovering at their condo in
Cabo San Lucas and starting a family theater production company with their daughter..."
Pensions in many ways they are the biggest Ponzi Scheme of modern man. Pension payouts are
often predicated on the idea the money invested in these funds will yield seven to eight
percent a year and in today's low-interest rate environment, this has forced funds into ever
riskier investments.
The PBGC America's pension safety net is already under pressure and failing due to the
inability of pension funds to meet their future obligations. The math alone is troubling but
when coupled with the overwhelming possibility of a major financial dislocation looming in
the future a nightmare scenario for pensions drastically increases. More on this subject in
the article below.
84% of state and local public sector workers receive defined benefit pensions as do 100%
of federal workers with little to no contribution on their part. After 30 years Federal
workers receive 33% of their highest 3 consecutive years pay and state workers average
benefits are $43000 with a range from 15000 (MS) to 80000 (CA). Private sector employees get
to pay for this and have little if anything coming from their employers in the form of a
pension. Instead, private sector employees get to gamble their savings in the stock and bond
markets to secure a retirement. And don't thing government employees are paid less - they are
usually paid very competitively with the private sector. Bottom line is private sector
employees are slaves to federal, state, and local governments.
Not only are government workers not paid that less, they get a slew of days off, sicks
days, mental health days , every minor holiday is a day off. And because they never get laid
off, the lower salary is worth more over the long term. then the private sector worker who
gets fired every 5 years
A 401K is not a pension plan and if you don't put anything into the 401K then you get
nothing out of the 401K. Plus, pensions can fail. The people that made no other arrangements
for their retirement other than rely on SocSec will have more because they will qual for food
stamps, housing subsidies, utility credits, etc. The picture is being distorted.
There is not going to be the old American pension, it's the new America, where everything
has been hollowed out. The new American economic conditions has created a vast
underclass.
The growing underclass is because of being hollowed out. Social services for the
underclass is costing hundreds of billions. The Trumpers want a massive cut in social
funding.
The communist Democratic Socialist have a wedge issue of underclass causes which keeps the
Democratic Socialist party growing. Clinton is their enemy as we now know from Clinton's out
burst.
The only way out for Trumpers is an infrastructure build. This will draw in the masses as
labor markets tighten, thus pushing wages up.
"... If I take Social Security at age 62 and then pay back the benefits within 12 months to erase the penalty for claiming early, is it true I get to keep the interest I earned while I had the money? ..."
"... I understand how delayed-retirement credits boost Social Security benefits by 8% for each year that one delays claiming between age 66 and age 70. But do cost-of-living adjustments during the years you wait amplify the advantage to more than 8% a year? ..."
Q If I take Social Security at age 62 and then pay back the benefits
within 12 months to erase the penalty for claiming early, is it true I get to keep the interest
I earned while I had the money?SEE ALSO:
10 Things You Must Know About Social Security
A Yes, but don't get too excited. Prior to 2010, when Social Security imposed the 12-month
limit for withdrawing an application and repaying benefits, it was often advised that people
who didn't need the money use this "do over" procedure to get what amounted to an interest-free
loan from the government. If you claimed benefits at 62 and repaid them at 66, you might be
playing with $100,000 or more of "house money." The 12-month window restricts that opportunity.
Also, note that if you receive benefits in one calendar year and pay them back in the next,
you'll likely have to pay tax on the benefits in year one. You can recoup the tax, but it's
complicated.
Q I understand how delayed-retirement credits boost Social Security benefits by 8% for
each year that one delays claiming between age 66 and age 70. But do cost-of-living adjustments
during the years you wait amplify the advantage to more than 8% a year?
A Yes. COLAs are built into benefits starting at age 62, the earliest age at which you can
claim benefits, even if you don't claim at that time.
Here's an example worked up for us by Baylor University professor William Reichenstein, head
of research for consulting firm Social Security Solutions. Let's say your benefit at age 66 is
estimated at $2,000 a month, but you decide to wait until age 70 to claim. You'll get eight
years of compounded COLAs based on the full retirement age benefit of $2,000 -- bringing the
monthly benefit up to $2,533, assuming an average annual COLA of 3%. You'd also get four years
of 8% delayed-retirement credits calculated on the $2,533 benefit. That extra 32% brings the
total monthly benefit at age 70 to $3,343. (Yes, a 3% COLA may seem high considering 2016's 0%
and 2017's 0.3%. But the annual average COLA since automatic adjustments started in 1975 is
3.8%.)
1. Re: the professor's hypothetical example... don't kid yourself. He shows a
hypothetical 20% increase ($2000 going up to $2500.) Just observing the past 3 years,
COLA's have been 0% twice,( so says social security) and & .3% this past year.. And a
few years before that, there were a few more 0% years, along with minimal COLA increases.
Myself, having been forced to retire in 2009, I've discovered what social security says
the COLA is, (on which they base your yearly increase in benefits) and what the CPI is in
REAL LIFE are ridiculously far apart.)
2. The payback question states, "it's complicated." Here's the quick and short answer: TO
START, you must be able to ITEMIZE your tax return ( and not take the standard deduction)
in the year you enact your do over, to even have a CHANCE to recoup some of the taxes you
paid on your social security benefits. The dollar amount you pay back in the "do over" to
SS that exceed the benefits you received from SS during the current year, is the amount
on which you can include as an itemized deduction on your tax return for the current
year. And remember, itemized deductions will only reduce your taxes by 15 cents or 25
cents on the dollar (depending on your marginal tax bracket.) There is no such thing as a
tax credit, nor an amended tax return, when it comes to trying to recoup income tax you
paid on social security benefits. My credentials? I'm a CPA & retired college
accounting professor.
One little discussed aspect of Social Security is the modest wealth
redistribution resulting from disability benefits. The upward trend of disability in
previous decades mirrors the decline in working class and lower middle class jobs and
income.
SSDI has been a target of the cutters for years and puts Trump in the middle between his
conservatives and his more lumpenproletariat base members, an increasing number of whom
live off SSDI benefits .
The number of SSDI recipients has tripled since the 1980s.
Democrats should continue to exploit the divergence between GOP policy and the grim
reality of a significant share of the Trumpist base.
How Ronald Reagan and Alan Greenspan Pulled off the Greatest Fraud Ever Perpetrated
against the American People
by Allen W. Smith / April 14th, 2010
David Leonhardt's article ,
"Yes, 47% of Households Owe No Taxes. Look Closer," in Tuesday's New York Times was
excellent, but it just scratches the tip of the iceberg of how the rich have gained at the
expense of the working class during the past three decades. When Ronald Reagan became President
in 1981, he abandoned the traditional economic policies, under which the United States had
operated for the previous 40 years, and launched the nation in a dangerous new direction. As
Newsweek magazine put it in its March 2, 1981 issue, "Reagan thus gambled the future
-- his own, his party's, and in some measure the nation's -- on a perilous and largely untested
new course called supply-side economics."
Essentially, Reagan switched the federal government from what he critically called, a "tax
and spend" policy, to a "borrow and spend" policy, where the government continued its heavy
spending, but used borrowed money instead of tax revenue to pay the bills. The results were
catastrophic. Although it had taken the United States more than 200 years to accumulate the
first $1 trillion of national debt, it took only five years under Reagan to add the second one
trillion dollars to the debt. By the end of the 12 years of the Reagan-Bush administrations,
the national debt had quadrupled to $4 trillion!
Ronald Reagan and Alan Greenspan pulled off one of the greatest frauds ever perpetrated
against the American people in the history of this great nation, and the underlying scam is
still alive and well, more than a quarter century later. It represents the very foundation upon
which the economic malpractice that led the nation to the great economic collapse of 2008 was
built. Ronald Reagan was a cunning politician, but he didn't know much about economics. Alan
Greenspan was an economist, who had no reluctance to work with a politician on a plan that
would further the cause of the right-wing goals that both he and President Reagan shared.
Both Reagan and Greenspan saw big government as an evil, and they saw big business as a
virtue. They both had despised the progressive policies of Roosevelt, Kennedy and Johnson, and
they wanted to turn back the pages of time. They came up with the perfect strategy for the
redistribution of income and wealth from the working class to the rich. Since we don't know the
nature of the private conversations that took place between Reagan and Greenspan, as well as
between their aides, we cannot be sure whether the events that would follow over the next three
decades were specifically planned by Reagan and Greenspan, or whether they were just the
natural result of the actions the two men played such a big role in. Either way, both Reagan
and Greenspan are revered by most conservatives and hated by most liberals.
If Reagan had campaigned for the presidency by promising big tax cuts for the rich and
pledging to make up for the lost revenue by imposing substantial tax increases on the working
class, he would probably not have been elected. But that is exactly what Reagan did, with the
help of Alan Greenspan. Consider the following sequence of events:
1) President Reagan appointed Greenspan as chairman of the 1982 National Commission on
Social Security Reform (aka The Greenspan Commission)
2) The Greenspan Commission recommended a major payroll tax hike to generate Social Security
surpluses for the next 30 years, in order to build up a large reserve in the trust fund that
could be drawn down during the years after Social Security began running deficits.
3) The 1983 Social Security amendments enacted hefty increases in the payroll tax in order
to generate large future surpluses.
4) As soon as the first surpluses began to role in, in 1985, the money was put into the
general revenue fund and spent on other government programs. None of the surplus was saved or
invested in anything. The surplus Social Security revenue, that was paid by working Americans,
was used to replace the lost revenue from Reagan's big income tax cuts that went primarily to
the rich.
5) In 1987, President Reagan nominated Greenspan as the successor to Paul Volker as chairman
of the Federal Reserve Board. Greenspan continued as Fed Chairman until January 31, 2006. (One
can only speculate on whether the coveted Fed Chairmanship represented, at least in part, a
payback for Greenspan's role in initiating the Social Security surplus revenue.)
6) In 1990, Senator Daniel Patrick Moynihan of New York, a member of the Greenspan
Commission, and one of the strongest advocates the the 1983 legislation, became outraged when
he learned that first Reagan, and then President George H.W. Bush used the surplus Social
Security revenue to pay for other government programs instead of saving and investing it for
the baby boomers. Moynihan locked horns with President Bush and proposed repealing the 1983
payroll tax hike. Moynihan's view was that if the government could not keep its hands out of
the Social Security cookie jar, the cookie jar should be emptied, so there would be no surplus
Social Security revenue for the government to loot. President Bush would have no part of
repealing the payroll tax hike. The "read-my-lips-no-new-taxes" president was not about to give
up his huge slush fund.
The practice of using every dollar of the surplus Social Security revenue for general
government spending continues to this day. The 1983 payroll tax hike has generated
approximately $2.5 trillion in surplus Social Security revenue which is supposed to be in the
trust fund for use in paying for the retirement benefits of the baby boomers. But the trust
fund is empty! It contains no real assets. As a result, the government will soon be unable to
pay full benefits without a tax increase. Money can be spent or it can be saved. But you can't
do both. Absolutely none of the $2.5 trillion was saved or invested in anything. I have been
laboring for more than a decade to expose the great Social Security scam. For more information,
please visit my website or contact me.
This article was posted on Wednesday, April 14th, 2010 at 9:00am and is filed under
Economy/Economics
, Social
Security , Tax .
5 comments on this article so far ...
Still, this is only symptom or really quite legal act by US. So, appears to me of the
system. So, what's wrong-right with the system of which governing the country by laws is
integral part? Apparently nothing; even to allen smyth.
So, why bother complaining ab an a legal act? Beats me! Why not change the system that
allows this? tnx
I think politics is, has and always will be the problem and it seems to have creeped in
to Dr. Smiths article.
The American people through decades of political rhetoric have come to believe all the lies
that have been told by politicians and duly reinforced by a compliant media.
Reagan proposed cutting benefits to fix social security. On 5/12/81 HHS Secretary Richard
Schweiker sent Congress the Administrations plan to rely on benefit cuts. You know what
happened next – the Democrats pounced with the elderly lobbies not far behind. Reagan
gave up and not unlike todays President, formed the commission mostly for political cover
and to take the heat off. And remember Congress passes the law, the President does not get
a vote.
The reserve fund build up for the boomers is also a myth. That is if we can believe the
Congressionsl Research Service:
"In fact, it has become conventional wisdom that Congress deliberately intended to built
up large balances in the trust funds, not just for the near term, but to help finance the
benefits of the post World War II baby boomers and later retirees." "To the contrary, a
review of the record of congressional proceedings would suggest that the goal was
not to create surpluses, but to assure that the system would not be threatened by
insolvency again in the event adverse conditions arose." ( CRS Report for Congress –
Social Security Financing Reform: Lessons From the 1983 Amendments – 97-741 EPW )
Or if we choose to believe Robert J Meyers:
Q: As we look at it today, some people rationalize the financing basis by saying that
it's a way of partially having the baby boomers pay for their own retirement in advance.
You're telling me now this was not the rationale. Nobody made that argument or adopted that
rationale?
Myers: That's correct. The statement you made is widely quoted, it is widely used, but
it just isn't true. It didn't happen that way, it was mostly happenstance that the
Commission adopted this approach to financing Social Security.
( http://ssaonline.us/history/myersorl.html
)
Senator Daniel Patrick Moynihan may have become outraged but he was on the commission.
He never realized that all cash surpluses have to be invested in debt – since Social
Security began? I find that hard to believe, but he was right to recommend cutting the FICA
tax, which of course went nowhere in CONGRESS.
If this new commission comes up with a plan to "extend the life" of the trust fund, as
happened with the new health care bill, it's just kicking the can down the road again.
Let's let them use the "trust fund" and run it down to zero. How? cut spending
elsewhere.
this is a great article alan, you missed one of the most important things greenspan did
to destroy the economy
he went to war on what he termed "wage inflation"
every time you see the prime go up that means there is upward pressure on wages and he
is trying to keep businesses from having money to offer higher wage
when you see wages go down it's because wage pressure is either stagnant or negative
of course there are other factors that make the prime go up or down but wage pressure is
the big reason you see it happening
when greenspan said "the economy is heating up" what he meant is "people are asking for
and getting a raise"
important stuff and one of the main reasons the middle classes wages have been
stagnant
– the US was not alone – this scam was taking place in most if not all
western faux-democracies. For the Canadian perspective – which has cost Cdn taxpayers
some two trillion dollars over the last 30+ years in "debt service" whilst government after
government claims 'no money!!' and slashes the social programs Cdns worked generations to
establish – What Happened? http://www.rudemacedon.ca/what-happened.html
. And thus it will continue until people catch on to this scam, this fraud, and put a lot
of people in jail. ABout the same time I find my way out from behind the looking glass, I
expect. We're all in cloud cuckooland now. Dorothy. The wizard is dead and the black witch
rules.
"Both Reagan and Greenspan saw big government as an evil, and they saw big business as a
virtue. They both had despised the progressive policies of Roosevelt, Kennedy and
Johnson"
Republicans BAD ..Democrats GOOD.
"When Ronald Reagan became President in 1981, he abandoned the traditional economic
policies, under which the United States had operated for the previous 40 years"
The 'traditional' economic policy of 'capitalism' (are economists allowed to utter that
word in public, or is 'traditional' a better oxymoron?) was rampant before 1981 and was
going about its destructive business. This article paints a picture of the pre-1981 world
being the 'glory days'.
"The official actuaries of the Social Security system say in order to get our Social
Security and retirement funds in balance, they'd have to cut benefits by 25 percent
indefinitely into the future," he says. "Do I think it's going to happen? Well I don't know,
but this is one of the reasons why inflation is the major problem out there. So long as you
don't do it, you're going to cause the debt overall -- the total government debt -- to rise
indefinitely, and that is an unstable situation."
He adds: "In the book discussing what the long-term outlook is all about, we say that the
issue of the aging of the population and its consequences on entitlements is having a
significant negative deterioration over the long run. The reason for that is what the data
unequivocally show is that entitlements -- which are mandated by law -- are gradually and
inexorably driving our gross domestic savings, and the economy, dollar for dollar. And so
long as that happens, we have to borrow from abroad, which is our current account
deficit."
He also said:
"When you deal with fear, it is very difficult to classify," he tells Here &
Now 's Jeremy Hobson. "But you can look at the consequences of it, and the consequence
is basically a suppressed level of innovation and therefore of capital investment and a
disinclination to take risks."
I agree with this, but not just as it relates to " a suppressed level of innovation " but
instead as it relates to the 2005 World Bank report on what produces wealth in a developed
economy like ours. It comes down to trust. Trust in your judicial system and trust in your
education system. I discuss this in the following 3 posts: 2007, 2009, 2011
This election at it's core is about trust. Destroy that, and we have no democracy, we have
no economy. It's that simple. That McConnell et al has decided he will not abide by the rules
agreed to in conducting the business of the Senate means we have no currently functioning
democracy. That is how fragile democracy in the US is. Our democracy comes down to two people,
the leaders of each party in the Senate agreeing to the rules. When one decides not to, there
is nothing that can be done other than vote.
You can hear the full interview here:
Sandi , November 5, 2018 10:48 am
Trust – I could't agree more. Thanks for shining this light.
Paul Krugman has been pounding the drum for years about the GOP's repeated con game of
creating deficits when they are in power, then running through the room with their hair on
fire on how deficits are going to be our downfall and so we MUST, MUST, MUST cut
entitlements. And yet we never seem to catch on.
It seems to me we should make all income, not just wages, subject to FICA. Of course we
could never touch what gets shipped off-shore anyway, so we'd just have to let that slide,
I suppose ..still, as long only the 'wage slaves' are taxed, things will only get
worse.
Karl Kolchak , November 5, 2018 12:16 pm
You still have trust? I gave that up after the Iraq War, the bailouts the Obama Betrayal
and Citizens United. Now I just assume the worst, no matter who is in power, and rarely am
I disappointed.
"... I have skipped the chest thumbing about the economy from Mnuchin and Mulvaney to focus on the stupidity ala CNBC . Real government spending barely kept pace with inflation, which is why outlays relative to GDP fell from 20.7% to 20.3%. Real tax revenues clearly fell in absolute terms and as a percent of GDP went from 17.2% to 16.5%. I guess this is what one gets when one lets Lawrence Kudlow become a chief economic adviser. But this kind of dishonesty is well known ever since Kudlow and his ilk tried to pull this intellectual garbage in the 1980's. Does anyone at CNBC not realize the Trump White House is playing the same games with numbers? ..."
"The only way to lower the record-high federal deficit would be to cut entitlement programs
like Medicare, Medicaid and Social Security1."
More McConnell: "It's disappointing but it's not a Republican problem." The deficit, grew 17
percent to $779 billion in fiscal year 2018. "It is a bipartisan problem and a problem of the
unwillingness to address the real drivers of the debt by doing anything to adjust those
programs to the demographics of America in the future."
The deficit has increased 77 percent since McConnell became majority leader in 2015.
A new Treasury Department analysis on Monday revealed that corporate tax cuts had a
significant impact on the deficit this year. Federal revenue rose by 0.04 percent in 2018 which
is a nearly 100 percent decrease from the previous year's 1.5 percent. In fiscal year 2018, tax
receipts on corporate income fell to $205 billion from $297 billion in 2017.
Still, McConnell insisted the change had nothing to do with a lack of revenue due to the tax
break or increased spending resulting from new programs since 2015. Instead he insists the
deficit increase is due to entitlement and welfare programs. Now he does the old switcheroo
from the yearly deficit to the national debt.
McConnell said, the debt is very "disturbing and is driven by the three big entitlement
programs that are very popular, Medicare, Social Security and Medicaid. There has been a
bipartisan reluctance to tackle entitlement changes because of the popularity of those
programs. Hopefully, at some point here, we'll get serious about this."
What McConnell
does not tell you is 8 years out those tax decreases will go away for much of the
population and many will see tax increases. McConnell and Republicans needed a way to keep the
60% of the total tax break going to the 1% of the Household Taxpayers making greater than
$500,000 annually since this tax break was passed under Reconciliation rules (Democrats could
not block it without 60 votes). Robert Reich has called this a Trojan
Horse tax break.
Recently, Mitch McConnell has been considering his legacy. I think it would be adequate to
paraphrase it as: "I saved the 2018 tax break for the 1 percenters. To hell with the rest of
you."
1. PGL pointed out the variance is barely audible on scale of the deficits. " I have
skipped the
chest thumbing about the economy from Mnuchin and Mulvaney to focus on the stupidity ala
CNBC . Real government spending barely kept pace with inflation, which is why outlays relative
to GDP fell from 20.7% to 20.3%. Real tax revenues clearly fell in absolute terms and as a
percent of GDP went from 17.2% to 16.5%. I guess this is what one gets when one lets Lawrence
Kudlow become a chief economic adviser. But this kind of dishonesty is well known ever since
Kudlow and his ilk tried to pull this intellectual garbage in the 1980's. Does anyone at CNBC
not realize the Trump White House is playing the same games with numbers? "
I kept my post the same because it is just another ruse by McConnell to get something done
for no reason what-so-ever. It is a lie by McConnell.
EMichael , October 17, 2018 11:00 am
And it will cost them exactly zero votes among the working class.
I wonder why that would be?
little john , October 17, 2018 12:02 pm
Maybe he'll get serious and endorse the NW Plan.
pgl , October 17, 2018 12:26 pm
A CNBC Federal spending SURGED. As in a 3.2% increase in NOMINAL spending, which means
real spending barely went up. As I noted under that post of mine on the CNBC/Treasury
dishonesty, Paul Ryan tried this same dishonest trick but the CBS guy nailed him. Well he
tried to but Ryan cut him off and repeated the same line.
Now how many people are stupid enough to not realize that Paul Ryan lies 24/7?
run75441 , October 17, 2018 1:20 pm
PGL:
I read your post earlier and recognized your point of spending barely rising. It is a ruse
of cut spending inside of a much larger ruse being precipitated by McConnell. If he can get
them to cut spending now, then maybe, maybe, they do not increase taxes down the road as
planned. I should have looked further and I did not.
I am thinking of adding your point in the text of my post. It is a great point and also
reinforces my point of the lies the Republicans tell the public. Thanks!
run75441 , October 17, 2018 9:19 pm
Noted . . . Just added your comment. Thanks again.
Joel , October 17, 2018 12:28 pm
"Maybe he'll get serious and endorse the NW Plan."
Co-terminus with the first verified report of porcine aviation.
pgl , October 17, 2018 3:04 pm
Trump blames the rise in the deficit on hurricanes and forest fires:
Someone fact check this please. But let's humor the Idiot in Chief for a comment by
assuming that the rise in the deficit is due to some temporary surge in FEMA spending. That
undermines the call for permanent reductions in Social Security and Medicare.
Point made – these clowns cannot keep their lies straight!
Amateur Socialist , October 17, 2018 7:17 pm
McConnell: "It's disappointing but it's not a Republican problem."
Not as long as people keep electing these clowns. I guess we'll find out in 3 more
weeks.
"... Note: Taking a spousal benefit does not reduce or change the amount your current spouse, ex-spouse, or ex-spouse's current spouse may receive. ..."
By Dana
Anspach Updated August 17, 2018 When a spouse dies, their Social Security benefits may
become available to their current or former marital partner, depending on certain
circumstances. A Social
Security spouse benefit is called a "spousal benefit" and is available to:
Current spouses
Widowed spouses
Ex-spouses
Before applying for spousal benefits, you should understand how your spouse's benefit may
be affected if you take your Social Security
benefits early, and what happens upon the death of a spouse. Eligibility for a Spousal
Benefit Current spouses and ex-spouses (if you were married for over 10 years and did not
remarry prior to age 60) both have eligibility for the spousal benefit. You must be age 62 to
file for or receive a spousal benefit. You are not eligible to receive a spousal benefit until
your spouse files for their own benefit first. Different rules apply
to ex-spouses . You can receive a spousal benefit based on an ex-spouse's record
even if your ex-partner has not yet filed for his or her own benefits, but your ex must be age
62 or older. Note: Taking a spousal benefit does not reduce or change the amount your
current spouse, ex-spouse, or ex-spouse's current spouse may receive.How Much You
Get As a spouse, you can claim a Social Security benefit based on your own earnings record,
or you can collect a spousal benefit that will provide you 50 percent of the amount of your
spouse's Social Security benefit as calculated at their full retirement age (FRA). Check the
Social Security website to determine your FRA, as it depends on your year of birth. If you file
before you reach your own FRA, your spousal benefit will be reduced because you are
filing early. You are automatically entitled to receive either a benefit based on your own
earnings or a spousal benefit based on your spouse's or ex-spouse's earnings. Social Security
calculates and pays the higher amount. If you were born on or before January 1, 1954, after you
reach FRA, you can choose to receive only the spousal benefit by filing a restricted
application. By doing this you delay receiving your own retirement benefits based on your
earnings record, until a later date. For example, at age 70 you could switch from receiving a
spousal benefit to receiving your own potentially higher benefit amount. Due to recent
Social
Security laws that went into effect Nov. 2, 2015, if you were born on or after Jan. 2,
1954, you will not be able to restrict your application and only receive spousal benefits. For
anyone born on or after Jan. 2, 1954, when you file you will automatically be deemed to be
filing for all benefits for which you are eligible.
"... If you have reached your full retirement age (and turned 62 before January 2, 2016), you may also elect to receive spousal benefits and delay taking your benefits, allowing your own delayed retirement credits to accrue, and switch to your own benefit at a later date. ..."
If you could receive more from Social Security based on your own earnings record than
through the spousal benefit, the Social Security Administration will automatically provide you
with the larger benefit.
If you have reached your full retirement age (and turned 62 before January 2, 2016), you may
also elect to receive spousal benefits and delay taking your benefits, allowing your own
delayed retirement credits to accrue, and switch to your own benefit at a later date.
However, you cannot elect to receive spousal benefits below your retirement age and later
switch to your own benefits.
Individuals who turn 62 on or after January 2, 2016, will not be
able to choose to take spousal benefits at their full retirement age.
However, spousal benefits should still be taken into consideration when planning your own
retirement strategy.
For example, let's say you and your spouse are both 66 and are still working, so you are
considering letting your Social Security benefit grow for another few years. However, if your
spouse anticipates collecting a spousal benefit on your work record, you might be better off
filing at your full retirement age instead of waiting.
As I mentioned earlier, there are no delayed retirement credits for spousal benefits. And
one of the requirements for collecting a spousal benefit is that the primary worker must be
collecting his or her own retirement benefit. Therefore, it rarely makes financial sense to
delay Social Security beyond your spouse's retirement age, if they expect a spousal
benefit.
This is just one example of how a spousal benefit can affect your overall retirement
strategy. The bottom line is that Social Security spousal benefits will affect the retirement
income of millions of American workers, so it's important to know what they are and how they
work.
The $16,728 Social Security bonus most retirees completely overlook
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Many couples can significantly enhance their lifetime Social Security earnings by having one
of the pair claim spousal benefits at 66 years and delay personal benefits until 70 years of
age.
This claiming strategy, which we call free spousal benefits , has
been discussed here
and elsewhere as one of the best ways to avoid the otherwise inevitable trade-off between
getting money sooner (early claiming) and a larger benefit later (delayed claiming).
Having drunk the free-spousal-benefit pool-aid, an inquisitive client asked if the claiming
strategy would work in the reverse. Instead of claiming spousal benefits first and then
switching to personal benefits later, Karen wanted to know if she should claim her modest
Social Security retirement benefits early, say at 62 years of age, and then switch to claiming
her husband's larger spousal benefits later on. On its face, her idea seems to make sense.
However, let's look at how this actually works for Karen and her husband Burt. They are both
62 and their full retirement age is 66. Karen's full retirement benefit is $400 a month and
Burt's is $2,000. Karen's maximum spousal benefit is $1,000 at 66 (that is half of Burt's age
66 retirement benefits). Burt plans to file for retirement benefits at 66, at which point Karen
will be eligible to claim spousal benefits. Karen knows that she can claim retirement benefits
early at age 62 and get $300/month (75% of the $400 she could get at her full retirement age).
She also believes that at 66 she can switch to her spousal benefits and get $1,000.
On this last point Karen is wrong. When getting supplemental spousal benefits at 66, her
full retirement age, her benefit will be $900, not $1,000.
The reasons for this are very convoluted. (A more complete description of the issues can be
found at socialsecuritychoices.com/blog/?p=391 .)
While Karen was hopeful that the reduction in benefits from early claiming will be temporary,
confined to benefits during her 62nd to 66th years of age, unfortunately this is not the
case.
While claiming at 62 will provide Karen with income sooner, there is a cost. First, claiming
at 62 means that she will receive only 75% of her retirement benefit. Secondly, the total
benefit she will receive after getting the spousal supplement will be smaller than it would
have been if she had waited until full retirement age to claim her retirement benefits. If she
opts for this strategy, she will receive this smaller benefit for the rest of her life.
Approach the strategy of taking your own retirement benefits now and a supplemental spousal
benefit later with caution. The rules here are especially complicated and Karen's example may
not apply in your case.
It would be wise to consult an expert before pursuing such a strategy. The long-term benefit
of claiming early might be lower than you expect.
That post led to an outpouring of deeply lived personal experience, of almost
French complexity, extolling the virtues of eating particular food types in
particular combinations at particular times, and not paying too much attention
to calories. Fine. If you wish to be befuddled, that is your perfect right.
So, with some trepidation, here is a summary of the current state of knowledge
regarding intelligence and health. Indeed, it is my summary of a summary paper.
A pointless redundancy, you may say, but I know you are busy, and I would not
like to interrupt your lunch break.
Intelligent people lead healthier lives, and that is not just because they
intelligently make healthy decisions, but also, it would appear, because they
are inherently healthier. Spooky.
What genome-wide association studies reveal about the association between
intelligence and physical health, illness, and mortality
Ian JDeary 1 Sarah EHarris 12 W DavidHill 1
1 Centre for Cognitive Ageing and Cognitive Epidemiology, Department of Psychology,
University of Edinburgh, 7 George Square, Edinburgh EH8 9JZ, United Kingdom
2Medical Genetics Section, Centre for Genomic & Experimental Medicine, MRC Institute
of Genetics & Molecular Medicine, University of Edinburgh, Western General Hospital,
Edinburgh EH4 2XU, United Kingdom
The associations between higher intelligence test scores from early life
and later good health, fewer illnesses, and longer life are recent discoveries.
Researchers are mapping the extent of these associations and trying to understanding
them. Part of the intelligence-health association has genetic origins. Recent
advances in molecular genetic technology and statistical analyses have revealed
that: intelligence and many health outcomes are highly polygenic; and that
modest but widespread genetic correlations exist between intelligence and
health, illness and mortality. Causal accounts of intelligence-health associations
are still poorly understood. The contribution of education and socio-economic
status -- both of which are partly genetic in origin -- to the intelligence-health
associations are being explored.
Until recently, an article on DNA-variant commonalities between intelligence
and health would have been science fiction. Thirty years ago, we did not
know that intelligence test scores were a predictor of mortality. Fifteen
years ago, there were no genome-wide association studies. It was less than
five years ago that the first molecular genetic correlations were performed
between intelligence and health outcomes. These former blanks have been
filled in; however, the fast progress and accumulation of findings in the
field of genetic cognitive epidemiology have raised more questions. Individual
differences in intelligence, as tested by psychometric tests, are quite
stable from later childhood through adulthood to older age. The diverse
cognitive test scores that are used to test mental capabilities form a multi-level
hierarchy; about 40% or more of the overall variance is captured by a general
cognitive factor with which all tests are correlated, and smaller amounts
of variance are found in more specific cognitive domains (reasoning, memory,
speed, verbal, and so forth). Twin, family and adoption studies indicated
that there was moderate to high heritability of general cognitive ability
in adulthood (from about 50–70%), with a lower heritability in childhood[4].
It has long been known that intelligence is a predictor of educational attainments
and occupational position and success
In addition to mortality, intelligence test scores are associated with
lower risk of many morbidities, such as cardiovascular disease, cerebrovascular
disease, hypertension, cancers such as lung cancer, stroke, and many others,
as obtained by self-report and objective assessment. Higher intelligence
in youth is associated at age 24 with fewer hospital admissions, lower general
medical practitioner costs, lower hospital costs, and less use of medical
services, and intelligence appeared to account for the associations between
education and such health outcomes. Higher intelligence is related to a
higher likelihood of engaging in healthier behaviours, such as not smoking,
quitting smoking, not binge drinking, having a more normal body mass index
and avoiding obesity, taking more exercise, and eating a healthier diet.
All this work launched a new field: cognitive epidemiology. When studying
health, factor in intelligence. If you read any research about a health problem,
like for example obesity, always ask yourself the question: how much of this
problem is associated with intelligence? Do they have early childhood data on
ability and health? Without that, there is probable confounding.
The associations which are found between health and intelligence could be
due to a direct genetic pathway shared by intelligence and health, and/or by
better, more educated and wealthy intelligence choices.
Genome-wide association studies transformed the field. Box 1 summarises all
the different statistical methods. This is a very good guide to the field. The
main one is GWAS, which finds regions of the genome which are correlated with
the trait in question and statistically significant at a P-value of <5 × 10−8
to control for the multiple comparison being made.
Here are all the correlations between the genetic code and health.
Table 1 here
Another part of understanding the genetic contribution to intelligence
health correlations concerns other predictors of health inequalities, and
intelligence's correlations with them. Intelligence is related to education
and socio-economic status (SES), and those were known to be related to health
inequalities before intelligence was known to have health associations.
Although education and SES are principally thought of as social-environmental
variables, both have been found to be partly heritable, by oth twin
based and molecular genetic studies, both have high genetic correlations
with intelligence, Mendelian Randomisation results show bidirectional genetic
effects between intelligence and education, and both have genetic correlations
with health outcomes
What does all this mean? It may mean that the underlying causes of health,
happiness, morbidity and mortality are unequally distributed, and favour some
people more than others. Evolution does not have to conform to our imaginings
or our notions of fairness. If genetics is a significant contributor within
a genetic group, it is plausible that it contributes to between group variance.
Perhaps the Japanese live longer because they are Japanese. This remains to
be proved, but is worth testing. If we ever achieve the noble ambition of creating
healthy environments all over the inhabited world we may yet have a residuum
of health differences due to purely genetic causes.
Meanwhile, you may be wondering what is the intelligent thing to do about
your health. Don't smoke, don't get fat, and don't read too many health warnings.
Dean
Baker at Beat-the-Press has pointed out (sorry, not able to link to it) that Associated Press
put out a tweet that presents an essentially hysterical story about future prospects for Social
Security following the recent release of the Trustees. This report says that as of 2026
Medicare and as of 2034 Social Security will face a "shortfall." However, the AP tweeted that
what they face is "insolvency." Needless to say, "insolvency" is much more serious than
"shortfall" and simply feeds the overblown hysteria that so many think about these programs,
feeding political pressures to mess with them.
The new report provides the latest update on what would happen if the forecast happens and
nothing is done. Given that the projection is that Social Security benefits are set to increase
by about 20% by 2034, if somehow nothing were done and benefits were set to be reduced so that
they could be paid by expected tax revenues, the benefit would be cut back by about that amount
to about what they are now in real terms. In short, this is not the hysterical crisis AP
suggested or that so many think is out there. We have seen this nonsense before.
Of course, Dean accurately points out that by law the benefits must be paid. This may also
be a time to remind everybody that the US is really in much better shape demographically in
terms of life expectancies, retirement ages, and expected population growth rates than most
other high income nations, with such cases as Japan and Germany in much worse shape than the
US. However, all these nations are making their public old age pension payments. In the case of
Germany the payments are higher than in the US, but the payments are being made, and its
economy is humming along very well. There simply is not basis for any of this hysteria in the
US regarding the future of Social Security.
"... "The main difficulty with choosing an investment adviser is that by the time you know enough to choose a good one, you probably know enough to do your financial planning and asset management on your own." ..."
There is no substitute to self-education. Those unwilling to learn are destined to repeat
these same mistakes. The financial-advice industry is too rife with conflicts of
interest for you to enter without equipping yourself with knowledge.
Maybe the best summation is by Dr. James M. Dahle in his book "
The White Coat Investor ." He says: "The main difficulty with choosing an investment
adviser is that by the time you know enough to choose a good one, you probably know enough to
do your financial planning and asset management on your own."
You can find
extensive information here to help you become a DIY investor. There are plenty of others
dedicated to demystifying the process of investing as well.
Take time and educate yourself. Then, if you still think you still need help with your
investments and financial planning, go out armed with knowledge and find a financial adviser
that fits your needs.
Chris Mamula used principles of traditional retirement planning, combined with
creative lifestyle design, to retire from a career as a physical therapist at age 41. This was
first published on the blog site Can I
Retire Yet?
"... The maximum monthly social security benefit is $3,538. caught my eye, though. ..."
"... The system was designed with psychological, political intent. The idea was that the program would be impossible for conservatives to eliminate because all wage earners would feel entitled to pensions that they themselves had paid for (though strictly speaking it is a pure tax and your taxes are paid to current retirees). ..."
"... I was in Hawaii recently and watching that was .well .interesting. You walk around and see extraordinary opulence, often gluttony really, and at the same time all those homeless. Yes, I do know the story about them, but, still Plenty of those, apparently, vets. ..."
Social Security benefits are based on your lifetime contributions and what age you choose
to begin taking them. So a higher earner will get more benefits (up to the cap, around $106k
if memory serves) than a modest earner–simply because he paid more into the system.
You can elect to take benefits as early as 62, or as later as 70.5.
The system was designed with psychological, political intent. The idea was that the
program would be impossible for conservatives to eliminate because all wage earners would
feel entitled to pensions that they themselves had paid for (though strictly speaking it is a
pure tax and your taxes are paid to current retirees).
In act early economists recommend the system be funded out of general revenues and said
there was no need for a payroll tax. FDR said he wanted people to take ownership in the
system so no one could ever destroy the system.
It is remarkably effective. It's remarkable effective and neither Ronald Reagan nor George
W Bush lasted more than a few weeks when they tried to roll back the system.
The only wins conservatives have scored against it are taxing some of the benefits (began
in the 80s) and making some changes to cost-of-living inflation adjustments in the 90s. It's
called the third rail of politics here and every old person is outraged by any suggestion
that benefits should be reduced. There is however a lot of propaganda about the alleged
future unaffordability of the system, and it now strikes me that there is an elite consensus
in favor of modifying the system to reduce benefits.
It's "known" that the US "social safety net" is the worst in West.
I mean, with that amount of available money provided by the State , how do we see all
that visible homelessness and poverty in US? I know that drugs and alcohol, with general
stupidity, can do that.
I guess my question is:
A family of four, breadwinner losing his/her job (offshoring, outsourcing, downsizing)
getting on that "net", renting would they lose their accommodation and effectively have
problem with food, shelter and medical help, while on that net while finding another job?
And, how long can they be on that net?
I know I can read about that a lot, but condensed info from a person on the ground there
would be much more helpful.
As a general rule of thumb the safety net is very weak for those in the middle class,
whereas in many other Western countries there are universal social insurance systems intended
to cover everyone regardless of income. Healthcare is an obvious one across the West, and
much ink has been spilled about the outrageous cost of college in America. The government's
safety net here is simply to allow young folks to go into unlimited state-guaranteed
debt.
Something of a stealth middle class safety net is provided by the corporate sector in the
form of health insurance, pensions, maternity leave, etc. This has been reduced since the 80s
but still exist, and government tax policy encourages it. As an example if you leave your
employer you have the right to keep your employer-sponsored health insurance through
something called COBRA.
A number of programs also exist to provide tax-deferred investment accounts for various
social purposes. These are available for retirement, healthcare, and higher education. The
programs cost the government nothing in expenditures, but reduce tax revenue (probably by
less than the public benefit however).
There is much more of a safety net for the poorer classes, but as a general rule of thumb
many of these programs run through women since they're dependent on the number of children
you have (and, of course, household income). If you're a single man or your baby mamma
doesn't want you around anymore, tough luck.
Programs that exist for the poor include:
Additionally some of the states have additional welfare programs.
Actual cash transfers to the poor have largely been abolished since the 90s, though the
Obama Administration revived them in stealth form by greatly expanding disability
payments.
As far as the homeless go, if you see them in the winter in cold cities they're probably
mentally ill.
If they're somewhere warm that's still possible, though then there are other factors such
as a lifestyle choice, temporarily down on luck, single man unable to find any work or
charity, etc.
Type of beneficiary
Beneficiaries
Total monthly benefits (millions of dollars)
Average monthly benefit (dollars)
Number (thousands)
Percent
Total
61,984
100.0
79,988
1,290.46 Average Benefit
The table format does not paste correctly. See the table here:
Comprehensive and informative.
Didn't know a couple of things.
there is an elite consensus in favor of modifying the system to reduce benefits.
Of course. It's the in their nature.
As a general rule of thumb the safety net is very weak for those in the middle class,
whereas in many other Western countries there are universal social insurance systems
intended to cover everyone regardless of income.
Interesting re former and true around here re later. The level of "assistance" depends on
assessed needs of a person/family, not on their previous income.
There is much more of a safety net for the poorer classes, but as a general rule of
thumb many of these programs run through women since they're dependent on the number of
children you have (and, of course, household income). If you're a single man or your baby
mamma doesn't want you around anymore, tough luck.
And
single man unable to find any work or charity, etc.
Interesting too. I will sound simplistic and naive, but it's really hard to reconcile those extremes in
US.
I mean, I have no problem with capable, talented, or just ruthless and greedy, or just lucky,
having all those zillions. Good on them.
But, at the same time, in the same place, people who are going through the trash cans.
Yes, I've heard all the explanations, all sound very reasonable, some don't even understand
(stupid me), but , still
I was in Hawaii recently and watching that was .well .interesting.
You walk around and see extraordinary opulence, often gluttony really, and at the same time
all those homeless. Yes, I do know the story about them, but, still
Plenty of those, apparently, vets.
I haven't got the slightest how to fix that, or even is it possible, but, still
..something simply does not compute.
Still, a couple of things are eluding me.
I'll use an example:
A man, single, late 20s, professional, worked in, say, corporate environment, got
"restructured/downsized/outsourced". Salary at the time of being "let go" around 80K. Worked
in similar capacity for, say, 6 years. Renting, of course. No savings (kid likes to
travel).
So, where I am, well, he does get an "assistance" which will pay for a rent, 3 decent meals
per day and he'll have a (state, not private, of course), medical help. Especially in
emergencies. And this can last for quite a while, actually.
Bottom line, no need to be homeless, no need to be hungry, and he'll get the basic and
emergency medical help.
All the rest, well, that's precisely the initiative to get a job, and do it fast. I mean, not
much fun living like that. But, at the same time, no need to sleep rough, beg and go through
trash cans.
I will sound simplistic and naive, but it's really hard to reconcile those extremes in
US.
I mean, I have no problem with capable, talented, or just ruthless and greedy, or just
lucky, having all those zillions. Good on them.
But, at the same time, in the same place, people who are going through the trash cans.
Yes, I've heard all the explanations, all sound very reasonable, some don't even understand
(stupid me), but , still
It's a political choice, pure and simple. And some of the political choices are unrelated
to the welfare state–some municipalities have statutes against vagrancy and enforce
them. Others don't.
I was in Hawaii recently and watching that was .well .interesting.
You walk around and see extraordinary opulence, often gluttony really, and at the same time
all those homeless. Yes, I do know the story about them, but, still
Plenty of those, apparently, vets.
Hawaii, for obvious reasons, is a place with a lot of voluntary homeless. The state has
been trying to get rid of them by buying them tickets to the mainland.
Many other voluntary homeless are found in California, Colorado, and Las Vegas. The
California ones may be quasi-involuntary as it seems many arrived from the Midwest to get
into paid rehab programs, then after running out of money moved into tent cities. But they
weren't homeless in the Midwest and panhandling enough for a Greyhound bus ticket is not hard
(though embarrassing, or at least it would be for me).
Bear in mind that Americans also donate a lot to charity, both in absolute and per capita
terms. So almost every community (besides rich-only suburbs) has a food bank which people
donate to, even if there's no social need for it. My secretary for instance is a very kind
person and as such is always trying to organize canned food drives for the food bank. The
many users of the food bank are what Victorians would call the undeserving poor who are
already on the federal SNAP program. The food bank lets them increase their purchases of
marketable commodities (such as soda), which can then be traded for supplies not covered by
the SNAP program (alcohol, tobacco, and illegal drugs).
Note that my community does not have homeless people as it's a rural small town.
Lots of churches, including here, will also do things such as offer free Thanksgiving and
Christmas dinners to the indigent and purchase toys for their children.
Larger cities have a mix of public and private homeless shelters. There generally isn't
enough capacity for all homeless, but that works as many homeless don't like the rules these
shelters impose.
So.. the same guy in US, how would that look like?
First, you are dealing with 50 different systems. Only Social Security is uniform
throughout the country.
As a general rule an able-bodied male would receive no permanent assistance in a state
like mine (Alabama).
He could get unemployment compensation for 26 weeks provided he complied with the job
search rules.
Other than pregnant women, adults in Alabama do not receive Medicare so if he was unable
to pay his Cobra insurance premiums he would have no insurance. There are public health
clinics but the availability varies by county.
Many that are under 62 try to get approved for Social Security Disability. It is a bit of
a racket. The rate goes up during times of high unemployment and is trending higher even
though most jobs are less physically demanding. "Mental" disability is one of the best
tickets available. This is the route most druggies take.
Playing it straight is a real disadvantage. As a general rule people lose assistance as
they earn more. As was pointed out, the ones who do not work and have no "income," wink,
wink, do best with regard to the available assistance.
Many of the "homeless" have mental, alcohol or drug problems (or all three) plus the
charitable organizations devoted to providing services for the homeless are extensive. Around
the cities free meals are widely available.
"... Canada is as neoliberal as almost anywhere else in the Anglo developed world. You can think of us as being just like the USA or UK, but about a decade behind in the adoption of dumb and cruel ideas. In the Anglo neoliberal family, Canada is the slightly retarded little sibling. ..."
"... Ireland allows you to claim citizenship if you have an Irish grandparent (with some caveats). Many US and Canadians use this to work/settle in the EU. A Chicago friend who was working in London and HK got her Irish passport without ever bothering to visit Ireland. ..."
"... Yves, Sweden might take you, if you can take the winters the requirements for self-employed residence permits aren't too harsh. So far they've managed to not overdo it on neoliberalism, although there are forces that sure try to make it happen. ..."
"... I also live near San Miguel de Allende in a small, agricultural Mexican community perched on the side of an extinct volcano. I pretty much avoid the expat scene, shop in the mercados, hang with Mexican friends and am thoroughly enjoying soaking in this wonderful way of life. I made this move at age 70. ..."
"... When I'm in Mexico the feeling is of constantly hitting my head against a glass ceiling and biting my tongue. ..."
"... But for the love of God, stay on the beaten tourist path (SMA-Oaxaca City-Cholula etc.). Don't go into Guerrero except maybe Taxco. I was just in Chilpancingo for a professional event, taking every precaution, and the stories you hear first hand are horrifying. The security situation in Mexico is deteriorating badly. ..."
"... Even states like Puebla that used to be safe are seeing kidnappings and other extreme crime. If you speak Spanish, the issue of security it is utterly unavoidable, it creeps into many conversations and dominates the local news. ..."
"... 'According to Pew Charitable Trusts, only 13 percent of Baby Boomers still have [defined benefit pensions].' ..."
"... This 13 percent remnant overwhelmingly consists of government employees, whose defined benefit pensions are uniformly underfunded (and even understated as to HOW underfunded they are). ..."
"... I had a work colleague from Sweden. She had been a school teacher there and came to the U.S. to sell financial products, make a lot of money and avoid Swedish taxes. I asked her if she were going to become a U.S. citizen. She looked at me like I was crazy, laughed and said, "Hell no, I would never wish to be old in America." ..."
"... From my perch, if any Americans want to make the move, I would say over the next decade before that door closes. The regulations are already tightening up such as making sure that you owe no taxes or the like before you leave. More Americans are now renouncing their citizenship as America still want to tax them even when they have moved away. After this decade, I regret to say, that America will be no country for old people. ..."
"... And speaking of inequality, most countries have far worse inequality than the US and it is savage and painful to watch when your security guard finishes a 12 hour shift and then starts another 12 hour shift across the street. ..."
"... By the way don't get me started on the cost of healthcare. It's cheap until you run into a major complication. I had surgery in Peru for something minor and the total bill was over $5000 USD. Imagine if it were heart surgery. My expat insurance paid it but you can't get that if you're over a certain age. ..."
Canada is as neoliberal as almost anywhere else in the Anglo developed world. You can think of us as being just like the
USA or UK, but about a decade behind in the adoption of dumb and cruel ideas. In the Anglo neoliberal family, Canada is the slightly
retarded little sibling.
The cost of living is high in Canadian cities. In Vancouver and Toronto, the cost of living has soared out of any sort of proportion
to employment incomes. Affordable rental housing is often infested with bedbugs or other vermin (Vancouver alleyways are strewn
with stained mattresses and other abandoned furniture). Beggars are seen everywhere, while the Teslas and Lexuses roll past. Not
a day goes by that I don't see elderly persons climbing in and out of dumpsters. Permanent shantytowns have arisen on the outskirts.
We got almost the same opiates problem as the USA.
The province of Quebec used to be more social-democratic in orientation than other parts of Canada. But even the Quebecois
seem to have caught the mental and spiritual diseases of the globalist bourgeoisie. I recently spent a month in Montreal, and
was aghast to see the staircases of downtown Metro stations rendered almost impassable by the large numbers of homeless men and
women trying to sleep there.
My younger relatives look at me very sceptically, when I tell them that as late as 1990, a beggar was an unusual sight in Vancouver.
Of course, people born since that time would think that what you see today is normal .
We were at a commercial hot springs somewhere in France about 15 years ago, and it cost around $5 to go in, and before entering,
there was a doctor and nurse that checked your blood pressure, etc., for no extra charge. It was so over the top in terms of anything
compared to here, in a delightful way.
In France, doctors make a lot less than in the US, particularly general practitioners. The GP doctors make on the order of
what a senior manager or engineer makes.
There are good reasons for that (among them free education for doctors and a totally different societal attitude towards healthcare,
based on SOLIDARITY – whose outcome is a more reasonable cost and coverage. Yes, they also do use that word a lot in general public
discourse, in many European countries. Have you heard the word SOLIDARITY in the US in public discourse, ever?).
A good summary of that and meaningful comparisons with other nations' healthcare systems is provided in the book 'The Healing
of America: A Global Quest for Better, Cheaper, and Fairer Health Care' by T. R. Reid.
Don't worry, Marcon and Merkel are accelerating the crapification of France and the wider EU. The next generation will get
to experience the joys of economic and health insecurity in abundance.
the main project now is to gut the public pensions. the PIIGS countries have already had to slash theirs, so the plan now is
to bring the rest of Europe to Canadian levels (retirement age at 67 or higher with a minimal state component).
By the way, it is not widely known for example that the retirement age in Russia is 60. And, judging by the tens of thousands
of healthy and active Russian retirees (these are teachers and professional workers, "middle class" people, not oligarchs – those
go to Monaco and Switzerland of course) living on the Black Sea coast of Bulgaria (mild winters, culturally and geographically
close, inexpensive by developed world standards, gateway to the EU), their pensions cannot be that bad.
And no, they don't look like they are about to die at 65.
So, take that, dear future US retirees (myself in that number).
Wikipedia says the retirement age in Russia is 60 for men, and 55 for women !!! My personal family practice physician is a
Russian immigrant and pre-GFC she claimed, "Most Russian men die before 60. (Wikipedia now says 70.91) Next time I see her I may
ask her about Russian retirement, and life expectancy etc. Another topic is the prevailing attitude of Russian immigrants when
they came to America. They really expected to clean up! I'd be interested in what other NC readers think about this.
Certainly
I can imagine the distress of Russian immigrants who through a lot to move to the US only to find by age 60–55 for women–they
might have been better off being back in Russia.
Indeed, the Black Sea coast is overran by Russkies, younger ones as well. The countryside is where the Brits move to to feel
like country squires on the cheap. And Americans are concentrated in Sofia, doing the heavy lifting of pretending to be civilising
the natives while securing staging areas for the future war against Russia. It's all one big happy international family :) Can't
wait to move back there permanently in 30 months.
They should allow Medicare to be used outside the US, especially for low cost countries in the Third World. They are cheaper
and just as good as the US for many medical services – maybe not for transplants but for heart bypasses, dialysis, etc., they
are ok.
correct: medicare cannot be used outside the u.s.
we are retirees living abroad much of the year. our secondary insurance (which we are lucky enough to have from former teaching
job) becomes our primary insurance. we submit bills to them and they pay (reimburse) fairly well.
we use local doctors and clinics at much lower rates than in the u.s.
emergency medical care in europe is nearly always free or all but free.
We've been to Ecuador twice in the last 4 years exploring retirement there – and decided against it. For a combination of reasons.
1. In spite of what gets touted in the retirement media, for the most part Ecuador is a third world country with everything
that entails.
2. The much ballyhood Cuenca is in an Andes plateau at 8,000 ft. elevation. Not a fan, and it's isolated, if you want to get
out of Cuenca there's a lot of nowhere to go. Cuenca has been haggling with airlines to get some service providers since TAME
cancelled its routes, that's been a constant and ongoing problem.
3. I liked Quito, It's at 9,000 ft. I really couldn't take it.
4. The coast is a very narrow strip of land at the bottom of the mountains, and outside of a couple of areas it's a backwater.
Little infrastructure, few services, dirt poor. The north coast of Ecuador (we call it the mosquito zone) shook down in a 7.8
earthquake in 2016 that wrecked everything from Manta to the Colombian border.
5. Ecuador completely overhauled its visa laws in February of this year making it much more difficult to get any kind of permanent
residency permit, and requiring all visa applicants to provide proof of personal health insurance to qualify for a visa.
6. Ecuador isn't cheap. They levy enormous taxes on almost everything that's imported, which is just about everything but food.
Impossible to get packages and mail in or out.
'Studies' have shown that the majority of pensioners who retire there, leave and go back home or somewhere else within 5 years.
American individualism is a recent myth. I remember how my grandmother who grew up in rural Montana a century ago could rattle
off the names of various second cousins, to say nothing of all the family stories. Life then was rugged but it was not individualistic.
Perhaps one can acquire new pals at the age of 70, as as not to be a lonely old man/woman.
Or are you just a Yankee with money?
And hopefully the new country is so subdued by the super power that there is no need to liberate it. For example, Libya, a
few years ago, would not have been a good choice, in this respect.
If you choose traditional medicare instead of a medicare advantage plan , I don't understand how it would narrow your network.
Traditional medicare is universal in the US and accepted by most providers. I've been on traditional medicare for16 years and
haven't had a provider that doesn't accept traditional medicare.
I wonder if that is regional. Where I live(south), I never see a problem with that.
My PCP when I asked him as I approached 65, replied, that of course he accepted medicare, that there was little difference
between it and other insurance, and that folks who did not accept medicare were immoral in his view.
I think out here in flyover it is less common for doctors to not take Medicare patients. My elderly father moved out here 1.5
years ago and has made considerable use of the excellent resources of the UW health system. His secondary private insurance covers
very little since he is out-of-network but Medicare has covered virtually everything and no expert has refused to see him (urology,
throat/swallowing, dementia, macular degeneration, etc.) due to being Medicare insured. I am pretty sure the entire Mayo Clinic
operation takes Medicare patients also.
It may be that independent docs are refusing Medicare patients but there are fewer and fewer of those out here.
A lot of doctors do not accept Medicare. My current MD does not. I think that is even more true of specialists.
And I am not in a network. I have an old-fashioned indemnity plan. I can see any doctor, anywhere in the world. I submitted
claims for 2 years from Australia, and have also submitted claims from the UK and Thailand.
it happens around this southern city . scary stuff, my first world problems may turn into third world problems. trying to imagine
being 70, living in a van, queing up for a chance at a valuable temp gig in an amazon warehouse.
I would have thought so, too. Certainly the media I have read has lead me to believe that many doctors don't accept Medicare.
I wondered what the percentages were so I did a search. Surprising to me. More nuance than one might think in the results -- seems
you can "accept" at finer-grained levels than one might assume in a Federal program. Here's what seems to be a reasonably objective
and recent appraisal: http://www.factcheck.org/2017/03/medicaids-doctor-participation-rates/
Anecdotal reply from the few doctors I have seen: They state they accept Medicare because it pays them quickly and there is
less paperwork than with most insurance companies, which results in less office overhead. Even with the lower payments from Medicare
for many procedures, the doctors do OK when the big picture is examined.
One of my docs accepts no insurance. But he will file the Medicare claim. I pay him and Medicare sends me a check. It's a little
unwieldy but he's a good doc (in my completely unprofessional opinion) so I put up with it. Others don't and go to other docs.
Physicians in private practice often do not accept Medicare or Medicaid do to billing issues. These are usually older doctors
with established practices. Younger physicians often end up working as employees of large chain hospitals to stay solvent, and
they will accept any form of payment.
I now live in Portugal. The quality of life is high, and cost of living quite low (though Lisbon has become pricey in terms
of property).
A few months ago I sustained a cut that wasn't healing well, and decided to visit a private walk-in clinic. It was clean, modern,
and there was virtually no wait. The nurse took care of me, as no doctor was required. She spent about twenty minutes cleaning
and dressing the wound, and gave me some extra waterproof bandages to take home.
The cost? Six Euros. You read that correctly: Six Euros.
To the issue of cost of living, I was in Portugal last week and had a myocardial infarction upon seeing petrol prices at 1.55€/litre.
Good thing is not only are there excellent public hospitals for such MIs, but the extremely relaxed recreational pharmaceuticals
policy makes for good prevention as well.
Where I live a liter is about .48 euro if I have my conversion right. So retirees here do catch some breaks. Also there's no
VAT although we do of course have sales tax. And finally many US retirees fully own their homes whereas in, say, Germany almost
everybody rents. Indeed I'd say that so far the US elderly have it easy compared to the millenials who are the ones really getting
screwed. Just reading an article the other day about the record number of millenials living with their parents or, undoubtedly,
their grandparents.
And finally I've read Nomadland and should be said that many of those older people wandering around the country do so by choice.
RVs are not cheap. A new one can cost as much as a house. Amazon prefers to hire these people for their work ethic and because
they bring their own housing with them which is handy for a temporary workforce. Amazon even tries to sugarcoat the exploitation
by making a kind of club out of it called CamperForce.
Home ownership in Germany is 52% and it is below 45% in Switzerland. It is 65-75% in almost all other rich countries including
the US. It is actually around 85% in Russia and 90% in Cuba although the amenities are not quite the same.
As a Swiss I can say that it does not pay to own your house outright. The way our taxes are structured you are cash ahead to
carry your mortgage in perpetuity. It is a nice gift for our banks.
Many 'Mericans say they own their home, but actually the bank (mortgage) owns the home. They're simply trying to improve their
equity (and freedom to paint it whatever color they please) in the home.
I've owned (completely mortgage free) several homes, and between crazy neighbors, time involved in upkeep, and property tax
the best hope is to sell them to a greater fool. (Price appreciation.) Spending over half of one's income on a home mortgage and
hoping the next generation will buy it when it's time to move on is more risky than many other "investments".
I was in Italy this year, in a remote part where you really needed a car to get around. The diesel prices were shocking, but
the small car efficiency actually balanced out the price. I don't think I spent any more per mile than I did in the US. For reference,
I drive a 4 cylinder Toyota which is not exactly a gas guzzler here.
My mom gave me her checkbook register from mid 1961-62 a few years ago, and for a family of 6, there was a total of $88 paid
to Dr. Evers, our family physician. My coming out party was $190.
The checks were mostly $6 and $7, with one $14 whopper.
I asked my mom if we had health insurance, and she told me that aside from a few that had Kaiser, nobody had health insurance
back in those days.
Health insurance was not as critical in those days. The low prices you quote for day to day purchases could also be found in
the healthcare of the day. Not the inflated prices we have now. Same with education. I recall seeing old tuition receipts from
my university that maxed out at a few hundred dollars per semester in the 1950's.
My dad's brother was a physician, an old-fashioned family doctor whose office was in his home and who made house calls. This
was in the 1940's and 50's. Many of his patients paid 'in kind;' although he lived in the city, people still had large gardens
or lived on outlying small farms, and in August and September especially, my aunt would routinely find boxes of fresh fruits and
veggies on their porch. She joked that she was kept busy canning and preserving for at least three months of the year.
Actually, there are some avenues available for some, depending on ancestry, but work is required.
My father was born in Europe, and, after three years and the help of an inexpensive lawyer, I was able to gain a second citizenship.
That, in turn, allowed me to live in Europe.
I believe that Ireland has fairly liberal rules along these lines, but it is worth checking into it no matter what foreign
country one's parents were born.
Won't even remotely work for me. I'm from old and undistinguished stock. All my grandparents were born in the US and three
of my four grandparents have gene pools that go back to before the Revolution (two English, one bizarrely Hungarian).
If you could speak Hungarian (which would be a feat ), you could apply for Hungarian passport by ancestry (assuming you can
track your Hungarian roots with sufficient documentation). That would open all of EU, and I think you might like Berlin
No, my Hungarian ancestors have supposedly been here over 200 years, plus my mother was terrified of both her parents, in particular
her Hungarian father, who was estranged from the rest of his family, and so she knows nothing about his ancestors. The claim was
they came to help fight in the Revolutionary War and stayed. That's likely family urban legend, but my mother is pretty sure his
parents were born here too.
Ireland allows you to claim citizenship
if you have an Irish grandparent (with some caveats). Many US and Canadians use this to work/settle in the EU. A Chicago friend
who was working in London and HK got her Irish passport without ever bothering to visit Ireland.
Easy enough within the EU of course – there are huge numbers of northern European retirees living on the Med and in Portugal.
But plenty of Britons are finding out to their horror they are very vulnerable to both Brexit and a weakening sterling.
I've not looked into the visa side of things, but some Asian countries target retirees as a source of investment in rural areas.
I don't know if it still does, but Taiwan used to market itself to Japanese retirees as a cheap place to move with your yen pensions.
There are a lot of retirement developments in Thailand and elsewhere, marketed on cheap property and good quality health systems.
They seem to aim mostly at Europeans and Japanese.
Mexico. I have friends (gay, married; a retired nurse and retired librarian), who moved there full-time 3 years ago after 30+
years in NYC, and nearly 15 years of periodic vacations all over Mexico, to consider possible locations. They moved to a medium-sized
city about 3 hours by bus from Mexico City, somewhat off the beaten path of the usual expat communities. Very affordable, and
permanent residency is not a problem. Mexico City is very affordable, very good subway system, and has lots of things to do if
you're retired and need to fill up a day. Over their years of visits, they built up a network of friends and connections, and
have found good local doctors and dentists. One is fluent in Spanish, the other not so much.
To me, another thing that makes the US horrible and expensive for older people (among other groups) is the virtual requirement
for a car. Outside of a few major metro areas you're basically screwed without one. Part of why I encourage my mother to move
back to Germany after my father passed away (even though she drives now and has a car) she can get basically anywhere in Europe
without needing to get behind the wheel.
Yves, Sweden might take you, if you can take the winters the requirements for self-employed residence permits aren't too harsh.
So far they've managed to not overdo it on neoliberalism, although there are forces that sure try to make it happen.
Thanks for the link. These bits from "Requirements for obtaining a residence permit as a self-employed" do seem a bit daunting,
though: "show that you have established customer contacts and/or a network in Sweden", and "show that the business' services or
goods are sold and/or produced in Sweden". This would be tough for us, since our main business now is fiber arts (weaving, etc.)
and farming, all very local things. I do some part-time programming but that's also quite local.
Fifteen years ago, I qualified for NZ immigration, just barely. Now I'm too old (their points system penalizes you on age).
Sad, really, since I spent a year in NZ as a child, went to school there, went on camping trips and adored the landscape, etc.
I still consider it my first home.
When Bush got appointed the second time in 2005 we made the move to Australia and boy are we glad we did.
The concerns about family and friends cited here are real but we have adjusted and Aussies are very easy and welcoming as new
friends.
We recently dropped our "private health coverage" which is essentially an American-style system that sits atop the existing
public system. So when my son recently had a non-serious health problem we were really astonished when, at 2 hours' notice, a
doctor showed up at our house to treat him. Bill? Zero. All of the health care we've received here has been top-notch.
Not mentioned in the article is that many countries, especially in Asia, are not ageist . Employers actually value and
respect the experience and wisdom older workers bring.
But my view is that the only hope is to hijack the politics of everything in the U.S., the richest country on Earth
has more than enough money to solve its woes. So pick a single issue, a simple one that everybody can understand, one that is
so destructive and hateful and wasteful that everybody can get behind it, and organize. Can I suggest Permanent War ? Maybe
mention the $21 trillion that went missing at the Pentagon in the last decade? Maybe help people understand that the
enemy (Osama, ISIS) is dead ? Show them a quick chart and ask them to pick which one they want to buy , an electronic
gun that can shoot Middle Eastern goat herders from space, or 25 new hospitals.
Stop the War. It's what worked in the 60's, and it can work again. A New Peace Dividend that can be spent on the things people
are crying out for like retirement and health care. Leave out all of the other divisive stuff like gender and race and abortions
and green energy and net neutrality. The party platform has one item on it: Stop The War. Peace, Bread, and Land.
Yes, the trick is getting to Canada and Quebec at my advanced age. I know the provinces have job categories where they are
seeking workers, otherwise my impression is it's by points, and I fail on that. The only way in might be if I got some sort of
teaching post at one of the unis for something where my background would add something they couldn't get locally.
I speak French. The spousal unit is learning. The cats picked it up quickly ;^) They are quite happy being "minous", rather
than kitties.
Actually in Montreal you can get by fine with English only in the West Island. I have anglophone colleagues who only speak English.
this is so true. 2 or more cars per household, and the ridiculous quantities of meat in their diet, are probably the two main
reasons why americans consume more than twice as much as the EU average.
I lived in Sweden for 6 months (as an EU citizen). There is indeed a lot going for it but there are a lot of issues too that
don't get media attention. As a Professor in Uppsala I was warned by a friendly local that "even if you were a Stockholm-based
immigrant to here you'd find it difficult to integrate". This was not due to any latent racism or anything like that – merely
that Swedes have quite an ingrained way of "putting down roots" (compared to, say, Denmark). So I was warned that socialising
means many many weeks of doing the coffee and cakes thing, then, if things go well, you may get invited out for a drink in a bar,
then again, if weeks of that work you may get an invite for a home visit.
It's tough – and I was someone who (unlike many anglos) was keen to learn the language so as to fit in better – though (of
course) Swedes typically have brilliant English you can't expect them all to speak it exclusively in a social context just to
accommodate you. So I witnessed Europeans (central, southern and western) tended not to integrate well and instead formed their
own groups. Furthermore Swedish healthcare, although overall cheap and good, does not do well on the "integrated care" front –
IIRC (don't have reference to hand) some "official" comparisons of industrialised countries bear this out and its ranking dropped
several places due to this issue.
It was incredibly difficult (even with employer sponsorship) to get Aussie permanent residency .but the "final hurdle" of citizenship
was a cinch (given that most of the "benefit" is accrued through PR, not citizenship) .I don't think any non-North American industrialised
country is unequivocally "better" – you decide what you want most and what you'll compromise on and take your choice. I'm probably
going to get citizenship of a 3rd country (Ireland – not cheap but I'm entitled to it via Irish mother and Irish paternal grandfather)
to hedge my bets if my company stays afloat but I have enough relatives there to know it has its own set of issues.
Agree on the integration part, but if you know this going in I think it's a bit more manageable (you learn not to take it personally,
that's just the way Swedes are, and it's definitely not universal). It also helps to join activity groups – they're into that
in a major way.
There are also large ex-pat communities in towns and cities of virtually any size. My circle of friends and acquaintances is
a Sesame Street-like cast of people from all over Europe, the Americas, Africa, and Asia who have all moved here to study and
work. Many of us speak Swedish with full professional fluency, hold dual-citizenship and regularly consume Swedish media but have
found other transplants to be among the most welcoming and have gravitated towards each other for that reason.
Oh, this is an entrepreneurial visa. That's; how I got into Oz but they shut that down. They typically require that you show sufficient net worth to fund a business and you need to generate a certain level of domestic
revenues and/or employment to stay.
The way "in Sweden" is tacked on at the end regarding where you make money makes it a little vague as to which part of the
and/or it applies to. I think they also do a reasonable job of looking at the whole case and would understand someone making a
living online or remotely. They just want you to pay tax here. If you haven't done the conversion already, 200,000 SEK is around
25,000 USD at today's rate, which I think is pretty modest from my vague knowledge of this type of visa in other parts of the
world.
But like I said, in my experience Migrationverket is quite polite, professional and even welcoming when you deal with them,
so it de worth contacting them if you're interested.
Aaw, that's really kind! And I am 1/4 Swedish if that at all helps, although my grandmother was born here (her father came
over and then had kids here after he got established).
I emailed one of our corporate attorneys today, he's been with the company since the early 1990s, and Outlook told me he resigned
on 12/8. I asked someone about it, and they said, yeah, he's moving to Sweden. I'm dying to find out why, and what he's going
to do.
It's the tax and treasury account compliance that stops many and causes more to renounce US citizenship combined with many
European banks refusing to do business with Americans that make expatriating very difficult. It's a feature and not a bug as Lambert
would say
FATCA has been a source of unending critical trouble for expatriates from the USA but also bureaucratic hassle for non-US citizens
who have strictly nothing to do with the USA.
I live 2 miles outside of San Miguel de Allende in the state of Guanajuato, Mexico. It's been voted the best tourist city in
the world by several magazines a little Paris. Settling here was tough, and ultimately I had to become functional in Spanish to
get the 13 year lease at $500/mo for a 4 bedroom 3 1/2 bath, needs work house, on 2 acres, since my landlord doesn't speak English.
But I live far and away better than I could in the US, on 1/3d to 1/2 of the cost. I am living in the only sustainable place of
my life pretty friendly, pretty clean, awfully nice a veritable garden of fireflies, butterflies, bird life, decent animal husbandry,
up against the mountains, much in nature reserve. There is excellent medical care at reasonable prices. I am 8 hours from the
US border if I have serious Medicare needs. Town offers wonderful food, luxuries, entertainment if I want to go in. Down here
we say, thank god people in the US are afraid and ignorant of Mexico. It keeps them away.
There is a lot of hand wringing in the Mexican press about how American and Canadian retirees have gentrified and de-Mexicanized
San Miguel de Allende. If the shit ever hits the fan, at the very least I would want my immigration papers in order, but really
I just would rather not be there.
Plus, quality major healthcare (the kind that a 65+ person may need suddenly at any time) is not cheap in Mexico and the Mexican
government has made it much harder for new arrivals to get onto the Institute of Medicine and Social Security.
When you add in the very high levels of xenophobia in Mexico (just look at how the Central Americans and even Mexican Americans
are treated) and deteriorating security situation in more and more states it is a risky proposition. I would not want my mom to
move there.
We take their low wage huddled masses and they get our gentry who benefited from paying low wages. It's win win! Or a stupid
circle jerk. Not sure which.
Unfortunately given escalating healthcare costs in Mexico, plus the same xenophobia as ever, they're much less keen on taking
our huddled masses. Plus they have a big problem now with American retirees who are trying to live on less than $1000 a month
in US social security, well under the approx $2500 month required to get a retiree visa, who can no longer return to the US for
healthcare or family visits because they can't even afford the bus ticket and might not be let back into Mexico because of their
massive immigration violations.
I think that's part of the problem. America is more and more reluctant to take in the huddled Mexican masses which means that
these huddled Mexican masses may begrudge more and more the privileged gringos who make the trip down south.
I also live near San Miguel de Allende in a small, agricultural Mexican community perched on the side of an extinct volcano.
I pretty much avoid the expat scene, shop in the mercados, hang with Mexican friends and am thoroughly enjoying soaking in this
wonderful way of life. I made this move at age 70.
Certainly, this required a major adjustment. It's not like moving from Boston to Tucson. It's more like moving to a different
universe. But if a person is open, hangs loose and finds someone to help work through the ins and outs of the immigration process,
it's not all that difficult.
My health insurance is free because of my age and health care here puts the emphasis on *care*. An acquaintance had a knee
replacement and the total out-of-pocket cost to her was 3300 pesos – about 170 usd. The entire surgical team came into her room
and introduced themselves before the procedure. The surgeon was top notch and she is fully functional with no pain for the first
time in years.
I've taken road trips from Chihuahua to Oaxaca alone with my dogs and have never felt unsafe. There are certain roads in Guerrero,
certain parts of Mexico City, etc that I avoid because it's just common sense. I did the same in parts of NYC and Albuquerque.
It was clear to me that I would outlast my savings if I'd stayed in the US. Here, I can afford to live here modestly but comfortably.
I have a Spanish tutor and I can get by. I am obviously a gringa but when Mexicans speak English to me and I answer in Spanish,
they smile and everything changes. People here are kind, polite and, if you don't behave like the proverbial "ugly American" (some
expats do, unfortunately), you may find yourself treated like family. And the way of life, the quality of the food, so many things
have had a hugely positive effect on my health. My borderline hypertension has given way to BP numbers I haven't seen since I
was in my 20s – and I take no pharmaceuticals.
I lived all over the US before moving here. I have no intention of going back. I'm eligible to become a Mexican citizen soon
and I will do so. Whether I renounce my US citizenship remains to be seen. I haven't been back to the US since moving here so
.
I speak Spanish at a near-native level (started learning as a child and lived years in Latin America).
My sincere advice is don't learn much more, if you're happy now, just keep being happy. If you're able to understand better
the world around you, the glow will rub off and you'll likely find that you are not in fact being treated as family but as a guest.
I once spent a year in South East Asia and made a conscious decision not to get too involved, and loved it. I pretty much had
the same experience you're having in Mexico. When I'm in Mexico the feeling is of constantly hitting my head against a glass ceiling
and biting my tongue.
The wonderful thing about not speaking the language is it's an automatic filter. Only people who like foreigners talk with
you and you are constantly in the position of wonderful people helping you out, because you need help.
But for the love of God, stay on the beaten tourist path (SMA-Oaxaca City-Cholula etc.). Don't go into Guerrero except maybe
Taxco. I was just in Chilpancingo for a professional event, taking every precaution, and the stories you hear first hand are horrifying.
The security situation in Mexico is deteriorating badly.
Even states like Puebla that used to be safe are seeing kidnappings and other extreme crime. If you speak Spanish, the issue
of security it is utterly unavoidable, it creeps into many conversations and dominates the local news.
because there isn't a lot of evidence most labor gets a very good return for crossing borders (like maybe all the low paid
mexican immigrant laborers with no rights for example?). Well yes and maybe it's better for them than staying put, but it isn't
any kind of good life. Most labor, even most skilled labor, is a lot closer to that "dime a dozen" bucket than any kind of name
your own price bucket. As individuals labor just doesn't have much power, now maybe labor movements need to cross borders have
all the workers at whole companies emigrate even.
Yes, I agree that in many cases labor doesn't necessarily win by moving in the real world. My comment was more on philosophical
level – and somewhat a spin on the NC concept of "because markets" – in an ideal world countries would compete on attracting labor
by what they offer in concrete material benefits.
'According to Pew Charitable Trusts, only 13 percent of Baby Boomers still have [defined benefit pensions].'
This 13 percent remnant overwhelmingly consists of government employees, whose defined benefit pensions are uniformly underfunded
(and even understated as to HOW underfunded they are).
On the back side of Bubble III, as pension sponsors' equity-heavy assets shrink like an ice cream cone in the Sacramento sun,
a hue and cry will arise for massive tax increases on the hapless public to bail out public employees' rich pensions. (Not that
they aren't already happening -- two towns near me just hiked their sales tax by 1 percent to bail out police and firefighter
pensions.)
'Pension envy' will be the defining cultural war of the 2020s. Got ammo?
"Pension envy" has been around for a long time, Jim. I'm in my late 50s and grew up in one of the reddest states in the country
(North Dakota). For forty years I've heard many snarky remarks about public pensioners, not to mention those gawdawful Unions
(AFL-CIO, et al.). It never occurred to these people to demand the same treatment from THEIR private employers instead of complaining
about collectively bargained for benefits. Much easier to beggar thy neighbor, apparently. Sigh.
yes just unionize and get a pension from your private employer – not all of which are big employers btw which might be the
only plausible shot at a private sector pension -however most people work for small to mid-size companies. And then people wonder
why people think public sector employees are clueless about reality when it's all "let them eat cake" all the time.
I say let's NOT pay much higher taxes to fund the public pensions but INSTEAD pay much higher taxes to fund expanded and improved
SOCIAL SECURITY for all. It's only equitable, it's only just, there shouldn't be favored types of retirees, whoever we work for,
we all get old if we live long enough. Btw those same private sector unions have often sold out younger employees and accepted
tiered wages etc.. I'm not anti-union, I'm skeptical of non-radical unions being sufficient.
For me, it's about merging all plans into one universal pension – Social Security, and defend it as hard as, or harder, as
pension plans are defended now.
government employees, whose defined benefit pensions are uniformly underfunded
They are not uniformly underfunded. The Wisconsin state and local employee pension system is fully funded. Even Scott Walker
hasn't been able to undo that.
The only way I could figure out how to retire in the US was to find a house in a semi rural community that is a 45 minute drive
past gentrification.
Start by buying a lot (bare land) then put a cheap RV on it, later a manufactured home if possible. Or find a lot with an older
decrepit -- but still livable single wide trailer. Buy it for a roof and grandfathered utilities.
Medicare, plus low price house, plus low-status address. We also looked for a county with a high percentage of over-65 residents
and rudimentary senior services.
Still not optimal but workable. northern California is where we landed because of family. Look for cheap towns with collapsed
logging, farming or fishing industries.
Investigate by taking vacations in community.
Downsides include car-dependent culture, dependence on Medicare system, poor public transit, 2 hour drive to land of decent
coffee shops.
Canada was a serious thought experiment until I realized they dont want old people unless they bring large bags of money along.
That's similar to what we've done, and we're an hour away from 'civilization'. Our difference being that we're still years
away-Medicare wise.
Our plan mostly revolves around the idea of not getting sick, a common way to avoid costly medical bills, combined with ACA
(for the time being) and costly deductibles that will put the hurt on us financially, but not devastate us, should push>meet<shove.
Too busy with yoga and writing to set up hostel. We do host traveling yoga teachers who come through periodically to teach
at county yoga studios.
The second part of the scheme outlined above is to bring a low cost avocation that gives your life meaning and connects you
with others. For me it was photography, writing, travel, and yoga. As years go by travel and photography are diminishing, yoga
and writing expanding.
I traveled like the dickens when I was younger, and am content now to hang out and do stuff that costs a pittance, most of
which doesn't involve a computer in any capacity, aside from this here ball & chain.
Yves, have you checked to see if you qualify for Canadian permanent residency? I did and don't qualify. I'm retired with a
good income from pension, social security, and interest from retirement savings. If I sold my house I'd nearly be a millionaire,
which around here isn't that big a deal. It's also not enough for the Canadians, which makes sense, given that I've never paid
into their health system and my medical expenses are likely to increase as I age. My understanding is that, given I am not going
to proved the Canadian economy with a scarce skill, I would have to invest $2 million in a business in Canada that created jobs
for Canadians.
I had a work colleague from Sweden. She had been a school teacher there and came to the U.S. to sell financial products, make
a lot of money and avoid Swedish taxes. I asked her if she were going to become a U.S. citizen. She looked at me like I was crazy,
laughed and said, "Hell no, I would never wish to be old in America."
I'm laying this one down at the door of social Darwinism at work. If you're poor then you deserve nothing and if you are rich
then obviously you deserve everything. That is why someone like Peter Thiel can waltz into New Zealand and buy himself citizenship
in less that a fortnight there. Not everybody can get themselves into the Best Exotic Marigold Hotel in India. And that mention
of Ayn Rand and her influence on American life through people like Paul Ryan?
Well, if so may Congressmen want to investigate Russian influence in American politics then I present you with Ayn Rand as proof
positive. In spite of all her malignant opinions, it should be noted that it did not stop her from claiming Medicare and Social
Security when she got old. She did not want to be bankrupted by illness in old age so registered under her married name.
From my perch, if any Americans want to make the move, I would say over the next decade before that door closes. The regulations
are already tightening up such as making sure that you owe no taxes or the like before you leave. More Americans are now renouncing
their citizenship as America still want to tax them even when they have moved away. After this decade, I regret to say, that America
will be no country for old people.
In the most excellent book "I Will Bear Witness" diarist Victor Klemperer is often writing about German-Jewish friends that
are leaving the 3rd Reich for other shores, subject to a "25% Reich Flight Tax", and in reality it was more like a 50-75% tax. What's our going rate?
I had another friend, a real gem of a man. From privilege, a Harvard graduate, progressive activist, who worked for low pay
in the non-profit sector. He described his future retirement plan as "homeless in Honduras."
Sorry, I was triggered by the introduction. I am an American in my late 30s and I've lived a large chunk of my adult life outside
the US, Latin America mostly and East Asia. Already now I'm hoping not to live long-term outside the country again.
I just made a short trip to Mexico and thought dear God I'm too old for this.
If you speak the local language and are hooked into local issues, you quickly realize that there is an unbelievable (for urban
Americans who are used to a mosaic international society) amount of xenophobia in almost every other country. Being an outsider
everywhere I go, with all the constant microagressions (and ocasional more major aggressions) wears on me the way Lambert says
that inequality wears on the body.
And if you don't speak the local language and try to isolate yourself among other retirees -- why even be alive at that point?
I don't imagine commenters on this site of all people sitting at a bar all day arguing US and UK politics in English with some
other retirees far away from the action.
And speaking of inequality, most countries have far worse inequality than the US and it is savage and painful to watch when
your security guard finishes a 12 hour shift and then starts another 12 hour shift across the street.
By the way don't get me started on the cost of healthcare. It's cheap until you run into a major complication. I had surgery
in Peru for something minor and the total bill was over $5000 USD. Imagine if it were heart surgery. My expat insurance paid it
but you can't get that if you're over a certain age.
And speaking of inequality, most countries have far worse inequality than the US and it is savage and painful to watch when
your security guard finishes a 12 hour shift and then starts another 12 hour shift across the street.
The obvious in your face OMFG inequality is often worse, but the absolute inequality in America is among the greatest in the
world. Most countries, outside Latin America, and Sub-Saharan Africa specifically, have better income equality. We are
one step up from El Salvador . I've been to El Salvador, and no offense to them, we really should be doing much, much
better than that small, oppressed, corrupt, dirt poor country. Granted, we are overwhelmingly wealthier, so being poor here is
often not as bad as there, but still.
With that rant done, the GINI coefficient, which is a quick dirty way of measuring inequality, and therefore the economic/social/political
well being of a country with 1.0 meaning one person owns everything and 0.0 complete income equality. The figures change some
depending on whose doing the figuring, but the GINI for income in the American paradise is around .47 compared to Mexico's 0.48
with the Swedish hellhole at 0.24. If you are counting wealth instead of income, the United States is 0.8. Also, our lowest, therefore
our most equal GINI was 0.36 in 1968. A study was done showing Rome's GINI (income) was 0.44.
I really should check again, but I recall reading nobody, anywhere who did not have revolution, uprising, something bad once
0.59 was reached.
Come to Bangkok. The medical care here is superb.. very reasonably priced and absolutely state of the art. Yes, we pay out
of pocket, but only for what we need. There's competition between health care providers and one can get a quote from multiple
sources for any surgical procedure. The US, with its ever increasing costs which now are something like 17% of GDP, is on an unsustainable
path. Combined with the pending pension crisis I am concerned about the future for my US colleagues.
After my first annual physical here my Dr. said, bluntly, no pills but lose 25 lbs and exercise daily and come back in 6 months.
An honest answer to our metabolic issues.
The lifestyle is fantastic, food is superb, cheap direct flights to anywhere in the world, world class beaches and vineyards,which
make a halfway decent red wine, with wonderful restaurants, are just two hours away. The occasional coup keeps everything interesting.
I can honestly say my lifestyle has improved in my retirement by leaving the US.
" The U.S. Is No Country for Older Men and Women "?
Indeed, it isn't. But increasingly, it's no place for younger people either. The stagnant wages, rising housing costs, and
rising medical costs impact younger people just like they do older people. And yes, I know that younger people's medical expenses
tend to be lower that they are for older people, but today's youth are being socked with educational expenses that seem to know
no bound:
https://www.nakedcapitalism.com/2017/12/student-loan-defaults-approach-5-million-using-permissive-definition-default.html
Is the solution really to "strengthen" programs like Social Security, Medicare and Medicaid, or would it be better to tackle
the monopolies and rent-seeking behavior that results in the need for ever more dollars to be supplied? Bob Hertz had some excellent
ideas regarding medical costs in
https://www.nakedcapitalism.com/2017/11/medical-cost-reduction-act-2017.html
. I think this would be a better solution than to simply promise more money for the money-hungry beasts out there to consume on
the behalf of seniors. Tackling rising costs at the source would benefit everybody .
But strengthening social services can be done and will help many people. Fixing root causes looks politically impossible (today) and will be strongly opposed by powerful interests. I doubt anyone
here would object but we are not in charge
Yes, makes some sense. Fixing root causes would include things like fixing ever rising rents etc. (although sometimes seniors
can get it cheaper). However, the reality is living on social security is hard at this point even for those who own a home, just
because the old age benefits are so much less than almost any other industrialized country on earth. So just increasing those
would help a lot.
the loss of the family network is an important thing to consider for many. Someone from our family always goes with my aunt to her hours-long chemo sessions and doctor appointments. In the waiting rooms, I see all these other solo cancer patients. They often look sodden. Maybe they're always going to chemo
alone? The last thing you want when battling illness is also battling a sense of isolation.
Seriously, all the centrists act like the US should welcome people from all over the world, while Canada hardly lets ANYONE
in. Also, I just got the aforementioned "Nomadland" book from my library, which I'll start on as soon as I finish "The Big Rig"
which is (so far) a fantastic book about the way the trucking industry screws its workers.
My friend Max, the neurosurgeon left the US several years ago for Switzerland. His son Peter had a serious brain tumor and
went to Switzerland for treatment. Max bankrolled the treatment with a $2 million gift. Max's son is now cancer free and is now
working at CERN and is also in the process of immigrating. Max and his son at beneficiaries of a very substantial trust fund that
is sited in Nevada. Max renounced his US passport and it cost 30% of his assets. Max's son is facing a similar cost. It was easy
for Max and his son, both are extremely wealthy and Max's parents were Swiss. Lesson: portable skills that enjoy strong demand
and loads of income.
I've often thought of moving abroad but see myself more as living in a different country for only part of the year. I'd love
to hear more from those who are ex-pats.
Home ownership in Germany is 52% and it is below 45% in Switzerland. It is 65-75% in almost all other rich countries including
the US. It is actually around 85% in Russia and 90% in Cuba although the amenities are not quite the same.
I think that it has become increasingly apparent that the rich have no sense of noblesse oblige. They are in it for themselves
and nobody else.
I'd be very interested to see if they believe their own propaganda on things like Ayn Rand and Social Darwinism. I know that
many libertarian types can be, but the more extreme Ayn Rand types? Or is this just a coping mechanism?
It may be like oil executives who for years publicly denied global warming, but knew the truth. I think that deep inside, many
wealthy people know exactly how worthless they are to society and insecure. They will never admit the truth though in public.
But the only bargain "world city" I know of is Montreal.
Canadian here. Montreal has it's pros and cons. I have talked with a few people who are fed up with that city and left.
Pros:
+ Cheap rent (especially compared to any other large city)
+ Very cultured city, for lack of a better term (night life, arts, exotic places to eat that you can actually afford, that sort
of thing)
+ For a while it was Canada's job creation capital due to our weak dollar
+ Cheap tuition for students compared to rest of Canada
+ Cheap hydro! Car insurance is also much cheaper.
+ Considered the best city in North America for cycling (
https://www.mtlblog.com/lifestyle/montreal-ranked-1-bicycle-friendly-city-in-north-america
). There's also lots of parks and green spaces.
+ Apart from NYC and if you live in the middle of the city, Montreal is one of the few North American cities where you probably
don't need a car
Cons:
– Becoming increasingly unillingual (French), which is one of the reasons why one of my colleagues left Montreal
– Buddy of mine says healthcare is not very good by Canadian standards and being an English speaker will be a big disadvantage
(the government is actively trying to get people to be French) and I believe there is mandatory French schooling for parents of
English origin
– Quality of roads is pretty awful in Quebec I find and drivers can be aggressive. Infrastructure as a whole is aging.
– Winter isn't that cold (By Canadian standards mind you), but Montreal does get quite a bit of snow.
– Outside of the boom periods, it can be hard to find a good job or frankly, a job
– Wages in many jobs isn't as good (although often the lower cost of living makes up for it, so net you may not be that much worse
off, and in some cases, even better off)
– Some of the worst traffic congestion in Canada
– Quebec separatism politics
– There are cultural issues you should be aware of:
http://www.cbc.ca/news/canada/montreal/quebec-low-birthrate-immigration-1.3573966
– A lot of consumer goods aren't as available in Canada, although you can rent a US mailbox or use Kinek at the border (Expensive
because our dollar is weaker and you have to pay for import taxes, US taxes, along with the mailbox fees). On the other hand,
there are some items in Canada and especially Quebec that are not as available in the US.
On the fence:
– If you own a home, I have been told that many parts of Montreal are a "Buyers market" now so if you ever want to move out
– There are government services like affordable childcare, but they do have long waitlists. That said, child care is cheaper than
in the rest of Canada as this still does drive the costs of the private sector down.
– The US is making it harder for Americans to renounce their US citizenship for those moving from the US (
https://www.theglobeandmail.com/news/politics/delays-costs-mount-for-canadians-renouncing-us-citizenship/article28688026/
)
– Taxes are higher, but the majority of payers (especially those not in the six figures and with children) will find themselves
better off I'd say in Quebec due to the better services.
– A lot of folks in Quebec say that Montreal is expensive compared to the rest of the province, although for a city its size,
it is fairly affordable
The big challenge though is that Canada's immigration system is pretty restrictive, and yes older immigrants are at a drawback
(the purpose is to attract immigrants that are likely to pay more in the system over their life than take out).
The other big issue with Canada is that neoliberalism, although not as bad as the US, has very strong backers and I fear could
get worse. We seem to be following the dark path the US has undergone. I just hope that a genuine left can come out, not this
neoliberal identity politics stuff that really serves the rich.
It's really not that hard to move to a third world country. It's practically a lateral move.
1. Bad public transport. Check.
2. Corrupt government. Check.
3. High wealth inequality. Check.
4. Increasingly bad infrastructure. Check.
I am sure there are plenty of areas where the US is ahead, but plenty where it's behind like affordable healthcare. But really
at the end of the day, moving is not easy because of : language, and for active people scratching that itch to be productive.
Yves, the US is also no place for young people. My wife and I have been visiting South America checking out possible retirement
locations. In Ecuador, we found a young Swiss man (late 20s) with his Ecuadorian girlfriend who were running the Hacienda we stayed
in near Cotacachi. The 80-year old owner had been in a car crash and had to have someone take over operations right away. The
owner's daughter was friends with the young Swiss man and recommended him to her father. In the United States you would never
see someone his age given this much responsibility. He had trained in the hospitality field and came to Ecuador a couple of years
earlier because he would actually have the opportunity to own and operate his own business, which he considered an impossibility
in Western Europe. He told us his Swiss parents were also seriously considering re-locating to Ecuador for a better quality of
life in retirement (and presumably – my guess – to be near the eventual grandchildren). They were not wealthy but had sufficient
funds to provide relatively small seed capital for their son's business in Ecuador.
In Montevideo, we met a young woman in her early thirties from Montana and her French husband, a chef, who had just opened
the café we had stopped in for postres and tea some 8 months earlier. They left the U.S. about 6 or 8 years ago (can't recall
exactly) because they concluded they had no opportunities there, and came to Montevideo after a friend recommended it. They now
have two daughters in school there.
I spoke with a prominent immigration attorney in Montevideo who told me that it's not just Americans, many Western Europeans
were also emigrating to Uruguay "because of social issues." I didn't press for an explanation.
It's a mistake – and implicitly demeaning to the country – to think of these places as retirement havens. A North American
or European young adult might actually be able to build a life for themselves in these places because the capital investment hurdles
are low, and there are opportunities.
Every time I talk to my Boomer father he wonders how I could be so irresponsible as to not, like him, have "saved for retirement."
He's got an Air Force pension, a local government pension, a pension from a private employer, and social security. There's a 0%
chance I'll ever be able to pay off my student loans. I have less take-home money after 20 ostensibly successful years in my profession
than I did when I was 15 years old and working in a deli.
For most people in my generation, our retirement plans are to hope to win the lottery, and if not, suicide.
They often did have to pay out of their salaries into those pensions as well, so he has a tiny bit of a point, it wasn't all
free money. But they were of course much better deals than the 401ks on offer now, that we are lucky to even be able to have purely
for the tax benefits, which most employers aren't even contributing to.
I remember my friend's mother, an RNA (Cdn equiv of an LPN) who religiously contributed to her voluntary pension plan. It was
hard for her, single mother in the 50's and 60's, but she considered it the responsible thing to do. When she came to retire in
the mid 70's she was disappointed (understatement) to find that the pension she had sacrificed to contribute to for all those
years paid her a whopping $17 per month.
When I was planning for my retirement, in the 70's and 80's, I was looking at interest rates of 7 to 10 % -- truly! It is no
accident that interest rates are now less than the rate of inflation, unless you are paying out, of course. We are being robbed
in every possible way.
I'm pre-baby boomer, with no pension because of the industry I worked in. But I do own my own home in rural Pennsylvania for
how long, I'm not sure. 20% of my modest income goes to school and property taxes. I recently let a handicapped friend live in
my other building; he gets $700 a month and $85 in food stamps. Currently both of us are struggling to deal with paying to heat
our homes, so the last time he was bitching to me I said: "Why else do you think old people are living in trailers in the Arizona
desert?"
I considered not only Arizona but Cuba. I know enough Spanish to get by. But I decided that I would stay in the U.S. I think
everyone needs to downsize and simplify because, unless the American people wake up and revolt, things aren't going to get any
better.
P.S. I tried to research bankruptcy and mortgage foreclosure rates in Pennsylvania. Nothing current, but I found that the rates
continually increased every year, and this was well before the 2008 implosion. So I assume that the situation is probably dire
by now.
What's a second world country? And Montreal is inexpensive?
Anyway thinking from a young person's perspective it's even worse. Employment prospects are crap everywhere especially Europe
where there is some inkling of a social safety net.
As I said, it's an inexpensive world city. You missed that. It's even been rated that way. Rent is cheap. My costs would be
40% or so lower than in NYC.
Yeah, but that's not a very high hurdle: almost *anything* is cheaper than NYC in particular, and NYS in general. Not to mention
less stressful. I tend to recommend Buffalo and outlying suburbs/rural areas, but then again I'm biased, being a native of the
area. Real estate differences can be dramatic even within NYS: I routinely compare prices and taxes in Erie county vs Wyoming
county. Its a real eye-opener, especially compared to anything near Albany or NYC.
This entire thread is simply heartbreaking, Americans have had their money, their freedom, their privacy, their health, and
sometimes their very lives taken away from them by the State. But the heartbreaking part is that they feel they are powerless
to do anything at all about it so are just trying to leave.
But
"People should not fear the government; the government should fear the people"
As your quote appears to imply, it's not a problem that can be solved by voting which, let's not forget, is nothing more than
expressing an opinion. I am not sticking around just to find out if economically-crushed, opiod-, entertainment-, social media-addled
Americans are actually capable of rolling out tumbrils for trips to the guillotines in the city squares. I strongly suspect not.
This is the country where, after the banks crushed the economy in 2008, caused tens of thousands to lose their jobs, and then
got huge bailouts, the people couldn't even be bothered to take their money out of the big banks and put it elsewhere. Because,
you know, convenience! Expressing an opinion, or mobilizing others to express an opinion, or educating or proselytizing others
about what opinion to have, is about the limit of what they are willing, or know how to do.
100M US citizens in 1945; 200M in 1976; 320M in 2016. Population up and resources down. The politicians would give you anything
to get a vote, the reason they don't is that the money is not there. Everything goes up in price and wages stagnant because that's
how economies adjust to less resources to share. Canada and Australia and Europe are going the same way as the US, not because
of nefarious politicians or greedy rich people, although they certainly exist, but because the sums don't add up any more. MMT
is just one example of grasping at straws. I wonder what part of 'you are doomed' old people don't understand? Apart from the
last 80 years or so, people got old and died; now they get old, get sick long term, go bankrupt and then die.
I have a very rare good, very old insurance policy.
I sure hope you can hold onto it Yves. I also had a really good private BCBS NC policy. This year they killed it and threw
me onto ACA which is horribly expensive and crappy if you are single and make > $48200. 5 years to Medicare .if it's still there.
I have also lived internationally in my late 30's. It takes huge effort to liquidate here and to move. I believe it's risky
to be an alien in a country if there is unrest -- and unrest is coming imo.
I'm scouting Panama this Feb but I also just read the central america will be ground zero for climate change and they are already
having droughts.
Canada or NZ are likely the best choices for immigration if that were even possible.
I live in Alaska. Can in no way think of living somewhere else. At sixty years of being. My body is a bit worn hard and put
away wet. I have no property, no retirement, no substantial savings. What i do have is knowledge.
Now driving a cab for cash in a small city on the coast. I make furniture as my backup income. Was a cabinetmaker at a time.
In fact i count on making furniture till i cannot.
Expecting to have SS is not something i count on. I know all the wild plants to forage, wild game to be had-small game. Fish
of course, living on the coast.
But when i cannot pay rent i will have to rely on the generosity of friends to let me put up a shack on their property to get
by, or squat on land. The woman who lets me live with her for the last twenty-two years will be able for retirement next year.
We will set her up with something simple in town. I shall head for the woods. Am building a foot powered wood lathe. You may find
me one day on the side of the road turning simple items for pittance + beer.
Getting a little tired of this leave the country stuff. Heard it from my dad in the 60's (Australia). Heard it from my husband
this morning (Canada). I am 66 years old and intend to fight it out on this line, like Grant, until they carry me out of here
in the funeral home van. This is my country, major f–ked as it presently stands.
More asset-shuffling through public-private partnerships will not solve the moral
catastrophe of short-termerism and greed that prevents enterprises from investing in the
human timeframe of a lifespan, that might support a proper social safety net. A sane
government which had the interests of all citizens at heart would impose a confiscatory tax
system on asset shufflers and short term greed. This is the opposite of the policies of our
political class, who prefer voter suppression to the sort of democracy that would find the
impoverishment of our elders intolerable.
"A sane government which had the interests of all citizens at heart" In the One
Exceptional Country? Not in my lifetime or that of my children.
Its all very fine to talk about how wonderful your favorite band-aid would be if only the
Repugnant or Democon team would support it, but in the real world there is only one
semi-valid retirement strategy.
Emigrate to a country that is sufficiently un-exceptional to not have to support an Empire
and which is poor enough to allow you to live on whatever savings or pension you have
accumulated.
This larger role of government proposal overlooks the fact that is just creates more piggy
banks for workers to raid to buy new cars, finance big ticket purchases, etc.
This human irrationality is common with today's IRAs. Congress has shown willingness to
expand access to retirement savings in order for workers to raid their pots of gold. We have
just seen this with legislation relaxing withdrawal in the federal TSP. Thus, how such
programs are set up and administered is likely to merely expand financial asset management
fees while collecting taxes and penalties to boost the treasury – with little
improvement in retirement outcomes.
The first thing that government could do is guarantee an acceptable pension to all those
who live past 80. Then we would not all have to save as if we will live to 95, bloating
financial markets for nothing.
And it should be funded from current earnings, not through financial markets.
We just hit the peak of 5 workers per retiree. This number will be going to 2.5 over the
next couple of decades.
I think you don't realize how low the standard of living has to drop to fund an age 55
retirement.
2/3 of boomers have less than something like 100k saved up so this means they will be
asking the young to fund their retirement because I don't see the 1%ers doing it, without
some huge transformation which would take a decade or two sidelining boomers anyway.
This situation should have been planned for 30-40 years ago but it wasn't because the
general meme at the time was that the markets would save the boomers.
When a squirrel plans for winter, it stores nuts, meaning it does not eat them all.
In our economic system we've been eating all our nuts plus using millions of years of
energy to eat even more than we needed. Our obesity epidemic is one blatant symptom. Even
most of those with big investment portfolios have overindulged just think of how many joules
of energy they have spent in their lifetimes yet they are still expecting their investments
to represent claims on future resources.
I guess it can work out if our planet can support it and the US can force its way on the
world for another few decades but I have trouble believing that a country with more than 30%
of its population over 60 can cling to its reserve currency status while net importing.
I believe we can fund a 55+ retirement if most retirees accept to rent a room in their
kids' house but the kids have to somehow get out of the basement of their parents' still
mortgaged house and take possession of the main floor. That's the conundrum.
Yeah, that's the question. Is retirement a universal human right or a privilege? This
whole notion of focusing on the plight of the elderly as a group is bizarre. In the US
context, older generations are significantly wealthier than younger generations.
If we are really talking about people living with dignity, then such a policy should apply
to people of all ages, not just older Americans.
How bout a UBI for the elderly and disabled, and free healthcare for everyone? Seems like
the simplest solution to me.
Aside from the fact that it seems like the obviously right thing to do, as an oldish
millennial, I'd prefer to have them out of the forced-labor market anyway.
I've also long thought that providing care for the elderly, disabled, and children could
go a long way toward filling the roles of a job guarantee for us relatively young and
able-bodied.
On the one hand, the job part of the job guarantee already exists almost everywhere in the
U.S. The problem is the job stinks – low pay and often very hard work.
On the other hand, it is foolish, and inhuman, to think of these jobs as overflow job
guarantee jobs in an MMT JG. We need an economy, and society, that values caring over (mostly
idiotic) for-profit paid work.
Maybe we can put "social" in the name, because it's the social safety net. And since it's
a source of financial security, we should also put "security" in the name.
But isn't it based on earnings? Which for tens of millions were based on 10$ an hour which
is not a livable wage thanks to CEO wage inflation going from 30x lowest wage to over
300x?
Just to respond to all of you, the Townsend Plan from back in the 1930's when Social
Security was being devised, pledged to give out $200/month to people of age:
https://www.ssa.gov/history/briefhistory3.html
According to an inflation calculator I used, that's $3400/month per person.
They actually paid out more like $50/month. Which is more like $900 in our money
today.
Social Security is fine, it just needs to be increased, and the age lowered (to at least
what it used to be). Calling it a UBI, although it is one, will just lead to people trying to
tie it to costs of living which varies widely across the country, it just needs to be
increased a lot to be on par with what much of the rest of the world offers.
coincidentially, i just read
" In 2016, California residents 62 and older took out more payday loans than any other age
group, according to industry data compiled in a new report from the Department of Business
Oversight. Seniors entered into nearly 2.7 million payday transactions, 18.4% more than the
age group with the second-highest total (32 to 41 years old). It marked the first time that
the DBO report on payday lending, published annually, showed seniors as the top payday
lending recipients. The total transactions by the oldest Californians in 2016 represented a
60.3% increase from the number reported for that age group in 2013. The fees can bring annual
percentage rates that top 400%. In 2016, the average APR was 372%, according to the DBO
report. Customers typically take out multiple loans in a year, ending up in what critics call
a "debt trap." .. The average payday loan borrower 62 years or older took out almost seven
payday loans last year, compared with the average of 6.4 loans for all customers"
It is simply the case that with an ageing populace, we will in total be spending more on
Cumadin, nursing home beds and depends than we used to. Pensions, public or private don't buy
warehouses of this stuff to use later. A larger amount of our current GDP will be spent on
this than on health club memberships and daycare than if our population wasn't ageing. Those
who are currently working will have a greater percentage of the wealth that the create
devoted to purchases of these goods and services than used to be the case when there were
fewer elderly. Some of this may be paid for with higher payroll taxes, some with higher
income taxes (because bonds in the SS trust fund) and some because the value of equities goes
down as pensions become net sellers rather than purchasers of assets. The more people are
looking for a magic and relatively painless solution, the further we are from actually
figuring out how to do this.
The thing is that many with underfunded guaranteed pensions will be getting good pensions
while those with no guaranteed pensions will be getting peanuts.
Not to mention those with pensions based on 10$ per hour while others were making much
more. Those who made more feel entitled to their money by they refuse to see how social,
fiscal and monetary policies contributed to the wealth disparity. Many of the winners were
not better but just at the place at the right time.
There has to be a redistribution within the older population first before we skim the pay
checks of the young still working.
So your solution includes taking money from those who saved and invested, and
re-distribute it to those who spent everything they earned? As someone in the "saved and
invested" category, I find that plan to be a non-starter.
When I was setting aside 15% of my income for savings and investments, paying extra on my
mortgage, and driving older cars, I have friends who (at the same income level as my wife and
I) literally spent everything they earned. They had lots of fun, and lots of new stuff that I
didn't.
Fast forward 30+ years, and now – in my late 50's – I'm planning my retirement
(before my 60th birthday). My friends? None of them are even thinking of retiring, and one
couple has said they will need to work into their 70's.
We made different choices, and ended up in different places – but that doesn't
obligate me to hand them what I have.
If you've been able to work on a consistent basis at decent enough paying jobs that you
could save, it is substantially due to luck: being born into a stable middle to upper middle
class family, being white and male, being born at a time when there was enough growth in the
economy that you could land good jobs early in your career, which is critical for your
lifetime earnings trajectory. Oh, and not having you or a spouse or a child get a costly
medical ailment that drained your savings. And not winding up in a job where you were being
ethically compromised and stood up against it, resulting in career and earnings damage.
Did you miss that college grads had a worse time that high school grads and even dropouts
in landing jobs in 2008-2010? And getting no or crap jobs then set them back permanently? And
this includes graduates in the supposedly more "serious" STEM fields, where contrary to DC
urban legend, there aren't a lot of entry level jobs. You do well if you find employment, but
save in a few niches like petroleum engineering, the unemployment rate is actually worse for
STEM college grads overall than liberal arts grads.
Yves, I think that Middle Class would acknowledge the "luck of the draw" on pension or
not. It's just that neo-liberalism would only redistribute
within
the laboring
classes, not from the looting .01 percent responsible. The Arnold Family Foundation cronies
in Rhode Island are making your argument. Those who lucked into wage-earning with a pension
shouldn't be the first redistribution.
If almost all the increase in productivity and income over the past 30 years had not gone
to the top 1%, where it is essentially exempt from SS taxes, there wouldn't be a problem.
If the Middle and Working Classes still earned the same share of national income they earned
before Reaganomics there wouldn't be a problem. Lots of people with good incomes; those
incomes almost all subject to SS deductions.
Your response to Middle Class puzzled me. It is undoubtedly true that there is luck
involved in his success. However, he was comparing himself to peers that seemingly had most
of the same luck but made different life choices. I think one can recognize his luck and his
thrift and appreciate them both.
It's not my solution. It's how the cookie will probably crumble. I'm in my late 40s and
I'm in the category who saved but I also realize that I was in the lucky group with extra
income and chances are I'm going to pay for that luck.
"There has to be a redistribution within the older population first before we skim the pay
checks of the young still working."
Increased taxes on the social security of wealthy people has been proposed, so has
increased Medicare premiums for wealthy people. These ideas were part of the "grand bargain"
proposed by some Republicans and Democrats, including Hilary Clinton.
What is considered "wealthy" in these proposals has yet to be determined. I don't think
that the "grand bargain" specified that the increased revenue would be used to help
impoverished seniors either. Anyway, how much of a surplus would these increased taxes
generate ? Enough to give poor retirees a meaningful cost of living rebate on their tax
returns?
I'm not necessarily against proposals such as these, but
a better and more certain solution would be to rein in the military/security complex, stop
all the wars for oil, and get the government back in the business of working for the citizens
of this country. I bet we could find a few extra dollars that way.
If you stop investing in the MIC you will send the signal that you are weakening and
renouncing being the "protectors" of the planet. This means potentially losing your reserve
currency status. That means you would lose your easy money printing and net importing
advantages.
The currency issuer can create new spending with the constraint being generating too
much inflation.
I worry about leaving this statement to stand alone, because The Market is an independent
thing, and it's in The Market that inflation is created or not. Players out there are capable
of creating inflation on their own. Abba Lerner's article on Functional Finance (linked here
a month or so ago) tells us that the remedy is taxation. I.e. spending to generate well-being
shouldn't be blamed for inflation. Applying the taxation remedy will take some political
backbone.
No, inflation is created in the real economy due to any of commodites inflation (cost-push
inflation), wage-pull inflation (created by too much demand, or in MMT terms, too much net
government spending) and more recently and not sufficiently acknowledged, by monopolies and
oligopolies (see pricing of cable services and drugs, which have monopolies via patents) .
Interest rates are a different matter and are controlled by the central bank. We've had
risk-free interest rates below the inflation rate for years now thanks to the ministrations
of the Fed.
Central banks have the power to kill the economy (raising interest rates so high that it
induces inflation) but not much/any power to stimulate (save goosing asset prices, which only
trickles down a bit to the real economy). The cliche is "pushing on a string".
I'm a great supporter of Social Security. There's nothing inherently wrong with Social
Security. The problem has been the politicians. In the mid-1980s the Reagan admin with Dem
support changed CPI price calculations (and have been doing so ever since) in order to make
any cost-of-living inflation adjusted increase in SS be less than the true CPI inflation
numbers. They also made something like the first $25,000.00 of retiree income (all sources)
tax exempt . but did not index that number to inflation. They were clever in hiding the time
erosion aspects of that "grand bargain." They also raised the retirement age. They used the
"saved" monies these changes to pay for tax cuts for the well off.
I think adding another mandatory paycheck deduction for private savings accounts
controlled by others would simply be another pot of money for politicians and Wall St firms
to rummage. Fees? Churn? "Special" tax treatment? I appreciate the good intentions of the
proposal. However, I'd rather see proposals for stronger protections and honest CPI
accounting for existing Social Security.
adding: the number of workers to retirees is less important than the productivity per
worker, which has been going up steadily for the past 40 years. If workers were still earning
the share of income from productivity and profits that they earned up until Reagonomics there
wouldn't be a problem. Since Reaganomics, however, almost all the gains in productivity and
income have gone to the top 1-2%. Meaning that most of the productivity gains are not
reflected in SS taxes. The top 1% pay SS security tax on only a tiny, tiny bit of their
income. So less and less national total income is subject to SS tax. Falling SS tax receipts
are less a function of fewer-workers-to-retirees than to less nation total earned income
subject to SS tax. imo.
Is no one talking about just abolishing the income cap on social security taxes anymore? I
thought I read somewhere that would largely fix any holes in the program and allow retirees
to get the COLA that they need to keep up with inflation
"The currency issuer can create new spending with the constraint being generating too much
inflation".
The problem with this is money. Money >> currency. As we have seen, the market can
create its own money independent of the currency issuer, making inflation/deflation difficult
for the monetary authority to control, e.g. the Eurodollar market.
Does anyone know anyone who has retired and lived solely on their 401k, just like a
pension? And this person did not inherit any large chunk of money to assist in providing
retirement funding. I want an example of a factory worker, McDonald's worker, etc where they
were part of the working class.
Why not just expand social security? I understand she advocates in addition to SS we have
this mandatory investing thru public/private partnerships.
But when you have that, doesn't the govt have to establish guaranteed rate of return?
Because when people invest, there has to be a winner and a loser, always. Otherwise, some
people's investments may not make a return enough to support them financially.
...Tontines, like Social Security, traditional pensions,
and life annuities, insure against the risk of living longer
than expected in retirement. The problem of outliving one's
savings has gotten worse as Social Security benefits have
been trimmed back and private sector employers have replaced
traditional pensions with 401(k)-style savings plans. In
theory, 401(k) savers can insure against longevity risk by
purchasing life annuities, but few actually do. There are
several reasons for this, starting with the fact that few
have significant savings to begin with-a problem exacerbated
by current low interest rates that lock annuitants into low
annual payments. In addition, potential buyers must navigate
complex and tricky insurance markets and face prices driven
up by adverse selection and asymmetric information, the
classic problem of markets for individual insurance whereby
people at greater risk (of living longer, in this case) are
more likely to purchase insurance and have an incentive to
conceal information to avoid higher risk-adjusted premiums,
leading to higher prices for all consumers and a shrinking
market
Potential annuity buyers also behave in ways are hard to
square with fully-informed and rational behavior, such as
overvaluing lump sums relative to their equivalent in
annuitized benefits and exhibiting loss aversion-in this
case, the tendency to dwell on the potential financial losses
associated with dying prematurely rather than the potential
gains from living a long life. Could tontines at least
counter these behavioral challenges? One psychological hurdle
for would-be annuity buyers is the fact that insurance
companies profit from annuitants' early death, which puts
people in a pessimistic and suspicious frame of mind.
Advocates say tontines could be structured so that only
investors-not issuers-would benefit from the deaths of others
in the pool, which might or might not alleviate these
concerns. (Tontine murders were once a common melodramatic
plot device in plays and murder mysteries)...
*
[A fairly thorough discussion of the pros and cons of
various investment and private insurance options for
retirement security are discussed concluded by the obvious
solution.]
*
...Unlike a tontine scheme, where payments simply increase
in inverse proportion to the share of surviving investors,
such longevity and return-smoothing adjustments are complex
and require trust in the system, so may be better suited to
government-sponsored plans than private sector ones. The
simplest solution, of course, is simply to expand Social
Security, an increasingly mainstream idea among Democrats but
not one that is likely to fly in the current Congress.
"The problem of outliving
one's savings has gotten worse as Social Security benefits
have been trimmed back and private sector employers have
replaced traditional pensions with 401(k)-style savings
plans."
Social Security benefits have been trimmed back? When did
this happen? (Are you referring to the changes made back in
1986, which gradually lengthened the full-benefit retirement
age to 67? It would have been helpful to say so.)
And it's not entirely accurate to say that 401(k)-style
retirement plans have worsened the problem of outliving one's
savings. For millions of retirees, the opposite has been
true; with the cooperation of the stock market (we're in the
second-longest bull market in 85 years), they're withdrawing
tens of thousands every year and seeing their total holdings
*increase* at the same time. Traditional defined-benefit
plans do provide greater security, but they're no match for
401(k)s, IRAs and other similar plans at actually increasing
in value.
This aspect of defined-contribution retirement plans
hasn't gotten nearly the exposure that the negative aspects
have. It's just as true though.
"we're in the second-longest bull market in 85 years"
Sure
... after the biggest crash in 80 years. And since when is
the length of time a bull market lasts, rather than long term
compound annual returns, the important metric?
You're attempt to describe the upside of retirement
savings in at-risk equity investments seems to be built on a
shaky and selective view of recent history.
"... If I had a 401K, I would not be trusting those jackals with my money. My ex lost pretty much everything after he had contributed for 12+ years. ..."
"... As far as cutting off Wall Street from the teat of the Fed, this is a virtual impossibility. Wall Street, the Fed, and the Federal Government, and particularly the National Security State, are all just different faces of the same entity. It would be like trying to separate the front and the back of a dollar bill. You can't do it without destroying the whole thing. ..."
"... "Companies are worried about their employees retirement prospects" Gotta love the language. Maybe they should pay their employees more ..."
"... this is why I don't read the news anymore. The ongoing casual lies are embedded within a broader tapestry of falsehood. ..."
"... Even of the boomers I bet many of them don't have pensions. Why? They didn't work for government or fortune 500s, and it was probably never that many people with lifetime at careers at small companies that got pensions. But much of the employment is small businesses. ..."
"... "The great lie is that the 401(k) was capable of replacing the old system of pensions," No kidding. There are so many great lies with 401(k)'s, the biggest being that it is now expected that people should be able to save enough for their own retirement if they would only assume some personal responsibility. ..."
"... Over the years, I have been astonished at how little many executives understand about finance, taxes, and business. I have always wondered what they actually do in their cocooned meetings. Generally speaking, those meetings result in hilarious memos re-organizing people that don't appear to have anything to do with the normal business while cutting costs that are essential to executing the business. ..."
"... So it is not a surprise to me that a high-level executive would be unaware that a 401k is tax-deferred, not tax-exempt. He probably also thinks that a hedge fund is guaranteed to outperform the S&P 500 and has already moved his money into one, which means he will have less money to pay his taxes with. ..."
"... I'm curious: If you pay the interest on the 401k loan with already-taxed money, is that interest taxed again upon withdrawal from the 401k? ..."
"... Yes it is a 35% tax savings, even if not in the highest bracket. Say in the 25% fed bracket (income of $37,950 to $91,900). Then California income taxes for that income can come to nearly 10%. ..."
"... many 401k accounts tend to have higher costs for equivalent funds than one can get in a rollover IRA. Buyer gots to do their research. ..."
"... No, he's correct. 401(k)s have TONS of hidden fees. You can't even get full disclosure of the full fees. You are guaranteed to have lower fees and more choices at Vanguard. ..."
Since American companies are run by the greediest psychopaths on the planet, the real reason
for the objection to 401K withdrawals might as well be that selling overpriced stock and using
the cash to pay bills, reduces the opportunity of the chief corporate psychopaths to cash out
on their stock options.
It's personal. How dare a peasant beat a corporate bigwig by cashing out early, and reduce
the bigwig's monetary takings by even a penny.
Tapping or pocketing retirement funds early, known in the industry as leakage, threatens
to reduce the wealth in U.S. retirement accounts by about 25% when the lost annual savings are
compounded over 30 years, according to an analysis by economists at Boston College's Center for
Retirement Research.
That's 25% less available funds that Wall Street can steal from customers. Starve the beast?
How do we cut them off from the teat of the FED?
Bernie Sanders: The business of Wall Street is fraud and greed.
precisely. If I had a 401K, I would not be trusting those jackals with my money. My ex
lost pretty much everything after he had contributed for 12+ years.
Re: " American companies are run by the greediest psychopaths on the planet "
I have a quibble with this point of view. Greed takes many forms, and greed for power is just
as motivating as greed for wealth. So I'm of the opinion that corporate psychopaths have plenty
of company in the halls of government, particularly in the National Security arena. These people
have shown that killing hundreds of thousands and destroying the lives of millions more is not
enough to satisfy their lust for power and control. Oh no, not nearly enough. The beast you speak
of must eat every day.
As far as cutting off Wall Street from the teat of the Fed, this is a virtual impossibility.
Wall Street, the Fed, and the Federal Government, and particularly the National Security State,
are all just different faces of the same entity. It would be like trying to separate the front
and the back of a dollar bill. You can't do it without destroying the whole thing.
And if I was Marc Jones, I wouldn't be crying "ovens" too loud. It's happened before, and by
people who may not have been all that much further along the psychopath curve than the ones we
are dealing with now.
I have friends who are just past their mid-30s and borrowed against their 401k to make a house
purchase. A promotion lead to a desire for a bigger home in a nicer town (i.e. schools) and when
they sold their current house a combination of real estate transaction fees and being slightly
underwater on mortgage (I thought housing prices always went up!?) meant the only place they could
go for excess savings was their retirement accounts. Now that's something I would never do, but
I understand the motivation. And from their perspective, things are still on the upswing in terms
of their age and career expected earnings.
I have another colleague who has been at our large company long enough to still have a pension
plan, while our U.K. colleagues are still in a union. Instead of wondering why our older colleagues
have it so good with regards to benefits and time off, they just joke about the days of a pension
being gone and make with the old man cracks.
"Companies are worried about their employees retirement prospects" Gotta love the language.
Maybe they should pay their employees more
If you actually believe that's what companies are concerned about but seriously this
is why I don't read the news anymore. The ongoing casual lies are embedded within a broader tapestry
of falsehood.
Well they could just make contributions to the 401ks for employees themselves without even
requiring the employee to put anything in (without requiring matching). Some companies do do this.
Probably better than just paying them more if they are really worried about their retirement funds,
because if they just paid them more there's a good chance it wouldn't go to retirement. I'm not
opposed to more pay, just realistic about how much might go to retirement. A pension of course
is better but small companies aren't going to manage that financially even if they wanted to.
Even of the boomers I bet many of them don't have pensions. Why? They didn't work for government
or fortune 500s, and it was probably never that many people with lifetime at careers at small
companies that got pensions. But much of the employment is small businesses.
"The great lie is that the 401(k) was capable of replacing the old system of pensions,"
No kidding. There are so many great lies with 401(k)'s, the biggest being that it is now expected
that people should be able to save enough for their own retirement if they would only assume some
personal responsibility.
But the math has never worked. According to Reaganomics, personal responsibility is the solution
to retirement needs, medical costs, education costs, child care costs, unemployment, etc. No one
has ever been able to produce a household budget for a family in the lower half of income that
would ever come remotely close to fulfilling the conservative's fantasy of personal responsibility.
It. Can't. Be. Done.
The great lie that is the 401(k) and Reaganomics serves the same purpose as so many other conservative
lies: it allows more money to flow to Wall Street and the richest Americans. It also is used to
justify tax cuts for the rich and cuts in social programs. It is about the greed of the few against
the living standards of the rest of our society.
The 401(k) was intended to be a supplemental income to a pension, but those pensions no longer
exist and are never coming back. In the face of what has happened, particularly the graft Wall
Street and financial managers have imposed on 401(k)'s and other retirement investments, what
is needed is a much more muscular Social Security system for retirement.
Does anyone know what percentage of boomers (or even older boomers) have pensions? I'm guessing
it's not all that high (even if it's 50%, that means half would be relying on SS and other savings
etc.).
So if all benefited from well funded DB plan wouldn't the economy be smaller from less spending
and markets even more overvalued?
Oh no, the economy would have been smaller so there would have been less money to save
My head hurts thinking about all those what ifs!
It just seems to me that the cost of living for the vast majority will always equal disposable
income because there is alway someone out there younger, willing to work longer hours, willing
to take a pay cut or pay extra for a house. Arbitrage rules.
Asking everyone to save for 30 years of retirement is a farce and sure to fail. And we are
currently witnessing its failure. There are just too many variables.
All it takes is for someone out there to plan using a life expectancy of 80 while another with
the same income uses 95. This gives them way more cash flow during their working years to increase
the price of everything screwing up the plans of those using more conservative assumptions.
Since companies don't care if you survive after you leave them and I bet in many of these big
box stores newbies and old timers probably earn about the same amount 10-15/hr. What is the real
reason they want to stop leakage? That 25% drop in gambling money & earnings for fund managers.
I am guilty moved on to new job and cashed it out. I didn't put any money in, don't care and don't
see this as a real way to ?retire.
After 2008 it seems like 401ks are just a place to dump garbage. What do I know, I am young &
dumb.
Question:
So my spouse has changed jobs 4 times in the last 5 years. Each time we have to cash out the old
401k and deposit it in the new one. Some times this rollover was done by direct wire transfer
from old to new, but one time they sent us a check, which we signed over to the new 401k account.
Are these somehow being counted as "cashing out"? We though these are really rollovers? Just curious
The Wall Street crooks through the governments they own have convinced the majority of the
people that 401(k)s are good because of (1) tax deferral and (2) company contributions. Americans
are obsessed with paying lower taxes that they let the Wall Street Banksters get their claws on
their savings. The laws dictate that only the banksters/brokers can keep and handle your savings.
Each trade results in a commission. Add to this mix the myriad of so called financial consultants
who churn the account for their own benefit. When Wall Street crashes, Good Bye!
BIL (high-level TV executive mostly unemployed for two years) withdrew his entire 401k without
understanding the tax consequences. April 15 a very large number is due to the Feds. Oops.
Over the years, I have been astonished at how little many executives understand about finance,
taxes, and business. I have always wondered what they actually do in their cocooned meetings.
Generally speaking, those meetings result in hilarious memos re-organizing people that don't appear
to have anything to do with the normal business while cutting costs that are essential to executing
the business.
So it is not a surprise to me that a high-level executive would be unaware that a 401k
is tax-deferred, not tax-exempt. He probably also thinks that a hedge fund is guaranteed to outperform
the S&P 500 and has already moved his money into one, which means he will have less money to pay
his taxes with.
Borrowing against your 401k is only an issue if you are saving in it at a low rate. The really
big issue with 401ks is that companies generally do not put much in matching funds in – typically
far less than their old pension fund contributions would be. Instead, those funds have been going
to pay for exorbitant healthcare insurance plans in the vastly over-priced US healthcare system.
I have borrowed against my 401ks over the years. However, I also save at a pretty high rate,
generally at the highest rate that the company permits. So I get the tax savings (been in some
of the highest tax brackets for over 20 years and live in a high income tax state, so about 35%
or so tax deferral) while building an asset base.
Occasionally, something comes up that needs some cash, so I take a loan against the 401k (generally
the value is less than a year's worth of contributions) and set up a schedule to pay it back over
a couple of years. Some years the interest rate on the loan (that you are paying to yourself)
is higher than the portfolio returns and other years it is lower. In the end, I have come out
ahead because I am not trying to save those chunks of money after tax in a bank savings account
that pays little or not interest.
Yes it is a 35% tax savings, even if not in the highest bracket. Say in the 25% fed bracket
(income of $37,950 to $91,900). Then California income taxes for that income can come to nearly
10%.
Mostly true, but it depends. If the new 410k has good, low cost investment options that one
wishes to utilize then it's probably fine. That said, many 401k accounts tend to have higher
costs for equivalent funds than one can get in a rollover IRA. Buyer gots to do their research.
No, he's correct. 401(k)s have TONS of hidden fees. You can't even get full disclosure
of the full fees. You are guaranteed to have lower fees and more choices at Vanguard.
Not just the corporation investing in equities or stock buybacks, or workers investing in equities,
but also the corporations turn themselves into finance/insurance businesses (Westinghouse, etc.)
It's funny that they can't see how they have defeated themselves – and they are blaming leakage
when spending the money is the antidote to stagnation as the system now works. It's hard to imagine
that the corporations want to retire the old workers to make room for new – I don't believe that
for a second because they'll gladly retire 4 olds and hire 1new. It's "flexibility" they are looking
for.
"... This was Alan Greenspan's trick that he pulled in the 1980s as head of the Greenspan Commission. He said that what was needed in America was to traumatize the workers – to squeeze them so much that they won't have the courage to strike. Not have the courage to ask for better working conditions. He recognized that the best way to really squeeze wage earners is to sharply increase their taxes. He didn't call FICA wage withholding a tax, but of course it is. His trick was to say that it's not really a tax, but a contribution to Social Security. And now it siphons off 15.4% of everybody's pay check, right off the top. ..."
"... The effect of what Greenspan did was more than just to make wage earners pay this FICA rake-off out of their paycheck every month. The charge was set so high that the Social Security fund lent its surplus to the government. Now, with all this huge surplus that we're squeezing out of the wage earners, there's a cut-off point: around $120,000. The richest people don't have to pay for Social Security funding, only the wage-earner class has to. Their forced savings are lent to the government to enable it to claim that it has so much extra money in the budget pouring in from social security that now it can afford to cut taxes on the rich. ..."
"... So the sharp increase in Social Security tax for wage earners went hand-in-hand with sharp reductions in taxes on real estate, finance for the top One Percent – the people who live on economic rent, not by working, not by producing goods and services but by making money on their real estate, stocks and bonds "in their sleep." That's how the five percent have basically been able to make their money. ..."
"... The Federal Reserve has just published statistics saying the average American family, 55 and 60 years old, only has about $14,000 worth of savings. This isn't nearly enough to retire on. There's also been a vast looting of pension funds, largely by Wall Street. That's why the investment banks have had to pay tens of billions of dollars of penalties for cheating pension funds and other investors. The current risk-free rate of return is 0.1% on government bonds, so the pension funds don't have enough money to pay pensions at the rate that their junk economics advisors forecast. The money that people thought was going to be available for their retirement, all of a sudden isn't. The pretense is that nobody could have forecast this! ..."
"... In Chile, the Chicago Boys really developed this strategy. University of Chicago economists made it possible, by privatizing and corporatizing the Social Security system. Their ploy was to set aside a pension fund managed by the company, mostly to invest in its own stock. The company would then set up an affiliate that would actually own the company under an umbrella, and then leave the company with its pension fund to go bankrupt – having already emptied out the pension fund by loaning it to the corporate shell. ..."
"... We have the highest healthcare costs in the world, so out of your paycheck – which is not increasing – you're going to have to pay more and more for FICA withholding for Social Security, more and more for healthcare, for the pharmaceutical monopoly and the health insurance monopoly. You'll also have to pay more and more to use public services for transportation to get to work, because the state is not funding that anymore. We're cutting taxes on the rich, so we don't have the money to do what social democracies are supposed to do. You're going to privatize the roads, so that now you're going to have to pay to use the road to drive to work, if you don't have public transportation. ..."
"... "Classical and neo-classical economics, as dominant today, has used the deductive methodology: Untested axioms and unrealistic assumptions are the basis for the formulation of theoretical dream worlds that are used to present particular 'results'. As discussed in Werner (2005), this methodology is particularly suited to deriving and justifying preconceived ideas and conclusions, through a process of working backwards from the desired 'conclusions', to establish the kind of model that can deliver them, and then formulating the kind of framework that could justify this model by choosing suitable assumptions and 'axioms'. In other words, the deductive methodology is uniquely suited for manipulation by being based on axioms and assumptions that can be picked at will in order to obtain pre-determined desired outcomes and justify favoured policy recommendations. It can be said that the deductive methodology is useful for producing arguments that may give a scientific appearance, but are merely presenting a pre-determined opinion." ..."
"... "Progress in economics and finance research would require researchers to build on the correct insights derived by economists at least since the 19th century (such as Macleod, 1856). The overview of the literature on how banks function, in this paper and in Werner (2014b), has revealed that economics and finance as research disciplines have on this topic failed to progress in the 20th century. The movement from the accurate credit creation theory to the misleading, inconsistent and incorrect fractional reserve theory to today's dominant, yet wholly implausible and blatantly wrong financial intermediation theory indicates that economists and finance researchers have not progressed, but instead regressed throughout the past century. That was already Schumpeter's (1954) assessment, and things have since further moved away from the credit creation theory." ..."
"... "Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system." ..."
"... it insults the intelligence of the audience, ..."
"... we would now call ..."
"... totally insupportable on its face. ..."
"... as a corporate, spiritually mandated obligation, ..."
"... You're going to privatize the roads, so that now you're going to have to pay to use the road to drive to work, if you don't have public transportation. ..."
"... Henry Ford II: Walter, how are you going to get those robots to pay your union dues? Walter Reuther: Henry, how are you going to get them to buy your cars? ..."
"... "You're turning the economy into what used to be called feudalism. Except that we don't have outright serfdom, because people can live wherever they want. But they all have to pay to this new hereditary 'financial/real estate/public enterprise' class that is transforming the economy." ..."
"... "The industrial capitalists, these new potentates, had on their part not only to displace the guild masters of handicrafts, but also the feudal lords, the possessors of the sources of wealth. In this respect, their conquest of social power appears as the fruit of a victorious struggle both against feudal lordship and its revolting prerogatives, and against the guilds and the fetters they laid on the free development of production and the free exploitation of man by man. The chevaliers d'industrie, however, only succeeded in supplanting the chevaliers of the sword by making use of events of which they themselves were wholly innocent. They have risen by means as vile as those by which the Roman freedman once on a time made himself the master of his patronus. ..."
"... The starting point of the development that gave rise to the wage labourer as well as to the capitalist, was the servitude of the labourer. The advance consisted in a change of form of this servitude, in the transformation of feudal exploitation into capitalist exploitation. " ..."
Posted on
March 9, 2017 by Yves
Smith Yves here. This Real News Network interview is from a multi-part series about Michael Hudson's
new book, J is for Junk Economics. And after a lively discussion by readers of the economic necessity
of many to become expats to get their living costs down to a viable level, a discussion of the disingenuous
political messaging around retirement seemed likely. Among the people in my age cohort, the ones
that managed to attach themselves to capital (being in finance long enough at a senior enough level,
working in Corporate America and stock or stock options) are generally set to have an adequate to
very comfortable retirement. The ones who didn't (and these include people I know who are very well
paid professionals but for various reasons, like health problems or periods of unemployment that
drained savings, haven't put much away) will either have to continue working well past a normal retirement
age (even charitably assuming they can find adequately compensated work) or face a struggle or even
poverty.
SHARMINI PERIES: It's The Real News Network. I'm Sharmini Peries, coming to you from Baltimore.
I'm speaking with Michael Hudson about his new book J Is For Junk Economics: A Guide to Reality in
the Age of Deception.
Thanks for joining me again, Michael.
MICHAEL HUDSON: Good to be here.
SHARMINI PERIES: So, Michael, on page 260 of your book you deal with the issue of Social Security
and it's a myth that Social Security should be pre-funded by its beneficiaries, or that progressive
taxes should be abolished in favor of a flat tax. Just one tax rate for everyone you criticize. We
talked about this earlier, but let's apply what this actually means when it comes to Social Security.
MICHAEL HUDSON: The mythology aims to convince people that if they're the beneficiaries of Social
Security, they should be responsible for saving up to pre-fund it. That's like saying that you're
the beneficiary of public education, so you have to pay for the schooling. You're the beneficiary
of healthcare, you have to save up to pay for that. You're the beneficiary of America's military
spending that keeps us from being invaded next week by Russia, you have to spend for all that – in
advance, and lend the money to the government for when it's needed.
Where do you draw the line? Nobody anticipated in the 19th century that people would have to pay
for their own retirement. That was viewed as an obligation of society. You had the first public pension
(social security) program in Germany under Bismarck. The whole idea is that this is a public obligation.
There are certain rights of citizens, and among these rights is that after your working life you
deserve to live in retirement. That means that you have to be able to afford this retirement, and
not have to beg in the street for money. The wool that's been pulled over people's eyes is to imagine
that because they're the beneficiaries of Social Security, they have to actually pay for it.
This was Alan Greenspan's trick that he pulled in the 1980s as head of the Greenspan Commission.
He said that what was needed in America was to traumatize the workers – to squeeze them so much that
they won't have the courage to strike. Not have the courage to ask for better working conditions.
He recognized that the best way to really squeeze wage earners is to sharply increase their taxes.
He didn't call FICA wage withholding a tax, but of course it is. His trick was to say that it's not
really a tax, but a contribution to Social Security. And now it siphons off 15.4% of everybody's
pay check, right off the top.
The effect of what Greenspan did was more than just to make wage earners pay this FICA rake-off
out of their paycheck every month. The charge was set so high that the Social Security fund lent
its surplus to the government. Now, with all this huge surplus that we're squeezing out of the wage
earners, there's a cut-off point: around $120,000. The richest people don't have to pay for Social
Security funding, only the wage-earner class has to. Their forced savings are lent to the government
to enable it to claim that it has so much extra money in the budget pouring in from social security
that now it can afford to cut taxes on the rich.
So the sharp increase in Social Security tax for wage earners went hand-in-hand with sharp
reductions in taxes on real estate, finance for the top One Percent – the people who live on economic
rent, not by working, not by producing goods and services but by making money on their real estate,
stocks and bonds "in their sleep." That's how the five percent have basically been able to make their
money.
The idea that Social Security has to be funded by its beneficiaries has been a setup for the wealthy
to claim that the government budget doesn't have enough money to keep paying. Social Security may
begin to run a budget deficit. After having run a surplus since 1933, for 70 years, now we have to
begin paying some of this savings out. That's called a deficit, as if it's a disaster and we have
to begin cutting back Social Security. The implication is that wage earners will have to starve in
the street after they retire.
The Federal Reserve has just published statistics saying the average American family, 55 and
60 years old, only has about $14,000 worth of savings. This isn't nearly enough to retire on. There's
also been a vast looting of pension funds, largely by Wall Street. That's why the investment banks
have had to pay tens of billions of dollars of penalties for cheating pension funds and other investors.
The current risk-free rate of return is 0.1% on government bonds, so the pension funds don't have
enough money to pay pensions at the rate that their junk economics advisors forecast. The money that
people thought was going to be available for their retirement, all of a sudden isn't. The pretense
is that nobody could have forecast this!
There are so many corporate pension funds that are going bankrupt that the Pension Benefit Guarantee
Corporation doesn't have enough money to bail them out. The PBGC is in deficit. If you're going to
be a corporate raider, if you're going to be a Governor Romney or whatever and you take over a company,
you do what Sam Zell did with the Chicago Tribune: You loot the pension fund, you empty it out to
pay the bondholders that have lent you the money to buy out the company. You then tell the workers,
"I'm sorry there is nothing there. It's wiped out." Half of the employee stock ownership programs
go bankrupt. That was already a critique made in the 1950s and '60s.
In Chile, the Chicago Boys really developed this strategy. University of Chicago economists
made it possible, by privatizing and corporatizing the Social Security system. Their ploy was to
set aside a pension fund managed by the company, mostly to invest in its own stock. The company would
then set up an affiliate that would actually own the company under an umbrella, and then leave the
company with its pension fund to go bankrupt – having already emptied out the pension fund by loaning
it to the corporate shell.
So it's become a shell game. There's really no Social Security problem. Of course the government
has enough tax revenue to pay Social Security. That's what the tax system is all about. Just look
at our military spending. But if you do what Donald Trump does, and say that you're not going to
tax the rich; and if you do what Alan Greenspan did and not make higher-income individuals contribute
to the Social Security system, then of course it's going to show a deficit. It's supposed to show
a deficit when more people retire. It was always intended to show a deficit. But now that the government
actually isn't using Social Security surpluses to pretend that it can afford to cut taxes on the
rich, they're baiting and switching. This is basically part of the shell game. Explaining its myth
is partly what I try to do in my book.
SHARMINI PERIES: If the rich people don't have to contribute to the Social Security base, are
they able to draw on it?
MICHAEL HUDSON: They will draw Social Security up to the given wage that they didn't pay Social
Security on, which is up to $120,000 these days. So yes, they will get that little bit. But what
people make over $120,000 is completely exempt from the Social Security system. These are the rich
people who run corporations and give themselves golden parachutes.
Even for companies that have engaged in massive financial fraud, the large banks, City Bank, Wells
Fargo – all these have golden parachutes. They still are getting enormous pensions for the rest of
their lives. And they're talking as if, well, corporate pensions are in deficit, but for the leading
officers, arrangements are quite different from the pensions to the blue collar workers and the wage
earners as a whole. So there's a whole array of fictitious economic statistics.
I describe this in my dictionary as "mathiness." The idea that if you can put a number on something,
it somehow is scientific. But the number really is the product of corporate accountants and lobbyists
reclassifying income in a way that it doesn't appear to be taxable income.
Taking money out and giving it to the richest 5%, while making it appear as if all this deficit
is the problem of the 95%, is "blame the victim" economics. You could say that's the way the economic
accounts are being presented by Congress to the American people. The aim is to popularize a "blame
the victim" economics. As if it's your fault that Social Security's going bankrupt. This is a mythology
saying that we should not treat retirement as a public obligation. It's becoming the same as treating
healthcare as not being a public obligation.
We have the highest healthcare costs in the world, so out of your paycheck – which is not
increasing – you're going to have to pay more and more for FICA withholding for Social Security,
more and more for healthcare, for the pharmaceutical monopoly and the health insurance monopoly.
You'll also have to pay more and more to use public services for transportation to get to work, because
the state is not funding that anymore. We're cutting taxes on the rich, so we don't have the money
to do what social democracies are supposed to do. You're going to privatize the roads, so that now
you're going to have to pay to use the road to drive to work, if you don't have public transportation.
You're turning the economy into what used to be called feudalism. Except that we don't have outright
serfdom, because people can live wherever they want. But they all have to pay to this new hereditary
"financial/real estate/public enterprise" class that is transforming the economy.
SHARMINI PERIES All right, Michael. Many, many, many things to learn from your great book, J Is
For Junk Economics: A Guide to Reality in the Age of Deception. Michael is actually on the road promoting
the book. So if you have an opportunity to see him at one of the places he's going to be speaking,
you should check out his website, michael-hudson.com
So I thank you so much for joining us today, Michael. And as most of you know, Michael Hudson
is a regular guest on The Real News Network. We'll be unpacking his book and some of the concepts
in it on an ongoing basis. So please stay tuned for those interviews.
It's 10 bagger time for sure. A house in the tropics with servants at your beck and call. Breakfast
on the veranda. Lunch at the club. An afternoon sail. Dinner at the house of a famous author.
Or some native woman who cooks spicy food and is hotter than the sun. No shuffleboard and pills!
You need to stay buff if you wanna live like this. You can't be flabby and short of breath.
Yves's remark on retirement by sector is apt. I laugh bitter tears when I see that a financial
CEO contract always includes a "pension," as if the tens of millions of dollars in salary and
bonuses weren't enough.
A "pension" is for those who, broken by a life of hard physical labor, finally can't work any
more for their crust of bread. It's not another revenue line-item that's barely enough to refuel
the yacht.
There was a time when people "saved for retirement." With real rates of return being negative,
and all assets priced arbitrarily at the whim of the central bank's policy du jour, I am perfectly
frank when people ask "what should they invest in": nothing. Pay down your debt, and spend whatever
you have beyond an emergency cushion right now, while you can enjoy it. Savings will inevitably
be wasted, by inflation, the "health-care system," or financial-sector scammers. Do not ask for
whom the bell tolls; if you have to ask, you can't afford it.
This is all in the context of the Federal Government already spending 20% of GDP, a number
that was never designed to happen. It is the States that were supposed to be in charge of the
people's welfare, not the national authority. So the argument that we should increase Federal
taxes to somehow redistribute wealth is also wrong, because that wealth will simply be wasted,
spent by people who are responsible to no one.
At moments like this there are no good choices. Most Europeans have long learned to live with
governments that were hostile to them, and that is where we stand now.
Tocqueville's Democracy In America is tough going in spots, but my gosh, what a beautiful world
he depicts, when the average Pennsylvanian's tax liability beyond his township was $4 a year.
I won't argue too hard about your "Federal vs State" argument, but note that if the state is
in charge of most taxation then Richy Rich can live in a low tax state next door and employ the
well-educated, healthy (single-payer) people in your state.
"Classical and neo-classical economics, as dominant today, has used the deductive methodology:
Untested axioms and unrealistic assumptions are the basis for the formulation of theoretical dream
worlds that are used to present particular 'results'. As discussed in Werner (2005), this methodology
is particularly suited to deriving and justifying preconceived ideas and conclusions, through
a process of working backwards from the desired 'conclusions', to establish the kind of model
that can deliver them, and then formulating the kind of framework that could justify this model
by choosing suitable assumptions and 'axioms'. In other words, the deductive methodology is uniquely
suited for manipulation by being based on axioms and assumptions that can be picked at will in
order to obtain pre-determined desired outcomes and justify favoured policy recommendations. It
can be said that the deductive methodology is useful for producing arguments that may give a scientific
appearance, but are merely presenting a pre-determined opinion."
"Progress in economics and finance research would require researchers to build on the correct
insights derived by economists at least since the 19th century (such as Macleod, 1856). The overview
of the literature on how banks function, in this paper and in Werner (2014b), has revealed that
economics and finance as research disciplines have on this topic failed to progress in the 20th
century. The movement from the accurate credit creation theory to the misleading, inconsistent
and incorrect fractional reserve theory to today's dominant, yet wholly implausible and blatantly
wrong financial intermediation theory indicates that economists and finance researchers have not
progressed, but instead regressed throughout the past century. That was already Schumpeter's (1954)
assessment, and things have since further moved away from the credit creation theory."
"A lost century in economics: Three theories of banking and the conclusive evidence" Richard
A. Werner
Francis Fukuyama talked of the "end of history" and "liberal democracy" in 1989.
Capitalism had conquered all and was the one remaining system left that had stood the test
of time.
With such a successful track record, everything was being changed to a new neo-liberal ideology
and globalization was used to test this new ideology everywhere.
The Great Moderation seemed to indicate that the new ideology was a great success.
"Seemed" is the operative word here.
A "black swan" arrives in 2008 and nothing is the same again, the Central Bankers pump in trillions
to maintain the new normal of secular stagnation.
Sovereign debt crises erupt, the Euro-zone starts to disintegrate, austerity becomes the norm.,
no one knows how to restore growth and the populists rise.
A new ideology comes in that is rolled out globally and seems to work before 2008.
What happened in 2008?
This is the build up to 2008 that can be seen in the money supply (money = debt):
The money supply is flat in the recession of the early 1990s.
Then it really starts to take off as the dot.com boom gets going which rapidly morphs into
the US housing boom, courtesy of Alan Greenspan's loose monetary policy.
When M3 gets closer to the vertical, the black swan is coming and you have an out of control
credit bubble on your hands (money = debt).
The theory.
Irving Fisher produced the theory of debt deflation in the 1930s.
Hyman Minsky carried on with his work and came up with the "Financial instability Hypothesis"
in 1974.
Steve Keen carried on with their work and spotted 2008 coming in 2005.
You can see what Steve Keen saw in the graph above, it's impossible to miss when you know what
you are looking for but no one in the mainstream did.
If you paid off all the debt there would be no money.
Money and debt are opposite side of the same coin, matter and anti-matter.
The money supply reflects debt/credit bubbles.
Monetary theory has been regressing for over 100 years to today's abysmal theory where banks
act as intermediaries and don't create and destroy money.
The success of earlier years was mainly due to money creation from new debt (mainly in housing
booms) globally feeding into economies leaving a terrible debt over-hang.
Jam today, penury tomorrow.
This is how debt works.
Twelve people were officially recognised by Bezemer in 2009 as having seen 2008 coming, announcing
it publicly beforehand and having good reasoning behind their predictions (Michael Hudson and
Steve Keen are on the list of 12).
They all saw the problem being excessive debt with debt being used to inflate asset prices
(US housing).
The Euro's periphery nations had unbelievably low interest rates with the Euro, the risks were
now based on common debt service. Mass borrowing and spending occurs at the periphery with the
associated money creation causing positive feedback.
Years later, it was found the common debt service didn't actually exist and interest rates
correct for the new reality.
Jam today, penury tomorrow.
Why doesn't austerity work? (although it has been used nearly everywhere)
You need to understand money, debt, money creation and destruction on bank balance sheets and
its effect on the money supply. Almost no one does.
Alternative and I would say much more accurate realities:
1) Michael Hudson "Killing the Host", "J is for Junk Economics"
The knowledge of economic history and the classical economists that has been lost and the problems
this is causing. Ancient Sumer had more enlightened views on debt than we have today.
2) Steve Keen "De-bunking Economics"
His work is based on that of Hyman Minsky and looks into the effects of private debt on the
economy and the inflation of asset bubbles with debt.
3) Richard Werner "Where does money come from?"
The only book generally available that tells the truth about money, I don't think there are
any other modern books that do and certainly not in economics textbooks
4) Richard Koo's study on the Great Depression and Japan after 1989 showing the only way out
of debt deflation/balance sheet recessions.
"Although commercial banks create money through lending, they cannot do so freely without
limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive
banking system."
The limit for money creation holds true when banks keep the debt they issue on their own books.
The BoE's statement was true, but is not true now as banks can securitize bad loans and get
them off their books.
Before 2008, banks were securitising all the garbage sub-prime mortgages, e.g. NINJA mortgages,
and getting them off their books.
Money is being created freely and without limit, M3 is going exponential before 2008.
Thanks SOS, agree. We're at that 08 point now, in fact it's worse.
Pensions should just be a click of the computer, no borrowings, savings or taxes needed and
they need to be sufficient to live on.
No, we aren't 'winning'
In Australia, we used to give people the 'aged' at 60 for women and 65 for men. Now its 67
for both, the woman's aged cut in was raised for 'equality' reasons, and it going up to 70 for
my kids.
Politicians, judges, CEOs and the c-class, all those 'shiny bums', they can often work well
into their 60s. The rest of us experience age discrimination in a tight job market and are forced
into menial jobs just when society should be funding their well earned retirement.
The whole "there aren't enough workers to support retirees" meme is risible.
Example: Jane funds an IRA for 30 years. For those 30 years, there is one person paying in,
and zero taking out. When Jane retires, the IRA flips to one person taking out, and zero paying
in.
Disaster, or working as advertised?
That Serious Thinkers, elected officials and the SSA themselves advance this trope to explain
why SS is hopeless is proof of willful mendacity.
Now if these folks admit, well yuh, you paid in over all of these years, but the money ain't
there no more, then first, that's an admission of mismanagement (unsurprising), and second, bail
us the fuck out like you did Wall Street.
Most every purported "help" by the government is the exact opposite: your paying into a black
hole.
Look around you. What around you was paid for by the government? The answer is none of it was.
Taxes are a way to keep the bureaucratic structure afloat. What is very clear is that once government
reaches a certain size it begins to massively leach off of those that work and gives it to those
that "manage".
Look at any industry today and you will find, in the private sector, declining or stagnant
wages for the "drones". Then look at the public sector: expanding, better benefits, better wages,
less work etc. Thinking about it makes my blood boil. I see truckers making less now then 10 years
ago, yet, the industry keeps crying that they "don't have enough workers". Yeah, sorry no one
wants to work 25/8 driving around in the day time, sleeping in a truck at night, getting tracked
through GPS & get penalized for going above speed limits when they can work for the DMV, make
the same amount, and sit at a desk for 7 hours a day with plenty of benefits and vacation time.
Its about time for this system to implode. I see globalization and government expansion as
a huge force that will eventually cause a revolution in the States.
Globalization and the government are simply red herrings meant to distract Trump voters while
shareholder value driven corporate overlords continue looting.
Look around you . The government employs less people than pretty much for my whole
life. Please get informed before you go off on a multi-paragraph rant.
maybe noone should work in trucking, freight trains are much more energy efficient as far as
a means of transporting goods over long distances. Nah I'm not faulting truckers, just saying
it makes no societal sense is all except maybe for the last few miles, but then neither do a lot
of things. I doubt many people want to work at the DMV, but then maybe the benefits are enough
to make a distasteful job seem worth it.
As usual, the abuse of history is the outstanding credibility-buster in this piece. When an
author says this,
Nobody anticipated in the 19th century that people would have to pay for their own retirement.
That was viewed as an obligation of society.
why should I believe anything else that he has to say?
The sole instance given is of Bismarck's Germany, actually ground-breaking in its social welfare
policies, which came only in the last part of the 19th century.
For most of the 19th century, just about everywhere, nobody who worked for a living expected
to live long enough to retire.
Indeed, retirement in past centuries had a different denotation. Its common use was among the
aristocracy, when one of that number determined to remove himself from active (urban) social or
political life and withdraw (hence the etymology, "re-tirer"), usually to the country.
Haygood had to resuscitate "rusticate" for the other day, to achieve a modern equivalent of
that.
All of this is common knowledge. In case you don't think so, spend five minutes with any book
of demographics or social history; and that's just for Europe. Don't let's even ask what "nobody
expected to pay for their retirement" meant in early nineteenth-century Alabama.
By the way, Hudson does this all the time. When I can fact-check offhand, from my fund of common
knowledge, he is often casually abusing the truth. I can be pretty sure that the rest of what
he says is just as unreliable.
You may be correct about the 19th century, but it is 2017. And his points about the US tax
system, the banks, the wealthiest 1% and our gov't deceiving the middle and lower class are solid.
A very basic retirement and healthcare should be provided to all in any decent marginally successful
society. Not to mention a supposedly "great" one.
I think this is where some progressive get tripped up and don't understand why their policies
aren't more popular to the wide swaths of America outside of their bubble.
Often times, these people (I use this term loosely to include working class whites in Appalachia
as well as Silicon Valley libertarians) like to provide a fair and wide safety net. However, most
policies that are advanced are strictly means tested. This causes significant resentment among
those just outside of the cutoff lines. Think: Social Security has essentially blanket coverage.
Yes, there's some redistribution going on behind the scenes, but if I pay in for 30 years I will
get most of my money back. It's wildly popular, while welfare programs are not.
The same applies for health care – Medicare is popular and Medicaid is not. If I pay in for
a government program, I want to be able to take advantage of it. Save me the crap about not wanting
to subsidize the lifestyles of the 1%; they pay in far more than they would take out of the program.
It's a small price to pay to have universal coverage and buy in from all segments of society.
So extending Medicare down to everyone is a better political strategy than extending Medicaid
upwards to encompass higher income levels.
You read a great deal into a statement that you didn't at all prove was untrue. Not impressive.
The question is, did society believe that it had a responsibility of care for people that got
too old to work? You didn't even address that. Yes we know life was "nasty, brutish and (most
often) short. That doesn't invalidate what he said.
PhilM 'I can be pretty sure that the rest of what he says is just as unreliable.'
No mate, he speaks truth and may have exaggerated, but the point remains that here, the UK,
most of Europe – then the state funds your pension if you need one. It is now a social obligation.
Only in the US, do you have this class of people (the working class) who don't deserve retirement
and must fund their own meagre pensions, and if the 'pool which funds the pensions' becomes insufficient,
well you know the rest.
Taxes see, they fund things, or more often don't, because it's a widely accepted lie to keep
the private bank money creation bullshit going forever.
That's the problem, Dog, I generally agree with his point, and with the responders to my comment,
on policy grounds. My point is that leading with something that is provably false, and even probably
false to common knowledge, is not a winning tactic; some would say it insults the intelligence
of the audience, even.
To me this site, if it's about anything, is about filtering out the BS that is used by people
with an agenda to "enhance" their arguments. Lambert does this with a Lancelot-sized skewer. And
part of the beauty is the crowd-sourced fact-checking from an extraordinarily informed, and sceptical,
community.
I may not have much to add to their expertise, but one thing I do know is some European history,
and it drives me berzerk to see people just misuse history as if it strengthens their argument.
If they don't know that what they are saying is true, they should not say it. And by "know it
is true," I mean, know the source, and the source of the source, and be able to judge its reliability.
That is what scholarship is all about: seeing how far down the turtles go.
So when someone just tosses out an assertion about "what the past thought was right," as if
that created a moral obligation or not in 2017 (which as MBC quite rightly observed it does not,
at least not without a clearer argument), they should be critiqued. When their assertion is based
on sloppy cherry-picked facts and wrongly generalized, they should be called out as either uninformed
or malicious, in hopes they will be less so in the future.
That's all I was saying; I did not have a point to make about pensions, because I agree with
Hudson's viewpoints almost all the time, which is why it is so sad to see him turn out to be so
cheesy, so often.
My personal experience of pensions is this: they are a total scam to lock people into exploitive,
nearly intolerable working conditions on the flimsiest of promises in the private sector; and
in the public sector, they are a way of adding to the debt burden of generations yet to come without
the assent of the people: taxation without representation, in effect.
I have seen professionals crumble morally thanks to the force of the pension. It is despicable
corporate oppression at the subtle level, because it looks as if they are doing a good thing,
which of course they are not. It's more subtle than their obvious screaming cruelties to people
and animals and the land, which, it must also be said, nobody does anything about either.
Yes pension systems aren't perfect, but some people don't have family or money to fall back
on when they get old. I am seeing more and more of my own friends in their 60s struggling to earn
money through work. They want to stop, but can't afford to.
And, I am dismayed and disheartened of seeing people on the sidewalks that could be my parents.
Or, shit, me
I have no sympathy for these people. Read Hillbilly Elegy and see the perspective from the
white working class. More often than not, people who are "struggling" in mid life are those who
made bad choices. They abused drugs, had kids out of wedlock, or didn't make a career for themselves.
Often, they spend poorly – on luxury items and consuming excessively.
I live now just like how I did when I was a poor student – with a carefully limited budget
and spending within my means (more on experiences than products). I save 80% of my income and
plan to retire early. More people can do the same.
My mentor/hero bought a fixer upper house that she repaired by herself. She bikes to work every
day in the snow, and buys her clothes from thrift stores. She makes a six figure salary.
Save for an uncertain future, folks, and you won't find yourself in dire straits later on in
life.
For most of the 19th century, just about everywhere, nobody who worked for a living expected
to live long enough to retire.
I suspect your children or your extended family, were your retirement if you lived long enough
pre-20th century times. Also I cannot imagine there was any sort of defined retirement prior to
20th century for the masses. People simply did whatever they could within their families until
they couldn't. Work loads probably just decreased with the fragility of old age.
Also many people did live long lives. IIRC, heavy mortality was primarily concentrated in children
and childbirth and maybe the occasional mass epidemic or bloody war. Dodge those and you could
probably live a fairly long life.
Quite right; there was a bimodal or multimodal curve, which is why mean averages of life expectancy
are not all that enlightening. But the fact is that most people who worked or fought, worked or
fought their whole lives, until they were incapacitated; then there was their family, or the Church,
or the poorhouse, or starvation, usually leading to mortal illness, if it had not done so before
then.
The other side of that story is that the old folk were there as part of the social and economic
unit: helping to pick the harvest with the very youngest; sharing skills and knowledge across
four or five generations, century after century-rather than being shuffled off to die in some
wretched cubby, doing "retirement" things. There's a terrific little book, Peter Laslett's The
World We Have Lost, that gives a well-sourced and interesting picture of pre-industrial family
life that pushes people to overcome some of their self-satisfaction about this kind of thing.
I remember reading where they found a Neanderthal remains that showed that this guy was definitely
disabled to the point where he couldn't have survived alone. Which means someone else helped him
live longer.
That's what humans have always done pretty much, before money. People paid in by being part of
society, and then their community helped them later. Social insurance is just the money big civilization
version of it isn't it?
I'm just thinking of the people with aging parents and children with parent cosigned student
loans And what if they were responsible for paying the $90,000+ / year nursing home payment and
all the medical bills, instead of Social Security, Medicare, Medicaid On top of trying to help
their kids get through college.
The whole scenario is a bad joke and getting worse.
There wasn't 15-20% of the population expecting to live 30 years in retirement and the next
generations to pay for their still mortgaged McMansions and trips to the tropics.
I have no issues paying for retirees. I have issues with asking the younger generations to
pay for lifestyles that are bigger than theirs. The Western retirement lifestyle is too energy
and resource intensive.
I don't think most people collecting a social security check actually have a big lifestyle,
much less trips to the tropics, that's a Charles Schwab commercial, not a reality for most people.
What Social Security has done is mostly reduce the number of old people living in poverty. Ok
so young and middle age people are still living in poverty, making everyone live in poverty including
people that are old and frail and sick is not an improvement. Are retired people's lifestyles
actually shown to be more energy intensive, I think in many ways they would be less so, ie not
making that long commute to the office everyday anymore etc..
Sorry, but your comment is delusional. It is impossible for someone retired on only Social
Security to "pay for their still mortgaged McMansions and trips to the tropics". In what universe
is that possible on a MAXIMUM annual income of less than $32,000? Googling "maximum social security
benefits" generates the following info:
"The maximum monthly Social Security benefit payment for a person retiring in 2016 at full retirement
age is $2,639. However, the maximum allowable benefit amount is only payable to those who had
the maximum taxable earnings for at least 35 working years. Depending on when you retire and how
much you made while working, your benefits may be considerably less. The estimated average monthly
benefit for "all retired workers" in 2016 is $1,341."
I suspect a lot of people (younger than boomers) might be still mortgaged to a small degree
when they retire as housing costs have gone up so that people can't afford a mortgage when they
are young, so if they buy real estate at all it's at middle age, buy the first home in their 30s
or 40s or 50, for a 30 year mortgage. But McMansions have nothing to do with that.
The income distribution table shows that the younger retirees 65-75 are not suffering when
compared to the working population they seem to have a good thing going for them
Merging all these data points, it becomes quite apparent that there is a large percentage of
retirees who still carry debt while collecting social security.
Increasing social security to some group means making another group pay
As usual, the abuse of history is the outstanding credibility-buster in this piece. When
an author says this,
Nobody anticipated in the 19th century that people would have to pay for their own retirement.
That was viewed as an obligation of society.
why should I believe anything else that he has to say?
The sole instance given is of Bismarck's Germany, actually ground-breaking in its social
welfare policies, which came only in the last part of the 19th century.
For most of the 19th century, just about everywhere, nobody who worked for a living expected
to live long enough to retire.
Indeed, retirement in past centuries had a different denotation. Its common use was among
the aristocracy, when one of that number determined to remove himself from active (urban) social
or political life and withdraw (hence the etymology, "re-tirer"), usually to the country.
Historically, he is right and you are entirely wrong, which is not surprising as Michael Hudson
is originally a philologist and historian and has specialised in economic history.
The modern conception of retirement is mostly a 20th Century invention, but throughout history,
there are many versions of 'retirement', and they were almost always paid out of current expenditures.
Roman soldiers were paid lump sums and frequently given land on reaching retirement age through
the Aerarium Militare. Militaries throughout ancient and medieval history had similar schemes,
and not just for officers, but again, these were rarely if ever paid out of a contribution scheme
– it was considered an obligation of the State.
In many, if not most societies, it was accepted that aristocratic employers and governments
had obligations to elderly staff – for example, fuedal workers would keep their homes when they
were no longer capable of working, and this extended well into the 19th Century. Organised religions
would almost always have systems for looking after retired religious members, again, always paid
out of current revenues, not some sort of investment fund. The concept of a fixed retirement age
(outside of the military) is a relatively modern one, but the concept of 'retirement' is not modern
at all.
This is the worst strawmanning bull**** I have seen in a while; it is simply infuriating. I
don't have the time to put all of what follows into perfect order, but here's what I can tap out
in a minute or two.
If, PK, you are trying to prove that some people in the past have stopped work and still gotten
paid, as part of their lifetime compensation for the work they have done, and that this is, de
facto, compensation during what we would now call "retirement," you win. Straw man knocked
over.
So let me again quote what Hudson says, just so your argument can be demonstrated as the pointless
distraction that it is:
"Nobody anticipated in the 19th century that people would have to pay for their own retirement.
That was viewed as an obligation of society."
That couldn't be clearer. "Nobody anticipated," as in "nobody." Meaning it was a generally
accepted social value that . what follows. What follows is "people," as in "people"; not just
soldiers, or priests, or servants; "people," ie, Gesellschaft; and then, "their own retirement,"
(which can only imply a period when they were old enough still to do something productive that
earned money, but chose not to, instead; because otherwise it would be called "disability," right?).
"That was viewed as an obligation of society," meaning, it was a right, not a privilege or gift
or compensation, and it was universal, because it applied to "people," and "nobody" thought otherwise.
There is just nothing there that is justifiable in any way based on the history of the nineteenth
century. The only exception is Bismarck's Germany, which is adduced as proof of the statement,
which is totally insupportable on its face.
If you stand by that, and are trying to suggest that "retirees," meaning as a group everyone
in society beyond a pre-defined age, as opposed to the disabled, were ever perceived as having
a societally based right to welfare support before the very late nineteenth or early twentieth
century, and that only in a very few, very advanced places, you fail three times over.
You do this in classically ahistorical ways: you conflate Gesellschaft with Gemeinschaft; you
adduce the military of the ancient world, which is just hilariously anachronistic, but even those
prove you wrong when examined closely; you completely misconstrue the rules of the corporately
organized ancien regime, which by the way was ancient history as far as the post-Dickensian industrializing
Europe that Hudson speaks of; you adduce the military and the priesthood as if they were representatives
of "society" as a whole, which they were not–they were adherents of the body that made the rules,
and liked to keeps its friends close, and could reward them. The same, while you are at it, was
true of some different varieties of public servants–but not many, and again, not before the late
nineteenth century, and certainly not in the US:
"Like military pensions, pensions for loyal civil servants date back centuries. Prior to the
nineteenth century, however, these pensions were typically handed out on a case-by-case basis;
except for the military, there were few if any retirement plans or systems with well-defined rules
for qualification, contributions, funding, and so forth. Most European countries maintained some
type of formal pension system for their public sector workers by the late nineteenth century.
Although a few U.S. municipalities offered plans prior to 1900, most public sector workers were
not offered pensions until the first decades of the twentieth century. Teachers, firefighters,
and police officers were typically the first non-military workers to receive a retirement plan
as part of their compensation."
Your ad hominem appeal to Hudson's authority as a historian is amusing: it is actually
not surprising that Hudson is wrong, and I am right; because he is an economic historian,
with a special faculty, apparently, for conducting contemporary policy polemics; and I would be
happy to give you my professional authority, except that this is the internet, so appeals to professional
authority don't mean anything at all, but I'll just put it to you that it is more than sufficient;
but leaving that aside, I am without a polemical agenda, except just this one: that the past needs
to be respected in its totality, and that even when being used to score points in contemporary
policy arguments. I know which of us has more credibility here just by reading Hudson's sentences,
which are devoid of historical meaning or sensitivity; and I know that I, as a historian, would
never knowingly misuse the past to make a point about the present, because that is being a bad,
bad doctor.
You bring up three cases: military, clergy, and servants. Those are exactly not what
Hudson is talking about when he mentions Bismarck, or the nineteenth century, or retirement and
its old age provisions as a whole, so you basically proved my point just by failing to address
the actual argument. What Hudson is referring to-because he says so with his one example-is the
Bismarckian "Gesellschaft" obligation to what had in previous centuries been called the the third
estate in generic terms. Not, mind you, the first and second estates and their servants and adherents.
If Hudson were talking about pensions for the military, he would have said so, and his argument
would have ended there, in a paragraph, because they are fully protected in that regard and have
been, at least more than the average citizen, since the GI Bill. Pensions for the military is
not part of some kind of "social obligation" for retirees; it is a reward for long service, and
therefore not some kind of "right of social welfare," but a kind of compensation, and it was not
much, at that, in the 19th century.
The regular clergy, which made up most of the clergy until the dissolutions, did not retire:
their jobs were for life, because they lived a life of prayer, and that was not something that
ever ended. The Church supported all clergy as a corporate, spiritually mandated obligation,
not as a generalized "social obligation" like social security, or what Bismarck instituted.
If your point is that certain corporate groups took care of their privileged members when they
no longer worked, that is one thing; if your point is that "retirement" as a condition that merited
social welfare, in general, the clergy don't make that for you. They were exceptions to the general
rule that people had to fend for themselves, a rule that applied to the entire third estate by
definition from time immemorial.
Lastly, servants: those who "retired" in the nineteenth century very often did not have the
same treatments as servants in the ancien regime, many of whom died in harness in any case. But,
if their employing families did continue to provide for them, they did so not out of a sense they
were meeting the "obligation of society to the retired," but as a matter of family or community
duty, noblesse oblige. It was completely at the mercy and discretion of the family involved. It
was a matter of personal honor, and still is, when servants have been your friends and companions
and have prepared and eaten the same food you have, and cleaned your mess and watched your back
and brushed your horses and trained you to ride, and seen your youthful foolishness, sometimes
for generations. Those are not "obligations of society"; they are personal and family and moral
obligations. So Cato the Elder took some heat for his recommendations on discarding old and broken
down slaves, but nobody suggested it was up to the Republic to pay for them instead. Since you're
going to the ancient world, you might better have used that example than that of the soldiers.
And so all that is what Hudson is not talking about. He's talking about Bismarck's
social security as a moral precedent, reflecting a widely held belief in the popular right to
a social safety net after a certain age.
So of course some people were "pensioned." They were called "pensioners," and many of them
were not at all "retired," but had gone on to work at other things, like soldiers who opened up
fish-and-chips shops (q.v.). That does not mean that there was ever a Gesellschaft-like concept
of "retirement" as a condition that brought the right to support by the commonwealth; not before
Bismarck. That's what Hudson's reference tries to imply, that such a concept was common in the
19th century, at a widespread societal level in Western Civilization, and it is provably, demonstrably,
obviously wrong. If it weren't, why would the Old-Age Pensions Act 1908 have ever been passed?
"Nobody anticipated in the 19th century that people would have to pay for their own retirement.
That was viewed as an obligation of society."
You simply cannot construe that to have any truth, given the facts of the century. You can
straw-man me about the concept of "retirement" all you like, although you are still wrong there,
because the groups you name aren't people who "work for a living," which is the third estate;
they are the first and second estates, and their adherents: those who fight for a living, and
pray for a living, and those who obey them.
So the fact remains that Hudson's statement was just polemical fluff, and no historian worth
the name should have uttered it. I guess I'll sit here and wait for his response, because yours,
well .
"He didn't call FICA wage withholding a tax, but of course it is."
This just drives me to apoplexy. 1, that it is not called a tax, and 2, that wage taxes are
never ever reduced.
Incessant yammering about "incentives" – but doesn't a wage tax disincentivise both employers
and employees with regard to wage work? – – Endless talk about how CEO's can't do ANYTHING unless
their taxes are REDUCED!!!!!!! But somehow .that just goes out the window when it comes to wages
– TAXES MUST GO UP.
Cheney – deficits don't matter .except apparently with regard to social security ..
The other scam about FICA and its "separate" funding is that social security being in balance
is OH SO IMPORTANT – deficits will be the death of it. Yet the general fund is in deficit (see
Mish today for a bunch of stuff on the hypocrisy of repubs on the deficit) and ever more deficit
and nobody seriously cares about it or worries about it. MONEY can always be found for invading
for Iraq, and paying for invading anybody is NEVER a problem. Feeding old folks, on the other
hand, sure strains the resources
Its like it is as important to keep a reserve army of the impoverished as it is to keep the empire.
FD -'This just drives me to apoplexy' Breathe, buddy.
Yes, mate, feeding old folks – looking after the oldies so they have health care, decent food
and a home.
How well each country does it reflects their views on whether it's a social obligation. For
many countries, there is no safety net and families provide the care, if they can.
It's becoming that way in the west too. I don't see many governments increasing welfare for
our poorest people, benefits are being gutted and those that did save for retirement are seeing
their funds looted and zero interest paid
Life in Indian joint family is great- no retirement work- food for life for a member- great
lack of boredoms and lonely depressions- life, life ,- exquisite vegetarian food fit for Gods-
low tech human scale towns- GREAT TO BE ALIVE ON 3 dollars a day! This talk of retirement and
working and senior junior savings is so pathetic that my sex drive just evaporated into thin air
reading it! Get a life.
It's good to read Michael Hudson's call-out of FICA as a mechanism to crush workers and transfer
wealth to the already rich.
FICA is indeed the worse sort of deductive reasoning. It is based on the premise that the rich
are entitled to be rich, and that the masses want to take their money from them. In America in
particular, wealth has historically been based on grants from the sovereign to loot the commons
(timber, agriculture, mineral extraction, railroads, military procurement, data mining, etc.).
These grants to loot the commons have nearly always been based on corrupt practices of cronyism
and bribery. Alchemists like Greenspan simply provide theo-classical mumbo-jumbo after-the-fact
justification for their piracy.
Ironically, I was just reading about impending failure of the Oroville Dam, a prime example
of America as the seat of greed. It was well-known that the spillways were inadequate and crumbling
due to 50 years of use. However, the Reagan-ites of Southern California refused to tax themselves
in order to save Oroville and Yuba City, 450 miles away.
It's sad that everyone, especially the rich, think that they can blow-up the United States
and then fly to their bolt-hole in New Zealand or Australia - or if you're not so rich to a shack
in Panama or Thailand. I suspect that we will soon find ourselves to be unwelcome pariahs in those
places.
How is FICA a redistribution to the wealthy? If anything, what you pay in buys you a share
of the distributions when you retire. That means the output is roughly proportional to the input
you contribute. The wealthy stop contributing after roughly the $120,000 limit, but that doesn't
mean they take an outsized distribution. They take home exactly the same (pre-tax) as someone
who only made $120,000 per year.
If anything there's a bit of redistribution behind the scenes that favours the poor. See my
earlier post. If you make too many changes to Social Security such that it becomes another welfare
program, it will lose its popular backing and eventually get axed.
Neoliberalism is OUT-DATED. Rather, for the past four decades, it's been fiat currency for
the .01% and gold standard straitjacket ideology for everyone else.
"The mainstream view is no longer valid for countries issuing their own non-convertible currencies
and only has meaning for those operating under fixed exchange rate regimes,
'The two monetary systems are very different. You cannot apply the economics of the gold standard
(or USD convertibility) to the modern monetary system. Unfortunately, most commentators and professors
and politicians continue to use the old logic when discussing the current policy options. It is
a basic fallacy and prevents us from having a sensible discussion about what the government should
be doing. All the fear-mongering about the size of the deficit and the size of the borrowings
(and the logic of borrowing in the first place) are all based on the old paradigm. They are totally
inapplicable to the fiat monetary system' (Mitchell, 2009).
We might now consider the opportunity afforded by the new monetary reality, effectively modelled
by MMT. A new socio-political reality is possible which throws off the shackles of the old. The
government can now act as a currency issuer and pursue public purpose. Functional finance is now
the order of the day. For most nations, issuing their own fiat currency under floating exchange
rates the situation is different to the days of fixed exchange rates. Since the gold window closed
a different core reality exists – one which, potentially at least, provides governments with significantly
more scope to enact policies which benefit society.
However, the political layer, in the way it interacts with monetary reality, has a detrimental
effect on the power of democratic governments to pursue public purpose. In the new monetary reality
political arrangements that sprang up under the old regimes are no longer necessary or beneficial.
They can largely be considered as self-imposed constraints on the system; in short the political
layer contains elements which are out-of-date, ideologically biased and unnecessary. However,
mainstream economists have not grasped this situation – or perhaps they cannot allow themselves
to- because of the vice-like grip that their ethics and 'traditional' training has on them.
MMT provides the best monetary models out there and highlights the existence of additional
policy space acquired by sovereign states since Nixon closed the gold window and most nations
adopted floating exchange rates. We just need to encourage the use of the space to enhance the
living standards of ordinary people."
Heterodox Views of Money and Modern Monetary Theory (MMT) by Phil Armstrong (York College)
2015
A new socio-political reality is possible which throws off the shackles of the old. The
government can now act as a currency issuer and pursue public purpose. Functional finance is
now the order of the day. For most nations, issuing their own fiat currency under floating
exchange rates the situation is different to the days of fixed exchange rates. Since the gold
window closed a different core reality exists – one which, potentially at least, provides governments
with significantly more scope to enact policies which benefit society.
What I especially like about your post is that it finally takes the mask off and openly admits
what everyone who tries to learn about MMT has realized at once: that for all of its utility in
understanding money systems, it is designed and propounded with an agenda: to undermine the mores
underlying centuries of private-property-based liberal capitalism. Those mores, which remain more
than illusions despite the encroachments of central banks, are the last barrier to prevent state
capitalism from becoming completely authoritarian, because as long as "taxation" is, at least
theoretically, the limit on state spending and therefore power, then "representation" actually
means something, and so representative democracy and property rights, which are the keys to a
functioning productive civil society and underlie all human progress for eight hundred years,
can survive a bit longer.
The very real and useful core of MMT, which describes what we see happening since the gold
standard fell, and is therefore unimpeachable from a certain objective turn of mind, is Janus-faced.
On the one hand, it acknowledges what the Framers knew intuitively when they gave the Federal
government the power of issuing money: the sovereign makes the money. On the other, as often used
here, and especially in your comment, it is a rationale for a government unrestrained by property
rights and representative constraints on its power of expenditure. That will not end well, simply
because it will not last long, and it will end in a military despotism or landed aristocracy (if
you're lucky). Because it always has, and you are not going to change that, are you?
In one of the recently discovered lectures (1940) by Karl Polanyi, in referring to post-war
Europe (post 1918) he argued:
"The alternative was between an integration of society through political power on a democratic
basis, or if democracy proved too weak, integration on an authoritarian basis in a totalitarian
society, at the price of the sacrifice of democracy."
It is still the same issue today which PhilM nicely illuminates when he states: "..What I especially
like about your post is that it finally takes the mask off and openly admits what everyone who
tries to learn about MMT has realized at once: that for all of its utility in understanding money
systems, it is designed and propounded with an agenda to undermine the mores underlying centuries
of private-property-based liberal capitalism. These mores, which remain more than illusions despite
the encroachments of central banks, are the last barrier to prevent state capitalism from becoming
completely authoritarian, because as long as "taxation" is, at least theoretically, the limit
on state spending and therefore power, then "representation" actually means something "
The national security state already has a potentially totalitarian hold on us and in the future
the MMT scenario "as a rationale for a government unrestrained by property rights and representative
constraints on its powers of expenditure" might nicely finish us off.
It would no longer be the neo-liberal present where the whole of society must be subordinated
to the needs of the market system, but the other extreme, where the whole of society must be subordinated
to the needs of the state supposedly working in the "public interest."
it is designed and propounded with an agenda: to undermine the mores underlying centuries
of private-property-based liberal capitalism.
You say that like it's a bad thing :-)
the last barrier to prevent state capitalism from becoming completely authoritarian
State capitalism? If this is supposed to be a topical reference I don't get it.
as long as "taxation" is, at least theoretically, the limit on state spending and therefore
power, then "representation" actually means something
How so? Did "taxation" restrain Bush from spending trillions on invasions? Can't you have representation
without taxation?
representative democracy and property rights, which are the keys to a functioning productive
civil society and underlie all human progress for eight hundred years
I thought that was the Catholic Church
"Property rights"-the private monopolisation of the gifts of nature-at least in their traditional
form, seem to me to be the third fundamental flaw in our political economy, along with Capitalism
(narrowly defined) and our bogus monetary ludibrium. We need a new Church.
MMT: great stuff. With you 100%. The issue is corruption and this culture of privilege and
corruption we live in. You better believe the government will be issuing currency for other than
the public interest. The fact is we live in an MMT economy now, it's just that the currency created
by the government is being passed out to the ethnically privileged .001%. The talk of deficits
and national debt is all a smoke screen to cover up this fact. It is way past time to educate
the masses on this theme, kudos to Michael Hudson & Steve Keen.
One part of society parasitical on the productive part .. starts small. $1 per $1000, then
$10 per $1000 until it gets to $1000 per $1000. Neither bought politicians, nor bought citizens,
stays bought.
Of course we shouldn't expect women and children to work that is destructive of reproduction
and child raising. Some women should work some children should work but only a few. Otherwise
obvious system dynamics will reduce the net population in quality and quantity.
You're going to privatize the roads, so that now you're going to have to pay to use the
road to drive to work, if you don't have public transportation.
This is a zero-sum game for the elite. They're already soaking us. If they soak us on tolls,
they'll have to take less money soaking us another way.
In contrast, Fed Gov reducing spending is not a zero-sum game for the elite. That means less
money to be soaked up from the public. Unless of course, the public compensates by taking out
more private debt. In which case, ka ching for the elite again.
That said, I don't think the mind-set really is to reduce Fed Gov spending. Rather, the mind-set
is to reduce entitlements so that other Fed Gov spending can be increased, namely on defense,
intelligence communities, etc. And I really don't think the elite have much of a dog in that fight.
After all, the elite suck up all the money regardless of how it's spent by the Fed Gov. So my
guess is that this campaign to reduce entitlement spending is being waged by the other agencies
in the Fed Gov and the eco-system that feeds off them.
In the 1980s Greenspan pushed for massive increases in FICA. And Reagan spent it on Star Wars.
Recently I've read that that wasn't really a missile shield project but a cyber technology project.
Today we read that the CIA has disseminated all this accumulated and obsolete technology; leased
it out to private contractors; or variously bribed the Europeans with it. Etc. Fast-back to the
1930s and FDR took the same SS money for WW2. In the 60s, JFK agonized about the budget and the
value of the dollar and could see no reason to go into Vietnam, but oops. LBJ bulldozed through
Congress our Medicare plan, which upped SS contributions, and he went promptly into Vietnam, spending
it all and stuffing the retirement funds with treasuries. Shouldn't we all be looking at how transitory
these achievements (or disasters) have been. Maybe nothing more than boosting the economy for
a few years every other decade or so. Money could achieve much more than this if we accepted as
fact the fleeting benefits of misspending it and instead concentrated on a steady economy benefiting
all. Hubris rules, but it doesn't ever make things better.
'it's a myth that Social Security should be pre-funded by its beneficiaries' - Sharmini
Peries
If it's a myth, it's one that's incorporated in the Social Security Act of 1935, as well as
(for private pensions) the ERISA Act of 1974.
After about a century of experimentation, we know how to fund pensions securely: estimate the
present value of the future liability using an appropriate discount rate, and then keep it funded
on a current basis.
Social Security grossly violates this model in three respects. First, it is only about 20 percent
funded, headed for zero in 2034 according to its own trustees.
Second, because Social Security does not avail itself of the Capital Asset Pricing Model developed
in the 1960s, it invests in low-return Treasuries, which causes required contributions to be cruelly
high. Had Soc Sec been invested in a 60/40 mix of stocks and bonds, FICA taxes could have been
half their current level and funded higher benefits.
Third and finally, Social Security is treated as an off balance sheet obligation in the Financial
Report of the United States. Unlike the legally enforceable obligation of private pension sponsors
to make good on their promises, the government refuses to take responsibility and put itself on
the hook. The Supreme Court has ruled that Social Security essentially is a welfare program, which
Congress can cut back or cancel at will. So much for "security" - there isn't any.
Social Security is part of a general pattern of government taking a sleazy, second-rate approach
to its social promises, by exempting itself from well-established prudential rules mandating best
practices. Frank Roosevelt wanted his constituents to be forever dependent on the kindness of
perfidious politicians. He got his wish.
>we know how to fund pensions securely: estimate the
C'mon Jim you can do better than that. Here is dictionary.com, do you see the problem with
your statement?
know:
verb (used with object), knew, known, knowing.
1. to perceive or understand as fact or truth; to apprehend clearly and with certainty:
estimate
verb (used with object), estimated, estimating.
1.to form an approximate judgment or opinion regarding the worth, amount, size, weight, etc.,
of; calculate approximately:
When you lend money to the profligate, they are happy. When you ask to be repaid, they are
furious. It turns out that is just as true when workers who payroll taxes on their whole income
"lend money" to the wealthy by paying excess amounts to the SS trust fund which in turn, enabled
tax cuts for the wealthy. The wealthy are incensed that the SS trust fund, which has "lent" trillions
to the treasury is now demanding to be "repaid" with interest.
That's the trick about S.S. that gets me. You cannot pay in 15% of your income with some amount
of reasonable compounding interest for your entire career and not have a massive nest egg at the
end. But the math is done straight up such that there never was interest on the payments, so we
are entitled to very little, despite every other form of investing on the planet returning some
kind of interest.
It's one of the reasons I argue for a Sovereign Wealth Fund to retain and manage all SS recepts,
so at least the contributions and return on investment are accounted for in plain sight, so nobody
can bait and switch.
And heaven forbid the Sovereign wealth fund could also be used as government bank that loans
(our) money direct to citizens, without private banks getting a cut.
It ain't utopia, but it is a way of playing their game and still winning results and the pr
war even in the face of the most anti-sociailst conservative.
We need to keep up with the Feudalism 2.0 Moniker.
We continue to refine society towards only 4 classes of people:
Warlords/Politicians
Productivity Owners
Rent Extractors
The Oppressed
Over the last 35 years the productivity owners have been making a run, vacuuming up all the
productivity improvements leaving everybody else stagnant, before considering inflation, but with
the robotic age coming, they are just getting warmed up.
>but with the robotic age coming, they are just getting warmed up.
Hmmm.
Henry Ford II: Walter, how are you going to get those robots to pay your union dues?
Walter Reuther: Henry, how are you going to get them to buy your cars?
Apparently not an actual quote, but one Reuther certainly endorsed.
You know "they" are just planning to kill 2/3 of us off, don't you? The elite are evil and
sure many of them are stupid, but far from all of them.
"You're turning the economy into what used to be called feudalism. Except that we don't
have outright serfdom, because people can live wherever they want. But they all have to pay to
this new hereditary 'financial/real estate/public enterprise' class that is transforming the economy."
Spot.On.
From Marx's "Capital", Chapter 26 (The Secret of Primitive Accumulation):
"The industrial capitalists, these new potentates, had on their part not only to displace
the guild masters of handicrafts, but also the feudal lords, the possessors of the sources of
wealth. In this respect, their conquest of social power appears as the fruit of a victorious struggle
both against feudal lordship and its revolting prerogatives, and against the guilds and the fetters
they laid on the free development of production and the free exploitation of man by man. The chevaliers
d'industrie, however, only succeeded in supplanting the chevaliers of the sword by making use
of events of which they themselves were wholly innocent. They have risen by means as vile as those
by which the Roman freedman once on a time made himself the master of his patronus.
The starting point of the development that gave rise to the wage labourer as well as to
the capitalist, was the servitude of the labourer. The advance consisted in a change of form of
this servitude, in the transformation of feudal exploitation into capitalist exploitation. "
"... Wasn't there a recent discussion about how 401(k)s are a sham? ..."
"... Hillary should have campaigned on this policy of diverting savings to Wall Street in order to help exports. This would have gotten more voters to the polls.... Call it a private Wall St. tax on savers. ..."
"... from Miles Kimball the supply-sider ..."
"... how would Brad Setser think about an 8 percent tax on Chinese consumers that the Communist sovereign wealth fund could invest abroad for their retirement? That would boost Wall Street some more. ..."
"As I explained in my May 14, 2015 column "How Increasing
Retirement Saving Could Give America More Balanced Trade":
I talked to Madrian and David Laibson, the incoming chair
of Harvard's Economics Department (who has worked with her on
studying the effects of automatic enrollment) on the
sidelines of a Consumer Financial Protection Bureau research
conference last week. Using back-of-the-envelope calculations
based on the effects estimated in this research, they agreed
that requiring all firms to automatically enroll all
employees in a 401(k) with a default contribution rate of 8%
could increase the national saving rate on the order of 2 or
3 percent of GDP."
Wasn't there a recent discussion about how 401(k)s are a
sham?
Progressive neoliberals....
Hillary should have campaigned on this policy of diverting
savings to Wall Street in order to help exports. This would
have gotten more voters to the polls.... Call it a private
Wall St. tax on savers.
how would Brad Setser think about an 8 percent tax on Chinese
consumers that the Communist sovereign wealth fund could
invest abroad for their retirement? That would boost Wall
Street some more.
Peter K. -> Peter K....
, -1
The other benefit of Kimball's plan - from a prog neolib
viewpoint - is that it would weaken Social Security.
In the nondescript
world of public
policy, oopsies don't
get any bigger than
this.
In a remarkable
story (#) in Tuesday's
Wall Street Journal,
several early
champions of 401(k)s,
the now-ubiquitous
tax-deferred plans
that help workers sock
away retirement funds,
expressed regrets for
what their efforts
later yielded: Private
pensions have
withered. Individual
workers now shoulder
risks that large
corporations once
bore. Investment fees
chip away at account
owners' returns. The
typical American
worker is badly
underprepared for old
age.
"I helped open the
door for Wall Street
to make even more
money than they were
already making," said
benefits consultant
Ted Benna - sometimes
known, according the
Journal's Timothy W.
Martin, as the "father
of the 401(k)." "We
weren't social
visionaries," said
former Johnson &
Johnson
human-resources
executive Herbert
Whitehouse, who helped
popularize the plans.
"The great lie is that
the 401(k) was capable
of replacing the old
system of pensions,"
said Gerald Facciani,
the former head of the
American Society of
Pension Actuaries.
Whoops.
Older Americans'
fear of leaving the
workforce with nothing
saved surely added to
the economic unease
that Donald Trump
channeled in his
campaign. ...
Instead, a Republican
Congress and the
incoming Republican
president are
preparing to repeal
Obamacare and replace
it with individual
health savings
accounts, or something
else, or perhaps
nothing at all. At the
least, the new regime
in Washington should
heed a lesson from the
401(k) debacle: When
you fiddle with the
safety net, you should
consider how people
and corporations
behave in real life.
...
Herbert Whitehouse was
one of the first in
the U.S. to suggest
workers use a 401(k).
His hope in 1981 was
that the
retirement-savings
plan would supplement
a company pension that
guaranteed payouts for
life.
Thirty-five years
later, the former
Johnson & Johnson
human-resources
executive has
misgivings about what
he helped start.
What Mr. Whitehouse
and other proponents
didn't anticipate was
that the tax-deferred
savings tool would
largely replace
pensions as big
employers looked for
ways to cut expenses.
Just 13% of all
private-sector workers
have a traditional
pension, compared with
38% in 1979.
"We weren't social
visionaries," Mr.
Whitehouse says.
Many early backers
of the 401(k) now say
they have regrets
about how their
creation turned out
despite its emergence
as the dominant way
most Americans save.
Some say it wasn't
designed to be a
primary retirement
tool and acknowledge
they used forecasts
that were too
optimistic to sell the
plan in its early
days.
Others say the
proliferation of
401(k) plans has
exposed workers to big
drops in the stock
market and high fees
from Wall Street money
managers while making
it easier for
companies to shed
guaranteed retiree
payouts.
"The great lie is
that the 401(k) was
capable of replacing
the old system of
pensions," says former
American Society of
Pension Actuaries head
Gerald Facciani, who
helped turn back a
1986 Reagan
administration push to
kill the 401(k). "It
was oversold."
Misgivings about
401(k) plans are part
of a larger debate
over how best to boost
the savings of all
Americans. Some early
401(k) backers are now
calling for changes
that either force
employees to save more
or require companies
to funnel additional
money into their
workers' retirement
plans. Current
regulations provide
incentives to set up
voluntary plans but
don't require
employees or companies
to take any specific
action. ...
The advent of
401(k)s gave
individuals
considerable
discretion as to how
and even whether they
would save for
retirement. Just 61%
of eligible workers
are currently saving,
and most have never
calculated how much
they would need to
retire comfortably,
according to the
Employee Benefit
Research Institute and
market researcher
Greenwald &
Associates.
Financial experts
recommend people amass
at least eight times
their annual salary to
retire. All income
levels are falling
short. For people ages
50 to 64, the bottom
half of earners have a
median income of
$32,000 and retirement
assets of $25,000,
according to an
analysis of federal
data by the New
School's Schwartz
Center for Economic
Policy Analysis in New
York. The middle 40%
earn $97,000 and have
saved $121,000, while
the top 10% make
$251,000 and have
$450,000 socked away.
Savings gap
And the savings gap
is worsening.
Fifty-two percent of
U.S. households are at
risk of running low on
money during
retirement, based on
projections of assets,
home prices, debt
levels and Social
Security income,
according to Boston
College's Center for
Retirement Research.
That is up from 31% of
households in 1983.
Roughly 45% of all
households currently
have zero saved for
retirement, according
to the National
Institute on
Retirement Security.
More than 30
million U.S. workers
don't have access to
any retirement plan
because many small
businesses don't
provide one. People
are living longer than
they did in the 1980s,
fewer companies are
covering retirees'
health-care expenses,
wages have largely
stagnated and low
interest rates have
diluted investment
gains.
"I go around the
country. The thing
that people are
terrified about is
running out of money,"
says Phyllis C. Borzi,
a U.S. Labor
Department assistant
secretary and
retirement-income
expert.
Some savers
underestimate how much
they will need to
retire or accumulate
too much debt. Lucian
J. Bernard is among
those wishing he had a
do-over. The
65-year-old lawyer
from Edgewood, Ky.,
doesn't have much
savings beyond a small
company pension and
Social Security. He
cashed out a 401(k) in
the 1980s to fund law
school and never
replenished it. He
implores his daughter
to start saving.
"It's a little
easier saying it than
doing it," he says.
Defenders of the
401(k) say it can
produce an ample
retirement cache if
employers provide
access to one and
people start saving
early enough. People
in their 60s who have
been socking away
money in 401(k)s for
multiple decades have
average savings of
$304,000, according to
the Employee Benefit
Research Institute and
Investment Company
Institute.
"There's no
question it worked"
for those who
committed to saving,
says Robert Reynolds,
who was involved in
Fidelity Investments'
first sales of 401(k)
products several
decades ago.
He considers
himself among the
success stories. At
64, he could retire
comfortably today
after saving for three
decades. "It's a very
simple formula," he
says. "If you save at
10% plus a year and
participate in your
plan, you will have
more than 100% of your
annual income for
retirement."
The 401(k) can be
traced back to a 1978
decision by Congress
to change the tax
code-at line 401(k)-so
top executives had a
tax-free way to defer
compensation from
bonuses or stock
options.
At the time,
defined
benefit-pension plans,
which boomed in
popularity after World
War II, were the most
common way workers
saved for retirement.
A group of
human-resources
executives,
consultants,
economists and policy
experts then jumped on
the tax code as a way
to encourage saving.
Ted Benna, a benefits
consultant with the
Johnson Companies, was
one of the first to
propose such a move,
in 1980, leading some
in the industry to
refer to him as the
father of the 401(k).
Selling it to
workers was a
challenge. Employees
could put aside money
tax-free, but they
were largely
responsible for their
own saving and
investment choices,
meaning they could
profit or lose big
based on markets. They
also took home less
money with each
paycheck, which is why
401(k)s were commonly
called "salary
reduction plans."
Traditional pension
plans, on the other
hand, had weaknesses:
Company bankruptcies
could wipe them out or
weaken them, and it
was difficult for
workers to transfer
them if they switched
employers.
Companies embraced
the 401(k) because it
was less expensive and
more predictable to
fund than pensions.
Company pay-ins ended
when an employee left
or retired.
Employees, for
their part, were drawn
to an option that
could provide more
than a company's
pension ever would.
Two bull-market runs
in the 1980s and 1990s
pushed 401(k) accounts
higher.
Economist Teresa
Ghilarducci, director
of the Schwartz Center
for Economic Policy
Analysis, says she
offered assurances at
union board meetings
and congressional
hearings that
employees would have
enough to retire if
they set aside just 3%
of their paychecks in
a 401(k). That assumed
investments would rise
by 7% a year.
"There was a
complete overreaction
of excitement and
wow," says Kevin
Crain, who as a young
executive at Fidelity
Investments in the
1990s recalled
complaints about some
of its funds
underperforming the
S&P 500. "People were
thinking: Forget that
boring pension plan."
Two recessions in
the 2000s erased those
gains and prompted
second thoughts from
some early 401(k)
champions. Markets
have since recovered,
but many savers are
still behind where
they need to be. ...
That seems to be the point of the
article. People find easy excuses/good reasons/ essentials
require them to pull out their 401k funds. That is sooo
wrong!
Yes it is possible to create a sizeable retirement fund if you have a stable job with 401K plan.
But many people don't and changing companies create difficulties for them (and associated losses).
Also you intimately depend on the stability of dollar during retirement as your holdings are not
indexed to inflation as for Social Security and a typical pension. As well on the stability of
bond and stock market. Then there is such phenomenon as inherent instability of financial sector
under neoliberalism (aperiodic market crashes).
Also you do not have the time to follow the market so you either use index funds (where returns
can be wiped out due to sharp recession and associated market crush close to your retirement) or you
run unbalanced portfolio and eclectic trading strategy with oversize risks. Especially if your
investing is fashion/sentiment driven.
Getting something like 2008 events on your first year of retirement can cut your funds almost in
one third if not more, if you panic and sell at low point.
I think you do not understand the most despicable part about 401k: It offload all the risk to
individual and remunerates (wildly) Wall Street, which became the middleman between the man and his
money, charging an annual fee.
This offloading of all the risks to individual is an immanent feature of neoliberalism, so we
have what we have. In this sense 401K is a perfect neoliberal invention, perfect for redistribution
of wealth up.
Also many people are not trained to distrust all wealth management and fund manager types and get
into various types of traps, when fool and his money are soon parted.
Let me remind you what happened with 401K accounts in 2008 -- they dropped for a year around 30%.
And similar volatility you can experience several times during your lifespan, on average probably
once is a decade, or even more often. And quick recovery like in 2003 or 2009-2010 is not guaranteed
at all.
There is also element of adverse selection in many if not most 401K plans companies providing
401K plan often hire intermediaries which handle 401K for some other services, and as a result 401k
provide limited selection of expensive and inappropriate for retirement funds which are not suitable
for balanced portfolio. Usually 401K are overloaded with stock funds, some with high fees and risky
strategy (international stock market, emerging markets, etc).
A good example here is Wall Mart which behaves as for 401K as a real predator hunting its pray in
a pack with another predator (Merrill Lynch)
If all 401K participants are allowed to invest in 30 year government bonds without any financial
change (but not via evergreen bond funds, who are in reality money vampires) that will be a slight
improvement over the current situation were bond funds provided are often real financial sharks (say
0.5% annually on 2% return or 25% of nominal return). Which is somewhat true even for Vanguard (to
say nothing about Fidelity). These ghastly, lazy, incompetent predators don't care much about 401K
investors.
401K also created that whole parasitic branch of financial industry, with a lot of people
employed. But to manage a sizable mutual fund is not a very exiting job either, if you try to do it
honestly. There are way too many variables beyond your control.
Employee pensions funds can do the same staff more economically (but they require higher
participation from the companies -- around 10% instead of 3-4% matching in 401K). So along with
offloading of risk switching to 401K also confiscated a part of your retirement fund.
401K funds are also not free from fraud (hidden fees) and mismanagement. The 401K plans typically
promote neoliberal "Cult of equities" which benefits Wall Street and large speculators, like Goldman
Sacks. As well of day traders and HFT as they create daily volume.
And last but not least 401K created those huge companies like Fidelity and Vanguard which
dominate the boards of most publicly trading companies, making the USA a classic case of rentier
capitalism (monopolization of holding of stocks). They also create a perfect playing field for
shorting shocks and facilitating derivatives such an options.
And this "greed is good" manta is corrupting even better of them such as Vanguard, which now started
offering some shady services and such.
"... I helped open the door for Wall Street to make even more money than they were already making ..."
"... "The great lie is that the 401(k) was capable of replacing the old system of pensions," said Gerald Facciani, the former head of the American Society of Pension Actuaries. ..."
In the nondescript world of public policy, oopsies don't
get any bigger than this.
In a remarkable story (#) in Tuesday's Wall Street
Journal, several early champions of 401(k)s, the
now-ubiquitous tax-deferred plans that help workers sock
away retirement funds, expressed regrets for what their
efforts later yielded: Private pensions have withered.
Individual workers now shoulder risks that large
corporations once bore. Investment fees chip away at
account owners' returns. The typical American worker is
badly underprepared for old age.
"
I helped open the door for Wall Street to make
even more money than they were already making
," said
benefits consultant Ted Benna - sometimes known, according
the Journal's Timothy W. Martin, as the "father of the
401(k)." "We weren't social visionaries," said former
Johnson & Johnson human-resources executive Herbert
Whitehouse, who helped popularize the plans.
"The
great lie is that the 401(k) was capable of replacing the
old system of pensions," said Gerald Facciani, the former
head of the American Society of Pension Actuaries.
Whoops.
Older Americans' fear of leaving the workforce with
nothing saved surely added to the economic unease that
Donald Trump channeled in his campaign. ...
Instead, a Republican Congress and the incoming Republican
president are preparing to repeal Obamacare and replace it
with individual health savings accounts, or something
else, or perhaps nothing at all. At the least, the new
regime in Washington should heed a lesson from the 401(k)
debacle: When you fiddle with the safety net, you should
consider how people and corporations behave in real life.
...
Herbert Whitehouse was one of the first in the U.S. to
suggest workers use a 401(k). His hope in 1981 was that
the retirement-savings plan would supplement a company
pension that guaranteed payouts for life.
Thirty-five years later, the former Johnson & Johnson
human-resources executive has misgivings about what he
helped start.
What Mr. Whitehouse and other proponents didn't
anticipate was that the tax-deferred savings tool would
largely replace pensions as big employers looked for ways
to cut expenses. Just 13% of all private-sector workers
have a traditional pension, compared with 38% in 1979.
"We weren't social visionaries," Mr. Whitehouse says.
Many early backers of the 401(k) now say they have
regrets about how their creation turned out despite its
emergence as the dominant way most Americans save. Some
say it wasn't designed to be a primary retirement tool and
acknowledge they used forecasts that were too optimistic
to sell the plan in its early days.
Others say the proliferation of 401(k) plans has
exposed workers to big drops in the stock market and high
fees from Wall Street money managers while making it
easier for companies to shed guaranteed retiree payouts.
"The great lie is that the 401(k) was capable of
replacing the old system of pensions," says former
American Society of Pension Actuaries head Gerald Facciani,
who helped turn back a 1986 Reagan administration push to
kill the 401(k). "It was oversold."
Misgivings about 401(k) plans are part of a larger
debate over how best to boost the savings of all
Americans. Some early 401(k) backers are now calling for
changes that either force employees to save more or
require companies to funnel additional money into their
workers' retirement plans. Current regulations provide
incentives to set up voluntary plans but don't require
employees or companies to take any specific action. ...
The advent of 401(k)s gave individuals considerable
discretion as to how and even whether they would save for
retirement. Just 61% of eligible workers are currently
saving, and most have never calculated how much they would
need to retire comfortably, according to the Employee
Benefit Research Institute and market researcher Greenwald
& Associates.
Financial experts recommend people amass at least eight
times their annual salary to retire. All income levels are
falling short. For people ages 50 to 64, the bottom half
of earners have a median income of $32,000 and retirement
assets of $25,000, according to an analysis of federal
data by the New School's Schwartz Center for Economic
Policy Analysis in New York. The middle 40% earn $97,000
and have saved $121,000, while the top 10% make $251,000
and have $450,000 socked away.
Savings gap
And the savings gap is worsening. Fifty-two percent of
U.S. households are at risk of running low on money during
retirement, based on projections of assets, home prices,
debt levels and Social Security income, according to
Boston College's Center for Retirement Research. That is
up from 31% of households in 1983. Roughly 45% of all
households currently have zero saved for retirement,
according to the National Institute on Retirement
Security.
More than 30 million U.S. workers don't have access to
any retirement plan because many small businesses don't
provide one. People are living longer than they did in the
1980s, fewer companies are covering retirees' health-care
expenses, wages have largely stagnated and low interest
rates have diluted investment gains.
"I go around the country. The thing that people are
terrified about is running out of money," says Phyllis C.
Borzi, a U.S. Labor Department assistant secretary and
retirement-income expert.
Some savers underestimate how much they will need to
retire or accumulate too much debt. Lucian J. Bernard is
among those wishing he had a do-over. The 65-year-old
lawyer from Edgewood, Ky., doesn't have much savings
beyond a small company pension and Social Security. He
cashed out a 401(k) in the 1980s to fund law school and
never replenished it. He implores his daughter to start
saving.
"It's a little easier saying it than doing it," he
says.
Defenders of the 401(k) say it can produce an ample
retirement cache if employers provide access to one and
people start saving early enough. People in their 60s who
have been socking away money in 401(k)s for multiple
decades have average savings of $304,000, according to the
Employee Benefit Research Institute and Investment Company
Institute.
"There's no question it worked" for those who committed
to saving, says Robert Reynolds, who was involved in
Fidelity Investments' first sales of 401(k) products
several decades ago.
He considers himself among the success stories. At 64,
he could retire comfortably today after saving for three
decades. "It's a very simple formula," he says. "If you
save at 10% plus a year and participate in your plan, you
will have more than 100% of your annual income for
retirement."
The 401(k) can be traced back to a 1978 decision by
Congress to change the tax code-at line 401(k)-so top
executives had a tax-free way to defer compensation from
bonuses or stock options.
At the time, defined benefit-pension plans, which
boomed in popularity after World War II, were the most
common way workers saved for retirement.
A group of human-resources executives, consultants,
economists and policy experts then jumped on the tax code
as a way to encourage saving. Ted Benna, a benefits
consultant with the Johnson Companies, was one of the
first to propose such a move, in 1980, leading some in the
industry to refer to him as the father of the 401(k).
Selling it to workers was a challenge. Employees could
put aside money tax-free, but they were largely
responsible for their own saving and investment choices,
meaning they could profit or lose big based on markets.
They also took home less money with each paycheck, which
is why 401(k)s were commonly called "salary reduction
plans."
Traditional pension plans, on the other hand, had
weaknesses: Company bankruptcies could wipe them out or
weaken them, and it was difficult for workers to transfer
them if they switched employers.
Companies embraced the 401(k) because it was less
expensive and more predictable to fund than pensions.
Company pay-ins ended when an employee left or retired.
Employees, for their part, were drawn to an option that
could provide more than a company's pension ever would.
Two bull-market runs in the 1980s and 1990s pushed 401(k)
accounts higher.
Economist Teresa Ghilarducci, director of the Schwartz
Center for Economic Policy Analysis, says she offered
assurances at union board meetings and congressional
hearings that employees would have enough to retire if
they set aside just 3% of their paychecks in a 401(k).
That assumed investments would rise by 7% a year.
"There was a complete overreaction of excitement and
wow," says Kevin Crain, who as a young executive at
Fidelity Investments in the 1990s recalled complaints
about some of its funds underperforming the S&P 500.
"People were thinking: Forget that boring pension plan."
Two recessions in the 2000s erased those gains and
prompted second thoughts from some early 401(k) champions.
Markets have since recovered, but many savers are still
behind where they need to be. ...
Progressives have already homed in on Republican efforts to privatize Medicare as
one of the major domestic political battles of 2017. If Donald J. Trump decides
to gut the basic guarantee of Medicare and revamp its structure so that it hurts
older and sicker people, Democrats must and will
push back hard
. But if Democrats focus too much of their attention on
Medicare, they may inadvertently assist the quieter war on Medicaid - one that
could deny health benefits to millions of children, seniors, working families and
people with disabilities.
Of the two battles, the Republican effort to dismantle Medicaid is more certain.
Neither Mr. Trump nor Senate Republicans may have the stomach to fully own the
political risks of Medicare privatization. But not only have Speaker Paul D. Ryan
and Tom Price, Mr. Trump's choice for secretary of health and human services,
made proposals to deeply cut Medicaid through arbitrary block grants or "per
capita caps," during the campaign, Mr. Trump has also proposed block grants.
If Mr. Trump chooses to oppose his party's Medicare proposals while pushing
unprecedented cuts to older people and working families in other vital safety-net
programs, it would play into what seems to be an emerging strategy of his: to
publicly fight a few select or symbolic populist battles in order to mask an
overall economic and fiscal strategy that showers benefits on the most well-off
at the expense of tens of millions of Americans.
Without an intense focus by progressives on the widespread benefits of Medicaid
and its efficiency, it will be too easy for Mr. Trump to market the false notion
that Medicaid is a bloated, wasteful program and that such financing caps are
means simply to give states more flexibility while "slowing growth." Medicaid's
actual spending per beneficiary has, on average, grown about 3 percentage points
less each year than it has for those with private health insurance,
according to the Center on Budget and Policy Priorities
- a long-term trend
that is projected to continue. The arbitrary spending caps proposed by Mr. Price
and Mr. Ryan would cut Medicaid to the bone, leaving no alternative for states
but to impose harsh cuts in benefits and coverage.
Mr. Price's own proposal, which he presented as the chairman of the House budget
committee, would cut Medicaid by about $1 trillion over the next decade. This is on
top of the reduction that would result from the repeal of the Affordable Care Act,
which both Mr. Trump and Republican leaders have championed. Together, full repeal
and block granting would cut Medicaid and the Children's Health Insurance Program
funding by about $2.1 trillion over the next 10 years - a 40 percent cut.
Photo
Tom Price, President-elect Trump's choice for secretary of
health and human services, has made proposals to deeply cut Medicaid.
Credit
Joshua Roberts/Reuters
Even without counting the repeal of the A.C.A. coverage expansion, the Price plan
would cut remaining federal Medicaid spending by $169 billion - or one-third - by the
10th year of his proposal, with the reductions growing more severe thereafter. The
Henry J. Kaiser Family Foundation
estimated
that a similar Medicaid block grant proposed by Mr. Ryan in 2012 would
lead to 14 million to 21 million Americans' losing their Medicaid coverage by the
10th year, and that is on top of the 13 million who would lose Medicaid or children's
insurance program coverage under an A.C.A. repeal.
The emerging Republican plan to "repeal, delay and replace" the A.C.A. seeks to
further camouflage these harmful cuts. Current Republican plans to eliminate the
marketplace subsidies and A.C.A. Medicaid expansion in 2019 would create a health
care cliff where all of the Medicaid funds and subsidies for the A.C.A. expansion
would simply disappear and 30 million people would lose their health care.
In the face of such a manufactured crisis, the Trump administration could cynically
claim to be increasing Medicaid funding by offering governors a small fraction of the
existing A.C.A. expansion back as part of a block grant. No one should be deceived.
Maintaining a small fraction of the current Medicaid expansion within a tightly
constrained block grant is not an increase.
Some might whisper that these cuts would be harder to beat back because their impact
would fall on those with the least political power. Sweeping cuts to Medicaid would
hurt tens of millions of low-income and middle-income families who had a family
member with a disability or were in need of nursing home care. About 60 percent of
the costs of traditional Medicaid come from providing nursing home care and other
types of care for the elderly and those with disabilities.
While Republicans resist characterizations of their block grant or cap proposals as
tearing away health benefits from children, older people in nursing homes or
middle-class families heroically coping with children with serious disabilities, the
tyranny of the math does not allow for any other conclusion. If one tried to cut off
all 30 million poor kids now enrolled in Medicaid, it would save 19 percent of the
program's spending. Among the Medicaid programs at greatest risk would be those
optional state programs that seek to help middle-income families who become
"medically needy" because of the costs of having a child with a serious disability
like autism or Down syndrome.
Democrats at all levels of government must aggressively communicate the degree to
which these anodyne-sounding proposals would lead to an assault on health care for
those in nursing homes and for working families straining to deal with a serious
disability, as well as for the poorest Americans. With many Republican governors and
local hospitals also likely to be victimized by the proposals of Mr. Ryan and Mr.
Price, this fight can be both morally right and
politically powerful
. Republicans hold only a slight majority in the Senate. It
would take only three Republican senators thinking twice about the wisdom of block
grants and per capita caps to put a halt to the coming war on Medicaid.
Gene B. Sperling was director of the National Economic Council from 1996 to
2001 and from 2011 until 2014.
From "One neat trick to stop Social Security 'Reform'" http://angrybearblog.com/2016/12/one-neat-trick-to-stop-social-security-reform.html
=== quote === Republicans constantly try to bring Social Security into ongoing debates about 'Balanced Budgets'.
But they face a fundamental problem with their math. For a variety of reasons, some quite reasonable
and others nakedly political (seniors vote) nearly every 'Reform' proposal out there promises to
hold 55 and older harmless. Meaning you can't have any more than miniscule effects on Cost projections
until today's 54′s and younger start retiring. Except for a handful of early retirees that event
happens 11+ years in the future, which is to say outside the 10 year Budget Scoring window.
You can't have a fix to a problem scored over 10 years with a solution starting Year 11. Sure
the 'Reformers' will blather about "Infinite Future Horizons". But any proposal that spares current
seniors from cuts will score close to zero by CBO and JCT. You just have to count years on your fingers.
... ... ...
GOP plans to "reform" Social Security often take this form
1. Américas $20 trillion public debt is unsustainable
2. Current Budget Deficits add to that debt
So far so good
3. Social Security must be part of that discussion
4. 55 and orders must be shielded from changes that allow them no time to adjust
5. (The Bush/Krasting argument) Payrolll tax increases across the board are neither politically possible
nor econimically wise
All three of these are doubtful. This post points out that 2 and 3 +4 (2nd edit) are incompatible
within a structure that assumes 10 year budget scoring. Argue or acknowledge that specific point
and we can move on. ... ... .. GOP point one is interesting on several fronts. One it is debatable on its own terms. It it is not
clear that current Public Debt is unsustainable on a percentage of GDP basis, especially when you
take that in the form of Debt Service at current and projected 10 year rates. A $10 trillion debt
at 8% (roughly Bush era) is twice as expensive as a $20 trillion debt at 2% in debt service terms
and assuming principal rollover. Simply put Obama years have seen a massive refi of Public Debt.
Much credit for which belongs to the Feds QE1 and QE 2.
... ... ..
Jim A, December 15, 2016 11:31 am
Of course that 22% benefit cut is an illusion created by thinking that the SS trust fund is something
more substantial than your left pocket borrowing from your right pocket and giving it IOUs.
Assuming
that we were to simply run out the clock and make no changes to SS until the trust fund ran out.
On the day before the trust fund ran out we would have combined general revenues and government borrowing
sufficient to redeem the special, non-negotiable bonds held in the trust fund. On the day afterwards,
the general revenue and the ability to the US treasury to borrow money wouldn't have changed. Under
current law we would at that point be forced to cut benefits to all retirees by 22%.
Presumably that
22% of revenue that was NOT being spent to repay the trust fund would be applied as deficit reduction.
Or used for tax cuts or new discretionary spending. Of course those are all political impossibilities,
and would never happen.
It is important to the Republicans that want to reform SS that people never
realize that we can afford to pay the shortfall in SS revenues from the treasury. Because once people
realize that, they will be more comfortable with that than they will be with the alternatives.
First Bush II bankrupted the country by cutting taxes for rich and unleashing Iraq war. Then
Republicans want to cut Social Securty to pay for it
Notable quotes:
"... His nominee to run the Department of Health and Human Services, Tom Price, a Republican congressman from Georgia, has been a champion of cuts to all three of the nation's large social programs - Medicare, Medicaid and Social Security. When discussing reforms to Social Security, he has ignored ways to bring new revenue into the system while emphasizing possible benefit cuts through means-testing, private accounts and raising the retirement age. ..."
"... But Mr. Price, who currently heads the House Budget Committee, has found a way to cut Social Security deeply without Congress and the president ever having to enact specific benefit cuts, like raising the retirement age. ..."
"... Mr. Trump's hands-off approach to Social Security during the campaign was partly a strategic gesture to separate him from other Republican contenders who stuck to the party line on cutting Social Security. But he also noted the basic fairness of a system in which people who dutifully contribute while they are working receive promised benefits when they retire. Unfortunately, he has not surrounded himself with people who will help him follow those instincts. ..."
Donald Trump campaigned on a promise not to cut Social Security, which puts him at odds with the
Republican Party's historical antipathy to the program and the aims of today's Republican leadership.
So it should come as no surprise that congressional Republicans are already testing Mr. Trump's hands-off
pledge.
... ... ...
As Congress drew to a close this month, Sam Johnson, the chairman of the House Social Security
subcommittee, introduced a bill that would slash Social Security benefits for all but the very poorest
beneficiaries. To name just two of the bill's benefit cuts, it would raise the retirement age to
69 and reduce the annual cost-of-living adjustment, while asking nothing in the way of higher taxes
to bolster the program; on the contrary, it would cut taxes that high earners now pay on a portion
of their benefits. Last week, Mark Meadows, the Republican chairman of the conservative House Freedom
Caucus, said the group would push for an overhaul of Social Security and Medicare in the early days
of the next Congress.
... ... ...
Another sensible reform would be to bring more tax revenue into the system by raising the level
of wages subject to Social Security taxes, currently $118,500. In recent decades, the wage cap has
not kept pace with the income gains of high earners; if it had, it would be about $250,000 today.
The next move on Social Security is Mr. Trump's. He can remind Republicans in Congress that his
pledge would lead him to veto benefit cuts to Social Security if such legislation ever reached his
desk. When he nominates the next commissioner of Social Security, he can choose a competent manager,
rather than someone who has taken sides in political and ideological debates over the program.
What Mr. Trump actually will do is unknown, but his actions so far don't inspire confidence. By law,
the secretaries of labor, the Treasury and health and human services are trustees of Social Security.
Mr. Trump's nominees to head two of these departments, Labor and Treasury - Andrew Puzder, a fast-food
executive, and Steve Mnuchin, a Wall Street trader and hedge fund manager turned Hollywood producer
- have no government experience and no known expertise on Social Security.
His nominee to run the Department of Health and Human Services, Tom Price, a Republican congressman
from Georgia, has been a champion of cuts to all three of the nation's large social programs - Medicare,
Medicaid and Social Security. When discussing reforms to Social Security, he has ignored ways to
bring new revenue into the system while emphasizing possible benefit cuts through means-testing,
private accounts and raising the retirement age.
There is no way to mesh those ideas with Mr. Trump's pledge. But Mr. Price, who currently
heads the House Budget Committee, has found a way to cut Social Security deeply without Congress
and the president ever having to enact specific benefit cuts, like raising the retirement age.
Recently, he put forth a proposal to reform the budget process by imposing automatic spending
cuts on most federal programs if the national debt exceeds specified levels in a given year. If Congress
passed Mr. Trump's proposed tax cut, for example, the ensuing rise in debt would trigger automatic
spending cuts that would slash Social Security by $1.7 trillion over 10 years, according to an analysis
by the Center for American Progress, a liberal think tank. This works out to a cut of $168 a month
on the average monthly benefit of $1,240. If other Trump priorities were enacted, including tax credits
for private real estate development and increases in military spending, the program cuts would be
even deeper.
Mr. Trump's hands-off approach to Social Security during the campaign was partly a strategic
gesture to separate him from other Republican contenders who stuck to the party line on cutting Social
Security. But he also noted the basic fairness of a system in which people who dutifully contribute
while they are working receive promised benefits when they retire. Unfortunately, he has not surrounded
himself with people who will help him follow those instincts.
Susan Anderson is a trusted commenter Boston 1 hour ago
There is a simple solution to Social Security.
Remove the cap, so it is not a regressive tax. After all, Republicans appear to be all for
a "flat" tax. Then lower the rate for everyone.
There is no reason why it should only be charged on the part of income that is needed to pay
for necessary expenses should as housing, food, medical care, transportation, school, communications,
and such. Anyone making more than the current "cap" is actually able to afford all this.
There is no reason the costs should be born only by those at the bottom of the income pyramid.
As for Republican looting, that's just despicable, and we'll hope they are wise enough to realize
that they shouldn't let government mess with people's Social Security!
Thomas Zaslavsky is a trusted commenter Binghamton, N.Y. 1 hour ago
The idea hinted in the editorial that Trump has any principle or instinct that would lead him
to protect benefits for people who are not himself or his ultra-wealthy class is not worthy of
consideration. No, Trump has none such and he will act accordingly. (Test my prediction at the
end of 2017 or even sooner; it seems the Republicans are champing at the bit to loot the government
and the country fro their backers.)
Christine McM is a trusted commenter Massachusetts 2 hours ago
I wouldn't hold Trump to any of his campaign promises, given how often he changes positions, backtracks,
changes subjects, or whatever. His biggest promise of all was to "drain the swamp" and we know
how that turned out.
He might have a cabinet of outsiders, but they are still creatures from outside swamps. That
said, if there is even the barest of hints that this is on the agenda, I can pretty much bet that
in two years, Congress will completely change parties.
Imagine: cutting benefits for people who worked all their lives and depend on that money in
older age, all in order to give the wealthiest Americans another huge tax cut. For a fake populist
like Trump, that might sound like a great idea (he has no fixed beliefs or principles) but to
his most ardent supporters, that might be the moment they finally get it: they fell for one of
the biggest cons in the universe.
Rita is a trusted commenter California 2 hours ago
Given the Republican desire to shut down Medicare and Social Security, it is not hard to predict
that they will do so a little at a time so that people will not notice until its too late.
But since the Republicans have been very upfront with hostility towards the social safety net,
one can conclude that their supporters want to eliminate social safety net.
Mary Ann Donahue is a trusted commenter NYS 2 hours ago
RE: "To name just two of the bill's benefit cuts, it would raise the retirement age to 69 and
reduce the annual cost-of-living adjustment..."
The COLA for 2017 is .03% a paltry average increase of $5 per month. There was no increase in
2016.
The formula for how the COLA is calculated needs to be changed to allow for fair increases
not reductions.
Mary Scott is a trusted commenter NY 4 hours ago
Republicans have been promising to "fix" Social Security for years and now we are seeing exactly
what they mean. We can see how low they're willing to stoop by their plan to cut the taxes that
high earners now pay on a portion of their benefits and decimate the program for everybody else.
I wouldn't be surprised if they raised SS taxes on low and middle income earners.
There has been an easy fix for Social Security for years. Simply raise the tax on income to
$250,000 thousand and retirees both present and future would be on much firmer footing. Many future
retirees will be moving on to Social Security without the benefit of defined pension plans and
will need a more robust SS benefit in the future, not a weaker one.
Don't count on Donald Trump to come to the rescue. He seems to hate any tax more than even
the most fervent anti-tax freak like Paul Ryan. Mr. Trump admitted throughout the campaign that
he avoids paying any tax at all.
The Times seems to want to give Mr. Trump limitless chances to do the right thing. "Will Donald
Trump Cave on Social Security" it asks. Of course he will. One has only to look at his cabinet
choices and his embrace of the Ryan budget to know the answer to that question. Better to ask,
"How Long Will It Take Trump To Destroy Social Security?"
At least it would be an honest question and one that would put Mr. Trump in the center of a
question that will affect the economic security of millions of Americans.
serban is a trusted commenter Miller Place 4 hours ago
Cutting benefits for upper income solves nothing since by definition upper incomes are a small
percentage of the population. The obvious way to solve any problem with SS is to raise taxes on
upper incomes, the present cap is preposterous. People so wealthy that SS is a pittance can show
their concern by simply donating the money they get from SS to charities.
david is a trusted commenter ny 4 hours ago
We can get some perspective on what Social Security privatization schemes would mean to the
average SSS recipient from Roger Lowenstein' analysis of Bush's privatization scheme.
Roger Lowenstein's Times article discusses the CBO's analysis of how the Bush privatization
scheme for Social Security would reduce benefits.
"The C.B.O. assumes that the typical worker would invest half of his allocation in stocks
and the rest in bonds. The C.B.O. projects the average return, after inflation and expenses,
at 4.9 percent. This compares with the 6 percent rate (about 3.5 percent after inflation) that
the trust fund is earning now.
The second feature of the plan would link future benefit increases
to inflation rather than to wages. Because wages typically grow faster, this would mean a rather
substantial benefit cut. In other words, absent a sustained roaring bull market, the private
accounts would not fully make up for the benefit cuts. According to the C.B.O.'s analysis,
which, like all projections of this sort should be regarded as a best guess, a low-income retiree
in 2035 would receive annual benefits (including the annuity from his private account) of $9,100,
down from the $9,500 forecast under the present program. A median retiree would be cut severely,
from $17,700 to $13,600. "
"... Social Security has succeeded because Roosevelt insisted it be paid for by the workers who would get the benefits, "so no damn politician can take it away from them." ..."
"... "These who pant after the very dust of the earth on the head of the helpless also turn aside the way of the humble; " ..."
The trouble with Sneed's article is that she does not appear to know what she is talking about.
She just wrote down what some "experts" told her with no idea what the words mean.
For example, she says,
"A 65 year-old at the top of the scale, a $118,500 average earner, would see his benefits cut
by 25% when he retired, compared to the current law, and that reduction would grow to 55 percent
compared to current law by the time the retiree was 85 years old."
Well, which is he, "at the top of the scale" or an "average earner"?
The point is probably trivial but I point it out so you will be on your guard if you read her
article.
Additionally she quotes Paul Van de Water, who is someone who actually knows that Social
Security can be fixed entirely and forever by simply raising the payrolll tax one tenth of one percent
per year until the balance between wage growth and growth in the cost of retirement is restored.
But somehow she doesn't bother to mention this, or maybe Van De Water forgot to mention it
because he favors a "tax the rich" solution without understanding that that will turn Social
Security into welfare as we knew it, and lead to its ultimate destruction by those rich who would
then be paying for it.
Social Security has succeeded because Roosevelt insisted it be paid for by the workers who would
get the benefits, "so no damn politician can take it away from them."
But the damn politicians keep lying and journalists keep repeating the lies without spending ten
minutes thinking about them. The basic "facts" about the Republican proposal, introduced by Texas Congressman Sam Johnson appear
to be :
gradually raise the retirement age from 67 to 69.
This amounts to a benefit cut of about 10%, but that's not the worst of it. Raising
the retirement age is simply a death sentence for people whose health is not up to working another
two years, or won't live to collect benefits for more than a few years after they retire.
change the cost of living adjustment to reduce real benefits as the retiree gets older .
This is called a "technical adjustment." They can pretend that the CPI is too generous and
know that most people won't understand the scam.
the size of initial benefits will be cut for most workers by catastrophic amounts .
This turns Social Security into a straight welfare plan. Most people will be paying for
benefits they will never get. The very poorest are promised a larger benefit for awhile until
the bogus cost of living adjustment, and increased retirement age do their work. Moreover it
is not clear what happens to "the rich" who lose their "side income" as they get older.
And of course there is always the fun of going to the welfare office every month to prove that
you don't have any hidden assets.
Meanwhile, the CRFB (Committee for a Responsible Federal Budget). an organization dedicated
to the destruction of Social Security by misrepresenting the facts, is playing cute games like "use
our calculator to find out how old you will be when SS runs out of funds."
But SS will never run out of funds as long as the workers are allowed to pay in advance for their
own benefits. With no change at all in SS, SS will pay 80% of "scheduled benefits," but this
is 80% of scheduled benefits which meanwhile have grown 25% in real value. So the GOP "plan
to save SS" is out and out theft.
CRFB has another cute game: "use our calculator to design your own plan to save social security."
But when I used their calculator it did not allow "increase the payroll contribution by one
tenth percent (for each the worker and the employer) per year for twenty years.
There are other ways to accomplish the same end, but this seemed to be the simplest way to fit
the CRFB "calculator." Someone with more time and a newer browser might want to try seeing
what they get. But look at small per year increases in payroll contribution. For example,
I think a 0.4% increase (combined), about two dollars per week for each the worker and the employer,
should solve the problem in ten years, but I haven't done the numbers on that myself.
Meanwhile, something that calls itself "the Bipartisan Policy Center, says "Ultimately, we are
going to need something that's a little more balanced between benefits saving and revenue changes
in order to get a proposal that could pass Congress and get approved by the president," said Shai
Akabas, director fiscal policy at the Bipartisan Policy Center."
It's hard to see how much cuts ("benefit savings") make sense to balance a dollar a week increase
in the payroll tax (revenue changes), but that's the kind of thinking that "Bipartisan" gets
you. "Hey folks, we can save you a dollar a week just by gutting Social Security so it
becomes meaningless as insurance so workers can retire at a reasonable age."
I am getting too discouraged. As long as no one is working to tell the people how this will
work for them, we are just going to stand around like sheep and watch them cut our throats.
As someone who grew up with the promise of Social Security as a minimal income support system
for my old age I can attest to the fact that when the "average" retiree, who has almost no individual
savings accrued, steps in the pile of Social Security "reforms," there will be not just a wailing
and gnashing of teeth.
Modern age old people no longer can rely on extended families for support. Those extended families
have been fragmented by the pressures of "modern" socio-economics. This is prime territory for
a demagogue.
The Twentieth Century had World War 1.0 and a subsequent "Lost Generation." It's increasingly
looking like the Twentyfirst Century will have the GFC, Social Support 'Reforms' and a subsequent
"Euthanized Generation."
Remember, this process will not affect just oldsters. It will suck in those closest to said
oldsters as emergency support resources. It won't be only oldesters who will be watching elites
"over iron sights."
Perhaps someone will enlighten me, but this is one thing that really puzzles me about the Republican
determination over many years to gut social security. I can understand their ideological fixation
with it – what I can't understand is why they are so willing to play electoral fire with it. Surely
this directly attacks millions of core Republican voters?
They may be able to fool many of them with deceptive slogans, but surely when the prospect
of finding their pensions slashed faces them, even the most supine and gullible middle American
Republican voter in their middle to late years is going to realise they've been had. The backlash
could be enormous. I find it hard to see how any rational politician would want to go near it.
They will find a way to blame it on the Democrats, and more importantly, on Blacks, Hispanics
and other minorities. They will sell the cuts and privatizations as the only way to save the system
that has been so badly damage by the fore mentioned, and as long as their base gets their beliefs
from Faux News, Bretbart, etc; it's quite probably the Republicans will succeed in getting what
they want while screwing down the ever hapless Democratic party.
I've met more than a few who'd almost be pleased to suffer as long as they thought blacks were
being made to suffer even more. There's no logic when hate gets this strong.
Exactly, the same way they have mortally wounded our once stellar public education system,
(a system once good enough to educate our "Greatest Generation) – is now a shell, death by a thousand
cuts
Also, if you think income disparity is bad now? – hang on to your wallet, because after 4 years
of Trump and his prospective cabinet picks, it will hit the stratosphere.
"There's no logic when hate gets this strong" – so true.
Smart to point at the educational system.
I have not found many youths who can tell me what they want to do. I find this really weird.
It is true that if you know what you want to do the library will do.
Thanks to Ben Franklin, inventors, engineers had a place to hang out and collect information they
could use.
Maybe you had to live in NYC to have a NYCity library card, but it is a big city.
Meantime Charter schools, which sounded great to us when at Kenwood on the Southside, are gaining
ground and collecting tax money regardless of results.
They are said now in Not Conscious to be handing out diplomas same as Public Schools did to get
some bodies out the door.
I was a graduate, but denied attendance at the diploma hand out thing, cause I refused to pay,
for my public school diploma. Public education, supposed to be free to citizens.
People think I didn't graduate.
The Union believed in Trump. I get sick about lots of things. It will be worse than they think.
Education & Defense are what the government is for.
Twelve years ago the Republicans needed the Democrats to actually plunge the knife on the back.
Democrats like Joe Lieberman dearly wanted to lend a bipartisan hand but Pelosi and Reid actually
rallied to prevent it. Talking Points Memo was all over it then. Now they're on top of Paul Ryan's
machinations to privatize Medicare and this Social Security scam. Kind of raised some old feelings
for TPM, but they're also heavily flogging the CIA Russian hacking dembot campaign.
About the only thing I knew about Hillary's agenda is that she wanted to means test Social
Security and Medicare and start new wars. Obama wanted to do many of the cuts in Sam Johnson's
bill but was foiled by Tea Partiers who couldn't take yes for an answer or were smarter than they
seemed.
Both Schumer and Pelosi said the Democrats would oppose any of these current plans. We'll see.
I would hope they would realize that Social Security and Medicare are issues where the only
winning move is to expand them. IOW, they need to realize this is an area where the campaign donors
need to be told to pound sand, shut up and expect to pony up – as in you ARE going to be paying
more into the system.
But these are people who thought there was no way that Clinton could lose, that this Russia nonsense
is a winning strategy and that ACA was going to be good for Democrats once people got to know
it. IOW, their grasp of reality outside their bubble might as well not exist it is so broken.
So while my fingers are crossed they still want their jobs AND aren't completely delusional, I
also know we better put the fear of the voters into every member of Congress about grannies and
wannabe grannies with canes beating them to a pulp any time they leave their house.
And by grannies I mean anyone on SS, and wanna be grannies everyone who someday might be able
to retire or at least only work part time after retirement age because of SS.
IF they cannot win an election they will not have any donors, and they are rapidly getting
to the point where a Democrat getting elected to a national office is the exception. Not to mention
there are a large number of states where that is pretty much the case. There is no reason to try
to bribe people so you can have them in your pocket if they are powerless.
They are terrible at strategy, but eventually they may figure out they need voters. You do
NOT alienate seniors as seniors are the most reliable voters around. Oh, and most of those seniors
have grandchildren they think deserve Social Security and Medicare as well. The only winning strategy
is to protect and expand.
I forgot to mention the consultant class. Absent a hostile takeover the Democrats may not be
fixable. Their disdain for and disconnect from the voters will do them in.
Would love to see this repeated and repeated, because although it's hard, we need to grasp
this fact:
their grasp of reality outside their bubble might as well not exist it is so broken.
their grasp of reality outside their bubble might as well not exist it is so broken.
their grasp of reality outside their bubble might as well not exist it is so broken.
their grasp of reality outside their bubble might as well not exist it is so broken.
their grasp of reality outside their bubble might as well not exist it is so broken.
Sam Johnson the same Sam Johnson who wrote "I spent seven years in the Hanoy Hilton. The Hanoy
Hilton is no Trump hotel." back in July ? Who milks his Vietnam tour of duty like a rabid milkmaid Who
says "I do not feel like a hero, and I do not call myself one" in the tones of one who thinks
the exact opposite? Who is constant cahoots with McCain (who is currently trying to sink a Trump
presidency) why am I not surprised that a neoliberal faction of the senatorial republican party
in seeking to weaken a populist president-elect is reaching for the third rail with both hands
and smearing all republicans with the same brush. I doubt very much Trump will weaken social security
since he knows it is the only thing his rebellious base of Deplorables can depend on call me simple
but Trump won this election against practically everyone and he knows his base is the only sure
recourse he has.
I don't count on that (Trump knowing not to touch Social Security). I wouldn't be surprised
if he went for privatization. HE will never ever need Social Security so why concern himself over
it? He's already throwing his electoral base under the bus with his cabinet picks. Every single
one of them is a direct violation of his pre-election promises.
I think Hillary also wanted to increase the payroll tax by 3% (an enormous amount of money)
and use it to privatize 3% of the SS funds to make up for shortfalls, ostensibly. They better
have a good insurance policy so that'll be another 3%. All this nonsense because we refuse to
admit we need social policies and social funding of the basic things. We are committing suicide
24/7 these days. Why don't we just call it all insurance?
The financial (rentier) crowd want to get their claws on the SS funds. They'll achieve their
goal unless we kick their puppets out of Congress.
They already have their teeth into your IRA funds, student loans, home mortgages and your bank
funds, It won't be too long before a Trojan Horse Prez signs away your SS. Beware!
We'll see if the Dems stand firm and fight back OR go for the old "bipartisanship!" bullcrap
and instead agree to a lessor CUT. They would then promote it as the two sides working together.
Typical neoliberal Dem establishment move.
Or are the progressive forces ascendant and ready to fight absolutely?
We'll see. In any case, the House will pass it, no question. The test is in the senate where
the Dems still have some teeth available (whether they USE those teeth is another thing altogether).
The Democratic Party must be made to defend Social Security as they rallied
against Bush's privatization plan. They will do so for political advantage, but they
too have attacked Social Security. Obama attacked it on three occasions–the Deficit Commission,
the chained CPI added to a budget proposal, and the timing of married couples claiming benefits–and,
were it not for Monica Lewinsky distracting
Bill Clinton, Bill Clinton would have been attempting to privatize Social Security, not Bush.
Now it the time to contact your senators and representatives: NO CUTS.
As things stand, what you recommend is the best action to take as of right now. It is not enough,
but when letters come in to Dems and Repubs stating the senders will NEVER vote for anyone who
votes to mess with Social Security, Medicare, Medicaid, there might be some reactions.
BUT it needs to be many, many, many people writing, calling, and meaning it when stating "Representative/Senator
XXX, you mess with this and you will never, ever get a vote from me."
Humm, if you are depending on Bernie or any one politician to save you, then you've lost the
point of Democracy. It's all of you forcing them to do the right thing.
Bernie Sanders has said it himself, even FDR said to Black Activist asking for an anti-discrimination
executive order to the defense industry: "I agree with you, I want to do it, now make me do it."
They did do it, by threatening a strike during WWII, for which some were sent to jail. That's
what it's going to take, because voting once every 2 or 4 years isn't going to cut it.
They will never attack current beneficiaries. This is a lesson they have learnt over the years.
This is why they changed tack in the 1980s and keep raising the eligibility age which is a very
soft target. One thing the GOPers understand really well is, GOPer Seniors ALWAYS vote and some
Dem Seniors vote sometimes. So they will leave current beneficiaries alone. GOPer Seniors – almost
all of them are driven by the conviction (Tea Party types) that Social Security and Medicare are
under jeopardy because of illegal immigration and because Social Security funds are being raided
and handed over to other beneficiaries like those on Disability etc. They have plenty of traction
on this because if you go ask the average 25 year old or even a 40 year old today whether they
can count on Social Security, most of them being morons and having swallowed the MSM propaganda
will tell you, 'I don't think it will be around when I get to 65'. I am fairly certain there are
polls to back this up. This is what the Greenspan Blue Ribbon Commission cleverly did under Reagan.
The people who are in their 50s today were in their late 20s in the 1980s and clueless about what
exactly Greenspan did to the eligibility age. So telling current beneficiaries that its good to
cut benefits for future beneficiaries makes a lot of sense to current beneficiaries. In any case
SS is toast. I think we will have to wait for the entire cycle of Old Age poverty to take root
again in another 50-60 years and for the tide to turn. It was wide spread old age poverty that
prompted FDR and also Trueman into action for SS and Medicare respectively.
Sewer species like Pete Peterson and the Hedge Funders target SS because it is a very productive
way to create mass unemployment and lower wages. They don't want people removed from the labor
market by SS when they become 65. Their secret longing is to drive down wages to the point where
the per hour rate will equal the human mules you see pulling overloaded hand carts in Mumbai,
India or Shangai, China. This is really the agenda. This is basically the psychology of monopoly
thinking. When you have captured markets up to a 95% level then you start looking like an idiot
because you have closed off growth altogether. Monopolies do not grow because there are no more
markets left. So the next thing to do is increase profits via driving labor costs down – standard
Michael Porter Harvard Business School trick. This is what they have been doing in the last 40
years.
It's how they are selling every sort of deregulation. it destroys the future, but who gives
a damn about their children and grand-kids, the ungrateful snots. Shipping the old folks off to
the retirement home has divorced them from both the care and of caring about their descendants.
Your comment about the old folks home is right on target. The better class of senior housing
establishments are often the most fortified of bubble worlds, and the Seniors there spend hours
ranting to each other about how the younger generation has screwed them over somehow. I've witnessed
it first hand. They've been carefully taught not to give a crap about future generations, including
their own kids and grandkids. It's all about MEEEEEEEEEEE .
Thank you, I think a lot of us have noticed the veracity of this, especially over the last
four decades. Show of hands who else out there is sufficiently paranoid, to consider signing-up
a year early & simply absorbing the hit, with some silly fantasy of being grandfathered-in?
Thanks! I was dizzy from a bad head cold, working in very bagger-ridden environs (a quite literally
Dikensian hell-hole in Pennsyltucky), applying for Medicare and fishing through obfuscatory pleonasm,
picking Plan D & N insurers the 2nd or 3rd page in, they ask you if you're applying for "benefits"
at this time! Jesus Anybody ANYBODY??? I have some meager equity (at least, last time I looked?)
sufficient for a decade or so. But with Republicans dying young?
Increasing the retirement age while the average life expectancy is decreasing seams especially
crewel. Combine that with that piece from the times that showed people like me, born in the 80's
only have a 50% chance of earning more than our parents and that we are already drowning in student
debt and that is a full on assault on the youth of this country. Screw the national debt burdening
future generations, this will actually burden us. This really is the worst country in the world.
Fuck Patriotism.
Anyone who has a chance of affecting the behavior of AARP when it comes to SS and Medicare
needs to step up and apply whatever pressure they can to get that thing to return to its origins
and "work the issue" for their members, present and future. I know, it's mostly just another front
for insurance and other sales pitches and scams and "cruise packages" and other lifestyle crap,
but at least there has to be some skeletal remains of the original bones of the organization in
there somewhere.
Or failing that, is there another entity that might be worth supporting and joining with, to
go on the offensive and fight back? I would hate to think it's all futility and "47%" from here
on out.
AARP's origins? It was founded by an insurance salesman as a slick way to sell, yep you guessed
it, the industry's interests to a powerful bank of less than bright voters.
Some of us question if there won't be mass human extinction before then. Maybe there will be
no old age for many people alive today including yours truly. But nonetheless, if by some miracle
the worst doesn't happen then Social Security is important.
Prez Hope and Change's support for chained-CPI will certainly complicate the fight against
this. If Obama and his Rubinite stable of bean-counting butt-boys were for it then it must be
okay?
They're banking on getting some Democratic support, to make it bipartisan. With weasels like
Mark Warner in the Senate, they might get some Democrats to sign on to this.
Eh? Democrats will line up with their Republican BFFs to screw over the proles. Given how Democrats
are now a very Rump party in this nation, what have they got to lose? Why take of their alleged
"constituents" in the 99% What a laugh. The constituents of the Dem pols are, have always been,
and will continue to be the .01%. So the Dems will happily oblige their real constituents by screwing
over the proles. Anyone who expects a different outcome is not living in reality.
Perhaps it's because "the banks own this place." Also the Republicans, like the Dems, are running
on the fumes of past ideological obsessions and Social Security was always seen as a prime Dem
vote getter and flagship of the hated New Deal. Remember Karl Rove wanted to take the country
back to the McKinley administration. But mostly it's probably because people like Paul Ryan are
creatures of their funders.
Plenty are stupid, but the Democrats are in complete disarray. The GOP will face push back
from their voters, but the Democrats as they are now are not a threat to win any time soon. AARP
recognizing the interests of its members can shake Washington, but right now, the GOP sees no
threat to its rule.
Many of the not so weathy Repubs are 'rich wannabes'. So they'll gladly toe the line on cut
social security cuts and free market memes. They think that they have noting to worry about because
they'll be wealthy before they retire and they won't need SS. Boy, do I have a few bridges and
lots of swamp land to sell them!
One can note the Social Security "reform" is usually pushed by wealthy individuals who feign
concern about saving a system for the future of less well off Americans.
Also, Social Security is a system that is of little import to the wealthy as they will not
be depending on it for basic living expenses.
The wealthy's real fears are of a raising of the income cap that will hit them directly or
of an effort to support higher wages for the citizens currently paying into Social Security, hitting
their business profits.
While it may seem unexpected they can get help from Democrats in this effort (Obama, Bill Clinton )
but I suspect this is so because wealthy donors support the effort and the Democrats can pitch
the "saving" aspect while collecting campaign cash.
If a politician is not re-elected as a result, they might have a more lucrative career at a
think tank or as a lobbyist.
Of course, if the wealthy are so concerned about the alleged Social Security problem that is
looming in the future, where were far sighted wealthy Americans when it came to questioning the
Iraq War, the drug war, the lack of financial reform, and all the USA military/covert actions
that have done great harm to public finances?
Strangely, Social Security "reform" is a big concern of theirs, and the other USA efforts that
have caused much harm, are not.
Then there is climate change, again, wealthy individuals are more concerned about "saving social
security" than saving the planet.
Also the "reform minded" politicians do not appear to allow that current social security benefits
probably are used by many entire low income families. So cutting grandma's benefits also could
immediately hit her kids/grandkids financially.
A secondary effect is that lowering SS benefits means the wages of current workers can be lowered
in concert as their SS payments, which flow to current recipients, can be lowered, perhaps even
allowing another Social Security reform effort to be promoted.
The ability of TPTB to sell this to the American public should not be underestimated as the
advertising/public relations/MSM has been successful in promoting/maintaining many bad ideas.
The wealthy are not concerned about saving anything unless they can make money off it. They
are already getting richer from the endless wars on terror and drugs, and taking planetary resources
for themselves. The only reason they talk about "reforming" Social Security and Medicare is to
get their hands on that money as well. And please do not expect the corporate media to explain
any of this to the dumbed-down masses.
The Republicans can afford to play with potential policial backlash for two reasons: First,
they relentlessly beat out false narratives about the demise of SS and its inadequacies so that
their flase story becomes a part of the consciousness of citizens. (This is the same thing done
to attack teachers, unions, the post office, government, etc. You put out the lie long enough,
it becomes the truth.) Second, they have been engaged in not one knife to the heart of the program
but an attempt to promote its demise by a thousand cuts, little by little, until the program is
no longer viable. I know for a fact that young people have bought into the lies put forth by them
and do not think the program will be there for them because they too have bought the lie. Those
pushing to kill the most effective program in US history, one that has kept the elderly from complete
poverty, are nothing more than evil. They want no public programs, and all revenue funnelled into
corporate models that enrich the 1%.
Conservatives love destruction for its own sake. Smashing the Alaska Wildlife Refuge, smashing
the ancient city of Baghdad, spilling oil all over North Dakota, wrecking Social Security, all
these things have a political component, but it is the destruction itself that makes them absolutely
adorable to Conservatives. Bear in mind this pervasive love of destruction, and many Conservative
initiatives will become more clear.
And the "base" goes along with it, because many of them have been inculcated with the theory
that it is more pleasurable to do someone else harm than to do one's self good. Given a choice
to make, they will always pick the former. Hope this helps.
Me, I find NC's alarm and amazement at the Republican plans to wreck Social Security ingenuous.
What did you think would happen? God knows you were warned.
Who warned us? Not the media. Not Obama. Who? I'm thinking naked capitalism.com, best Paul
Revere substitute I can come up with at the moment.
Nobody here needed warning. Nobody is alarmed or amazed. And nobody stuck their heads in the
sand and figured everything is going to be peachy. What we did need was a well written reminder.
People drunk a whole lot of Koolaid like "it takes a Democrat to cut social security". Koolaid
was spilled all over in drunken Koolaid orgies at one point toward the end of election silly season.
But the party is over and all that is left is the wreckage. Of course Hillary may have done the
same thing as we weren't exactly getting any encouragement from her that she wouldn't and rather
in fact got hints that she might (support for Peterson committee, her retirement plans for private
investment etc. – to supplement Social Security of course). None of which were absolute certainty
that she would cut it of course, but they aren't always honest about that are they, so not encouraging
either.
It's best seen as an all out effort to wreck any good that the government does for common people
so that they can beat the war drum of government failure. This then serves as the smoke screen
to hide just how much ultra rich directly benefit from government support through bailouts, privatization,
tax cuts, subsidies, and out right theft and fraud. And just how much more they will get when
Social Security and Medicare are privatized and benefits are shrunk. Those are large streams of
government controlled funds, and they want it.
Social Security and Medicare work extremely well, and should be expanded. But don't delude
yourself into thinking this is obvious to most people. Both political parties are dedicated to
killing Social Security and Medicare and are extremely adept at spouting the " we must kill it
to save it" BS.
Ds movement to the right and their continuation of R policies, no matter how vile, actually
redeems the R party for the next election. If they take turns governing only on behalf of the
.9, .09 and .01% they take turns redeeming the other branch of the money party. The colluding
media will propagandize every bit of corruption and sleazebaggery as 'no other option' trot out
imaginary deficits.
The voted out politicians will enthusiastically do it because they enter office looking for
the big sellout as they will receive the only objective they ever had in achieving elected office .
lucrative appointments and sinecures at parasitizing corporations, think tanks, scam foundations
and presidential libraries.
Exactly. But not everyone has a reflex sight or scope. And a lot of people who do have such
a very wrong notion of who the targets ought to be, the ones that actually pose the greater=st
immediate threat
Though 4,000 veterans appearing at Cannon Ball with the #NoDAPL presence probably have or are
developing a correct "sight picture" and target designation
Oh H-! Where is my 3-9X40 when I need it?
The late lamented science fiction writer Mack Reynolds penned a screed along these line a ways
back about a pissed off ageing Lord Greystoke and the fate of the old in America called "Relic."
The plan will be structured to only hurt future retirees. The solution to this political problem
is to have anyone who will be affected demand that they be allowed to opt out from now on and
to receive a refund, with interest, of all of their previous contributions to the system because
the "earned benefits" have been taken away. Ownership in America is a sure winner politically.
I don't expect Democrats to have the balls to actually propose this, but it would leave the
plans in tatters because without the tax stream and the already contributed taxes it won't be
able to pay current retirees. Now that would get the current retirees attention!
Not only can old people no longer depend on their extended families for support I'm afraid
many young people in that extended family have had to rely on the older people for support. My
young adult children are not doing terribly well in the new economy and I don't see things improving
for them any time soon - if at all. I've had to step in and help a little here and little there
more and more as the costs for those unplanned surprise expenses keep blindsiding my children.
And maybe that is what the author thought, but it doesn't work. Wages above the SS max don't
get taxed and don't add to the final benefit, so people who have an average salary equal to the
max have a benefit that is below the max. The difference would depend on how much the salary fluctuates,
year by year.
Perhaps a serious attack on welfare for the rich would persuade the enemies of Social Security
that those who live in glass houses should not throw stones?
To make such an attack, one needs must take over the "reins of power." In short, your suggestion
is revolutionary. (I'm not averse to such, just observing.)
I mean an ideological attack since much welfare for the rich is not yet recognized as such
(e.g. government provided deposit insurance instead of a Postal Checking Service or equivalent,
e.g. interest on reserves, e.g. other positive yeilding sovereign debt).
Yes it is. It is part of the means by which the poor, the least so-called creditworthy, are
forced to loan to depository institutions to lower the borrowing costs of the rich, the most so-called
credit worthy.
The ethical alternative is an inherently risk-free Postal Checking Service or equivalent for
all citizens, their businesses, etc. Then the poor need no longer lend (a deposit is legally a
loan) to banks, credit unions, etc or else be limited to unsafe, inconvenient physical fiat, aka
"cash."
Interesting that maybe 4,000 veterans showed up and formed up at Cannonball/DAPL, to stand
against the thugs and "government" and with the Native Americans who seem to have found a set
of honest and attractive memes to present to the rest of us. The Bonus Marchers got the MacArthur
Fist way back when, but I'm wondering how all those troops trained in maneuver-and-fire would
take to further (planned) assaults on their livelihoods and families, while they are ever more
being "deployed" to protect the as-s-ets and post-national "interests" of the Few
Not to worry. Organization is taking place. In New York State the Bernie delegates have kept
in touch since the convention. They have organized into 25 affiliates state wide. We have had
a conference already. The Lower Hudson Valley affiliate may be able to defeat the Trump agenda
all by itself. We tuned into the Our Revolution call and decided to do our own thing.
https://twitter.com/NYPANetwork
Any similar initiative in Massachusetts? The last time the Republicans tried to gut SS under
Bush, the Democrats came out in force and held meetings on weekends around Rhode Island (where
I was living at the time) to fire up opposition to the plan. I'm anticipating Elizabeth Warren
and other MA democrats will oppose this, but want to be ahead of that by looking for other avenues
of opposition like Bernie's coalition, such that it is.
I seriously doubt anyone would be enthused by a Democrat party still headed by that Super Frisco
Water Carrier Pelosi. I know I would not for one. The bell tolls for Bernie but the man has been
struck dumb.
If you already have an OR local or state group and you want to be affiliated with national,
or at least talk to national DM me on twitter and I can get you in touch, I have a friend who
works for them. https://twitter.com/UserFrIENDlyyy
Social security has already been cut over the last several years without a peep out of anyone.
No cost of living adjustments in 3 of the last 8 years. Actual inflation is at least 2 points
higher than the reported figures. Social security has been cut 15-20% since the financial crisis.
Yep. And I have elderly friends who are suffering bc of it. But everyone is very passive having
bought into the propaganda that this is "just the way it is," and "there's just not enough money"
to provide anymore via SS. So we have a very passive population, who've mostly all bought the
propaganda about how "broke" Soc Sec is we proles, yet again, have to suck it up bc the wealthy
certainly cannot be expected to have the income cap raised heave forfend.
Just got my Soc Security statement. My net gain, for 2017, after an increased deduction for
MediCare, is .nothing. See, there's no inflation (except my car insurance, home insurance, health
insurance, food, etc have all gone up). And to add insult to injury, our benefits (derived from
involuntary deductions from our paychecks) are called "entitlements."
As our elected "representatives" are so adamantly opposed to these programs, and would like to
reduce them to table scraps, I am eagerly awaiting the announcement that Congressional pensions
and healthcare benefits are going to be discontinued.
Same here. Any small gain was offset by increase in deduction for Medicare. In addition to
the rising costs you cite, I find I am paying increased local taxes, among other things. So, like
most people, we must contend with stagnant income to pay rising cost of living (and I mean the
necessities).
I started paying into the system in 1965. Medicare used to be no cost and cover all medical expenses,
so that is a cut in itself. I knew that I could not rely on SS in my old age, and I live modestly.
I agree with your last comment. I have never seen why our representatives in Congress should receive
any different coverage than the citizens they are elected to represent. As individuals, they can
supplement it, just as we have to.
I was notified yesterday via letter that my SS benefits will increase 4.00 / mo next year.
This will be a great help because my rent went up 7.00 / mo to 1600.00 for my studio apt.
Current law says that in approximately 13 years all benefits will be cut – across the board
– by 20-25%.
That is an unacceptable outcome.
What to do with this reality? The answer is "Something" must get done. The wrong answer is,
"Don't do anything, wait 13 years, and then fall off a cliff".
The proposal that in the author's words "Guts" SS actually increases benefits by 9% for the
bottom 20% of beneficiaries. The cost of the proposal falls on those who have high incomes before
AND after reaching age 65. The proposal stabilizes SS for the next 75 years, and there are no
new taxes required. Exactly what is wrong with that?
In the post pension plan age, I think the 20%-90% bracket needs it. Maybe up to the 99% bracket
once our current 401K bubble bursts and Housing Bubble II bursts.
So the only option are things that actually punish today's working class and weaken the system
by eliminating the all in/all the same position? No, it isn't. The problem is that the answer
is to slowly raise the payroll tax AND eliminate the cap – something that should have been done
decades ago once it became clear that the people who lived the longest on SS were largely those
who stopped paying payroll taxes at some point throughout the year. But we cannot consider those.
Nope we have to talk about raising the retirement age when life expectancy for most is dropping
and we have to go with things that mean that you need to start living like you have to choose
between drugs and eating cat food from day one because your benefit will never increase regardless
of how much more your food, housing or medicare premium increase, or there even if they allow
cost of living they write off things because you can give up steak for chicken over and over.
Instead of a expanding to a more universal program, you support turning SS farther into a program
that categorizes individuals, assigns a hierarchy and then ranks them according to some random
definition of human and who is most deserving.
There's nothing wrong at all with having nothing but contempt for others and hiding behind
some made up term of 'cost'. It's perfectly reasonable to deny the means to the dignity of housing
and food to others.
The fact the last two Dim-o-crat presidents (Clinton and Obama) and not a few Dim-o-crat Senators
and Congressmen are in agreement about "saving" Social Security doesn't help either. Clinton's
plan was derailed by the Lewinski thing and Obama's because the Republicans wouldn't take yes
for an answer (didn't want him to get credit for it but don't mind doing it themselves)
In case anyone has not noticed, they are already cutting SS benefits by stealth means. There
have been no cost of living increases in 3 of the last 5 years, and for my personal SS benefits,
the measly .3% increase next year goes away entirely with the increase in medicare payments. I
suspect many folks, like my sister who is 78 and still working full time, do not realize that
the increases they are receiving are due entirely to their still being in the work force. In addition,
with the cutbacks that have been forced on the administrative side of SS, more mistakes are being
made. A friend of mine was declared "dead" by SS (something that also happened to me with my tiny
pension plan). When she attempted to correct the error, the SS employee discovered that "thousands"
of people had been similarly affected. This happened last summer and my friend is finally receiving
her benefits, but a month late and for some reason the agency cannot issue that catch-up check.
She is still working and so not completely bereft, but what in the world are the folks doing who
have no other income??? I suppose our overlords will be most pleased that the constant annoyances
they are causing us will result in our passing away from sheer anger and frustration.
That's interesting. I have a friend, who is still in her 50s, who was working on her will,
etc, and discovered that she was no longer "alive" as far as Soc Sec was concerned. She got it
rectified, and it didn't have a negative impact on her (she's still comparatively young and working).
But it's decidedly odd about how all these citizens are suddenly dead as far as Soc Sec is concerned.
And yes, it takes some effort to get back on the database of the living. For those who are really
elderly, this could be a very difficult thing to do.
It boggles my mind why any one would ever want to gut social security. Companies already push
people out at 55 and then you have a good 8 to 12 years of somehow managing until social security
comes to your rescue. Younger people do think social security will not be in place when they are
in their 60s which makes them angry. And who can ultimately rely on the stock market etc. to give
them the money they will need when older – shivers. Is the economy that sound? Plus many people
cannot manage to work so long due to health reasons which do start creeping up on people in their
late 50s or the work they do is too labor intensive for them to imagine keeping at it until 69
or even 67. Bodies give out at some point. That is reality. Everyone wants to work until 70 but
the companies don't want older workers – they want young, fresh, vital. If anything, social security
should start at 60.
Two reasons come to my mind, a desire to reduce or eliminate the employer half of payroll taxes
AND the pool of money that the financial industry thinks should be theirs to rape and pillage.
But I'm sure there are others.
Recent posts and comments have noted both more billionaires and a rapid concentration of wealth
amongst them. But it's mo' po', too, what Turchin calls 'popular immiseration'. To decrease the
effects of 'interelite competition' the wealthiest cannot just bestow unto their favorites, they
must tend to the rich on the downslope. Those are the ones with resources to engage in attrition.
So there is a long history of shoving the costs onto those who can't fight back, and the unlanded
are easier to slap down.
A personal case: Pearl was a delightful very elderly lady a few doors down. Her house was in
trust until she died, and she had a daughter and a grandaughter living with her. When she died,
one of her (all over-55) children had medical debt needing paid and so he vetoed keeping the house.
It sold, the land was lost to the family, and daughter and grandaughter were homeless.
That interelite competition was apparent in the election. Our choice of two New York billionaires
was a choice over which aspect of the FIRE sector would dominate, Finance or Real Estate. But
those differences seem to get averaged out below a scale of 10^8 or so dollars.
Re Companies that push people out at 55 and don't want older workers and prefer younger ones,
this leaves a lot of people in that 55-70 age bracket in a difficult (and in some cases, a terrible)
situation if they're not in the minority of those who have a secure gig until they retire (usually
people that I know that have government gigs w/ pensions.) The Presidency nor the Congress have
no solution for older workers who get pushed out and face discrimination due to their age when
they seek employment. They would prefer to not hear about it and if they're sleeping in cars or
in tents under bridges, that's their problem.
continuing what's been going on for the past 8 years, ever heard of quantitative easing, the
ACA, or chained CPI? Foam the runway with HAMP, maybe, or endless war as the only jobs guarantee
available. Sorry, but trump is just more of the same, only a little more forthright. You should
be used to it by now.
No argument here. Put the Dems in control and they will find all kinds of excuses for doing
the same thing, all bight more subtlety. Clinton was going to privatize Social Security and Obama
proposed chained CPI. Not to mention the effects of TPP.
Another columnist whose "answers" are predicated on the assumption that taxes provision government
programs. Just one question: Where do tax payers get the dollars to pay taxes with if government
doesn't spend them out into the economy first?
If that's too much thinking: Where was all this "we're out of money" talk when the Fed, according
to its own audit, pushed $16 – $29 trillion out the door to save the financial sector from its
own frauds? Yet government routinely denies it makes the money when the orders-of-magnitude demands
of safety net programs appear. Taxes make the money valuable; they do not, and obviously cannot,
provision government.
As long as this isn't common knowledge, we're all condemned to austerity. Even public policy
makers sympathetic to workers (e.g. Dilma Rousseff) are in peril if they adopt the "inevitable
austerity" routine.
Unfortunate that I had to scroll this far down to find the first person with a correct understanding
of government finance. I've explained MMT point blank to people multiple times and they still
cannot grasp it. Until people start caring and get a general understanding of how this thing works
we are in a lot of trouble. I am hoping that Trump will be godawful enough to bring about such
a conviction for revolution to the average American
As the Henry Ford saying goes (oft-quoted by Ellen Brown):
"It is well enough that people of the nation do not understand our banking and monetary system,
for if they did, I believe there would be a revolution before tomorrow morning."
Exactly right and if the powers that be were really concerned about funding SS from those who
will receive it all they have to do is raise the income cap to cover total income for everyone
- not just middle income workers. Problem solved and no need to worry about the fact that the
government can't run out of dollars.
I see the Trust Fund as having been accumulated over the decades by my generation - by paying
higher FICA tax to purchase fed bonds with. TF running out now supposed to be the big to do? Wasn't
it supposed to run out? Aren't we supposed to use what we saved?
I like to say: have an SS retirement shortfall today? Do it all over again: hike FICA, lower
income tax and accumulate bonds. Mmm.
But, just yesterday I had a brainstorm. If Repubs want to cut benefits so FICA shortfall doesn't
have to made up by income tax cashing bonds (covering about 25% of outgo just before our bonds
run out, then, Repubs want to steal our savings that we forgave immediate gratification to accumulate
all those long years.
Always suspected income tax payers who are hit for as much as 39% would balk at cashing the
bonds when the time came - but on the basis of the usual world run for the haves idea. Never thought
of it in terms of outright theft - before yesterday.
PS. Really shouldn't use up all bonds. Right now there are about four years of full replacement
in the TF. Legal solvency is defined as one year - needed to cover temporary shortfall while Congress
moves to fill in - happened couple of times.
No. Defined benefit plans are supposed to be funded so that the assets earn enough to pay promised
benefits. If the assets run out, the plan is not only mismanaged, it's bankrupt.
Seriously, if your checking account were emptied by a hacker, would you ask "Wasn't it supposed
to run out?" You are a crime victim.
Educate, Agitate, Organize, yup, expanding on cry shop's comment above, it's more than breitbart
and Fox these days. The mainstream media may be (usually) more polite and more subtle, but they
will not report the basic info accurately like Yves and Lambert do here. Our Revolution is a good
start. There need to be alternative sources of information such that education can happen. That
is why the "fake news" attacks on alternative media are such a big deal. The founders of the US
understood the importance of information too, one reason the postal service was established with
low rates for all periodicals. "Knowledge will forever govern ignorance; and a people who mean
to be their own governors must arm themselves with the power which knowledge gives", wrote Madison.
We really are sheep without knowledge. Some like it that way .
Donald Trump, at his rallies, consistently lied to his fervent fans that he was going to save
Soc Sec & Medicare. What a laugh.
I've been blogging and telling people throughout the election process that Trump made a very
public DEAL with Paul Ryan that he, Trump, was totally behind cutting and gutting SS & Medicare.
That is the main (possibly only) reason why Ryan gave Trump his very tepid "endorsement." But
this was very public knowledge and not hidden.
But of course, Trump lies constantly, so his fans were mainly enthralled with what a bully
he is and believed what they wanted to believe. Made up fantasies. Some of his fans are waking
up to the fact that they've been screwed over royally. Of course the M$M will happily oblige by
somehow finding a way to blame it all on Obama, Clinton, the Democrats, whatever (not that the
Dems aren't equally happy to cut and gut SS & Medicare, as well) and the proles will buy it.
Although various states have now passed laws to legalize what's called "assisted suicide,"
there's still a lot of resistance to it, esp from those of various religious persuasions. Also
assisted death in these cases is only available for those already in the latter stages of terminal
illnesses, and generally extreme poverty doesn't fall under that definition. So sucks to be you.
I guess dying from hunger and exposure, due to extreme poverty, is our just deserts. No rest
for the wicked. When you die, you have to die as painfully and slowly as possible just to impress
upon you how worthless and awful you truly are. The punishments will continue until morale improves.
This was posted hours ago. How many readers have taken the time to email their congressmen?
Please do! You don't have to be lengthy or learned. You can simply state a couple of talking points
you all know and intimate that tampering with benefits is not going to be accepted. This is definitely
one of those "if you're not with us you're against us" issues, and the sooner your elected representatives
understand you mean that the better.
"I think a 0.4% increase (combined), about two dollars per week for each the worker and
the employer, should solve the problem in ten years, but I haven't done the numbers on that
myself. "
WHUT? Why are space cadets like this even allowed on the internet?
Trying to patch Soc Sec's $10 trillion hole with an 0.4% FICA tax hike is like trying to empty
the Atlantic Ocean with a teaspoon.
Net present value, Dale - I'm afraid you cut class that day. Now it's too late.
The attempt by the right to "fix" Social Security is nothing more than an attempt to make the
trust fund disappear, and to mark all the obligations that fund was supposed to have met null
and void.
If this sounds like they are trying to steal the trust fund, that is not the case. They have
already stolen it. Now they just have to fix the accounting to say they didn't, which they will
do by setting the system to never need to cash a bond from the trust fund.
Tin foil hat, you say? Fine, but do me a favor. Whenever a bill is introduced to "fix" Social
Security, do the accounting for how it will play out. The trust fund will no longer be needed?
Something about this strikes me as a hilarious farce of unintended consequences. People worried
about "government debt" and demanding its reduction are getting exactly what they wished
for.
I'm not quite sure of your meaning here. It sounds like you are mocking people for not being
able to get out from under a propagandist educational/media system and a corrupt government. Then
again, it also seems to be gloating and that people deserve to be immiserated.
This is called a "technical adjustment." They can pretend that the CPI is too generous and
know that most people won't understand the scam.
I am a 100% disabled veteran and several years back they tied our COLA to the SS COLA.
The result is that since mid 2013 in this region we have lost about 40% of our purchasing power.
Our standards of living have dropped by that much.
Of course there is NO INFLATION, the letters I have been getting actually claimed that because
of this DISINFALTIONARY economic environment . That is no inflation so no raise this year.
Now, I am going to be 59 this spring, I worked at a lot of things between 1973 and 2005 when
a judge ruled in my favor regarding my disability and awarded me SSD. But, because I spent so
many years fighting SS and did not have the quarters of income recent enough my SSD amounts to
$1,013 per month.
Now for all the republicans out there who think SS is too generous, I would ask you to stick
your filthy little brains, or rather pull them out of your exhaust holes. You can claim it is
too generous when you have spent a lifetime paying in and then someone tells you that 12 grand
a year is too generous.
MY RENT IS MORE THAN THAT and this place s a hovel in the sticks. The only way I can have a
roof over my head for less is to live in my vehicle.
Fortunately I also have a bit in VA disability and between the two I thought of myself as middle
class if just barely only 36 months ago, now I would consider myself in dire poverty at 20k a
year, anything less and we are talking eating at the mission and sleeping in shelters. Vehicle?
Right. The fact that they refuse to acknowledge inflation and use quite literally half a dozen
tricks to disappear it from the headlines does NOT mean it does not exist. If you can eat gasoline
and flat screen TV's you are certainly doing great, otherwise you are experiencing something never
known in the USA, structural downward mobility for 90% of us.
And it is these facts that drove the angry and the stupid to vote for Trump, they were not
the majority of voters, but between them and antiquated laws giving voters in small states far
more power than in urban areas (where people actually live) that Orange Hitler dude got in, and
so did the GOP majority of fascists who have as a holy mission class warfare and getting rid of
diversity of any kind, racial, sexual, or gender.
They are going to gut every bit of progress since Teddy Roosevelt. They are going to bring
back segregation, this time though via school vouchers. They are not going to FORCE non white
non middle class kids into slum condition schools, so they will plausibly claim HEY it is NOT
segregation and those parents have an equal right to move their kids to private schools also.
No, instead these kids will be abandoned in schools that the government will slash funding to
as white upper and middle class people are partially paid the tuition to send their kids to private
schools which are exempt from federal discrimination laws. I am NOT holding my breath for this,
I have a one way ticket to Australia for the first week of January.
THAT is going to be the story of all government for a while, social security is just one of
MANY functions of government they are going to kill off. If you think people were angry in 2016
just you wait till 2020.
It is already so bad that unless the GOP grows a conscience and a heart in the next 2-4 years
the USA will break up the way the Soviet Union did. The nation now has what so many married couples
cite in divorce proceedings, IRRECONCILABLE differences.
And the worst of it is that no matter if you like it or hate it the USA is the rock of stability
that has keep civilization working since the end of WWII. You break up the USA and bingo there
is no uni in the unipolar geopolitical world. What we will have is chaos and war and humanity
will fail. USA FAIL=Humanity FAIL.
Thank you. Thank you. Thank you. For your plainspoken honesty. This should be copied and posted
everywhere, starting with senators and representatives.
They should have an option for an opt out of social security, medicare/Medicaid, Affordable
Health Care. Not having that kind of freedom to me is not worth it. I am not buying any other
excuses such as I am not shrewd to invest my money. Taking money is the easy part. Getting back
is always laborious if you are lucky to get.
right. many people opt out of "mandantory" auto insurance by just not
getting it. it's been estimated that in FL at different times as many as
one third of the drivers on the road are not insured. and really, if they
get injured, they get treated in an emergency room until they are stabilized
(the law) and if they were sued for damages, what could be recovered?
but, let's remember, while they are on their "ride" they are "free." Yep.
a lot of people think like that.
Social Security, let's lay it to rest once and for all Social security has nothing to do
with the deficit. Social Security is totally funded by the payroll tax leviedon employer and
employee. If you reduce the outgo of Social Security, that money would not go into the general
fund or reduce the deficit. It would go into to the Social Security Trust Fund. So Social Security
has nothing to do with balancing a budget or lowering the deficit.
would someone explain why the greenspan changes , which were supposed to keep social security
solvent, did not, I've googled the history and the only answers seem to be that the trust had
trillions in surplus that were used to pay off other obligations, , which I do know that the funds
were used to lower the deficits in previous years, but wouldn't the surplus still be there? Explanation
please by someone knowledgeable about the history and why the problems now
"Well, which is he, "at the top of the scale" or an "average earner"?"
Oops. Even I understand that one. It means he earned an AVERAGE of $118,500, the maximum that
SS taxes.
Next question: what kind of idiot actually introduces a bill to cut Social Security? One who
plans on a lucrative retirement from politics, that's what kind.
Protesting the proposed policies of President who owns real properties of value in media-drenched
major cities that require the labor of lower income workers on a daily basis might be more effective
than protesting a President whose wealth is almost entirely stored in secret, offshore bank accounts.
"The trouble with Sneed's article is that she does not appear to know what she is talking about.
She just wrote down what some "experts" told her with no idea what the words mean."
You missed the question, is it the writer or the policy of the site?
"... Second, it is important to note that the size of the projected shortfall in the Medicare Part A program (the portion funded by its own tax) has fallen sharply in the Obama years. The shortfall for the 75-year planning horizon was projected at 3.53 percentage points of payroll in 2009, the first year of the Obama presidency. It has now fallen by 80 percent to just 0.73 percent of payroll. This reduction is due to a sharp slowdown in the projected growth of health care costs. Some of this predates the Affordable Care Act (ACA), but some of the slowdown is undoubtedly attributable to the impact of the ACA. ..."
"... On Chris Wallace's question, we know now from Hillary Clinton's Wall Street speeches that her plan on debt and entitlements is to support the elitist Bowles-Simpson project, the centerpiece of which was raising the age for Medicare and Social Security. Who do you think Hillary is lying to about benefits - everyday Americans like you (who she deplores) or her Wall Street backers? ..."
"... Japan has been doing this deficit spending thing for 20+ years and borrowed an enormous amount of money. It has not solved anything. Growth continues to be elusive. Progressive economists keep whistling by the graveyard. And the conservatives just want to cut taxes. Both groups look like medieval doctors who prescribe bloodletting no matter what the illness is. Oh, the dismal science! ..."
"... She proudly proclaimed that her programs would not add to the national debt implying no increase in deficit spending. She ridiculed Trump because his tax plan would add significantly to the deficit and national debt. Clearly she wants to portray an image of fiscal responsibility and Wallace's question allowed her to go down that path. ..."
At the debate last night, moderator Chris Wallace challenged both candidates on the question of cutting
Social Security and Medicare. The implication is that the country is threatened by the prospect of
out of control government deficits. The question was misguided on several grounds.
First, as a matter of law the Social Security program can only spend money that is in the trust
fund. This means that, unless Congress changes the law, the program can never be a cause of runaway
deficits.
Second, it is important to note that the
size of the projected shortfall in the Medicare Part A program (the portion funded by its own
tax) has fallen sharply in the Obama years. The shortfall for the 75-year planning horizon was projected
at 3.53 percentage points of payroll in 2009, the first year of the Obama presidency. It has now
fallen by 80 percent to just 0.73 percent of payroll. This reduction is due to a sharp slowdown in
the projected growth of health care costs. Some of this predates the Affordable Care Act (ACA), but
some of the slowdown is undoubtedly attributable to the impact of the ACA.
Anyhow, the implication of Wallace's question, that these programs are somehow out of control
and require some near term fix, is not supported by the data. We will have to make changes to maintain
full funding for Social Security, but there is no urgency to this issue.
On the more general point of deficits, the country's problem since the crash in 2008 has been
deficits that are too small, not too large. The main factor holding back the economy has been a lack
of demand, not a lack of supply. Deficits create more demand, either directly through government
spending or indirectly through increased consumption. If we had larger deficits in recent years we
would have seen more GDP, more jobs, and, due to a tighter labor market, higher wages.
The problem of too small deficits is not just a short-term issue. A smaller economy means less
investment in new plant and equipment and research. This reduces the economy's capacity in the future.
In the same vein, high rates of unemployment cause people to permanently drop out of the labor force,
reducing our future labor supply if these people become unemployable. (Having unemployed parents
is also very bad news for the kids who will have worse life prospects.)
The Congressional Budget Office now puts potential GDP at about 10 percent lower for 2016 than
its projection from 2008, before the recession. Much of this drop is due the decision to run smaller
deficits and prevent the economy from reaching its potential level of output. We can think of this
loss of potential output as a "austerity tax." It currently is at close to $2 trillion a year or
more than $6,000 for every person in the country.
It is unfortunate that Wallace chose to devote valuable debate time to a non-problem while ignoring
the huge problem of needless unemployment and lost output due to government deficits that are too
small.
On Chris Wallace's question, we know now from Hillary Clinton's Wall Street speeches that her
plan on debt and entitlements is to support the elitist Bowles-Simpson project, the centerpiece
of which was raising the age for Medicare and Social Security. Who do you think Hillary is lying
to about benefits - everyday Americans like you (who she deplores) or her Wall Street backers?
and the nerve of this Wallace dude and the nerve of all these other... so called journalist on
this show?
Wallace even didn't notice - the whole time!! - that it was Alec Baldwin -(and not Trump) -
who answered his silly questions - and then the nerve of the so called 'media' to praise Wallace
- that he didn't notice that Alec Baldwin answered his questions.
I am perfectly fine with running deficits to get out of a recession and compensate for temporary
shortfall in private demand. Isn't this the original idea behind deficit spending? But we are
7 years out of a recession.
Japan has been doing this deficit spending thing for 20+ years and borrowed an enormous
amount of money. It has not solved anything. Growth continues to be elusive. Progressive economists
keep whistling by the graveyard. And the conservatives just want to cut taxes. Both groups look
like medieval doctors who prescribe bloodletting no matter what the illness is. Oh, the dismal
science!
The Japanese yen is severely overvalued and therefore Japan's exports no longer can sustain GDP
growth as they did in the past. Combined with Japan's anemic consumer demand, there is nothing
but government spending to spur growth. If Japan now cut its deficit spending, its economy would
collapse.
My point is that American health care is profit driven. The private health insurer companies drive
up the costs in all sectors of health care - whether that be for a simple phlebotomy test or a
urinary catheter or...., or for a visit to a cardiologist after initial treatment for angina in
an emergency dep't.
Health care should be considered a basic human right in any country and not one that is affected
by the amount a person can pay - or the quality of private insurance a person can afford. I worked
in the field for 33 years before retiring and what I saw was, in many cases, very sad and unfortunate.
Those who had money went on with their lives and those who did not often simply died. That is
no way to manage any society.
Dear Michael,I am in TOTALl agreement with you but, as a very satisfied Kaiser Permanente member,
I am a little defensive about maligning the term "HMO" which, I believe, is a beacon of hope for
"Best Practices" in our current profit driven health delivery mess. I am a retired RN who watched
first hand as the system became ruled by consolidation and greed. I remember in the 1980s being
told that consolidation would bring cost down. What a joke that was. So I am working for single
payer, Medicare for all. Carol
"It is unfortunate that Wallace chose to devote valuable debate time to a
non-problem while ignoring the huge problem of needless unemployment
and lost output due to government deficits that are too small." -D. Baker
We should have a Full Employment Fiscal Policy coupled with a Federal Job Guaranty would put an
end to this discussion. Funding the entitlements are not an issue - although the law may need
to be revised - as the government can issue its currency without a problem - inflation being the
constraint. (The increase in demand for apartments, cable subscriptions, and shuffleboards are
unlikely to trigger uncontrolled inflation.)
Dean thinks the debt is not a problem but the majority of voters Clinton was trying to reach probably
do think it is a problem. She proudly proclaimed that her programs would not add to the national
debt implying no increase in deficit spending. She ridiculed Trump because his tax plan would
add significantly to the deficit and national debt. Clearly she wants to portray an image of fiscal
responsibility and Wallace's question allowed her to go down that path.
I did not say that she did not propose to increase spending - just that she would not increase
the debt because everything is "paid for". If everything is paid for by tax increases then there
is no near term stimulus to the overall economy. There may be long term benefits if the projects
are worthwhile but that will take years to surface. She also declined to defend the benefits of
fiscal stimulus after the financial crisis. People hear what they want to hear from these debates.
I think you are wrong about the near term benefits of taxing wealthy people and then using that
money for public spending. The propensity of the wealthy for spending is low and therefore if
you take some of their money and spend it it will be stimulative.
I am aware of this ptc argument but find it weak. I know plenty of "wealthy" couples who save
very little. Anyhow, even if there is some merit to the argument why not borrow now at almost
zero cost and ensure the maximum stimulus.
Another factor - public spending may not find its way into the lowest income levels of our
society. Infrastructure projects, for example, will enrich contractors and materials industries
as much or more than the individual workers. Also, they take a long time to get started as there
really is no such thing as shovel ready. Couple the protracted startup with higher taxes and you
get very little near term benefit.
This whole discussion is of course mute since running deficits does not crowd out investing. And
increasing the debt has no negative implication other then the political effects. The government
can print money and spend money. If it runs deficits it can keep interest rates low by buying
securities.
We need to stimulate DEMAND Now to get the economy revved up and the money flowing. Best way is
the change Social Security such that it doesn't kick in until the earner has made $10,000 (i.e.)
and account for that by lifting the cap accordingly such that 90% of all earned income is taxed:
just as it used to be when Reagan/?? fixed it. Just think what all that money would do in the
economy. It would not be used to by back stock or inflate golden parachutes. It would be immediately
spent. It would be DEMAND.
The $173 Trillion Austerity Tax in the Infinite Horizon
By Lara Merling and Dean Baker
The Peter Peterson-Washington Post deficit hawk gang keep
trying * to scare us into cutting Social Security and
Medicare. If we don't cut these programs now, then at some
point in the future we might have to cut these program or
RAISE TAXES.
There are many good reasons not to take the advice of the
deficit hawks, but the most immediate one is that our economy
is suffering from a deficit that is too small, not too large.
The point is straightforward, the economy needs more demand,
which we could get from larger budget deficits. More demand
would lead to more output and employment. It would also cause
firms to invest more, which would make us richer in the
future.
The flip side in this story is that because we have not
been investing as much as we would in a fully employed
economy, our potential level of output is lower today than if
we had remained near full employment since the downturn in
2008. The Congressional Budget Office estimates that
potential GDP in 2016 is down by 10.5 percent (almost $2.0
trillion) from the level it had projected for 2016 back in
2008, before the downturn.
This is real money, over $6,200 per person. But if we want
to have a little fun, we can use a tactic developed by the
deficit hawks. We can calculate the cost of austerity over
the infinite horizon. This is a simple story. We just assume
that we will never get back the potential GDP lost as a
result of the weak growth of the last eight years. Carrying
this the lost 10.5 percent of GDP out to the infinite future
and using a 2.9 percent real discount rate gives us $172.94
trillion in lost output. This is the size of the austerity
tax for all future time. It comes to more than $500,000 for
every person in the country.
By comparison, we can look at the projected Social
Security shortfall for the infinite horizon. According to the
most recent Social Security Trustees Report, ** this comes to
$32.1 trillion. (Almost two thirds of this occurs after the
75-year projection period.) Undoubtedly many deficit hawks
hope that people would be scared by this number. But compared
to the austerity tax imposed by the deficit hawks, it doesn't
look like a big deal.
"... When I signed up for a 401k at my previous job, I wanted to invest in the S&P index fund, as it was the lowest cost option. Given that Putnam used their own fund, it charged 0.35% at a time when Vanguard was at 0.07% and Fidelity at 0.10%. ..."
"... Rule of 72 says that at 7% return for ten years would be $20,000 not $136K. ..."
"... Washington has proven itself incapable of managing its money (our taxes) prudently and efficiently because of our corrupt representatives putting their electoral and personal interests first. The 401K experiment has failed. Very few individuals will be able to rely on them for retirement security, and of those most hail from the higher income brackets. They do virtually nothing for retirement security for the vast, vast majority of the country. ..."
"... Social Security is a proven, cost effective, and reliable deliverer of retirement income for our entire population. 401K's will never come close, and in fact aren't worth shit to most people. But that is not what matters in Washington. ..."
"... The Plan administrator has a fiduciary obligation to manage the options. The administrator can put pressure to make non-Sponsor funds available. With a total company 401k of only about $5mm, I was able to pressure our 401K plan Sponsor to provide access to lower cost equivalent portfolios for investment options such as S&P 500, Russell 2000 and a long-term bond yield (via Vanguard and Fidelity). ..."
"... Difficult to reconcile this with the Department of Labor's new fiduciary rule, which reportedly requires financial advisers to place the interests of clients with retirement-saving accounts ahead of their own. I have read that it will be implemented sometime next year, assuming there are no additional delays. (hat tip Barry Ritholtz) ..."
Thanks for this analysis. I have a 403b through my institution of higher Ed, specifically Tiaa.
Their funds are kind of lousy (compared, say, to a vanguard index) and there's little choice in
which funds seem to be available from one institution to another.
The idea that workers will somehow sit down and process the numbers surrounding badly performing
funds, and then redistribute, is a fantasy. Who has the financial literacy to do that? Like healthcare,it's
another area of personal finance where people are expected to take on time consuming and complex
administrative duties.
Mandatory 401s sounds just great. Can't wait. "You give me your money, you tell me where to
put it among crappy options, wait forty years, and you may or may not ever see it again, based
on the quality of your choices. Pleasure doing business with you."
I love the last line, because it applies to almost everything in our society today: far more
scrutiny and oversight. Thanks to Naked Capitalism for turning up the scrutiny.
We are going to have a fight on our hands if and when HRC gets elected. The fact that our politicians
have gotten away with weakening New Deal programs that actually worked well is all the evidence
I need to believe they are not finished with their attack.
When I signed up for a 401k at my previous job, I wanted to invest in the S&P index fund,
as it was the lowest cost option. Given that Putnam used their own fund, it charged 0.35% at a
time when Vanguard was at 0.07% and Fidelity at 0.10%.
If you put $10k into the fund at 35 bps, you'd have $136k at the end of 10 years (assuming
7% gross return). if you got it at 7 bps, you'd have $137k. Now, if you'd bought a loaded A share
American Fund with a 5.75% sales load and a 65 bps expense ratio, you'd have $126k.
The principle of low fees is important, but you're effectively there with the 35 bps fund.
"…investors might be vigilant enough to recognize that their interests are not being well served…"
Come on. Really. I would wager that the percentage of people knowledgeable and sophisticated
enough to do so at well under 0.1% of the population. The entire system of 401 retirement plans
has been constructed for the purpose of fleecing undisclosed fees from us suckers forced into
these plans.
Washington has proven itself incapable of managing its money (our taxes) prudently and
efficiently because of our corrupt representatives putting their electoral and personal interests
first. The 401K experiment has failed. Very few individuals will be able to rely on them for retirement
security, and of those most hail from the higher income brackets. They do virtually nothing for
retirement security for the vast, vast majority of the country.
Social Security is a proven, cost effective, and reliable deliverer of retirement income
for our entire population. 401K's will never come close, and in fact aren't worth shit to most
people. But that is not what matters in Washington.
I see this as akin to a Board of Driectors governance issue.
The Plan administrator has a fiduciary obligation to manage the options. The administrator
can put pressure to make non-Sponsor funds available. With a total company 401k of only about
$5mm, I was able to pressure our 401K plan Sponsor to provide access to lower cost equivalent
portfolios for investment options such as S&P 500, Russell 2000 and a long-term bond yield (via
Vanguard and Fidelity).
All it required was performing the minimums of being a 401k plan administrator. Quarterly monitoring
of fund performance versus peers via a service like Morningstar (took 4 hours to prebuild screens
that displayed QonQ, YonY and 3Yon3Y), pressing the Sponsor for alternatives and then refusing
the steak dinner to discuss with the Sponsor. I mean for crying out loud this is really simple.
And of course if your plan administrator isn't doing this minimum I'm sure they have fiduciary
insurance so there are alternatives.
Of course many people aren't willing to ask/press these questions of their employer/HR. I've
seen plans administered exceptionally well (utility with a union for about 1/3 of employees and
small family energy firm) and poorly (some larger energy companies). Why somebody doesn't provides
this administrator function as an outsource is beyond me. The real liability can be quite high
and pushing off to a 3rd party who does just that would seem worth the $.
My 401K was administered by Fidelity and I believe there were no restrictions whatsoever. I
could invest in any Fidelity fund or actually any fund through a brokerage account. If you didn't
use a Fidelity brokerage account offered by the plan as an option your choices were restricted.
They are often dodgy too. Great-west/Empower does a real bait and switch on the options offered
for certain 401A funds were there is deeply buried disclosure about proprietary versions charging
much higher fees, than the term sheet prominently displayed as "this is what you're buying if
you select this fund". This is a real racket
Yves, article and analysis insightful, thanks again. "Doggy" in title makes sense, but "dodgy"
may apply as well to Fidelity specifically, read on. Stumbled on to Reuters write up by Tim McLaughlin
about Fidelity this month and began a search for a new money management firm with a "fiduciary"
bone in it's body:
http://www.reuters.com/article/us-usa-fidelity-family-specialreport-idUSKCN1251BG .
Though the article indicates Fidelity's behavior is not "illegal nor unethical" – Yale University
law professor John Morley said Fidelity runs the risk of losing investors by competing with the
funds that serve them.
"What they're doing is not illegal, not even unethical," Morley said. "But it's entirely appropriate
for mutual fund investors to take their money elsewhere because Fidelity has made a decision to
take away some of their potential returns."
Many of us are trapped in the DC funds our employers establish for us. As cdub referenced,
pressuring plan administrators is one way to change options or broaden offerings – but one needs
to understand what pressure to apply.
Difficult to reconcile this with the Department of Labor's new fiduciary rule, which reportedly
requires financial advisers to place the interests of clients with retirement-saving accounts
ahead of their own. I have read that it will be implemented sometime next year, assuming there
are no additional delays. (hat tip Barry Ritholtz)
So: Hillary Clinton has already said that she will raise Social Security taxes on people who make
less than $118,500 per year, but Donald Trump has not indicated whether he will impose Social Security
taxes on income above $118,500 per year.
Other proposals that have been pushed in order to "replenish the Social Security Trust Fund" -
or to achieve the long-term stability of the Social Security system - mainly focus on three approaches:
One is privatizing Social Security, as Wall Street wants, and which proposal is based on private
gambles that the assets that are
purchased by the Wall
Street firm for the individual investor will continually increase in value, never plunge, and never
be reduced by annual charges to pay Wall Street's fees for management and for transactions, throughout
the worker's career until retirement.
Another approach is gradually reducing
the inflation-adjuster for benefits, the inflation-adjusted value of the benefits that Social
Security recipients will be receiving. President Obama had been trying to get congressional Republicans
to agree with him to do that (which some call "the boiling-frog approach" because it's applied so
gradually), but they continued to hold out for privatizing Social Security, and thus nothing was
done.
And the third option is to increase the retirement-age, as Obama also wanted to do (and which
is really just another form of "boiling-frog approach"), but also couldn't get congressional Republicans
to accept that. (Trump's comment to "Not increase the age and to leave it as it is" is a clear repudiation
by him of this approach. And his promise to not increase taxes would, if taken seriously, also prohibit
him from endorsing Hillary Clinton's approach.)
"... Mr. James recommended a proposal by Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at The New School in New York, to create a retirement savings plan for everyone based on 3% annual salary contributions shared equally among employees and employers. The federal government would guarantee a 2% return, through a modest insurance premium on such accounts . "With corporate profits at an all-time high, this should be a manageable burden," he said, adding that the approach "is going to require us to look beyond the next election cycle." ..."
Blackstone Group's Tony James, likely to be Clinton's Sec of Treasury, advocates a hedgfund enriching
scheme involving MANDATORY government savings plan on all Amercans.
Tony James head of the crooked Blackstone Group, a giant hedge fund connected to many state pension
funds, is likely to be Clinton's Treasury Sec. Hedge funds have donated 125 million to Crooked Hillary,
20k to Trump. This is thievery on the grand, epic biblical scale with the usual bs about "helping"
people.
"We absolutely have to start now," Mr. James said at a Center for American Progress conference
in Washington on Wednesday. " It has to be mandated . Nothing short of a
mandate will provide future generations a secure retirement."
Mr. James recommended a proposal by Teresa Ghilarducci, director of the Schwartz Center for Economic
Policy Analysis at The New School in New York, to create a retirement savings plan for everyone
based on 3% annual salary contributions shared equally among employees and employers. The federal
government would guarantee a 2% return, through a modest insurance premium on such accounts . "With
corporate profits at an all-time high, this should be a manageable burden," he said, adding that
the approach "is going to require us to look beyond the next election cycle."
Mr. James also called for redirecting $120 billion in annual retirement tax deductions to give
every worker a $600 annual tax credit to save for retirement.
small search brings up deluge of corruption, payoffs etc.
Contrary to What AP Tells You, Social Security Is NOT a Main Driver of the Country's Long-term
Budget Problem
The New York Times ran a short Associated Press piece * on Social Security and "why it matters."
The piece wrongly told readers that Social Security is "a main driver of the government's long-term
budget problems." This is not true. Under the law, Social Security can only spend money that is in
its trust fund. If the trust fund is depleted then full benefits cannot be paid. The law would have
to be changed to allow Social Security to spend money other than the funds designated for the program
and in that way contribute to the deficit.
The piece also plays the "really big number" game, telling readers:
"the program faces huge shortfalls that get bigger and bigger each year.In 2034, the program faces
a $500 billion shortfall, according to the Social Security Administration. In just five years, the
shortfalls add up to more than $3 trillion.
"Over the next 75 years, the shortfalls add up to a staggering $139 trillion. But why worry? When
that number is adjusted for inflation, it comes to only $40 trillion in 2016 dollars - a little more
than twice the national debt."
Since this is talking about shortfalls projected to be incurred over a long period of time, it
would be helpful to express the shortfall relative to the economy over this period of time, not debt
at a point in time. This is not hard to do, since there is a table ** right in the Social Security
trustees report that reports the projected shortfall as being equal to 0.95 percent of GDP over the
75-year forecasting horizon. By comparison, the costs of the war in Iraq and Afghanistan came to
around 1.6 percent of GDP at their peaks in the last decade.
The piece also gets the reason for the projected shortfall wrong. It tells readers:
"In short, because Americans aren't having as many babies as they used to. That leaves relatively
fewer workers to pay into the system. Immigration has helped Social Security's finances, but not
enough to fix the long-term problems.
"In 1960, there were 5.1 workers for each person getting benefits. Today, there are about 2.8
workers for each beneficiary. That ratio will drop to 2.1 workers by 2040."
Actually the drop in the birth rate and the declining ratio of workers to beneficiaries had long
been predicted. The reason that the program's finances look worse than when the Greenspan commission
put in place the last major changes in 1983 is the slowdown in wage growth and the upward redistribution
of wage income so that a larger share of wage income now goes untaxed.
In 1983, only 10 percent of wage income was above the payroll tax cap. Today it is close to 18
percent. This upward redistribution explains more than 40 percent *** of projected shortfall over
the next 75 years.
It is also worth noting that the loss in wage income for most workers to upward redistribution
swamps the size of any tax increases that could be needed to maintain full funding for the program.
While AP wants to get people very worried over possible tax increases in future years, it would rather
they ignore the policies (e.g. trade, Federal Reserve policy, Wall Street policy, patent policy)
that have taken money out of the pockets of ordinary workers and put it in the hands of the rich.
fewer workers to pay into the system. Immigration has helped Social Security's finances, but
not enough to fix the long-term
"
~~dB~
Fewer workers who on balance draw smaller pay-check-s within a World of rising prices.
Can you see the long trend of inflation? Do you see how the price of a t-bond has risen steady
on during the past 35 years? As the bond price rises the yield falls. Do you see how much?
This is a long term unstoppable inflation that raises the price of all ships. All nursing
homes and all ships!
That's 139 Trillion with a capital
"T", and that rhymes with "P", and that stands for pool!
And don't look at guys like me to
save Social Security. My unfunded liability for kids shoes alone is over $20,000, and that's
assuming they leave home at 18.
The country's major banks are like trouble-making adolescents. They constantly get involved
in some new and unimagined form of mischief. Back in the housing bubble years it was the pushing,
packaging and selling of fraudulent mortgages. Just a few years later we had JP Morgan, the
country's largest bank, incurring billions in losses from the gambling debts of its "London
Whale" subsidiary. And now we have the story of Wells Fargo, which fired 5,300 workers for
selling phony accounts to the bank's customers.
It is important to understand what is involved in this latest incident at Wells Fargo. The
bank didn't just discover last month that these employees had been ripping off its customers.
These firings date back to 2011. The company has known for years that low-level employees were
ripping off customers by assigning them accounts -- and charging for them -- which they did
not ask for. And this was not an isolated incident, 5,300 workers is a lot of people even for
a huge bank like Wells Fargo.
When so many workers break the rules, this suggests a problem with the system, not bad behavior
by a rogue employee. And, it is not hard to find the problem with the system. The bank gave
these low level employees stringent quotas for account sales. In order to make these quotas,
bank employees routinely made up phony accounts. This practice went on for five years.
As it became aware of widespread abuses, it's hard to understand why the bank would not
change its quota system for employees. One possibility is that they actually encouraged this
behavior, since the new accounts (even phony accounts) would be seen as good news on Wall Street
and drive up the bank's stock price.
Certainly Wells Fargo CEO John Stumpf, as a major share and options holder, stood to gain
from propping up the stock price, as pointed out by reporter David Dayan. In keeping with this
explanation, Carrie Tolsted, the executive most immediately responsible for overseeing account
sales, announced her resignation and took away $125 million in compensation. This is equal
to the annual pay of roughly 5,000 starting bank tellers at Wells Fargo. That is not ordinarily
the way employees are treated when they seriously mess up on the job.
Regardless of the exact motives, the real question is what will be the consequences for
Stumpf and other top executives. Thus far, he has been forced to stand before a Senate committee
and look contrite for four hours. Stumpf stands to make $19 million this year in compensation.
That's almost $5 million for each hour of contrition. Millions of trouble-making high school
students must be very jealous.
There is little reason for most of us to worry about Stumpf contrition, or lack thereof.
His bank broke the law repeatedly on a large scale. And, he was aware of these violations,
yet he nonetheless left in place the incentive structure that caused them. In the adult world
this should mean being held accountable.
This is not a question of being vindictive towards Stumpf, it's a matter of getting the
incentives right. If the only price for large-scale law breaking by the top executives of the
big banks is a few hours of public shaming, but the rewards are tens of millions or even hundreds
of millions in compensation, then we will continue to see bankers disregard the law, as they
did at Wells Fargo and they did on a larger scale during the run-up of housing bubble.
There is another aspect to the Wells Fargo scandal that is worth considering. Insofar as
the bank was booking revenue on accounts that didn't exist, it was also ripping off the banks'
shareholders. The shareholders' interests are supposed to be protected by the bank's board
of directors.
It doesn't seem the shareholders got much help there....
Cellino & Barnes? I hope these
plaintiffs have been attorneys than that. But yea - having a government agency make your case
is a good idea as I'm sure top Wells Fargo management has hired some nasty defense attorneys.
California has
some of the strongest whistle blower protections in the country.
I find it remarkable that(and I have tried but failed to find any evidence) not one of these
mistreated employees filed a lawsuit years ago. The firings started in 2011. Are you telling
me these employees sat around for 5 years without a single one of them taking action?
The other part that bothers me is this bonus level goal. Wells Fargo is not the only company
in the world that sets their bonus levels at points that are almost impossible to obtain.
Not talking whistle blower protections.
Firms like Cellino and Barnes only take cases where they know they can win. Then again - I
am talking about a dirt bag law firm. Why bring a case when the odds are stacked against you?
But I think what you are pointing out is they is a new sheriff in town with respect to gathering
the facts - which of course is always key in winning any law suit.
"not one of these mistreated
employees filed a lawsuit years ago".
A lot of women who have been raped don't bother to
prosecute the creep thinking they can't win anyway. This may have been the thinking of these
employees until now.
I am not saying the law firm is incompetent, I am saying it seems to me they are taking
a case where WF might not want to deal with more bad pr and settle.
The only people, from what I have seen of this case, that have a chance to win on the merits
are those who claimed they called the ethics department at Wells and were fired for that action.
Yes, the lawyers are circling
like vultures.
But it just shows that lawyers evaluate cases before taking them on, and that the cases' prospects
depend on public opinion.
In addition, it is much easier for people to feel empowered, talk
to lawyers, and fight back if they don't feel isolated and vulnerable to retaliation.
"the executive most immediately
responsible for overseeing account sales, announced her resignation and took away $125 million
in compensation. ... That is not ordinarily the way employees are treated when they seriously
mess up on the job."
Based on (public) evidence available to me, I have to inform you that
this *is* ordinarily the way how the higher executive ranks are treated when the have to leave
because of a serious blunder. In many cases, the termination package is written into their
contract, with exceptions mostly for criminal malfeasance, breach of contract, and that type
of thing, or if the management/board deems it is better for everybody else to "convince" the
undesired executive to leave without a big splash, then they will sweeten the deal.
As I have seen in tech, in many companies the rank-and-file are treated to similar arrangements,
only the amounts are several orders of magnitude lower. But it is not very common for somebody
to be outright fired without severance. There are commonly provisions like a few weeks of salary
continuation per year of service, or offering a small sum to get a quick exit instead of a
drawn out and arduous process of managing somebody out and "documenting" everything.
Here's the part that bothers
me about this.(and once again I will mention that I feel almost dirty defending bank execs).
" large-scale law breaking by the top executives of the big banks".
I don't get this at all. It seems that setting huge bonus numbers is somehow large scale
law breaking.
But let's look at the real numbers is some perspective here(which is usually Baker's thing).
The idea seems to be that Stumpf came up with this idea to open accounts that people did
not know they had. Those accounts would both generate revenue and allow him to talk about the
growth of accounts in the bank.
I have seen nothing that shows how many accounts were opened illegally(I would like to see
that) and nothing to show how many legal accounts were opened during this time frame. With
that info you could put this into perspective how Stumpf and other high level execs gained
from this action.
That being said I know one thing. People who had accounts opened illegally were returned
the fees that they paid. That total is $5 million. Not a lot of revenue but it kind of makes
sense. You cannot charge people a lot of fees with products they do not even know they have.
there is no way in the world that anyone can think there was going to be a lot of money made
on accounts that were, to all intents and purposes, dead.
Meanwhile, in the time period that this case covers, Wells Fargo had profits of almost $100
billion. To think the CEO is going to worry about such an insignificant amount of revenue by
"planning" an illegal action is absurd.
I am all in in the bank CEOs committing fraud during the bubble, there was a huge amount
of profit to be made. But to think this thing came from the top, or even five or six levels
down, is silly. There is no reason.
This was the case of front line people committing fraud to make money. It was also the case
of their managers to encourage and/or allow that fraud to make money.
Wells certainly deserves the punishment for allowing this fraud to happen, but thinking
it originated in the executive offices makes no sense from an standpoint.
'a retirement plan ultimately depends on the future
earning power of the economy'
That's why all modern pension plans hold some equities.
An individual's cost to own one diversified equity fund and one diversified bond fund is about 0.1%
per year. Whereas the expected benefit (compared to SocSec's all Treasury portfolio) is about 3.0% annually.
The seminal research pointing to an equity premium was done in the U.S. in the early 1960s, resulting
in Nobel prizes for several participants. A half century on, their work has had zero effect on the politically
petrified SocSec system - 20% funded, headed for zero in 2033.
Seminal research - Fisher/Lorie paper of 1964, establishing the equity premium and founding
CRSP which serves as the database for nearly all U.S. equities research:
Nobel Prizes 1990 - Harry Markowitz, Merton Miller, William Sharpe - for Modern Portfolio Theory,
which implies in conjunction with the equity premium that the optimal risk-reward portfolio should
include equities:
Zero effect:
"Since the beginning of the Social Security program [in 1935], all securities
held by the trust funds have been issued by the Federal Government."
Headed for zero:
"The dollar level of the theoretical combined trust fund reserves declines
beginning in 2020 until reserves become depleted in 2034."
- SocSec Trustees Report 2015,
page 3.
Can you spell "secular stagnation" ? And can you explain to us
what returns are expected for stocks in the "secular stagnation"
regime in comparison with bonds?
And what will you do if S&P500 drops to 660 like it did in 2008.
And stays at this level for a couple of years like oil prices recently
did.
LTCM was founded in 1994 by John W. Meriwether, the former
vice-chairman and head of bond trading at Salomon Brothers. Members
of LTCM's board of directors included Myron S. Scholes and Robert
C. Merton, who shared the 1997 Nobel Memorial Prize in Economic
Sciences for a "new method to determine the value of derivatives".[3]
I think that comprehensive financial planners now do a lot of the work that
family attorneys did in generations past. This is partly because the sort of
person who goes to law school now is much more intellectual -- and thus often a
little more introverted and socially inept–than in years past. Watergate caused
that, I believe. All of a sudden everybody was interested in the mechanism of
the law. Fifty years ago a right-of-way agreement from the local utility was
three sentences. Now it's five pages single spaced, in some English derived
technical gibberish.
Anyway, you really need the professional when somebody dies. That
professional is far more likely to be the financial planner than the lawyer
these days, in part because the financial planner is paid by assets under
management, rather than hundreds of dollars per hour, so the financial planner
would be paid anyway. I think it is rare to see attorneys designated as
executors of estates these days. They charge six percent by statute, and that's
too much for many people's blood. God forbid that one should be appointed to
manage a trust with multiple beneficiaries. They'll stretch it out thirty
years.
In reading the following NYT article about the Greek Crisis, with an emphasis on pensions and
pensioners, I recalled Professor Hamilton's post on the US Social Security system. To borrow Warren
Buffet's phrase about finding out who is skinny dipping when the tide goes out, I wonder if the
tide has just receded faster for Greece than for the US, in terms of over promised and under-funded
Social Security and pension plans, especially in regard to vastly underfunded state and local
government pension plans. And of course, federal government owns both the asset and the liability
for the Social Security Trust Fund
Greece's social security system was troubled even before the crisis, already divided into
more than 130 funds and offering a crazy quilt of early-retirement options that were a monument
to past political patronage.
In 2012, the pension funds, which were obliged under Greek law to own government bonds*,
were hit by a huge debt write-down as those bonds plummeted in value. As a result they lost
about 10 billion euros, or $11.1 billion - roughly 60 percent of their reserves.
Greece's creditors, seeking to make the Greek labor market more competitive, insisted that
the government reduce the amount companies and workers must contribute toward pensions. And
they insisted that Greece reduce its minimum wage so that those who do contribute have smaller
outlays.
At the same time, the pension system was becoming an even bigger component of the social
safety net, absorbing thousands. People like Ms. Meliou retired early, either because of the
sale of state-owned companies, because they feared their salaries would be cut and thus their
pensions would be smaller, or simply because their businesses failed. Few are living comfortably,
and many support unemployed children.
"... Hey, if the plutocrats won't raise wages then they will need to raise the payroll tax cap on Social Security. They should have thought of that before starting so many wars. The Bonus Army will not be denied. ..."
"... Raise it my foot, they need to eliminate it. The cap has always been more welfare for the rich. ..."
"... Why not eliminate the income cap ($118k) entirely and start taxing capital gains and dividends for Social Security too? Members of Congress pay this tax on 65% of the salaries ($174k), while 95% of all wage earners pay this tax on 100% of their earnings. ..."
An Aging Society Is No Problem When Wages Rise: Eduardo Porter
discusses the question of whether retirees will have sufficient
income in twenty or thirty years. He points out that if no
additional revenue is raised, Social Security will not be able to
pay full scheduled benefits after 2034.
While this is true, it is important to note that this would have
also been true in the 1940, 1950s, 1960s, and 1970s. If projections
were made for Social Security that assumed no increase in the
payroll tax in the future, there would have been a severe shortfall
in the trust fund making it unable to pay full scheduled benefits.
We have now gone 25 years with no increase in the payroll tax, by
far the longest such period since the program was created. With
life expectancy continually increasing, it is inevitable that a
fixed tax rate will eventually prove inadequate if the retirement
age is not raised. (The age for full benefits has already been
raised from 65 to 66 and will rise further to 67 by 2022, but no
further increases are scheduled.)
The past increases in the Social Security tax have generally not
imposed a large burden on workers because real wages rose. The
Social Security trustees project average wages to rise by more than
50 percent over the next three decades. If most workers share in
this wage growth, then the two or three percentage point tax
increase that might be needed to keep the program fully funded
would be a small fraction of the wage growth workers see over this
period. Of course, if income gains continue to be redistributed
upward, then any increase in the Social Security tax will be a
large burden.
For this reason, Social Security should be seen first and foremost
as part of the story of wage inequality. If workers get their share
of the benefits of productivity growth then supporting a larger
population of retirees will not be a problem. On the other hand, if
the wealthy manage to prevent workers from benefiting from growth
during their working lives, they will also likely prevent them from
having a secure retirement.
RC AKA Darryl, Ron said...
Hey, if the plutocrats won't raise wages then they will need
to raise the payroll tax cap on Social Security. They should have
thought of that before starting so many wars. The Bonus Army will
not be denied.
DrDick -> Darryl, Ron...
"they will need to raise the payroll tax cap on Social Security"
Raise it my foot, they need to eliminate it. The cap has always
been more welfare for the rich.
Bud Meyers -> DrDick...
Why not eliminate the income cap ($118k) entirely and start
taxing capital gains and dividends for Social Security too? Members
of Congress pay this tax on 65% of the salaries ($174k), while 95%
of all wage earners pay this tax on 100% of their earnings.
mulp
"We have now gone 25 years with no increase in the payroll tax,
by far the longest such period since the program was created. With
life expectancy continually increasing, it is inevitable that a
fixed tax rate will eventually prove inadequate if the retirement
age is not raised."
Illogical!
If wages of younger workers were maintaining the same gains over
their previous generation peers, and in fact, gained even more due
to reduced supply of workers relative to steady demand for labor as
the large boomer cohort leaves the labor force to the smaller
subsequent generation.
Instead, conservative free lunch economicntheory, itself grossly
illogical, has led to cuts in wages as a matter of policy based on
the idea that workers are not consumers, so gdp can grow faster if
workers are paid less, leading to a larger supply of consumers with
pockets of money being created by the tinker bell of wealth.
While changing demographics might require higher payroll taxes, say
younger generations having more kids than the boomer generation and
being stay at home parents than boomers were, in reality, the
younger generations are moving further along the trend line of
working more, just like the boomers.
Incomes are falling leading to reduced gdp growth because that is
driven by labor incomes which are labor costs, and lower gdp means
lower wage income means lower tax revenue with a fixed tax rate.
Social Security has structural problems simply because
conservatives have sold Americans a bill of goods, promising
something for nothing.
TANSTAAFL
As a leading edge boomer, I've had the best of both good and bad
policy. Great big government benefits when young to give me a great
start in life, followed by bad policy tax hikes for me paid for by
screwing the generation of children I did not have, and now 68,
getting the great big government Social Security benefits Reagan
signed into law in 1983, doubly great because, my big government
start in life lasted to 2001 and made me very rich from simply
working and living like my parents who were shaped by the
depression. And Republicans can not cut my benefits because I'm
hidden in the biggest block of the Republican base who almost all
depend on Social Security.
... ... ... EF: More recently, one of your areas of research has been retirement
finance and the investment decisions of workers thinking about their retirement. In recent decades,
we've seen a tremendous shift in the private sector from defined benefit retirement programs to
defined contribution programs. Was this mainly a response by firms to the tightening of the regulatory
environment for defined benefit plans, to changing demand from workers, or to something else?
Poterba: I think it's a bit of everything. A number of factors came together
to create an environment in which firms were more comfortable offering defined contribution plans
than defined benefit plans. One factor was that when firms began offering defined benefit plans,
in World War II and the years following it, the U.S. economy and its population were growing rapidly.
The size of the benefit recipient population from these plans relative to the workforce was small.
It was also a time when life expectancy for people who were aged 65 was several years less than
it is today. Over time, the financial executives at firms came to a greater recognition of the
true cost of defined benefit plans.
I also think the fiduciary responsibilities and the financial burdens that were placed on firms
under the Employee Retirement Income Security Act of 1974, or ERISA, have discouraged firms from
continuing in the defined benefit sector. ERISA corrected a set of imbalances by requiring firms
to take more responsibility for the retirement plans they were offering their workers and to fund
those plans so that these were not empty promises. ERISA was enacted in the aftermath of some
high-profile bankruptcies of major U.S. firms and the discovery that their defined benefit plans
were not well-funded, leaving retirees with virtually no pension income.
But ERISA and the growing recognition of the costs of defined benefit plans are probably not
the full story. The U.S. labor market has become more dynamic over time, or at least workers think
it has, and that has led to fewer workers being well-suited to defined benefit plans. These plans
worked very well for workers who had a long career at a single firm. Today, workers may overestimate
the degree of dynamism in the labor market. But if they believe it is dynamic, they may place
great value on a portable retirement structure that enables them to move from firm to firm and
to take their retirement assets with them.
Most workers who are at large firms, firms that have 500 employees or more, have access to
defined contribution plans. Unfortunately, we still don't have great coverage at smaller firms,
below, say, 50 employees. For workers who will spend a long career at a small firm, the absence
of these employer-based plans can make it harder to save for retirement. A key policy priority
is pushing the coverage of defined contribution plans further down the firm size distribution.
That's hard, because smaller firms are less likely to have the infrastructure in place in their
HR departments or to have the spare resources to be able to learn how to establish a defined contribution
plan and how to administer it. They are probably also more reluctant to take on the fiduciary
burdens and responsibilities that come with offering these plans.
Another concern, within the defined contribution system, is the significant amount of leakage.
Money that was originally contributed for retirement may be pulled out before the worker reaches
retirement age.
EF: What is causing that?
Poterba: Say you've worked for 10 years at a firm that offers a 401(k) plan
and you've been contributing all the way along. You decide to leave that firm. In some cases,
the firm you are leaving may encourage you to take the money out of their retirement plan because
they may not want to have you around as a legacy participant in their plan. Sometimes, the worker
may choose to move the funds from the prior 401(k) plan to a retirement plan at their new employer,
or to an IRA. Those moves keep the funds in the retirement system. But sometimes, the worker just
spends the money. When an individual leaves a job, they may experience a spell of unemployment,
or they may have health issues. There may be very good reasons for tapping into the 401(k) accumulation.
Using the 401(k) system as a source of emergency cash, sort of as the ATM for these crises, diminishes
what gets accumulated for retirement.
Inadequate social insurance for workers who lose their jobs leads to inadequate retirement savings.
So while there may be a "very good reason" for this from an individual's perspective, from a larger
social perspective this is a problem connected to our unwillingness to provide adequate social insurance
for those who are the unlucky losers to the dynamism inherent in capitalism that propels us forward.
Those who benefit so much from the dynamism could and should do more to help those who pay the costs.
pgl:
"I also think the fiduciary responsibilities and the financial burdens that were placed on
firms under the Employee Retirement Income Security Act of 1974, or ERISA, have discouraged firms
from continuing in the defined benefit sector. ERISA corrected a set of imbalances by requiring
firms to take more responsibility for the retirement plans they were offering their workers and
to fund those plans so that these were not empty promises. ERISA was enacted in the aftermath
of some high-profile bankruptcies of major U.S. firms and the discovery that their defined benefit
plans were not well-funded, leaving retirees with virtually no pension income."
Gee we corporations liked pushing the responsibility of provided retirement benefits onto others
and now that government regulations made that more difficult for us to do - we don't want to take
any responsibility whatsoever!
Which is exactly why Mark's closing here is so correct.
likbez said in reply to pgl:
"Gee we corporations liked pushing the responsibility of provided retirement benefits onto
others and now that government regulations made that more difficult for us to do - we don't want
to take any responsibility whatsoever!"
Not only that. 401K opens huge possibilities of shadow deals between financial firms/mutual
funds and providers of 401K plans. They can agree on a bad set of funds (for example with high
annual costs or with bad diversification -- heavily tilted toward stocks) in exchange of discounted
services in other areas.
This is actually how such deals are done by all major corporations. Providers of 401 mutual
funds in this case typically perform other services for the corporation. Some like Wall-Mart are
especially cruel to their workers in this respect and fleece them mercilessly.
Also the amount of contributions from the company is usually much less then in defined benefit
plan and all risks are transferred to employees.
The other negative side effect was tremendous growth of mutual fund industry which increased
the "Financialization of the economy" -- hallmark of the neoliberal social system (aka casino
capitalism).
This industry which has developed over the decades between 1980 and 2000 created preconditions
for the situation, in which financial leverage tended to override capital (equity), and financial
markets dominate the traditional industrial economy and agriculture.
For example such behemoths as Vanguard, Fidelity, Pimco, etc are direct result of the switch
to 401K plans. They would never exists in such enormous size without them.
They by the virtue of being the largest shareholders play very negative role in corporate governance
(if we use this neoliberal term). For example both Vanguard and Fidelity are indirectly responsible
for 2008 crisis as the major voting shareholders of Wall Street "Masters of the Universe".
Such mutual funds providers are creating a new situation on the market with their enormous
mutual funds and amount of funds under management.
Indirectly they facilitate sophisticated parasitic forms of trading which can exist only in
high volume environment.
Tom aka Rusty said in reply to pgl:
Between 1974 and 1990 almost every small business and professional group DB plan I was aware
of was closed or frozen, including HR-10s. Most of the rest faded away over time.
The ERISA administrative costs and financing risks were too much for these smaller sized firms,
and the 401(k) came along (started in Rev. Act 1978, regulated more thoroughly in 84 and 86 tax
acts).
A reform directed at the likes of General Motors didn't work well for the little guys. And
General Motors continued playing games anyway.
And the 401(k) has not filled the void.
pgl said in reply to Tom aka Rusty:
"The ERISA administrative costs and financing risks were too much for these smaller sized firms".
Oh Lord - Rusty wants to excuse all sorts of nefarious corporate behavior as it is just too
hard to play by the rules. How tiresome.
Rusty believes in free lunch economics. Eliminate all labor costs so profits are 100% of revenue
and gdp will explode as wealth creation drives production and the surge in supply will create
consumers with drills of money due to the effect of other people's wealth.
Workers are a deadweight cost to an economy because workers such money into a blackhole from
which the money never reappears.
Consumers are never workers and workers are never consumers.
Wealth comes from profits, not labor.
Labor destroys wealth.
That sums up free lunch economics. The free in free markets means wealth and profit should
be free by labor being free.
pgl said in reply to Tom aka Rusty:
I wonder if Rusty has ever seen "Pensions: The Broken Promise" (NBC September 12, 1972) detailed
the consequences of poorly funded pension plans and onerous vesting requirements. This Congress
to hold a public hearings on pension issues and public support for pension reform grew significantly.
Or does Rusty remember Studebaker which closed up in the 1960's with pension plan was so poorly
funded that Studebaker could not afford to provide all employees with their pensions. 3600 did
receive full benefits but 4000 workers aged 40–59 who had ten years with Studebaker received lump
sum payments valued at roughly 15% of the actuarial value of their pension benefits, and the remaining
2,900 workers received no pensions.
But Rusty thinks compliance with ERISA is just too complicated.
djb said in reply to pgl:
I mean seriously , pension after pension just disappeared when the firms declared bankruptcy
and suddenly the money is no where to be found
there is nothing about that in this article
Mr. Poterba has no credibility with me, based on this interview
defined contribution, in part, was supposed to make it so this couldn't happen
pgl said in reply to djb:
I agree that Poterba could have spent more time on this issue but he is not the bad guy here.
The bad guy are the fools who say government intervention has no place (hello Rusty). Defined
contributions is a different means for paying for retirement but as Mark Thoma has noted since
the beginning of this blog, it does not cover certain risks. Which is why we need to defend the
Social Security program.
ilsm:
" The size of the benefit recipient population from these plans relative to the workforce
was small."
Malthusian excuse for productivity gains going to the pentagon and other payors of the .1%.
"Inadequate social insurance for workers who lose their jobs leads to inadequate retirement
savings."
The system works for the duped, the exploiters and the plunderers, no one else.
tom:
During the Obamacare debate, there was talk about a public option. Why not a public option
for 401K plans, that would take the burden of administering such planes away from small firms?
And if we are going to get so hot under the collar about 'choice', why not give employees two
choices for public option, a defined contribution public option, and a defined benefit public
option?
"The time has long since passed when we should be arguing about whether global warming is happening
or whether the consequences will be serious. The question is what we are prepared to do about
it."
And the answer is… "set targets"?
As long as adopting shorter work weeks and years to achieve full employment is off the agenda,
doing something meaningful about climate change is also off the agenda. Shorter hours is not a
panacea for full employment or slowing man-made climate change. But excluding shorter hours from
the policy mix is the opposite of a panacea - guaranteed toxic.
It is no mistake that shorter hours are off the agenda. It is not happenstance or serendipity.
The best way to describe the thinking behind the exclusion is a kind of rentiers' marxism-in-reverse.
Marx's model of capitalism predicts an "increasing organic composition" of capital. In the absence
of capital devaluing crises, such an increase makes labor increasingly scarce relative to capital.
Shorter hours would make labor even scarcer relative to capital. Price of labor goes up, returns
to capital go down. Can't let that happen. This is America, where "free enterprise" rules and
the rich buy the public policy regime - and whatever economic policy rationale justifies it -
that suits them.
So achieving full employment and mitigating climate change are off the respectable economists'
agenda. The question is what are we prepared to do about that?
Types of accounts where RMDs apply. While your invested money sat in your qualified
retirement accounts, the IRS deferred any taxes due until a later date. That date arrives when you
hit age 70 ½.
Once you reach the trigger age for RMDs, the IRS requires that you start taking RMDs and begins
collecting taxes previously deferred. Taxes come due on amounts only as they are distributed to you
and not while you keep them invested.
For the year you first reach 70½, you must take a minimum distribution either that year or no
later than April of the following year. Every year after, you also must take the required minimum
distribution by Dec. 31 of each tax year.
Beware deadline penalties. Not only does the IRS want to tax revenue from your
retirement accounts, if you fail to meet the deadline for distribution the taxman sticks on an additional
and whopping 50% penalty.
Figuring out what you owe.
IRS publication number 590 explains how to calculate the actual amount you must take as an annual
distribution and additional information on how RMDs apply to each type of retirement account you
might own.
Generally, calculate RMD for each account by dividing the prior Dec. 31 balance of that IRA or
retirement plan account by a life expectancy
factor. Use the:
Joint and Last Survivor Table
if your sole beneficiary of the account is your spouse and your spouse is more than 10 years younger
than you;
Uniform Lifetime Table if your
spouse is not your sole beneficiary or your spouse is not more than 10 years younger; and
These great resources help you avoid the price of getting these calculations wrong – a price high
enough that I recommend you consider help with the calculation and with getting the proper amount
withdrawn from your accounts before the IRS deadline.
I especially warn those tracking more than one tax-deferred retirement account. If you still have
years or even decades before RMDs apply to you, your parents or loved ones 70½ or older need this
reminder, too.
"... Only consider retaining old plans if you have an exceptional deal, like 3% or higher guaranteed interest in the current low interest-rate world. ..."
The state of Americans' retirement preparation is shocking. Why is this, and what can people
do about it?
PBS ran its Frontline documentary The Retirement Gamble a few years ago, and it's still
pertinent. It's hard to watch this program without a sense of horror at the way our retirement
plan system is rigged to rip off Americans struggling to save for their later years after
working.
Here are the key points in The Retirement Gamble. Read them and think about what you can do to
shore up your retirement plan:
The majority of Americans close to or in retirement don't have enough saved to cover a
lengthy life as a retiree. And they don't have any ideas about improving their situation.
The retirement systems - chiefly, 401(k) and 403(b) plans - bilk billions of dollars from
Americans in the form of fees. Plan documents deliberately hide some of these fees in fine
print.
U.S. government attempts to clamp down on runaway retirement plan fees have met with mixed
reaction in Congress, thanks to successful lobbying efforts by the financial services
industry, such as JP Morgan Chase and Prudential Financial.
Americans are confused about the critical difference between a fiduciary and a
non-fiduciary retirement advisor. The former, such as fee-only Registered Investment Advisors,
are required to put clients' interests before their own interests. Brokers, however, adhere to
a lower suitability standard – as long as a product seems "suitable," the broker has done his
or her work. (My firm is an RIA.)
Periodic market swoons and fees hammer many retirement plan participants, who ignore how
they invest. One interview on the program featured a retired couple, both teachers, who had an
excessive concentration of their retirement money in dot.com stocks; their account plunged
more than two-thirds in 2000. Agents circulate in teacher's lounges and sell the educators
"tax-sheltered annuities," neglecting to tell them they are handcuffed to punitive redemption
penalties, misleading return projections and high fees.
Potential Versus Real Wealth
John Bogle, the Vanguard Investments founder, pointed out that a "little" 2% annual fee
will erode a whopping 63% of what clients could earn in their retirement accounts that booked
a 7% annual average return (pre-fees). In other words, what he called "the tyranny of
compounding costs" whittled the $100,000 you should have down to a measly $37,000 over 50
years of investing. JP Morgan Chase and other brokers who run expensive retirement plans come
across poorly when they responded to this by saying they weren't familiar with these numbers,
each retirement client has different needs, etc.
Sadly, there don't seem to be enough improvements to retirement plans to avoid having
Americans work well into their 70s, if they can, or run out of money in retirement.
So what can you do? Here are some strategies:
Utilize tools such as www.brightscope.com to verify the quality, including cost, of your
plan. If your plan is rated poorly, consider only saving up to the amount of your 401(k)
contribution that your company matches.
If you qualify, based upon your adjusted gross income, save additionally in an individual
retirement account. Look for low-cost mutual funds (e.g., Vanguard) so you can save 1% to 2%
per year in fees.
Consider opting out of your plan if you have no match. You lose the up-front
tax-deduction, but you may end up with more in hand by investing in low-cost mutual funds with
after-tax money. Run these numbers with a professional since your retirement horizon and tax
bracket can affect outcomes.
Coping: IRA Withdrawal Rules
Rollover old 401(k) or 403(b) plans from previous jobs to eliminate ongoing plan fees.
Only consider retaining old plans if you have an exceptional deal, like 3% or higher
guaranteed interest in the current low interest-rate world.
Postpone taking Social Security benefits as long as possible. Seek professional help
before making Social Security decisions.
Consider downsizing by moving to a less expensive part of the country if you are at risk
of outliving your assets. Sadly, some places – such as New Jersey, where I live – are
relatively unattractive for retirees due to high taxes (including state estate tax) and high
living expenses. New York may not be much better.
Save, save and save some more. Get professional advice about your retirement strategy from
a qualified advisor.
"... The title is an allusion to Keynes' famous observation that fund managers, courtesy of endemic
groupthink, tend to prefer (and consequently often deliver) conventional failure as opposed to unconventional
success. Swensen himself has steered the Yale Endowment through many years of impressive investment
returns. ..."
"... "The drive for profits by Wall Street and the mutual fund industry overwhelms the concept of
fiduciary responsibility, leading to an all too predictable outcome: except in an inconsequential
number of cases where individuals succeed through unusual skill or unreliable luck, the powerful
financial services industry exploits vulnerable individual investors." ..."
"... The rather sickening fight over the bonus pool at Pimco now being gleefully reported in the
financial media is just one example of a large fund management organisation that appears to have
entirely forgotten what its core purpose is, or should be. ..."
In medicine, they have something called the Hippocratic Oath. It requires physicians to swear
to uphold certain ethical standards. In modern fund management, there is no Hippocratic Oath.
Whereas doctors are expected to "First, do no harm", in modern fund management, iatrogenic illnesses
hold sway. An iatrogenic illness is one that is caused by the physician himself.
Fund management doctors seem to be doing the best they can to kill their own patients. Science
has a word for this, too. It's called parasite. There is a solution to all this insanity.
... ... ...
There is a solution to all this insanity.
The chief investment officer of the Yale Endowment,
David Swensen, has written an excellent book entitled 'Unconventional Success'.
The title is an allusion to Keynes' famous observation that fund managers, courtesy of endemic
groupthink, tend to prefer (and consequently often deliver) conventional failure as opposed to unconventional
success. Swensen himself has steered the Yale Endowment through many years of impressive investment
returns.
Swensen pulls few punches.
The fund management industry involves the
"interaction between sophisticated, profit-seeking providers of financial services [Keynes
would have called them rentiers] and naïve, return-seeking consumers of investment products.
"The drive for profits by Wall Street and the mutual fund industry overwhelms the concept of
fiduciary responsibility, leading to an all too predictable outcome: except in an inconsequential
number of cases where individuals succeed through unusual skill or unreliable luck, the powerful
financial services industry exploits vulnerable individual investors."
The nature of ownership is crucial. To Swensen, the more mouths standing between you and
your money that need to be fed, the poorer the ultimate investment return outcome is likely to be.
In a rational world, investors would be well advised to favour smaller, entrepreneurial boutiques,
or private partnerships, over larger, publicly listed full service investment operations – especially
subsidiaries of banks or insurance companies – with all kinds of intermediary layers craving their
share of your pie.
The rather sickening fight over the bonus pool at Pimco now being gleefully reported in the
financial media is just one example of a large fund management organisation that appears to have
entirely forgotten what its core purpose is, or should be.
This past week, and the conjunction of the Bill Gross lawsuit and the Investment Association's
Daniel Godfrey debacle, is likely to go down as one of the biggest fund management public relations
disasters in history.
Before buying any fund, ask yourself some questions:
How big is it? The tree cannot grow to the sky. But try telling that to Pimco, or to
the average member of the Investment Association. Managers' pay is invariably linked to the size
of funds under management. The more assets, the more pay. It takes guts, and principles, to turn
money away and concentrate solely on investment performance. But that's precisely what many smaller
investment boutiques do on a regular basis. And it's why we only invest with smaller investment
boutiques.
Has the manager invested his own money? If he hasn't, why should you? Meaningful personal
investment is by itself no guarantee of investment outperformance, but it shows the most basic
alignment of interests between manager and investor.
Is it independent, and owner-managed? David Swensen has gone on record saying he prefers
the smaller, private partnership over the larger, listed full service operator. How many mouths
must your fees feed?
Is it an asset manager, or an asset gatherer? This gets to the heart of the challenge
facing investors today. The investment world is polarised between asset managers, who focus their
energies on delivering the best possible returns for their clients, and asset gatherers, who just
want to maximize the number of clients.
Most fund management firms fall into the latter category. Favour the former.
How to distinguish between the asset managers and the asset gatherers? Try to find managers like
the celebrated investor Jean-Marie Eveillard, who once remarked:
"I would rather lose half of my shareholders than half of my shareholders' money."
The managed fund marketplace is clearly much larger than it should be. It is oversupplied, and
there is insufficient genuine talent and integrity to support the grotesque number of spurious, me-too
funds out there all chasing a finite pot of capital.
After a disastrous week in the spotlight, asset management companies might wish to start cutting
their fund ranges before the regulators force them to. >
Muddy1
Working in a brothel? Working in finance?
It's the same thing. You take people's money and then they get screwed.
"..."Some advisers use 'fee-only' for marketing purposes instead of as a pledge to their clients,"
"
A
recent decision in a lengthy legal case involving two certified financial planners was hailed
as a victory for consumers.
A husband and wife, Jeffrey and Kimberly Camarda of Fleming Island,
Fla., had been marketing themselves as "fee-only"
financial planners, a term for those who charge clients a fixed rate for their services and don't
earn commissions or bonuses when recommending financial products. But that wasn't true, according
to the Certified Financial Planner
Board of Standards, which filed a disciplinary action against the pair. It claimed that the Camardas
were selling insurance products from which they earned commissions without disclosing that potential
conflict of interest, a violation of CFP Board rules. Then the couple sued the board, saying they
were unfairly disciplined. But in July, a judge dismissed their lawsuit.
"Some advisers use 'fee-only' for marketing purposes instead of as a pledge to their clients,"
says Eleanor Blayney, a consumer advocate on the board. There's no way to tell just how many
financial advisers misrepresent how they're compensated, she adds. What's clear is how much working
with the wrong kind of adviser can cost you. A
study from the White House by the Council of Economic Advisers, published in February, estimated
that financial advisers who have conflicts of interest cause $17 billion in losses every year to
Americans, many of them in working and middle-class families. And that's just for those who are using
IRAs to save for retirement.
Part of the problem is that there's no governmental regulatory body that polices all financial
planners. Investment advisers and brokers who sell bonds, stocks, and other financial products must
be registered with the Securities and Exchange Commission or in some cases with state regulators.
There's no such oversight for financial planners, who help clients with retirement planning, estate
planning, saving for college, and other matters.
The CFP Board, however, will investigate complaints it receives or violations the organization
uncovers itself. It can suspend or revoke the use of the certified financial planner designation,
but it can't stop financial planners from giving advice.
The best line of defense against unscrupulous planners is to educate yourself. That can be confusing
at first, because there are more than 150 designations for financial planners. But many of the titles
are dubious; they can be earned after just a few hours of study and an open-book test. Adding to
the confusion is that many suspect designations sound similar to legitimate ones.
Larry Kotlikoff, professor of economics at
Boston University, says maximizing your benefits can be simplified into
three basic rules: Delay your Social Security benefits, take spousal/survivor/mother and father/child
benefits, and make sure one of these two rules doesn't undermine the other. The best choice
when it comes to when to cash in on your Social Security ultimately comes down to personal circumstances,
but waiting to collect higher benefits through the delayed retirement credit can be a huge advantage.
These guidelines are a good starting point, but a lot of the finer details can be confusing, especially
when it comes to spousal benefits. Since the most complex rules can be the most lucrative, it's worth
some investigation. The problem is most Americans are unaware of the finer points of Social Security
and don't know where to turn for help. Social security offices are dwindling and
phone wait times are getting longer, so the smartest course of action is to arm yourself with information
as early as possible. Even the
Social Security Administration (SSA) is known for
spreading misinformation, so double-check and triple-check your information before making a big
decision about your retirement.
On PBS NewsHour's Making Sen$e, Kotlikoff compiled a
list of 34 social security secrets people should know, as well as some
additional rules
in a follow-up article. His findings are particularly useful if you're looking
for explanations of the many highly nuanced rules for collecting spousal benefits. Bear in mind his
list was compiled back in 2012, but Kotlikoff continues to report on Social Security and work to demystify
the finer details. You can even write in and
ask him a question regarding your situation.
Spousal benefits are the most overlooked Social Security benefits, according to Kotlikoff, and$10 billion in spousal benefits go unclaimedin America every year. In what can be called loopholes
for married couples, Americans can collect more in Social Security by employing strategies like "file
and suspend," in which one partner suspends retirement benefits so the other can collect spousal benefits.
Later, the couple can cash in on the delayed retirement credit.
Taxpayers are essentially walking away from money they are entitled to if they don't take advantage
of all the Social Security rules that could help them. Here are ten more little-known Social Security
rules that could help you maximize your benefits, sourced from Kotlikoff's list as well as others.
1. You can suspend your benefits temporarily and see rewards later
Once you are at or over full retirement age, you can suspend further Social Security benefits and
then restart them later. The "start-stop-start"
strategy refers to starting your benefits prior to full retirement age, stopping them at full retirement
age, and starting them up again at age 70 when they will be 32% larger due to the delayed retirement
credit.
2. You can withdraw and repay Social Security, then collect more later
As long as you repay all the benefits you received, you can withdraw your Social Security claim and
then reapply at a later date (when you will get higher benefits based on your age). The SSA used to
allow claim withdrawals at any time, but after it became more common, the
rules were changed. Now you can only withdraw your claim within 12 months of receiving benefits,
and you can only withdraw a claim once in your lifetime.
3. In some states, you can collect unemployment and Social Security at the same time
Americans can be both unemployed and retired in certain states. If you collect checks from both agencies,
you just have to report the income of both. Receiving unemployment benefits won't affect your Social
Security payments, but in some states, collecting Social Security can
reduce your unemployment checks.
4. You can shop around for the best deal
You can go to several Social Security offices and receive different benefit estimates. This is because
Social Security staff have
differing interpretations of the rules, although there is only one that is correct. But just as
you may be able to shop around for the best estimate, make sure a social security office isn't erroneously
denying you a legal benefit, such as the right to file and suspend.
5. Delaying your divorce can lead to more benefits
If you're divorced but were married for at least 10 years, you can collect spousal benefits. So if
you're getting divorced after about 9 and a half years, it would be wise to
delay your divorce, since it will mean a payout for both you and your ex. You have to wait to collect
until your ex is 62, but if you aren't 62 yet you can still get benefits at a reduced rate.
6. Survivors can file and suspend before full retirement age
A widow/widower can begin benefits based on his or her own earnings record and later switch to survivors
benefits or, conversely, begin with survivors benefits and later switch to their own benefits-even if
the surviving spouse is filing
before full retirement age.
With spousal benefits, on the other hand, you cannot file and suspend
before full retirement age.
7. There's no advantage to delaying spousal/survivor benefits after full retirement age
It does not benefit you to delay collecting either your spousal or survivor benefits past your full
retirement age. Your own retirement benefits will grow if you delay, but there's no reason to wait so
long to collect spousal or survivor benefits.
8. In some cases, you won't be penalized for working
If you take retirement, spousal, or widow/widower benefits early and lose some or all of them as
a result of Social Security's earnings test, don't worry too much. The SSA will actually give you credit
for the money they've docked in the form of permanently higher benefits once you reach full retirement
age. Be advised, however, that in the case of mother and father benefits, if you earn too much money,
you lose the docked money for good.
Even if you have never been subjected to an investment fraudster's sales pitch, you probably know
someone who has. Following the legendary Willie Sutton principle, fraudsters tend to go "where the
money is"-and that means targeting older Americans who are nearing or already in retirement.
Financial fraudsters tend to go after people who are college-educated, optimistic and self-reliant.
They also target those with higher incomes and financial knowledge, and have had a recent health
or financial change. If you believe you've been defrauded or treated unfairly by a securities professional
or firm, file a complaint. If you suspect
that someone you know has been taken in by a scam,
send a tip.
To entice you to invest, fraudsters use high pressure and a number of "tricks of the trade."
Here are some common tactics:
The "Phantom Riches" Tactic-dangling the prospect of wealth, enticing you
with something you want but can't have. "These gas wells are guaranteed to produce $6,800 a month
in income."
The "Source Credibility" Tactic-trying to build credibility by claiming to
be with a reputable firm or to have a special credential or experience. "Believe me, as a senior
vice president of XYZ Firm, I would never sell an investment that doesn't produce."
The "Social Consensus" Tactic-leading you to believe that other savvy investors
have already invested. "This is how ___ got his start. I know it's a lot of money, but I'm in-and
so is my mom and half her church-and it's worth every dime."
The "Reciprocity" Tactic-offering to do a small favor for you in return for
a big favor. "I'll give you a break on my commission if you buy now-half off."
The "Scarcity" Tactic-creating a false sense of urgency by claiming limited
supply. "There are only two units left, so I'd sign today if I were you."
Protect yourself with these strategies:
End the conversation. Practice saying "No." Simply say, "I'm sorry, I'm not
interested. Thank you." Let them know you'll think about it and get back to them. Have an exit
strategy so you can leave the conversation if the pressure rises.
Turn the tables and ask questions. Before you give out information about
yourself,
ask and check.
Talk to someone before investing. Be extremely skeptical if the salesperson
says, "Don't tell anyone else about this special deal!" A legitimate professional will not ask
you to keep secrets. Even if the seller and the investment are registered, discuss your decision
first with a family member, investment professional, lawyer or accountant.
Take your name off solicitation lists. To reduce the number of sales pitches
you receive, use the Federal Trade Commission's
National Do Not Call Registry.
FINRA offers an array of information and resources to help you outsmart investment fraud.
Red Flags of Fraud
Knowing the important warning signs of financial fraud puts you in charge.
Ask and Check
Ask the right questions and verify the answers before you work with an investment professional
or buy an investment product.
How Social
Pressure Cost One Family $30,000 It's often hard to resist an investment tip from someone in your social circle. Before
handing over any money, you need to check out the investment and the person selling it.
Spot a Scam
in 6 Steps
Financial fraudsters use sophisticated and effective tactics to get people to part with their
money. Here are six steps you can take to help you spot an investment scam.
Investor Alerts
Don't be taken in by these frauds and scams. Learn how to protect yourself and your money.
More
Risk Meter
Use our Risk Meter to see whether you share characteristics and behavior traits that have been
shown to make some investors vulnerable to investment fraud.
Scam Meter
In just four questions our Scam Meter will help you tell if an investment you are thinking about
might be a scam.
Parasitic rent-seeking (aka legalized theft) of financial oligarchy is an important problem that
if behind the drive to squeeze Social
Security. They want to privatize it. Just look how efficiently Merrill Lynch manages
Wal-Mart workers 402K plans.
Kevin Drum poses a reasonable question about the existence of a retirement crisis in a recent
blogpost. He notes that retirement income projections from the Social Security Administration's MINT model show
income for older households rising from 1971 to the present, while incomes for those in the age 35 to 44 were nearly
stagnant. The model also shows income for older households continuing to rise over the next three decades. Kevin's
conclusion is that we are wrong to spend a lot of time worrying about retirees, and would be wrong to consider
increasing Social Security taxes on the working population to maintain scheduled benefits for Social Security
recipients.
While the story of rising income for retirees is correct, there are several points to keep in mind. First, the
main reason that income for the over 65 group has risen is that the real value of Social Security benefits has
risen. Social Security benefits are tied to average wages, not median wages. This is important. Most of the upward
redistribution of the last three decades has been to higher end wage earners like doctors, Wall Street types, and
CEOs, not to profits. Since the average wage includes these high end earners, benefits will rise through time,
pushing up retiree incomes. For the median household over age 65 Social Security benefits are more than 70 percent
of their income, so the story of rising income is largely a story of rising Social Security benefits.
However even with this increase in Social Security benefits, replacement rates at age 67 are
projected to fall
relative to lifetime wages (on a wage-adjusted basis) from 98 percent for the World War II babies to 89 percent for
early baby boomers, 86 percent for later baby boomers and 84 percent for GenXers. There are several reasons for this
drop. The most important is the rise in the normal retirement age from 65 for people who turned 62 before 2002 to 67
for people who turn 62 after 2022. This amounts to roughly a 12 percent cut in scheduled benefits. The other reason
for the drop is the decline in non-Social Security income. This is primarily due to the fact that defined benefit
pensions are rapidly disappearing and defined contribution pensions are not coming close to filling the gap.
It is also important that the over age 65 population on average has a considerably longer life expectancy today
and in the future than was the case in 1971. In 1971 someone turning age 65
could expect to live
roughly 16 years, today their life expectancy would be over 20 years. This is a good thing of course, but it
means that when we use the same age cutoff today as we did 40 plus years ago we are looking at a population that is
much healthier, and therefore also more likely to be working, and further from death. If we adjusted our view to
focus on the population that was within 16 years of hitting the end of their age 65 life expectancy, the story would
not be as positive.
The data from the MINT model may also be somewhat misleading because it includes owner equivalent rent (OER) as
income. While not having to pay rent is clearly an important savings to an older couple or individual that has paid
off their mortgage, it can give an inaccurate picture of their income. There are many older couples or single
individuals that live in large houses in which they raised their families. The imputed rent on such a house can be
quite large relative to their income as retirees. (Imputed rent is almost
one quarter of total consumer
expenditures even though only two-thirds of families are homeowners.) There are undoubtedly many retirees who
live in homes that would rent for an amount that is larger than their cash income, which will be primarily their
Social Security check.
In principle it might be desirable for such people to move to smaller less expensive homes or apartments, but
this is often not easy to do. Government policy that hugely subsidizes homeownership and denigrates renting is also
not helpful in this respect.
The other part of the income picture overlooked is that almost all middle income retirees will be paying for
Medicare Part B, the premium for which is taking up a large and growing share of their cash income. That premium has
risen from roughly $250 a year (in 2013 dollars) to more than $1,200 a year at present. This difference would be
equal to almost 5 percent of the income (excluding OER) of the typical senior. That means that if we took a measure
of income that subtracted Medicare premiums (not co-pays and deductibles) it would show a considerably smaller
increase than the MINT data. The higher costs faced by seniors for health care and other expenditures is the reason
that the Census Bureau's supplemental poverty measures shows a much higher poverty rate than the official measure.
Finally, there is the need to focus on the question of how well seniors are doing. Seniors income has been rising
relative to the income of the typical working household because the typical working household is seeing their income
redistributed to the Wall Street crew, CEOs, doctors and other members of the one percent. However, even with the
relative gains for seniors their income is still well below that of the working age population. The median person
income for people over age 65 was $20,380 in 2012 compared to a median person income of $36,800 for someone between
the ages of 35 to 44. Now we can point to the fact that incomes have been rising considerably faster for the over 65
group, but this would be like saying that we should be annoyed because women's wages have been rising more rapidly
than men's wages. Women still earn much less for their work and seniors still get by on much less money than the
working age population.
The bottom line is that it takes some pretty strange glasses to see the senior population as doing well either
now or in the near future based on current economic conditions. We can argue about whether young people or old
people have a tougher time, but it's clear that the division between winners and losers is not aged based, but
rather class based.
"... limit it [your company stock --NNB] to ~10 percent of your portfolio."
Under a law passed last year, you can even sell shares that your employer contributed to your
account, as long as you've been there for three years.
Being too conservative
Plowing too much money into low-risk choices like stable value, bond and money funds may seem
safe since it protects your 401(k) from market setbacks.
But it's dangerous in the long run because your savings won't grow enough to provide you with
an adequate income in retirement.
A better approach: Create a blend of stocks and bonds that provides a cushion against price
drops but also gives you a shot at the gains you'll need to amass a sizable nest egg.
For help setting the appropriate mix for your age, check our Asset Allocator tool.
Doin' the smorgasbord thing
In an attempt to diversify, some people spread their money evenly across all the options on their
401(k) menu.
That doesn't produce a well-rounded portfolio any more than scarfing every item at a buffet assures
a balanced meal. You might wind up with too big a helping of growth or bonds, depending on your
plan's options.
What to do? First plug your choices into the Instant X-Ray tool at morningstar.com to see how
your portfolio breaks down by the major asset classes - large and small stocks, bonds and foreign
shares.
You can then compare your current mix to the blend our Asset Allocator recommends and, if necessary,
rejigger your choices to get your 401(k) on track.
Avoiding these errors won't guarantee you a giant nest egg. But you will be making the most of
every penny you set aside. And in the long run, that will pay off.
How do you know when you've crossed the invisible line and you're not young anymore? Maybe it's
the first time you look at Billboard's top 20 list and don't recognize a single name. Or when your
kids start staying out later at night than you can keep your eyes open.
Or maybe it hits you when you realize that if the stock market falls 30 percent, as it does
from time to time, you'll lose the equivalent of a year's pay, not a week's, and you don't want
to have to work forever to make the money back.
In the last case at least, there's a silver lining. It means you've managed to put away a substantial
sum, reaping the benefits of 30 or so years of steady saving and compounding returns.
But that's a once-in-a-lifetime deal. You will never get those 30 years back. If you're
a boomer, in other words, the math has started to work against you: Whether you're 49 or 56 or 60,
odds are you have more to lose than ever and less time than ever to recover if something goes wrong.
So your age demands that you become more risk-averse. And with the market coming off record highs,
the housing market taking forever to find a bottom and a host of other troubling financial signals,
you've got reason to worry about stock prices tumbling.
Yet with many good years still in front of you, getting out of the market isn't an option either.
You need your savings to keep growing to outpace inflation and reach your goals.
How are you supposed to do all of these contradictory things at once?
Get some perspective
Although it may not feel like it, you probably have time to ride out a decline. Consider the
bear market that started in 2000, one of the worst ever. Standard & Poor's 500 dropped 49% over
nearly three years, and the index took more than seven years to fully recover.
Do you have seven years before you'll start drawing down your savings? Plus, you're not going
to withdraw the whole shebang on Day One but rather over 20 to 30 years or more.
Keep this in mind too: Drops of that magnitude occur only about every 30 years. Declines of 20%
to 30% are more typical, and on average the S&P 500 gets back to even 3.5 years after a pullback
begins, says Sam Stovall, chief investment strategist at S&P.
In every market drop of less than 15% since 1970 (there have been many), the index has fully
recovered within a year.
Do a gut check
That doesn't mean you shouldn't take action to minimize your losses in a pullback, especially
if you reach for the Tums every time you listen to the financial news.
"If you're worrying because you can't accept a market drop, now - before there's another big
one - is a great time to adjust your asset allocation," says Steven Sheldon, president of SMS Capital
Management in Houston.
To assess your age-appropriate tolerance for risk, ask a few simple questions. How much longer
do I want to work? Has my health declined? Do I have any large expenses fast approaching, like college
tuition or elder care for a parent?
These will give you an idea of how much money you'll need fairly soon and how securely it should
be tucked away.
Pick an asset mix that suits you - the sooner you need the money, the less you should hold in
stocks - then rebalance once a year to maintain that blend.
For help, check out the Asset Allocator tool. A conservative recommended mix for someone who
doesn't need current income and will retire in about 10 years: 40% large stocks, 15% small stocks,
15% foreign stocks, 25% bonds and 5% cash.
Minimize the downside
You want to spread your money among the broad asset classes of stocks, bonds and cash, obviously,
but you should also diversify within them. Your stocks or stock funds, for instance, should include
foreign shares and a mix of small, medium and large companies, especially big companies that pay
a dividend and have consistently grown earnings.
Your bonds should be Treasuries and high-grade corporates. An inflation hedge like gold
or Treasury Inflation-Protected Securities (TIPS) wouldn't hurt either.
How effective is broad diversification? Consider the Vanguard Wellington fund, which takes such
an approach. In the last bear market - one of the worst ever - this fund actually rose 2.4%. It
has lagged the S&P 500 since then but by only a small amount.
Then too, in the seven or so years that the large-cap S&P 500 was falling and clawing back to
even, foreign stocks rose 30%, small stocks doubled and real estate investment trusts more than
doubled.
The amazing truth: Folks who had properly spread their bets back in 2000 didn't feel much of
a pinch at all.
Don't sell after prices fall
When today's bull market finally ends - and it will - don't give in to temptation and sell. It's
not easy to stand firm. But selling after a drop almost always backfires.
In fact, if your nerves can stand it, buy more shares while prices are down. Although making
a big bet on a market bottom is reckless, a regimen of investing the same dollar amount every paycheck,
month or quarter lets you actually benefit from dips, corrections and bear markets.
This discipline can't work quick magic on large losses, but it virtually guarantees that you'll
bounce back faster. So instead of worrying about the next bear market, get ready for it and sleep
well - at least until the kids get home and wake you.
Good point. Inequality gives BigF more rope to hang itself. The same is true
for 401Ks. Rather than the money controlled by professional investors, the money
is control by the rubes who are easily suckered.
There are plenty of good investments that need to be made. Unfortunately,
BigF is not in position to reap the return on investment. There are many investments
that BigG could make and have no problem reaping the returns. BigG needs to
take more money from BigF and make the important domestic investments.
This is another example of market failure.
Dan Kervick said...
Yes, financial deregulation seems to be a huge part of it. But along with
that perhaps there has been a kind of moral deregulation? A change in the
understanding and mores of millions of people with respect to financial investment?
What I mean is that everybody seems to have the idea these days that they are
are entitled to some big financial score and that earning big yields from one's
financial investments is the normal state of affairs. So it's not just the banksters.
There is a whole bunch of dumb greedy money out there all the time, hunting
the next big score. Look at all the online trading, the proliferation of personal
finance magazines. I don't remember much of that kind of thing from when I was
a kid.
Maybe insecurity is contributing as well (some coming from inequality). Perhaps
people in an earlier generation had come to think that if you just did your
job and were reasonably prudent, and saved extra money in some safe place, America
would deliver a pretty decent life to you and a comfortable retirement.
Now
America is a hustle, and so its hustle or be hustled.
Darryl FKA Ron said in reply to Dan Kervick...
"What I mean is that everybody seems to have the idea these days that they
are are entitled to some big financial score and that earning big yields from
one's financial investments is the normal state of affairs."
[OK, the only way that "everybody" could get even near a majority is if you
count Lotto as one of those "financial investments." Otherwise, "everybody"
in the financial markets search for yield amounts to less than 10% of everybody.
At any rate, what you are describing is the Pavlovian effect of present
incentives which favor speculation over productive investment in financial markets.
It is not just the greed, but the dopamine injection from speculating and occasionally
winning. So, the difference between the securities and derivatives players and
the Lotto players is mostly that the odds are better for many of the former
to win as much or more than they lose.]
Perhaps people in an earlier generation had come to think that if you
just did your job and were reasonably prudent, and saved extra money in some
safe place, America would deliver a pretty decent life to you and a comfortable
retirement.}
One might add also that never has life been so replete with opportunity or
alternatives -- both of which can be highly confusing.
Also, we are genuflecting at the altar of Mammon unlike we have, perhaps,
ever in the history of the US. Being rich was always something "nice to be",
but who (born before 1980) really believed it was indeed a real possibility.
Now, it is indeed possible. The TV is full of people who won enormous lottery
fortunes. The magazines are full of "self-made millionaire" stories as well.
Some people, with a college education and ten years experience in Silicon Valley,
are indeed very, very rich.
Ditto Hollywood.
These super-rich have become "role models" for a great many young-adult
Americans.
The country, in terms of the Americans who occupy it, has never been
so rich for some and yet so poor for others. The disparity is alarmingly large.
And we can thank, I never tire of saying, Reckless Ronnie Reagan for it.
His lowering of the higher-income tax-rates in the 1980s made it possible to
get very rich, very quickly.
For some. The others are just gawking in awesome wonder ...
Can this highly disparate Income Inequality go on forever? (Yes, it can.)
But should it?
We are nowhere near an answer, and far too many are hooked on "Making A Quick
Megabuck". Or two, or three, or four, or a hundred ...
Bigger Social Security benefit. The longer you put off taking Social Security benefits
up until age 70, the more you will receive. For each year you delay claiming the benefit you
will receive about 8 percent more. If you can find an enjoyable part-time job, why not put off
signing up for Social Security for a few years.
Health care coverage. If you retire before 65, then you probably will have to spend
a lot of money on health care coverage. Medicare will kick in at 65, but before then you'll
have to figure out how to pay for health insurance. It's not easy to find a part-time job with
health care coverage, but there are a few out there.
Purpose.You need to have a purpose, whether you're retired or not. Many
retirees have a hard time adjusting to an unstructured lifestyle and plunge into depression.
Working part time on something you care about will ease the transition and give you a purpose.
If you don't need the money, then volunteering for an organization you care about is also
a great option.
Retirement can be a difficult transition for many of us. Instead of an abrupt transition to full
retirement, why not work a little bit and ease into it? Staying active by working part time after retiring
from a long career can help your finances and help you adjust to a less structured retiree lifestyle.
Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement
investing and the challenges of early retirement. He recently left his corporate job to be a stay
at home dad and blogger and is having the time of his life.
Beth
I"m almost 55. I'm looking forward to retirement, and have financially planned for it.
If I work after I retire from my corporate job, it will be doing something different
that would allow me to try something new. Im an accountant, and could see doing something
like selling jewelry, working at Barnes & Nobel, or teaching knitting classes.
virginia
Most people retire so they can travel, do hobbies and spend time with grandkids and friends
but all of that gets old after awhile. Many who retire from their jobs wish they still had work
to do of some sort just to stay active, bring in some extra money and feel worthwhile again.
If not for anything else, put some structure in one's life.
Let Tyrants Fear
Bull(s)(h)(i)(t) article, they want you to work till you drop, plain and simple. Now people
that can not plan their budgets, money, and always in debt, they will have to get their act
together, if they want to retire.
John
If you're working after retirement, you're not retired.
Norm
Most people work part time jobs when they retire because the 401k that replaced company pensions,
are not a viable solution to the large majority of Americans. You will see retiremnt drop over
the next 10 years.
Retirement is just an after thought where 401k's are concerned. 401k's real purpose is to
fuel the stock market. Every friday billions of dollars are payroll deducted from almost everyone's
check. It sure keeps the bankers humming along, and if everyone would stop investing that money...
.America as a country would be devasted. That is why they wanted to get their greedy little
fingers on your social security. The typical american worker gets only the crumbs off the 401k's
and then you get a guy like George Bush whom absolutely killed the economy, and took those crumbs
away.
If your looking to retire on 401k's, you better be investing some serious jack and hope that
your pile doesn't run out before you die. Good luck with that.
WHOFKGCARES
"You need to have a purpose" we work so we can enjoy life - retirement is a pleasure not
a worry...
luannesrackissmallerthanmine
It is a paradox for the elites. They need everyone to be financailly overwhelmed so they
have to work until the day they die so that no one has free time on their hands to get angry
at the growing inequality and injustice of the system.
However, since illegal aliens, outsourcing and technology are eliminating the need for thousands
and millions of jobs, the traditional model of working for a living is no longer viable. Furthermore,
the young are increasingly the group being unemployed....and we all know what large numbers
of young unemployed looks like....(Arab Srping.)
Now, with retirement age people completely unprepared due to the dismantling of pension plans
and unions, there is a perfect storm on the way.
I would say that Capitalism has run it's course and the predictable revolts, riots and revolutions
are right around the corner if the rich elites don't start giving back.
GaryM
If you still need money you made the wrong decision to retire in the first place. Retired
12 years and loving it.
Apparently my former professor Ian Ayres has made a lot of people upset, at least judging by
the
Wall Street Journalarticle about him (and co-author Quinn Curtis) and indignant responses
like
this one from various interested parties. What Ayres and Curtis did was point out the losses
that investors in 401(k) plans incur because of high fees charged at the plan level and high fees
charged by individual mutual funds in those plans. The people who should be upset are the employees
who are forced to invest in those plans (or lose out on the tax benefits associated with 401(k)
plans.)
In
their paper, Ayres and Curtis estimate the total losses caused by limited investment menus
(small), fees (large), and poor investment choices (large). Those fees include both the high
expense ratios and transaction costs charged by actively managed mutual funds and the plan-level
administrative fees charged by 401(k) plans.
What really annoyed people in the 401(k)) industry (that is, the mutual fund companies that administer
the plans and the consultants who advise companies on plans) was Ayres and Curtis's charge that
many plans are violating their fiduciary duties to plan participants by forcing them to pay these
fees. Various parties connected with a plan (e.g., the named fiduciary, the administrator, the investment
adviser) have fiduciary duties, which include duties of prudence (doing a reasonably diligent job)
and loyalty (putting the participants' interests first). Overpaying for investment management and
administrative services would seem to constitute a breach of these duties.
The response of the industry has been one of righteous indignation and blanket assertion. For
example,
Drinker Biddle huffs, "In our experience, most plans are well-managed." 401(k) plans provide
different "services," so different plan-level fees are appropriate; and high fund fees are OK because
"it is commonly accepted that the use of actively managed funds is prudent."
Just because lots of rent-seekers say so doesn't make it so. Investment management is pretty
close to a commodity business. Even if markets for illiquid assets aren't that efficient, and
even if publicly traded securities markets are a little inefficient around the edges (and I have
no problem with rich people putting their excess cash into hedge funds trying to exploit those inefficiencies),
paying money to gamble on fund managers is not something that companies should be encouraging their
employees to do. There's no good reason not to just provide a lineup of cheap, big index funds with
low costs and low tracking error.
Plan administration is a commodity business, too. I've been in 401(k) or 403(b) plans at four
companies (one of which changed administrators partway through), my wife has been in plans with
two different administrators, and apart from fund choice I don't recall any differences between
them (and I'm pretty attentive to these things).
So yes, most plan sponsors and administrators are violating their fiduciary duties, as I argued
in a paper
(summary
here). Not that they should stay up nights, at least for now. The courts have for the most part
endorsed current behavior, probably "reasoning" that if everyone's doing it, it must be OK. But
anything Ayres and Curtis can do to draw attention to the problem of high fund fees and plan fees
will help move us closer to the day when workers don't have to pay for their companies' poor choices.
@ AndyfromTucson PEOPLE STILL HAVE A CHOICE.
Although your employer (and especially the "planner" who gets the use of that money, often an insurance
company such as Met Life) will try to talk you out of it, I believe that you can transfer part of
the money (the vast majority of it over time) to a Roth IRA or traditional IRA (depending on your
age and individual tax situation). If you make 1 transfer (rollover) per year (which I believe is
the current limit) you can still take advantage of the employer matching in your 401k and yet transfer
the majority of your money where you have more choices how to invest and lower fees (say for example
at a discount brokerage such as Fidelity or TD Waterhouse)
Employers have long hoped that simpler 401(k) plans would entice more workers to save. But for more-savvy
investors, that may not be good news.
Many companies have pruned the number of investment options
in their plans to keep workers from feeling overwhelmed by too much choice. General Motors Corp.
and Delphi Corp., for instance, recently cut these options by nearly half. Meanwhile, other
companies have loaded up their plans with a slew of target-date funds -- one-stop shopping for retirement
savers -- while shrinking the variety of other funds.
But simple isn't always better. In paring choices, companies may be reducing workers' ability
to diversify their assets, leaving them exposed to the downdrafts that sometimes roil stocks and
bonds simultaneously.
Investing in a 401(k) plan allows you to defer paying income tax on the money you save for retirement,
helps automate your decision to save for retirement by having the money withheld from your paycheck
and often allows workers to get valuable employer contributions. However, investing in a 401(k)
plan isn't always worth it, especially if your plan has high fees, poor investment choices and no
employer contributions. Here's how to tell if your employer is providing a subpar 401(k) plan:
No immediate eligibility. Ideally, you should start saving in a 401(k) plan
with your first paycheck, but many employers won't let you. Only 54 percent of 401(k) plans offer
immediate eligibility, according to a recent Vanguard analysis of 2,000 401(k) plans with 3 million
participants. And 16 percent of 401(k) plans require workers to be with the company for an entire
year before they are able to put their money in the plan. "It's sort of a legacy of when record
keeping was more manual," says Jean Young, a senior research analyst for the Vanguard Center for
Retirement Research. "You want to make sure that somebody is going to be with your organization
before you enroll them."
No employer contributions. Most Vanguard 401(k) plans (91 percent) offer an
employer contribution. The best 401(k) plans immediately provide employer contributions to workers,
but the majority of 401(k) plans impose a waiting period before new employees are eligible for a
match or other company contributions. Many 401(k) plans require between one and six months (27 percent)
or even an entire year of service (28 percent) before employees become eligible for a 401(k) match.
A very small match. The maximum possible match employees can get is a median
of 3 percent of pay among all Vanguard 401(k) plans. The bottom quarter (24 percent) of 401(k) plans
offer a maximum possible employer match of less than 3 percent. The top 15 percent of plans provide
employer matches worth 6 percent or more of pay.
A match that is difficult to take advantage of. Employer contributions vary
considerably by employer, with Vanguard alone administering 401(k)s with more than 200 different
match formulas. Almost half (48 percent) of 401(k) plans require employees to contribute 6 percent
of their pay to the 401(k) plan to capture the maximum possible 401(k) match. Other employers require
workers to save between 3 and 5 percent of pay (37 percent) or at least 7 percent (11 percent) to
get the entire match offered.
The exact match formula plays a role in how easy it is for employees to actually take advantage
of company 401(k) contributions. The most common 401(k) match is 50 cents for each dollar contributed
up to 6 percent of pay, and 24 percent of 401(k) plans use this match formula. Another 14 percent
of 401(k) plans offer a multi-tier match formula such as $1 for each dollar saved on the first 3
percent of pay and 50 cents for every dollar contributed on the next 2 percent of pay. And 7 percent
of plans cap the maximum amount of employer contributions workers can get.
Match formulas have the biggest impact on workers who can only afford to save a small amount.
Consider a worker who is able to save 3 percent of her salary in a 401(k) plan. If her employer
matches 50 cents for each dollar contributed up to 6 percent of pay, she would get 1.5 percent of
her pay as a 401(k) match instead of the maximum possible match of 3 percent. If her employer instead
matched dollar for dollar the first 3 percent of pay, she would be able to take advantage of the
entire match offered with the same maximum potential cost to her company.
No nonmatching contributions. Some employers contribute to a 401(k) plan on
behalf of employees without them having to save anything on their own, contributing a median
of 4.2 percent of pay. The most generous 401(k) plans (16 percent) provide employer contributions
worth 10 percent or more of worker salaries.
Long vesting schedule. Employees who leave a job before they are vested in the
401(k) plan could forfeit some or all of their employer's contributions. Only 44 percent of 401(k)
plans offer immediate vesting, which means you will get to keep all of your employer's contributions
whenever you leave the company. Some 401(k)s have cliff vesting schedules in which you don't get
to keep any of your employer's 401(k) contributions until you have been employed by the company
for a specific number of years. "If you are likely to change jobs a lot because of the nature of
your career, and the company has a generous match but that is subject to a three- or five-year cliff
vesting schedule, it's not likely to benefit you," says David Loeper, author of "Stop the Retirement
Rip-off: How to Avoid Hidden Fees and Keep More of Your Money." Other employers have graded vesting
schedules in which you get to keep a gradually increasing proportion of your employer's contributions
based on your years of service - typically getting to keep the entire 401(k) match only after five
or six years of service. "The employer doesn't want to invest in the employee and then have the
employee up and take off," says Christopher Carosa, a retirement plan consultant and chief contributing
editor of FiduciaryNews.com. "From the employee's standpoint, it's better to have immediate vesting."
Poor investment choices. The average Vanguard 401(k) plan offered 27 investment
options in 2012, up from 16 in 2003, many of which were recently added target-date funds. "If you
have more than 20 options it's probably not going to be a user-friendly plan," Carosa says. "It's
going to put too much of the burden of deciding what to invest in on the employee." However, almost
half of Vanguard 401(k) plans now offer at least four low-cost index funds that invest in U.S. equities,
international equities, bonds and cash, up from a quarter in 2004. "The index core is going to have
the lowest cost typically, and costs have been demonstrated to be very important in terms of predicting
future outcomes," Young says.
High fees. Most 401(k) plans charge a variety of fees ranging from record-keeping
costs to expense ratios on each investment option. You want to make sure that the expenses aren't
excessively high. "An easy to remember rule of thumb is to look and see who is selling the fund
to the plan. If the fund is being sold by a broker or an insurance company that is working in a
non-fiduciary capacity there is a good chance that you will have these excess fees," Carosa says.
"You want to make sure that none of the options in the plan have 12b-1 fees or revenue sharing."
401(k) plans are now required to give all investors information explaining the fees associated
with each investment option in the plan, due to new U.S. Department of Labor rules. Make sure you
look at these quarterly and annual 401(k) statements, and keep costs in mind when making investment
decisions. "The fee is 100 percent certain; the return is not guaranteed," Loeper says. He recommends
aiming to pay no more than 75 basis points for most investments, and less than 20 basis points for
index funds. "If you are paying more than three-quarters of a point," he says, "somebody is making
excess profits or is gambling with your money."
Lack of retirement funds force you to believe in scams. Beware this trap " free cheese is available
only in a mousetrap". Same for investments that bring dramatically more then safe "inflation plus 2%"
return available from TIPs. Actually there is something troubling about the level of
gullibility and groupthinkdemonstrated in the article below: "And so were more and
more people in Lexington, including doctors, lawyers and accountants..."
Yahoo/Associated Press
In this Feb. 28, 2013 photo, Sarah Chavez, center, sits with her son Bidal, right, and daughter
Sarahi, front, at her home in Lexington, N.C. Desperate to raise money for their …more6-year-old daughter's cancer treatments last summer, friends told Jose and Sarah Chavez
of a way to quickly turn their meager savings into a small fortune. But what the Chavez family and
many others didn't know was that state and federal regulators for months had received complaints
that ZeekRewards was a scam.
LEXINGTON, N.C. (AP) - In the hardware store on South Main Street, the owner pulled Caron Myers
aside to tell her about the best thing to happen in years to this once-thriving furniture and textile
town.
Did she hear about the online company ZeekRewards? For a small investment, she could make a fortune.
He had invested. So had his grandsons. And so were more and more people
in Lexington, including doctors, lawyers and accountants.
Skeptical at first, Myers drove a few blocks to the company's one-story, red-brick office and
spotted a line of people circling the building. She was sold, and plunked down several thousand
dollars. But months later, Myers, like hundreds of thousands of others, discovered the truth: ZeekRewards
was a scam.
"I was duped," Meyer said. "We trusted this man. The community is still in shock."
Authorities say owner Paul Burks was the mastermind of a $600 million Ponzi scheme - one of the
biggest in U.S. history - that attracted 1 million investors, including nearly 50,000 in North Carolina.
Many were recruited by friends and family in Lexington, a quintessential small town where neighbors
look out for each other.
But what investors didn't know was that regulators had received nearly a dozen complaints about
ZeekRewards and the related site Zeekler.com, but failed to take action for months,
leaving the company free to recruit tens of thousands of new victims.
The Securities and Exchange Commission, which closed the operation Aug. 17, said Burks was selling
securities without a license. The Ponzi scheme was using money from
new investors to pay the earlier ones.
Burks has agreed to pay a $4 million penalty and cooperate with a federal court-appointed receiver
trying to recover hundreds of millions of dollars.
Investigators say Burks, a former nursing home magician, siphoned millions for his personal use.
But he has not been charged.
In his first public comments, Burks told The Associated Press he couldn't discuss details because
of lawsuits by victims trying to recoup money.
"Everything will come out in time," said Burks, 66, standing in the doorway of his home.
Asked if he had anything to say to victims, he shook his head.
"I never told anyone to invest more money than they could afford," Burks snapped. "I didn't tell
them to do that. Never."
He said if they lost money, "it's their fault. Not mine. Don't blame me."
But Cal Cunningham, a former prosecutor representing investors in a lawsuit, slammed Burks -
and regulators for taking so long to act.
"It's why we need a full hearing on what happened in a court of law - whether that be our civil
case or a criminal proceeding. A lot of people were hurt," he said.
____
Burks started Zeekler in early 2010 as an online penny auction site. His business experience
included nearly four decades in multilevel marketing programs - such as Amway - including failed
attempts to launch similar businesses of his own.
In penny auctions, consumers compete to pay pennies on the dollar for name brand products such
as iPads. Each bid costs as much as $1, so participating can become expensive and the sites can
earn nice profits when multiple users bid against each other.
In January 2011, he incorporated aspects of multilevel marketing
into the business when he launched ZeekRewards. The program offered a share of the
penny auction's profits to people who invested money, promoted the company on other websites and
recruited other participants. Under a complicated formula, investors were issued "profit points"
that grew every day.
Investments were capped at $10,000, but people could invest on behalf of their spouses, children
or other relatives. Some mortgaged homes to raise their investment.
At first, ZeekRewards complied when investors sought to cash out. And that became the best ad
of all: happy investors with their checks in Facebook photos.
People who didn't trust the mail traveled long distances to drop off checks at the cramped office
building where security guards allowed only seven inside at a time. Employees collected money and
wrote out receipts at the office cluttered with dozens of plastic mail bins stuffed with check-filled
envelopes. To withdraw money, investors filed an online request - or called - and then had to wait
for a check.
By the end of 2011, it seemed like everybody in Lexington was talking
about ZeekRewards. Many saw it as a way to make extra cash to pay bills or help family.
"No one was in it to get rich," said Mary Bell, a 75-year-old seamstress from Lexington who scraped
together money to invest.
Sarah Chavez wanted extra money for her daughter's frequent hospital visits for leukemia. Her
husband worked in a factory, and they invested $7,000.
"It's hard to believe in something like that. But everyone told us it was a sure thing," she
said.
Burks mostly kept to himself, and few locals knew anything about the quiet, balding man with
thick glasses.
In the 1980s and early 1990s, the Shreveport, La., native toured nursing homes in the South as
a magician with country singer David Houston. Burks moved to Lexington in the early 1990s because
his wife was from the area. In 2000, Burks ran for the state House as a Libertarian, but he collected
only 330 votes. Then he became a local celebrity. Most afternoons, he ate lunch at the same downtown
restaurant with an entourage of managers. Conference calls with investors were posted on YouTube.
He produced glossy brochures touting the company.
"In addition to the mind-blowing savings, you can create more wealth than you have ever thought
possible with ZeekRewards' geometrically progressive matric compensation plan," the brochure said.
Burks also hired some of the industry's top attorneys and analysts
to promote his company.
The publicity paid off. When the Association of Network Marketing
Professionals held its annual convention in March 2012, it called ZeekRewards the model of legal
compliance.
___
But behind the scenes, there were troubling signs, according to documents, company emails and
consumer complaints reviewed by the AP.
In early June, the state of Montana gave ZeekRewards the boot. Montana
requires multilevel marketing companies to register. But ZeekRewards didn't submit
any paperwork - even after warnings, said Luke Hamilton, a spokesman for the attorney general's
office.
"We started getting a lot of complaints," he said.
In August, a North Carolina employees' credit union warned customers
not to invest in ZeekRewards because it was a "fraudulent company."
But regulators received complaints long before then.
In a Nov. 23, 2011, complaint filed with the North Carolina Attorney General's office, Wayne
Tidderington of Florida called ZeekRewards an "illegal" Ponzi scheme. He said a relative had invested
$8,000 and the company guaranteed a return of 125 percent every 90 days.
The attorney general's office can ask a judge to shut down a business because of deceptive trade
practices. But it forwarded Tidderington's complaint to the secretary of state's office because
it looked like it might involve securities. The secretary of state's
office, however, declined to take action because it didn't believe it had the jurisdiction, spokeswoman
Liz Proctor said.
The complaint died.
"I put it all together," Tidderington told the AP. "I gave them the roadmap. I said, 'Here's
a snake. Here's the gun. Here's the bullets. Shoot the snake.' But they ignored me."
Over the next seven months, the attorney general's office received nearly a dozen more complaints.
But it wasn't until July 6 that it issued an order giving Burks until the end of the month to
turn over all Zeek-related documents. He missed that deadline.
Kevin Anderson, senior deputy attorney general for consumer protection, insisted his agency correctly
handled the case, saying his office receives thousands of complaints a year.
"We have to have more concrete evidence than a couple of consumer complaints before we go to
court," he said.
The SEC received similar complaints during the same period, but the agency didn't begin its investigation
until the summer.
SEC spokeswoman Christine D'Amico declined to comment on the investigation, except to say the
agency took action "as soon as we believed we had sufficient evidence to obtain an emergency court
order to halt the fraud."
___
Months later, people in Lexington are wondering what's next.
Kenneth Bell, the court-appointed receiver, said ZeekRewards may
have taken in $800 million. So far, he's recovered $312 million. Hundreds of millions
were paid out to investors. Just how much is missing? He doesn't know.
Myers said the community is still recovering - but the wounds are deep. People are wondering
why investigators didn't act more quickly and why no one, including Burks, has been charged.
"There are thousands and thousands of victims who might not have lost a penny had the government
intervened more quickly," she said.
"In general, the good news is that people ages 75 and older are much less likely to have debt,
and generally carry far less debt, than other older Americans. But Craig Copeland, a senior research
associate with EBRI and the report's author, said it was still troubling to see that the trend
for that group was toward increasing, rather than decreasing, debt burdens."
"But in general, she said the really troubling finding she's seeing is that younger Americans
appear to be taking on more debt than previous generations, and paying it off at slower rates.
That could mean that today's young people have even bigger problems than their parents
and grandparents when they reach age 75 and older."
..But I see BennyBoy today says that continued ZIRP has few risks, in his opinion, like asset
bubbles or inflation. Of course a lack of assets among the elderly or the young might not be considered
a bubble...hmmmmmm...
...Could Bernanke be economic antimatter? An anti-bubble?
Americans had good reason to be disgusted by politicians arguing over the so-called fiscal
cliff. But do they recognize such behavior in themselves?
Retirement is your own fiscal cliff. I mean ... it you one of those is going to ... retire by
age sixty five ... but you're not saving and pushed into retirement and you standard of living dramatically
drops.
You are pushed into the situation when you need as much as you can. Maximize you match, use Roth
IRA (which gives you tremendous flexibility).
And working several extra years might be not under you control. Health issues or job market can
decided against it.
This is probably the only reasonable way to buy annuity; otherwise you can emulate annuity by putting
the savings in Roth account and investing in mixture of Tips and junks bonds portfolio.
The Center for Retirement Research at Boston College has just released a new study that shows
that the best way for people to turn their 401(k) balances into a stream of income is to "buy" an
annuity from Social Security. Many people don't recognize that Social Security is in the annuity
business, but it is and it has the cheapest product in town.
As more people approach retirement with 401(k) plans as their only supplement to Social Security,
they face the challenge of how best to use their accumulated 401(k) assets to support themselves
once they stop working. They could invest in safe assets and try to live off the interest, but the
value of the assets would erode as prices rise and interest income would fluctuate as nominal interest
rates rise and fall. They could invest in a portfolio of stocks and bonds and draw out some percent
each month, but to avoid outliving their assets that draw is now about 3 percent. They could take
some of their money to an insurance company and buy an annuity, but commercial annuities tend to
be expensive because they are designed for people with above-average life expectancy and involve
considerable marketing costs.
A much better alternative is for the household to "buy" an annuity from Social Security. They can
make this "purchase" by using their savings to pay current expenses and delaying claiming to get
a higher monthly benefit at an older age. The savings used is the "price" and the increase in monthly
benefits is the annuity it "buys."
For example, consider a retiree who could claim $12,000 a year at age 65 and $12,860 at age 66 –
$860 more. If he delays claiming for a year and uses $12,860 from savings to pay the bills that
year, $12,860 is the price of the extra $860 annuity income.[1] The annuity rate – the additional
annuity income as a percent of the purchase price – would be 6.7 percent ($860/$12,860). Remember
that Social Security benefits are indexed for inflation, so the retiree is buying a real annuity.
Vanguard – a wonderful company – also sells real annuities but it pays much lower rates.
The reason that Social Security annuities are a better deal than those in the private market is
that Social Security can offer a product that is actuarially fair – they are based on the life expectancy
of the average person (not those people whose parents lived into their 90s) and Social Security
doesn't have to worry about marketing costs or profits. Moreover, in this period of very low rates,
Social Security is an especially good deal because the increase in benefits is not based on current
rates but rather is a basic feature of the system. So buying an annuity from Social Security, especially
in today's low interest rate environment, is the best deal in town.
So read the
study and tell your friends with some 401(k) assets to use them to delay claiming their Social
Security benefit.
Alicia Munnell, the director of the Center for Retirement Research at Boston College, is a weekly
contributor to "Encore.
This is probably the only reasonable way to buy annuity; otherwise you can emulate annuity by putting
the savings in Roth account and investing in mixture of Tips and junks bonds portfolio.
The Center for Retirement Research at Boston College has just released a new study that shows
that the best way for people to turn their 401(k) balances into a stream of income is to "buy" an
annuity from Social Security. Many people don't recognize that Social Security is in the annuity
business, but it is and it has the cheapest product in town.
As more people approach retirement with 401(k) plans as their only supplement to Social Security,
they face the challenge of how best to use their accumulated 401(k) assets to support themselves
once they stop working. They could invest in safe assets and try to live off the interest, but the
value of the assets would erode as prices rise and interest income would fluctuate as nominal interest
rates rise and fall. They could invest in a portfolio of stocks and bonds and draw out some percent
each month, but to avoid outliving their assets that draw is now about 3 percent. They could take
some of their money to an insurance company and buy an annuity, but commercial annuities tend to
be expensive because they are designed for people with above-average life expectancy and involve
considerable marketing costs.
A much better alternative is for the household to "buy" an annuity from Social Security.
They can make this "purchase" by using their savings to pay current expenses and delaying claiming
to get a higher monthly benefit at an older age. The savings used is the "price" and the increase
in monthly benefits is the annuity it "buys."
For example, consider a retiree who could claim $12,000 a year at age 65 and $12,860 at age 66
– $860 more. If he delays claiming for a year and uses $12,860 from savings to pay the bills that
year, $12,860 is the price of the extra $860 annuity income.[1] The annuity rate – the additional
annuity income as a percent of the purchase price – would be 6.7 percent ($860/$12,860). Remember
that Social Security benefits are indexed for inflation, so the retiree is buying a real annuity.
Vanguard – a wonderful company – also sells real annuities but it pays much lower rates.
The reason that Social Security annuities are a better deal than those in the private market
is that Social Security can offer a product that is actuarially fair – they are based on the
life expectancy of the average person (not those people whose parents lived into their 90s) and
Social Security doesn't have to worry about marketing costs or profits. Moreover, in this period
of very low rates, Social Security is an especially good deal because the increase in benefits is
not based on current rates but rather is a basic feature of the system. So buying an annuity
from Social Security, especially in today's low interest rate environment, is the best deal in town.
So read the
study and tell your friends with some 401(k) assets to use them to delay claiming their Social
Security benefit.
Alicia Munnell, the director of the Center for Retirement Research at Boston College, is
a weekly contributor to "Encore.
Social Security has taken 12.4% of your taxable income since 1990, about 8% since 1980. Don't
be conned into thinking that you only pay 6.4% and your employer matches as that second 6.4%
is money he would pay you were he not required to pay that part of your wage directly to the
government.
Think of it this way, your employer doesn't care who he has to pay your wages to, he cares
about the total number. You, The Federal Government, some garnishment from a successful claimant
against you ..... in terms of the total it's all the same to him.
If you are able do a little arithmetic and guess at what you'd be worth had you simply put
a little effort into your life and learned to chase some yield for your 8- 12.4%, it might start
to dan on you the extent to which you got done. Government bond funds payed a ton in the 80's,
tech stocks roared in the 90's (not much yield however), royalty trusts paid double digit yields
in the first decade of this century. But you got your 'guaranteed' retirement with a COLA.
Now from the FAQ as SSA.gov
How is a COLA calculated?
The Social Security Act specifies a formula for determining each COLA. According to the formula,
COLAs are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical
Workers (CPI-W). CPI-Ws are calculated on a monthly basis by the Bureau of Labor Statistics.
A COLA effective for December of the current year is equal to the percentage increase (if
any) in the average CPI-W for the third quarter of the current year over the average for the
third quarter of the last year in which a COLA became effective. If there is an increase, it
must be rounded to the nearest tenth of one percent. If there is no increase, or if the rounded
increase is zero, there is no COLA.
And now, and my apologies as this next read requires a little effort on your part, a link
to the primer at shadow government statistics.
The following comment will offer up a taste from the above link.
The Way the Politicians Wanted It
In the early-1990s, political Washington moved to change the nature of the CPI. The contention
was that the CPI overstated inflation (it did not allow substitution of less-expensive hamburger
for more-expensive steak). Both sides of the aisle and the financial media touted the benefits
of a "more-accurate" CPI, one that would allow the substitution of goods and services.
The plan was to reduce cost of living adjustments for government payments to Social Security
recipients, etc. The cuts in reported inflation were an effort to reduce the federal deficit
without anyone in Congress having to do the politically impossible: to vote against Social Security.
The changes afoot were publicized, albeit under the cover of academic theories. Few in the public
paid any attention.
Sam Zuckerman of the San Francisco Examiner, noted "In the 1990s, for example, Republicans
wanted to make changes in calculating inflation along the lines recommended by a special commission,
including more use of quality adjustments. By lowering the official inflation rate, such changes
promised to reduce the annual cost-of-living adjustments for Social Security and other federal
programs.
"[Katherine] Abraham, the Clinton bureau [of Labor Statistics] commissioner, remembers sitting
in Republican House Speaker Newt Gingrich's office:
" 'He said to me, If you could see your way clear to doing these things, we might have
more money for BLS programs.' " [v]
Federal Reserve Chairman Alan Greenspan and Michael Boskin, the chairman of the Council of
Economic Advisors, were very clear as to how changing or "correcting" the CPI calculations would
help to reduce the deficit. As described at the time by Robert Hershey of the New York Times,
"Speaker Newt Gingrich, Republican of Georgia, suggested this week that fixing the [CPI] index,
with its implications for lower spending [Social Security, etc.] and higher revenue [tax bracket
adjustments], would provide maneuvering room for budget negotiators …" [vi]
"Alan Greenspan, chairman of the Federal Reserve, is among the other Government officials
who have spoken optimistically about financial benefits of a more accurate [CPI] index …" [vii]
"[E]conomists believe one of the most important [CPI upside biases] is when consumers shift
their buying patterns in response to changing prices, substituting one product for another.
The [CPI] index is based on a fixed market basket of goods and services. But, for example, if
the price on an item like steak gets too expensive, consumers may switch to hamburger." [viii]
The Boskin Commission Report, December 4, 1996, actually used steak and chicken for its substitution
example. The examples used in arguing for changing the CPI clearly were tied to prices rising
and resulting consumer demand shifting to a lower-quality product. Simply put, that was the
destruction of the cost-of-maintaining-a-constant-standard-of-living issue and was the primary
consideration of those seeking to change the CPI, although other issues would come into play.
The drive here was as to get a lower inflation reading, irrespective of whether the data were
"more-accurate."
So you get it in the teeth thrice, 12.4% of your income is removed from you wallet in exchange
for a promise of a retirement income with the implication that it will provide for a moderately
comfortable retirement, whatever that means. Then the amount of the payout is methodically
reduced by manipulation of the adjustment for inflation which is the very vehicle that provides
for your comfort within your comfortable retirement, whatever that means. Finally you
stupidly bite and fail to provide any savings for your retirement out of what income you have
left thinking that your government actually gives a rat's ass about you.
You got used. The day you retire, you are of little use as you now draw on government accounts
rather than pay in. Your death will be viewed by your government as a good thing. Hurry up and
die. Disease, malnutrition death panels ..... it's all the same to your Uncle Sam.
As an aside while it was Ol' Newt promoting the idea in a meeting, it was Clinton who signed
on for the changes.
coberly:
Roanman
you could leave off the snotty remarks. i was one of those shouting against the Boskin commission.
the 12% you pay for FICA is what gets the 2% or better real return on your "investment."
But it is not so obvious to me that the boss would pay "his" share if the bad old government
didn't force him to.
No doubt someone as smart and good smelling as you could negotiate for a 6% raise if the
boss didn't have to pay FICA. But i don't think the eighty percent of us who are too stupid
to know anything about investing would even get the 6% called "the workers share" if the bad
old government didn't force the boss to pay FICA.
It has something to do with the "power" of the parties at the bargaining table.
As for your take on "the government," you know it's who we vote for. I've been trying to
get people to make it clear they won't vote for anyone who cuts their SS... even in the name
of a "more accurate" CPI.
Why don't you join the country and work on making it work.
Jack:
Roanman, I happen to be one who appreciates your rehashing the bullshit that passes for elected
representative activities in this country. Note that I use the phrase "elected representative"
because your use of the word government is too amorphous and fails to draw the relationship
between those whom we vote for and those who then screw the electorate in favor of their financial
backers.
Given that you are so insightful regarding the inadequacies of the Social Security system
as a back stop retirement vehicle for the masses I was wondering if you might fill us all in
on the investment vehicle that you have discovered that guarantees a good return and safe haven
for that 12.4% in extra take home pay that we are going to receive once the bad old SS system
is finally put to the grave?
Oh, and while you're at it please explain how it is that you are so certain of the employer's
6.2% reaching our pockets? I do admire a person with such a strong sense of certainty
about so many uncertain and unpredictable phenomenon. I await with baited breath your explanation.
PJR:
The BLS response to the Boskin Commission can be found here: http://www.bls.gov/pir/journal/gj10.pdf
BLS professionals rejected the idea of replacing the CPI-U with the Chained-CPI--the "chicken
for steak" problem. But they did make some changes to their methodology, with the net result
of a slight decline in CPI-U estimates. Did the BLS go too far and begin underestimating inflation?
Tough question and I'm not convinced by what John Williams says (and he should more carefully
note which Boskin recommendations were rejected). Based on the BLS report in the above link,
I think BLS professionals are reasonable and intelligent analysts who are trying to do a good
job and beat back This tricky retirement funds problems that the CPI-U overstates inflation
and claims that it understate inflation -- and they usually vary depending on the political
motivation.
Many elderly investors have lost a combined $20 million
October 12, 2012 | THE PRESS DEMOCRAT
The first of many elderly investors who claim to have lost a combined $20 million in what Sonoma
County prosecutors are calling a vast Ponzi scheme testified Friday they gambled their life savings
on word-of-mouth recommendations and the promise of 12 percent returns.
Some, like Hyam Liebling, 86, of Oakmont in Santa Rosa, testified they plunked down their money
with Aldo Baccala, 71, of Petaluma, despite being unclear about who he was and how the money was
secured.
"I just trusted the guy," said Liebling, who walked to the witness stand with the help of a cane.
"And I trusted the information I got from a friend who invested in him for many years."
After a brief meeting with Baccala in 2008, Liebling said he wrote him a check for $30,000, eager
to begin collecting generous monthly interest payments. A few weeks later, he shelled out $25,000
more, increasing his total investment to $55,000, he said.
The money was going into mobile homes owned by Baccala's Petaluma real estate company and later,
assisted living centers, he said.
But in November 2008, Liebling testified the monthly payments stopped. He received a letter from
Baccala telling him he'd run out of money.
Liebling and other investors sued Baccala in civil court but have since received nothing, despite
a settlement promising repayment.
Asked about the impact on his life, the elderly man said, "Well, we're retired."
Liebling was the first to testify in a preliminary hearing expected to continue next week. Prosecutors
said there are 55 victims, many of them elderly, who were cheated out of their money.
...in honor of yet another hopium-fueled stock market rally (via
Capitalists@Work):
Once upon a time, in a place overrun with monkeys, a man appeared and announced to the villagers
that he would buy monkeys for $10 each.
The villagers, seeing that there were many monkeys around, went out to the forest, and started
catching them.
The man bought thousands at $10 and as supply started to diminish, they became harder to catch,
so the villagers stopped their effort.
The man then announced that he would now pay $20 for each one. This renewed the efforts of the
villagers and they started catching monkeys again. But soon the supply diminished even further and
they were ever harder to catch, so people started going back to their farms and forgot about monkey
catching.
The man increased his price to $25 each and the supply of monkeys became so sparse that it was
an effort to even see a monkey, much less catch one.
The man now announced that he would buy monkeys for $50! However, since he had to go to the city
on some business, his assistant would now buy on his behalf.
While the man was away the assistant told the villagers, "Look at all these monkeys in the big
cage that the man has bought. I will sell them to you at $35 each and when the man returns from
the city, you can sell them to him for $50 each."
The villagers rounded up all their savings and bought all the monkeys.
They never saw the man nor his assistant again, and once again there were monkeys everywhere.
Now you have a better understanding of how the stock market works.
IF recent stock market gyrations have taken a bite out of your 401(k), get ready for more discomfort.
You're about to learn how much you're paying just to maintain that account.
New Labor Department rules will require fuller disclosure about the fees charged on 401(k)'s.
Fees, of course, can be an enormous drain on retirement savings - but they are often obscured, giving
many Americans the impression that the accounts are somehow cost-free.
A survey published
last February by AARP, for example, found that 71 percent of those polled believed that they
did not pay fees on their 401(k)'s. Six percent said they did not know whether fees were levied.
So the coming disclosures, scheduled to show up on third-quarter statements this fall, may come
as a shock. Still, it's better to know than to be in the dark.
There are an estimated 483,000 individual retirement account plans, covering 72 million participants,
the Labor Department says. These accounts hold roughly $3 trillion in assets. Greater transparency
couldn't be more important.
The new rules are intended to ensure that the fees in 401(k) plans are reasonable. The Labor
Department says it hopes that the disclosures will help investors compare various investment offerings
and see how costs eat away at account balances.
Two main fees are extracted from 401(k) plans: investment management fees and administrative
costs. Under the new rules, companies administering 401(k)'s - often mutual fund concerns - must
provide employers who sponsor the plans with details of all fees associated with running the accounts.
For example, fees for general plan administrative services, like legal work, accounting and recordkeeping,
will have to be disclosed.
Plan sponsors are supposed to use this information to analyze whether the fees in their plans
are too high. But they won't have to pass along all of this data to participants. Instead, the sponsors
will be required to calculate expense ratios for the investments offered in a plan, showing participants
the charges per $1,000 invested.
According to a
Deloitte/Investment Company Institute study released last November, the median 401(k) expense
ratio was 0.78 percent. But the range of ratios is wide, the report noted: from 0.28 percent to
1.38 percent.
Expense ratios on 401(k) plans are supposed to be lower than those on investments offered to
individuals. That's because the combined assets in many retirement plans should be large enough
to qualify for lower-cost institutional funds. In general, the greater the assets held in a plan,
the lower the fees.
Brent L. Glading, founder of the Glading Group, a
consulting firm that analyzes 401(k)'s, says he welcomes the disclosure requirements but fears that
the new rules will confuse plan participants. Employers will have to work much harder to educate
participants about costs and benefits of various fund offerings, he says.
Unfortunately, he adds, employers are not up to the task. "The disclosure is going to make index
funds look better in some cases, and that's fine," he says. "But you will find many active managers
with fees that are justifiable because their performance outperforms the index. It is clearly going
to be the responsibility of the plan sponsor to help participants understand what it all means,
and I am not sure they are prepared for it."
If plan sponsors are to help their employees use the disclosures to make better investment choices,
they have a lot of boning up to do. A study issued
by the Government Accountability Office in
April found that half of the 1,000 sponsors surveyed either did not know if they or their participants
paid investment management fees or believed, incorrectly, that such fees were waived by service
providers.
Investment management fees are a rather large cost to be unsure about. According to the Deloitte/I.C.I.
study, these fees make up 84 percent of total 401(k) expenses.
Such ignorance might be understandable for sponsors of small plans, but large plan overseers
can also be clueless. According to the G.A.O. study, 31 percent of large plan sponsors didn't know
whether they or their participants paid investment management fees.
The report also said 29 percent of plan sponsors did not know if their plans paid for trustee,
legal or audit services.
If plan sponsors don't even know that fees are levied, they are surely not putting any effort
into aggressively managing the costs that their employees are paying in their 401(k)'s. The G.A.O.
study confirms that.
While almost half the plans surveyed by the G.A.O. reported that they did not know if they or
their participants paid transaction costs, 95 percent of those said they had not even asked their
service providers for information regarding these costs.
When sponsors do receive an accounting of various costs, they rarely use it to push for lower
fees, the G.A.O. found. For example, the Labor Department requires sponsors to identify individuals
receiving at least $5,000 in compensation for services rendered to a 401(k) plan. But the G.A.O.
noted that 89 percent of the sponsors surveyed said they did not use the information to compare
fees with those charged by other companies. And 83 percent said they didn't use the data to negotiate
lower fees from current providers.
"The reality is, most of the fiduciaries of these plans don't want
to do what they are supposed to do," Mr. Glading said. "They say, 'It doesn't save money for the
company, so why do I care?' There has to be a groundswell from the employees."
PERHAPS that will be the main benefit of the new disclosures. It may just be that when workers
begin to see how investment fees and administrative costs are ravaging their retirement savings,
they'll start prodding the managers overseeing these plans to behave like the fiduciaries they are.
The fact is, fund companies and other providers of 401(k)s are getting
rich off these plans. And in this zero-sum game, future retirees are definitely the poorer for it.
IF recent stock market gyrations have taken a bite out of your 401(k), get ready for more discomfort.
You're about to learn how much you're paying just to maintain that account.
New Labor Department rules will require fuller disclosure about the fees charged on 401(k)'s.
Fees, of course, can be an enormous drain on retirement savings - but they are often obscured, giving
many Americans the impression that the accounts are somehow cost-free.
A survey published
last February by AARP, for example, found that 71 percent of those polled believed that they
did not pay fees on their 401(k)'s. Six percent said they did not know whether fees were levied.
So the coming disclosures, scheduled to show up on third-quarter statements this fall, may come
as a shock. Still, it's better to know than to be in the dark.
There are an estimated 483,000 individual retirement account plans, covering 72 million participants,
the Labor Department says. These accounts hold roughly $3 trillion in assets. Greater transparency
couldn't be more important.
The new rules are intended to ensure that the fees in 401(k) plans are reasonable. The Labor
Department says it hopes that the disclosures will help investors compare various investment offerings
and see how costs eat away at account balances.
Two main fees are extracted from 401(k) plans: investment management fees and administrative
costs.
Under the new rules, companies administering 401(k)'s - often mutual fund concerns - must provide
employers who sponsor the plans with details of all fees associated with running the accounts. For
example, fees for general plan administrative services, like legal work, accounting and recordkeeping,
will have to be disclosed.
Plan sponsors are supposed to use this information to analyze whether the fees in their plans
are too high. But they won't have to pass along all of this data to participants. Instead,
the sponsors will be required to calculate expense ratios for the investments offered in a plan,
showing participants the charges per $1,000 invested.
According to a
Deloitte/Investment Company Institute study released last November, the median 401(k)
expense ratio was 0.78 percent. But the range of ratios is wide, the report noted: from
0.28 percent to 1.38 percent.
Expense ratios on 401(k) plans are supposed to be lower than those on investments offered to
individuals. That's because the combined assets in many retirement plans should be large enough
to qualify for lower-cost institutional funds. In general, the greater the assets held in a plan,
the lower the fees.
Brent L. Glading, founder of the Glading Group, a
consulting firm that analyzes 401(k)'s, says he welcomes the disclosure requirements but fears that
the new rules will confuse plan participants. Employers will have to work much harder to educate
participants about costs and benefits of various fund offerings, he says.
Unfortunately, he adds, employers are not up to the task. "The disclosure is going to make index
funds look better in some cases, and that's fine," he says. "But you will find many active managers
with fees that are justifiable because their performance outperforms the index. It is clearly going
to be the responsibility of the plan sponsor to help participants understand what it all means,
and I am not sure they are prepared for it."
If plan sponsors are to help their employees use the disclosures to make better investment choices,
they have a lot of boning up to do. A study issued
by the Government Accountability Office in
April found that half of the 1,000 sponsors surveyed either did not know if they or their participants
paid investment management fees or believed, incorrectly, that such fees were waived by service
providers.
Investment management fees are a rather large cost to be unsure about. According to the Deloitte/I.C.I.
study, these fees make up 84 percent of total 401(k) expenses.
Such ignorance might be understandable for sponsors of small plans, but large plan overseers
can also be clueless. According to the G.A.O. study, 31 percent of large plan sponsors didn't know
whether they or their participants paid investment management fees.
The report also said 29 percent of plan sponsors did not know if their plans paid for trustee,
legal or audit services.
If plan sponsors don't even know that fees are levied, they are surely not putting any effort
into aggressively managing the costs that their employees are paying in their 401(k)'s. The G.A.O.
study confirms that.
While almost half the plans surveyed by the G.A.O. reported that they did not know if they or
their participants paid transaction costs, 95 percent of those said they had not even asked their
service providers for information regarding these costs.
When sponsors do receive an accounting of various costs, they rarely use it to push for lower
fees, the G.A.O. found. For example, the Labor Department requires sponsors to identify individuals
receiving at least $5,000 in compensation for services rendered to a 401(k) plan. But the G.A.O.
noted that 89 percent of the sponsors surveyed said they did not use the information to compare
fees with those charged by other companies. And 83 percent said they didn't use the data to negotiate
lower fees from current providers.
"The reality is, most of the fiduciaries of these plans don't want to do what they are
supposed to do," Mr. Glading said. "They say, 'It doesn't save money for the company, so why do
I care?' There has to be a groundswell from the employees."
PERHAPS that will be the main benefit of the new disclosures. It may just be that when workers
begin to see how investment fees and administrative costs are ravaging their retirement savings,
they'll start prodding the managers overseeing these plans to behave like the fiduciaries they are.
The fact is, fund companies and other providers of 401(k)s are getting rich off these plans.
And in this zero-sum game, future retirees are definitely the poorer for it.
The Center for Retirement Research at Boston College has just released a new study that shows
that the best way for people to turn their 401(k) balances into a stream of income is to "buy" an
annuity from Social Security. Many people don't recognize that Social Security is in the annuity
business, but it is and it has the cheapest product in town.
As more people approach retirement with 401(k) plans as their only supplement to Social Security,
they face the challenge of how best to use their accumulated 401(k) assets to support themselves
once they stop working. They could invest in safe assets and try to live off the interest, but the
value of the assets would erode as prices rise and interest income would fluctuate as nominal interest
rates rise and fall. They could invest in a portfolio of stocks and bonds and draw out some percent
each month, but to avoid outliving their assets that draw is now about 3 percent. They could take
some of their money to an insurance company and buy an annuity, but commercial annuities tend to
be expensive because they are designed for people with above-average life expectancy and involve
considerable marketing costs.
A much better alternative is for the household to "buy" an annuity from Social Security.
They can make this "purchase" by using their savings to pay current expenses and delaying
claiming to get a higher monthly benefit at an older age. The savings used is the "price" and the
increase in monthly benefits is the annuity it "buys."
For example, consider a retiree who could claim $12,000 a year at age 65 and $12,860 at age 66
– $860 more. If he delays claiming for a year and uses $12,860 from savings to pay the bills that
year, $12,860 is the price of the extra $860 annuity income.[1] The annuity rate – the additional
annuity income as a percent of the purchase price – would be 6.7 percent ($860/$12,860). Remember
that Social Security benefits are indexed for inflation, so the retiree is buying a real annuity.
Vanguard – a wonderful company – also sells real annuities but it pays much lower rates.
The reason that Social Security annuities are a better deal than those in the private market
is that Social Security can offer a product that is actuarially fair – they are based on the life
expectancy of the average person (not those people whose parents lived into their 90s) and Social
Security doesn't have to worry about marketing costs or profits. Moreover, in this period of very
low rates, Social Security is an especially good deal because the increase in benefits is not based
on current rates but rather is a basic feature of the system. So buying an annuity from Social Security,
especially in today's low interest rate environment, is the best deal in town.
So read the
study and tell your friends with some 401(k) assets to use them to delay claiming their Social
Security benefit.
Alicia Munnell, the director of the Center for Retirement Research at Boston College, is
a weekly contributor to "Encore.
The Wall Street mantra of stocks for the long run is beginning to get a little stale. If Abbey
Joseph Cohen had been right for the last twelve years, the S&P 500 would be 4,000.
For this level of accuracy, she is paid millions. Her 2011 prediction of 1,500 only
missed by 16%.
The S&P 500 began the year at 1,258 and hasn't budged. The lowest prediction from the Wall Street
shysters at the outset of the year was 1,333, with the majority between 1,400 and 1,500. The same
Wall Street clowns are now being quoted in the mainstream media predicting a 10% to 15% increase
in stock prices in 2012, despite the fact we are headed back into recession, China's property bubble
has burst, and Europe teeters on the brink of dissolution.
They lie on behalf of their Too Big To Tell the Truth employers
by declaring stocks undervalued, when honest analysts such as Jeremy Grantham, John Hussman and
Robert Shiller truthfully report that stocks are overvalued and will provide pitiful returns over
the next year and the next decade.
"High earners already have their SS benefits taxed and that money goes to the SSTF."
Moderate earners DO have their SS benefits taxed at regular income tax rates: I cannot find
any reference saying that it goes into the SSTF.
I paid tax on my Social Security and I (my wife) am/is NOT a 'High Earner, see below
Per the IRS: http://www.irs.gov/newsroom/article/0,,id=179091,00.html
[Are Your Social Security Benefits Taxable?
IRS Tax Tip 2011-26, February 07, 2011
The Social Security benefits you received in 2010 may be taxable.... the following seven
facts from the IRS will help you determine whether or not your benefits are taxable.
How much – if any – of your Social Security benefits are taxable depends on your total income
and marital status.
Generally, if Social Security benefits were your only income for 2010, your benefits are
not taxable and you probably do not need to file a federal income tax return.
If you received income from other sources, your benefits will not be taxed unless your modified
adjusted gross income is more than the base amount for your filing status....
You can do the following quick computation to determine whether some of your benefits may
be taxable: • First, add one-half of the total Social Security benefits you received to all
your other income, including any tax exempt interest and other exclusions from income. • Then,
compare this total to the base amount for your filing status. If the total is more than your
base amount, some of your benefits may be taxable.
The 2010 base amounts are: • $32,000 for married couples filing jointly. • $25,000 for single,
head of household, qualifying widow/widower with a dependent child, or married individuals filing
separately who did not live with their spouses at any time during the year. • $0 for married
persons filing separately who lived together during the year.]
----------------------------------------------
The taxable amount of SS payments increases to a maximum of 85% when the modified AGI reaches
$34,000($44,000 if married)
So, the current system already is progressive on the payments side. To make it more regressive
would make many of us very angry.
I do very much agree that the SS contribution cap should be eliminated.
Arne:
"the main problem is NOT that people are living longer"
Sorry, wrong.
In 30 years lifespan for men (at age 65) increased from 14.0 to 17.5, a 25 percent increase
in years and, therefore, a 25 percent increase in costs. Without that increase in retirement
years, SS would be over-funded.
Living longer IS the primary issue.
(That does not mean you have to increase the NRA, but please get the facts straight.)
cm:
You cannot consider only life expectancy at 65, or the minimum benefit eligibility age. In
order to collect, you have to make the gate. You are leaving out those who contribute but don't
collect. I don't know how much that takes away from your point.
And I thought the big problem was the wave of boomers? (The boomers at fault for one more
thing aside from all the others.)
"Dead people are the newest frontier in debt collecting…"
I am NOT making up this
vulture stuff, OK?
This is our society as it really is.
The
banks need another bailout and countless homeowners cannot handle their mortgage payments, but
one group is paying its bills: the dead.
Dozens of specially trained agents work on the third floor of
DCM Services here, calling up the dear departed's next of kin and kindly asking if they want
to settle the balance on a credit card or bank loan, or perhaps make that final utility bill
or cellphone payment.
The people on the other end of the line often have no legal obligation to assume the debt
of a spouse, sibling or parent. But they take responsibility for it anyway.
"I am out of work now, to be honest with you, and money is very tight for us," one man declared
on a recent phone call after he was apprised of his late mother-in-law's $280 credit card bill.
He promised to pay $15 a month.
Dead people are the newest frontier in debt collecting, and one of the healthiest parts of
the industry. Those who dun the living say that people are so scared and so broke it is difficult
to get them to cough up even token payments.
So completely out-of-control greedy has our amok-running banking industry become that they're
going after money they cheerfully and openly admit isn't owed to them by the people they're
harassing, mainly, it appears, because they've stripped the living creditors so badly they
don't have anything left to "cough up". So why not go after the families of dead creditors? Maybe
they've got something left to worth stealing.
Well, if you can "retaliate" against some country that didn't do anything to you because there's
no profit in invading the country actually responsible for attacking you, why can't bankers steal
from people who have money but don't owe it to them when the people who do owe it to them
are dead? Makes sense to me.
It can't possibly be legal to harass people who don't owe you anything, can it? Have we come
so far, sunk so deeply into the muck? And it doesn't even end there, no no no.
"The retirees didn't understand this was being done to them. They just assumed, "Oh well, this company
is affected like everyone else by the economy." They didn't see the role the companies played [in deceiving
their employees]. The federal courts found Cigna documents that made it clear that the HR executives
were discussing how, if the cutting of employees' benefits was handled right, there wouldn't be an employee
backlash because the people wouldn't understand what was happening."
A striking example was Lucent, which inherited about 100,000 retirees when it was spun off from
AT&T. From the beginning, Lucent kept saying, "We are crippled by these retirees," but the truth
is, they also received more than enough actual money from AT&T to pay every dime of benefits for
all the current and future retirees. Bit by bit, they cannibalized these benefits. They eliminated
a death benefit, which is a very simple thing that says, if you work for us for 25 or 30 years,
and you die, your widow will get $50,000 dollars or whatever per year. Lucent said they couldn't
afford that. So they took it away and saved $400 million that had been set aside physically in the
pension plan for these folks. At the same time, they awarded more than $400 million in bonuses to
executives.
I kept on thinking about the market crash of 2008, where bankers were partly saved from public
outrage because the public really didn't understand how the system worked. I remember thinking,
"This is so complicated that I can't even really get angry about it, because I don't know how it
all breaks down."
The retirees didn't understand this was being done to them. They
just assumed, "Oh well, this company is affected like everyone else by the economy." They didn't
see the role the companies played [in deceiving their employees]. The federal courts found Cigna
documents that made it clear that the HR executives were discussing how, if the cutting of employees'
benefits was handled right, there wouldn't be an employee backlash because the people wouldn't understand
what was happening. And it's a pattern that has existed at a number of other companies.
It may seem odd to you that a person wouldn't know their pension is being cut, from, for example,
$20,000 a year to $15,000 or $10,000. But companies have various ways of masking it. One way is
to pay people a lump sum when they leave, saying, "Here's a lump sum so you don't need to wait until
you're 65 to get a payment." Almost everyone who was attracted to that assumed it was the equivalent
amount to a pension because they didn't know about the time value of money and discount rates and
so forth.
If you make $50,000/yr before retirement and wish to have 60% of that after retirement,
how much do you have to save in order to earn that much in your 0.5% bank account?
Let's see, $50,000 x 0.6 = $30,000 @ 0.5% interest: $30,000/0.005 = $6,000,000.
This is a blatant error as principal is untouched. In order to retire at 66 with $30K per
year income and 0.5% interest and assuming 30 years payout period (or life expectancy 96 years),
you need $840K. Assuming one start contributing at 25, monthly contributions and interest 0.5%
you need to contribute $1500 per month to get this sum at 66.
Bruce
So you would need to contribute $18,000/yr or 36% of pre-tax income? That pretty much proves
Yves's point – people who can save are realizing they need to increase their savings levels.
Its even worse in higher income brackets as people realize that existing savings no longer
provide any compounding, much less compounding over inflation. If inflation is running a 3-5%,
and all in tax rate is 35%, additional savings on top of existing savings are required at a
5-8% rate just to keep the existing savings purchasing power from being eroded. Just think if
you had $100,000 saved for college tuition already for an 8 year old. You know you will need
almost double that just to keep up with tuition increases, and you won't get it from "the market",
so you just have to spend less – but there is no real increase in "savings" by doing so.
This is the real trap that Bernanke has set himself, as it's an exponential function on saving
for future expenses – the number starts to grow faster than anyone's capacity to save no matter
how frugal they become. But it won't stop them from trying……
kievite
Bruce:
So you would need to contribute $18,000/yr or 36% of pre-tax income? That pretty much
proves Yves's point – people who can save are realizing they need to increase their savings
levels.
Everything is wrong in this example :-). Adult male life expectancy in the USA is 84 I think.
So if you are a male you can contribute twice less :-). If you are afraid of inflation use TIPS.
They have decent return over the years. Of course if you want to play stock market you probably
will be fleeced.
BenE
Yup, I did the calculation for myself just recently.
The generation x/y, the 20 to 40 year olds, are squeezed severely by high house prices and
stock prices. Since they can no longer rely on high capital gains to fund their retirement,
they would in theory need their stocks at a p/e where they can rely on good dividends instead.
Take my situation. I am a 30 year old engineer and my wife is a doctor. We live in Canada.
Problem 1: Low interest rates.
These might be good for propping up the banks but we are trying to save up for retirement
here and lately, are lucky if I we get positive real returns on our investments. If you
try online retirement savings calculator they all have default values of around 3% inflation
and 8% expected returns. With these numbers, the calculator tells us we need to save about
12% of our income to get 50% of it for a good part of our retirement. We would need to save
about $1000 a month on a combined $100 000 salary to secure a good retirement.
However if I input a more realistic 4% return on investments, the calculator tells us
we need to save 37% of our income, that is $3100 a month.
result: minus $2100/month from us to the rest of the economy.
This situations means our generation's families, have something like 25% yearly less
income compared to the previous generation to spend outside retirement savings.
What do you think that does to the GDP numbers? Can spending from boomer retirees compensate
for that?
Problem 2. High house prices.
We live in an apartment in part because houses are still very expensive. It seems the
economic punditry sees high house prices as a good thing. I'm sure it is good for banks
who are backing all the inflated mortgages but for those of us that are trying to become
home owners, it makes things very difficult. It also means that when we do buy a house,
it will be barely affordable and our monthly budget will largely go towards paying back
the bank. Now problem 1 partly offsets this as we can get mortgages at lower interest rates
but the low rates seems to keep the prices inflated and cancel out all the benefits (at
least here in Canada).
If you're my age, the numbers simply don't add up. Especially if, as some suggest, the stock
prices stay high due to them being sold oversees instead of passed on to our generation. In
the case of housing, this is happening right now in Vancouver for example, where houses are
sold at insane prices to rich Chinese immigrants and we younger locals can only afford leftovers.
Birch
Thank you. I'm in the same boat you're in. I think we can safely assume that whatever we save
will be worth less when we need it than it is now. Retirement, in the 20th century sense, is
probably on it's last legs. Perhaps we will move back to an old-school broad family arrangement,
where the working youth take care of the live-in elders – physically and financially – because
they know that they will need the same treatment from the next youth when they're old. I don't
think this is a bad thing – better than dumping the elders on the garbage heap anyway.
One thing I can suggest, if you haven't already, many credit unions in Vancouver offer better
interest rates on term deposits and such than any of the (five) banks do. You can almost keep
up with inflation – but not quite.
Blissex
There is another blatant error here:
"you need $840K. Assuming one start contributing at 25, monthly contributions and interest
0.5% you need to contribute $1500 per month to get this sum at 66."
The blatant error in the above it is that the saving profile is constant across time, which
means that most of the saving is done when the worker is youngest, so that interest can build
up for the longest.
The question here is how easy it is for the average 25yo worker to contribute $18,000/year
to their pension account, and to keep contributing that sum every year for the next 40 years,
with no periods of unemployment or illness, and the answer is that it is nearly impossible.
If the contribution profile is such that most contributions to the pension account are made
after 40-45, as it happens in the so-called real world, then things are nowhere as easy.
There is also a composition fallacy here. By necessity someone's financial assets must be
someone else's financial debt, and if there are 2 workers per retiree, and the retiree gets
$30k per year from a capital of $840 going down to 0 at age 96, that means that each worker
*must* have debts $420k down to whatever is left at the death of the retiree (let's say on average"
210k each!).
In any case if there are 2 workers per retiree spending 30k/y, each of them is therefore
contributing via interest or profits $15k/year towards current pensions, which is amazingly
similar to the $18k/year required saving rate, which is amazingly similar to the contribution
rate, which means that the system is still pay-as-you-go.
So if there is a low worker-retiree ratio like 2 workers must have gigantic debts and pay
a lot of their income to retirees, and the only choice how efficiently that can be done (via
low-overhead OASDI or high-margin financial products); and if the worker-retiree ratio is high,
there is little problem.
It is indeed impossible to avoid pay-as-you-go in the aggregate, because retirees accumulate
financial assets, not stocks of food and clothes etc., so when they retire someone has to produce
that food and clothes etc. that the retirees need to consume with their retirement income, and
give them to the retiree.
There is another composition fallacy in the total numbers.
So suppose that there are 150m workers, each producing an average of 50k/y and 75m retirees,
each consuming an average of 30k/y and each with a capital of 840k.
Annual GNP is 150m*50k => 7.5 trillions, but retirees will own financial assets of up to
75m*840k => 63 trillions, or let;s say on average 31.5 trillions, which is a ridiculous idea.
Unless of course there is a gigantic real estate and stock market Ponzi bubble fueled by
worker demands for retirement assets, which is one of the real goals of those advocating private
retirement accounts.
Crazy Horse
I don't know what form of herb you guys are smoking. There won't be any retirement for the ex-middle
class Americans who are in the process of being evicted from the only asset they once had. Even
those who still live in their underwater residences two or three years from now will have their
"savings" eroded by serial joblessness and the price inflation of necessities like food and
transportation.
And how well do you think suburbia is going to work when the dollar is no longer the world
reserve currency and we have to exchange real goods for the oil necessary to keep it functioning?
The only way a middle class American can afford to retire today is to move to a country where
the cost of living is in accord with their modest resources. If they in fact have a little savings
left, they may be able to find a gringo enclave where they can play bridge with fellow expats
and watch the sun set. In my case I'm moving back to the village in the mountains of Columbia
where I lived as a Peace Corps volunteer 40 years ago. Little has changed there– farmers still
bring their vegetables to market every Sunday on mule back and the eggs and coffee are better
than anything available in the USA. One can go for months without hearing English spoken or
hearing about the latest financial swindle which is fine with me. $500 per month is a kings
ransom. And did I mention that Columbia ranks #36 in the world for health care, ahead of the
US in 37th place? Ironic isn't it– forty years after I was sent to a third world country to
show them how to live a better life, the life they have, for all its faults, looks better than
the imploding catastrophe of the USA.
tyaresun
And if anyone in your family falls seriously ill bankruptcy is your only option.
Yves Smith
His math is correct, you don't like his assumptions. :-)
I don't know how many old people you know, but no retiree I know
is comfortable with the notion you posit (and retirement planners may push), that of liquidating
principal. It is one thing to have that happen, another to plan for that. There
are enough "shit happens" scenarios that afflict older people (start with the cost of assisted
living or nursing home care) that you can blow through the $30K a year level assumed here in
a heartbeat.
Moreover, expected age of death is a moving target. At any point in time, someone 65 is expected
to die older than a 20 year old because some people don't make it to 65. That continues as you
reach 70 and 80. So if you planned based on your life expectancy at 25 and actually live to
80, that means you can now expect to outlive the funds you get aside based on your life expectancy
at age 20.
Basically. your logic builds too few buffers in. Assuming you live off interest means you
have your principal as a buffer. You may argue that is too conservative. but to each his own
planning.
Pwelder
It was always the older folks whose spending accounted for a disproportionate share of consumer
spending not financed by debt.
But you can't do financial repression without killing their cash flow. (Not to mention the
huge increases in contributions required to fund defined benefit pension programs or the retirement
income targets of individuals.)
So a policymaker like Bernanke who goes for artificially low interest rates aimed at supporting
the banks and/or government finances sets up a demand-killing downdraft that his models seem
not even to recognize, much less measure. As noted in some comments above, he very likely can't
see what he's doing.
And there in a nutshell is the incoherence of current policy.
craazyman
I think the Amy Winehouse retirement will be the most popular. It's almost free. :)
Birch
Almost free? Cummon, how much did she 'invest' in booze and drugs to fund her 'retirement plan'.
It's not a cheap life style. This is a risky plan too, though; I know plenty of rock musicians
that bought into this retirement plan, but behold, they're into their forties now and they're
still living!
Many of the retirees said they needed financial advice. At the same time, they expressed distrust
of the financial services industry and a fear of hidden fees and costs.
One 63-year-old said, "If I trusted an adviser, then I'm always wary because I know that they
are out to make money. . . . I don't trust them handling my money."
Said another respondent, "My overall impression with investment advisers is that their
ultimate goal is their own wealth, not mine."
You may not realize this, but your
401(k) or other workplace
retirement
plan is not free.
Until your new and improved account statement arrives, you can check to
see if BrightScope has graded your 401(k)
or 403(b) plan. If its total plan cost is among the highest in its peer group, you ought to
ask for an explanation. Ditto, if you run one of BrightScope's
personal fee reports on the funds you've selected
yourself in your retirement plan and find that you're paying well
over 1 percent in total costs.
If you are investing in actively managed mutual funds (perhaps because your employer
hasn't seen the light and given you a lineup of low-cost index or
exchange-traded funds as an option), keep in mind that those
fund companies may be handing some of their investment fees back to your plan's record keeper
to pay for administrative costs.Ask about this and
inquire whether that's the only reason your employer continues to do business with any high-fee,
actively managed funds.
Try not to get too indignant about this, at least at first. At a small employer in uncertain
economic times, having a retirement plan in the first place isn't a given. Let your colleagues
in human resources or finance know that they, too, will benefit personally if you can find a
way to strip out some costs.
Injecting a little emotion into the proceedings may help, too, though threats will probably
not be constructive, especially given what happened at ABB. (The gunman there left no note,
though
he
had told friends of troubles at work.)
Again, just a quarter of a percentage point in annual savings now can mean tens of thousands
of dollars more come retirement time. Try visualizing it this way, by imagining it as the difference
between one vacation each year or two at age 75, or one plane ticket, or several, for the grandchildren
to come see you annually. Make sure to remind everyone you talk to of that.
And if it's confusing or even frightening to confront data like this initially, given its
importance? Don't throw up your hands or just cross your fingers, as many of your colleagues
will do. Instead, find other like-minded people to help you decipher the numbers and start an
improvement movement.
"I think 10 to 15 percent of people will always get value out of increased disclosure," Mr.
Alfred said. "Most of the time, they are the most influential people at the company, and they're
the most likely to tell other people about it."
Debate over Alan Simpson's comments on life expectancy
continues.
The last chart from my
previous post
on this topic showed differences in life expectancy by race. What you'd really like, however, is
differences by socioeconomic status. After all, it's far more likely that we can (and perhaps should)
base policies on earnings rather than race. Unfortunately, the CDC data I used two days ago didn't
have differences by earnings.
The comments about an increase in the retirement age being progressive puzzle me. I guess
I can kinda see how that could be if you look only at monthly income.
But as you increase the retirement age, total income over the expected life clearly is less
affected for those with longer life expectancies(rich) than for those with shorter (poor). I.e.
regressive. Am I missing something?
Whether renting is better than buying depends on many factors, particularly how fast prices and
rents rise and how long you stay in your home. Compare the costs of buying and renting a home in
the calculator below.
Click the advanced settings button to change inputs such as your rate of return on investments,
condo/common fees and your tax bracket.
Repugs represent top 1% and nobody else. This policy shift from "starve the beast" to "starve the
lesser people" is what they are about. Nothing more nothing less. I wonder whether 50% voters suffer
from Stockholm syndrome, acute dementia or what ? Not the Democrats are much better but still there
is some difference here... I guess Ann Rand's ideas, awful as they are, serve the need to insulate wealth
from any sense of responsibility to the larger society. We and our families, and our children, are just
parasites who need to be dispensed with in the most efficient manner possible...
1) Over the next 75 years, Social Security's shortfall is equal to about 0.7 percent of GDP.
Source (PDF).
2) For the average 65-year-old retiring in 2010, Social Security replaced about 40 percent of
working-age earnings. That "replacement rate" is scheduled to fall to 31 percent in the coming
decades. Source.
3) Social Security's replacement rate puts it 26th among 30 Organization
for Economic Cooperation and Development nations for workers with average earnings.Source.
4) Without Social Security, 45 percent of seniors would be under the poverty line. With Social
Security, 10 percent of seniors are under the poverty line.
Source.
5) People can start receiving Social Security benefits at age 62. But the longer they wait,
up until age 70, the larger their checks. Waiting to 66 means checks that are 33 percent larger.
Waiting to 70 means checks that are 76 percent larger. But most people start claiming benefits
at 62, and 95 percent start by 66.
Source.
6) Raising the retirement age by one year amounts to roughly a 6.66 percent cut in benefits.
Source.
7) In 1935, a white male at age 60 could expect to live to 75. Today,
a white male at age 60 can expect to live to 80.Source.
8) In 1972, a 60-year-old male worker in the bottom half of the income distribution had a life
expectancy of 78 years. Today, it's around 80 years. Male workers in the top half of the income
distribution, by contrast, have gone from 79 years to 85 years.
Source.
Among his comments, my preferred solution:
Social Security's 75-year shortfall is manageable. In fact, it'd be almost completely erased
by applying the payroll tax to income over $106,000.
Source (PDF).
Here are the five best ideas to emerge from Retirement 20/20:
Focus on income, not accumulation. The 401(k) account statement you receive regularly shows how
much you've accumulated, not how that sum translates to income. Retirement 20/20 recommends adding
income projections to account statements as a way to get individuals to think more about income.
Create incentives for income. While most retirement savers prefer taking a lump sum distribution
at retirement, tax incentives might convince them to annuitize at least part of the nest egg. Retirement
20/20 recommends preferential tax treatment for annuity income. Another recommendation sketches
out a plan to include default annuitization options in DC plans.
Better risk-hedging. Researchers recommend allowing investors to choose a pre-set portfolio that
emphasizes fixed income, particularly Treasury Inflation Protected Securities (TIPS), and much less
investment in equity, particularly at retirement. The pre-set portfolio model would permit lower
administrative costs and a design that meets target risk goals at retirement. "While this may require
that individuals contribute more to achieve the same retirement income, it would also protect them
against market crashes," the report notes.
Go for stability, not guarantees. DC plans that offer income conversion options could make these
plans less costly to run by providing something less than an absolute guaranteed benefit -- for
example, a benefit with an inflation adjustment feature that can be adjusted over time. Retirement
20/20 suggests another alternative that would have employees work toward a targeted benefit that
isn't guaranteed, but structured so that workers who make a certain level of contribution would
likely get a defined benefit within 10 percent of the target at retirement.
Create fewer, bigger plans. Unseen fees charged to investors are one of the biggest variables
in 401(k) plan performance -- especially at smaller companies. These include investment product
fees, administration and record-keeping fees and other fees for investment advisory services, insurance
and auditing. Research by Brightscope.com shows that average 401(k) total plan cost can be as low
as 0.20 percent of assets for the largest plans and a whopping five percent for smaller plans.
Retirement 20/20 suggests regulatory changes that would allow more small employers to band together
in larger plans sponsored by an entity other than the actual employer; here, it points to the success
of TIAA-CREF, which has a long history of administering highly cost-efficient DC plans for academic
and non-profit employers.
"There's a wonderful opportunity here to drive higher value and better outcomes for plan participants,"
says Bruce Corcoran, managing director of institutional K-12 markets for TIAA-CREF. "It's more challenging
to do with plans [covered under the] Employee Retiree Income Security Act, but it's a bit of an
art."
A Yahoo! User
I had TIAA-CREF and was extremely unhappy with their rate of returns and expense charges,
I had no choice, my employer would not allow me to move money to another brokerage where they
have 403B.
I wonder if a VP or someone in the company get's benefit from choosing lousy 401K / 403B
funds and providers; if they do they should go to jail. They are stealing your retirement.
401K / 403B should be treated like IRA, you should be able to move to another provider where
returns and expense ratios are best.
A Yahoo! User
Reuters... complicit in conditioning the American public for the "annutizing" of 401k and
IRAs.
No, you won't accept it... you will beg for it. Just wait, feeling good about recovering
from the 2008 lows? Wall Street crooks will tank this market to the point no one will want to
invest in stocks for a generation. You will beg the government to make your retirement accounts
whole... and they'll be ready to offer a conversion from your decimated 401k into treasuries
with a nice bonus and "guaranteed" returns.
A Yahoo! User
Tiaa-cref has some of the worst returns of any mutual funds I have ever had in the past.
And I'm talking about before the market crash we all experienced. I mean the nineties and the
time before the current crisis. During these boom times the stock
portion of tiaa-cref gave me an average annual return of 2%. It was disgraceful.
Any teacher who invests with them is a fool. I was one of the biggest fools.
Steve Mcmullen
According to the US Census Bureau:
1 in 3 Americans has zero net worth.
Half of all Americans have only $2000 anywhere
10% of all Americans own 85% of the retirement money out there.
commentoz:
401ks did not start as a loophole. CODAs, their precursor plans from the 50s, allowed employees'
profit-sharing income (only) to be tax-deferred. But not all companies had CODA plans. Around
1978 the law was extended to include a percent of wage income to be tax-deferred. This allowed
virtually any employer to offer these deferred plans since they all pay wages. Of course then
the light bulb flashed for employers to dump the DB plan millstone and abdicate all responsibility
for employees' post-employment welfare. Or, some powerful companies were lobbying specifically
to get the CODA law extended so that they could dump DBs. Either way, employees have been bussed
en-masse to the casino, where the house ( IRS, Plan Sponsors, and Employers ) hold the cards.
Brian
Just a out right RIP OFF 4 Seniors. They played & paid by the rules all thier life. Now whe
they collect SS benifits the tax fun begins. Say they saved and in 401s and between distributions
recieve $30 k per year. Add that to perhaps $12k a year for the wife and $24k for the husband.
Well the AGI = $66k to pay taxes on. That is State & Federal ++++. RIP>RIP>RIP>
AverageJoe4:
Make the 401K like an annuity which most of us don't trust??? I put more into my 401K BECAUSE
it is not an annuity. I can pull it out for a health emergency WITHOUT Big Brother approval.
I would be putting in the minimum if the regulations with this unaware Blogger is suggesting.
The 401(k) generation is beginning to retire, and it isn't a pretty sight.
The retirement savings plans that many baby boomers thought would see them through old age are
falling short in many cases.
The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter
of what is needed in that account to maintain its standard of living in retirement, according to
data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston
College for The Wall Street Journal. Even counting Social Security and any pensions or other savings,
most 401(k) participants appear to have insufficient savings. Data from other sources also show
big gaps between savings and what people need, and the financial crisis has made things worse.
In general, people facing problems today got too little advice, or bad advice. They didn't realize
that a 6% annual contribution, with a 3% company match, might not be enough.
Some started saving too late or suspended contributions when they or their spouses lost jobs.
Others borrowed against 401(k) accounts for medical emergencies or ran up debts too close to their
planned retirement dates.
In the stock-market collapses of 2000-2002 and 2007-2009, many people
were over-invested in stocks. Some bailed out after the market collapse, suffering
on the way down and then missing the rebound.
Initially envisioned as a way for management-level people to put aside extra retirement money,
the 401(k) was embraced by big companies in the 1980s as a replacement
for costly pension funds. Suddenly, they were able to transfer the burden of funding
employees' retirement to the employees themselves. Employees had control over their savings, and
were able carry them to new jobs.
They were a gold mine for money-management firms. In 30 years, the 401(k) went from a small program
to a multi-trillion-dollar industry supporting thousands of financial planners and money managers.
But a 401(k) also requires steady, significant savings. And unlike corporate pension plans, which
are guaranteed by the U.S. government, 401(k) plans have no such backstop.
The government and employers aren't going to pay more for people's retirements. Unless people
begin saving earlier and contributing more to their 401(k) plans, advisers say, they are destined
to hit retirement age with too little money.
Vanguard Group, one of the biggest providers of 401 (k) plans, has changed its advice on how
much people should save. Vanguard long advised people to put 9% to 12% of their salaries-including
the employer contribution-in their 401(k) plans. The current median amount that people contribute
is 9%, counting the employer contribution, Vanguard says.
Recently, Vanguard has begun urging people to contribute 12% to 15%, including the employer contribution,
because of the stock market's weak returns and uncertainty about the future of Social Security and
Medicare.
... ... ...
It isn't possible to calculate precisely how many people are able to cover the recommended 85%
of their pre-retirement income, but Federal Reserve data suggest that many people can't.
Consider households headed by people aged 60 to 62, nearing retirement, with a 401(k)-type account
at their jobs.
Such households had a median income of $87,700 in 2009, according to data from the Center for
Retirement Research at Boston College, which derived this and other numbers by updating Fed survey
data, at The Journal's request. The 85% needed for retirement would be $74,545 a year.
Experts estimate Social Security will provide as much as 40% of pre-retirement income, or $35,080
a year for that median family. That leaves $39,465 needed from other sources. Most 401(k) accounts
don't come close to making up that gap.
The median 401(k) plan held $149,400, including plans from previous jobs, according to the Center
for Retirement Research. To figure the annual income from that, analysts typically look at what
the family would get from a fixed annuity.
That $149,400 would generate just $9,073 a year for a couple, according to New York Life Insurance
Co., the leading provider of such annuities- less than one-quarter of the $39,465 needed.
Just 8% of households approaching retirement have the $636,673 or more in their 401(k)s that
would be needed to generate $39,465 a year.
Some families do have other income. Just under half expect pension income of a median $26,500
a year. Added to the $9,073 in 401(k) income, that still falls short. Some families have other savings,
but Federal Reserve and other data suggest that those don't fill the gap for most people.
These data don't even include people who are in the direst situations: Those who have lost their
jobs, stopped contributing to 401(k) plans or shifted to jobs without 401(k) plans. The numbers
also don't account for inflation, which would further eat into income from a 401(k).
Some researchers question the Fed numbers because they are based on surveys rather than on records
of actual contributions.
Jack VanDerhei, head of research at the Employee Benefit Research Institute, a group supported
by 401(k) providers, estimates the median person actually has about $158,754, based on data from
401(k) providers. That is based on individuals in their 60s who have been at the same company for
more than 30 years, a somewhat different group than that measured by the Fed data.
Even that amount of 401(k) savings generates much less than what is needed.
The difficulties have been worsened by the 2007-2009 financial crisis. Since the housing and
financial markets began to collapse, about 39% of all Americans have been foreclosed upon, unemployed,
underwater on a mortgage or behind more than two months on a mortgage, says Michael Hurd, director
of the Rand Corporation's Center for the Study of Aging.
Rudy Haugeneder: .
Give me a break. People don't need 85% of their pre-retirement income after they retire.
Half would be more than enough. Check with people with who have retired. They generally become
homebodies who would rather plant flowers, bird watch, or read than hit the permanent vacation
road. And they don't care about the latest fashion or buying the latest computer toy when the
old one does the job. And they downsize their housing by choice, not out of financial necessity.
Just ask them. And seniors don't want to spend their lives focused and taking care of their
grandchildren. A visit or two now and then, yes, but not more. Their children like to play them
for babysitting suckers, hitting them with the grandma/grandpa guilt trip to get them to take
care of the kiddies rather than paying to have somebody else do it. And elders don't spend their
lives at restaurants or at live theater, etc. They have an assortment of other pleasures: chatting
or playing cards at the local seniors' center, enjoying a cheap coffee -- not an expensive Starbucks
equivalent. And if they go to such coffee shops, its to chat and read for a couple of buck a
day. Investment companies and this Wall Street Journal story attempts to make seniors feel poor
and stupid when in fact even 50% of pre-retirement income would, generally speaking, be more
than enough income to keep them more than happy. And I could go on and on to show you what seniors
don't need despite what the WSJ and investment salespeople claim. This is serious psychological
assault and battery based on lies, untruths, and greed -- advertising for papers like the WSJ
and super commissions for salespeople who shamefully don't know what the heck they are talking
about. It's morally criminal.
Please tell me who came up with this 85% rule? Financial advisors? Folks who make money on
other people investing their money with them? When I retire, my wife and I will have far fewer
expenses (i.e. no mortgage, no loans from kids' education, no union dues, etc.) than I do now.
I am also fortunate enough to have a medical insurance for life. Why do I need so much money?
I believe this is a myth based on faulty and lofty expectations- simplify your life as you get
older and be grateful for the free time you could have (and do somehting valuable with it like
volunteering in your commmunity or learning something new). Time or money- you choose..............
the individuals who invested "on their own" were in self-directed 401(k) plans. They made
stupid choices; they were screwed with excessive fees; they followed the advice of every crazy
with his or her own sense of where the market is going. At least the Social Security portion
of their retirement is intact.
Had the individuals mentioned in this article been subject to that "mythical, all-enriching"
privatized SS that the fringe right along with the brokerage community (looking for big retail
commissions and fees) have been touting as their only source of retirement income instead of
as a supplement to SS, they would have made the same stupid or ill-informed, or just unlucky
decisions, and all they'd have to show for it would be a collection of buy-and-sell tickets,
monthly statements, and the prospect of moving in with their kids.
The article enforces the need for social security more than a thousand Rachel Maddow or Chris
Matthews shows ever could
Geremy Grantham predicted - in 1998 - that the S&P would generate negative real and absolute
returns over the next decade because stocks were so over-valued. Guess what - he was right!
I agree with you that feds screwed up the housing and mortgage market. But how did Bill Clinton
or Newt cause Yahoo to trade at $1,000/share?
You're talking about two different bubbles. We recovered from the tech bubble, but not from
the housing bubble. Clinton helped to lay the ground work from removing Glass-Stegall. Bush
helped with removing leverage limits on investing. These two, together gave us the current problems.
Retirement income was supposed to be made up of pension, 401k/other savings and social security.
Pension plans no longer exist at most companies. Many people are not fortunate enough to spend
much time in one company to build up 401k plans and vest in their company's match. Often those
job changes are not their choice due to outsourcing or other downsizing. Social security is
under attack. So how are people supposed to support themselves? Working until 70 may not be
possible due to health issues or inability to find a job after being laid off later in life.
How many companies want their employees working until 70? The
truthful answer is probably none. And people should be able to retire at a reasonable
age to open more jobs for younger workers. If you have been unlucky enough to lose your job
in the last couple of years you probably have used a portion of at least savings if not 401k.
This will be a big problem for a lot of people for years to come. Going from what some consider
overly generous pension plans to zero pension plans is just hurting everyone in the long run.
But let's keep bashing unions and giving carte blanche to big business to do what is good for
them.
Look, your 401k WILL BE RANSAKED AGAIN! It is just a matter of time. What guarantee has a
baby boomer when all baby boomers retire to continue working? In what? Even today if you are
over 50 nobody wants to give you a job but as a walmart greeter if that. Please stop the lies.
Babyboomers are broke, period. Congress need to pass a law where retirement funds are guaranteed
and the interest earned guaranteed as well. Otherwise you will have hunger and a revolution.
Yes, right here! Obama's tiring demagoguery and the republican lies are getting really old.
They pillaged the country and bankrupted it.
On top of that, the congress and the banking industry are colluded to defraud the tax payer
with their tax law that makes it pretty a nobrainer to channel their hard earned money to 401ks
or be taxed to the max, then they pillage the accounts with stock market swings and transaction
commissions of mutual funds. IT IS A RACKET, AN INSTITUTIONALIZED RACKET. Get your money out
of there and figure out a way to outsmart the thieves. We have thieves and victims of their
thievery, no in betweens. That a 401k loses half its value, a retirement fund is criminal. Concerning
bonuses.. Taxed at 45%? Who created that racket? You know who. This country has been taken over
by professional thieves and you have better stop them cold by not givign them your money any
which way you can find and elude the massacre of your savings.
The major problem with peoples retirement plans are that they are grossly underfunded and
are left in risky instruments with such a short time to retirement. There are several causes
of this, as a culture we feel the need to keep up with everyone else and it causes us to spend
outside our means. Secondly, the wages for the middle class have been stagnant for entirely
too long. The only way people are able to keep the spending going with the same level of income
is to tap into their homes or underfund their retirement plans. I have a hard time seeing the
executive pay in this country skyrocketing while middle income employees work longer hours (if
they are lucky enough to still have a job) without seeing the corporate profits reflected in
their paychecks. Every one thinks that they will one day be in that top earner bracket with
enough hard work, but that day dream can only last so much longer before people wake up and
realize the system is extremely skewed in favor of the haves. The middle class has run dry and
cutting corporate taxes is not going to generate demand. Corporations are currently sitting
on $2 trillion, it's not that they need tax breaks to move forward with hiring, they need demand.
This problem will not be fixed until we address the extreme disparity in wealth.
These days a healthy stock market doesn't mean a healthy economy, as a glance at the high unemployment
rate or the low labor-market participation rate will show. The Tea Party is right about one thing:
What's good for Wall Street isn't necessarily good for Main Street. And the Germans aren't buying
the New York Stock Exchange for its commoditized, highly competitive and ultra-low-margin stock
business, but rather for its lucrative derivatives operations.
The stock market is still huge, of course: the companies listed on American exchanges are valued
at more than $17 trillion, and they're not going to disappear in the foreseeable future.
But the glory days of publicly traded companies dominating the American business landscape may
be over. The number of companies listed on the major domestic exchanges peaked in 1997 at more than
7,000, and it has been falling ever since. It's now down to about 4,000 companies, and given its
steep downward trend will surely continue to shrink.
Nor are the remaining stocks an obvious proxy for the health of the American economy. Innovative
American companies like Apple and Google may be worth hundreds of billions of dollars, but most
of them don't pay dividends or employ many Americans, and their shares
are essentially speculative investments for people making a bet on how we're going to live in the
future.
Put another way, as the number of initial public offerings steadily declines, the stock market
is becoming little more than a place for speculators and algorithms to compete over who can trade
his way to the most money.
What the market is not doing so well is its core public function: allocating capital efficiently.
Apple, for instance, is hugely profitable and sits on an enormous pile of cash; it is thus very
unlikely to use its highly rated stock to pay for any acquisitions. It hasn't used the stock market
to raise money since 1981, and there's a good bet it never will again.
If you spend too much of your 401(k) account balance early on in retirement, you will reach your
later years with very limited resources. But there are steps you can take to make your retirement
account balance last longer. Here are some strategies to make sure your retirement savings lasts
the rest of your life.
Most retirement savers aren't dipping into their nest egg immediately upon retirement. In fact,
most investors don't even touch their 401(k) savings until they are required to. Only 18 percent
of households with retirement accounts make any withdrawals in a typical year between ages 60 and
69, according to a recent National Bureau of Economic Research (NBER) study of IRA, Keogh, 401(k),
and Thrift Plan account holders between 1997 and 2005. The proportion of households making a retirement
account withdrawal grows slowly from about 10 percent at age 60 to 23 percent at age 69. Delaying
401(k) withdrawals early in your retirement gives you additional time to build up more tax-deferred
growth.
Avoid Tax Penalties
After decades of delaying taxes, retirees age 70 1/2 and older are required to take distributions
from traditional retirement accounts and pay any resulting income tax. (Seniors who are still working
and not at least 5 percent owners of the company may be able to further delay 401(k) withdrawals.)
Account holders who fail to withdraw the required amount from their traditional 401(k) or IRA face
a 50 percent tax penalty on the amount that should have been withdrawn in additional to the regular
income tax due. Between ages 69 and 71, the proportion of households taking retirement account withdrawals
jumps from about 20 percent to over 60 percent. And after age 73, about 70 percent of households
take withdrawals annually. "The sharp increase in withdrawals when distributions become mandatory
suggests that many households in their early 70s would not make withdrawals if it were not for the
required minimum distribution rules," write NBER researchers James Poterba, Steven Venti, and David
Wise. Withdrawals from Roth 401(k)s and Roth IRAs are not required after age 70 1/2 because account
owners already paid income tax on that money.
Avoid Two Distributions in the Same Year
The year you turn 70 1/2, you have until April 1 of the following year to take your required
distribution. But every year after that, required minimum distributions must be taken by December
31. If you wait until the April 1 deadline to take your first distribution, you will have to make
two withdrawals in the same year, which could result in a hefty income tax bill that year.
Reduce Withdrawal Rates
The less you withdraw from your 401(k) each year, the longer your money will last. Before age
70, the average 401(k) withdrawal is about 1.9 percent of the account balance each year. "In most
years, the average real rate of return earned on personal retirement account balances would exceed
this value, so the pool of personal retirement account assets would grow even in the absence of
new contributions," NBER found. After age 70, the average annual withdrawal rate is 5.2 percent.
"Rather than declining in value after households retire and begin to finance retirement consumption,
our findings suggest that personal retirement account balances continue to grow through at least
age 85, although the rate of growth is slower at older ages than at younger ages," according to
the NBER report.
While most retirees spend about 5 percent or less of their nest egg each year, some retirees
do withdraw unsustainable amounts from their retirement accounts. Between ages 60 and 69, about
7 percent of households withdraw more than 10 percent of their retirement assets. And 11 percent
of those over age 72 withdraw more than 20 percent of their balance in a single year. These households
are in danger of using up their savings too quickly.
Reinvest Withdrawals
Taking money out of your retirement accounts doesn't mean you need to spend it. "Withdrawals
from personal retirement accounts do not necessarily translate into consumption," the NBER study
found. "Households may simply redirect their assets from personal retirement accounts to other investment
accounts." If you don't need the money right away, consider reinvesting your 401(k) withdrawals
in a taxable investment account, bonds, or a savings account for future use.
Lousy gold deals. The value of gold surged last year, and strapped consumers did
everything they could to unload old rings and necklaces. But New Jersey found that 49 businesses
were short-weighting the gold while Massachusetts authorities found wide variance in the amounts
companies paid for the same items. To avoid: Ask a jeweler the carat of the metal and the weight
in pennyweights or troy ounces. An online calculator can help you figure out the value based
on the price of gold that day. Call other jewelers to see what they would pay. A fair deal would
give you 85 percent of the value.
You-may-already-be-a-winner scams. The target, often an elderly person, receives
a phone call or letter announcing that he's won millions from a foreign lottery, Publishers
Clearinghouse or Reader's Digest. To get the money, however, he has to wire hundreds or even
thousands of dollars to cover a phony fee or taxes. No prize ever materializes. To avoid:
Ignore calls or letters demanding a fee in exchange for a lottery or sweepstakes prize. If you
think an elderly relative might be susceptible, monitor her mail.
Advance fee loans. All you have to do to get a loan? Just send in $1,000 or more.
Once you do, you never hear from the company again. To avoid: Use the lowest-rate credit
card you can get to finance your debts. If all your cards are maxxed out, fuhgeddaboudit. You
shouldn't be borrowing at all.
Fishy overpayments. The targets are usually landlords or small business owners who
advertise rooms for rent or goods and services in classified ads or on Craigslist. A would-be
renter or buyer sends a check that's an overpayment and asks for the victim to wire the extra
amount back. Later, the check bounces. To avoid: Be suspicious of anyone overpaying;
don't send back any money until the check clears your bank.
Ponzi schemes. After Bernie Madoff, you'd think that people would be immune to investment
promoters promising pie-in-the-sky returns. But prosecutors were kept busy all last year by
scammers who stole investors' money. To avoid: Keep your investments in a dull, old mutual
fund. To paraphrase Will Rogers, you may not get much return on your money, but you will
be certain about getting return of your money.
Most financial professionals are not trying to confuse you on purpose. They simply spoke so much
jargon in business school that they forgot that most people don't know that a "subordinated debenture"
is a low-priority debt or that "PEG" is a short-hand way of talking about a company's earnings growth.
Unfortunately this confusing Wall Street-speak could put you in in a fog when approaching financial
transactions. And that can make you vulnerable to people who would like to
trick you out of your money. When salesmen and con artists see that your normal radar for bad
advice, toxic investments and outright scams is getting nothing but fog (the potential result of
all the hot air on Wall Street), they ramp up clever lies to separate you from your cash.
You can fight back by knowing Wall Street's 5 most costly lies. When you hear these phrases,
run for cover.
Lie #1: This time it's different.
As every market bubble in history approached a spectacularly devastating pop, stupid and scummy
"advisors" spit out this ridiculous statement to convince people that gravity no longer applied
to this portion of the earth. To be sure, each time that it was(not) different, they were
able to articulate a good justification for why it should be.
During the stock market bubble of the late 1990s, for example, it was "different" because
"the Internet changes everything!" The Internet would make workers more productive; companies
more profitable; communication easier; and foster international business transactions. And, of course,
it did.
So did the telephone, the automobile, the typewriter, the printing press, the airplane, the assembly
line, the cotton gin, and computers…just to name a few. And yet these market-changing technologies
did not change the relationship between stock prices and fundamental indicators of value. Not then.
Not now.
When a stock is selling for a price that substantially exceeds it's earnings multiplied by its
growth rate, sell it.
Lie #2: It's returns, not fees, that matter
This clever lie is almost always spoken by somebody whose livelihood depends on you overpaying
for his or her services, such as planners who sell high-cost "load" funds, annuities, and "wrap"
accounts.
The lie is effective because it's based on a partial truth: If you could guarantee higher returns,
you wouldn't mind paying higher fees. But in reality, the high fees are a sure thing. The returns
are not.
In fact, decades of academic research has come to one inescapable conclusion: The more fees you
pay, the worse your average annual returns.
Lie #3: This opportunity won't last!
Again, there's a chance that at least part of this statement is true. Financial regulators could
get wind of the "opportunity" you're being sold and shut it down before more people are scammed.
For instance, you can't invest with Bernie
Madoff anymore. You also missed your chance to invest in hundreds of "initial public offerings"
of companies that went belly-up shortly after raising investor capital. Brokers selling these dogs
rightly said the "opportunity won't last" because the companies issuing these shares were taking
their last rattling breaths, which is why institutional investors refused to buy their shares and
why brokers were trying to peddle the stock to you - or anyone gullible enough to buy it.
In reality good investment opportunities are commonplace and consistent. They don't go away overnight.
Take your time evaluating investment options. If you invest in haste, you'll repent in leisure.
Lie #4: Banks don't understand it
When somebody offers you a "guaranteed" 20% profit, the only logical question to ask is: Why
are you offering this to me? After all, if the salesman really had a sure-fire route to earning
a 20% profit, he/she could go to a bank, borrow the money at 5% or 6% and pocket the remaining double-digit
return. They wouldn't need your money. But here the salesman says: "Banks just don't understand
this opportunity…"
News flash: Your local bank teller may not be an Ivy League graduate, but someone in that bank
building likely is. And they're not at all confused. Neither, by the way, is the promoter who is
talking to you. He's functioning on one of Wall Street's favorite truths, best expressed by P.T.
Barnum: "There's a sucker born every minute." If you buy an "opportunity" that the banks don't understand,
you are that sucker.
Lie #5: You can trust me
If you wanted to peddle some smarmy, rotten investment, would you go find a ugly, rude person
to sell it? Of course not. You'd go out and look for a charming, good looking salesman who would
smile at prospective marks and say, "You can trust me. I put my Grandmother in this investment."
These guys will pull out your chair, bring you coffee and take your elderly grandmother to the
grocery store. Why? The idea is to build trust - to make you think that a salesman is your friend.
If they do this right, you'll be so convinced you can trust them that you'll fail to read the legally
required disclosures that spell out all the red flags.
If someone wants you to invest your hard-earned money, make sure you read and understand the
fine print. Trust no one with your financial security who doesn't live in your house and
share the rewards or penury along with you.
Kathy Kristof is the author of
Investing 101, published by Bloomberg Press
A grim category of crime is on the rise: senior-on-senior financial fraud.
According to regulators and prosecutors, there has been a significant increase recently in the
number of cases in which older investors have been taken advantage of by elderly scam artists.
"That's a definite new trend," says Denise Voigt Crawford, the Texas securities commissioner.
"We're seeing more cases of older people ripping off other older people. Someone joked that seniors
ripping off their peers is becoming 'the new retirement plan.'"
In Texas, John F. Langford, 76 years old, is expected to go on trial in Amarillo next year on
charges that he fraudulently sold about $6 million in promissory notes and what he called "private
annuities" to a circle of his fellow senior citizens. "We dispute all the state's allegations,"
says Mr. Langford's attorney, Tim Pirtle.
In Louisiana, meanwhile, Judith Zabalaoui, 73, pleaded guilty in February 2009 to five counts
of mail fraud and is now serving an eight-year prison sentence after persuading at least 35 clients,
many of them elderly, to invest in two nonexistent companies that promised "safe" returns of 13%
to 26%. She had clients sign a power of attorney, giving her access to their funds - and spent more
than $3 million of their money on her own expenses, including clothing and vacations, according
to court documents.
Anthony Joseph, Ms. Zabalaoui's attorney, didn't respond to requests for comment.
Many financial planners who got into the business during the bull market of the early 1980s are
senior citizens themselves now. With their own wealth ravaged by the bear market of the past decade,
many of these people can no longer afford to retire. That, say regulators, may be prompting some
older financial advisers to engage in riskier and less ethical behavior.
Elderly investors are natural targets in part because they may be
more susceptible to fraud. A 2008 study by researchers at the Georgia Institute of
Technology found that older adults are significantly worse than younger
people at detecting whether someone who may have stolen money is telling the truth.
What's more, according to research by Harvard University economist David Laibson and his colleagues,
the typical person's ability to make astute financial decisions peaks
at about age 53, then wanes with each passing year; another study found that investing ability takes
a steep drop after age 70.
Brian Knutson, a neuroscientist at Stanford University, has monitored the brain activity of dozens
of older investors. "When they encounter a risk," says Prof. Knutson, "they will be more likely
than younger people to focus on the upside of that risk." That can lead older investors to play
down the downside.
According to Mara Mather, a psychologist at the University of California, Santa Cruz, older adults
also seek less data than younger people do when making complex decisions - and
will go out of their way to avoid negative information or confrontations.
This "high avoidance," Prof. Mather says, can lead older investors to get sucked further into a
scam, throwing good money after bad.
Some older financial advisers use their age as a selling point, telling
clients they understand the challenges that older investors face. In many instances,
say prosecutors, unscrupulous advisers also tout their professional designations, or credentials,
as further evidence of their expertise.
Professional credentials have exploded in popularity among financial advisers in recent years.
Some credentials are difficult to obtain, but many of the newer ones can be gotten easily - often
with minimal study and just a few hundred dollars.
The Wall Street Journal has identified more than 200 credentials available to financial-services
professionals, including at least six with the word "senior" in their name: certified senior adviser;
certified senior consultant; certified senior specialist; certified senior financial planner; chartered
senior financial planner; and chartered adviser for senior living.
Mr. Langford, the Texas adviser, marketed himself by telling prospective clients that he was
a certified senior adviser and even showing them the number on his membership certificate, says
Ludie Stone, 89, who invested $211,000. "That gave me confidence," she says. The Society of Certified
Senior Advisors permanently revoked Mr. Langford's designation in October 2008 after receiving a
complaint, a spokesman says.
Some advisers find that credentials are so effective in winning new
clients that they don't even need to keep the designation current.
The certified financial planner designation, for example, is among the industry's most stringent
and respected. It requires a bachelor's degree, 15 credit hours of college-level courses in certain
subjects, 10 hours of exams over two days, adherence to an ethical code and 30 hours of continuing
education every two years in order to qualify for biannual renewal.
Yet Ms. Zabalaoui, the Louisiana adviser, marketed herself as a CFP, say clients, even though
her credential lapsed in 2000. Among the burned investors were Rex and Jackie Hall, an Albany, La.,
couple ages 58 and 60, respectively, who lost $24,000. Mr. Hall says his wife met Ms. Zabalaoui
at a seminar and was impressed. "When you see the letters [CFP] after her name," Mr. Hall says,
"you assume she has an enhanced position."
It is important for older investors to run financial decisions past
a younger relative or someone who can resist the emotional pull of the situation,
says Prof. Knutson. In some states, such as Alabama, "sentinels" trained by securities regulators
seek to attend any free lunch or dinner seminars hosted by financial advisers. If the sentinels
see anything awry, they report it to state or federal investigators.
At the very least, older investors should never attend such events
unless they are accompanied by a trusted younger friend or family member. And younger
relatives should periodically ask their older family members whether they have been pitched any
products or services by financial advisers, say regulators and consumer advocates.
The husband-and-wife team of Thomas and Susan Cooper, ages 69 and 67, respectively, have hosted
several such seminars over the years. Securities regulators in Illinois allege that the couple improperly
sold annuities to 15 elderly clients. Last week, testimony concluded in administrative hearings
through which the state is seeking to revoke the investment-adviser registrations of the Coopers
and their firm.
The Coopers, according to the state's investigation, generated more than $400,000 in commissions
in the first half of 2008 by persuading clients to buy fixed indexed annuities. According to the
state's investigation, the Coopers' clients incurred more than $125,000 in early-surrender charges
when they exchanged out of existing insurance products.
"The state's allegations are completely unfounded, and its numbers are inaccurate and not proven,"
says the Coopers' attorney, Thomas Kelty. "The state failed miserably to prove any of its allegations."
A decision is expected in the case early next year.
Mrs. Cooper is a CFP. George Keller, a 69-year-old retired factory worker, says the professional
credential raised his comfort level. "Oh my goodness, yes, I was impressed by that," recalls Mr.
Keller of their first meeting, an informational seminar the Coopers hosted over dinner at the Hilton
Garden Inn in Kankakee in 2006.
"Her husband, Tom, stood up before we ate and gave a very solid, God-honoring prayer," Mr. Keller
says. According to Mr. Keller, the Coopers had asked several of their existing clients to attend
the dinner. "Some were friends of ours," he recalls.
"We felt that because [the Coopers] were close to our age, they
would understand and would have dealt with a lot of the problems that we face at our age: health
setbacks and that sort of thing," he says. "Isn't that supposed to be a plus - to get somebody
who understands your problems?"
According to Mr. Keller and state investigators, the Coopers prematurely switched him out of
an insurance policy and into a fixed indexed annuity. That allegedly
earned the Coopers a commission of $3,519 while costing Mr. Keller roughly $27,000 in insurance
death benefits and a surrender penalty of more than $1,100.
Mr. Keller says he realized something had gone wrong when he noticed that his insurance death
benefit had dropped to less than $5,000. Even so, Mr. Keller says he "felt bad about pushing this"
with investigators.
As with many senior-on-senior fraud cases, a sense of loyalty kept the alleged victims from complaining
even after losses were sustained. Illinois investigators say they had to subpoena many of the alleged
victims to gather information from them. Mr. Kelty, the Coopers' attorney, says that during testimony
in the hearing, "to a person, they testified that they were satisfied, fully informed and have no
complaints whatsoever against the Coopers."
"We were feeling guilty," recalls Mr. Keller about raising his complaint in the first place.
"We thought we'd somehow started it."
It's hard to top priestly pedophilia (and bishops covering up for them) for sheer despicability,
but Bernie Madoff and his fellow hucksters are giving the men of clod a close run for their--and
our-- money.
Dan Gerstein, Forbes
==========
It's difficult to imagine a more self-serving sentence, as if all of the troubles of Wall Street
can be laid at the feet of one thief, who by the way, took all of his lucre from the rich. Don't
misunderstand me. Madoff is guilty and many a philanthropic Jew is pulling back from his or her
favorite charities which hurts the poor and middle
class here and abroad.
But the true culprits are unnamed. Gerstein doesn't even bother to elude to them -- insider tips,
free lunches, mingling with the wealthiest people alive are identifiable perks. Who would want to
lose them just so he could tell the truth?
The real thieves are the unnamed men and women who stole pension funds from the middle class,
stole the equity of their homes -- in most cases their largest if not only asset -- who brought
the world's economy to its knees, who are watching now as their own portfolios are growing because
even the largest and most patriotic (salute here please) corporations in American have laid off
workers -- hundreds of thousands of workers -- so that the Wall Street zombies can continue to suck
blood from America's working class.
Madoff is where he belongs. But where are the rest? Why have they escaped even a hearing on capitol
hill? We know who they are, we know what they did, and they are walking free, making record profits
because operating costs are down (no one is working), benefits are being taken away (in the name
of a healthcare plan that won't even start for four more years) and they are squeezing more and
more from the pockets of the poor with claims of high costs.
GE's costs were so high they didn't have to pay taxes last year. All their expenses went to running
the company, paying their shareholders and throwing exorbitant wages to those at the top. Of course,
they were only able to make a few dollars in the countries where the taxes are low to nil.
What we need is a new financial game. We need for people to get off the grid -- in every conceivable
way. We need for people to learn to cooperate -- it can't be done on the fly or under pressure.
It's more difficult than you can imagine.
On Dec 4, 7:11 pm, Doc Holliday <dokholli...@bellsouth.net>
wrote:
I ain't totally over yet and "folks" are getting the real story and > musing over and over the
reality of the situation and not the propaganda of the fat cats and their MSM what is becoming
more and more distasteful as news, What is being spoken as the truth because so > many now have
experienced it or beginning to feel the effects of this wash of shit that has flooded across
our nation through and amongst themselves over the last decade of more folks than not have had
in one way or the other received a royal screwing of which they didn't not deserve by the fat
cats via the complicity of a collective elitist comradeship of our government. It seems more
and more "we" are getting damned tired of it!
... ... ...
You can eke out a bit more by moving money to smaller banks that offer the
new breed of high-interest checking accounts that
require you to use your debit card a lot and to sign for purchases. This may require giving up access
to a branch, however, which some people are unwilling or unable to do.
Or you can try to earn more on the rewards side, through a bank like PerkStreet or
a savings plan like SmartyPig's,
which also requires you to spend money to get the biggest possible return.
My tactic is to keep spare cash at BankDirect, an online bank that
pays 100 American Airlines frequent-flier
miles each month for every $1,000 I have on deposit. There's a bit of risk here because you
need to redeem the miles to get any return.
But the yields can easily run 2 percent or more depending on the retail price of the flights
or premium-class upgrades you redeem your miles for. (The miles have also helped me qualify for
lifetime platinum status on the airline, which I will hit in the next couple of days.)
Plus, you pay no taxes on the miles you get; that's not the case for
interest you earn.
Yeah, the miles aren't worth much, and the 5 percent interest rates
on savings accounts from several years ago would certainly be preferable. But at least you can fly
to a beach free and worry there about when you'll be able to do a little better.
3 Reasons Now is Not the Time to Speculate in Stocks Written by Staff Writers When it's sunny,
you head outside without a thought, but when it's rainy, you look for your umbrella.
When the markets are trending up, you don't worry about your investments much, but when the markets
turn bearish … what do you do?
In an interview with Jeff Sommer of The New York Times in July 2010, Robert Prechter said that
he is convinced that a "market decline of staggering proportions" is
on its way, and that individual investors should get out of the market and into cash
and cash equivalents, such as Treasury bills.
"I'm saying: 'Winter is coming. Buy a coat,'" Prechter said. "Other people are advising people
to stay naked. If I'm wrong, you're not hurt. If they're wrong, you're dead. It's pretty benign
advice to opt for safety for a while."
Read some of the latest nuggets directly from Elliott Wave International President Robert Prechter's
desk - FREE. Click here to download a free report packed with recent analysis and forecasts from
Prechter's Elliott Wave Theorist.
For more specific advice as to why now is not the right time to speculate in stocks, here's an
excerpt from chapter 20 of Prechter's business best-selling book,Conquer the Crash - You Can Survive
and Prosper in a Deflationary Depression, 2nd edition 2009.
* * * * *
Should You Speculate in Stocks?
Perhaps the number one precaution to take at the start of a deflationary crash is to make sure
that your investment capital is not invested "long" in stocks, stock mutual funds, stock index futures,
stock options or any other equity-based investment or speculation. That advice alone should be worth
the time you spent to read this book.
1. Stocks May Go to Near Zero
In 2000 and 2001, countless Internet stocks fell from $50 or $100 a share to near zero in a matter
of months. In 2001, Enron went from $85 to pennies a share in less than a year.
These are the early casualties of debt, leverage and incautious speculation. Countless investors,
including the managers of insurance companies, pension funds and mutual funds, express great confidence
that their "diverse holdings" will keep major portfolio risk at bay.
Aside from piles of questionable debt, what are those diverse holdings? Stocks, stocks and more
stocks. Despite current optimism that the bull market is back, there will be many more casualties
to come when stock prices turn back down again.
2. Stock Mutual Funds Will Fall, Too
Not only will many stocks fall 90 to 100 percent, but so will a substantial number of stock mutual
funds, which cannot exit large equity positions without depressing prices and which have the added
burden to you of one percent (or more) annual management fees.
The good news is that we will finally find out who the few truly good fund managers are and which
ones were heroes by virtue of being around for a bull market.
3. The Fed Won't Be Able To Save the Stock Market
Don't presume that the Fed will rescue the stock market, either. In theory, the Fed could declare
a support price for certain stocks, but which ones? And how much money would it commit to buying
them?
If the Fed were actually to buy equities or stock-index futures, the temporary result might be
a brief rally, but the ultimate result would be a collapse in the value of the Fed's own assets
when the market turned back down, making the Fed look foolish and compromising its primary goals,
as cited in Chapter 13.
It wouldn't want to keep repeating that experience. The bankers' pools of 1929 gave up on this
strategy, and so will the Fed if it tries it.
"the investment answer" for today's markets - does not preserve your capital, November 28,
2010
By Hugo Belgien - See all my reviewsAmazon Verified Purchase(What's this?)
This review is from: The Investment Answer (Kindle Edition)
The book "The investment answer" doesn't tell you how to invest self-directed, but what you
should tell your fee-only advisor. The authors are (rightly) against managed funds but do not
clearly spell out that you should buy ETFs and what their advantages are. The authors are for
diversification (a la Markowitz) but do not point out that diversification did not help you
much in the last bear market. The authors are for buy-and-hold (a diversified portfolio) with
some annual readjustment, but buy-and-hold does not work in a major bear market --- you would
have been better off to cut your losses with e.g. stop-loss orders, selling all holdings which
are e.g. below their 200 dma, or using relative strength.
Conclusion: This book is NOT "the investment answer" for today's markets; it does
not address e.g. the question: How to preserve your capital. It's not worth the $ 7.99 (for
a kindle version).
There are no visible picket signs on
Wall Street. The
U.S. stock market- the world's biggest when measured by the market value of the companies that
trade here - still opens for business every trading day. And the 6 o'clock news still lets everyone
know if the Dow finishes the day up or down.
Yet, increasingly, investors on Main Street are not playing the stock market game with confidence
like they used to, mainly because the game of making money has gotten tougher and more volatile
since the financial crisis. Retail investors are buying fewer stocks.
They are paring back on stocks and stock funds they already own. Instead, they're moving into safer
investments, like cash and bonds.
"Investors are on strike," says Axel Merk, president and chief investment officer at Merk Mutual
Funds.
The fear on Wall Street is that this buyer's strike will linger for years, resulting in a lost
generation of investors similar to what occurred after steep stock declines in the 1930s during
the Great
Depression and early 1970s, a recessionary time punctuated by high inflation.
Consider Stacy Harris, 58, from
Nashville. While she's not totally out of the stock market, her cash stash has ballooned to
42% of her portfolio. That's twice as big as her slimmed-down stock holdings, now just 21% of her
investment pie.
"I'm sitting on an uncomfortable amount of cash," says Harris, editor of Stacy's Music Row
Report, an online publication that blogs about the country music scene. "Until things get better,
I'm not putting any more money into stocks."
Another member of the shaken-investor class is Bill Woodward of Pittsburgh. He was once an avid
stock investor. A decade ago, he used to troll stock chat rooms on the Internet in search of hot
stocks. Now, his portfolio is down to three holdings: a dividend-paying oil tanker company, a fund
that bets against the real estate market and a penny stock he calls his "lottery ticket."
He couldn't care less about the nearly 5,000 other stocks that trade on major U.S. exchanges.
"I have no interest in coming back," says Woodward, 60, who works at a local employment center that
helps people find jobs. His distrust of market regulators and his belief that they don't protect
individual investors are the top reasons for his anti-stock stance.
It's hip to be conservative
After back-to-back stock market busts in a 10-year span in the 2000s, cocktail party chatter
that once centered around get-rich-quick stocks has given way to sober chats about ways to reduce
risk, the best places to stash cash and why it makes sense to buy boring bonds instead of sexy stocks.
Days like Wednesday, when the Dow skyrocketed 255 points, are offset by months like August, when
the Dow suffered its worst August drop since 2001.
Yanking cash out of the stock market for fear of losing it has been the trade of choice for Main
Street investors since the start of 2009, when the fallout from the financial crisis made it clear
stock prices don't always go up.
"The lost generation is not coming back," says Michael Panzner, who writes the blog Financial
Armageddon.
Recent statistics paint a picture of retail investors in retreat. Nothing illustrates Main Street
investors' diminished appetite for stocks more than the dollars flowing in and out of mutual funds.
Since the beginning of 2008, stock mutual funds have suffered cash outflows totaling roughly $245
billion. In contrast, bond mutual funds have enjoyed inflows of close to $616 billion, according
to data from the
Investment
Company Institute, a mutual fund industry trade group. Similarly, prior to the financial meltdown
two years ago, 401(k) investors had seven of every 10 dollars of their retirement money invested
in stocks, but that is back below 60%, according to
Hewitt Associates.
Anti-stock sentiment is also evident in the soon-to-be-released 2010
Scottrade American Investor Study.
While 73% said they still believe the stock market will produce long-term gains, 65% of investors
polled said they were "very" or "somewhat stressed" about their current financial situation. The
"economy" was the No. 1 source of that stress. Nearly one of three investors (31%) said they were
"investing less money" or "investing more conservatively." The most conservative investors of all:
Gen Y (18 to 28 years old) and Gen Xers (29-45), the study found.
Bad times for stocks
It's hard to blame individual investors for their growing skittishness toward stocks. They've
endured not one but two of the worst stock market downturns in history - within a short 10-year
span. The dot-com-inspired stock bubble burst in early 2000, knocking the broad stock market, as
measured by the Standard & Poor's 500-stock index, down 49.1% by the time the bear market ended
in 2002. That was followed by the 56.8% plunge from 2007-09, when a credit-driven bubble in stocks,
real estate and many other assets ended badly.
As a result of the back-to-back bear markets, the Dow Jones industrial average is still trading
just 270 points above the 10,000 level, a milestone it first attained to great fanfare back in 1999.
Since the Oct. 9, 2007, high, the stock market's value has declined by $5.6 trillion, according
to Wilshire Associates. "Investors are saying, 'Why would I want to put money into stocks? I'm still
losing money,' " says Charles Biderman, director of research at TrimTabs, a firm that tracks fund
cash flows.
Panzner ticks off three other key reasons Main Street investors have suddenly turned very risk-averse:
•Investors are trying to make sense of an unprecedented economic
earthquake that has left them feeling blindsided and unsure about their economic futures
like never before. Nearly 15 million are unemployed, and many have seen the value of their homes
- typically their biggest investment - crater.
•There is a feeling among investors, Panzner says, that the investment "game is rigged" in
favor of professional traders and money managers. The belief that the playing field is not level
has created intense feelings of animosity toward Wall Street.
•The aging of the Baby Boomers has created a demographic headwind for the stock market."More
people will be looking to draw down their savings," Panzner says. "As people get older, they
will want to take less risk and protect their nest eggs."
And there's no guarantee that stocks will rebound strongly after
major bear markets, as they have tended to do in the past. "Markets don't always
go up," Merk warns. For proof, he points to the Nikkei 225, Japan's main blue-chip stock index.
The index peaked on Dec. 29, 1989, at 38,915.87 before a multiyear asset bubble burst. On Wednesday,
more than 20 years later, the Nikkei closed at 8927.02 - 77.1% below its record high.
Fears of another super swoon are what keep Ron Munn, a 69-year-old retiree from Green Valley,
Ariz., up at night.
"As part of the 'Lost Generation,' now is certainly not the time to jump back in the market and
possibly become part of the 'Gone Forever Generation,' " Munn says in an e-mail. "Keeping your powder
dry with safe cash and bond investments makes sense under the current economic and political situation."
What will get investors back?
Despite all the doom and gloom, not everyone on Wall Street believes that investors will stay
away from the stock market for years, if not decades.
"A lost generation? I don't buy it," says Jim Paulsen, chief investment strategist at Wells Capital
Management. He says investors always say they hate stocks and that they "don't want to touch a stock"
after a sharp downdraft. They said it after the 1973-74 bear market, they said it after the
dot-com crash and they are
saying it now. "I've heard this all before," he says.
What will bring the Main Street masses back to Wall Street?
Jobs. When hiring picks up, so will consumer and investor confidence. With that will
come higher stock prices, Paulsen says."At this point we have ourselves in such a panic that
the only tonic to calm mind-sets is you will need two, three and even four months in a row of
200,000-plus jobs created," Paulsen says. "If we get that, you could see a fairly violent move
up in interest rates and stocks. But if jobs don't show, the depression mentality is going to
grow."
A new bull market. Animal spirits will return when the stock market starts heading
higher and your neighbor starts bragging about all the money she made in the market, says
Michael Farr of money management
firm Farr Miller & Washington. More days like Wednesday, when stocks soared 3%, are needed."We
need a bull market somewhere in something," Farr says. "As soon as the guy next door is making
a buck, investors' curiosity will be piqued," and they will regain their courage and start investing
in stocks again.To drive home his point, he uses a casino analogy: "The reason slot machines
have ringing bells and flashing lights" to announce a winner is that it "keeps everyone else
pulling their handles. You don't have to be the one that wins, you just have to know someone
is winning."
Clarity over government policy. All the question marks on government policy, ranging
from taxes to financial regulation, are stifling business decision-making and innovation, Merk
argues."A key ingredient to functioning markets is clarity," Merk says. "You need to know what
the government is up to. But we just don't have that. Investors will come back to the business
of investing when investment can take place based on analysis of businesses, rather than anticipating
the next government intervention."
A resurgence of dividends. In a world where yield or income is gaining popularity
at the same time that yields on government bonds are sinking to or near record lows, investors
will be more apt to return to stocks if companies upped their dividend payouts, argues Jason
Trennert of Strategas Research Partners."Retail investors have been traumatized by two 50% declines
in stocks in the past 10 years, serial misdeeds on the part of Corporate America and Wall Street,
and for anyone left, the flash crash," he says. "I've come to the conclusion that only dividends
could immediately restore some confidence on the part of the investing public in stocks."
Single-digit P-Es. It might take a scary stock market swoon that knocks the price-to-earnings
ratio back to single-digits to create a truly good entry point for investors, Panzner warns.
In prior bear markets, stocks bottomed out in October 1974 at a P-E of 7 and in August 1982
at less than 8, InvesTech Research data show. Both lows set the market up for big gains over
multiyear periods, including the 18-year bull run from 1982 to 2000. The S&P 500's current P-E,
based on projected earnings over the next four quarters, is 12.7, according to Thomson
Reuters. The long-term P-E is roughly 15. Getting back to single-digit P-Es is "the best
prospect for getting a sustainable recovery," Panzner says. "Stocks have to get so cheap, so
washed out and so hated," the only direction is up.
There's one more thing investors like Harris and Woodward would like to see before they would
feel comfortable investing aggressively in stocks again: a stiff crackdown by the
Securities and Exchange Commission on unscrupulous Wall Street types that prey on individual
investors.
Says Woodward: "What would bring me back? Show me that the
SEC is back to protecting the little guy."
Adds Harris: "I don't think we want to be in a position again where we have a guy like Bernie
Madoff." Madoff orchestrated the biggest Ponzi scheme in history, robbing the financial futures
of countless people.
For now, "Everyone is thinking more conservatively," Harris says. "They want to make sure their
money is there when they need it."
montanavet3:
"Could investors fleeing stocks become a lost generation?" ++++++++++++++++ Take put the
word "investors" and plug in "gambling addicts", and I say good riddance. But the stock market
"investing/gambling" firms suck in new suckers every day with their slick TV ad campaigns ....
now you even have them pushing AMATURES into CURRENCY trading .....
Sheep to slaughter ..... and the "killers'' laugh all the way to the bank!
John Pombrio:
Y'see, the problem is right there in the story. Stock Price=Profit. Sorry, not true. The
price of a share of stock was NEVER meant to be "profitable". The COMPANY was to make the profits
and DISTRIBUTE them to the shareholders as DIVIDENDS and with the shareholders helping to cover
the risk of doing business. This core idea has been well and truly perverted in the past 20
years. It was the greed and the media that invented the stock market as a "Get Rich Quick" scheme
when some of the internet and computer companies rang up such astounding profits in such a short
time. Microsoft, Yahoo, Google. All of a sudden, the news started throwing the DOW in our face
and how much profit some companies and investors were making. Thus started the great stampede
to the stock market. Even boring companies were now faced with "WHERE'S MY PROFIT?" from their
shareholders. Well, profits did rise by slashing headcount, acquiring other companies, or perhaps
moving expenses to another year. CEO's were given huge incentives to rise the stock price by
outrageous bribes of "options". Was all this "profit" good for the COMPANY, its CUSTOMERS, or
the SHAREHOLDERS? You wonder why so many companies are now floundering with no trained people,
few good customers, and a flat stock price. Will the market recover? I cannot see that happening
for 10-15 years. Why? The US baby boomers are the richest generation that has ever lived on
this planet. They have been burned badly 4 times in less than 10 years, 2 stock crashes, a housing
crash, and finally a staggering loss of jobs. Like my parents who lived through the depression,
that is a truly bitter lesson that they will remember for the rest of their lives. It will not
be until an entirely new generation that will regard what we have been through as "history"
that will start investing again. Hopefully, with a new maturity at the risks involved in investing
and with an awareness that a good company to invest in is one that rewards the stockholders
with dividends, not hyped up stock prices.
Ontopofit:
"His distrust of market regulators and his belief that they don't protect individual investors
are the top reasons for his anti-stock stance."
Exactly, why put your money where a den of theives live?
Jackov
:highlySkilled (0 friends, send message) wrote: 29m ago
The problem is that there is no longer a stock market to invest in.... what we have is wall
street insiders racing Ferraris on a track they designed (directly connected hi frequency trading
robots) and keep messing with in a game that has nothing and I mean nothing to do with investment
or reasearch, and the rest of the so called non Wall Street "investors" are subjected to heavy
marketing to come rent a Ford Pinto to race blindfold.
In short investment is the wrong name, Wall St is a fixed game for insiders to PLAY using
outsider's money.
=============
You can invest directly in businesses or franchises--laundrymats, liquor stores, etc.
RidingHigh:
The Stock Market was initially used for companies to raise capital in exchange for ownership
- it gradually turned into a gambling parlor.
topdawg:
It's really pretty simple. The average investor on Main Street feels like he's been duped
by the Wall Streeters. We play one game, while the big cats on Wall Street play an entirely
different game where they know and make the rules. We lose, they win.
As the old saying goes, "Fool me once, shame on me ..................... "
larry elford:
the industry has earned it's "reputational bankruptcy" very well.
It will be safe to invest once again when those who tried to steal our economy are jailed,
and those regulators who helped them, (or simply looked the other way) are also jailed for failure
to protect the public interest. Until then, white collar crime is simply the best paying occupation
in the world.
2 minute video on how to become an investment advisor (in canada) 4 minute video on how to
commit the perfect crime BREACH OF TRUST, The Unique Violence of White Collar Crime, by a twenty
year veteran broker turned whistleblower
Anyone who can use Excel would agree with "Savers shouldn't necessarily expect to be able to live
just off their income in times when interest rates are low. It may make sense for them to eat into their
capital a bit.". Let's say that you are 60 years old male with more major chronic deseases. That's assume
that you can last till 90 (very few males, and females managed to do this). Or if you are in perfect
health conditions and all your relatives are centinaries you can raise it to 95. Now assume 3% a year
average return on your funds. You probably already know pretty well what your Social security is. It's
prudent to take it at 70. Let's assume that it is 2K a month. forget about inflation: deterioration
of your physical conditions will limit your needs faster then inflation. Everything else is simple.
Older households could afford to suffer because they had benefited from previous property
price rises, Charles Bean, the deputy governor, suggested.
They should "not expect" to live off interest, he added, admitting
that low returns were part of a strategy.
His remarks are likely to infuriate savers, who are among the biggest victims of the recession.
About five million retired people are thought to rely on the interest earned by their nest-eggs.
But almost all savings accounts now pay less than inflation.
The typical savings rate has fallen from more than 2.8 per cent before the financial crisis
to 0.23 per cent last month.
Mr Bean said he "fully sympathised". But he continued:
"Savers shouldn't necessarily expect to be able to live just
off their income in times when interest rates are low. It may make sense for them to eat
into their capital a bit."
He added: "Very often older households have actually benefited from the fact that they've
seen capital gains on their houses."
Selected Comments
charles 2:
There is no god-given right to be a rentier, old or young.
Furthermore, a lot of the savers that are today crying murder would not have been in a position
to save anything had the economy not gone into a credit frenzy for the last twenty to thirty
years. The principal they are forced to eat now is simply the couterparty
of the undeserved income (be it from capital or labor) that they received in the past.
The public in western countries is in denial when it thinks that it is ONLY bankers who were
overpaid.
Yves Smith:
With all due respect, I believe you are projecting the US love affair with stocks onto the
British. If you were a fixed income investor, the story was unduly low risk spreads, remember?
That's why everyone went so far out on the risk curve.
You are assuming ordinary people who are now retired in the UK were taking on a lot of extra
risk knowingly. Not sure they were going out on the wild side in terms of risk assumption, and
certainly not understanding the tradeoff if they did.
Indeed, your "rentier" goes even further and suggests these savers never worked but were
members of the idle rich. Huh? Most people who are retired and have a stash have saved it out
of labor income.
charles 2:
Yes, and the bankers in the city, their servants, and the people that produced their luxury
goods, and others also gathered their savings as "labor income" !
Consider for instance a craftsman working for say, Hermes, would he have had a job with the
credit bubble and the extension of the wealthy class that came with it ? Same thing with the
Mercedes builder, etc…
When credit excesses having lasted for so long, very few workers
can claim with certainty that 100% of their labor income could have existed in a sustainable
economy. Remember that it is the marginal income that is the source of savings
: if I am saving 30% of my income but in reality I should be paid 15%, it means that 50% of
my saving should not exist.
charles 2:
I meant : " if I am saving 30% of my income but in reality I should be paid 15% less, it
means that 50% of my savings should not exist."
i on the ball patriot :
charles 2 says; "There is no god-given right to be a rentier, old or young."
This is victim bashing!
There is no god given right for the wealthy ruling elite to control the destiny of the many,
and make that destiny dependent on "rentier" crumbs and the misdirection of the use of resources
in the production of shit goods for the benefit of the wealthy.
Further, there is no god given right for the wealthy ruling elite to then cut that crumb supply
when those same people are older.
Had the wealthy ruling elite pigs at the top not misdirected the use of resources and created
the enslaving credit bubbles - read intentional debt traps - the people may very well have created
a more sustainable future for themselves.
Your point is good that the public in western countries have 'benefited' to some degree by
the excesses, but it deflects from the fact that some pigs are more equal than others in creating
and controlling the conditions in which those false 'benefits' were created.
The public, in western countries and in all other countries on the planet, is in denial when
it thinks that it has a say in its governments. That is the problem.
Deception is the strongest political force on the planet.
Banker:
>>When credit excesses having lasted for so long, very few workers can claim with certainty
that 100% of their labor income could have existed in a sustainable economy.
You could have been right, if the the "credit excesses" had spread their wealth around in
proportion. It is absolutely not so.
The gains during the boom disproportionately went to a small group. The losses during the
bust are spread around.
The entire Greenspan "pump-n-dump" scheme is a giant wealth transfer upwards. During the
pump, the wealthy get almost all the benefits. During the dump, they lose less.
This is exactly like saying Bear Strearn's Cayne lost money and was punished by that. Hello?
Cayne amassed a few hundred millions, and lost most of it. He still comes out of the pump and
dump with about 100 million. Your average pensioner earned next
to nothing from the pump, and now is supposed to lose what he has.
Now if you were going to make another kind of argument – that savings are illusory, or that
you can't take it with you,
F. Beard :
A good book on the history of money and powerful ammunition against the gold-bugs is The
Lost Science of Money by Stephan Zarlenga
Tao Jonesing:
One of the primary reasons that FDR was able to accomplish many of the New Deal reforms,
including those that flowed from the Pecora Commission (e.g., creation of the SEC and the Galss-Steagall
Act) is he had "inside help" from members of the rentier class who realized that the system
that had benefitted them would inevitably consume them, after it got done consuming "the little
people."
In the absence of a modern day Pecora Commission, the kind of hubris displayed by the Bank
of England is our best hope of waking the ire and passions of members of the economic elite,
whose wealth translates into political power.
By the way, in general, I refuse to think of elderly people as "rentiers," particularly if
what they've saved came from the fruits of their labor. That being said, if they've saved enough
to live off the interest in a savings account, it's hard to imagine that all of that money came
from being a middle-class working stiff. Regardless, we shouldn't be penalizing savers to reward
banksters.
r cohn:
There are huge negative consequences of the current very low interest rate policy. Among
them are:
1.much higher poverty rates among older people
2.Much lower pensions even for defined benefit programs. It is absolutely inevitable that
public pensions will have to change radically either voluntarily or through the court system.
3. accelerated pressure on housing prices with all of the resulting negative feedbacks.
4 depressionary spending patterns for decades in retirement areas like FLA. and AZ 5.lower
wages and less availibilty of jobs for younger workers.
For those abhoring the rentier class, you have to realize that the ZIRP benefits mainly the
banks. Basically we have a policy where everyone is subsidizing the banks; savers directly and
consumers by fewer jobs and lower rates of investment
Tao Jonesing:
Another way to look at it: having savings does not make you a "rentier."
For example, my 13 year old daughter has $350 in a savings account. She ain't a rentier by
any stretch of the imagination.
In the face of QE, the Fed's ZIRP seems aimed to encourage savers to chase higher yield by
speculating in the secondary markets. Financial specualtion is the
hallmark of the rentier, not savings that earns interest as part of the essential
bargain of commercial banking.
Ed:
One blogger, at the site "Early Warning", had an amazing post up last week which argued,
in effect, that of course there are going to be no investments with returns higher than inflation
in the future. That means that a dollar you save today will be worth exactly that, a dollar,
when you retire so you better be saving at least 50% of your income.
Of course, if a dollar I save today is worth exactly that, a dollar, thirty years from now
this means I shouldn't be saving anything. Because I may not be alive in thirty years. It makes
no sense for a 40 year old to not consume to support a 70 year old who may not exist, if the
choice is spending exactly the same amount on the 40 year old and the 70 year old. Not to mention
the risk of losing the saved dollar anyway.
An economy that has effectively zero interest rates, with only
bubble investments available, is an economy that is not friendly to savings.
If this is what we are going to have, expect no one to save for their old age.
But the implications go further, because as "structural unemployment" creeps up, there is
an increased likelihood that an old person may not be able to work even if he wants to and is
physically capable of doing so. So no income.
For an individual, I don't have any answer other than muddling through. As a society, there
are hard questions to be asked why wealth is draining from the middle class and working class
and how long this will last. Plus there is the question of managing the transition. Once the
pie is no longer getting bigger, the question of who gets the slices becomes much more critical.
Tortoise:
Look at the issue in a logical and unemotional way: Is it possible that savings only accumulate?
Is it not more rationale that, ON THE AVERAGE, people save during their productive years so
that they can live while they are not working?
Those who invested in stocks, bonds, or real estate between 1982
and 2000 did marvelously and many may consider themselves very smart - it is
human psychology to attribute misfortunes to bad luck and successes to our own genius. T
Those who graduate from college nowadays face a much tougher world where there is a lot of
wealth in other people's bank accounts - and these people, whether obscenely rich or just comfortable
- believe that they should keep it in perpetuity for themselves and their trust funds… Something
has to give…
1. Make all your mistakes early in life: The more tough lessons you learn early on, the
fewer (bigger) errors you make later. A common mistake of all young investors is to be too trusting
with brokers, analysts, and newsletters who are trying to sell you something.
My interpretation: be very conservative
as you approach retirement, beware "get rish quick" schemes' and high return investments. Often
one-two percents of additional return increase the risk ten times.
2. Always make your living doing something you enjoy: Devote your full intensity for success
over the long-term.
My interpretation: Ability to spend your
time on things that you like most is almost as important if not more then you financial success.
3. Be intellectually competitive: Do constant research on subjects that make you
money. Plow through the data so as to be able to sense a major change coming in the macro situation.
My interpretation: never believe one word
of Wall Street sharks and MSM. Try to read a few good books and form coherent conservative investment
strategy. At least read my notes on 401K investing as it is result of substantial amount of efforts
of understands the situation after being fleeced ;-)
4. Make good decisions even with incomplete information: Investors never have all the
data they need before they put their money at risk. Investing is all about decision-making with
imperfect information. You will never have all the info you need. What matters is what you do with
the information you have. Do your homework and focus on the facts that matter most in any investing
situation.
5. Always trust your intuition: Intuition is more than just a hunch - it resembles a hidden
supercomputer in the mind that you're not even aware is there. It can help you do the right thing
at the right time if you give it a chance. Over time, your own trading experience will help develop
your intuition so that major pitfalls can be avoided.
6. Don't make small investments: You only have so much time and energy so when you put
your money in play. So, if you're going to put money at risk, make sure the reward is high enough
to justify it.
My interpretation: This is profoundly wrong
advice for 401K investors (aka donors) unless you interpret it as advice to avoid excessive diversification
of your assets: for example using more then dozen of mutual funds/ETFs. Better to just bury money
in the back yard: they would return more than the S&P500 over the last decade ;-)
A new paper from the National Bureau of Economic Research by Jeffrey Wurgler, Nomura professor
of finance at New York University, discusses the potentially overlooked perils of indexing. More…
Here's one for a spirited debate.
A new paper from the National Bureau of Economic Research by Jeffrey Wurgler, Nomura professor
of finance at New York University, discusses the potentially overlooked perils of indexing.
The main point is that with ever increasing amounts of money tracking stock indices, stock performance
is being skewed based on whether shares sit in an index or not.
Wurgler calls it the "comovement and detachment effect".
And in Wurgler's opinion, it could all be having very under- appreciated side effects in equity
markets– especially on fundamentals. As he notes:
…these all stem from the finite ability of stock markets to absorb index-shaped demands for
stocks. Not unlike the life cycles of some other major financial innovations, the increasing
popularity of index-linked investing may well be reducing its ability to deliver its advertised
benefits while at the same time increasing its broader economic costs.
In Wurlger's estimates, as much as $8,000bn in countable products.
In terms of the effects, he finds:
On average, stocks that have been added to the S&P between 1990 and 2005 have increased almost
nine percent around the event, with the effect generally growing over time with Index fund assets.
6 Stocks deleted from the Index have tumbled by even more. Given that mechanical indexers must
trade 8.7% of shares outstanding in short order, and an even higher percentage in terms of the
free float, not to mention the significant buying associated with benchmarked active management-this
price jump is easy to understand and, perhaps, impressively modest.
--
If a one-time inclusion effect of a few percentage points were the end of the story, then
the overall impact of indexing on prices would be modest. But the inclusion effect is just the
beginning. The return pattern of the newly-included S&P 500 member changes magically and quickly.
It begins to move more closely with its 499 new neighbors and less closely with the rest of
the market. It is as if it has joined a new school of fish.
Figure 2 (right) illustrates the phenomenon. It is worth repeating that this pattern is occurring
in some of the largest and most liquid stocks in the world.7
In essence, he argues that the liquidity and market capitalisation of the stock becomes increasingly
irrelevant once it becomes a member of a major index.
And this is where the real economic impact starts, he says, because the motivations of index
investors are quite different to those of stock pickers, who do address the fundamentals.
As he explains:
The net flows into index-linked products are both large and not perfectly correlated with
other investors' trades. Indexers and index-product users are by definition pursuing different
strategies from those of the more active investor. They are less interested in keeping close
track of the relative valuations of index and non-index shares. Some are index arbitrageurs
or basis traders who care only about price parity between index derivatives and the underlying
stock portfolio. The upshot is that over time, the index members can slowly drift away from
the rest of the market, a phenomenon I will call "detachment."
Consequently, Wurgler says this detachment may lead to a significant price premium for S&P 500
Index members.
He also cites a paper by Morck and Yang from 2001 which matched stocks within indices as closely
as possible to a stock outside the index, with compatability defined in terms of size and industry.
The comparative valuations showed that S&P membership drove up a price premium in the order of
40 per cent.
Which leads him to conclude:
…the evidence is that stock prices are increasingly a function
not just of fundamentals but also of the happenstance of index membership. This
drives many of the negative consequences noted below.
As for those negative consequences, those are:
1) Bubbles and crashes.
The S&P 500 Index's visibility and the easy access to ETFs and Index funds facilitate a high
sensitivity of flows to returns.
-
Index membership also affects high-frequency risks, and may encourage trading activity that
exacerbates those risks. Dramatic examples include the crash of October 19, 1987 and the intraday
"flash crash" of May 6, 2010. SEC investigations have centered on S&P 500 derivatives in both
cases.
2) A confused risk-return relationship.
Whereas the basic proposition of asset pricing theory is the positive relationship between risk
and expected return, he says in stock markets, the proposition is incorrect:
High risk stocks have, on average, delivered lower returns than low risk stocks in both U.S.
markets and those around the world.
--
A $1 investment in a low beta portfolio in 1968 grows to $60.46 by 2008, while the same investment
in a high beta portfolio yields $3.77. The high beta portfolio actually has a negative real
return; the 2008 portfolio adjusted for inflation is worth 64 cents. Restricting to larger cap
stocks doesn't significantly change the qualitative picture.
And this he says is because the basic problem is that managers benchmarked against a simple index
will tend to favour high beta stocks – because the index is actually already outperforming versus
the fundamentals.
In other words, for a manager benchmarked against the market portfolio, a stock with an alpha
of 2% can be a candidate for underweighting. A similar argument shows that such a manager is
also incentivized to overweight a low or negative alpha, high beta stock, unless the alpha is
extremely negative.
rnm:
I'll download and read the paper in more detail, but judging by the excerpts it appears the
author makes sometimes overreaching statements, but a few general comments from being an index
fund PM:
- indexing will always represent a minority of any market and has little or no influence
on price discovery .. why? because there will always be investors who believe they have superior
insight .. even in the US where indexing has the highest level of peneration, it is still around
(at last check) 25% of equity market
- S&P500 is a large cap index, about 70% of US equity free float market cap .. an index by
definition should represent the broad investment opportunity set and I believe a better representation
of index investing is any broad market index such as the DJ Total Market Index .. there is the
least amount of turnover and trading activity from index change is very diffuse
- I believe there are issues with more narrowly defined indexes such as SP500, but from the
active, not index side .. as an index investor the only motivation to trade is capital flows
in or out of the fund or index change, either either from company imposed share capital changes
(corporate activity) or index driven changes, typically free float changes or asset inclusion
.. .. flows tend to be small relative to the size of the portfolio, so impact of trading on
price is not significant
- changes in indexes (such as MSCI or FTSE World/All-World) where the (foreign) investors
are not the primary participants in price discovery tend to exhibit mean reverting behaviour
follwing the change .. more importantly for indexes such as SP500, UKX, ASX200, index inclusion
changes the nature of the asset (and its cost of capital) and has permanent relvative performance
effect because it is now on the radar for all market participants, not just indexers .. every
index change sell-side brokers would ask our opinion on who would be included/dropped because
for the companies at the margin of inclusion it was always significant .. this may be more what
the author is referring to Report
bluesky:
just v suprised this debate does not get much airtime. 100% index tracking = nonsense. The two
big questions are what is the index tracking penetration level at
which significant distortions start to be seen and how does an active manager exploit the mispricing
opportunities
Interesting piece although I could not get access to the actual paper.
I have thought that index trackers could not really endure without
other forms of investment management forming a large (I don't know how large) part of the universe.
[Sept 17, 2010] Looking back at August events
Looks like a secular shift into fixed income. The average 401K investor sees the manipulation
of the equity markets by HFT and other insiders. Also after the last
ten-fifteen years of losses in S&P500 investments and like, return of principal is more important
than return on principal.
The situation looks like a lull before storm. Rising bonds create
an strange feeling of being of the deck of Titanic.
My feeling that another shakeout of the system is closer and closer be it European problems or
US problems. Exact timing is unpredictable. But to me things were just
look too smooth since end on 2009 despite unresolved structural problems on all levels...
Authorities are kicking can down the road. It works for a while.
But as Stein said "when something can't go on forever, it will stop."
So the next round of fleecing 401K investors might be just around the corner...
A hedge fund manager/friend of mine recently described forces driving the market as "barely manned
scrip cannons." Unfortunately, I believe it's a fairly accurate description of the HFT-ETF-Algo
driven cluster that used to be a market for financial assets. Individual investors have lost confidence,
voted with their feet, and left us with a single asset. It comes with a put option underwritten
by the federal government and its value fluctuates in response to barely manned scrip cannons.
That suggests that caution is necessary in using junk bonds for 401K portfolio...
In the monthly CMBS Market Trends update from Fitch we read that the hotel delinquency rate has
just passed the psychological 20% delinquency threshold for the first time. As of August, 20.80%
of all hotel-backed loans is in some stage of delinquency (up from 18.64% in July): that means that
one in five (and rising) hotel-backed loans will likely never be repaid and proceed to liquidation.
These and such are the ways, when underlying assets refuse to generate enough cash flow to satisfy
interest requirements, let along create equity value... Which should explain why publicly-traded
REITs are trading at near record highs.
For example, WisdomTree Investments Inc., founded with help from Jeremy Siegel, a Wharton School
professor, enjoyed great fanfare in 2006 when it launched a roster of ETFs that emphasized dividend-paying
stocks, which Prof. Siegel argued were the key to beating the market in the long run.
Yet WisdomTree LargeCap
Dividend Fund has posted negative average annual returns of 8% over the past three years, compared
with 6.7% declines for the
SPDR ETF, which
tracks the Standard & Poor's 500-stock index, and 6.3% declines for the
iShares Russell 3000
Index ETF.
Stashing cash in a bank is a better choice for investors than buying U.S. stocks, according to
Mark Cuban, a billionaire entrepreneur who owns the Dallas Mavericks basketball team.
"Something is going to give in this market," Cuban wrote about stocks
in an Aug. 20
posting on his Blog Maverick website. "I want to have as much capital available as possible
for when it happens."
I wrote a whole series of articles warning people about the stock market over the years.
You can see
them here. It's gotten worse. So I thought i would write some more about why you should probably
avoid putting any new money into the stock market…
If you haven't noticed, individuals are avoiding
the stock market in droves. There has been an
enormous exodus from equity based mutual funds. Why ? Because people buy stocks for only one
reason, they want them to go up in price. If you don't believe the market is going to go up. If
you don't believe you can find a greater fool to buy your stock, or the stock your funds own, why
would you buy either ? You wouldn't and people aren't.
... ... ...
I'm not saying you should get out of the stock market. What I am saying is that it is not a bad
thing to accumulate cash right now. Retention of capital is a good thing. Don't go chasing stocks.
Something is going to give in this market. Like I said, I dont know what it is, but I want to have
as much capital available as possible for when it happens.
Baron Rothschild said "the time to buy is when there is blood in the streets", Warren Buffet
said it differently when he said " you pay a very high price in the stock market for a cheery consensus"
This is the time to start saving for a "bloody day". There will be a time when capital regains
its scarcity. When it becomes more expensive. When it does , what do you want to have in as great
an amount as possible ? Capital.
So save your money. Pay off your credit cards. Put your money in the bank where it is insured.
Be patient. Get a good nights sleep knowing that your money is not going any where and just wait
till your capital is in demand and you get paid for it. When everyone is complaining about the money
they lost, you will be ready to step in and buy.
That is how fortunes are made. Having money when no one else does. And you can take that to the
bank !
The initial story is suspect as failing to notice $300K leaving account is not very probable. But
a stunning comment by Roman Berrt about about his disabled mother is a real eye-opener... However, current
technology may provide a practical solution. I get a email every time when more then, say, $100.00 is
withdrawn from my account.
Then the same officials who had directed me to keep the accounts open, disappeared - systematically,
for just over six months. When I sought to talk to the fraud department, I still could not get records
- including my own missing bank statements - even to see the full extent of my losses. The bank
officials who had directed me to keep my accounts open were unavailable at the branch - over the
course of many attempts to speak with them. The police at the Sixth Precinct needed to see the missing
documents, but even they could not force WaMu to hand over their - my - records. (WaMu's own internal
emails cite a $300,000 figure for my loss from fraud - I still did not have enough of my records
to identify the loss. It is illegal, by the way, to withhold from an account holder his or her own
records).
At eight months after the fraud discovery was confirmed - eight months of trying to communicate
with officials and a fraud department who were oddly unavailable or unresponsive - I received a
form letter from the WaMu Fraud Department advising me that according to the regulations, I had
had a six month window for taking action; and (since WaMu had played out the clock for eight months)
the letter asserted that I had waited 'too long' and my case was closed.
Inadvertently, subsequent to that, a WaMu bank official handed me the wrong file - wrong from
his point of view; illuminating from mine, and from any consumer's. It contained emails, some of
which you can see at
TheSmokingGun.com, from WaMu bank officials to one another - and including emails from and to
their counsel, PR department and and the fraud department - that take as given that stonewalling
a client with a fraud claim on the bank is standard practice; and yet
one freaked-out bank official in the emails warns his colleagues that if their mechanisms in this
regard became known, their practices would be all over the newspapers.
I was stunned by what seemed from the emails to be a systemic practice. Why would a bank want
to perpetuate bank fraud rather than fight it?
As I researched the issue and spoke to other consumer bank account holders whose accounts had
been corrupted by fraud, and to consumer advocates, I learned how systemic experiences such as mine
- and worse experiences - are becoming. I heard from consumers across
the country from all walks of life who had also been misdirected by their banks, or told that for
various technical reasons their corrupted accounts could not be closed, and then faced difficulty
reaching fraud departments or officials once the fraud was confirmed….
Customers assume that banking regulation and Congressional oversight means that if they find
fraud on their checking accounts, there is accountability - which is not in fact the case; strong
bank lobbyists translate into weak protections for consumers and, as
you can see from the emails, the bank's reasonable assumption that most customers in this situation
will not be able to hold them accountable. And indeed, since legal action is time-consuming
and expensive, most defrauded bank customers do eventually give up and go away…..a bank's fraud
investigation department is actually likely fraudulently representing itself as the customer's,
rather than solely the bank's, advocate. Banks such as WaMu - and now
Chase, which bought WaMu - expect such people to simply go away. They - and we -
should, rather, reach out to our elected representatives for wholesale reform - and put each and
every such case online, so consumers can see the worst offenders for themselves, and, with the power
of the internet and their own consumer choices, protect themselves and demand accountability.
Roman Berrt:
I am (sadly) not surprised. About three years ago my mother, invalid and confined to a hospital
bed in her home then and still, had a situation where a part-time
caregiver took her credit cards and some checks and spent thousands of dollars of my mother's
money in a matter of days. When the fraud was discovered and my sister and I
(on my mother's behalf) notified the card issuer and bank of the fraud, they launched an "investigation"
to determine if in fact fraud had occurred. It dragged on for months and at the end of that
time their initial finding was that no fraud had occurred and that my mother was responsible
for the charges and checks.
It took the services of a lawyer to bring the bank to its senses. In the end, it turned out
that they had video surveillance from ATM machines, point of purchase locations (like the local
MegaMart) and so on which showed the caregiver using the stolen card and checks but apparently
they knew they'd never recover the money from the caregiver and
decided that it would be easier to steamroll an old and frail woman who they thought would not
be in a position to fight back.
Let me re-state that concisely: The bank/card issuer knew positively
that fraud had occurred and yet chose to deny that fraud had occurred.
The banks are not our friends. They will do only what they are forced to do, and that included
complying with the law.
In the end, with the services of an attorney, the bank admitted that fraud had occurred,
reimbursed my mother and turned over the results of their investigation to the local DA who
in turn brought charges against the thief who in turn entered a plea of guilty and wound up
in jail (for a short time.) But like I said, we had to essentially force the issue.
If I and my sister had not intervened, they'd have stuck my mother
with the loss.
Bobbo:
Sometimes it helps if you cite UCC 4-406, the specific provision of the Uniform Commercial
Code that imposes liability on the bank.
The customer's duty is to diligently review statements and report any errors or fraud to
the bank. As long as the customer promptly notifies the bank, it's the bank's problem.
The bank has the burden of proving that the customer was not
sufficiently diligent, and that the losses could have been prevented if the customer had been
diligent. Here is the text:
She failed to notice $300k leaving her account over a period
of two years?! Sorry, I'm with the bank on this one. There is clearly fraud at play here but
it is the customer, not the bank.
smells like chapter 11
The law is plain - banks are not the fiduciaries of their depositors, the relationship is
one of creditor and debtor, with the bank being the debtor.
As the California Court of Appeal noted in 1991 in connection with a depositor's claims against
a bank arising out of unauthorized transfers:
Commercial Cotton 's [an older case] characterization of a bank-depositor relationship as
quasi-fiduciary is now inappropriate. While some aspects of that relationship may resemble aspects
of the insurer-insured relationship, there are equally marked differences between those relationships.
Since appending the quasi-fiduciary label to the ordinary bank-depositor relationship runs counter
to both pre- and post- Commercial Cotton authority, and such a label provides no analytical
framework against which to evaluate the propriety of extending tort remedies for contractual
breaches, we no longer approve the denomination of the ordinary bank-depositor relationship
as quasi-fiduciary in character. Copesky v. Superior Court, 229 Cal.App.3d 678, 280 Cal.Rptr.
338 (1991)
Should it be otherwise? Maybe so. The rule arose in the 1800's and was based upon a banking
systemn based entirely paper era where the ability of a third party to unlawfully extrract money
from one's account was far more difficult that it is in today's electronic world.
However, current technoogy may provide a practical solution.
I get a text everytime when even $1.00 is withdrawn from my account. The bank
provides this service for free. That service would probably helped stopped the fraud described
becuase almost anyone could pretty easily spot an unauthorized withdrawal within the 30 days
of the mailing of a statement as required by UCC 4406.
If someone can't manage this type of communication, such as an
elderly or otherwise impaired person, then maybe the rules need to be adjusted to take that
into account.
DownSouth:
What we are witnessing is the descent of the United States into third-world status, or into
a culture of distrust and noncooperation. I call it the Mexicanization of the United States.
And I'm not sure most Americans fully understand where this all leads. In Mexico, not even
the mid-level government authority (police chief, mayor, congressman) dare venture out into
public without an army of bodyguards. And even then they are frequently gunned down. The assassinations
are almost always marked up by the authorities as being motivated by "the drug war," but I suspect
the motivations are much more complex than that. Either way, you're talking about a decent into
a culture of violence and social chaos.
Dan Kahan in "The Logic of Reciprocity: Trust, Collective Action, and Law" describes how
the descent into perdition occurs:
A relatively small fraction of the population (consisting, perhaps, of those who've
been trained in neoclassical economics) consists of committed free-riders, who shirk no matter
what anyone else does, and another small fraction (consisting maybe those who've read too much
Kantian moral philosophy) of dedicated cooperators, who contribute no matter what. But most
individuals are reciprocators who cooperate conditionally on the willingness of others to contribute.
Moreover, some reciprocators are relatively intolerant: they bolt as soon as they observe anyone
else free-riding. Others are relatively tolerant, continuing to contribute even in the face
of what they see as relatively modest degree of defection. And a great many more--call them
neutral reciprocators--fall somewhere in between.
Under these circumstances, individuals are unlikely fully to overcome collective action problems
through reciprocity dynamics alone. No matter how cooperative the behavior of others, the committed
free-riders will always free-ride if they can get away with it. Indeed, their shirking could
easily provoke noncooperative behavior by the less tolerant reciprocators, whose defection in
turn risks inducing the neutral reciprocators to abandon ship, thereby prompting even the tolerant
reciprocators to throw in the towel, and so forth and so on. If this unfortunate chain reaction
takes place, a state of affairs once characterized by a reasonably high degree of cooperation
could tip decisively toward a noncooperative equilibrium in which only the angelic unconditional
cooperators are left contributing (probably futilely) to the relevant public good.
As Kayan goes on to explain, the only way to stop the descent into perdition is that free-riders
be punished:
Maximum cooperation, then, probably requires that reciprocity dynamics be supplemented
with appropriately tailored incentives--most likely in the form of penalties aimed specifically
at persistent free-riders. Although trust and reciprocity elicit cooperation from most players,
some coercive mechanism remains necessary for the small population of dedicated free-riders,
who continue to hold out in the face of widespread spontaneous cooperation, thereby depressing
the contributions made by relatively intolerant reciprocators. In the face of a credible penalty,
however, the committed free-riders fall into line.
In the United States, however, neoclassical economic theory and its ugly twin in the fields
biology and psychology--the New Atheism preached by the likes of Ayn Rand and Richard Dawkins--have
become so dominant that we no longer believe in punishment of financial or economic crimes,
or that altruistic punishers or strong reciprocators even exist. Everything is about the self,
about the individual and individual fitness, and the group and group fitness be damned.
But the altruistic punishers and strong reciprocators haven't gone away. They're still out
there, despite what the neoclassical economists and their New Atheist allies profess.
And as a criminal defense lawyer in San Antonio told me many years ago, when the authorities--the
legislature, law enforcement and the courts--don't deliver justice, what you get is street justice.
For more on the interaction of the individual and the group (the system or the culture) and
how it is the combination of these two that shapes behavior, there's this intriguing lecture
by Amanda Pustilnik.
Thank you Down South, excellent post and link. I obviously agree fully.
You call it the "Mexicanization" of America. I call this the "caveat emptorization" of America.
the caveat-emptor free-market ideologues are fools.
they laugh at financial victims as 'sheeple' and cloak themselves
in a "well they should have known better or at least learned the information". but life is simply
not long enough to learn everything.
I am a doctor and I laugh myself to pieces every time I hear them claim how smart they are
and how they are able to make "informed" medical decisions. I'm sure mainly based on GoogleHealth
web searches or whatever.
I have 11 years of medical training AFTER college (so not including all the pre med courses),
and yet I have to rely on my own doctor's recommendations since I am not an internist. I know
that I am in her hands and that in the end I have to trust her. I am not so foolish as to think
that I am "fully informed". I am a financial dork, so am relatively informed there. But what
about when I fix my car? or when I buy a house? or when I contract for legal services? In the
end, I have no choice but to TRUST my counterparty.
The caveat emptorization of America is breaking that trust, and thus eventually all commerce
beyond dark-ages technology will break down.
we have a very long road ahead since we can't even trust our fiduciary agents.
koshem:
Banks rely heavily on the enormous cost a defrauded customer lawsuit incurs on the defrauded.
This modern version of the Wild West takes the law out of the equation
and substitutes it with raw force the banks possess.
The government itself uses the same raw force when suit by its own employees. Government
agencies are, by and large, organized according to the 50s organizational practices (e.g. three
employees have a supervisor who enjoys almost absolute power and doesn't do anything but supervision).
As a result, abuse and harassment are prevalent. Many government employees injured by these
abuses cannot afford to complain and internal reform is impossible. Customers and employees
will be protected from abuse only when following the law will be enforced by swift and affordable
reaction to violation.
nilys:
It's a dog-eat-dog kind of climate out there. How what banks do is any different from what
other companies and individuals do?
Chances are you've read Napoleon Hill's classics, Think & Grow Rich and Success Through
Positive Mental Attitude, coauthored with insurance mogel Clement Stone. I did way back when
I was at Morgan Stanley in the 1970s. Today, the cult of "Positive Thinking" is very much alive.
Look in the business & finance shelves in Barnes and Noble. Still, in the wake of Wall Street's
2008 meltdown, many began questioning the magic of "PMA" as they saw their 401(k)s flatline.
It'll take more than PMA, mantras, affirmations and a pep talk from the "God Wants You To Be
Rich" crowd to rebuild your retirement nestegg. And it'll take a lot longer than you hope because
there's a "new normal" for the American mind as well as the lower market expectations Pimco's Bill
Gross sees ahead. And it's not about increasing your optimism level. The meltdown and bailouts left
us with enormous anger, frustration, skepticism and mass distrust of virtually everything, including
the Think & Grow Rich mantra: "Whatever the mind can conceive, it can achieve."
Barbara Ehrenreich, the author of Nickel and Dimed, a 2000 bestseller, captures this new
mindset in her diagnosis of America's troubled psyche. Macho male readers may prefer reading the
new books detailing Wall Street's collapse in blow-by-blow real-time TV-style dramas, like Sorkin's
Too Big To Fail. But if you want the psychological "new normal," step into Ehrenreich's office
where you'll dig deep and discover what's really going on in America's collective brain. Read Ehrenreich's
Bright-Sided: How the Relentless Promotion of Positive Thinking Has Undermined America.
Yes, "Positive Thinking" & "Happiness" Are Undermining America!
She pokes huge holes in the myth of positive thinking and its "new age" siblings - optimism,
self-esteem, positive psychology and the new "science of happiness" - that are undermining America
with false promises of an entitlement of prosperty. In BusinessWeek
Michelle Conlin focused on Ehrenreich's warning to future whistle-blowers in the chapter on "how
positive thinking destroyed the economy." Listen:
"In pre-subprime America, delivering the news that we were all burning down the house was
a career-ender. Nowhere was this more true than on Wall Street. One such martyr to the cause
of financial realism, Ehrenreich writes, was Mike Gelband, who ran the real estate division
of Lehman Brothers. Gelband warned Lehman CEO Dick Fuld about the real estate bubble in 2006.
'Fuld promptly fired the misfit, and two years later, Lehman went bankrupt'." Hmmm, isn't that
about the time Paulson left as Goldman's boss to become Treasury Secretary, later Bloomberg
News revealed that Paulson did warn the White House staff of a possible meltdown, still
they stayed in denial till it was too late.
Today we know Paulson and Fuld are just bit players in America's broader 'positive thinking'
drama, which far more pervasive than the guys at the top of Corporate Amercia and Wall Street. It
also infected home builders, realtors, mortgage brokers and millions of homebuyers were all hypnotized,
in denial about the risks of defaulting on mortgage payments in event of a down market.
Other critics are equally blunt. Writing in the
New York Times
Hanna Rosin says "I have waited my whole life for someone to write a book like Bright-Sided.
When I was a young child, my family moved to the United States from Israel, where churlishness is
a point of pride. As I walked around wearing what I considered a neutral expression, strangers would
often shout, 'What's the matter, honey? Smile!' as if visible cheerfulness were some kind of requirement
for citizenship," adding that "America's can-do optimism has hardened into a suffocating culture
of positivity that bears little relation to genuine hope or happiness."
She hesitated to go as far as Ehrenreich who saw a larger conspiracy using positive thinking
as "just another way for the conservative, corporate culture to wring the most out of its workers."
Others were not so reluctant:
"We're always being told that looking on the bright side is good for us, but now we see that
it's a great way to brush off poverty, disease, and unemployment, to rationalize an order where
all the rewards go to those on top," warns Thomas Frank, Wall Street Journal columnist
and author of The Wrecking Crew: How Conservatives Rule.
"The people who are sick or jobless - why, they just aren't thinking positively. They have no
one to blame but themselves," a mindset that echoes the ideologt of many conservatives, religious
fundamentalists and hard-core capitalists today.
Read Bright-Sided, it is a perfect psychological counterpoint to typical dramas like
When Giants Fall, Bad Money, Panic and Bailout Nation. You'll get a shrink's eye view
deep into America's collective brain. And by jarring you out of denial, it'll protect you from the
new bubble/bust cycle already blowing.
In
"Action
List for the Newly Unemployed," Charles offers some thoughtful advice for those who suddenly
find that the rose-colored recovery they've been promised by the experts in Washington and on Wall
Street is little more than a nightmarish illusion:
Here is a basic, common-sense list of actions to consider should your household income fall
drastically for any reason. It is based on the concepts I laid out in
Survival+.
Cut expenses immediately. Middle-class households seem especially prone to thinking
they can weather a radical drop in income without any real change in lifestyle until a new
job appears. Some even resort to pulling money out of IRAs and retirement accounts (and
paying penalties to do so) to maintain the lifestyle to which they have grown accustomed.
The better strategy is to perform immediate triage on the household
budget and eliminate all extraneous spending. Cut expenses in every way:
unplug zombie appliances and chargers, stop buying snacks and convenience food, stop going
to high-priced yuppie markets, borrow films from your library rather then rent them, etc.
Write the budget down and track your actual expenses monthly. Reward yourself with a
small treat if you stay within the new budget.
Look at your biggest expenses and reduce them to your "new normal" income by whatever
means are necessary. Typically, the biggest expenses are housing, healthcare and perhaps
education.
There is abundant evidence that when it comes to unsustainable mortgages, The
wealthy strategically default as a business decision. If a mortgage is completely out of
line with the household's reduced income, then the wealthy may have the right idea: it's
just business. Anyone considering defaulting on debt should of course do what the wealthy
do and consult experienced, licensed real estate and tax attorneys before making any decisions.
Some people have found that renting out rooms in their house allows them to align their
income with their mortgage costs. Either expenses must be cut or income increased, or both.
Hoping to find a high-paying job in the near future is not a strategy, it is just a form
of denial.
Many people we know who have seen their small business income suffer have already cancelled
their health insurance--$1,000+ a month is a lot of money. There may be professional organizations
which offer cheaper catastrophic-type insurance to members; those seeking to slash their
health insurance costs will have to look around for creative ways to do so.
Keep productive. All work has dignity. Base your pride in being productive, not
on your position or title. It is very easy to fall into feeling lousy about oneself when
unemployed, and the best way to counteract that natural diminishment is to stay productive.
Find an organization who needs your energy and skills; yes it is "working for free" but
you get value for your efforts: you keep your skills sharp and maybe add new ones, you have
self-worth by contributing to a worthy organization, and you network with others in ways
which might lead to some paying work.
One value we have lost in the U.S. is the inherent
value and dignity of all work. Too many people feel that all sorts of work is "beneath them."
No wonder, perhaps, given that our popular culture worships at the altar of narcissism,
self-glorification, indulgence and victimhood.
I personally consider picking up trash around my neighborhood a highly valuable form
of unpaid labor. There is nothing lowly about work performed with care, attention and impeccability.
Work to establish multiple sources of household income. If there are potentially
employable members of the household earning nothing, then get them out there making some
sort of income, even if it is informal, sporadic and low-paying. Something is better than
nothing.
Think like an employer. The attitude built up by 60 years of prosperity is generally
"give me a job and I'll do good work." That was no hindrance in decades of rising employment
but now there is a new reality: a thousand other people will also do good work when given
a job.
The key word here is "given." If you think like an employer, then you realize that
doing good work is the minimum baseline. You have to provide additional value that gives
the employer/supervisor some hope that you will bring a much-needed spark to the enterprise.
That could be a cheery, generous nature; it could be a can-do attitude of wanting to learn
new things. It could be a willingess to be flexible in hours worked.
This is not a suggestion to work for free for an enterprise which pays others to do similar
work. But even in this recessionary environment, all too many people expect to work according
to their own requirements rather than the needs of the enterprise. This difference in baseline
assumptions is most visible between native-born Americans and recent "green card" immigrants,
who typically will do whatever it takes to get ahead.
Beware the illusion of incremental change. Sustained effort brings results, but
within this common-sense approach is a pernicious trap I call The Seductive Illusion of
Incremental Change (May 13, 2008). Picking the "low hanging fruit" produces significant
improvements, and with that the illusion is formed: if we just keep doing what we've been
doing, little by little the problem will be chipped away to zero.
For example, in the
first round of household budget cuts, it's not too difficult to pare away a few hundred
dollars (travel, eating out, unlimited texting phone plans, etc.). That initial success
can lead to a false confidence that such cuts can be continued to the point that income
and expenses are actually aligned.
But incremental change often starts yielding diminishing returns. Are the changes being
made fundamental, or are they essentially tweaks to a system heading toward collapse?
Weight loss is an example many of us can relate to. A pound of human fat contains 3,500
calories. To lose a pound of fat you need to burn 3,500 calories in excess of what you eat.
To lose five pounds, you must burn 17,500 calories more than you eat. If you ramp up your
exercise program and burn 500 more calories a day, then in 35 days you will lose the five
pounds. Alternatively, you can cut 250 calories from your intake and expend 250 calories
in additional exercise.
This sort of sustained effort will produce fundamental results, but anything less will
not. Just sending out 10 resumes a week may not produce any job offers, and cutting marginal
expenses rather than making the deep cuts needed to re-align income and expenses will only
set aside the day of reckoning.
Preserve capital. Pulling money out of savings, IRAs and 401Ks to maintain a
giant mortgage or an unsustainable lifestyle is unwise; that savings might be needed down
the road for a really important emergency such as getting a knee replacement (paid in cash).
Given the likelihood that the stock market will eventually reflect the weakness of the
real economy, then keeping IRAs and 401K capital in cash rather than stock mutual funds
is a form of capital preservation.
Become fluid and flexible. Someone to whom various kinds of work is "beneath
them" is like the person who has no interest in learning new skills; their inflexibility
dooms them by reducing their adaptability. The living branch bends in the wind, the dead
branch snaps off.
Accept the new reality. If someone offers you four hours of work, take it. It
might lead to something else, and if not, at least you made a few bucks. Clinging to past
paradigms is a dead-end.
Get healthy, stay healthy. Losing status, income, security, etc. are wounds to
self-worth and the soul. Increased stress and anxiety are not healthy. Exercise and productive
work/learning are important ways to reduce stress and build a positive response to unwanted
change. Walk a quarter mile; when that's easy, walk a half-mile. When that's easy, walk
a mile, and so on. Seek respite and renewal in Nature. Your body is a temple; don't feed
it crap.
Think entrepreneurally. The basics of entrepreneurism are simple: seek out unfilled
needs, or offer a service/product which offers customers faster, better, cheaper. Identify
what you like doing even if it's unpaid (at first) and pursue that line.
According to the Fidelity study,
"Among the 11 million workers whose 401(k) plans are run by Fidelity, 11 percent took out a loan
from their plan during the 12 months ended June 30, the company said, up from 9 percent at the same
point a year earlier. By the end of the second quarter, plan participants with loans outstanding
against their 401(k) accounts had reached 22 percent versus 20 percent a year earlier."
We all like to keep up with "the Joneses", in at least some ways. But perhaps if we focused on
"What's Enough?" we would have a more balanced perspective.
What are your thoughts on this subject?
JimK:
One major way we struggle to keep up with the Jones's is with housing. Of course nowadays
that has turned into a bit of a joke, but that is a little glimmer of light that maybe we can
use to illumine other ways we chase rainbows.
Status is a common factor in much of our chasing. So we can look at 1) to what extent is
it smart to try to achieve whatever level of status; 2) to what extent will investing a lot
in stuff type X actually gain us status?
An important consideration in status is community of various types, especially family and
work team. We want our children to grow up happy and to have friends who will lead them in good
directions. Society does run on status, and high status opens up lots of valuable doors. But
there is also some paradox here - if a person is seen as a status seeker, they actually lose
status.
Does a big house really gain a person high status? It can make a person look like a status
seeker! And it can be so expensive that one cannot afford the car, schools, country club, clothes,
vacations, fitness club, etc. that can also earn status.
Just some thoughts here to seed discussion.
John T:
A neighbor of ours once said, "I will stay where I am and meet the Joneses coming back."
A worthwhile motto is, strive to be a good neighbor.
allenwrench:
We seldom question if more of a "good thing" is desirable for our supposed happiness in life.
The question, that Voluntary Simplicity helps answer, is the question of what IS enough so we
may be happy right now in the present.
A life of Voluntary Simplicity focuses our attention on the fact that "everything we own
take a little piece ~ peace of us." And in doing so, we can let go of peace and life destroying
rituals and possessions and replace them with a contented, satisfied and complete life in the
present moment instead of a life that revolves around the next thing to be acquired in hopes
of satisfying our insatiable appetites.
Greed is never satisfied by attainment - it is only satisfied by contentment. This orientation
of conscious thought to simplify ones life in whatever activity the individual is engaged in
is the foundation of success when it comes to simple living...mindfulness of our direction in
life.
Voluntary Simplicity is the tool I use to counter this desire to constantly expand my life
with more complexities, stress and problems and to live within my comfortable boundaries for
a serene life. I started with 12 step programs in 1974 to work on various addictions. As such,
I find a less complex life very useful to my addictions recovery work. The 12 Step programs
do actually touch on the VS topic, although it is not specifically called VS. Here are a couple
of quotes that can be taken as their efforts at applying VS to one's life.
........From page 76 of the 12 & 12 of Alcoholics Anonymous........
"The chief activator of our defects has been a self-centered fear-primarily that we would
lose something we already possessed or would fail to get something we demanded. Living upon
a basis of unsatisfied demands, we were in a state of continual disturbance and frustrations.
Therefore, no peace was to be had unless we could find a means of reducing these demands."
I cannot tell you that I have no 'unsatisfied demands' in my life; but, I will say that since
joining the simple living movent my unsatisfied demands can now be counted on one hand, whereas
in my prior life, I needed a notebook to record them all.
........Taken from pages 122-125 of the 12 & 12 of Alcoholics Anonymous.......
"In later life he (the addict) finds that real happiness is not to be found in just trying
to be a number one man, or even a first-rater in the heartbreaking struggle for money, romance,
or self-importance. He learns that he can be content as long as he plays well whatever cards
life deal him. He's still ambitious, but not absurdly so, because he can now see and accept
actual reality. He is willing to stay right size."
End of quote.
I find VS to be a very important state of mind to be in. It shows which direction a person
is pointed in with their life. The same way an addiction has 3 roads to go down, so it goes
with VS. An addict can be expanding their addiction, freezing their addiction or reducing their
addiction. A person suffering from an overly stressed or complicated life can be expanding the
complications, freezing the complications or reducing the complications.
Thoreau says that we need food, shelter, fuel and clothes as necessities. In modern times,
I will add transportation to the list depending on your local. Everything else is pretty much
optional. If we have these needs met and are not happy, then their is no end to our supposed
needs for that elusive state of happiness that we seek. We all seem to have no shortage of supposed
needs or wants as complexity addicts. We only want to go in one direction...more.
Life does not go in one direction no matter how wealthy you are, life is always up and down.
My goal in life prior to joining the VS movement was to get rich and buy anything I wanted to.
My goal now is to live within my means, comfortably fit within my space and gratefully accept
my current position in life.
VS has contributed to this recovery and continues to do so each day. I make it a practice
to wake up with VS, eat lunch with VS and to go to bed with VS the same way I do with my 12
step program work and without this constant awareness of how daily decisions affect my VS or
12 Step program, I'd be back on the road to my prior sick life.
We should not confuse Voluntary Simplicity with the misnomer of 'Voluntary Poverty' VS is
not about living low, it is about making choices and balanced living. We can take a vow of poverty
and not have a pot to piss in-yet we can still live a complex, sickly life full of unneeded
rituals and stress. What it does take is introspection and balance coupled with working towards
inner peace.
You get out what you put in with VS. If you do not cut back enough on the complexities that
rob you of living life, then all you have is your same complex life back that you started with.
If you cut out too many complexities and are unhappy or bored, don't worry, you can always add
them back.
We suffer from no shortage of stress and complexities of living,
especially if you have a family. Life gives us plenty of problems for free. You can even trade
the complexities that offer no reward other than more problems for new complexities that offer
rich rewards or good feelings.
For instance, I gave up some of my computer compulsion time and
put that time into yoga class and meditation. I started with VS in 1996 by canceling
some subscriptions to 5 business newspapers and magazines and pulled out about 50-60 rosebushes
that we could not care for.
After that, I saw the beneficial results and kept at it, questioning everything and experimenting
with which complexities could be removed and which needed to stay in order to live a balanced
life. We make what we want of VS, there are no rules other than if you do not do enough you
do not get any results.
There are no VS police to boss you around and tell you what is right or wrong. We have to
decide this for ourselves as individuals. As I have said before, the program is the final judge
of your success, not you, not me, not anyone else.
A lady wrote in asking if she could be into VS and still have a gold chain? Yes, we can have
a gold chain, we can even have 10 gold chains if we please. Can a person have 100 gold chains
and still be into VS?
No, I could not say with a straight face I was into VS and own 100 gold chains. But, the
person that has scaled back from owning 1000 gold chains could definitely say they have applied
VS to their lifestyle by cutting back from 1000 to 100 gold chains.
It is all relative and all up to us and what we wish to derive from our efforts at simplicity.
Another fellow posted how he wanted a canoe, but his wife said he could not have one and be
a VS devotee.
It is not up to others to tell us what we can have - our recovery or VS program will tell
us. If the canoe would comfortably fit within a financial budget, and a person has the comfortable
space required to store it and the object does not cause a person any undue harm or problems
such as maintenance that they cannot upkeep, legal problems or rob them of time they cannot
afford to give, I see no problem in having it.
A person wrote me and asked, "Is writing your long 5 page post really simple living?" My
response was, "Yes, writing 5 pages or even 5000 pages is vastly superior to living the old,
sick life that I used to live." Critics are all around us and work to tear down programs instead
of building them up. Either our efforts at simplicity or recovery will promote our peace or
destroy our peace - so put peace first. Always listen to your recovery program instead of the
critics - it has the final say.
Below are some definitions of VS from the book The Circle of Simplicity ~ Andrews.
"For me, voluntary simplicity is living consciously, trying to eliminate the unnecessary,
the superficial clutter. It is trying to live morally and ethically in the global economy by
using less."
"I think that voluntary simplicity as living on purpose, making sure I have the time to do
the things I want to do, not wishing my time away."
"I think voluntary simplicity is being true to yourself, true to the environment. It's finding
that place for every facet of my life and defining how much is enough. For me it is spiritual."
"It's choosing to enhance one's life by surrounding yourself with what really brings you
fulfillment. It is defining my own standard of success and prosperity, community and fun."
"Voluntary simplicity is balancing the realities of my life (limited economics, time and
energy) with my values and implementing them into a lifestyle that is comfortable and rewarding.
I think voluntary simplicity is an "art of living." I believe it is an art to live, to be true
to yourself and to be open to innovation."
An in-depth discussion and clarification of the term "Voluntary Simplicity" by Philip Slater
All personal solutions to wealth addiction involve one form or another of what has come to
be called Voluntary Simplicity. This doesn't not necessarily mean going "back to nature" and
does not mean living in poverty and discomfort, although some people may elect forms of simplicity
that would be highly uncomfortable for the rest of us. Above all, it does not mean forcing yourself
to give up something you really enjoy, out of some pious conviction that it's the "right thing
to do." Voluntary Simplicity merely means trying to rid one's life as much as possible of material
clutter so as to concentrate on more important things: creativity, human survival and development,
community well-being, play.
The key word in Voluntary Simplicity is "voluntary," which means that the giving up of the
material clutter is not coerced either from the outside or from the inside. As Andre Vanden
Broeck observers, only those who have experienced affluence are in a position to have a "choice
divorced from need." The poor aren't in a position to make such a choice-they are stuck with
a scarcity that is neither simple nor voluntary.
Nor is Voluntary Simplicity coerced from within, for to deprive yourself out of some ideological
conviction is merely to feed the Ego Mafia. The word "simplicity" may have overtones that arouse
our suspicions: a vaguely puritan ring, conjuring up images of drab smocks, self-righteousness
and flagellation. But if this is in the spirit in which Voluntary Simplicity is embraced the
result will most certainly be noxious.
There is an old Zen story about two monks traveling together who encounter a nude woman trying
to cross a stream. One of them carries her across, much to the consternation of the other. They
continue in silence for a couple of hours until the second monk can stand it no longer. "How,"
he asks "could you expose yourself to such temptation?" The first monk replies, "I put her down
two hours ago. You're still carrying her."
Addiction is internal; if you experiment sincerely with Voluntary Simplicity and find yourself
still thinking of money and possessions, your simplicity is a fraud and you might just as well
go back to pursuing wealth until you've had your fill of it. To achieve its goal, Voluntary
simplicity must be undertaken in the spirit, not of Puritanism or self-flagellation, but out
of adventure. All adventurers throughout history have, after all, been people who abandoned
comforts, possessions, love and security to seek new experiences in faraway places.
Richard Gregg, who coined the term in 1936, once complained to Gandhi that while he had no
trouble giving up most things, he could not let go of his books. Gandhi told he shouldn't try:
"As long as you derive inner help and comfort from anything, you should keep it." He pointed
out that if you give things up out of a sense of duty or self-sacrifice they continue to preoccupy
you and clutter your mind. To talk of "denying oneself" is to use the language of despotism.
Simplicity is an affirmation, not a denial of oneself.
It is always nice to have our own work confirmed by others that have gone before us as well
as those that follow us. Many years ago I coined the phrase "Everything you own takes a little
piece ~ peace of you." A couple years ago I came across Richard Gregg's original work on Voluntary
Simplicity penned in 1936 and this is what he said on the subject of peace disturbance or as
he termed it "SIMPLICITY A KIND OF PSYCHOLOGICAL HYGIENE".
Taken from the original work:
Pendle Hill Essays Number Three
THE VALUE OF VOLUNTARY SIMPLICITY
RICHARD B. GREGG
Acting Director of Pendle Hill 1935-36
Chapter X. SIMPLICITY A KIND OF PSYCHOLOGICAL HYGIENE
There is one further value to simplicity. It may be regarded as a mode of psychological hygiene.
Just as eating too much is harmful to the body, even though the quality of all the food eaten
is excellent, so it seems that there may be a limit to the number of things or the amount of
property which a person may own and yet keep himself psychologically healthy. The possession
of many things and of great wealth creates so many possible choices and decisions to be made
every day that it becomes a nervous strain. Often the choices have to be narrow. The Russian
physiologist, Pavlov, while doing experiments on conditioned reflexes with dogs, presented one
dog with the necessity of making many choices involving fine discriminations, and the dog actually
had a nervous breakdown and had to be sent away for six months' rest before he became normal
again.
Subsequently, American psychologists, by similar methods, produced neuroses in sheep by requiring
many repetitions of mere inhibition and action; and as inhibition is an element in all choices,
they believe it was that element which may have caused the neurosis in Pavlov's dog. Of course,
people are more highly organized than dogs and are easily able to weigh more possibilities and
endure more inhibitions and make more choices and nice distinctions without strain, but nevertheless
making decisions is work and can be overdone.
I'll leave you with a snip of wisdom from Thoreau from his book Walden.
"The twelve labors of Hercules were trifling in comparison with those which my neighbors
have undertaken; for they were only twelve, and had an end; but I could never see that these
men slew or captured any monster or finished any labor. They had no friend Iolaus to burn with
a hot iron the root of hydra's head, but as soon as one head is crushed, two spring up."
VictorianTech:
"What's enough" is a learned behavior. We get it from our upbringing, our schooling, and
our media influences. There is no objective standard; all concepts of "enough" are subjective
and culturally based.
My mother swallowed the Hollywood/Madison Avenue agenda hook,line and sinker. All her life
she was miserable, angry and bitter because she didn't have the mansion, new car, servants and
diamonds she saw on tv and in the movies. Her life was consumed by and wasted in loathing of
being less than rich. It always angered me, because what did she expect, with no education,
no valuable skills, and of all things married to a quasi-hippie country boy? But she truly believed
that what she saw on tv was the way life was supposed to be.
Her constant viperish bitching deeply influenced me; so I bought into a different version
of consumerist propaganda. Just get a highly advanced college education, it said, and the world
will be at your feet. So I did. I came oh-so-close to making it. But when my health collapsed,
so did everything.
I learned that the very best remedy for "keeping up with the Joneses" is complete finacial
collapse. And a financial collapse is not complete until it results in homelessness.
The experience of homelessness does an amazing job of reprogramming one's beliefs about "what's
enough". It's a highly unpleasant and very effective way to learn what is truly important. Like
a roof over your head, food, and warmth. You learn to have vast gratitude for simply being able
to look out the window at the rain, instead of being out in it. For being able to wash your
hair whenever you wish, or having a toilet at your disposal whenever needed. A warm soft place
to sleep with some semblance of security is a wonderful thing.
In a society that is so drenched in consumerism, people come to believe they will just
die if they don't get the latest (fill in the blank- car, iPhone, fashions, whatever). I
know better. But I only know better because I got there first, and then lost it. A person
who has never gotten there has nothing to compare to, so they rely on what others tell them
is the proper goal for "enough".
There are needs, and there are wants. I think whether you end up content with your life depends
on whether your personal definition of "enough" lies close enough to the needs end of the scale,
and not the wants end. And knowing the difference between the two.
sl:
I am uncomfortable with attributing the excess "stuff" that most Americans accumulate to
either greed or a quest for status.
My observation would be that the "stuff" accumulated was borne of a desire for an experience.
Someone desires the experience of riding a bicycle so he/she goes out, buys the bike, the shoes,
the Lycra, the panniers, the rack for the car, the hooks to hang it in the garage, the shoes,
the helmet, the lights, a patch kit, etc, etc, etc. add it up, even for a relatively benign
low-impact hobby like riding a bike one starts to accumulate a lot of stuff.
Then suppose that person wants to go hiking. Innocent enough. Again, shoes, tent, sleeping bag,
pad, bug spray, mosquito netting, sunscreen, GPS,
etc, etc, etc.
Then that person wants the simple pleasure of grilling outdoors. BBQ, tongs, lighter fluid,
briquettes, etc.
I go to garage sales, estate sales, and auctions. I see the crap that Americans are trying to
shed. They weren't trying to impress anyone and they weren't indulging in an orgy of consumption.
They just had an appetite for a type of experience.
Even an experience such as travel entails accumulating 'stuff'.
Often the experience desired is hosting one's friends and family to a nice dinner or party,
that entails a ginormous amount of 'stuff', much of which will rarely get used.
But it was not an appetite for the 'stuff' that drove it, but a hunger for an experience. We
all want to be good hosts, right?
The challenge is to get more people to hunger for understanding as opposed to indulging a
whim for an 'experience'.
Good luck with that. That goes back to Socrates.
Humans crave novelty, or in Socrates day, 'relishes', and this restless hunger for new experiences
leads inevitably to more and more 'stuff'.
coriolis:
That's an interesting perspective on the matter. I don't want to judge anyone's motivation
in their acquisition of stuff, but the quest for these experiences can be similar to a quest
for material goods. I do see people jumping into their experiences on an impulse. Buying that
bike and all the gear could easily require an investment of thousands of dollars, and after
that thirst for the experience is satisfied, the person may never ride it again. That whole
exercise could have been a quest for some status, or just a passing fancy. Either way, it becomes
a collosal waste. Now contrast that to the person who has an old beater of a bike, loves the
sport, and gradually upgrades the equipment as things wear out. That person might end up with
a large collection of top of the line stuff, but the difference is, it's useful, and the experience
became a way of life.
I don't disagree that the desire for experience causes the accumulation of stuff, but soemone
who flits around from one experience to another is not unlike the person who has bought into
unrestrained consumerism. In both cases, its seeking gratification with a short attention span.
[Aug 14, 2010] How much car can you afford?
bakho says...
The best rule-of-thumb we've seen is that monthly payments shouldn't
exceed 8% of your gross monthly income. If that's $3,000, for example, then the payments should
be no more than $240 a month.
Nor should you stretch your loan out over more than 48 months, or four years, to lower payments
enough to fit that rule.
New cars and trucks start depreciating as soon as they're driven off the showroom floor.
Stretching payments out for 60 months or more virtually guarantees
buyers will be "upside-down" for much of the loan. That means they'll owe more
than the vehicle is worth, making it difficult to sell or trade.
Yet extending payments over five, six or even seven years is how dealers persuade customers
to spend -- and borrow -- record amounts for new cars and trucks.
According to the Federal Reserve the average length of an auto loan was 61.1 months in May
and the average amount financed reached an all-time high of $27,163. At 7.8% annual interest,
the average rate for such loans, the monthly payment would be a hefty $540 a month.\
Exactly a month ago I put up a post
If a Social Security Annual Report Vanishes into the Forest noting that not only was the Report
months overdue but that nobody seemed to notice or care that there was no official announcement
about the reasons for the delay or a new release date. The date that had been floated back in April
was June 30th, then later some were saying 'July' and then when July rolled around word around the
Capitol was 'August'. But nobody who knew anything was talking on the record. Then last week of
all papers it was the Spokane Spokesman-Review that reported August 5th. But that news was only
semi-officially confirmed this week when it was announced that AEI was having a briefing on the
Report on Friday the 6th (today) and NASI was having a bigger event on Monday the 9th. But as for
any official announcement there was nothing, not at SSA, nor at Treasury or HHS or Labor. Nor was
the Report up on the web Thursday morning. It wasn't until an hour before official Report release
that Labor issued a news release with a link to the pdf of the Report. Well I was ready, a live
link to it was up here at 11:22 Eastern, beating the official time by 38 minutes. But all of this
leaves this question. Why the secrecy? Three Cabinet Secretaries and the Commissioner of Social
Security were scheduled to release a public Report that had implications for every worker and retiree
in the country and yet no one knew nothing
Well the Report appeared and proceeded to make about as little noise as it did when in vanished
into the woods, as I type a search on '2010 Social Security Report' turns up no MSM links in the
top ten, unless you consider HuffPo MSM, and two of the top six results are to my posts here. Now
Heritage and the Washington Times (which I don't consider MSM) had what appear to be canned pieces
up claiming that the Report confirmed their gloomy views but didn't seem to address the actual numbers
but for the most part there is very little coverage.
Now you can call me a cynic but some of this secrecy and effective non-coverage may stem from
the fact that the Report did not match the current narrative of 'Crisis'. Instead Trust Fund depletion
remained pegged at 2037, the date that cash surpluses vanish moved from 2016 to 2015 while the 75
year actuarial gap actually dropped significantly from 2.00% to 1.92% putting it right back to 2001
levels. Meaning that a decade of 'Crisis' has gone by with no action at all and Social Security
emerges unchanged. Which leaves all the "we can't afford to wait!" "delay will only make the cost
larger and more abrupt!!" folk with a little egg on their faces. Social Security-still not broke.
More notes and an interesting graph under the fold.
For those joining this party late the 'Trust Fund Ratio' is the Trust Fund balance expressed
as a percentage of cost in any even year with the offical target being a TF Ratio of 100, meaning
one year of reserves. This is called by the Trustees 'actuarial balance'. Although we generally
talk about THE Social Security Trust Fund, there are actually two, the OAS (Old Age/Survivors) and
the DI (Disability) Trust Funds. In this figure OAS is the dark line and DI the light one. Additionally
though we also tend to talk about Social Security going deplete in some future year or being able
to pay out some percentage of benefits at that date in doing so we are generally referring to what
the Trustees call the 'Intermediate Cost Alternative' in this figure denoted as 'II'. However they
also give us two other Alternatives, a more pessimistic one called 'High Cost' here 'III' and a
more optimistic one called 'Low Cost' here 'I'. Low Cost and High Cost are fairly artificial in
construction as each takes each of the variables that together determine solvency and varies them
in the same direction, either better for solvency in the case of Low Cost or worse for High Cost.
Since in practice it is not likely that every economic and demographic variable will move in the
same direction in the same magnitude these two alternatives have to be regarded as being on the
extremes of the probability spread. On the other hand this depends crucially on whether Intermediate
Cost has in fact captured the true mean for each variable, if Intermediate Cost can be shown to
be on the whole too pessimistic then Low Cost outcomes become more probable, and of course the converse
is true. But that will have to be the subject of future posts.
A very common claim about Social Security is that there is no way
that we can grow out of 'crisis'. Well this figure puts that claim in doubt, because while Low Cost
may not be totally likely it is at least possible and if it comes about OAS projects to never have
a TF Ratio lower than 300, and since the target is only 100 can be said to give a result of 'over-funded',
if it seems to be coming about then the policy question in the year 2020 will begin to revolve around
when to cut FICA and by how much to get that tail pointing closer to 100 than to 450 and rising
as it leaves the projection period, Because oddly enough an over-funded Trust Fund is in its own
way a bigger threat to Social Security long-term than an under-funded one. (I can point to some
older posts on this if anyone cares).
Which brings us to an important point. While it may well be that Low Cost is unlikely, it is
not an optimal outcome anyway, instead the sweet spot is somewhere between I and II in this figure
and to get there we don't have to hit every number of Low Cost, just enough of them in the right
magnitudes to pull II's tail up so that it intersects 100 at the end of the projection period or
at least dips below actuarial balance (the same thing) as far in the future as possible. And many
of those numbers are susceptible to deliberate policy choices. For example Social Security outcomes
improve with higher immigration and higher fertility, and since immigrants, at least those from
developing countries, tend to be more fertile sticking to a policy of closed borders, while maybe
appealing to younger Teabaggers in the here and now, plays a certain amount of hell with their future
retirement outlook. Equally Social Security solvency is positively correlated with more employment
and higher real wage although the effect is offset by the fact that the increased income also results
in increased costs in the form of higher benefit checks. But from the perspective of the worker
this is all good, it means that any future percentage cut in benefits would be from that much higher
a baseline, which means that solvency effects aside a deliberate policy targeting employment and
real wage will result in a better Social Security outcome. (Minimum wage increase anyone?). Similarly
improvements in productivity, even if they don't pass through perfectly to Real Wage, increase affordability
by holding down the percentage of GDP needing to be devoted to Social Security, or perhaps assisting
us to achieve Prof. Jamie Galbraith's appeal to enhance Social Security benefits rather than cut
them.
Which suggests a second prong to the NW Plan. The first prong simply assumes Intermediate Cost
numbers and programs in the revenue increases needed to target actuarial balance, the second would
be to advocate for policies that make some or all of those tax increments unnecessary. The right
answer is not to just passively accept our fate and schedule benefit cuts prematurely, the numbers
needed to substantially cut the payroll gap even in the absence of tax increases are by no means
out of reach, add a few tenths of a point to productivity and a good deal of 'crisis' simply vanishes.
Bruce Krasting
The High Cost projections you refer to show that the SS surplus peaks in 2011 (starts in
50 days....) and it peaks around 2.6T.
Look at the assumtions used. The next 24-36 months economic results will be substantially
less than those assumed by the Fund in the High Cost. in other words, SS will top out very soon
now. No sense of urgency there. Right Bruce? What the heck. It is about 1.4T shy and five years
early. No problem right?
Bruce Webb
Why are you assuming High Cost? Everyone else officially works off of Intermediate Cost.
And this is garbled:
"The High Cost projections you refer to show that the SS surplus peaks in 2011 (starts
in 50 days....) and it peaks around 2.6T. "
High Cost shows surpluses peaking at $114 bn in 2012, a point at which the TF balance will
be $2.8 trillion, but with continuing though shrinking surpluses through 2019 at which time
the TF balance will be at its peak of $3.3 trillion.
Plus Social Security uses Calender Years and not Fiscal Years.
So I have a 'What the heck' question myself. What the heck Report are you reading? Not to
mention that you have fatally confused the concepts of 'surplus' and 'trust fund balance'. And
even if you are thinking cash flow, High Cost doesn't show that going negative again until 2015.
Methinks you started your gloating a little early here. (Or maybe Happy Hour comes early
in your time zone).
coberly
Bruce,
you give Krasting a better answer than he deserves. The peak of the Trust Fund, even under
High Cost Assumptions means exactly zilch. Some day, sooner or later, the Trust Fund is going
to run out of money (down to the one year reserve). then Social Security will return to normal
business as usual with what looks like a tenth of a percent increase in the payroll tax from
time to time. That's about eighty cents per week about every four years according to present
estimates. It is VERY unlikely it will ever be much more than that, and more than likely it
will become a lot less than that as the Baby Boom dies off, and the increase in life expectancy
reaches asymptotically to some natural limit.
Krasting is like most of the innumerate people in this country. He hasn't the slightest idea
what he is talking about, but big numbers, and "running out" work powerfully on his endocrine
system so he treats us to his sweaty thoughts. Unfortunately he has powerful friends and a hapless
country which has been taught to believe THE END OF THE TRUST FUND is a LOOMING CRISIS1. It
isn't even a problem... except for the hysteria that comes from letting them frame the issue
this way.
john
Bruce-This is a great post. I was wondering if have ever spoken with any of the report's
actuaries? After looking at TableII.C1 and then at Section V. ,I was wondering if the actuaries
have run numbers using a variety of asumptions such as HC unemployment with LC mortality with
IC productivity? I am concerned that the current "recovery" will become the New Normal. A future
somewhere between IC and HC possibly? But as Dale will remind me in a minute, IT DOESN'T REALLY
MATTER! Thanks.
ilsm
Bruce,
Thanks for the charts.
What is the premise for keeping the rate of "other non interest spending" the same through
the "outyears". Forgive me I have spent a lot of my life working the warfare state cabal budgets.
In the 2010 unified budget the war machine takes 20% approx of the outlays within a percent
of SS and more than Medicare.
In the UK the ministry of defence, which is less a minitruth label than national (epmpire)
security, plunders just 7% of their unified outlays.
Suppose those charts showed that empire security robs 7% of the unified budget outlays in
2012? And other corporate welfare is reduced from 20% to 8%.
In that case the SSTF which is accumulated deferred taxes from the general funds can be redeemed
instead of the cash being wasted on the empire and corporate welfare.
I propose that if the rate of "other non interest spending" remains the same for a few more
years the goose which lays the golden eggs will be dead and SSTF will not matter.
The US can abide just so much plundering before it is wasted.
Bruce Webb
CBO mostly works on a 'Current Law' basis. I think the assumption here is that currently
authorized programs, at least ones that are not sunsetted, are likely to be reauthorized. Either
that or they are just relying on Paygo rules that assert that new spending has to be offset
by cuts to old spending (or by taxes).
ilsm
Entitlements are 57% of unified outlays in 2010.
The empire security aparatus and corporate welfare which are a command economy dependent
upon the taxpayer for succor consume the remaining 43%.
Entitlement go to people and hospitals for food, services and health care that benefit millions
of individuals.
The war machine takes resources away from producing things for people and makes aircraft
carriers to go and make 'shows of force' to the Red Chinese who have missiles and such so that
those useless shows of force could become expensive if the Chinese sink one of our carriers.
So, let's forget the 'show of force' to intimidate the Chinese who hold more than a trillion
in US debt and worry about taking care of the millions of citizens who make the country, despite
the factthe owners are making money on Chinese slave labor.
How can the US have a war machine to intimidate the holders of our debt?
And that war machine be so harmful as to make the vicious circle where US has to import from
the object of the war machines fear and intimidation?
Actually it's not only T-bills: TIPs and gold also somewhat compensate for inflation. TIPs compensate
partially and gold is very volatile so take you poison...
Q: The new edition of The Black Swan includes what you call "10 principles for
a Black-Swan robust society." One of them is: "Citizens should not depend on financial assets as
a repository of value and should not rely on fallible 'expert' advice for their retirement." Can
you explain what you mean?
Taleb: The problem is that citizens are being led to invest in securities they don't understand
by people who themselves don't quite understand the risks involved. The stock market is probably
the best thing in the world, but the true risks of the stock market are vastly greater than the
representations. And this leads to extremely strange situations in which, say, someone has a bakery,
is extremely paranoid about suppliers, very careful about risks, and protects his business with
appropriate insurance. Then, at some point, he puts his $122,000 in savings in a fund that he knows
nothing about, based on risk measures he knows nothing about, in companies very few people know
much about.
People use "risk measures," but you're really not measuring anything like you measure temperature
or distance. You are making a speculative assessment of a future event.
That's not measuring, that's estimating. And as we saw with BP (BP),
with the banking system, and with Toyota (TM),
companies themselves are hiding risks from the security analysts. They're
cutting corners. Companies have a tendency to hide risks.
So someone extremely careful and prudent in the management of his
own affairs will be completely careless with the half of his savings invested in the stock market.
I'm saying: Don't use the stock market as a repository of value. It has vastly more risks than you
think.
I was at an investment conference last week with mutual fund managers and financial advisers.
There were a surprising number of mentions of the possibility of "Black Swans," and your name came
up. Do you think those people understand the concept?
No, they don't get it. My Black Swan idea is very different: There are events that you can't
forecast, and you need to be robust to these events. If I think that someone doesn't understand
Black Swans, I'm sure that whatever bad news happens to him will be Black Swans for him but "white
swans" for me.
What should you do with your savings?
We have this culture of financialization. People think they need to make money with their savings
rather with their own business. So you end up with dentists who are more traders than dentists.
A dentist should drill teeth and use whatever he does in the stock market for entertainment.
People should have three sources of variation in their income. The first one is their own business
that they understand rather well. Focus on that. The second one is their savings. Make sure you
preserve them. The third portion is the speculative portion: Whatever you are willing to lose, you
can invest in whatever you want.
In the second category-preservation of value-you should have the consciousness that there is
something called inflation. You should avoid some classes of investments that are very fragile.
What are are potential sources of fragility or danger that you're keeping an eye on?
The massive one is government deficits. As an analogy: You often have planes landing two hours
late. In some cases, when you have volcanos, you can land two or three weeks late. How often have
you landed two hours early? Never. It's the same with deficits. The errors tend to go one way rather
than the other. When I wrote The Black Swan, I realized there was a huge bias in the
way people estimate deficits and make forecasts. Typically things costs more, which is chronic.
Governments that try to shoot for a surplus hardly ever reach it.
The problem is getting runaway. It's becoming a pure Ponzi scheme. It's very nonlinear: You need
more and more debt just to stay where you are. And what broke [convicted financier Bernard] Madoff
is going to break governments. They need to find new suckers all the time. And unfortunately the
world has run out of suckers.
You're saying that what is supposed to be the safest place to invest, government debt, is
in some ways the most dangerous?
Unless you invest in your own home currency in very short-term Treasury bills.
Because governments can print more of their own currency, the risk comes
from a rise in interest rates rather than a government default. When you have hyperinflation,
deficits, or debt problems, with short-term bills you can catch higher interest rates to compensate
you for the inflation or whatever return you've missed.
The Dow Jones Industrial Average last week ended up pretty much where it had been a little more
than a week earlier. A rousing 200-point rally on Wednesday mostly made up for the distressing 200-point
selloff of the previous Friday.
The Dow plummeted nearly 800 points a few weeks ago -- and then just as dramatically rocketed
back up again. The widely watched market indicator is down 7% from where it stood in April and up
59% from where it was at its 2009 nadir.
These kinds of stomach-churning swings are testing investors' nerves once again. You may already
feel shattered from the events of 2008-2009. Since the Greek debt crisis in the spring, turmoil
has been back in the markets.
At times like this, your broker or financial adviser may offer words of wisdom or advice. There
are standard calming phrases you will hear over and over again. But how true are they? Here are
10 that need extra scrutiny.
1 "This is a good time to invest in the stock market."
Really? Ask your broker when he warned clients that it was a bad time to invest. October 2007?
February 2000? A broken watch tells the right time twice a day, but that's no reason to wear one.
Or as someone once said, asking a broker if this is a good time to invest in the stock market is
like asking a barber if you need a haircut. "Certainly, sir -- step this way!"
2 "Stocks on average make you about 10% a year."
Stop right there. This is based on some past history -- stretching back to the 1800s -- and it's
full of holes.
About three of those percentage points were only from inflation. The other 7% may not be reliable
either. The data from the 19th century are suspect; the global picture from the 20th century is
complex. Experts suggest 5% may be more typical. And stocks only produce average returns if you
buy them at average valuations. If you buy them when they're expensive, you do a lot worse.
3 "Our economists are forecasting..."
Hold it. Ask your broker if the firm's economist predicted the most recent recession -- and if
so, when.
The record for economic forecasts is not impressive. Even into 2008 many economists were still
denying that a recession was on the way. The usual shtick is to predict "a slowdown, but not a recession."
That way they have an escape clause, no matter what happens. Warren Buffett once said forecasters
made fortune tellers look good.
4 "Investing in the stock market lets you participate in the growth of the economy."
Tell that to the Japanese. Since 1989 their economy has grown by more than a quarter, but the
stock market is down more than three quarters. Or tell that to anyone who invested in Wall Street
a decade ago. And such instances aren't as rare as you've been told. In 1969, the U.S. gross domestic
product was about $1 trillion, and the Dow Jones Industrial Average was at about 1000. Thirteen
years later, the U.S. economy had grown to $3.3 trillion. The Dow? About 1000.
5 "If you want to earn higher returns, you have to take more risk."
This must come as a surprise to Mr. Buffett, who prefers investing in boring companies and boring
industries. Over the last quarter century, the FactSet Research utilities index has even outperformed
the exciting, "risky" Nasdaq Composite index. The only way to earn higher returns is to buy stocks
cheap in relation to their future cash flows. As for "risk," your broker probably thinks that's
"volatility," which typically just means price ups and downs. But you and your Aunt Sally know that
risk is really the possibility of losing principal.
6 "The market's really cheap right now. The P/E is only about 13."
The widely quoted price/earnings (PE) ratio, which compares share prices to annual after-tax
earnings, can be misleading. That's because earnings are so volatile -- they're elevated in a boom,
and depressed in a bust.
Ask your broker about other valuation metrics, like the dividend yield, which looks at the dividends
you get for each dollar of investment; or the cyclically adjusted PE ratio, which compares share
prices to earnings over the past 10 years; or "Tobin's q," which compares share prices to the actual
replacement cost of company assets. No metric is perfect, but these three have good track records.
Right now all three say the stock market's pretty expensive, not cheap.
7 "You can't time the market."
This hoary old chestnut keeps the clients fully invested. Certainly it's a fool's errand to try
to catch the market's twists and turns. But that doesn't mean you have to suspend judgment about
overall valuations.
If you invest in shares when they're cheap compared to cash flows and assets -- typically this
happens when everyone else is gloomy -- you will usually do very well.
If you invest when shares are very expensive -- such as when everyone
else is absurdly bullish -- you will probably do badly.
8 "We recommend a diversified portfolio of mutual funds."
If your broker means you should diversify across things like cash, bonds, stocks, alternative
strategies, commodities and precious metals, then that's good advice.
But too many brokers mean mutual funds with different names and "styles"
like large-cap value, small-cap growth, midcap blend, international small-cap value, and so on.
These are marketing gimmicks. There is, for example, no such thing as "midcap blend."
These funds are typically 100% invested all the time, and all in stocks. In this global economy
even "international" offers less diversification than it did, because everything's getting tied
together.
9 "This is a stock picker's market."
What? Every market seems to be defined as a "stock picker's market," yet for most people the
lion's share of investment returns -- for good or ill -- has typically come from the asset classes
(see No. 8, above) they've chosen rather than the individual investments. And even if this does
turn out to be a stock picker's market, what makes you think your broker is the stock picker in
question?
10 "Stocks outperform over the long term."
Define the long term? If you can be down for 10 or more years, exactly how much help is that?
As John Maynard Keynes, the economist, once said: "In the long run we are all dead."
With $16 trillion in retirement accounts, baby boomers and their parents have become a prime
target for scam artists who push overhyped investment returns, unsuitable annuities and Ponzi schemes.
Kimberly Lankford, contributing editor of Kiplinger's Personal Finance Magazine, shares tips that
can help you avoid retirement rip-offs:
Ignore the hype Be suspicious of any sales pitch that promises unrealistic returns.
Anyone who guarantees annual returns of 12% or higher isn't in the
ballpark - that's even higher than the long-term average return for large-company
stocks, and much higher than guaranteed investments. Be particularly wary of claims that you
can retire early based on those high returns - a common pitch salespeople use when they hear
that a company is making early-retirement offers.
Be skeptical of 'free lunch' seminars Salespeople often make their initial contact
with seniors in "free lunch" seminars. But in a sweep of these types
of seminars, the Securities and Exchange Commission found unethical business practices in nearly
half. And don't trust a salesperson just because he or she has a professional
designation that focuses on seniors. Such credentials sometimes require little more than paying
a fee and passing an easy take-home test.
Do background checks Before doing business with a broker, check his or her background
using the Financial Industry Regulatory Authority's BrokerCheck tool at
www.finra.org. Look for
disciplinary actions taken against the broker, as well as red flags, such as if the broker has
frequently changed firms. For insurance and annuities, check whether the agent
is licensed with your state insurance department (see
www.naic.org for links). And check on certified financial planners at the CFP Board of Standards
(www.cfp.net).
Get investment information in writing Maintain notes of conversations with salespeople
about your investments and keep copies of broker mailings and sales presentation handouts. After
speaking with a broker about your investment goals, ask him or her
to summarize your discussion in writing. Ask the broker to rate an investment's risk on a scale
of one to 10 and put the answer in writing, too.
Ask about surrender charges and guarantees --[those are usually
bogus; think about deferring retirement till 70 if you need annuity -- Social Security is the
same thing but a much better deal] Before buying an annuity, ask specifically about surrender charges and how much money you
can withdraw each year. Many deferred annuities levy a surrender
charge if you try to withdraw your money within the first seven to 10 years.
Also ask about interest guarantees. Some annuities offer a bonus in the first year, after which
the minimum guarantee drops to 2% or 3%. Ask for a written summary
of everything you discuss with the salesperson.
Set up an account To avoid falling prey to a Ponzi scheme,
establish an account at an independent financial institution (typically a brokerage) to
hold your money. Never write a check directly to an individual - only to the
custodial institution, which must send you quarterly statements.
Don't feel pressured Consult with your adult children
or another financial adviser before investing your money.
Ask regulators for help If you have questions or discover that you or your parents
have been sold an unsuitable investment, contact your state securities department (go to
www.nasaa.org for links) or contact your state insurance
department ( www.naic.org) for complaints about unsuitable
insurance or annuities
More scammers -- often elderly themselves--try to con retirees "Seniors who suffer from isolation
and diminished capacity make ideal targets"
Annuities. Reverse mortgages. Life insurance pools. Principal-protected notes. The options being
offered to senior citizens hoping to ensure a comfortable retirement are dizzying. And in a growing
number of cases, that may be the intention as more scammers--often elderly
themselves--try to con retirees. Though hard numbers are difficult to come by, many
lawyers and advocates for the elderly say more seniors than ever are being lured into investment
schemes that are unsuitable for people of their age or are outright swindles. says Steve Riess,
a San Francisco attorney who represents elderly victims of con artists peddling bogus investments.
One out of five Americans over the age of 65 has been the victim
of a financial scam, according to the Washington-based Investor Protection Trust, a nonprofit that
promotes shareholder education. That means more than 7.3 million seniors have been
taken advantage of financially through inappropriate investments, high fees, or fraud, which insurer
MetLife says comes at a cost of more than $2.6 billion a year. "Older people are being targeted
because, as 1930s robber Willie Sutton said when asked why he robs banks, 'that's where the money
is,'" says Kathleen Quinn, executive director of the National Adult Protective Services Assn. in
Springfield, Ill.
Many of today's scammers have a particularly good understanding of their victims--because the fraudsters
themselves are of retirement age, if not exactly retired. More elderly con artists than ever seem
to be preying on retirees, perhaps because senior citizens put more confidence in someone their
age, says Denise Voigt Crawford, president of the North American Securities Administrators Assn.
"It's astounding that you can't even trust older people anymore," Crawford says.
In November, William Kirshner, 84, a financial adviser in Corpus Christi, Tex., was sentenced
to five years in prison for stealing more than $100,000 from senior citizens and other clients who
invested in promissory notes issued by his company. Ronald Keith Owens (above), 74, was sentenced
to 60 years in prison in January 2009 for persuading investors, including retirees, to put more
than $2.6 million into nonexistent bank-related investments. And William Walter Spencer, 68, a Franklin
(Tenn.) financial adviser, sold elderly members of his church promissory notes that turned out to
be bogus. He pleaded guilty to fraud in May and is expected to be sentenced in August.
It looks like the author is wrong: from his data it looks like life expectancy plus 10% gives a
good estimate of longevity. Also few people understand their surroundings after 90. And for most people
it is stupid to expect to live till 100. Difference between men and women in longevity is substantial.
To understand his point, let's take a look at an example. Suppose you're a 65-year-old man who uses
the life expectancies in my prior post to plan a drawdown strategy for your 401(k) balances. You'd
see from the post that your average life expectancy is 18 years, for an average age at death of
83. Suppose you then decide you can draw down your 401(k) balance so that it will be exhausted after
18 years. This would be a bad move, since there's a 50-50 chance you'll live beyond those 18 years.
In fact, there's a 25-percent chance (one out of four) that you'll live five years beyond your life
expectancy to age 88, and a 5-percent chance (one out of twenty) that
you'll live 12 years beyond your life expectancy to age 95.
The life expectancies
I described in my earlier post combine the numbers for both healthy and unhealthy people. If you
get moderate exercise, keep your weight at healthy levels, and don't smoke or abuse alcohol, you've
dramatically increased your odds of living longer than the average life expectancy --
--[That's not true, much depends on you genes -- NNB]. And you
need to plan for that.
Let's look further at the numbers. Suppose you're a 65-year-old woman. Your average life expectancy
is 21 years, for an average age at death of 86. But there's a 25-percent chance that you'll live
five years beyond your life expectancy to age 91, and a 5-percent chance that you'll live 13 years
beyond your life expectancy to age 99.
One more example: Suppose you're a 65-year-old man with a 62-year-old spouse. Given the odds,
there's a 50-50 chance at least one of you will live for an additional 26 years. If either of you
is healthy, chances are good you'll beat the averages. For example, there's a 25-percent chance
your money needs to last 30 years, and a 5-percent chance your money needs to last 37 years. Now
that's longevity risk!
The bottom line? When planning a drawdown strategy for your 401(k) balances, I recommend you
plan for at least the 25-percent likelihoods mentioned above, and maybe even the 5-percent likelihoods,
particularly if you take care of your health.
Many retirement planning software programs ask you to input how long you expect to live. I suggest
that you use a life expectancy calculator which takes into account your lifestyle and family history,
such as the calculators at www.bluezones.com or
www.livingto100.com. Then, I'd add five to ten years to
the resulting life expectancy, just to be sure you won't outlive your money. In this case, it's
better to plan for the best case scenario than the worst!
Another thing to remember is that it takes a boatload of money to be retired for so long. This
is one of many reasons I encourage you to do the math to see how much money you need to retire,
and consider working in your "early" retirement years. You don't want to live it up in your sixties
and seventies, and then be forced to look for work in your eighties! Making smart decisions now
will help you enjoy all your retirement years.
Here is an advice from the man with whom I generally disagree
that I can agree with :-). If you have substantial 401K savings try to see if
you can delay getting Social Security until you are 70.
Four years from 66 to 70 make a dramatic difference in monthly payments, so you can live, say, on
$60K a year you need, say $60K*4=$260K from you 401K and other savings to do this trick (actually slightly
less then that, for example $223K that if you use ladder of CDs and bonds with average 3% return). "If
you have a reasonable life expectancy, delay taking Social Security until you are 70;
it is the cheapest, safest "annuity" you can "buy.". Spend all your 401K,
to the last dollar, if necessary. Don't buy annuity with you hard earned 401K
dollars -- this is a much better plan.
As for 2-3% rule Bernstein advocates, this is pure stupidity: he probably can't spell Excel correctly
;-). Get you life expectancy from good life expectancy calculator, add 10% and model it in Excel. It
takes 15 minutes to calculate. For example, if I have $500K in 401K savings and draw $48 a year till
$66 (expecting to be able to earn $12K supplementary income until you are 66), $60K from 66 to 70 and
$20K a year after that my savings will last approximately till 84, if we assume 3.5% average return
(achievable with bond/CD laddering). Average healthy 60 years old male life expectancy in the USA is
approximately in this range. If you are married and both of you can delay retirement until 70 you probably
can get $60K a year from Social Security alone.
Money manager and The Investor's Manifesto author William Bernstein on the challenges of investing
well for a comfortable retirement
Rather than relying on Monte Carlo simulations, I'd suggest a simple rule: If you're a 60-year-old
withdrawing 2 percent of your retirement savings annually, you'll be as safe as can be; at 3
percent, you're probably safe; at 4 percent, you're taking real risks; at 5 percent, you've
a good chance of an Alpo diet. (At 70, you can perhaps add 1 percent to 1.5 percent to these
numbers.)
One other recommendation: If you have a reasonable life expectancy,
delay taking Social Security until you are 70; it is the cheapest, safest "annuity" you can
"buy." Yes, if you die before age 82 or so, you "lose." But losing by living too long with inadequate
income has far more serious consequences.
For 95% of the population stocks, bonds, and paper investments are an incredibly stupid investment
vehicle. Unless you own the investment bank of course. Boomers, Xers, and Yers would be smart
to realize this. Your Broker is "broker than you" because he gets paid to sell, not create returns.
The Broker gets paid even if you don't make money, conflict of interest? STOP BUYING THEIR PRODUCTS,
you'd be better off just paying off your debts and saving the excess. My plan is working well.
No debt, ever. Owning a business that creates profit without accounting
trickery, owning real estate (no debt) that produces a cash return. I get richer
without working much at all. It's hard work for the first 10 years but it gets exponentially
easier after that. Instead of me being chased by the snowball, I'm chasing it.
PA_Observer:
I'll let others do the moralistic bombast. If your going to maintain your lifestyle after
retirement, you're going to have to be saving/investing 20% of your gross income from day one
of employment. The 20% includes whatever company match you might get. Now, since you're probably
already in debt for that U degree, getting a crappy salary and paying a ridiculous amount for
rent and car insurance, I might as well said that you needed to save 20 unicorns per year. The
honest fact is, the majority Gen-X's and Y's are going to die in poverty while the brokerage
industry bilks them for every possible cent. If it was me, CD's at your credit union are good
place to keep that small amount of money that you manage to save.
Goldman's Behaviour Exposes Fatal Systemic Structural Weaknesses
Debts Owed and Assets Pledged versus Maturity Level of Debts Owed
As witnessed during the S&P's decline to 666, the stock market significantly overstates the
current value of wealth contained therein. From the DJIA high of XX,XXX, the decline to X,XXX
represented a loss of XX trillion in wealth. However, only X trillion of cash was extracted,
and that amount is overstated several multiples based on "trading activity (gambling)" versus
actual "redemptions for cash."
The stock market represents a hope for future value, yet it is presented and perceived by
most to be a store of value whose present value--measured by the number of shares you own multiplied
by the last closing price--is equal to your current cash value.
If anything, the last two years should galvanize in every person's mind, the absolute fallacy
in that way of thinking. The stock market trades on the margin.
Wealth measured by such a vehicle is elusive at best.
The current recession was brought on because of the occurrence of a severe mismatch in debts
owed versus the ability to pay off those debts-in CASH. Cash being the ultimate measure of the
liquidation value of an asset.
When the debts owed were due (or called in) it became clear that nobody had the cash to make
the repayment. Assets (those collateralizing the debts and all other assets for that matter)
simply did not have the cash value people thought the assets represented..
Is this a ponzi scheme? No, not necessarily. It could be simply a mismatch of Debt Maturity
Date versus the Economy's ability to repay those debts-in cash.
Except, of course, in this case the Debts Owed were and are based on Asset Values that are
suspect at best. Faulty, and as time went on even criminally negligent valuations of Debt were
put forth and Cash extracted from the Economy. This is self-evident because those who sold the
Debt (whose valuation was criminally negligent) took out side bets indicating their belief the
Debt they just sold would NOT be repaid.
What company in America manufactures a product and then makes a bet the product will FAIL?
And, we are not talking about product liability insurance here, we are not even talking about
running out and betting the number 8 horse at Aqueduct. We are talking about using a stacked
deck to deal a lousy hand to your partner in a poker game and deal yourself a Royal Flush.
The net result of this has been to expose the system as broken. The widely held belief of
Value which investors have held for years is shown to be seriously flawed.
Your 401(k), your mutual funds, your stock portfolio, your municipal
bond portfolio, your promised pension…they are, very simply, not worth what you think they are.
And they are worth significantly LESS than you believe.
How much less? Probably much more than you can even imagine.
Does the Government understand what has happened and are they working to solve the problem?
The simple answer is NO. Government is expanding entitlement programs and ratcheting up their
spending in the face of a private sector that is providing less tax revenue.
Simple, the government will raise taxes. Wrong answer. Raising taxes will certainly occur,
but once again there is an obvious mismatch in the Maturity of Debts Owed and the ability to
liquidate assets for CASH to pay those Debts.
Society will be forced to borrow from itself because there is simply not enough outside investment
to provide the CASH owed to meet the Maturing Debts.
What happens at that point? In fact, what happens when it is clear that is the only path
available to keep the system going?
This is where we are now.
And rest assured, the money will be printed to keep the system going.
My thoughts do not lead me to think inflation/hyperinflation. Instead, I think about printed
dollars paying for more and more people's basic needs and from a wider economic perspective,
average personal consumption declining and "assets" heretofore valued on a "cash basis" being
generally recognized to be worth significantly less.
One real question is when people "admit" the "cash value" they believe their "asset" is worth
is not a "valid" cash value, how many will decide they would prefer to have "cash" and see how
events unfold.
The real black swan is likely to be a dash for cash more than anything else.
When it comes to the fixed-income portion of their portfolios, investors have a choice: individual
bonds or bond funds -- be they open-end mutual funds or exchange-traded funds (ETFs). For many investors,
bond funds make sense, because of their convenience and diversification. However, there are many
reasons individual bonds are preferable. To demonstrate the pros and cons of each choice, let us
introduce two retirees.
Meet Betty, who prefers individual bonds. On Saturday mornings, after
fiddling with the engine of her Mustang convertible, she likes to take a walk with her neighbor,
Fred. He is also a retiree, but the fixed-income portion of his portfolio is in mutual funds. In
fact, that's what everyone says about him. "That Fred sure is a real fund guy."
During their walks (which sometimes lead them to the beach, other times to the park, occasionally
to a monster-truck rally), they often discuss money. They've found that they're both looking for
stable, safe income from their fixed-income investments. However, their respective choices have
led to significantly different consequences. Those differences can be broken down into three categories.
1. The "fixed income"
Betty recently invested $10,000 in corporate bonds that will pay 6% a year for the next seven years.
As with most bonds, the interest is paid semiannually. Thus, she'll receive two payments a year
of $300 each. She can plan on this, and budget accordingly.
On the same day, Fred put $10,000 in the Hideyhole Intermediate-Term
Corporate BondMutual Fund, which pays a
monthly dividend, as most fixed-income funds do. Its yield is currently around 6%.
However, the "fixed income" of a
bond fund is not fixed. The
payment changes, depending on the bonds the
fund manager has bought
or sold, and the prevailing
interest rates. Fred doesn't
know exactly how much he'll receive from month to month.
2. Safety of principal
On the day that Betty's bond matures, she will receive $10,300: the $10,000 she originally invested,
and the last interest payment. She knows beforehand when this will happen and can plan accordingly.
As for Fred, he won't know how much his initial investment will be worth in seven years, or even
seven weeks. That's because the net asset value (NAV) of the fund (i.e., the price of each share
of the fund) changes daily, again depending on the bonds in the fund and interest-rate fluctuations.
In fact, during the worst of the financial crisis, most bond funds dropped in value. Here's approximately
how much several ETFs dropped in 2008 from Sept. 9 to Oct. 10.
iShares iBoxx $Invest Grade Corporate Bond
(NYSE: LQD)
19%
iShares iBoxx $High Yield Corporate Bond
(NYSE: HYG)
26%
Source: Yahoo! Finance.
People who invested in bonds hoping they would hold up while stocks fell (the S&P 500 declined
by 27% during this period) were in for a surprise. Fortunately, four of those six ETFs have recovered
their losses and are actually higher today. But they turned out to be more volatile than many investors
expected.
On the other hand -- and this is a really big hand -- Betty will get her $10,000 back
only if the issuer is still in business. Investors in General Motors, WorldCom, and Lehman Brothers
bonds can tell you that this doesn't always happen. Diversification is important with bonds, too,
and you get that instantly with a bond fund, which owns hundreds of different issues.
3. Costs
Betty -- whom Fred affectionately refers to as "The Bond Bombshell" -- bought her bonds through
a discount broker. She paid $50 in commissions, plus a 1% markup, the profit the bond dealer makes
on the transaction.
Fred -- whom Betty calls "Elmer Fund" -- pays an annual expense ratio, as do all mutual fund
investors. His fund charges 0.77% per year, which is about average for a bond fund, although bond
ETFs are much cheaper. That means that his share of the expenses to run the fund is $77 a year.
In seven years, when Betty's bonds mature, her costs will still have been $150. Over those seven
years, Fred will have paid $539 -- assuming, for simplicity's sake, that the fund's NAV doesn't
change, which is unlikely.
Fred did make sure to buy a no-load fund (i.e., an open-end mutual fund that doesn't charge a
sales commission). Had he chosen a fund that charged a 3% load, for example, his costs would have
risen by $300, plus there would be $300 less of his principal to earn interest.
Both sides of the fence, and common ground
When Betty and Fred get into a really heated discussion of bonds -- as we all do -- their arguments
boil down to these.
Betty: "Retirees buy bonds for stable, reliable income, and they want to know that they'll get
their principal back. You don't get that with bond funds, and you pay ongoing expenses."
Fred: "Well, you put all your faith in a handful of companies. What if one of those companies
defaults? I've diversified by investing in a fund that owns hundreds of bonds; if one or two of
the issuers go belly-up, I won't lose my shirt."
Finally, Betty and Fred agree that the "bond vs. bond fund" dilemma is an individual choice that
should be made after thorough research -- and then forgotten to make more time for monster-truck
rallies.
The long-term, capital-gains tax will rise from 15 percent to 20 percent. The tax on dividends
will rise from 5 percent or 15 percent (depending on your income) to a maximum of 39.6 percent,
because it will be treated as ordinary income.
Municipal Bonds
Given that scenario, more investors than usual may be tempted to
look at municipal bonds, which are largely exempt of state and federal taxes.
Barbara Lane, partner at Citrin, Cooperman & Company in White Plains, New York, says before investing
in municipals, investors should look at what the effective rate or the rate after taxes if you invested
in something taxable; your net might still be higher with a taxable investment.
"You have to see what kind of rates you can get on both sides and what kind of tax bracket you
are in," she says.
High-grade municipal bonds returned between 11.5 percent and 13 percent in 2009, as the economy
shrank and interest rates fell; few expect the same kind of performance even with the current Treasury
market rally.
Investors also need to know that unlike Treasurys or government-insured deposit bank products
like CDs or money market funds, there is a default risk with municipal -- or state -- bonds.
The two main varieties are general obligation bonds, which are secured by a government pledge
to use resources such as tax revenues to repay investors -- and essential service revenue bonds
as good examples, which cover things such as water and sewer systems and projects.
The bottom line: if you're buying them for yield and are willing to hold them to maturity, then
many financial advisors think that municipal bonds are a great place to be in light of anticipated
higher income taxes.
Education & Health
Another way to offload some income is to make a five-year, tax-free contribution to a 529 college
savings plan. You essentially piggy back on the annual gift tax exclusion, which for this year is
$13,000, and take five years worth in one tax year. You don't even need to file a gift tax return.
Raftery says 529s look even better when tax rates are on the way up -- all of the income and capital
gains earned within the the plan grow tax free, as long as the proceeds are ultimately used for
educational expenses.
"So if I keep my $65,000 in my bank account and I'm earning interest on it, I pay tax on the
interest that the $65,000 earns," says Raftey. "If I put it into a 529 plan, there is no income
tax on the assets in the 529 plan, and if the income taxes I have to pay are going up, hey, the
tax free investment of the 529 plan looks even better," he says.
For many taxpayers, 2011 will be just the beginning. Starting in
2013, more new taxes will be introduced to help pay for the health care reform law. Investment income
and capital gains will likely be subject to an extra tax, say experts, so those who can might want
to cash in on extra income in 2012.
Change aside, experts say investors should not forget about tried-and true-tax planning strategies
of the past.
Steve Wallman, founder and CEO of Folio Investing in McLean, Vir., recommends that everyone should
look at their investments with an eye to hold on to good performers and offload losers to strategically
harvest tax losses.
Lane agrees, adding that no matter what you do for tax-planning purposes,
it should also be a good investment decision.
Yes, willful ignorance is endemic to too many politicians.
In some ways I think this is the advantage of a commission. Certainly Erskine Bowles understands
the math and the public forum provides at least some hope for public education. Or else it could
just be yet another ideological food fight. We'll see.
My reading of why Simpson was appointed is to undermines the
excuse from the right wing if they refuse to participate. No one is going to
argue that Obama is stacking the deck with RINO shills, the way Bush did in his Social Security
Commission that only invited members who believed in private accounts.
Anyway, the commission is going to recommend raising payroll taxes (hopefully by raising
the taxable maximum) and raising the retirement age. There is probably some sentiment for some
kind of means testing (so-called "progressive price indexing") although I think that comes at
the price of raising minimum benefits or benefit levels for those beyond some age.
As I recall, Reagan and Tip O'Neill came to a compromise that
did "save" or extend the solvency of SS back in the early 80s. Unfortunately, the money raised
was used for other purposes instead of being put into a "lock box."
I can't cite you chapter and verse, but when Bush was trying abolish SS, a lot was written
on how the doomsday numbers were by no means a certainty... How it wouldn't be that hard to
fix whatever problems there were through gradual tax increases... And how transitioning to a
private accounts system, even a partial one, was going to cost about a trillion...money that
could be used to shore up the system.
The real problem appears to be Medicare and Medicaid.
If we were REALLY thinking long-term, we'd also say that this
great Boomer bulge is just that, a bulge. After we, the bulge, pass through the snake, the demographics,
I believe, are likely to return to more manageable levels, where the ratio of workers to retirees
is more in balance.
The bulge, however, will consume the entire purse of money. As you say, the system can be
fixed with sizable tax increases, but doing that all but negates the benefit. In short, people
in my generation will be asked to increase our contribution to the system during our working
years, but our benefit on the back end (in retirement) will decrease. Thus, the system becomes
more of a hindrance than a benefit.
Your generation has had some pretty good sized tax cuts, and those of your generation who
make over $100,000 per year are paying a smaller percentage of their total income than my generation
did during my last working years. You can just as easily afford to pay more FICA to cover the
future needs of Social Security as my generation could afford to pay the high income tax rates
we had.
By far the biggest difference in our generations is that my generation was willing to pay
our share of taxes without the constant whining. Yours isn't.
Each time the Catfood Commission holds its secret meetings, Alex Lawson of Social Security Works
has been outside with his camera, shooting video of the closed front door as
FDL runs a live stream on our
front page. The Washington Post
wrote it up recently. As committee members go in and out of the room Alex asks them questions
when he can, and yesterday he had an exchange with Alan Simpson that was…well, extraordinary.
Simpson is apparently a graduate of the Bobby Etheridge school of charm. Alex Lawson was incredibly
respectful and polite as the crankly Simpson berated, interrupted and cussed him. Simpson has been
a long-time supporter of rolling back the New Deal, and when asked about cuts he would recommend
to the President and Congress
on CNBC, Simpson said "We are going to stick to the big three," meaning Social Security, Medicare
and Medicaid. His sentiments haven't changed.
CJR's Trudy Lieberman
recently ran down Simpson's history of delicate statements on the subject of Social Security. He
is equally decorous on camera with Alex, who clearly knows a great deal more about the subject than
he does. Simpson starts from the premise that the Treasury will default on the bonds issued to the
Social Security trust fund, because all the best people apparently know that it's better to default
on America's senior citizens and plunge them into poverty than it is to default on, say, the Chinese.
Despite Simpson's assertions, raising the retirement age to 70 IS a benefit cut. It would put
an estimated
1.5 million senior citizens into poverty. After two years of watching billions of dollars in
taxpayer money being paid out to Wall Street CEOs in lavish bonuses while the White House
breaks
every promise they've made to rein them in, that takes a fat load of nerve.
The commission is also looking into cutting Medicare benefits, because the deal guaranteeing
no-bid Medicare contracts to the pharmaceutical industry by both Republicans and Democrats can't
possibly be abrogated. The committee claims it's independent, but it's not THAT independent. So,
old people, too bad for you.
Erskine Bowles has returned to run
the same play he ran during the Clinton administration, when he negotiated the secret deal between
Bill Clinton and Newt Gingrich to cut Social Security benefits. Despite warnings from both
John Boehner and John Conyers
that the commission will report its recommendations to a lame duck Congress who could pass it before
the end of the term. Both Harry Reid and Nancy Pelosi have promised to bring the commission's proposals
up for votes.
In the absence of any transparency coming from the committee about what transpires in its secret
meetings, Simpson's comments to Alex are the best insight we have into what is being discussed there.
Bottom line: bon apetite, Grandma!
ALAN SIMPSON: We're really working on solvency… the key is solvency
ALEX LAWSON: What about adequacy? Are you focusing on adequacy as well?
SIMPSON: Where do you come up with all the crap you come up with?
SIMPSON: We're trying to take care of the lesser people in society and do that in a way without
getting into all the flash words you love dig up, like cutting Social Security, which is bullshit.
We're not cutting anything, we're trying to make it solvent.
SIMPSON: It'll go broke in the year 2037.
LAWSON: What do you mean by 'broke'? Do you mean the surplus will go out and then it will only
be able to pay 75% of its benefits?
SIMPSON: Just listen, will you listen to me instead of babbling? In the year 2037, instead of
getting 100% of your check, you are going to get about 75% of your check. That's if you touch nothing.
If you like that, fine. You'll be picking with the chickens yourself when you're 65.
So we want to take care, we're not cutting, we're not balancing the budget on the backs of senior
citizens. That's bullshit. So you've got that one down. So as long as you've got those two things
down, you can't play with anymore, that we're not balancing the budget of the United States on the
backs of poor old seniors and we're not cutting anything, we're stabilizing the system.
LAWSON: Thanks for being so frank. My question is: raising the retirement age, is actually an
across-the-board benefit cut?
SIMPSON: There are 15 different options being discussed in here today, and why nail one of them…[inaudible]…if
you would like to get one of them that pisses your people off.
LAWSON: Alice Rivlin was just on CNBC saying that that was one of the favorite methods.
SIMPSON: There are 15 of them in there. All of them have to do with stabilizing the system, which
we are told is insolvent, it's paying out more then it's taking in.
LAWSON: Right now?
SIMPSON: Yes.
LAWSON: But what about the $180 billion in surplus that it brings in every year?
SIMPSON: There is no surplus in there. It's a bunch of IOUs.
LAWSON: That's what I wanted to actually get at.
SIMPSON: Listen. Listen. It's 2.5 trillion bucks in IOUs which have been used to build the interstate
highway system and all of the things people have enjoyed since it has been setup.
LAWSON: Two wars, tax cuts for the wealthy.
SIMPSON: Whatever, whatever. You pick your crap and I'll pick the real stuff. It has to do with
the highway system, it was to run America. And those are IOUs in there. And now there is not enough
coming in every month. You're paying in every month for me. I appreciate that, I really do.
LAWSON: Which is how the system was setup, that the current generation funds the retirees.
SIMPSON: When I was your age there were 16 people paying into the system and 1 taking out and
today there are 3 people paying into the system and 1 taking out.
LAWSON: But isn't that the good news.
SIMPSON: And in 15 years there will be 2 people paying in, what's good news about that?
LAWSON: Didn't they plan for that, which is why they've been…
SIMPSON: Of course not because they thought … the retirement … they that you would die at 57
and that's why they set the date at 65. If you can't get through this stuff, then why do you spread
this crap. The thing was setup when the life expectancy was 57 years and that's why they set 65
as the retirement date. Now the life expectancy is 78, whatever it is, and so we have to adjust
that and make it work for the future people like you in the United States.
LAWSON: But here's one question on that, and thanks again for being so frank, life expectancy
is not equally distributed across the income spectrum.
SIMPSON: That's true. We know that.
LAWSON: The life expectancy gains is actually this 5.5 years difference between the wealthiest…[inaudible]…and
the…
SIMPSON: We know that, we talk about that. We talk about everything you know. But if you just
want to use flash words…
LAWSON: No flash words. I just wanted to zero in on a few things and you've hit most of them.
The worthless IOUs.
SIMPSON: Use honesty.
LAWSON: I am. I'm being honest.
SIMPSON: No, no you're not.
LAWSON: The worthless IOUs that actually goes back to 1936.
SIMPSON: They're not worthless, there are IOUs in there.
LAWSON: Backed by the full faith and government, full faith and …..
SIMPSON: You've got it, full faith and credit.
LAWSON: Full faith and credit.
SIMPSON: That's absolutely true.
LAWSON: There we go. They're bonds just like any other bonds. That the government has to pay
back.
SIMPSON: That's right. But there are not people involved. It is the government and the government.
LAWSON: Well, it's actually the government and the citizens, right? The government doesn't actually
own the bonds, it's the government owing…
SIMPSON: Let me say things in a way so your fans will understand this, so you can go and be a
hero. There is not enough in the system by the month to pay in, to pay out what comes in. In other
words, there is more going out, than coming in. That happened 3 or 4 weeks ago.
So, what do they do? They go to that trust fund and say, 'We need the IOUs out of it.' And they
say, 'You can have them, but you have to pay for them.' So you're taking a double hit on your own
government. Makes no sense. The government goes and says, 'Hey, here's that 2.5 trillion IOUs, now
we need some money out of that system because we haven't got enough to pay this month.' And they
say, 'Great.' So the government gets a double hit.
LAWSON: Thanks so much Senator. We obviously have a very different understanding of the system.
SIMPSON: Yes we do. But we are all involved in one thing, not secrecy.
LAWSON: No, I understand that. But in my understanding from actually looking at the 1983 commission,
they actually started prefunding the retirement of the baby boom by building up that huge surplus.
SIMPSON: They never knew there was a baby boom in '83.
LAWSON: But actually they knew there was going to be demographic issues when the set up Social
Security, so they actually predicted…
SIMPSON: They never dreamed that the life expectancy from 57 years of age to 78 or 75 or whatever.
Who would dream that? No one. They just died. People worked. Social Security was never a retirement.
It was setup to take care of poor guys in the Depression who lost their butts, who were digging
ditches, and it was to give them 43% of their wages…when they got out…and that's what it was. It
was never a retirement. It was an income supplement.
LAWSON: Well it's actually an income insurance, right? It's a wage insurance program to replace
lost wages due to death, disability and old-age. But, it's definitely an insurance program meaning
that the people own the insurance, right, their giving money in, in expectation that it's their
money to come out.
SIMPSON: That's right. And they're going to get their money. But right now, to get their money,
which has all been used and consists of Treasury Bills, the government has to go and get it out
of there and pay it and say, 'Here's some money for you.' So you don't diminish the 2.5 trillion
bucks. So it's got your government putting up money, which increases the deficit to get this money
out to go to the beneficiary.
LAWSON: But that's not Social Security that's increasing the deficit, because it's still bringing
in more money than goes out.
SIMPSON: The government of the United States has to take separate money out of some stack to
get the IOUs out of Social Security, that's a double hit and that increases the deficit.
LAWSON: But what I'm telling you is Social Security is separate though, from the general budget,
right? It's totally in the green.
SIMPSON: But it wasn't. Just four weeks ago, there wasn't as much coming in as going out.
LAWSON: Except you're not calculating the interest paid on the bonds, because, if you do include
that, it's still in the green this year.
SIMPSON: Well you can go through all the sophistry of babbling that you want to.
LAWSON: It's not sophistry. It's just what the SSA says. So I'm just going on the numbers.
SIMPSON: You need to read the report of the Social Security Administration, the one that was
given to us. Have you got a copy?
LAWSON: I'd love a copy.
SIMPSON: I'll get you that. In fact, I'll have a guy give that to you. You need to have that.
And it's good for you.
LAWSON: That would be fantastic. Thanks so much Senator
I know where you're coming from. I'll never forget getting my statement and realizing that thanks
to the stock market (remember when we were supposed to privatize Social Security?) I had lost more
than my annual salary in one month.
SIMPSON: Whatever, whatever. You pick your crap and I'll pick the real stuff.
I am guessing the rest of the Catfood Commission feel the same way about their two wars. Actually
Pete Peterson is one of the biggest warprofiteers and financial arsonists of anyone. But they think
"our crap" are wars and redistribution of more wealth to the more wealthy. So "their crap" is Highways?
Perhaps someone should call up the Veal Pen and tell AARP about Peterson's opinion of the elderly.
That they are old and in the way and why do they not die sooner. The old people need to be patriotic
and stop living so long and help the millionaires and the billiionaires of the Catfood Commission.
Simpson said "We are going to stick to the big three," meaning Social Security, Medicare
and Medicaid.
Someone ought to tell Simpson that the "big three" are Iraq, Afghanistan and Korea. The trillion
dollars we've already spent on Afghanistan would have gone a long way to paying back the Soc. Security
fund. But, hey, I guess that's way too easy.
Someone should also tell Mr. Simpson that since no one over the age of 50 can find a job nowdays,
if they tinker with the retirement age they might as well send everyone over 50 a loaded gun so
they can just shoot themselves and help the Beltway crowd keep those wars going at all costs.
Let's see: all Republicans will vote with Simpson's and Bowles's recommendations, and so will
the Blue Dogs.
The Secretary of Treasury is the Chairman of the Boards of Trustees of the Social Security and
Medicare trust funds. He serves with five other trustees, three from the Federal government (the
Commissioner of Social Security, the Secretary of Health and Human Services and the Secretary of
Labor) and two public trustees who are appointed by the President and confirmed by the Senate.
Unless FDL helps mobilizing physical demonstrations, the one pronged, inside the Beltway track
approach is not going to stop the Obama driven American train wreck.
So now the newest talking point on Social Security from a Republican Senator is that the Social
Security Trust Fund is all IOU's due to funding our Interstate Highway System???
Someone please
explain, if our Social Security Fund is full of IOU's and there is no surplus as stated by Senator
Simpson, is he implying that all FICA taxes immediately coming to the Trust Fund are sent back out
to current recipients? This does not make sense. And…why were previous administrations "allowed"
to leave IOU's in the Trust Fund? Aren't those "IOU's" government bonds? We can fund endless wars
but not repay the government bonds for Social Security???
Kiplinger presents idiotic figure $1 million as need for retirement if you wish to have $40K a year.
Use spreadsheet with your data to find out real figure (life expectancy estimates can be obtained from
various sources see Calculators; just do not
lie too much entering the data ;-). Kiplinger data are blatantly incorrect. For most couples
with Social security (let's say $2K for husband and $1K for a wife), and life expectancy 84 for a husband
and 90 for a wife $500K is enough, if we assume retirement age 62.5, living of savings till 66, getting
Social security and 0% after inflation return (TIPS). What is important is to have as much as possible
of this savings in Roth so that you use after tax savings and Roth the first 10 years in retirement
when you can still active, can travel and such. Avoiding taxes the first 10 years is very important
(for example medical expenses are not taxed in flexible medical accounts). Without Social Security $800K
is enough for the same couple.
May 30th, 2010
constantnormal:
Kind of a deceptive chart … applicable ONLY if one is generating
their entire retirement income from savings (as in IRA/401K). But that is rarely
the case, as most people (at least for a little while longer) will be able to get something
out of Social Security (a damn sight less than they put in, to be sure, but then Social Security
never has been a savings plan - it is instead and always has been - a literal Ponzi scheme,
dependent upon new contributors to pay the benefits of existing retirees), and again most people
will have some meager pension income, despite the severe whackage that corporations have delivered
to their pension plans in the past several decades (at least the employee pensions, executive
pensions remain robust).
Instead of looking first at how much you need to save, I think
it is much better to try and estimate how much income you will require, then set about building
some sort of financial scheme to deliver that income. And as for the amount needed
to live on in retirement, I can tell you to expect to spend AT LEAST as much as you were spending
when you were working. That old canard about needing less money to live on in retirement is
bunk, having been shattered by rising taxes, soaring health care expenses, and a general unpredictability
about the future. This may not apply to the uppermost 1%, but they already have their retirement
covered, courtesy of a societal money pump that has operated for many decades, delivering a
sizable advantage to the wealthy over those less fortunate.
And as you are constructing your personal models of where your income will arrive from, you
may as well steer toward the safe side, and omit Social Security, as about the only remaining
approach to preserve that system is to implement later retirement ages, and tax the bejesus
out of any individual savings you have managed to accrue.
And in your retirement planning, don't forget to consider spending
your retirement outside the USofA, in some nation with a working health care system, that doesn't
tax you to death, and has a considerably lower cost of living. Such places exist.
gorobei:
With 30 year TIPS yielding 1.8%, you can pretty much give up on the financial planners that
talk about "average 8% growth" or whatever. The current world is not constrained by a lack of
capital, so don't expect excess returns because you have $100K to offer for the long term: we
arbed that out years ago, and the move to IRAs, etc, was a one-time boost.
So, you have 50 years (age 20-70) of work to support yourself for 20 years (70-90.) You should
be saving around 30% (call Social Security 13%, so please sock away 17% extra per annum.)
Feel free to adjust if you are in a special situation, e.g. real income growth potential
(most people do not.)
constantnormal:
Another thing that strikes me as nonsensical is the assumption in the chart that people will
be able to postpone retirement indefinitely. At some point, the inability of the senior employees
to change with the business, and learn new ways of doing their jobs (which can be counted on
to change radically), will push them out the door into a retirement they are not prepared for,
or into a pointless and fruitless quest for minimum wage work, competing with high school kids
and illegal aliens.
CitizenWhy:
I wonder about the numbers in this scheme. My retirement savings (at 67) shriveled to a piddling
$175,000. This gives me a guaranteed minimum of nearly $10,000 per year (higher this year).
I get a much higher amount from Social Security. If I play things right I pay no taxes. I have
no work expenses, like suits. So my take home income is pretty good, especially since I moved
to a nice, big, cheap apartment in a nice minority-majority neighborhood that is gentrification-resistant.
And I have no car, with the pubic bus stopping at my door. I do not use prescription drugs but
buy certain supplements. I live very modestly but can afford events in the arts, eating out
often enough, small luxuries, a gym membership. I never owned a house.
I am the poor relation but I get along fine. I'd much rather live in my neighborhood than
in "prestigious" neighborhoods. People can live more modestly, and better, than they think.
Keep things simple.
RW:
The living solely on savings AKA million bucks model is simple minded and probably not a
good fit for most people or at least those who would consider being sent out to pasture rather
tedious.
For example, accepting the 4% drawdown figure for the moment (not unreasonable), it's obvious
that earning $1000 bucks a month from any other source - part-time work, hobby, eBay, etc. -
means you would only need $700,000 in savings to make the same monthly $ nut a million bucks
would generate (12,000/yr = 300,000 x 4%).
If you can reliably (and pleasurably) earn money going forward and have accumulated an adequate
disaster fund - major medical, inability to work, go to hell money, that kind of thing - then
fretting about how far away you are from a net-worth of a million bucks doesn't make much sense;
it's not the model you are following.
Tarkus:
I think it is a misnomer to use the word "Save" anymore. What they really mean is "Are you
INVESTING properly for retirement?" With rates so low on saving accounts, the Fed is basically
forcing you to seek risk just try and maintain parity ("try", as all investments will entail
some risk of loss). Also, the hidden tax of inflation is an incentive to spend now before it
is worth less (a "savings" disincentive). It is a treadmill that continues to speed up, and
according to Wall St, you must also now become a good, knowledgeable financial analyst because
they do not provide good advice (translation – you must do whatever job you happen to be doing,
AND do their job better than they do – for yourself).
franklin411:
I wonder if this chart takes the difference in life expectancy into account. People live
about 15 or 20 years longer now than they did in the 1920s. This means that the people who made
it to retirement in the 1920s either died quickly or they had really good genes (meaning they
had low medical costs in retirement).
Today, people live longer and having a few bad genes isn't automatically a death sentence,
meaning that medical costs are higher.
How the Common Man Sees It :
I think CitizenWhy laid out one of the best benefits of retirement. Because you are no longer
dependent upon a stationary job you have mobility. Most of the best jobs also are in large population
areas which tends to increase your cost of living. By moving to a place that has a smaller population
you can reduce your costs. If you move to a warmer climate you can reduce your expenses that
way too.
The chart also lays out what costs look like in 2010. Buy the time most of us are retiring
in 10 – 40 years that number will be closer to 2 – 8 million but it is the cash flow that matters
most. It is better to get a 20% return on 1 million than it is a 4% return on 3 million.
rileyx67:
Always saved 10% of income, which was the "advice" some years back, and when unable to do
so, worked a second part-time job to cover and meet the "deficiency". Spent last 5.5 years with
my company taking a 25% pay cut "building an ESOP, whose value reached over $400,000, but by
the time I retired and able to sell, was less than $40,000. Same company( United Airlines) subsequently,
in bankruptcy court was permitted to void themselves of all Defined Benefit pension plans, so
thus left with one third former from the PBGIC! Am completely comfortable and anxiety free,
thanks to that 10% "rule", plus some sound investing advice from this and other sites.
... AND for those "thinking" will need to work past the normal
retirement age, good luck with your health to be able to do so…but "good luck" is hardly a PLAN!
But will Main Street exit? Will we ever learn? No. The Wall Street casino makes mega-billions
for insiders like Blankfein and the Goldman Conspiracy. Yet "The Casino" is still below the 2000
record of 11,722. So after accounting for inflation, Wall Street lost over 20% of Main Street's
401(k) retirement money between 2000 and 2010. Yes, Wall Street's a big loser the past decade. Their
advice is self-serving. Period.
... ... ...
Correction or new crash...
...Gary Shilling said price-to-earnings ratios are at a "nosebleed 22.5 level." The Dow was around
11,000. Money manager Jeremy Grantham recently said the market's overvalued 40%. That could mean
a collapse to 6,600. Last week in Reuters' "Markets Could Be Derailed Again," George Soros echoed
a "game over" warning with a "stark warning ... that the financial world is on the wrong track and
that we may be hurtling towards an even bigger boom and bust than in the credit crisis."
Looks like 401K investors are being taken further and further out to sea without a life jacket.
And all they will be hearing from the crew when the boat go overboard, are going to be recommendation
like "have a nice swim, suckers".
The other problem is that every form of wealth accumulation has ultimately been stolen
from the middle classes and they are not inclined anymore to play those games. You cannot steal
from people with inflation and then taxes and then stagflation and then debt encumbrance and
then... you know that list too.
Worst of all, the middle class is counting on transfer payments to bail them out. Wait until
they discover that the value of the transfer payments will be inflated away. Even if they have
an alleged inflation tracking mechanism in their pension, the bogus
CPI calculation will assure that it doesn't track actual living expenses.
The government must be planning on a deadly epidemic or a meteor
strike to bail it out, because there's going to be a lot of very unhappy middle-class boomers
hitting retirement over the next 20 years, and no way to keep them fed and housed.
Mr Slippery :
sm_landlord wrote:
there's going to be a lot of very unhappy middle-class boomers hitting retirement over
the next 20 years, and no way to keep them fed and housed.
I met a lady at a volunteer function Thursday whose father, age 74, was forced out of retirement
after losing half his retirement funds in 2008 melt down. She told me he was 100% in stocks
at the time.
Byzantine_Ruins:
Mr Slippery wrote:
I met a lady at a volunteer function Thursday whose father, age 74, was forced out of
retirement after losing half his retirement funds in 2008 melt down. She told me he was
100% in stocks at the time.
Yah. After the meltdown in 2008, I got to talk with a lot of well-off people due to lucky
circumstances.
70 year old men, mourning they had been wiped out.
BROKERS selling complex securities that they once contended were safe and sound have saddled
individual investors with billions in losses since the credit bubble burst. Remember auction-rate
securities? Those were peddled to investors as just as good as cash - until they no longer were
after that market seized up in 2008.
Questions about how Wall Street marketed yet another complex product, sold as solid and secure,
are now emerging in investor arbitration cases. The instrument is named, inaptly as it turns out,
"100 percent principal protected absolute return barrier notes."
These securities are essentially zero-coupon notes sweetened by tying the return, in part, to
the performance of an equity index, like the Standard & Poor's 500 or the Russell 2000.
The securities promise to return an investor's principal, typically
at the end of 18 months, with the added gain from the index's performance if that index trades within
a certain range. Brokerage firms often issued these securities.
For an investor in one of these notes to earn the return of the index as well as get the principal
back, the index cannot fall 25.5 percent or more from its level at the date of issuance. Neither
can it rise more than 27.5 percent above that level. If the index exceeds those levels during the
holding period, the investors receive only their principal back.
Convoluted enough for you?
Yet, these securities appear to have been sold to conservative individuals
whose financial market forays were usually limited to certificates of deposit. Many of these investors,
to their great misfortune, bought principal-protected notes issued by
Lehman Brothers. They are now worth pennies
on the dollar.
CORINNE and Gregory Minasian were two of these investors who, at the suggestion of their broker
at
UBS, sunk almost $100,000 - more than half of their savings - into
Lehman notes in early 2008. They lost everything and have filed an arbitration case
against the firm to recover their losses.
The Minasians are a retired couple who live on Long Island. They
contend that their UBS broker pushed the investment when one of their C.D.'s matured.
The broker failed to explain the risks in the security, the Minasians said, and did not provide
them with a prospectus. They did not even know their investment had been issued by Lehman Brothers
until the firm collapsed.
"I am not a sophisticated investor," said Mr. Minasian, a former engineer who is 68. "Many years
ago I dabbled in the stock market, but I learned my lessons. Over the past 10 to 15 years my wife
and I invested in C.D.'s."
But that approach changed in January 2008, when, according to the Minasians, their UBS broker
began calling with an investment idea - principal-protected notes. "We questioned him over and over,"
Mr. Minasian said. "We initially told him we weren't sure and that we wanted to think it over. Maybe
the next day he called us and told us he was putting his father into the same notes and his father
is very conservative."
The Minasians said they decided to buy the instrument because they were assured by UBS, a financial
adviser they had dealt with for years, that it was safe. The thing was called a "principal protected"
note, after all.
Eight months later, Lehman went bankrupt. The note was virtually worthless.
Mrs. Minasian, 67, said she and her husband did not receive notice
of problems with the investment until mid-October, when they received a form letter from UBS saying
the value of their investment was "unavailable."
"I opened the letter and said, 'Why are we getting this?' " Mrs. Minasian said. "As I read it
and we were wondering if it in fact did pertain to us, my heart sank. I almost fell on the floor."
UBS sold $1 billion of these notes to investors. Commissions were
1.75 percent, far higher than those generated on sales of C.D.'s. When Mr. Minasian asked about
the commission, he says, his broker said there was none.
A spokeswoman for UBS, Karina Byrne, said, "UBS properly sold Lehman structured products to UBS
clients, following all regulatory requirements, well-established sales practices and client disclosure
guidelines." Client losses, she added, were the result of the "unprecedented failure" of Lehman
Brothers.
... ... ...
Add these securities to the growing pile of Wall Street inventions that benefit ... wait for
it, wait for it ... Wall Street.
[Apr 23, 2010]
time-to-replace-the-4-ruleRetirement-Savings Withdrawal Strategy Is Flawed, but Replacement Is Complex
What a f*#cking retards those guys are. Did they ever suspect about the existence of Excel and longevity
estimators?
How much -- when the time comes -- should you withdraw from your accounts earmarked for retirement?
Answer that question correctly and you get to enjoy the retirement of your dreams. Answer it incorrectly
and you either outlive your assets or you leave more money to your heirs than planned.
Conventional wisdom suggests that you withdraw on average 4% adjusted for inflation. Now comes
a paper co-authored by William Sharpe, the winner of the 1990 Nobel Prize in Economics, challenging
the conventional wisdom.
"It is time to replace the 4% rule with approaches better grounded in fundamental economic analysis,"
wrote Sharpe in his paper "The 4% Rule -- At What Price?" (That paper appeared in The Journal
of Investment Management in 2009, but resurfaced last week in the financial-adviser community
and is sparking debate anew.)
"Supporting a constant spending plan using a volatile investment policy is fundamentally flawed.
A retiree using a 4% rule faces spending shortfalls when risky investments underperform, may accumulate
wasted surpluses when they outperform and, in any case, could likely purchase exactly the same spending
distributions more cheaply."
Having a surplus is a problem. It means that you spent less than you could have in retirement,
that you short-changed yourself. It means you could have spent more traveling to exotic places or
visiting family and friends or splurging on your hobbies and philanthropic endeavors.
Having a shortfall is a much bigger problem, however. It means that you lived too large, too
fast. And while it might not mean eating dog food late in life, it sure as heck could mean a much
lower standard of life as you age.
According to Sharpe, who is also the founder of Financial Engines, the typical 4% rule recommends
that a retiree annually spend a fixed, real amount equal to 4% of his initial wealth, and rebalance
the remainder of his money in a 60%-40% mix of stocks and bonds throughout a 30-year retirement
period.
What's more, he shows the price paid for funding what he calls "unspent surpluses and the overpayments
made to purchase its spending policy." According to Sharpe, a typical rule allocates 10%-20% of
a retiree's initial wealth to surpluses and an additional 2%-4% to overpayments.
By the way, the improvements to the strategy include changing the amount to withdraw based on
market performance, or the length of the plan, or the portfolio mix, or the rebalancing frequency,
or the confidence level.
Sharpe's study, in essence, shows that retirees waste money by adopting the 4% rule. "The 4%
rule's approach to spending and investing wastes a significant portion of a retiree's savings and
is thus prima facie inefficient," Sharpe wrote.
Instead, he suggests that retirees consider "maximizing their expected utility," an approach
advocated by financial economists. "While we still may be far away from such an ideal, there appears
to be no doubt that a better approach can be found than that offered by combinations of desired
constant real spending and risky investment. Despite its ubiquity, it is time to replace the 4%
rule with approaches better grounded in fundamental economic analysis."
These are points, said Boston University economics professor Zvi Bodie, "that have long been
known to academics."
The only problem with what academia knows to be right and what's practical in the field -- even
by Sharpe's own admission -- is this: "Many practical issues remain to be addressed before advisers
can hope to create individualized retirement financial plans that maximize expected utility for
investors with diverse circumstances, other sources of income, and preferences," Sharpe wrote in
his paper.
Nothing Better Than 4% Rule
E. Tylor Claggett, a finance professor at the Perdue School of Business at Salisbury University,
said the question of whether it's time to toss the 4% rule in the circular file is an old one and
it has always been perplexing.
"The truth is, no one has a crystal ball," he said. "Therefore, no one knows how long the retiree
will live, what his or her actual future financial needs will be (due to health issues and the like)
and the future year-to-year performances of the various capital market components. If all of these
were known, we would not have to have this discussion. Instead, we are left with looking for 'rules-of-thumb'
to increase the probability that a retiree's needs will be met given his or her asset base at the
time of retirement."
Others agree.
"It may be true that from an academic standpoint the 4% rule is less efficient than a more fine-tuned,
more complicated approach that adjusts the withdrawal percentage based on time horizon and ongoing
performance," said Rande Spiegelman, vice president of financial planning, Schwab Center for Investment
Research. To Spiegelman, any rule of thumb, no matter how useful for long-term planning purposes,
has limitations when applied to individual facts and circumstances.
So instead of slavishly following any approach, Spiegelman says it's always a good idea to remain
flexible. "The 4% rule is easy to understand and follow, and provides a good starting point for
the average investor looking for a ballpark idea of how much they need to save or, conversely, a
ballpark estimate of how much they can safely withdraw," he said.
Meanwhile, Stephen P. Utkus, a principal with the Vanguard Center for Retirement Research, agrees
that the 4% rule is flawed. But he also notes, as did Sharpe, that there's no practical mechanism
to replace it with and that further research is required.
In the paper, Sharpe hinted at one strategy, which involves the purchase and sale of a complex
set of options, but this, said Utkus, is "a technique that is not practical today and doesn't not
exist in the real world of consumer finance."
Right now, Utkus said there's a big gap between academic theory and practice.
"Until academic methodologies come to a more practical set of solutions for households, they
remain conceptual approaches, not strategies that can be implemented today with real-world clients
and investors," said Utkus. "Over time, of course, the challenge is for academic models to become
more real-world, and for real-world practitioners to learn from the academic models. Right now,
there is a sizeable gap."
Meanwhile, academics are debating various models of what optimal draw-down methods should be,
though by no means is there any settled consensus on the issue. What Sharpe's statement is saying
is that, according to an economic model we have constructed, the 4% rule is flawed. Fair enough.
Robert Powell is the editor of Retirement Weekly.
Robert Powell has been a journalist covering personal finance issues for more than 20 years,
writing and editing for publications such as The Wall Street Journal, the Financial Times,
and Mutual Fund Market News.
Price:$20.45 & eligible for FREE Super Saver Shipping
Why are we in such a financial mess today? There are lots of proximate causes: over-leverage,
global imbalances, bad financial technology that lead to widespread underestimation of risk.
But these are all symptoms. Until we isolate and tackle fundamental causes, we will fail to extirpate
the disease. ECONned is the first book to examine the unquestioned role of economists as
policy-makers, and how they helped create an unmitigated economic disaster.
Here, Yves Smith looks at how economists in key policy positions
put doctrine before hard evidence, ignoring the deteriorating conditions and rising dangers that
eventually led them, and us, off the cliff and into financial meltdown. Intelligently
written for the layman, Smith takes us on a terrifying investigation of the financial realm over
the last twenty-five years of misrepresentations, naive interpretations of economic conditions,
rationalizations of bad outcomes, and rejection of clear signs of growing instability.
In eConned, author Yves Smith reveals:
why the measures taken by the Obama Administration are mere palliatives and are unlikely
to pave the way for a solid recovery
how economists have come to play a profoundly anti-democratic role in policy
how financial models and concepts that were discredited more than thirty years ago are still
widely used by banks, regulators, and investors
how management and employees of major financial firms looted them, enriching themselves
and leaving the mess to taxpayers
how financial regulation enabled predatory behavior by Wall Street towards investors
how economics has no theory of financial systems, yet economists fearlessly prescribe how
to manage them
I have been a huge fan of author Yves Smith's Naked Capitalism blog for years now, and this
book is a major triumph, putting in one place and fully developing the major themes that Smith
has explored on her blog over the course of the recent financial crisis. While this might appear
to be well-plowed territory, Smith tells it as an economics story
that is really a story of a failed democracy.
The linchpin of her work is the ascendant power of Wall Street over Main Street during the
Greenspan era and now the Bernanke era. Complicit with politicians, financial regulators, and
the revolving door of government service, the big Wall Street firms
and banks have, according to Smith, seized the political process to serve their narrow, financial
interests instead of those interests that serve a well-functioning polity.
However, despite the seemingly inflammatory thesis, this book is no rant. Smith, an industry
insider, is one of the smartest and expert observers of the flawed process that we now have,
and the book is loaded with incisive explanations that pull it all together for the average
reader in clear and at times thrilling language.
In the broadest sense, this is a moral tract as much as an economics
and political one. The moral outrage, while controlled and polite, is palpable
on every page. In essence, this is a deeply informed book that does what economics and political
tracts almost never do: it tugs at the heart as well as at the mind.
10% annualized return is probably unrealistic and mathematic is incorrect, but the idea of a comparison
is valuable. It just need to be recalculated with average 4.5%-5.5% return as a more realistic possibility
(1% over inflation is an achievement for a typical 401K investor in 10 year periods). Also if we assume
that taxes will increase that also changes that dynamic. It might be better to pay roughly 30% in taxes
today and maxout ROTH.
Here's an exercise I did. I assumed $50k salary, 28% income tax bracket, 3.5% inflation, and
10% investment return over 30 years. I considered 4 scenarios: contributing $5000 to each of a 401(k)
with no match, a 401(k) with a 50% match, a Roth IRA, and regular taxable accounts. For comparison,
I calculated the future value of the income tax that is paid today in each scenario.
The math shows that a 401k without a match really isn't worth it.
Let me know if you find an error in my calculations.
$5000 contribution to 401k with a $2500 match.
Taxes are 28% of $45000=$12,600.
In 30 years, that investment is worth ~$119k. Taxes are $33,312 (28% income tax)
The future value of the $12,600 income tax you paid is $35,366.
NET FUTURE INCOME: 118,973-33,312-35,366 = $50,295
$5000 contribution to Roth.
Taxes are 28% of 50000=$14,000.
In 30 years, that investment is worth ~$79k. Taxes are $0 (not taxable)
The future value of the income tax you paid is $39,295.
NET FUTURE INCOME: 79,315-39,295-0 = $40,020
$5000 contribution to Taxable account.
Taxes are 28% of 50000=$14,000.
In 30 years, that investment is worth ~$79k. Taxes are $11,897 (15% capital gains)
The future value of the income tax you paid is $39,295.
NET FUTURE INCOME: 79,315-39,295-11,897 = $28,123
$5000 contribution to 401k.
Taxes are 28% of 45000=$12,600.
In 30 years, that investment is worth ~$79k. Taxes are $22,208 (28% income tax)
The future value of the $12,600 income tax you paid is $35,365.
NET FUTURE INCOME: 79,315-35,365-22208 = $21,741
Make Your Social Security Choice Wisely by Robert Powell
If you're married, you'll need to figure out what impact your decision regarding the timing of your
Social Security benefits will have on both spousal benefits and widow's benefits.
Calculating the best age to take Social Security benefits is tricky, but critical.
Many Americans take Social Security early, at age 62, because they really need it. They're in
poor health or unemployed or both. Others take benefits early because they're worried they'll lose
out on what's rightfully theirs if benefits are reduced. But few people try to figure out the best
age to take Social Security -- and that's a serious mistake.
Even though it's challenging, calculating the best time to take benefits is well worth it, especially
given that Social Security represents about one-third of the average retiree's income.
What's key is evaluating the so-called break-even period to determine whether it would be better
to delay Social Security benefits (delaying them means a higher monthly benefit), take a reduced
benefit early, or start them at "normal" retirement age. Of course, there's a good reason why so
few people really do the calculations.
"When to begin Social Security retirement benefits is a challenging question that vexes many
financial planners and clients," Michael Kitces, editor of The Kitces Report, wrote in a recent
issue.
Living beyond the break-even point can produce large amounts of wealth relative to the risk.
But delaying Social Security benefits does represent a serious risk, Kitces said: If you wait and
then die before claiming your benefit, it really messes things up for your widow. Still, there are
situations in which delaying Social Security retirement benefits can pay off significantly.
"Is it better to begin payments early, or to delay Social Security and forfeit current payments
to receive a larger income stream in the future?" he said. "Although the analysis of such a question
would seem relatively straightforward, the complex rules of Social Security make the evaluation
more difficult, especially when evaluating the implications of living beyond the so-called 'break-even'
point."
Putting It Off Can Pay Off
One of the biggest risks to your retirement plan is unexpected longevity
-- living longer than you expect and having to fund additional years of retirement. "The decision
to delay Social Security provides tremendous additional value, at the exact time that it is needed,"
Kitces said.
Another risk: High inflation. "To the extent that inflation turns
out to be unexpectedly high, delaying Social Security benefits also turns out to be an effective
inflation hedge, because the value of delaying increases in higher inflation environments," he wrote. Though not the case now, during high inflation, which many predict on the horizon,
you would get larger cost-of-living adjustments.
Also, a low rate of return on investments poses a risk. "The decision to delay [benefits] also
turns out to be an indirect hedge to poor returns in the portfolio," Kitces wrote.
How to Decide
"At the most basic level, the decision about whether or not to delay Social Security retirement
benefits represents a very straight-forward trade-off," Kitces wrote. "You can either receive cash
payments now, in your pocket, to spend or invest however you choose, or you can give up those payments
in exchange for receiving a higher stream of income for life at a future date."
Here are the things you should consider to make a more informed decision.
1. What's Your Normal Retirement Age?
The first order of business: You need to know what your normal retirement age, or NRA, is. If
you were born in 1937 or earlier it's 65. If you were born in 1970 or later it's 67. And if you
were born between 1938 and 1969, it's somewhere in between. Of note, if you were born in 1943, your
NRA is 66. And since it's now 2009, that means anyone born in 1943 is now at NRA, the age at which
you can receive your full Social Security benefit.
Once you know your NRA you can calculate how much Social Security benefits will be increased
or decreased if you choose to take your benefit later or earlier than your NRA. Take your benefit
before NRA and it's reduced by 5/9ths of 1% for each month the benefits begin early, up to a maximum
of 36 months before your NRA. Take your benefit after your NRA and the benefit is adjusted upward,
depending on the year in which you were born, due to the "delayed retirement credit." With delayed
retirement credits, at least under current law, a person can receive his or her largest benefit
by retiring at age 70. A person born in January of 1943, for instance, who waited until 50 months
after reaching full retirement age would have a benefit 131.25% of their primary insurance amount.
2. Will You Be Working?
Next, you need to determine whether you'll be working, especially if you have not yet reached
full or normal retirement age, according to Kitces. Because of Social Security's earnings test,
Kitces says it's almost always a bad idea to take Social Security benefits early if you have earned
income greater than the earnings test threshold. Social Security withholds benefits if your earnings
exceed a certain level, called a "retirement earnings test exempt amount," and if you are under
your NRA.
But it's also important to note that one of two different exempt amounts applies, depending on
the year in which you reach your NRA. Under the earnings test, your Social Security benefits are
reduced by $1 for every $2 of earned income that you have in excess of $14,160 per year. But if
your NRA is 2009, your benefit is reduced $1 for every $3 of earned income in excess of $37,680.
3. How's Your Health?
At the end of the day, Kitces said the most significant factor in the entire process of evaluating
the decision to delay Social Security is whether you're likely to live long enough to receive value
from higher monthly benefits. The shorter your life expectancy, be it because of health, genetic,
or other relevant factors, the less prospective value to delaying Social Security. If you're not
expected to live long enough to reach the break-even point or you're so unhealthy that you may only
live a few more years, "it will virtually always make sense to begin benefits as soon as possible,
and get as many payments as possible," Kitces said.
Now the tricky part here is two-fold: First, what's your life expectancy? In 2006, life expectancy
at birth for the total population reached 78.1 years, according to the Centers for Disease Control
and Prevention. But a man aged 62 has a life expectancy of about 19 years, and a woman of the same
age has a life expectancy of 22 years.
Besides calculating your life expectancy, you need to calculate your personal break-even number.
According to Kitces, once you factor in such things as the time value of money with an appropriate
discount rate and the inflation adjustments for the increased benefits when delaying Social Security
benefits, break-even points vary from 15 years to 23 years. So don't blindly accept some rule of
thumb that you've read -- crunch the numbers.
The Tradeoffs
Now, if you don't plan to automatically defer benefits or start benefits early, Kitces said,
"you have to evaluate the prospective tradeoffs between electing benefits early, or delaying benefits
with the risk of not living to the break-even period and the opportunity for wealth creation by
living beyond it."
To do this, you first have to pick a conservative growth rate, as well as an assumption for inflation.
What's more, you need look at your retirement cash-flow needs and other income sources and investments,
the risks you might face in retirement, and your longevity. Once you have a sense of the tradeoffs,
you can come up with the best possible answer for your situation, rather than the rule-of-thumb
case.
The Caveats
If you're married, you'll need to figure out what impact your decision
regarding the timing of your Social Security benefits will have on both spousal benefits and widow's
benefits. Also, you'll need to figure the effect of taxes on your decision.
"Social Security benefits have their own unique rules for determining the amount of benefits
that will be subject to taxation, and there is significant interplay between the taxation of Social
Security benefits and other aspects of the client's planning situation that may create taxable income
and affect the taxability of Social Security," Kitces said.
There you have it. You can certainly take Social Security early if you want. Goodness knows many
do. But given that Social Security might represent one of your largest assets and perhaps your most
dependable income stream, wouldn't you rather know that you had it as close to right as possible?
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The two argue that stories also influence the optimism and pessimism of, and toward,
entire nations and economies.
They give the fascinating example of
José López Portillo
(left), a Mexican president of the 70s and 80s, who presented his country, Mexico, in the context
of an ancient story about the Aztec god Quetzalcóatl (also the title of a novel López Portillo had
once written). The god was expected to reappear at a special time to make Mexico great again.
As it happened, this was during the oil shocks of the 70s and oil was being discovered in Mexico.
Perhaps Quetzalcóatl's time was now? It did not go unnoticed that the presidential jets were named
Quetzalcóatl and Quetzalcóatl II. The country and foreign investors liked the story, and Mexico's
economy surged.
Until it stopped surging, of course. That's when a different story took over.
The point, as Akerlof and Shiller put it, is this:
Great leaders are first and foremost creators of stories…
Indeed, the power of stories is such that
We might model the spread of a story in terms of an epidemic. Stories are like viruses. Their
spread by word of mouth involves a sort of contagion.
Jag:
Hi Andreas – firstly thanks for getting the etymology of idiot into the august pages of the
Economist…. and in your excellent Hannibal blog born article no less (loved your phrase "speciousness
of the speech").
Secondly since sending the link to the FP article, have read the book it was excerpted from
and thought you might enjoy additional snippets/nuances from the relevant chapter.
Social psychologists Schank & Abelson argue "peoples' memories
of essential facts are… indexed in the brain around stories". Implying facts
that don't fit the dominant story are often not remembered. Hence such inconvenient truths become
less factive. Put another way denial isn't just an individual psychological mechanism and collective
denial, in the form of dominant but distorting narratives, is why democracies need Socratic
needling… and to borrow a phrase from your profession – why we must always be on guard against
"narrative bias".
Schank and Abelson also say "human conversation tends to take
the form of reciprocal story telling". And that we take deep seated delight in
telling stories that provoke a reaction. A motive I sense is strong in your blogging.
Re ur-stories – Polti 1916 only 36 basic dramatic plots, Tobias 1993 only 20 fundamental
stories
Finally – re viral stories, sticky truths and in the words of one of our ages most successful
story tellers (there has been no week when at least one book of his was not in the NYT bestseller
list for the last decade) and himself noted for having altered the language and metaphor (=simple
analogous story) we use to describe viral spread of memes….
Gladwell's Stickiness Problem
There's a danger in crafting ideas that are more compelling than
accuratehttp://bit.ly/5y6qOp
from Psychology Today
The two argue, and are probably wrong that stories also influence the optimism and pessimism of,
and toward, entire nations and economies. I think they got it in reverse. Real human conditions affect
people and generate storyline no matter what official propaganda claims. This storyline is sticky and
might persist despite changes economic conditions: both when good times turn into bad and vise versa.
So it has some lag with the actual economic conditions.
The human mind is built to think in terms of narratives, of sequences of events with an internal
logic and dynamic that appear as a unified whole. In turn, much of human motivation comes from living
through a story of our lives, a story that we tell to ourselves and that creates a framework for
motivation. Life could be just "one damn thing after another" if it weren't for such stories. The
same is true for confidence in a nation, a company, or an institution. Great leaders are first
and foremost creators of stories.
More... Social psychologists Roger Schank and Robert Abelson have argued that stories and storytelling
are fundamental to human knowledge. People's memories of essential facts are, they argue, indexed
in the brain around stories. Facts that are remembered are attached to stories. We keep in mind
a story of those memories, a story that helps define who we are and what our purpose is.
Politicians are one significant source of stories, especially about the economy. They spend much
of their time talking to their public. In doing so they tell stories. And since much of their interaction
with the public concerns the economy, so also do these stories.
You just received a call from your financial adviser. After a few pleasantries and a brief discussion
about the weather, he lays this on you: "I've made a slight change to the way I manage investment
portfolios. Rather than selecting mutual funds that try to beat the markets, I'm starting to use
index funds." He continues: "But I'll only use index funds for efficient markets. In inefficient
markets, I believe actively managed funds will provide superior
investment performance."
Welcome to "Core and Explore", also known by "Core and Satellite," "Barbell," "Core Plus" and
a variety of other witty names. The theory suggests that index funds (or ETFs) work best in large
and liquid markets and that actively managed funds work best in small and less liquid markets. Accordingly,
a combination of index funds and active management generates higher returns than an all index fund
portfolio.
Here's something that oughta give the marketing wizards at traditional Wall Street firms a heart
attack: Timing beats buy and hold, according to a study by finance professors at the New
York University Stern School of Business.
I doubt its pure timing - my best guess is, the fund managers involved more likely used aggressive
risk management tools and capital preservation strategies. To the unknowing, these look like timing
but are not.
The profs found that fund managers who invest based on macroeconomic trends - and are willing
to adjust their portfolios as those trends change - are the managers most likely to add value for
investors.
How you define "macroeconomic trend changes" and the basis of portfolio adjustments is a key
factor - one that is not delineated all that clearly:
"By analyzing data from January 1980 through December 2005, the study identified the top
25% of actively managed equity mutual funds based on their ability to select stocks during expansionary
economic periods. The report noted that this same group showed proficiency at market timing
during recessions as well.
This group outperformed other funds in both risk-adjusted terms and after expenses, according
to the study."
Cash has beaten stocks for the past 10 years; Even worse, Bonds have beaten Stocks since 1966.
To me, this suggests that an active asset allocation program (rather than pure market timing) is
the way to go for most high net worth investors.
Despite the weak stock performance, expect massive pushback on this from the long-only,
fully-invested, fee-based actors on the street.
Already, we see critiques from Morningstar. Russel Kinnel, the director of mutual fund research,
carped that "the 1980s were littered with funds that blew up because managers tried to follow macroeconomic
trends."
The Street will this line of thought tooth and nail, but given the horrific performance if the
LOFIFB firms, they have their work cut out for them . . .
There are several additional problems here. First of all this is inflation which realistically can
be assumed around 3% per year. That means that for all practical proposes real 401K returns for investors
using cost averaging returns will be zero or negative.
The second problem is that losses of 401K investors using stocks (even without self-defeating moves
like selling low and buying high) for the last 15 years are substantially higher then the author assumes.
My calculations had shown that for 401K investors who started in Jan 1996 and used cost averaging investing
100% in S&P500 underperformed Vanguard stable value fund approximately 30% (assuming today's S&P500
value 1100). For PIMCO Total Return it's even more. That tells us something about Siegel.
If we assume that stable value returns match average inflation, 401K investors who use S&P500 can
lose close to half purchasing value of their savings before retirement. So assumption of positive returns
(after inflation) in 401K in my view is pseudo-science and assumption of positive returns in S&P500
in case of cost averaging is even worse (Lysenkoism ?).
In stock universe all profits will be stolen by executives (profits will be siphoned off via stock
options) and Wall Street, the role of 401K investors will limited to the role of bag holders. As Jake
Chase noted in his comment: "No published financial statement of any bank or public corporation
is anything but a trap for the gullible, a convenient fiction, an outright fantasy. Any investment decision
is nothing but a bet, and we might as well all be monkeys throwing darts at the financial pages."
The article below first appeared in our
Washington Post column yesterday.I'm reproducing it in full here because there is an
important correction, thanks to a response by
Andrew Biggs. I've fixed the mistake
and added notes in brackets to show what was fixed. Also, I want to append some additional notes
about the data and some issues that didn't fit into the column.
Recent volatility in the stock market (the S&P 500 Index losing almost 50% of its value between
September and March) has led some to question the wisdom of relying on 401(k) and other defined-contribution
plans, invested largely in the stock market, for our nation's retirement security. For example,
Time recently ran a
cover
story by Stephen Gandel entitled "Why It's Time to Retire the 401(k)."
However, the shortcomings of our current retirement "system" predate the recent fall in the markets,
will not be solved by another stock market boom. The problems are more basic: we don't save enough,
and we don't invest very well.
We ran several scenarios of what a typical two-adult household that entered the job market last
year at age 22 might expect to receive on retirement at age 65 in 2051. For each scenario, we assumed
that our household would earn the median amount for its age group every year. We began with data
from the U.S.
Census Bureau on 2008 earnings by age group, and assumed that real incomes would grow by 0.7%
per year (the average growth rate for the 1967-2008 period). According to analysis by Andrew Biggs,
medium earners typically accumulate Social Security benefits equivalent to 52% of their pre-retirement
income, which comes to $40,265 per year. (All figures are in 2008 dollars.) For our scenarios, we
used different estimates of the household's savings rate and of the rate of return it would earn
on its savings. [Correction: I initially used the online Social Security
Social Security benefits
calculator, which says it provides estimates in "today's dollars," but actually uses wage-indexed
dollars. See Biggs's explanation of the
difference.]
For the first scenario, we assumed the average economy-wide savings rate of 2.4% over the last
ten years (1999-2008) and a real rate of return of 6.3% - the long-term average real return for
the stock market. (In his book Stocks for the Long Run, Jeremy Siegel calculates the annual
real rate of return from 1871 to 2006 as 6.7%; updating that figure through 2008, we get 6.3%.)
At retirement, this yields accumulated savings of $298,064. Today, a 65-year old couple could convert
$298,064 into a joint life annuity of $18,467 (we did an online search for annuity rates), meaning
that they would receive that amount each year (not indexed for inflation, however) as long as either
person were still alive. (Anything other than buying an annuity is gambling that you won't outlive
your money.) $18,467 is only 24% of the household's income at age 64. Combined with Social Security,
the couple would receive $58,732 per year, or a respectable 76% of its pre-retirement income of
$77,432. [Correction: Originally this was 59%; all later figures were also 17 percentage
points too low.]
Savings were unusually low over the past decade. The current savings rate (first three quarters
of 2009) is 3.6%. Plugging this into our spreadsheet, we get an annuity of $28,092 and retirement
income of $68,357, or 88% of pre-retirement income.
But this overlooks the fact that people do not earn the rate of return
of the stock market. Even assuming that people are investing in stocks, most do so
via stock mutual funds which, on average, do worse than the stock market as a whole. For example,
in the 1990s the average diversified stock fund had an annual return
2.4 percentage
points lower than the Wilshire 5000 Index (which reflects the performance of the overall market).
The main reason for this underperformance is that mutual funds have
to
pay fees to their managers - who, on average,
do not earn those fees through superior stock-picking (to put it mildly).
If we use a 3.9% annual return instead of a 6.3% annual return, now our annuity is only worth
$15,347 per year, and combined with Social Security our household is only earning 72% of its pre-retirement
income. But wait - it gets worse.
The average investor in mutual funds does not even
do as well as the average mutual fund. The reason is that investors tend to chase
returns. They take money out of funds that have recently done badly and move it into
funds that have recently done well. Because of mean reversion (the tendency for trends away from
the average to return back to the average), this means they take money out of funds that are about
to go up and put it into funds that are about to go down. Among large blend stock funds (the category
that includes S&P 500 index funds),
research
from Morningstar shows that the gap between mutual fund performance and investor performance
ranges from 0.9 to 2.2 percentage points, depending on fund volatility. (It can be much higher -
over 10 percentage points - for other types of funds.)
Taking an average gap of 1.6 percentage points, our expected annual returns are now just 2.3%.
Now our cumulative savings are only $172,853 and our annuity is only $10,709; combined with Social
Security our household is only earning 66% of its pre-retirement income.
Now, you can get close to that 6.3% expected return through a simple strategy: buy a stock index
fund and don't touch it. But this has another problem - you are 100% invested in stocks, the riskiest
of the major asset classes. Whatever your expected cumulative savings,
there is a 50% chance that your actual savings will be lower, and they could be a lot lower.
Since we're talking about survival in old age, ideally our household would not take any risk
at all. The closest you can get to this is to invest in inflation-protected Treasury bonds. 20-year
TIPS (Treasury Inflation-Protected Securities) currently yield 1.96% on top of inflation. [Note:
In the Post column I used 2.4%, the yield at the latest auction; however, that was back in July,
and long-term bond yields have come down since then, so this is the current yield according to Bloomberg.]
This provides a final annuity of $9,925; combined with Social Security, that's 65% of pre-retirement
income. That's not very much. And the only way to get higher returns is by taking on risk.
Bear in mind that we're assuming that Social Security will be around in its current form, as
will Medicare (or else seniors will have sharply higher health care costs than they do today). Also,
we've made a number of optimistic assumptions along the way: that life expectancies do not increase
by 2051 (this would reduce the annuity you can get with the same savings); that median-income
households save money at the average rate for all households, which is untrue (richer households
save at a higher rate, making the average savings rate higher than the median savings rate); and
that the savings rate is constant over age (since older people in fact save at a higher rate, the
money has less time to build up). In addition, we haven't started talking about below-median households,
who save at a lower rate. [Note: I assumed you can get an annuity yielding 6.2%, from
this online site;
Biggs, who probably knows better than I, uses 5.4%, which yields lower annuities for the same amount
of savings.]
The problems, in short, are that we don't save enough and we don't invest very well. One could
argue that these are a matter of choice. People could save more, and they could make smarter investing
decisions. But given that they don't, we could very well see tens of millions of seniors without
enough money to live decently in retirement. Given that prospect, perhaps we should question leaving
retirement security to individual choices and free markets.
***
Andrew Biggs argues that the numbers
show that the retirement system is doing OK. After all, if you assume just a 2.4% savings rate and
a 6.3% real return, you get 76% of your pre-retirement income. The system is doing better than I
thought it was before Biggs pointed out my error, but that's almost entirely due to Social Security.
Social Security is replacing 52% of pre-retirement income (not 35% as I initially calculated) and
private savings are replacing anywhere from 13% to 24%, depending on the scenario. I think the 13%
scenario is the most accurate, since is the lowest-risk option; anything else is not retirement
saving, it's retirement gambling.
Biggs also thinks (email to me) that my savings rates are too low, especially with auto-enrollment
into 401(k)s on the rise. This is a plausible point; we don't really know where the savings rate
will end up after this recession. If the median worker is auto-enrolled in a 401(k) - and, even
better, if he gets an employer match - he may be OK. Then we may be talking about a problem that
affects a significant number of lower-income households (who are less covered by 401(k)s and employer
matches than higher-income households), though not the median household.
This is the
spreadsheet with the scenarios. WordPress.com won't let me upload an Excel file, so I embedded
it in a Word file and uploaded that.
There's a legitimate question about 2008 vs. 2051 living standards. For example, in our most
pessimistic scenario, we still end up with an annuity of $50,190 in 2008 dollars. That might not
seem so bad. After all, median income in 2008 was only $53,303, and this is all in real terms, right?
However, I don't think that's the right approach to take. Living standards will improve on average
between now and 2051, and therefore an income of $50,190 2008 dollars will feel very different in
2051 than it felt in 2008. This is why I think the right comparison is to pre-retirement income;
that tells you the drop in living standards that people will suffer at retirement. (In practice,
most people probably won't buy annuities, and won't adjust their living standards down immediately
- but that just means they have a higher chance of outliving their money.)
Another possible objection is that we're leaving out capital gains from housing. Even if the
average return that investors get from stock mutual funds is only 2.3%, the fact is that many people
invest in their houses and seem to get higher returns. However, I think that we can't count on these
higher returns. First, these returns are largely a product of leverage and subsidized interest rates;
real housing prices underperform the stock market. Second, a given house doesn't really change in
real value (the utility it provides to people), even if its price changes; in general, its value
goes down, unless you put money into it for maintenance and improvements. If the price of
equivalent houses goes up in real terms, that just means that (on average) one generation of home
owners is taking money from the next generation of home buyers in the form of higher prices. In
other words, it's a multi-generational Ponzi scheme that can't go on forever. Third, of course,
not everyone owns a house.
In doing the research for this column I came across a paper by Andrea Frazzini and Owen Lamont
called "Dumb Money: Mutual Fund Flows
and the Cross-Section of Stock Returns." They find that, at least when looking at historical
data, you can make money by doing the opposite of what investors do with their mutual funds.
That is, money flowing into mutual funds is a valid predictor that the stocks in those funds will,
on average, go down relative to the market. The real beneficiaries are corporate issuers of stock,
who are able to issue stock at high prices when demand for it is high. I also like the way they
put their findings into context: "These facts pose a challenge to rational theories of fund flows.
Of course, rational theories of mutual fund investor behavior already face many formidable challenges,
such as explaining why investors consistently invest in active managers when lower cost, better
performing index funds are available."
Finally, I hate making mistakes. So I wholeheartedly endorse Biggs's call for the Social Security
Administration to fix its misleading
calculator.
By James Kwak
spencer
By using current real data you are ignoring inflation that would make the situation worse
than you describe.
You are assuming a savings rate of 2.4%.
If you ignore inflation that yields a constant saving stream in real terms.
But in an inflationary environment of for example 2% to 3% annually, and go back and apply
a 2.4% savings rate to nominal earnings some 20 years the dollar savings you get are only about
half of current earnings in real terms. To achieve the 2.4% average real savings in an inflationary
environment in savings rate in earlier years has to be higher to offset the impact of inflation
on averages wages.
jake chase
When you assume the financial future will be roughly like the past, you disregard the sea
change in financial markets caused by swaps and OTC derivatives: over leveraged risk is a guerrila
army bearing nuclear grenades moving in quantum jumps through the investment landscape. They
can blow up anywhere, any time. Exposure is entirely hidden. No published financial statement
of any bank or public corporation is anything but a trap for the gullible, a convenient fiction,
an outright fantasy. Any investment decision is nothing but a bet, and we might as well all
be monkeys throwing darts at the financial pages.
In the past ten years, a stock index fund returned nothing. To the extent corporations achieved
growth in profits, the dough was siphoned off in executive stock options. Today, you get nothing
in government bonds, unless you want to take thirty year risk. If you want a good investment,
buy a laundromat (and a gun).
Tom S
I think the biggest mistake in your estimate is that you assume people will begin saving
at age 22. From what I have seen of the typical college graduate, they will often spend maybe
six months unemployed and often spend the first couple of years paying off debt and getting
on their feet. Alternatively, there are many young people (like myself) getting graduate degrees
which means more years of no saving. If I did such a calculation I would assume no saving begins
until at least age 25, maybe 28. This will really crunch your already low values.
It's important to create a simple spreadsheet at least to decide whether you should take you SS
at 62.5 or 66.
Even after suffering significant losses last year, many remain overly optimistic about their
investment returns and the ability of their savings to fund their expenses after they stop working.
... ... ...
Perhaps even more startling is the extent to which their savings are falling short of their goals.
On average, these pre-retirees expected they would need $800,000 to fund their retirement. However,
most had only saved about $300,000.
Despite their inadequate savings, nearly two-thirds of the group
lack any formal plans for retirement savings or spending strategies.
Of the 35 percent of those who had a written plan for retirement, only slightly more than half
- about 52% percent - say they had updated it in the past year during the market downturn.
Hanky Panky and Govt Sachs having secret "social" events in a bugged room of a hotel... Nah,
can't possibly be true.
C'mon fellas, a little vodka, a little kgb, some hookers ... gimme a break.
...the true nature of these "wall street insider's" over the past two years ... scumbags who
would sell their grandmothers into slavery for the cost of a sandwich.
A friend sent this along, and we thought it was worth publishing an extended excerpt. This is
Part 1 of the essay, and we look forward to Part Two – Managing Your Own Money – Take Action Now.
That is really the challenge isn't it. Most people are financial non-specialists. Their lives
are full enough as it is, with things that they understand and that are important to them.
Too often the call to 'take control of your own money' is a prelude to 'and buy into my advice,
what I wish to sell to you.'
Financial advice is a difficult thing to provide in a blog. It would be like a doctor writing
a prescription for the public at large, fitting for some, inappropriate for others, potentially
deadly for a few. This is why I do not do it. Ever.
The prescription I use for my personal situation is the most that I will share, in addition to
general opinions and analysis of the markets and the economy. I am 58 years old, and have amassed
a fair amount of savings over the past twenty years. My general rules for the current period now
are:
1. Get liquid. Have little or no debt. Be in cash and diversified. Reduce living expenses to
essentials.
2. Get as far away as you can from Wall Street and riskier assets as is practical.
3. Put something you can spare from discretionary retirement savings into long term assets that
are not directly contingent on anyone else whom you cannot trust:
a. Personal food production, preservation, and preparation
b. Precious metals as insurance against monetary inflation / breakdown
c. Essentials for daily living and personal health care
d. Investments in practical education
e. Personal infrastructure and efficiency
f. Have a contingency plan for a systemic shock.
4. Above all be flexible. If this stagflation we are in becomes a protracted deflationary spiral
or an emerging hyperinflation, both possible outcomes, we will see it happening and may need to
adjust. This is where being light on debt and long on liquidity is most helpful. There is no one
right plan for the unexpected, ever.
If you have 401k plans you cannot cash in, you might consider
some very long term 'leap' puts to hedge them. But Cash or short term
Treasuries is preferable. I have all my discretionary cash scattered across several
very highly rated banks within FDIC limits. I have some money available for investment in foreign
currencies although I have cashed in my loon and aussie dollar positions now. I have sold some 'collectible
assets' that might have done very well if we get a prolonged period of high inflation similar to
the 1970's in order to raise cash levels. I may regret this, but so be it. The cash can be deployed
as the situation develops. Cash can otherwise be kept your home currency
which you use on a daily basis, as long as it is safe and liquid.
If you wish raise your voice or to peacefully demonstrate, be prepared with a simple set of coherent
positions and specific demands, avoiding anger. The mainstream media likes nothing better than to
portray demonstrators as cranks or fools. In general they are not sympathetic to the less powerful.
They will not lead change, but they will eventually follow.
Try to avoid squabbling amongst yourselves. When the reformers fight over fine points and petty
egotistical issues, the status quo rejoices, often formulating and encouraging the bickering.
Debate television where no serious discussion occurs, but plenty of sound bites and ad hominem
attacks get thrown, is the model for media distraction. But it 'works' for the short term opportunists,
and generally adds to the bread and circuses atmosphere masking an historic wealth transfer
and the decline of an empire, as it has done in the past.
And as always, the banks must be restrained, and the financial system reformed, and balance restored
to the economy before there can be any sustained recovery.
Reality Arbiter The Extinction of Ethics in Finance – The Fallout
by Greg Simmons
October 13, 2009
"...To revisit my original intention in writing this article, I cannot stress to you the importance
of understanding exactly what is going on in the world. No one is to
be trusted with your money. Not Wall Street, not the banks, not the government – nobody is to be
trusted! Does the investing public not realize that Wall Street almost lost every penny of American
wealth? Now we're supposed to believe they've saved the day? I beg to differ.
Those parasitic liars nearly took us to zero. Who knows, they still
might.
The grossly deluded public has been at the mercy of brokers, financial advisors, Wall Street,
the Fed, congress, and the US Treasury far too long. This moral hazard and subsequent uneven playing-field
created by the current financial structure (the trifecta of the Fed, Treasury, and the "Banksters")
wherein the scales of balance tip only upward, hence siphoning this nation's wealth into the coffers
of those that create such hazards. Their current solutions to this crisis, a crisis of their own
making, is nothing more than a replication of the same idiotic practices that got us here in the
first place; corporate bailouts, homebuyer tax-rebates, foreclosure moratoriums, cash-for-clunkers,
all designed to forego the inevitable sanctification of sins past and deliver them on to the US
taxpayer.
The difference between the past and present is that now we have a government willing to set up
shop and take over entire industries; mortgage lending, auto, banking, and who knows going into
the future. Just wait, we'll be in the airline business in no time. I feel like I'm in a perpetual
state of Déjà vu - with a repeat of September 2008 barreling headlong around the next bend.
That we exist in a quasi public-private financial system wherein
the government in collusion with the Fed and the "Banksters" take your money essentially by force
(specifically through the leverage of ZIRP) or otherwise and shove it into new toxic instruments,
bailouts, and ill-conceived stimulus programs that even these so-called best-and-brightest have
no concept of the inherent risks, or hazard of unintended consequences, is proof that the entire
game is rigged against you.
It is time to take control of your money.
Now, with regard to the subject of managing one's own money, the rules of the game have officially
changed. The EXTINCTION OF ETHICS in today's financial markets IS the new rule. You must take total
responsibility for the management of your own money and you must do it now! I don't know how to
make it any more clear. I could probably write an entire thesis about
the utter abandonment of morality by today's so-called investment community. I mean, does everybody
have to cheat each other to make a dollar? The subject literally brings into question the human
thread that binds our social fabric together.
Given the dire state of the global economy and the fact our collective economic situation has
gotten significantly worse, not better, creates an opportune time to shift any misplaced philosophy
of trust in a corrupt system and recognize that we're in the middle of a COVER-UP, NOT A RECOVERY!
A comment I always appreciated and have tried to take credit for but know I plagiarized from
somewhere is this; ANTICIPATING BAD LUCK IS GOOD LUCK; DEPENDING ON GOOD LUCK IS BAD LUCK.
This so-called recovery is merely a papered-over facade made possible
by trillions of newly created dollars. The time to prevent getting thrown back
into the ditch is now. Remember, do not fall victim to the CNBC-induced epidemic of economic
amnesia."
Can you make the risk of stocks go away just by owning them long enough? Many investors still
think so.
"Over any 20-year period in history, in any market, an equity portfolio has outperformed a fixed-income
portfolio," one reader recently emailed me. "Warren Buffett believes in this rule as well," he added,
referring to Mr. Buffett's bullish selling of long-term put options on the Standard & Poor's 500-stock
index in recent years. (Selling those puts will be profitable if U.S. stocks go up over the next
decade or so.)
As the philosopher Bertrand Russell warned, you shouldn't mistake wishes for facts.
Bonds have beaten stocks for as long as two decades -- in the 20 years that ended this June 30,
for example, as well as 1989 through 2008.
Nor does Mr. Buffett believe stocks are sure to beat all other investments over the next 20 years.
"I certainly don't mean to say that," Mr. Buffett told me this week. "I would say that if you
hold the S&P 500 long enough, you will show some gain. I think the probability of owning
equities for 25 years, and having them end up at a lower price than where you started, is probably
1 in 100."
But what about the probability that stocks will beat everything else, including bonds and inflation?
"Who knows?" Mr. Buffett said. "People say that stocks have to be better than bonds, but I've pointed
out just the opposite: That all depends on the starting price."
Why, then, do so many investors think stocks become safe if you simply hang on for at least 20
years?
In the past, the longer the measurement period, the less the rate of return on stocks has varied.
Any given year was a crapshoot. But over decades, stocks have tended to go up at a fairly steady
average annual rate of 9% to 10%. If "risk" is the chance of deviating from that average, then that
kind of risk has indeed declined over very long periods.
But the risk of investing in stocks isn't the chance that your rate
of return might vary from an average; it is the possibility that stocks might wipe you out. That
risk never goes away, no matter how long you hang on.
The belief that extending your holding period can eliminate the risk of stocks is simply bogus.
Time might be your ally. But it also might turn out to be your enemy. While a longer horizon gives
you more opportunities to recover from crashes, it also gives you more opportunities to experience
them.
Look at the long-term average annual rate of return on stocks since 1926, when good data begin.
From the market peak in 2007 to its trough this March, that long-term annual return fell only a
smidgen, from 10.4% to 9.3%. But if you had $1 million in U.S. stocks on Sept. 30, 2007, you had
only $498,300 left by March 1, 2009. If losing more than 50% of your money in a year-and-a-half
isn't risk, what is?
What if you retired into the teeth of that bear market? If, as many financial advisers recommend,
you withdrew 4% of your wealth in equal monthly installments for living expenses, your $1 million
would have shrunk to less than $465,000. You now needed roughly a 115% gain just to get back to
where you started, and you were left in the meantime with less than half as much money to live on.
But time can turn out to be an enemy for anyone, not just retirees. A 50-year-old might have
shrugged off the 38% fall in the U.S. stock market in 2000 to 2002 and told himself, "I have plenty
of time to recover." He's now pushing 60 and, even after the market's
recent bounce, still has a 27% loss from two years ago -- and is even down 14% from
the beginning of 2000, according to Ibbotson Associates. He needs roughly a 38% gain just to get
back to where he was in 2007. So does a 40-year-old. So does a 30-year-old.
In short, you can't count on time alone to bail you out on your U.S.
stocks. That is what bonds and foreign stocks and cash and real estate are for.
In his classic book "The Intelligent Investor," Benjamin Graham -- Mr. Buffett's mentor -- advised
splitting your money equally between stocks and bonds. Graham added that your stock proportion should
never go below 25% (when you think stocks are expensive and bonds are cheap) or above 75% (when
stocks seem cheap).
Graham's rule remains a good starting point even today. If time turns out to be your enemy instead
of your friend, you will be very glad to have some of your money elsewhere.
The hypothetical scenario of an investor with a $1 million portfolio who retired at the peak
of the market in 2007 assumes that he was invested entirely in stocks and was taking monthly
withdrawals by liquidating stocks month to month at a 4% withdrawal rate. This would be ill
advised under any situation, as the article implies.
Retirees planning to draw down their portfolios must maintain
at least three to five years of withdrawals in cash or short term bonds (ideally,
using a bond ladder over five years). This reduces, but does not eliminate, the risk of having
to liquidate stocks at a bad time. Once this is accomplished, all that remains is the need to
not panic during market declines and avoid the temptation to sell out at lows.
If the investor with a $1 million portfolio simply had a ladder of bonds representing spending
for years 1 to 5 in the amount of $200K in total (five years of $40K withdrawals), he could have invested the remaining $800K in more volatile assets
without risk of having to liquidate at the March 2009 lows.
[ Why take additional risk if you a million ? -- NNB]
I believe that this is precisely why Ben Graham stated that investors should have a limit
of 75% stock allocation - he knew that having more than that in a portfolio intended to be drawn
down over time could result in poorly timed forced sales of stock.
This was a very timely article and maybe in the future the five
year ladder concept could be fleshed out in more detail. That would be a practical
example and actionable plan for retirees concerned with volatility.
Well said. If you pay 1.4% to a fund you are giving them 14%
of your expected return of 10%. Most people don't tithe that much to their church,
why give it to a big financial firm that is not going to equal
the indexes.
If someone is afraid of individual stocks, look at plain vanilla index ETF's.
Note: The Supreme Court is getting ready to rule that investors don't have the right
to object to obscene fees in court; that its the exclusive jurisdiction of the directors appointed
by the people charging the obscene fees to decide if the fees are "fair" even if twice what
they would charge in a competitive situation. Oh and you have to pay a 12b-1 fee too to pay
for the marketing to lure in new investors so that the firm doesn't have to pay its own marketing
costs.
The 10% average return is a compound geometric return which is only achieved by reinvesting
all dividends, something the average financial advisor failed to understand in the 1990's. Once
you start taking distributions you do not have reinvestment. The long term rate of return for
appreciation only, without reinvesting dividends is only about 6%. Financial planners have been
arguing the rate of return you can "safely" withdraw since the 2000 crash. If you don't get
it from a dividend or interest payment you shouldn't spend it unless its an emergency because
you are dipping into principal.
The next big issue may be bonds for those that buy bond mutual funds which never mature. If
interest rates spike, holders of long-term bond funds will have losses similar to that of stocks.
With the huge budget deficits and the rest of the world getting tired of the ever shrinking
vallue of the dollar, some smart people think its when, not if. If you want bond income, do
not buy funds, buy individual issues so that you know when you will get your principal back.
It's important to note that almost all financial advisers would like to bury this column
under the Titanic - and for good reason. The mantra of buy-and-hold has been a financial fiction
for as long as I can remember. And I agree the the last two sentences offered by Dean Anderson.
I'll take it one step further: Insist that your market broker or financial adviser place either
stop-limit or stop-market orders on your entire stock portfolio. The sad truth is that many
brokers and advisers failed to protect client accounts from the catastrophic market sell-off
in March. If your broker or adviser can't - or won't - service your accounts properly, it's
time to fire them and find a new one that can. Fool me once, shame on you. Fool me twice, shame
on me.
With today's agency society arrogating to itself far too large a share of market returns, the
outlook for future individual retirement savings is dire.
The amazing disappearance of the individual stockholder as the backbone of the U.S. stock market
has been one of the least recognized but most profound trends of the last half-century. As shown
in the chart nearby, direct ownership of stocks by American households has declined from 91% in
1950 to just 32% today. The 9% ownership stake held by financial institutions in 1950 crossed the
50% mark in 1983, and now totals 68% of all stocks. It is hard to imagine that our earlier society
dominated by individual stock ownership will ever return.
Of course, individual investors remain major participants in the stock market, but now do so
largely through mutual funds and public and private pension plans. But such participation lacks
the traditional attributes of ownership such as selection of individual stocks and engagement in
the process of corporate governance.
*
But aren't our financial institutions owners of stocks? Not really. They are owners in name --
agents, in fact, with a duty to act on behalf of their principals, including our mutual fund owners
and beneficiaries of our retirement plans. Today's agency-dominated investment society is overwhelmingly
composed of those two groups of underlying owners.
At first, the march toward institutionalization was led by pension plans. Holding less than 1%
of all stocks in 1950, they shot up to 19% in 1980 and 27% in 1989-95, only to ebb to today's level
of 21%. Growth in mutual-fund ownership, on the other hand, was stagnant in the early years, holding
at 3% in 1950 and 1980 alike, rising to just 8% by 1990. Since then, fund ownership of stocks has
risen relentlessly to a record high of 28% currently. Within the pension segment, public plans are
holding steady while private pension plans are gradually receding. But the secular decline in defined-benefit
pension plans has been matched by an offsetting rise in defined-contribution thrift and savings
plans in which mutual funds are the major component. So today's dominant stock ownership by mutual
funds seems destined for continued growth.
Institutional investing is now largely the business of giants. America's
100 largest money managers alone now hold 58% of all stocks. When such a relative
handful of professional managers substantially displaces a diffuse group of millions of inchoate
individual investors, one might have expected the managers to more aggressively assert their rights
of stock ownership and demand more enlightened corporate governance focused on shareholder interests.
With few notable exceptions, however (some state and local pension plans, unions, and TIAA-CREF),
our institutional investors have refrained from active participation in corporate affairs.
What explains the passivity of these institutions that in fact hold effective control over corporate
America? First, too many of our financial agents have their own interests to serve, often conflicting
with the interests of their investor-principals. It is a truism that principals are likely to watch
over their own money with far more care than they take in watching over the assets entrusted to
them as the agents of others. When there are many masters to serve, it is the master who pays the
servant whose interests are most likely placed front and center. Corporate pension plans, for example,
are controlled by the same executives whose compensation is based on the earnings they report to
shareholders. During the 1990s, they arbitrarily raised their projections of future pension plan
returns, enhancing operating earnings to meet "guidance" targets, even as interest rates tumbled
and prospective returns eroded.
Similarly, mutual fund managers are compensated by separate corporations seeking to maximize
the return on their own capital (i.e., to enhance their own wealth), in direct conflict with their
duty to maximize the returns on the capital entrusted to them by their fund shareholders. The excessive
advisory fees, expenses, hefty sales loads, and huge commissions on portfolio transactions paid
to brokers in return for their sales support consumed something like 45% of the real returns earned
on fund portfolios during the past two decades.
Second, unlike their predecessors in the '50s and '60s, financial institutions focus on investment
strategies that emphasize short-term speculation in evanescent stock prices, rather than traditional
long-term investing based on durable intrinsic corporate values. From
1950 to 1965, equity mutual funds turned over their portfolios at an average rate of 17% per year;
in 1990-2005, the turnover rate averaged 91% per year. The old own-a-stock industry could hardly
afford to take for granted effective corporate governance in the interest of shareholders; the new
rent-a-stock industry has little reason to care.
To further complicate matters, today's typical giant private financial institution -- managing
both pension plans and mutual funds -- faces serious conflicts in its exercise of the rights and
responsibilities of ownership. When a proxy proposal is opposed by the management of a corporate
client, the money manager is unlikely to vote in its favor. It is not surprising, then, that governance
activists among large private money managers are conspicuous not merely by their scarcity but by
their absence. And it gets worse. Today, it is difficult to separate the owners from the owned.
Through its defined-benefit pension plans, corporations own 12% of all stocks, and dominate another
11% through defined-contribution savings plans. What is more, most of our largest money managers
are themselves now owned by giant financial conglomerates. Arguably, this circularity of ownership
allows corporate America to control itself.
The problems created by this new and conflicted world of financial intermediation are hardly
trivial. Excessive return projections for pension plans have played a major role in creating the
current shortfall of $600 billion in private pension plan liabilities relative to plan assets. The
shortfall in public plans has been estimated at $1.2 trillion, bringing the total deficit to $1.8
trillion, and rising. Individual retirement savings are also at dangerously low levels. Only 22%
of workers participate in 401(k) savings plans and only 10% in IRAs (9% have both). Despite having
had a quarter-century-plus to build assets in these tax-sheltered plans, investors have accumulated
balances of but $33,600 and $26,900 per participant respectively, a trivial fraction of what would
be required for a decent retirement.
With today's agency society arrogating to itself far too large a share of market returns,
the outlook for future individual retirement savings is dire. A citizen entering the work
force today has an investment horizon of at least 60 years. If the stock market were to earn an
average nominal return of 8% per year, $1,000 invested today would then be worth $101,000 -- the
magic of compounding returns. But if our financial system consumes 2.5 percentage points annually
of that total return -- a conservative estimate of today's reality -- that $1,000, growing now at
5.5% net, would be worth just $25,000, a minuscule 25% of the accumulation that could have been
obtained simply by owning the stock market itself. The magic of compounding returns, it turns out,
is simply overwhelmed by the tyranny of compounding costs at today's exorbitant levels.
The serious shortfalls in retirement reserves that represent the backbone of the nation's savings
have arisen importantly because our manager-agents have placed their own interests ahead of the
interests of the investor-principals they are duty-bound to serve. Our financial institutions have
failed to exercise the rights and responsibilities of corporate citizenship; to adequately fund
pension reserves; and to deliver to fund shareholders their fair share of the returns generated
by the financial markets themselves.
>*
Why? Largely because the radical change from an ownership society dominated by individual investors
to an intermediation society dominated by professional money managers and corporations has not been
accompanied by the development of an ethical, regulatory and legal environment that requires trustees
and fiduciaries, as agents, to act solely and exclusively in the interests of their principals.
In addition, we have developed a patchwork of tax-deferred retirement programs -- Social Security,
corporate and public pensions, deferred compensation plans, 401(k)s, 403(b)s, individual IRAs, and
Roth IRAs -- and are now considering the addition of Personal Savings Accounts to the list. We need
to undertake a careful appraisal of this often costly mix, and develop an integrated retirement
system that will enhance savings.
The overarching need is for a clearly enforced public policy that honors the interests of our
citizen-investors and puts these beneficiaries in the driver's seat where they belong. The ownership
society is over. The agency (or intermediation) society is not working as it should.
Mr. Bogle, founder and former CEO of Vanguard, is author of "The Battle for the Soul of
Capitalism," published this week by Yale.
Of course, people's retirement outlooks vary widely. Some 20 million workers still participate
in a traditional pension plan, and employers pay pension benefits to millions more retirees (that
doesn't even count government-sponsored public plans), according to Boston College's Center for
Retirement Research.
Those workers are sitting a lot prettier than the more than half of U.S. families who aren't
covered by any kind of pension at their current job, according to the Employee Benefit Research
Institute, a nonprofit, nonpartisan group. Still, even a well-prepared person may get thrown off
by a job loss or unexpected health-care costs. (Average medical costs in retirement can run into
the six figures even for those covered by Medicare, according to EBRI.)
And those lucky people with traditional pensions likely are wondering how long the money will
last as the financial crisis shreds employers' ability to fund such plans for the long haul.
See related story on PBGC.
Defined-contribution plans such as 401(k)s have largely taken the place of traditional pensions:
67% of workers say they have a DC plan, up from 26% in 1988, while 31% of workers participate in
a traditional pension, down from 57% in 1988, according to EBRI.
But, while lower-income workers face a worrisome retirement reality all their own, middle- and
upper-middle class workers likely face the biggest living-standard shock. That's because lower-income
people can replace a good chunk of their preretirement income with Social Security, and high-income
people generally have enough personal savings. But middle-class workers may see their relatively
comfortable life change drastically come retirement.
July 20, 2009 | http://globaleconomicanalysis.blogspot.com
From the 2002 bottom until the 2007 market top it was hard to go wrong no matter what you did.
Everything from junk bonds to commodities to emerging markets to the major market indices were all
headed up. This made people feel they were protected from harm. It was
an illusion.
... ... ...
Off To The Races?
People are expecting it's off to the races again with the rally since May. Not so fast.
Fundamentally the market is very overvalued here. Expected earnings growth is unlikely to happen
for many reasons. Clearly that does not preclude a further rally, but the above chart shows what
happens to market rallies based on speculation as opposed to fundamentals.
Perhaps the market has bottomed, but perhaps it hasn't. Even if it has bottomed, where is it
going? Consumers are 70% of the economy and consumer attitudes toward debt, consumption, and risk
taking reached a secular peak. Moreover unemployment is still rising and consumer balance sheets
are in shambles.
Nearly 30 years ago James Fries at Stanford University School of
Medicine put a ceiling of 85 years on the average potential human life span. More
recently a team led by Jay Olshansky at the University of Illinois at Chicago said it would remain
stuck there unless the ageing process itself can be brought under control. Because infant mortality
in rich countries is already low, they argued, further increases in overall life expectancy will
require much larger reductions in mortality at older ages. In Mr Olshansky's view, none of the life-prolonging
techniques available today-be they lifestyle changes, medication, surgery or genetic engineering-will
cut older people's mortality by enough to replicate the gains in life expectancy achieved in the
20th century.
That may sound reasonable, but the evidence points the other way. Jim Oeppen at Cambridge University
and James Vaupel at the Max Planck Institute for Demographic Research in Rostock have charted life
expectancy since 1840, joining up the figures for whatever country was holding the longevity record
at the time, and found that the resulting trend line has been moving relentlessly upward by about
three months a year. They think that by 2050 average life expectancy in the best-performing country
could easily reach the mid-90s.
Rises in life expectancy have been habitually underestimated because it seemed unlikely that
the improvement could go on for ever, and just as regularly the figures have had to be revised soon
afterwards. Some experts now think there may be no theoretical limit at all, pointing to the huge
rise in the number of centenarians in the past few decades. In America they are the fastest-growing
section of the population, with an increase from 3,700 in 1940 to over 100,000 now.
Why are people living ever longer? Robert Fogel at the University of Chicago, a Nobel prize-winner
in economics, reckons that improved medical care and technology are only part of the answer.
Another part, he thinks, is something he has dubbed "technophysio evolution". Over
the past few centuries humans have developed more resilient physiques because they gained unprecedented
control over their environment and their living conditions. Western
people's average body size has increased by 50% over the past 250 years. Larger body size (but not
obesity), Mr Fogel's research has shown, is associated with better health and longer life.
But modern life has its downsides too. Stress is often seen as a life-shortening factor-though
perhaps the effects are not as lethal as some people think, or else the Japanese, who are famous
for working long hours, would not have the highest life expectancy in the world.
Another hazard of affluence is getting fat. Around 10-20% of the adult population in many rich
countries, and over 30% in America, are now clinically obese. Overweight people are at greater risk
of cardiovascular and respiratory diseases, cancer, type-II diabetes and other life-shortening ailments-though
it is not yet clear whether the effects are strong enough to cancel the trend to greater longevity.
And life expectancy can go down as well as up. In much of eastern Europe it started dropping
in the 1980s in response to the upheaval in the region, and despite a subsequent slight recovery
it has still not regained the level of the 1960s.
People almost everywhere could extend their life spans further just by doing a few sensible things,
such as not smoking, drinking only in moderation, eating lots of fruit and vegetables and taking
regular exercise. Educated folk are better at keeping to such rules, and as a group they live markedly
longer than those with only basic schooling. Richer people, unfairly, also live longer than less
well-off ones, even in the developed world.
But all this is tinkering at the edges. Mankind's dream has been to conquer ageing altogether,
and scientists are working on it. Spare-part surgery to replace worn-out bits of the anatomy is
already well-established and will get better with the use of stem-cell technology. For a more general
effect, experiments on rodents have shown that a severely restricted but balanced diet can increase
their lifespan by about 30%. But nobody knows whether this would work in humans, and even if it
did, there might be few takers.
The longer-term hope is to find a way of switching off the ageing process by manipulating the
appropriate genes, which in theory could make people near-immortal (though they could still die
of accidents and diseases). But if that were feasible, the consequences would need to be carefully
thought through. In Jonathan Swift's "Gulliver's Travels", the hero meets a tribe of immortals,
the Struldbruggs, who far from being wise and serene turn out to be a miserable lot: "Whenever they
see a funeral, they lament and repine that others have gone to a harbour of rest to which they themselves
never can hope to arrive."
Hale and hearty
People in the rich world can now expect to live, on average, more than a quarter of a century
longer than they did 100 years ago. Is that a blessing or a Struldbruggian curse? Clearly it depends
on whether they become old and frail at the same age as before and just limp on for much longer,
or if the extra years are hale and hearty ones.
Most of the evidence supports the more cheerful view. Research led by Kenneth Manton at Duke
University found that in recent years disability above the age of 65 in America has been falling
significantly. In other rich countries the picture is more mixed. When the OECD recently looked
at 12 member countries, it found clear signs of a recent decline in disability in elderly people
in only five of them (including America). But other studies produced more optimistic results.
By and large, people do now seem to remain in good shape for longer.
Moreover, the period of ill health that usually precedes the final goodbye has got
shorter in the past few decades, which demographers call "compression of morbidity" (as a rule of
thumb, the bulk of spending on an individual's health care is concentrated in the last year or two
of life, and particularly in the final six months). This compression has a variety of causes, including
the shift from manual to physically less demanding white-collar work, rising levels of education
and much-improved health care and medical technology, from keyhole surgery to heart pacemakers.
Eighty, it is said, is the new 65.
But even fairly fit older people need more health care than younger
ones, not least because they often suffer from chronic diseases that are expensive to treat.
In the EU, one estimate puts health-care spending on the elderly at about 30-40% of total health
spending. So will the better health of an ageing population, good as it has been for so many, impose
unaffordable costs on public-health budgets?
Over the past few decades all OECD countries have seen their health spending grow considerably
faster than their economies. Ageing populations will add further momentum to that growth. Howard
Oxley, a health-care expert at the OECD, reckons that increased spending on health and long-term
care for the elderly could amount to an extra three-and-a-half percentage points of rich countries'
GDP by the middle of the century-and a lot more if spending on medical technology continues to go
up at current rates.
Measured by spending on health care as a share of GDP, America already tops the list, shelling
out the equivalent of more than 15% of GDP (see chart 4). The American government's health-care
spending will be hugely affected by ageing because of Medicare, the state-funded health-care programme
for the elderly and disabled, and Medicaid, the programme for the poor (and often also old, because
it covers long-term care).
President Barack Obama is determined to reform his country's health-care system to improve coverage
and, eventually, drive down costs. More money does not always produce better results. People in
America are less healthy and die sooner than in Britain, which proportionately spends little more
than half as much on its health care. According to David Cutler, an economics professor at Harvard
who has advised the president on the reform, even doctors believe that around 30% of money spent
on health care in America is wasted.
Peter Orszag, head of the Office of Management and Budget, has recently been praising the work
of a group of medical experts at Dartmouth Medical School, led by Elliott Fisher, which has been
compiling an atlas of regional variations in American medical practice and health-care spending,
mainly for people on the Medicare programme. It found that in 2006 Medicare spending varied more
than threefold across American hospital referral regions. Again, higher spending does not seem to
result in better care or greater patient satisfaction. Because the system has encouraged the provision
of lots of doctors, specialists, hospitals and expensive diagnostic kit, all of them are kept busy
without much regard to results.
The trouble with health care in America, says Muriel Gillick, a geriatrics expert at Harvard
Medical School, is that people want to believe that "there is always a fix." She argues that the
way Medicare is organised encourages too many interventions towards the end of life that may extend
the patient's lifespan only slightly, if at all, and can cause unnecessary suffering. It would often
be better, she thinks, not to try so hard to eke out a few more hours or weeks but to concentrate
on quality of life.
Take care
But long before they get to that point, growing numbers of old people will become less able to
look after themselves and need more care. Across the OECD, spending on long-term care is already
equivalent to around 15% of total health spending and is rising fast. The great bulk of that care-an
estimated 80%-is still provided by family and friends, the traditional source of support for the
elderly. But more women are going out to work, so fewer of them have time to look after old folk
and formal help is becoming increasingly important.
In most developed countries only a small minority of over-65s-between 3% and 6%-live in institutions.
Keeping old people in nursing homes or hospitals is expensive, staff is hard to find, and in any
case most people would much rather be looked after at home. Many countries
are now providing grants to adapt homes, paying families for the care they provide and supplying
helpers to give a hand with things like dressing and bathing.
With far more people reaching a great age, a lot more such care will be needed in future. How
will it be paid for? A few far-sighted countries-including Germany, the Netherlands, Luxembourg
and Japan-have already introduced mandatory long-term-care insurance schemes. Others may have to
follow.
Want to know why GM stock is above zero? Look to hedge funds and short-term trading.
Long before the June 1 negotiating deadline, it became quite clear that General
Motor s Corp. was headed for bankruptcy. Its debtholders were going to get crushed. The shareholders
were wiped out.
Except that they weren't. As the deadline neared, shares of GM did a funny thing:
They kept trading at more than $1 each. They didn't disappear.
Last month, shares rose a few pennies during a given trading day and fell a few
pennies the next. Taken as a whole, GM shares reflected nearly $1 billion in value that did not
exist. Even today, with GM in bankruptcy, the automaker's shares are trading around $1.50.
Market analysts seem baffled, but trading in GM reflects the sea change that's
taken place in the markets during the last decade. Simply put, the market has slowly given itself
to short-term traders. The traders control volume, and whoever controls the volume controls the
price.
The old notion that profitable companies with good growth prospects should have
rising share prices -- and that failures like GM should be gone, or at least trading in the pennies
-- is history.
Today, a hedge fund investing billions using a quantitative formula can stall
a stock; a couple hedge funds aligned can turn a profitable company into a Dow laggard. Toss in
a few short sellers and you have the great Wall Street collapse of September 2008.
It wasn't always this way. Before the machines and the shorts took over Wall
Street, stocks were evaluated by an underlying company's prospects. Buy-and-hold investing ruled
the day. Investors such as Warren Buffett and Bill Miller were the models.
Those fellows are a far cry from this generation's masters of the universe. Traders
are in charge now. They rule the market. They dominate volume. That stock you bought because you
thought the company was in good shape? It's a pawn in the hands of a computer model or some supertrader
like Steven Cohen at SAC Capital Partners or Bridgewater Associates' Ray Dalio.
To move a security, they don't need to own it. They can have a short position.
They can put an order to sell 1 million shares in a dark pool, those anonymous marketplaces that
operate outside the walls of the exchanges. They can own options or futures contracts. Buy enough
GM puts and watch the price begin to fall under the pressure.
A crucial decision facing retirement savers is how to allocate their savings across broad investment
classes, including the choice of how to divide investments between domestic and foreign holdings.
This study investigates whether cross-border investing would have been advantageous to U.S. retirement
savers in the past. The analysis is based on empirical evidence on asset returns in eight industrialized
countries that have reliable historical time series data on stock and government bond returns. The
goal is to determine whether U.S. workers would have obtained higher expected retirement incomes,
with smaller risk of catastrophic investment shortfalls, if they invested part of their retirement
savings in foreign stocks and bonds without hedging the currency risks of their overseas investments.
The results show that workers could indeed have increased their expected pensions if they included
unhedged foreign assets in their portfolio and if the portfolio were selected from one on the efficient
frontier. Under many naïve investing strategies, however, increasing workers' allocation to overseas
assets will not reduce the risk of catastrophically poor investment performance.
The tabulations show that the risk of obtaining a very low pension replacement
rate actually increases if workers allocate a sizeable percentage of their savings to overseas investments.
"If another decline in the market is going to bankrupt you or put you out of business or destroy
your retirement account, you should not go back into the stock market," said
John C. Bogle, the founder of Vanguard and viewed by many as the father of index investing.
"It's not complicated. The stock market can go up and down a lot and nobody really knows how much
and when."
What's worked for Mr. Bogle may not work for you, but his method isn't a bad place to start.
"I have this threadbare rule that has worked very well for me," he said in an interview this week.
"Your bond position should equal your age." Mr. Bogle, by the way, is 80 years old.
... ... ...
As to those investors who got out of stocks, Mr. Bogle said it might be time for some of them
to get back in. "But I would take two years to do it," he said. "Maybe average in over eight quarters,
and do an eighth each quarter. I am just not in favor of doing things in a hurry or emotionally."
And then? "Don't touch it," he said, emphatically. "One of my rules is don't do something. Just
stand there."
... ... ...
There are different ways to invest your cash and bond holdings.
Rick Rodgers, a financial planner in Lancaster, Pa., invests 10 years of annual expenses in a
bond ladder, with an equal amount coming due every six months. The ladder can include high-quality
corporate bonds,
Treasury notes, certificates of deposit or
municipal bonds, depending on the retiree's tax bracket. Mr. Simon takes a similar approach
using a 15-year ladder of zero-coupon bonds. He says that investors can start building the ladder
in their 50s, with the first rung coming due the year they retire.
Simply having a retirement account is not enough. Much of the discussion this past year has focused
on getting more workers to open a 401k. The problem is that the big majority of retirement accounts
don't really hold nearly enough money.
According to Bogle's numbers, the median IRA has $55,000 in it. By his calculations, that's enough
to provide a steady income of $2,200 a year -- less than $200 a month. That's it.
The typical 401k holds only $15,000. Bogle argues that to reach the level of income they hope
for in retirement, Americans need to put 15% of their earnings in retirement accounts for their
entire working lives. Very few do.
One of the biggest differences between individual accounts and traditional
pension plans is that they transfer what Bogle calls "longevity risk" from pension funds to individuals.
What that means in practice is that you need to save more -- a lot more -- in your account than
a pension plan would include in order to cover the chance that you'll live to a very old age.
Right now, we have no good solution to this. In theory, you should be able to put your money
into an annuity at retirement that'll cover this risk. But as Bogle points out,
there are virtually no annuities that will let you do this at a low
cost. So now your underfunded retirement account looks even worse.
One large elephant in the room that was not discussed is inflation
and/or taxes.
All of the money that is being printed by the Feds for various bail outs, stimulus, budget deficits,
is going to lead to either higher taxation, or printing of more and more paper ruined with green
ink.
In my opinion, I expect to see inflation that will make either Zimbabwe or the Wiemar Republic
look fiscally responsible in the near future.
This guy is a regular crazy trader, but some ideas he mentions deserve a second look.
So, what is a discipline anyway? Here are the standard definitions:
A system of rules of conduct or method of practice.
The trait of being well-behaved.
Training to improve strength or self-control.
It's a process of continually educating yourself and improving your
techniques. The truth is that knowledge is power, and, in the world of investing, it's also money.
Now, more than ever, we all need to learn to be nimble and flexible. There is no room for lazy portfolios or blindly followed tips. We can't afford
to fall in love with any one idea or one stock; cut your losses early, when they're no more than
annoyances.
Several financial planners recommend shorter-term fixed-income investments, or at the least making
sure your bond investments aren't heavily tilted toward long maturities, because they are mos.132/search?q=cache:0C86fJ3VQS8J:www.gabrielrobet.com/my_weblog/2008/11/correlation-pitfalls-naive-diversification-and-asset-allocation-strategies.html+naive+asset+allocation&cd=8&hl=en&ct=clnk&gl=us">
Gabriel Robet Correlation pitfalls, naive diversification, and asset allocation strategies
Correlation pitfalls, naive diversification, and assetallocation strategies
Correlation is the heart of modern portfolio theory and most asset allocation strategies,
where it measures dependence between financial assets under the assumption of multivariate normally
distributed returns, an assumption almost always violated in real life. Kat (2002) shows that
for correlation to be a good measure of the dependence structure between the variables involved,
it is not enough that each variable is normally distributed, but one must also verify that their
joint distribution is normal.
If correlations don't work, investors may employ comparatively unsophisticated strategies
for their asset allocation, such as naïve diversification (also called 1/N heuristics: invest
the same amount in each asset). Naïve diversification is appealingly simple and usually results
in reasonably diversified portfolios. So how well does naive diversification perform against
portfolio optimization models? DeMiguel, Garlappi and Uppal (2004) test static naïve diversification
against several models of optimal asset allocation and show that the optimizing models have
a higher Sharpe ratio in-sample, but naive diversification has a higher Sharpe ratio out-of-sample:
the gain from optimal diversification relative to naïve diversification is typically smaller
than the loss arising from the error in estimating the inputs to the optimizing models.
Kat (2002). The Dangers of Using Correlation to Measure Dependence.
Download pdf
DeMiguel, Garlappi and Uppal (2004). How Inefficient Are Simple Asset-Allocation Strategies?
Download pdf
What mix of fixed income and equity funds should companies offer in their 401(k) savings plans
to prevent participants from investing too conservatively or too aggressively? And how should plans
deal with differences in risk aversion across the participant population? Should plans offer different
funds based on age of participants, allowing young workers to select aggressive, stock-rich portfolios
of funds and older employees to gravitate toward fixed-income funds?
For more than two decades, as income inequality increased and job security decreased, Americans
lapped up personal finance columns, books, and television shows. We thrilled to stock tips and swooned
at sensible strategies for using dollar-cost averaging to
invest in no-load index funds. Buy and hold, my
friends! The annualized gain for the S&P 500 stock index over time is more than 10 percent! You,
too, can turn into the millionaire next door. Carpe diem, folks! Seize the financial day!
The advice proffered by the vast majority of analysts, would-be gurus, and television
pundits came down to one word: stocks. Some, like CNBC's infamous Jim Cramer, advocated stock-picking
strategies. Others encouraged mutual funds. But
very few - at least of those that could get publicity via mainstream outlets - doubted the efficacy
of the market.
That our personal finances
weren't fully ours to seize didn't seem to occur to many of us until recently, when the stock market
plunged almost 40 percent in a mere year, housing went into free fall, and the unemployment rate
began to climb perilously toward double digits. All these facts suddenly left the personal finance
industry facing a conundrum of its own making. The backbone of the self-help complex is the idea
that you can do it. You. Singular. But what happens when you lose your job and can't find a new
one before your six months of recommended emergency savings runs out? Or a good chunk of your retirement
income is in the form of a pension from your former employer - and that employer is named Chrysler?
What then?
"Personal
finance has come to substitute for the role government should
play for people," observes Nan Mooney, author of (Not) Keeping Up with Our Parents.
"In the past 20 years the myth of the person succeeding on their own has gotten bigger and bigger.
This myth is dangerous. It tells you if you can't balance everything and you are in debt, it is
your fault."
Sounds harsh, but if you are laid off and at the end of your resources, what
other message can you take away from people like mega-personal finance guru Suze Orman, who continues
to argue that people's main problem with money is ... emotional. (Orman also urges people to invest
for retirement in the stock market, while admitting the bulk of her savings is in municipal bonds.)
Or Jean Chatzky of everywhere from NBC's Today show to Oprah's couch, who helpfully
tells people in her latest book, The Difference: How Anyone Can Prosper in Even the Toughest Times,
"Overspending is the key reason that people slip from a position of financial
security into a paycheck-to-paycheck existence." (Note: Italics original to Chatzky.)
Chatzky forgets to mention that studies have demonstrated
the problem most likely to land one in bankruptcy court isn't an addiction to designer clothes but,
instead, overwhelming health care expenses.
"Buy and hold" is an age-old investment strategy that made many people money in years past, but
some investment advisers now say that philosophy is a losing proposition. Gerald Jordan, of Hellman
Jordan Management; and Jack De Gan, of Harbor Advisory; and Doug Kass, of Seabreeze Partners, discuss.
"We've long had a buy and hold strategy, but that's a strategy only in a secular bull market,
which we're not in right now," said Jack DeGan of Harbor Advisors. He suggested investors be "more
opportunistic
around valuations and trade in a core position."
Run on 401Ks coming?
401(k)s Hit by Withdrawal Freezes
Investors Cry Foul as Some Funds Close Exits; Perils of Distressed Markets
By ELEANOR LAISE
Some investors in 401(k) retirement funds who are moving to grab their money are finding they
can't.
Even with recent gains in stocks such as Monday's, the months of market turmoil have delivered
a blow to some 401(k) participants: freezing their investments in certain plans. In some cases,
individual investors can't withdraw money from certain retirement-plan options. In other cases,
employers are having trouble getting rid of risky investments in 401(k) plans.
When Ed Dursky was laid off from his job at a manufacturing company in March, he couldn't withdraw
$40,000 from his 401(k) retirement account invested in the Principal U.S. Property Separate Account.
That fund, which invests directly in office buildings and other properties, had stopped allowing
most investors to make withdrawals last fall as many of its holdings became hard to sell.
Now Mr. Dursky, of Ottumwa, Iowa, is looking for work and losing patience. All he wants, he said,
is his money.
"I hate to be whiny, but it is my money," Mr. Dursky said.
The withdrawal restrictions are limiting investment options for plan
participants and employers at a key time in the markets. The timing is inconvenient
for the number of workers like Mr. Dursky who are laid off and find their savings inaccessible.
Though 401(k) plans revolutionized the retirement-savings landscape by putting investment decisions
in the hands of individuals, the restrictions show that plan participants aren't always in the driver's
seat.
Individual investors mightn't even be aware of some behind-the-scenes maneuvers causing liquidity
problems in their retirement plans. Many funds offered in 401(k) plans
lend their portfolio holdings to other investors, receiving in exchange collateral that they invest
in normally safe, liquid holdings.
The aim is often to generate a small but relatively reliable return that can help offset fund
expenses. But in recent months, many of the collateral investments have gone haywire, prompting
money managers to restrict retirement plans' withdrawals from the lending funds.
Some stable-value funds also are blocking the exits. These funds,
available only in tax-deferred savings plans such as 401(k)s, typically invest in bonds and use
bank or insurance-company contracts to help smooth returns. But in cases of employer bankruptcy
and other events that can cause withdrawals, these funds can lock up investor money for months at
a time.
Investors in the Principal U.S. Property Separate Account said they understood the risk of losses,
but didn't think their money could be locked up for months or years. Most participants in the 15,000
plans holding the fund haven't been able to make any withdrawals or transfers since late September.
"To sell property at inappropriately low prices in order to generate cash for a few would hurt
the majority of investors and violate our fiduciary obligations," said Terri Hale, spokeswoman for
Principal Financial Group Inc., the parent of the fund's manager. The fund, which had $4.3 billion
in net assets at the end of April, still is making distributions for death, disability, hardship
and retirement at normal retirement age.
As of April 28, redemption requests that had yet to be honored totaled nearly $1.1 billion, or
roughly 26% of the fund's net assets. Principal doesn't anticipate that it will make any distributions
to investors who have requested redemptions until late 2009 or beyond, Ms. Hale said. Meanwhile,
the fund continues to fall, declining 25% in the 12 months ending April 30.
Some investors have lost hope of recovering their money. Judith Sterner, a 69-year-old part-time
nurse, had more than $12,000 in the fund when she tried to transfer that balance to a money market
last fall. But her transfer was denied, and her stake has since declined to less than $10,000.
"This $12,000 represents a year of my retirement money that I don't have," said Ms. Sterner,
of Morton Grove, Ill.
Principal still allows new investors into the fund. It categorizes the U.S. Property account
as a fixed-income investment, alongside much stodgier funds holding high-quality bonds. New investors
are warned of potential withdrawal delays, Ms. Hale said. As for the fixed-income categorization,
she said, "a substantial portion of the account return is based on income streams from rents, and
its returns have been comparable to fixed-income funds."
While the problems selling real-estate investments are relatively straightforward, withdrawal
restrictions related to securities lending stem from far more obscure practices.
Funds often lend out portfolio holdings, through a lending agent, to other investors. These borrowers
give the lender collateral, often amounting to about 102% of the value of the securities borrowed.
Some of the collateral pools in which funds invest this collateral held Lehman Brothers Holdings
Inc. debt and other investments that plummeted in value or became hard to trade in the credit crunch.
Though agents who coordinate funds' lending programs share in profits from securities lending,
the risk of such collateral-pool losses falls entirely on the funds that have lent the securities
and, ultimately, retirement plans and other investors holding those funds.
The problems have limited retirement plans' ability to get out of securities-lending programs,
though participants' withdrawals generally haven't been affected.
Retirement plans offered to employees of energy company BP PLC last fall tried to withdraw entirely
from four Northern Trust Corp. index funds engaged in securities lending. Certain holdings in Northern's
collateral pools had defaulted, been marked down, or become so illiquid that they could only be
sold at low values, according to a BP complaint filed in a lawsuit against Northern Trust.
The BP plans halted new participant investments in the funds and asked to withdraw their cash
so it could be reinvested in funds that don't lend out securities.
But under restrictions imposed by Northern Trust in September, investors wishing to withdraw
entirely from securities-lending activities would have to take their share of both liquid assets
and illiquid collateral-pool holdings, according to a Northern Trust court filing. BP rejected that
option, and the companies still are trying to resolve the matter in court.
Northern Trust's collateral pools are "conservatively managed" and focus on liquidity over yield,
the company said.
State Street Corp. in March notified investors of new withdrawal restrictions in its securities-lending
funds. Until at least the end of the year, plans can make monthly withdrawals of only 2% to 4% of
their account balance, the notice said.
Plans wishing to withdraw entirely from lending funds will have to take a slice of beaten-down
collateral-pool holdings.
"Given the current state of the fixed-income market, we felt it was prudent to put some well-defined
withdrawal parameters in place," said State Street spokeswoman Arlene Roberts.
"Stock monkeys" like "speak-first-think-later" pundit James Cramer are so despicable (if not criminal,
see Cramer v. Stewart on Daily
Show) ) that I wonder how even openly tabloid TV channel (CNBC) can keep him on staff. Stewart criticized
Cramer for being a bad journalist-- for sucking up to and being co-opted by the people he should be
covering, for failing to ask these people tough questions, for failing to treat their answers with appropriate
skepticism, for failing to do independent investigation to discover the problems in the U.S. economy
and the misbehavior of financial elites. Stewart criticized Cramer for being a Wall Street sycophant,
essentially a cheerleader for a financial bubble ("who gives a shit -- put some money in -- roll the
dice and see what happens") and thus had encouraged millions of ordinary Americans to invest in junk
and then lose much of their savings later on. Stewart called him a corrupt journalist, who served with
financial elites helping them to rip-off the ordinary citizens he was supposed to inform
Years ago, when I wrote a popular financial makeover feature for a major national newspaper, one
of our subjects asked if he should be plowing his more than $50,000 in savings into gold. It was
1997 and gold was trading at a little more than $300 an ounce. The financial planner assisting with
the piece laughed dismissively, and the question never made it into the final write-up. Well, my
bad. As I write, gold is hovering around $900 an ounce.
For more than two decades, as income inequality
increased and job security decreased, Americans lapped up personal finance columns, books, and television
shows. We thrilled to stock tips and swooned at sensible strategies for using dollar-cost averaging
to invest in no-load index funds. Buy and hold, my friends! The annualized gain for the S&P 500
stock index over time is more than 10 percent! You, too, can turn into
the millionaire next door. Carpe diem, folks! Seize the financial day!
The advice proffered by the vast majority of analysts, would-be gurus,
and television pundits came down to one word: stocks. Some, like CNBC's infamous
Jim Cramer, advocated stock-picking strategies. Others
encouraged mutual funds. But very few-at least of those that could get
publicity via mainstream outlets-doubted the efficacy of the market.
That our personal finances weren't fully ours to seize didn't seem to occur to many of us until
recently, when the stock market plunged almost 40 percent in a mere year, housing went into free
fall, and the unemployment rate began to climb perilously toward double digits. All these facts
suddenly left the personal finance industry facing a conundrum of its own making. The backbone of
the self-help complex is the idea that you can do it. You. Singular. But what happens when you lose
your job and can't find a new one before your six months of recommended emergency savings runs out?
Or a good chunk of your retirement income is in the form of a pension from your former employer-and
that employer is named Chrysler? What then?
"Personal finance has come to substitute for the role government should play for people," observes
Nan Mooney, author of
(Not) Keeping Up with Our Parents. "In the past 20 years the myth of the person succeeding
on their own has gotten bigger and bigger. This myth is dangerous. It tells you if you can't balance
everything and you are in debt, it is your fault."
Sounds harsh, but if you are laid off and at the end of your resources, what other message can
you take away from people like mega-personal finance guru Suze
Orman, who continues to argue that people's main problem with money is ... emotional. (Orman
also urges people to invest for retirement in the stock market, while admitting the bulk of her
savings is in
municipal bonds.) Or
Jean Chatzky of everywhere from NBC's Today show
to Oprah's couch, who helpfully tells people in her latest book,
The Difference: How Anyone Can Prosper in Even the Toughest Times,"Overspending
is the key reason that people slip from a position of financial security into a paycheck-to-paycheck
existence." (Note: Italics original to Chatzky.) Chatzky forgets to
mention that studies have demonstrated the problem most likely to land one in bankruptcy court isn't
an addiction to designer clothes but, instead,
overwhelming health care expenses.
All in all, these might not be the right messages just now. While Orman's book, no doubt propelled
by her continuing celebrity and television show, remains at the top of the New York Times
best-seller list, Chatzky's book is languishing listless, a very different fate than the one met
by her
last book, which was released in a different era-2006, to be precise.
In the current economic climate, a new group of au current advisers is coming to the fore. Many
of them, like Peter Schiff, received their initial boost of
fame by predicting various aspects of the current meltdown and are now trying to make money by telling
people how to survive and thrive in the post-crash world. Schiff's
Crash Proof, currently in its 11th printing, urges consumers to buy gold to hedge
against coming hyperinflation. At the other end of the spectrum is
Martin D. Weiss' recently published
The Ultimate Depression Survival Guide. Weiss, a Florida-based investment adviser, advocates
that many people should cut their stock losses and sell off, as we are entering a period of deflation.
Online gurus are also seeing spikes. ITulip.com's Eric Janszen
says he received 12,000 new subscribers last year. George Ure, a business consultant who runs the
free site UrbanSurvival.com and the subscription
site Peoplenomics, makes predictions about future events
based on a linguistics theory applied to Internet postings and has seen an increase of more than
20 percent in unique visitors year over year. Nonetheless, it's not looking like the new gurus will
be any more helpful than their more conventionally minded peers. After
all, the online world has been abuzz with accusations that many of Schiff's personal clients suffered
losses of
between 40 percent to 70 percent in 2008.
Which leads to another question: What's next for personal finance? The past two years have demonstrated
over and over again that bad things can happen to good savers and investors. Very few of us have
the wherewithal to fund both retirement savings and a large enough emergency fund to sustain us
through a bout of unemployment lasting, say, more than a year. No one, it turns out, really knows
what an individual stock, mutual fund, or commodity like oil or precious resource like gold will
be worth in six months, never mind six years.
Nonetheless, personal finance is unlikely to crawl away and die anytime soon for a simple reason:
We think we need it. "We're kind of screwed but we don't have a choice but to take care of ourselves
because no one else is helping," admits MSN's personal finance columnist,
Liz Weston.
A number of personal finance gurus have been moving, some ever so slowly, over toward the idea
of pressuring the government for change. Weston, who has written extensively about what should be
and isn't in pending congressional legislation putting brakes on the credit card industry,
is begging her readers to contact their representatives about the plan. Others have gotten more
ambitious. Schiff used his burst of fame to endorse
presidential candidate Ron Paul. Weiss is currently circulating a
petition
to stop further bank bailouts.
Me, I'd settle for a few mea culpas from our finance gurus. After all, I am aware I owe my gold-loving
dude an apology. Unfortunately, I know the planner assigned to the case won't be eating crow any
time soon. I recently received a copy of
his latest book in the mail. It's all about how if you can just identify your money archetype,
financial success will be yours. Oh, and one other thing. The press release quotes him as advising,
"Don't rush out to buy gold."
Impact varies by account balance: ... those with more than $200,000 in account balances
had an average loss of more than 25 percent.
Impact varies by age and job tenure: 401(k) participants on the verge of retirement (ages
56–65) had average changes during this period that varied between a positive 1 percent for short-tenure
individuals (one to four years with the current employer) to more than a 25 percent loss for those
with long tenure (with more than 20 years).
Short-term vs. long-term: While much of the focus has been on market fluctuations in the
last year, investing for retirement security is (or should be) a long-term proposition. When a consistent
sample of 2.2 million participants who had been with the same 401(k) plan sponsor for the seven
years from 1999–2006 was analyzed, the average estimated growth rates for the period from Jan. 1,
2000 through Jan. 20, 2009, ranged from +29 percent for long-tenure older participants to more than
+500 percent for short-tenure younger participants.
Recovery time and future stock market performance: This analysis also calculates how long
it might take for end-of-year 2008 401(k) balances to recover to their beginning-of-year 2008 levels,
before the sharp stock market declines. Because future performance is unknown, this analysis provides
a range of equity returns: At a 5 percent equity rate-of-return assumption, those with longest tenure
with their current employer would need nearly two years at the median to recover, but approximately
five years at the 90th percentile. If the equity rate of return is assumed to drop to zero for the
next few years, this recovery time increases to approximately 2.5 years at the median and
nine to 10 years at the 90th percentile.
Near-elderly with very high equity exposure: Estimates from the EBRI/ICI 401(k) database
show that many participants near retirement had exceptionally high exposure to equities: Nearly
1 in 4 between ages 56–65 had more than 90 percent of their account balances in equities at year-end
2007, and more than 2 in 5 had more than 70 per-cent. As a result of the Pension Protection Act
of 2006, many 401(k) plan sponsors appear to be offering lifecycle/ target-date funds, which automatically
rebalance asset investments into more "age appropriate" allocations. Had all 401(k) participants
been in the average target date fund at the end of 2007, 40 percent of the participants would have
had at least a 20 percent decrease in their equity concentrations, and consequently, may have mitigated
their losses, sometimes to an appreciable extent.
Millions of mutual fund investors have been sold a pipedream and they don't even know it. Others
know it and they simply don't care. If you own mutual funds, isn't it time you found out how your
funds have really performed versus corresponding index funds and ETFs?
To that end, Standard & Poor's has just released its analysis of active mutual fund managers
compared to S&P indexes. And the data is a stunning blow to all would-be market beaters.
S&P's research discovered the majority of active funds in 8 of 9 major stock categories failed
to beat corresponding S&P stock indexes. The S&P 500 (NYSEArca:
SPY -
News) beat 71.9% of active managers while the S&P
MidCap 400 (NYSEArca: MDY -
News) and S&P SmallCap 600 (NYSEArca:
IJR -
News) outperformed
79.1% and 85.5% of managers in matching categories. The data was recorded over a five-year period
ending in 2008.
'The belief that bear markets favor active management is a myth,' stated the S&P report. The
analysis also revealed similar results of bear market underperformance by mutual fund managers during
the last downturn from 2000 to 2002.
What does all of this mean?
It means the statistical evidence continues to show that investors
would be better off investing in dumb index funds and ETFs than investing with dumb fund managers.
Rewarding Failure
One of the key problems with mutual fund management is their convoluted business practices of
rewarding failure. Instead of punishing bad behavior, they reinforce it. For example, in 2008, Mario
Gabelli vacuumed in a $46 million paycheck from GAMCO Investors (NYSE:
GBL -
News) even though client assets at the firm fell
by 33%. Despite the worst economic and market conditions of our generation, Wall Street's fund executives
are still cashing in like a bear market never happened. Mr. Gabelli is a Barron's roundtable contributor
and he presides over funds such as the Gabelli Equity Trust (NYSE:
GAB -
News) and the Gabelli Asset Fund (Nasdaq:
GABAX -
News).
'Having a mutual fund management company is like having a toll booth on the George Washington
Bridge all for yourself,' is what Marty Whitman, manager of the Third Avenue Value Fund (Nasdaq:
TAVFX -
News) told
Forbes Magazine. If that's true, it looks like John Bogle's 'Designing a New Mutual Fund Industry'
will have to wait a few more decades. Sorry Jack. In the meantime, all investors should immediately
start re-designing their own investment portfolios to avoid getting victimized.
Who's Protecting Who?
Instead of protecting mutual fund shareholders as they should be, mutual fund titans have resorted
to 4th grade techniques, namely, finger pointing. In a recent letter to mutual fund shareholders,
the Chairman of Fidelity Investments Edward C. 'Ned' Johnson III, gave the financial services industry
a severe verbal licking.
'Although we ended 2008 better than a number of financial firms, it was a year of painful experience
for the financial services industry, a period laced with toxic investment waste and the casual use
of other people's money by a number of institutions,' Johnson said.
What Johnson failed to mention in his criticisms was the most interesting of all.
Did you know that Fidelity's fund managers more than doubled their ownership stake of floundering
bailout kid, Citigroup (NYSE: C -
News) during the
fourth quarter of last year? As Citi was sinking, so were Fidelity's equity mutual funds. In 2008,
64 percent of the firm's stock funds were beaten by its peers. I wonder if this is this the 'toxic
investment waste' Fidelity's Chairman was referring to.
In contrast, index funds and ETFs have been 'protecting' their shareholders during this vicious
bear market. How? Quite simply, by not doubling and tripling up on dead-beat stocks like Citigroup.
Now that Citi's market cap has collapsed, so has its rotten-apple influence on the performance of
major stock benchmarks that contain it. By design, stocks with the lowest market capitalizations
have the least amount of influence on the performance of an index.
The Performance Chasing Mafia (PCM)
There are others who claim they can find mutual funds that do beat the market. I classify them
as official members of the performance chasing mafia or 'PCM' for short. They remain utterly defiant
(and aloof) about the relevant statistical facts, because they know better.
Take for example, Adam Bold, founder and chief investment officer of The Mutual Fund Store, a
chain of 70 fee-only financial advisers. He recently told Bloomberg, 'I'm a believer that by indexing,
you're accepting mediocrity. There are a limited number of people who have shown an ability to consistently
beat the market year after year.' Earth to Adam! Earth to Adam!
The problem, which Mr. Bold doesn't address, is that it's next to impossible to accurately pre-identify
top performing fund managers before they become top performing fund managers. That leaves people
like Bold with one choice: To chase historical performance. Investors almost never get what they
bargained for and performance chasing advisors get lots of fees. Nevertheless, Bold has made himself
a very successful Wall Street career in helping people to identify yesterday's winners, as his $4
billion monstrosity illustrates.
Finding Better Alternatives
Index ETFs are the solution to avoiding underperforming mutual funds. If you don't want to be
limited to ETFs that follow S&P stock indexes, there are other excellent choices to consider.
For example, Vanguard's ETFs follow MSCI constructed indexes, which generally tend to be broader
and more diversified because they own more securities. See the Vanguard Large Cap ETF (NYSEArca:
VV -
News), the Vanguard MidCap ETF (NYSEArca:
VO -
News), and the Vanguard SmallCap ETF (NYSEArca:
VB -
News). All of
these Vanguard ETFs charge rock bottom annual expenses that range from 0.07% to 0.13%.
If you need ideas on how to build a successful all-ETF portfolio, check out ETFguide's
Ready-to-Go ETF Portfolios. Our ETF Portfolios
just finished their third straight year of outperforming major benchmarks like the S&P 500 and MSCI
EAFE (NYSEArca: EFA -
News) stock index.
Which ETFs can help you reach your investment goals? Take the time to learn more.
Mutual funds have provided a wide variety of investment styles and strategies for many years.
In fact, the number of mutual funds has almost eclipsed the actual number of stocks traded in the
stock market. This broad offering of products has presented a challenge to both retail and institutional
investors, as they try to determine the best funds to reach their desired results in each respective
asset class.
The mutual fund rating business has blossomed from a quarterly rating service to a multimillion
dollar industry. Rating agencies provide a valuable service to customers and keep the fund managers
on their toes with constant scrutiny, which can make or break a fund's success. Still, while the
ratings are important to investors, they can be deceiving. In bear markets, a high-rated fund can
perform just as well (or a badly) as a low-rated fund can, regardless of strong performance in a
bull market.
The Lipper Rating System
Lipper provides mutual and hedge fund reviews, commentary and tools used for screening and analyzing
data. While Lipper services the institutional and asset management industry, its mutual fund services
are provided in detail for retail investors of all levels. Lipper's proprietary rating system, Lipper
Leaders, covers more than 80,000 funds and uses consistency, capital preservation, peer performance
and expense management as its tenets, among other factors. The Lipper ranking system is based on
a scale of one to five (with five being the highest rating). Lipper Leaders are the funds that rank
in the top 20% of their peer ratings, with the next 20% receiving a rating of four, and so on.
The Morningstar Rating System
Morningstar also uses a ranked system, but it uses stars instead of numbers as the rating standard.
Also similar to Lipper, Morningstar offers both online and hard copy reports tailored to specific
investors' preferences. Morningstar also created a nine-square style box for both equity and fixed-income
funds, which depicts styles and size categories. Morningstar presents breakdowns for equity funds
into 12 industry groups inside three primary economic sectors to compare weighting decisions.
Chasing Performance
Performance is likely the most recognizable component of mutual fund ratings. This component
by itself is easy to follow and does not require in-depth knowledge of the market. However, "chasing
performance" has led many investors into what is known as the "performance trap." This is when money
flows heavily into a fund that was highly rated in the previous year. More often than not, that
same fund does not repeat such impressive numbers in the following period. In this situation, consistency
comes into play and rating firms add some value. Ratings firms will apply expertise and evaluate
a fund's performance on a relative and absolute basis.
Because different investing styles tend to display varying results over market cycles, new styles
can be extremely important to an investor. The rating companies can add much value here, as it is
not a good idea to leave style analysis up to the fund manager.
The Downside of Ratings
One of the biggest problems with mutual fund ratings is that during a long-term bull market,
investors and those who rate funds can easily become complacent. During volatile market times, mutual
funds managers are susceptible to any temptation to try to increase performance or protect against
downside risk; both factors can lead to rogue trading, or even fraud.
Also, due to the lengthy process of becoming a highly-rated fund, up-and-coming funds may not
be recognized in time to make a substantial investment in their early period.
The Bottom Line
The business of evaluating mutual funds has evolved into an industry in itself. Mutual funds
are evaluated on many levels beyond just performance, including peer group comparisons, sector weightings
and cash holdings. Though not infallible, ratings systems can provide investors with relative guidance
and direction that can lead to decent returns.
Pension funds have been hit hard by the stock market crash, losing about a third of their
value in some cases, and there may be another problem.
Before the crash, some financial experts warned that pension funds were making overly optimistic
projections of investment earnings in the decades ahead, often assuming about 8 percent a year.
Investment earnings, the heart of a modern pension system, are usually expected to provide
two-thirds or more of the revenue needed to pay retiree benefits in the future.
In public employee retirement systems, a rosy forecast of future earnings means that fewer
taxpayer dollars have to be spent to provide generous retirement benefits.
The giant California Public Employees Retirement System assumes annual earnings averaging
7.75 percent in the decades ahead. The California State Teachers Retirement System assumes 8
percent.
Lowering the projection of earnings by even a percentage point or two would create a funding
gap of tens of billions of dollars.
CalPERS, an industry leader, warned its 1,500 local government members last fall that their
employer contribution rates may increase from 2 to 5 percent of payroll in July 2011 if the
stock market does not recover by June 30, the end of the current fiscal year.
Beyond raising rates to plug the big hole punched in pension funds by the stock market crash,
the problem could get even bigger if forecasters decide that the critics are right, lowering
projections of future earnings.
After the big drop in the stock market last fall, the CalPERS investment portfolio, once
a high flier, had an average annual return of 3.32 percent for the last 10 years, well below
the forecast of 7.75 percent.
A prominent critic of the high earnings forecasts, David Crane, was a rare appointee to a
pension system board, CalSTRS, with a big-league background in investments.
Crane, an adviser to Gov. Arnold Schwarzenegger, helped build a small San Francisco business,
Babcock & Brown, into a global investment firm, becoming personally wealthy along the way.
After the governor put Crane on the CalSTRS board and he had served almost a year, the Senate
refused to confirm the appointment in June 2006, ousting a board member who had repeatedly questioned
the 8 percent earnings forecast.
Legendary investor Warren Buffet, in his annual letter to Berkshire Hathaway shareholders
in February of last year, questioned the 8 percent earnings forecast common among the pension
funds of major corporations.
"How realistic is this expectation?" Buffet said. "Let's revisit some data I mentioned two
years ago: During the 20th Century, the Dow advanced from 66 to 11,497. This gain, though it
appears huge, shrinks to 5.3 percent when compounded annually."
[Note: On the above calculation, a senior pension fund manager wrote me: "Don't believe everything
you read, take out your calculator."]
The founder of Vanguard mutual funds, John Bogle, told a congressional hearing on retirement
security last month that corporate pension funds raised their assumed earnings from 6 percent
in 1981 to 8.5 percent by 2007, far above historical norms.
"And the pension plans of our state and local governments seem to be in the worst condition
of all," Bogle said, adding parenthetically: "Because of poor transparency, inadequate disclosure,
and non-standardized reporting, we really don't know the dimension of the shortfall."
The plight of the public employee pension funds has drawn a creative proposal from U.S. Rep.
Gary Ackerman, D-New York, to shore up two of the nation's troubled institutions.
Public pension funds would pool some of their money and buy $50 billion to $250 billion worth
of stock in banks. In exchange, the federal government would guarantee the pension funds an
annual return of about 8.5 percent.
Earnings forecasts were not a problem in the early days of California public employee pension
funds, when investments were limited to fixed-income bonds and mortgages.
In 1966, a ballot measure, Proposition 1, allowed the pension systems to put 25 percent of
their funds into blue-chip stocks. Advocates said the change would enable increased retirement
benefits and lower employee and taxpayer contributions.
A measure to allow 60 percent of pension funds to be invested in stocks, Proposition 6, was
rejected by voters in 1982. But two years later voters approved a far broader measure, Proposition
21, simply requiring that investments be "prudent."
The ballot pamphlet argument said the measure, still in effect today, is similar to federal
law covering private pension funds and is needed to prevent inflation from eroding the value
of pension funds.
The ballot argument said pension fund trustees are "personally liable" if they invest funds
without "the degree of care expected of a prudent person, who is knowledgeable in investment
matters."
The lifting of the restrictions on investing in stocks in 1984 came a few years after legislation
allowed public employees to form unions and bargain collectively for labor contracts, which
usually include retirement benefits.
A state labor law in 1968 covered local government employees. Teachers were added in 1975
under the Educational Employment Relations Act, state employees in 1977, and University of California
and California State University employees in 1978.
Many public employee labor unions went on to negotiate contracts providing generous benefits
- up to 90 percent of the final salary at age 50 for some police and firemen - that are expected
to be paid mainly by pension fund investment earnings.
Retirement benefits provided by a labor contract have strong legal protection. In a widely
watched test case, the City of Vallejo declared bankruptcy last year and asked a federal bankruptcy
judge to overturn its labor contracts.
In hindsight, after a historic market crash that may force taxpayers to bail out pension
funds, was it prudent to lift the restrictions on investing in stocks?
Calpensions asked an expert, Alicia Munnell, director of the Center for Retirement Research
at Boston College.
"In the old days (before the mid 1980s), many public plans had limitations on equity investments,"
Munnell replied by e-mail. "Virtually all have eliminated those constraints. Allowing more freedom
to the investment managers is probably a positive development.
"The controversial area is the rate of return assumed in the actuarial valuation of pension
plans. Public sector sponsors tend to assume high returns (8 percent or more), which makes the
taxpayers' commitment for future benefits seem small and encourages major expansion.
"Bottom line: a free hand for investment managers is a good idea; more cautious assumed rates
of return would help check major benefit expansions."
I always wondered where that 8% came from. With long-term bond yields at historic lows, this
figure is pie-in-the-sky because pension funds will be lucky to get 8% a year in the next few years.
Investors overwhelmingly hold negative views toward credit rating agencies and the Securities
and Exchange Commission, and they expect the market slump will continue into next year, a survey
by the Greenwich Roundtable and Quinnipiac University found.
The survey of 89 wealthy private and institutional investors in late January and early February
found confidence in regulators and in hedge funds was shaken during the credit crisis. It will
take six to 12 months of healthier markets before investors jump back in, the survey reported.
"Leverage, liquidity and lack of confidence are still keeping the sophisticated investor
on the sidelines," Steve McMenamin, executive director of the Greenwich Roundtable, said in
a statement.
As a result, he said, unprecedented numbers of limited partners refuse to make new commitments
to alternative investments, such as hedge funds.
Greenwich Roundtable is an organization for investors who allocate capital to alternative
investments, with members representing more than $6.4 trillion in assets.
Among other findings, more than one-third of those surveyed said they lowered allocations
to hedge and private equity investments during the past quarter, though more than one-half left
allocations unchanged.
One-third reported that as many as 40 percent of their fund managers suspended redemptions,
while close to one-quarter were dissatisfied with the way redemption gates were currently structured.
Ten percent of investors complained gates were being abused.
These LPs should have checked those gait clauses more carefully before committing the big money
to hedge funds. It's too late to whine about it now!
[Note: I am skeptical of any hedge fund ETF that charges 0.9% per year. Investors should ask
who is on this platform and how they performed over the past 12 months. A better solution for investors
looking for "passive" liquid exposure to hedge funds is to replicate hedge fund indexes using a
few futures contracts (this is tricky too; contact me for more details).]
But that 8% projection of investment earnings needs to come down. Pension funds and their stakeholders
need to reassess their growth projections and realize that overly optimistic projections will only
aggravate their pension deficits.
Rita Hritz knows several people who have lost more than $100,000 in the stock market recently,
and she's not taking any chances.
She pulled out of the market in 2005 because she was tired of the ups and downs, and she has
no plans to invest in anything again except real estate.
"I would like to invest in the future, but it's so volatile, I don't know that I would," said
Hritz, 50, an ultrasound technician in Chardon, Ohio. Hritz submitted her story to CNN's iReport.com.
Hritz is just one example of an American who has lost confidence
in the stock market, which has plummeted in recent months. Confidence among investors
as a whole is a key factor in determining how the market behaves, economists say;
when investors collectively lose confidence in the market, it is more
likely to drop.
In fact, confidence is an example of an "animal spirit," a term referring to the psychological
factors that move the market. British economist John Maynard Keynes coined the term.
"One of the reasons this recession was not foreseen was that people didn't perceive the role
of animal spirit in how the economy
works," said George Akerlof, winner of the 2001 Nobel Prize in economics and co-author of the new
book "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism."
Stories about the nature of the economy that pass from person to person are another reason why
markets go up and down, he said.
The stories that friends tell one another or that are propagated through the media influence
people's confidence in the market and therefore affect the market itself, he said.
For example, in the late 1990s, the "story" was that there was a dot-com bubble: People bought
stocks in Internet and technology-related companies that seemed to be rising in value rapidly. When
people realized that they'd been overconfident and that some of the stocks were overvalued, the
bubble burst.
"These stories get passed from one person to another, and because they get passed from one person
to another, it acts like an epidemic," Akerlof said.
Another animal spirit is "money illusion." Capitalism produces not only what people want but
what people think they want, Akerlof said.
A person seeking to buy medicine in the 19th century might end up buying snake oil, a product
without curative properties. Similarly, "snake oil" financial instruments are often sold in unregulated
markets.
"We've just been through a period in which people have been buying assets on the basis that they
were overconfident," he said. "They had too much trust."
It's only now that people are seeing that they had made poor investment choices, he said.
Where's the bottom?
Some people, like David Lowery, recently decided that they've had enough of losing money in the
market. The 56-year-old truck driver in Euless, Texas, closed his IRA on Thursday. He had cut his
401(k) contribution from 7 percent to 1 percent of his paycheck Monday.
"What money you've got, better get it out and put it under the mattress," said Lowery, who also
shared his views on iReport.com. Read his iReport
Lowery had hoped to retire in nine years, but now he thinks he may have to work until age 70.
He may put his money in bonds or CDs instead of stock-based funds.
Some economists say you should take a good look at your
job security before making investment
decisions.
People who are facing layoffs or are unemployed should be more careful with their investments,
but those with secure jobs can afford to take greater risks, said Lubos Pastor, professor of finance
at the University of Chicago.
"People should not succumb to their fears. They should rationally assess whether they are able
to bear the risk of the stock market," he said.
But while it's anyone's guess when the market will pick back up again, rest assured that it most
likely will not hit zero.
"It's implausible that it would be zero unless we're hit by a comet or the government nationalizes
everything," Pastor said.
Expecting history to repeat
Experience with recessions also affects people's investment behavior, some economists say.
Hritz got laid off and went bankrupt in 1981, a year that saw a recession.
Her previous financial struggle has made her more cautious about putting money in the market today,
she said. Read her
iReport
Her experience is consistent with research that shows people who lived through the Great Depression
tend to be more cautious with their stock market allocations, but younger people who did not live
through that recession are more optimistic.
That means that, after this current recession, everyone will be more cautious than before, Pastor
said.
Those who do stay in the market will reap the benefits of any future rebound, Pastor said. In
fact, the market will rally several months before the end of the recession, but those who sell everything
will miss out on that.
"Going just by on your instincts by fear and by your confidence, that is usually misleading,"
he said. "That type of investing leads people to buy at the peak and sell at the bottom."
As for Hritz, she maintains a cautious distance from the stock market.
Her husband, Jim Schaefer, was originally going to retire this month, but he has no plans to stop
working, she said.
"We're seeing a decline in value of the house we're in, but I'm not
panicking like I would if I would have played the stock market," Hritz said.
An important information is "There's a special rule for workplace-based retirement
accounts. If you leave your job when you are 55 or older, you can tap your retirement funds without
paying the 10% penalty," One possible step revive your 401K is probably an understanding that
in stock casino only house wins and stop losing money due to excessive stock allocation. Wall Street
firms for which Kiplinger serves as a talking puppet want you fees and stock funds fees are much better
for then then bond funds or god forbid money market funds fees.
Your best bet is to keep on contributing, stick with stocks and try not to raid your account.
The economic funk has made virtually everyone anxious about retirement. In fact, 83% of Americans
worry that the recession will have a major impact on their retirement plans, according to a recent
poll by the National Institute on Retirement Security.
Don't let economic jitters change your savings habits. Sticking with the tried-and-true practice
of socking away as much as possible in your 401(k) or IRA -- or both -- should still put you on
track for retirement. But we don't blame you for being concerned that your 401(k) has turned into
a 201(k). We answer some common questions about how to pump up your depleted accounts.
My employer has stopped contributing to my 401(k). Should I stop contributing, too?
Absolutely not. Particularly now, with Standard & Poor's 500-stock index down 33% over the past
year, you don't want to miss the chance to pick up stock-market bargains. Plus, if you stop putting
money in your 401(k), you'll miss out on a valuable tax deduction. Say you're in the 25% federal
tax bracket. If you contribute $4,000 to the plan, you'll save $1,000 in income taxes -- and even
more when you include state tax savings.
I've already lost so much in my 401(k). Wouldn't it be better to keep my savings in cash until
the market bounces back?
You're in good company. Nearly one-third of those who participate in a 401(k) plan lost 30% or
more last year, reports Mercer, a consulting firm.
But if you sit on the sidelines and venture back into the market only after it turns around,
you risk missing out on the market's top-performing days, which tend to come at the beginning of
a recovery. For instance, if you were fully invested in the S&P 500 from December 31, 1997, through
December 31, 2007, you would have received an annualized return of 4.2%. But if you missed out on
the index's 30 best days during that time period, you would have suffered average annual losses
of 7.2%, according to an analysis by T. Rowe Price. No one knows exactly when the market will recover
in the future, so it is better to keep your long-term money invested in stocks for the long haul.
I thought my tolerance for investment risk was pretty high -- until the stock market collapsed.
What should I do now?
Investing and risk go hand in hand. How much volatility you can stand depends on your age, your
investment goals and your ability to sleep at night. If you are within a few years of retiring or
close to reaching the dollar goal you've set for your retirement kitty, lock in your savings by
reducing your risk, says Richard Ferri, chief executive officer of Portfolio Solutions, an investment
adviser in Troy, Mich.
For instance, if you've determined you need $1 million by the time you're 65 and you have accumulated
$900,000 by age 60, take your foot off the gas and cut your portfolio's stock holdings by 10%. You'll
feel as if you're taking action, but, in reality, the move won't affect your portfolio that much.
Then don't touch it again for at least a year. "There's nothing you can do about a bad economy except
wait for it to get good again," Ferri says.
The volatile market has left my retirement portfolio completely out of whack. How do I rebalance?
Decide on a rebalancing schedule -- quarterly or annually works well -- and stick to it. By rebalancing
at regular intervals, you avoid subjective decisions based on emotion. Plus, you force yourself
to sell investments that have performed relatively well and buy laggards to re-establish your original
asset allocation. About half of all employer-based retirement plans offer an automatic-rebalancing
feature, according to a new study by Hewitt Associates, an employee-benefits consulting firm.
Or consider investing in a target-date retirement fund, which adjusts automatically as you approach
retirement. More than three-fourths of employers now offer target-date funds in their 401(k) plan,
Hewitt says. Although these funds suffered in the market meltdown, too, they generally beat the
S&P 500.
My retirement portfolio fell 35% last year. How long will it take for it to recover?
Unfortunately, it could take years. Let's assume you had a portfolio of $250,000 that fell 35%,
to $162,500. If you don't add anything and earn pretax annual returns of 5% -- about half of the
stock market's long-term rate of return -- it would take more than nine years for your account to
recover, according to calculations by T. Rowe Price. However, if you add $4,000 a year and your
investments earn 5% annually, your account would rebound to about $250,000 in six and a half years.
Higher investment returns and larger contributions would produce faster results and a bigger nest
egg.
I have both a 401(k) and a Roth IRA. Is that too many retirement accounts?
No. It's actually a good idea to have both types of retirement accounts to diversify your future
tax liability. With a traditional 401(k), you enjoy an upfront tax deduction, but future withdrawals
will be taxed at your ordinary tax rate (not the lower capital-gains rate reserved for most investments).
With a Roth IRA, you pay taxes now instead of later. But to contribute, your income can't exceed
$120,000 if you're single ($176,000 if you're married) in 2009. Nearly 30% of employers offer Roth
401(k)s, which provide the same tax-free income in retirement but without income-eligibility restrictions.
I need to borrow money from my 401(k). What are the pros and cons?
If you're facing a financial emergency and your only choice is between borrowing from your 401(k)
plan or making a hardship withdrawal, it's an easy decision: Take the loan. You'll avoid the taxes
and penalties that come with a hardship withdrawal. Most 401(k) plans allow you to borrow up to
50% of your vested account balance or $50,000, whichever is less.
Although the money and interest you repay go back into your account, a 401(k) loan can still
be costly. Money not invested will stunt the growth of your retirement savings. And if you fail
to repay the loan on a timely basis -- usually within five years (longer if you use the money to
buy a first home) -- you will owe state and federal income taxes, plus a 10% penalty if you are
younger than 59. Together, the taxes and penalty can wipe out 40% or more of your balance. And if
you lose your job, you usually have to repay the loan within 60 days or it will be treated as a
taxable distribution. "If you take a loan, make sure you'll be staying at your job a while," warns
David Wray, president of the Profit Sharing/401k Council of America.
Is there a way to avoid the 10% penalty if I tap my 401(k) before I turn 59?
Yes. There's a special rule for workplace-based retirement accounts.
If you leave your job when you are 55 or older, you can tap your retirement funds without paying
the 10% penalty, although you will still owe income taxes. This early-out rule does not apply to
IRAs, so if you roll over your 401(k) to an IRA, you lose penalty-free access to your money.
Millions of baby boomers born into the dawn of the most spectacular economic expansion in history
are being forced to re-imagine their retirement futures. Few news outlets have failed to seize
upon the low-hanging pun: the boomers have gone bust.
Among the adjustments forced by the
new circumstances, perhaps the cruelest twist for many boomers is the need to join younger generations
in the roommate queue. The housing crash has forced record numbers of late-middle age homeowners
to take in boarders or risk becoming boarders themselves. From California to Vermont, home-share
organizations founded to assist the elderly are scrambling to meet the demands of newly bust
boomers.
"In the last few months we've experienced explosive growth in interest by homeowners age
50-plus to find rooms and roommates," says Jacqueline Grossmann, Chicago coordinator for the
National Shared Housing Resource Center. "The trend now is getting younger and younger. People
in their 50s and 60s are losing their nest eggs and increasingly willing to give up their privacy
in exchange for rents of $500, $600 a month."
Boomers are maximizing room occupancy for the same reason that their kids in their 20s and
30s are still competing for the best group rentals on Craigslist: they're broke.
The extent to which boomer wealth was based on home values is highlighted by a new report
from the Center for Economic and Policy Research, entitled "The Wealth of the Baby Boom Cohorts
After the Collapse of the Housing Bubble."
The report details how the collapse has left the majority of those around retirement-age
almost completely reliant on entitlements. The net worth of median households in the 45 to 54
age bracket has dropped by more than 45 percent since 2004, to just over $80,000. Households
headed by those aged 55 to 64, meanwhile, have lost 38 percent of net wealth.
The result is that many baby boomers will only have entitlements to rely on in their retirement."
Make that entitlements, roommates, and each other.
As more and more boomers scale down their retirement plans and consider alternative living
arrangements, it's worth asking: Is shared housing such a bad thing for aging boomers? Does
a return to the Communal idea, borne of economic necessity, also have emotional, social, and
environmental benefits? Why wait for the retirement home or hospice to live with other people?
With the nation full of worthless, ridiculously large, and mostly empty houses, why not fill
them with the newly penurious and like-minded boomers in need of housing?
Terry S., a 62-year-old self-employed divorced psychologist in Pittsburgh, is one boomer
considering the cooperative housing route. Until the crisis hit last year, Terry planned to
spend her retirement between Europe and New York City, living off her IRA and savings. But the
crash saw her wealth plummet by 60 percent. "My friends and I feel betrayed because we are now
in the same or worse position than those who never saved their money, but may have a pension,"
she says. The crisis forced her to rethink retirement, and she now plans to buy a house with
her friends. She explains the logic:
Some of my friends and I shared a communal house in the 70s. We first came up with this idea
[of doing it again] when we were talking about the possibility of having to live in assisted
living or nursing homes, and we decided it would be far better to all live together in a big
house with friends we knew and loved and hire a nurse and a cook. One of my friends owns a construction
firm and he says he can put an elevator in any home for less than $100,000. We have looked at
several homes. One was a beautiful house that backed onto a huge city park and had a pool decks
all around and could easily be converted into four private residences. It was $600,000, which
would only be $150,000 per unit. Much less than the $4,000 a month to have half of a dingy room
in a nursing home that smells like urine.
If the deepening economic crisis does lead the boomers back to Countercultural values, a
generation will have come full circle. Whether they end up living in a group house, a shared
apartment, or a full-on hippie-style commune, studies show that they will live longer and more
fulfilling later lives. "The results here are truly amazing," says Kirby Dunn, pointing to studies
that gauge the effects of shared housing. "Across all programs and age-brackets, people say
they feel safer, are less lonely, happier, and sleep better. They also call their family less
often for help."
Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble
This paper makes projections of wealth for 2009 for the baby boom cohorts (ages 45 to 54
and ages 55-64) using data from the 2004 Survey of Consumer Finance. It updates an earlier paper
on this topic from June of 2008 using projections for housing and stock values that are more
plausible given the sharp downturn in both markets over the last 8 months, and creates three
possible scenarios from best to worst-case for baby boomers' wealth in 2009.
The projections show:
1) The median household with a person between the ages of 45 to 54 saw its net worth fall
by more than 45 percent between 2004 and 2009, from $172,400 in 2004 to just $94,200 in 2009
(all amounts are in 2009 dollars). If the median late baby boomer household took all of the
wealth they had accumulated during their lifetime, they would still owe approximately 45 percent
of the price of a typical house and have no other assets whatsoever.
2) The situation for early baby boomers is somewhat worse. The median household with a person
between the ages of 55 and 64 saw its wealth fall by almost 50 percent from $315,400 in 2004
to $159,800 in 2009. This net worth would be sufficient to allow these households, who are at
the peak ages for wealth accumulation, to cover approximately 90 percent of the cost of the
typical house, if they had no other assets.
3) As a result of the plunge in house prices, many baby boomers now have little or no equity
in their home. According to our calculations, of those who own their primary residence, nearly
30 percent of households headed by someone between the ages of 45 to 54 will need to bring money
to their closing (to cover their mortgage and transactions costs) if they were to sell their
home. More than 15 percent of the early baby boomers, people between the ages of 55 and 64,
will need to bring money
to a closing when they sell their home.
These calculations imply that, as a result of the collapse of the housing bubble, millions
of middle class homeowners still have little or no equity even after they have been homeowners
for several decades. These households will be in the same situation as first-time homebuyers,
forced to struggle to find the money needed to put up a down payment for a new home. This will
make it especially difficult for many baby boomers to leave their current homes and buy housing
that might be more suitable for their retirement.
Finally, the projections show that for both age groups, the renters within each wealth quintile
in 2004 will have more wealth in 2009 than homeowners in all three scenarios. In the second
and third scenarios, renters will have dramatically more wealth in 2009 than homeowners who
started in the same wealth quintile.
Homeownership is not everywhere and always an effective way to accumulate
wealth. For those who owned a home in the last few years, the collapse of the housing bubble
led to the destruction of much or all of their wealth.
Three Scenarios
The "Three Scenarios" mentioned above relate to projections of the Case-Shiller
housing index looking ahead.
The first scenario assumes that nominal house prices decline no further from the level reported
in the November 2008 Case-Shiller 20-city index to the 2009 average. The second projection assumes
that nominal house prices in 2009 are on average five percent lower than they were in November 2008.
The third scenario assumes that nominal house prices fall fifteen percent in 2009.
Already we know the first scenario is out. Moreover it is possible that even scenario 3 is optimistic.
So much for the idea the way to accumulate wealth is through real estate.
Buying real estate may have helped one to accumulate wealth if one paid off the mortgage rather
than continually borrowing against the equity to take vacations, buy cars, or to "put the money
to work".
Nearly everyone attempting to put that money to work has gotten clobbered doing so.
Net Worth - Households Aged 45-54 in 2004 vs. 2009
click on chart for sharper image
Only those boomers in the top quintile have close to enough money for retirement. And that is
the group hit hardest by the recent selloff. Think that group is going to be vacationing as much
as they thought, eating out as much as they thought, golfing as much as they thought, etc.?
I don't.
Moreover, those in the first through fourth quintiles are not prepared for retirement at all.
The fourth quintile was arguably close in 2004. They are no longer prepared.
Note: There are 14 sets of figures in the CEPR article. It's well worth taking a closer look.
Structural Demographics Poor
The structural demographics are very poor. Please see
Demographics Of Jobless Claims for still more details. Here is a key clip.
Structural demographic effects imply that prospects in the full-time labor market will be poor
for those over age 50-55 and workers under age 30. Teen and college-age employment could suffer
a great deal from (1) a dramatic slowdown in discretionary spending and (2) part-time Boomer
reentrants into the low-paying service sector; workers who will be competing with younger workers.
Ironically, older part-time workers remaining in or reentering the labor force will be cheaper
to hire in many cases than younger workers. The reason is Boomers 65 and older will be covered
by Medicare (as long as it lasts) and will not require as many benefits as will younger workers,
especially those with families. In effect, Boomers will be competing with their children and
grandchildren for jobs that in many cases do not pay living wages.
A structural shift in consumption to savings or at least reduced consumption, is in store for boomers.
Meanwhile job prospects are looking pretty grim for some time to come across the entire economic
spectrum. This economic backdrop is deflationary.
Attitudes towards debt and consumption have
changed.
Moreover, the above data suggests those attitudes, particularly among the key boomer group who
now needs to draw down on accumulated wealth, are not changing back anytime soon. And it is attitudes,
not Fed actions that will determine how long the deflationary period we are in lasts. I touched
on the importance of attitudes many time, most recently in
All Manias Leave Something Undervalued. Please take a look if you haven't already.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Drink-and-dashers notwithstanding, thrift has been essential to survival over time. "I don't
think you and I would be here if there weren't frugal people 100,000 years ago," Lastovicka says.
"It's why we've done really well as a species. Someone figured out that we need to save some of
the crop so we can eat in the winter."
... ... ...
That's the conclusion of a forthcoming study in the 'Journal of Positive Psychology'. Ryan Howell,
assistant psychology professor at San Francisco State University, asked participants to reflect
on a time in the past three months that they used money to make themselves happy with both material
and experiential purchases. (Experiential purchases were defined as those in which you get nothing
but a memory at the end -- concert tickets, dinners out, a weekend away, etc. Material items were
defined as tangible objects in their control -- shoes, jeans, electronics -- but excluding pricey
purchases such as homes and cars.)
Participants were then asked to reflect on 26 different questions
that had to do with psychological needs
satisfied by the purchase. "On a scale of 1 to 7, both material purchases and life experiences were
in the positive category," says Howell. "It's just there were sizable differences between material
and life experience. The idea is you're happy with a material purchase but you're thrilled with
a life experience."
In addition, experiential purchases made people around the buyer happier as well. "People felt
closer to friends and family as a result of the purchase," Howell notes. "We were also surprised
in that experiential purchases made them feel a higher sense of vigor; they felt more alive because
of the purchase."
The mortgage and credit sickness that brought banks and brokers to their knees has
now infected the companies that insure our lives and protect our families.
The life insurance companies that millions of Americans entrust to help protect their families
or pay the bills in their golden years are caught in a downward spiral eerily similar to the one
that has brought down banks and brokers.
Like Bear Stearns and Lehman Bros. (LEHMQ,
news,
msgs), life insurers
Hartford Financial Services (HIG,
news,
msgs), Principal
Financial Group (PFG,
news,
msgs), Lincoln
National (LNC,
news,
msgs) and many
others all have significant exposure to mortgage-backed securities and other risky debt instruments.
They're reporting huge losses that -- if they continued -- could trigger a meltdown.
That could wipe out shareholders, who already have suffered declines of 20% to 40% in the past
week alone. Customers with annuities or insurance policies might have to turn
to state insurance backstop funds and settle for only a portion of the money they were expecting.
Health, auto and property insurers are better off. But based on how far life insurance stocks
have fallen, investors are worried many won't survive at all.
What are the chances this doomsday scenario will play out?
"To know that, you have to gauge how bad this market will get over the next six months, which
none of us know," responds Jim Ryan, an analyst with Morningstar (MORN,
news,
msgs). It all
comes down to how much worse things could get for the economy and for the debt instruments and stocks
that life insurance companies hold.
"We're telling people to be more careful, particularly if you are
going into longer-range products that involve significant upfront funding like annuities," says
Bob Hunter, the director of insurance for the Consumer Federation of America.
"You want to make sure that the company is actually around when you
want to get the money out. I'd say there's a good likelihood some of them will go under."
Yes index funds might be slightly less scam-prone then managed funds. But the real question is:
"Are stocks really necessary in 401K account?" And if yes should they constitute more then tiny percentage
(let's say less then 20%) of the total ?
The investment implication is clear, according to Mr. Kritzman. "It is very hard, if not impossible,"
he wrote in his study, "to justify active management for most individual, taxable investors, if
their goal is to grow wealth." And he said that those who still insist on an actively managed fund
are almost certainly "deluding themselves."
What if you're investing in a tax-sheltered account,
like a
401(k) or an
I.R.A.? In that case, Mr. Kritzman conceded, the odds are relatively more favorable for active
management, because, in his simulations, taxes accounted for about two-thirds of the expenses of
the actively managed mutual fund and nearly half of the hedge fund's. But he emphasized the word
"relatively."
"Even in a tax-sheltered account," he said, "the odds of beating the index fund are still quite
poor."
Switching employees from defined benefit pension plans into 401K was an intentional major hit to
the standard of living of middle class. Now chickens come home to roost. Like one reader aptly commented:
"Thanks D'bya & Congress. You all did a hell of a job...." I would add that the mainstream media reached
a state of zombification parallel to that of the banks
January 28, 2009 | Washington Post
Millions of American workers lost an average of 27 percent of their
401(k) retirement savings in 2008, according to a study released this morning by Fidelity Investments.
The average 401(k) balance went from $69,200 in 2007 to $50,200 last year because of dramatic
market declines, the study found.
Despite such losses, Fidelity's analysis of 11 million participants in more than 17,000 corporate
plans showed that employees continued to contribute to their retirement savings and took out fewer
loans against the plans than the previous year. In fact, they added an average of $5,600 in pre-tax
earnings to their accounts, a slight increase from the year before.
"Employees are staying the course and I think this is very good news because I think it really
shows that employees recognize these savings dollars are a need to have, not a like to have," said
Scott B. David, president of Workplace Investing for Fidelity Investments. "This is a necessary
savings for their financial well-being."
But in a sign that workers are struggling financially, the Fidelity study showed a slight increase
in the percentage of workers who took so-called hardship withdrawals, from 1.6 percent in 2007 to
1.8 percent in 2008. Unlike 401(k) loans, hardship withdrawals require proof of a severe financial
need and come with a hefty tax bill.
David said the people who took hardship withdrawals most likely did not have the option to take
a loan against their plans. Historically, those who take hardship withdrawals have taken out loans
first and many employers restrict the number of loans allowed.
"Once you've taken the loan, the next likely step is the withdrawal, which is a terrible thing
to do because of the tax implications and the penalties," David said.
The average hardship withdrawal amount decreased slightly in 2008 to $6,000, but David attributed
that to the fact that workers had less money to pull out of their accounts.
The report comes at a time when the 401(k) concept is under intense
scrutiny from lawmakers, academics and economists. The stock market's collapse has revealed the
vulnerability of America's retirement system. Increasingly, employers have abandoned traditional
pensions, forcing workers into 401(k)s which tend to have more exposure to market forces. Many lawmakers
also pushed 401(k)s, approving rules in recent years that, for instance, make it easier for employers
to automatically enroll their employees in such plans.
David said 401(k)s are still a good retirement savings vehicle but should not be the only one
that an employee relies on.
"They were designed to be one of several savings vehicles," he said. "To look at 401(k)s as the
only form of retirement savings is not appropriate."
"To look at 401(k)s as the only form of retirement savings is not appropriate."
When the 3-5% we put into our 401K is all we can afford, and when our home also decline 25% in
value, what alternatives do the common worker have? With unemployment zooming and most people either
out of work of not sure they will have a job tomorrow, what do these experts suggest.
With assets decreasing by 30% a year, income decreasing by up to 90% and expenses increasing
in double digits, just what should people do?
A. Wait for the banks to help us with the billions in tax dollars they have received?
B. Wait for our law makers to find a miracle cure?
C. Burry our head in the sand?
D. Blow our brains out before our insurance lapses?
If you have a 401(k) retirement plan at work, you don't need us to tell you that
you've taken a hit in the past year. The really bad news is that the damage to your retirement security
is likely worse than what the numbers say on your statement.
Many Americans didn't have enough savings coming into the downturn. And employers are increasingly
cutting back or suspending their 401(k) match. FedEx, Eastman Kodak, Motorola, General Motors and
Ford, among others, have announced such moves.
There's also no guarantee that today's battered 401(k)'s will rebound
powerfully. People close to retirement don't have time for a do-over. Even for those still far from
retirement, there's no telling how stocks will perform in the future.
They could post impressive gains, especially in the near term, from their current low levels.
But they could also struggle. The last 25 years was a time of low inflation
rates and low interest rates, which boosted stock prices. Going forward, inflation and interest
rates have nowhere to go but up, which would be bad for stocks.
It wasn't supposed to be this way. Over the last several decades, businesses and government used
matching contributions and tax breaks to encourage the proliferation of 401(k)'s. They lauded them
as a way to harness the market to create wealth and increasingly viewed them as replacements for
traditional corporate pensions.
In 1983, 62 percent of workers with retirement coverage had a traditional pension only, while
a mere 12 percent had 401(k)'s. Today, approximately 20 percent have a traditional pension and about
two-thirds have only 401(k)'s.
The shift to 401(k)'s also shifted investing risks and responsibilities from employers to employees,
but as long as participants generally made money and recovered losses quickly, the risks seemed
reasonable. Now many Americans are inevitably having second thoughts.
So far, the cumulative wipe-out of household retirement savings totals
about $2 trillion, and no one believes that the downturn is anywhere near over. As a result, participants
in 401(k)'s are in greater danger than ever of coming up short in retirement.
That grim reality calls for an expanded approach by policy makers to retirement issues. Traditionally
- and correctly - an important focus has been on lower-income Americans who lack the means to save
and tend to work for employers who do not offer retirement plans.
During the campaign, President Obama supported a better savers' tax credit to encourage savings
among lower-income Americans. He also supported universal I.R.A.'s, which would make a 401(k)-like
account available to all workers. Those good ideas should be pursued. There are also good ideas
for improving 401(k)'s that deserve attention, such as helping people manage their retirement withdrawals
so that the money lasts a lifetime.
The wipeout in 401(k)'s has made it clear that it is not enough to
get more people to save more. There needs to be a better way to reasonably ensure that a lifetime
of savings can't be undone by forces beyond one's control. The Center for Retirement
Research at Boston College, a leader in retirement policy, is advocating a new savings account -
in addition to Social Security and 401(k)'s - that would enable risks to be shared among workers,
retirees and the government.
After decades of promoting and improving 401(k)'s, in which employees bear substantial risk,
that's a new and difficult reality for policy makers to grapple with. The sooner Mr. Obama puts
his team on the issue - his budget director, Peter Orszag, is one of the nation's top retirement
experts - the better.
"What you might call the 401(k) effect has had two political consequences and, in the medium term,
will probably have two even more powerful social ones. The first impact is a shift in the public's appetite
for radical government action. The same constituents who besieged their members of Congress, calling
on them to oppose a "Wall Street bail-out", are now demanding to know why the government has not acted
more decisively. The second result has been a
big shift in the polls in favour of Barack Obama, who seemed to be faltering a month ago but is
now predicted to be heading for a landslide victory."
Last week's dizzying rush of events and economic and market data threw up one number which can
serve as your Rosetta Stone for understanding what impact the global financial crisis will have
on American society: $2,000bn (€1,500bn, £1,200bn). That is the amount Americans have lost from
defined-contribution 401(k) pensions over the past 15 months. Peter Orszag, director of the Congressional
Budget Office, cited the figure in public testimony last Tuesday, so today the vanished retirement
savings will be even greater.
The hit to the 401(k)s – nearly triple the amount Hank Paulson asked for to rescue Wall Street
and more than double the cost of the war in Iraq – most directly connects what had been a crisis
of financial institutions and esoteric financial instruments with the lives, and old-age security,
of millions of middle-class Americans.
The credit crunch has been gnawing away at the world's financial sector for more than a year,
but as recently as a fortnight ago – the date the House Republicans defied their own party and
voted against Hank Paulson's bail-out plan – it still did not have much traction with Main Street
America. That started to change even as members of Congress were casting their no ballots – because
the US equity markets plunged in response. In the two subsequent weeks they have plummeted further,
with the Dow
closing
on Friday at 8451.19, bringing the week's decline to 18.2 per cent, its sharpest drop ever.
The Dow matters to the Joe Six-Packs of America because this is a society of shareholder capitalism.
Until this month's sell-off, more than 60 per cent of Americans owned shares, up from just over
10 per cent in 1980. The result is a culture in which business television reporters are celebrities
with photo spreads in Vanity Fair, Warren Buffett is a national hero, and the group Republican strategists
call "the investor class" forms a majority of the population.
In boom markets, that is a good thing. But it means that a market sell-off is felt beyond Wall
Street. What you might call the 401(k) effect has had two political consequences and, in the medium
term, will probably have two even more powerful social ones.
The first impact is a shift in the public's appetite for radical government action. The same
constituents who besieged their members of Congress, calling on them to oppose a "Wall Street bail-out",
are now demanding to know why the government has not acted more decisively.
The second result has been a
big shift in the polls in favour of Barack Obama, who seemed to be faltering a month ago but
is now predicted to be heading for a landslide victory. Months of a slowing economy, falling house
values and petrol prices spiking above $4 a gallon were not enough decisively to shift the political
debate to "the economy, stupid", the field on which the Democrats yearned to play. But the plunge
in the Dow – computed with terrifying exactness in the 401(k) statements millions of Americans receive
every month – has, and barring a war or a domestic scandal it will likely propel Senator Obama to
the White House.
The third, social consequence is not yet being felt, but it soon will be. The culture that gave
us the term "retail therapy" seems about to rediscover the virtues of thrift. The assets that Americans
measured to calculate their net worth – their homes and stock portfolios – have fallen sharply in
value. And the personal credit they used to keep up with the Joneses in a society where so many
people seemed to be getting so rich has dried up. One sign of the Zeitgeist: Gawker, the popular,
waspish media blog (published by a friend and former FT colleague) this week offered recession-busting
survival tips for hip New Yorkers, including buying lunch from street carts and cooking at home.
The fourth consequence of the 401(k) effect hangs in the balance, and its resolution could affect
not just the US but the rest of the world. Shareholder capitalism was a vital part of how America
connected its most important political tenets – capitalism and democracy which, since the fall of
the Berlin Wall, it has been exporting around the world with success. Now that the markets have
turned on America's Main Street capitalists, the question is whether their faith will be shaken.
Watching TV stock-pickers enthusiastically suggesting we now have a buying opportunity, it seems
the answer, for now, is not yet.
The essential fallacy of the 401(k) has been exposed. It took a historic market collapse -- one
that threatens to impoverish workers already in retirement and those who are nearing it. But then,
crushing hardship is often what's required to usher out an era of ideological illogic and unconscionable
greed.
The advent of the 401(k) in the late 1970s and early 1980s was a
leading indicator of what became a political mania for shifting the risk and responsibility for
life's big challenges -- health care, an adequate income in retirement -- from employers and other
broad-shouldered institutions to the narrower, weaker backs of individuals themselves.
It was never sold this way, of course. The pitch for the 401(k) was a contemporary version of
the get-rich-quick scheme: The promise of strolling along a sun-dappled beach in retirement would
be realized with ease, so long as workers regularly contributed modest amounts to the accounts,
then let the compounding magic of the market work. To hear the mutual fund companies and the media
tell it, only fuddy-duddies and dinosaur employers would be foolish enough to opt for the old-fashioned
defined-benefit pension, the type employers paid for and professional managers oversaw, and which
guaranteed monthly payments in old age. The type that gave the hard-boiled men and women of the
industrial age security, but would never reward them with riches.
The offer seemed good to media observers, and to the politicians who nurtured the do-it-yourself
retirement with successive legislative schemes. During the stock market boom of the 1990s, esteemed
business publications published breathless articles featuring manufacturing workers who would use
their lunch breaks to track their mutual fund balances and ponder the possibilities of the loan
they would take out for a cabin on the lake or an anniversary trip to Hawaii.
But despite the hype, the data on 401(k)s have never -- ever -- shown that these accounts were
creating a mass of workers who would be able to retire with security, let alone luxury.
The 401(k)s didn't expand the proportion of the work force with pension
coverage, notwithstanding claims that shifting to accounts that required workers to contribute would
make employers more willing to offer the benefit. Less than half of workers have any type of pension
coverage from their current employer at all, according to the Center for Retirement Research at
Boston College.
For those who do have retirement accounts, the bottom line has long been grim. In 2004, the last
year for which data are available, the median balance in IRA and 401(k) retirement accounts was
$35,000, according to the Federal Reserve. For those nearest to retirement -- households headed
by someone between 55 and 64 -- the median balance in 2004 was $60,000.
That's enough to generate about $400 a month in retirement income, according to the research
center.
These numbers reflect balances before the current market meltdown, which wiped out about $2 trillion
in retirement assets when losses in individual accounts as well as employer-based pension funds
are tallied. How did this happen? Like so many other political experiments of the last three decades,
it was good for the corporate bottom line -- and therefore, supposedly good for America. The 401(k)
plan was first promoted to supplement, not replace, traditional pensions, according to Alicia Munnell,
director of the Boston College center. Over time, as new businesses were formed, they opted to provide
only these accounts, eschewing traditional plans.
More recently, even companies with healthy, traditional pension systems have frozen those plans
(effectively abandoning their pledges to longtime workers) and replaced them with 401(k)s. Why?
"Shifting from a defined-benefit plan to a 401(k) plan will reduce required employer contributions
from 7 to 8 percent of payrolls to the 3 percent employer match," Munnell and a team of researchers
wrote in a 2006 paper.
This was never about empowering workers to reap the rewards of financing their own retirement.
It was about reducing corporate costs.
"I think what has become clear is that we just can't have a system
where people are exposed to this type of market risk," Munnell told me in an interview. Nor, in
the age of global competition, can American businesses solely shoulder pension costs that in other
countries are at least partially borne by governments.
Some new system that might be called "Social Security-plus" must be developed. Remember that
in a year or two, when politicians try to sell us on the supposed need to "reform" Social Security
with something that really amounts to Social Security-minus.
Retirement Savers Lost $2 Trillion October 8 | Yahoo (U.S.News & World Report)
Stock market turmoil has wiped out roughly
$2 trillion of Americans' retirement savings over the past 15 months, according to the Congressional
Budget Office.
The value of pension funds and retirement accounts dropped by roughly $1 trillion, or almost 10
percent, in the year ending June 30, the
CBO
told the House Education and Labor Committee Tuesday, citing Federal Reserve data. Since then, asset
prices have dropped even further. The CBO says that retirement assets may have declined by as much
as $2 trillion over the past 15 months.
"To the extent households view balances in defined-contribution plans as part of their overall
portfolio of wealth, a decline in those balances could lead people to reduce or delay purchases
of goods and services," says Peter Orszag, director of the CBO. "It could also lead some workers
to delay their retirement." The CBO says this multitrillion-dollar loss in retirement wealth could
further slow the ailing economy.
Individual 401(k) participants' average losses ranged from 7.2 percent to 11.2 percent in the
first nine months of 2008, according to an Employee Benefit Research Institute
analysis of 2.2 million participants.
Over two thirds of the assets in 401(k)-style defined-contribution plans are invested in equities,
either directly or through mutual funds. During the first nine months of 2008, stocks were down,
with the S&P 500 index losing more than 19 percent. Fixed-income investments fared better, with
the Lehman Aggregate index gaining 0.63 percent and three-month treasury bills gaining 1.54 percent.
The recent market turmoil may be disproportionately affecting older Americans. Older employees
generally have less of their money in stocks and stock funds than do younger workers, which shields
them somewhat against catastrophic losses. But older workers' average account balances are markedly
higher, so they have more to lose in a significant downturn and less time to recoup losses before
retirement. "In the last few weeks, we've been confronted with older workers' and retirees' lives
being turned upside down; their panic tops off an already existing state of chronic anxiety about
retirement futures," says Teresa Ghilarducci, a professor of economic policy analysis at the New
School for Social Research.
Two potential solutions to retirement losses offered by the CBO are working longer to offset
financial declines and sensibly allocating your assets to avoid bearing the risks associated with
tumultuous
markets as much as possible. For example, most workers should invest in diversified index funds
rather than individual stocks.
Here's another potential strategy to
insulate yourself against stock market risks.
Investors advised by ``Black Swan'' author
Nassim Taleb have gained 50 percent or more this year as his strategies for navigating big swings
in share prices paid off amid the worst stock market in seven decades.
Universa Investments LP, the Santa Monica, California-based firm where Taleb is an adviser, has
about $1 billion in accounts managed to hedge clients against big moves in financial markets. Returns
for the year through Oct. 10 ranged as high as 110 percent, according to investor documents. The
Standard & Poor's 500 Index lost 39 percent in the same period.
``I am very sad to be vindicated,'' Taleb said today in an interview in London. ``I don't care
about the money. We're proud we protected our investors.''
Taleb's book argues that history is littered with high- impact rare events known in quantitative
finance as ``fat tails.'' As the founder of New York-based Empirica LLC, a hedge- fund firm he ran
for six years before closing it in 2004, Taleb built a strategy based on options trading to bullet-proof
investors from market blowups while profiting from big rallies.
Mark Spitznagel, Taleb's former trading partner, opened Universa last year using some of the
same strategies they'd run since 1999. Pallop Angsupun manages the Black Swan Protection Protocol
for clients and is overseen by Taleb and Spitznagel, Universa's chief investment officer.
``The Black Swan Protection Protocol is designed to break even 90 to 95 percent of the time,''
Spitznagel said. ``We happen to be in that other 5 to 10 percent environment.''
Options Strategy
The S&P 500 dropped 18 percent last week, its worst week since 1933, on concern that the credit
crunch would cripple the financial system and trigger a global recession.
``We got a lot of giggles when we said we're targeting 20 percent moves,'' Spitznagel said. He
and Taleb declined to confirm the investment returns listed in the documents, which were reviewed
by Bloomberg News.
Taleb's strategy is based on buying out-of-the-money options -- puts and calls whose strike price
is either lower or higher than the market price of the underlying security. A put option gives the
buyer the right, though not the obligation, to sell a specific quantity of a particular security
by a set date. A call option gives the right to buy a security.
The Black Swan Protection Protocol bought puts and calls on a portfolio of stocks and
S&P 500 Index futures, along with some European shares. The Black Swan Protocol doesn't rely
on commodities, currencies or insurance on bonds known as credit default swaps, Taleb said.
``We refused to touch credit default swaps,'' Taleb said. ``It would be like buying insurance
on the Titanic from someone on the Titanic.''
White Swan
The Black Swan strategies are designed to limit losses to a few percentage points. Some investors
did better than others depending on when they decided to lock in profits, Taleb said. The returns
have enabled Universa to line up more money from investors in the next month, Taleb said.
As a trader turned philosopher, Taleb has railed against Wall Street risk managers who attempt
to predict market movements. Even so, Taleb said he saw the banking crisis coming.
``The financial ecology is swelling into gigantic, incestuous, bureaucratic banks -- when one
fails, they all fall,'' Taleb wrote in ``The Black Swan: The Impact of the Highly Improbable,''
which was published in 2007. ``The government-sponsored institution Fannie Mae, when I look at its
risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup.''
Taleb said the current crisis is a ``White Swan'', not a Black Swan, because it was something
bound to happen.
``I was expecting the crisis, I was worried about it,'' Taleb said. ``I put my neck and money
on the line seeking protection from it.''
Taleb is angry that Wall Street is continuing to use traditional tools such as value at risk,
which banks use to decide how much to wager in the markets.
Older Americans with their nest egg in the stock market right now may be watching secure retirement
dreams crumble
before their eyes. Retirees and baby boomers near retirement age may have lost a hefty chuck of
their savings at an age when many have little time or ability to recover.
I recently spoke with Bill Losey, a financial planner and author of Retire in a Weekend! The
Baby Boomer's Guide to Making Work Optional, about a method he advocates that, in theory, would
allow baby boomers to weather temporary market slumps. Losey calls his approach the "safe-money
benchmark strategy," which calls for the liquidation of assets when they exceed a predetermined
benchmark the investor chooses.
For example, an investor with $400,000 invested in index funds or ETFs might sell high whenever
those investments hit a $425,000 benchmark. The $25,000 in profits is stored in
ultrasafe investments like certificates of deposit, bonds, treasury bills, or even cash so that
investors can never lose those profits unless they choose to spend them. Ideally, a retirement saver
accrues three to five years' worth of living expenses in this "safe money area" in the years leading
up to retirement by always selling high during upswings and taking the spoils out of the market.
Once retired, you can use this liquid cushion to weather periods of flat growth or negative returns.
"If a normal market correction lasts two or three or four years, you will never have to withdraw
from a declining portfolio balance," Losey says.
If you've employed any of these strategies, please tell us about it below.
The weak economy is forcing older workers to rethink their retirement.
After watching their nest eggs crack under the weight of falling stock and home prices, some
workers who were about to quit the daily grind have put those plans on hold. And some retirees have
even returned to work.
"They've crunched the numbers and concluded they can't head to the lake after a 20 percent loss
in their net worth," said Monique Morrissey, an economist at the Economic Policy Institute. "Now
is no time to pick leisure over labor."
A recent survey by AARP found that one in five workers ages 55 to 64 intends to delay retirement
because of the economic downturn. Most blame stock market losses, while others cite declining home
values.
And only 18 percent of workers and 29 percent of retirees now feel very confident about having
enough money for a comfortable retirement – the smallest percentages in at least a decade, according
to the Employee Benefit Research Institute.
Neal Ator retired in September and began collecting Social Security in December.
But the 65-year-old McKinney resident has since taken a part-time job as a loan officer to supplement
his retirement income.
Drawing on his experience as a credit counselor, he sells reverse mortgages out of his home.
He hopes the paycheck will offset the losses from his investments and pay for some travel with his
wife.
"Many of my neighbors have also come out of retirement," Mr. Ator said. "Besides the satisfaction
we get from our jobs, we're all trying to make sure our nest eggs last as long as we do."
The ups and downs of the market will play an even bigger role in retirement decisions as workers
depend less on traditional fixed-benefit pensions and more on 401(k)s and individual retirement
accounts, experts say.
"This is just the beginning of a long-term trend. The changing nature of retirement income will
make boomers more and more vulnerable to market downturns," said Richard Johnson, an economist with
the Urban Institute.
Employers' decisions to scale back or drop retiree health benefits, coupled with rising health
care costs, have also compelled workers to remain on the job at least until they qualify for Medicare
at 65, he said.
'Stress test'
Scott Daily of Carrollton figured he had had enough of the corporate world last year after going
through his fourth downsizing. He was looking forward to kicking back, riding his motorcycle and
tinkering with old cars.
"I talked to my financial planner, who thought I could afford to do those things, even though
I'm only 60," he said. "I'm debt-free – I don't even have a mortgage. And I've been able to save
for my retirement."
Then the market took a nosedive, slashing 30 percent from Mr. Daily's portfolio and sending him
in search of a job again.
"I'm not hurting, but I'm wondering whether the economy will deteriorate further," he said.
Over his career, Mr. Daily managed dozens of construction projects across the country, traveling
more than 3 million miles. He's now trying to find an employer who values that hands-on experience.
Gary Brownfield, a certified financial planner with GB Financial Services in Plano, said he often
gives his older clients a "financial stress test."
"We look at what would happen to their nest egg if the market collapsed
the day after they retired," he said. "Then we see whether they'd have enough time to recover and
enough money to live on throughout retirement."
The exercise sometimes convinces his clients that they need to continue working and add muscle
to their portfolio, Mr. Brownfield said.
Many people make the mistake of overestimating what they can afford to withdraw from their nest
egg and underestimating inflation's effect, said Viktor Szucs, a certified financial planner at
Quest Capital Management in Dallas.
"Anyone who withdraws too much in a bear market, especially early in retirement, will outlive
his money," Mr. Szucs said. "A good rule is to take out no more than 4 percent a year. That should
keep a portfolio going for many years."
The past decade of tame inflation also lulled older adults into thinking that they didn't have
to worry about their dwindling purchasing power, he said, but today's high gas and food prices have
jolted them back to reality.
Extra income
Peter Laux, who's 65 and lives in Plano, works as a management consultant four days a week because
he believes he can't afford to take much from his shrunken nest egg, which has lost 20 percent in
a year.
"If the market were better, I wouldn't work at all," he said. "But my cardiologist tells me I
may live to be 95, and my mutual funds certainly aren't giving me the kind of returns I'll need
to last that long."
Mr. Laux, who took an early retirement package from Texas Instruments Inc., intends to draw Social
Security when he reaches 66. But his consulting income lets him enjoy a more comfortable lifestyle.
"Because I don't see myself sitting at home and eating cat food, I will keep chasing consulting
jobs," he said.
Depressed housing prices have also shaken older workers' confidence in retirement, Mr. Szucs
said, since some boomers had figured they'd sell their homes, downsize and use the profits in retirement.
"Even those who don't plan to move after retirement are still psychologically affected by falling
home values," he said. "They look at their net worth on paper and feel poorer, so they continue
working."
But the topsy-turvy housing market may also allow a few people to realize their retirement dreams
sooner than they had expected, Mr. Szucs said.
"Dallas has fared better than most housing markets, so clients of mine who had wanted to move
to California or Florida but been priced out of those once-booming markets can now afford a place
on the beach," he said.
Middle aged men and pensions in the industries. Much wealth has vanished...I notice a lot of
apathy among employees such as teachers whose state plans have not declared losses yet except generally.
The MA plan declared a 29% "loss" in value, but I have yet to see a clear statement about what the
"loss" implies, how much is perhaps permanent as in owning worthless paper, and how current revenue
can handle the next few years of retirements of boomers. Can anyone help out in this evaluation?
Selected comments
Noni Mausa replies:
"Jay said: "...It is better for one person's mistake with other people's money to affect thousands
of workers, rather than one person's mistake with their own money..."
There's so much wrong with this brief comment that I hardly know where to start.
Chief among them, though, is that it wasn't "one person's mistake" that
lost Americans a quarter of their 401(k) investments.
It was a network of liars and thieves and incompetents and ideologues, regulated by Lady Justice
blindfolded and swordless.
Some companies, it's true, scuppered their pension plans under chapter 11 as the only alternative
to complete failure. But
many went
into chapter 11 as the "neutron bomb" option -- wipe out (their debts to) their people, while
leaving the buildings standing. And some never maintained their pension funds in the first place,
or raided them for quick cash when they felt like it.
The single key to the mass collapse of the money system was the reduction of fiscal governance in
almost all levels and domains.
Now, it is true the market will take care of itself over time. But it won't take care of us.
The sea always seeks the lowest level, but this doesn't help when you're drowning.
What will Americans do now, to try to avoid a future skinning like this? They've been shown that
in a "I will gladly pay you Tuesday" scenario, Tuesday never comes -- that cash-in-hand is the only
pay they can be sure they will get. How would you bargain, Jay, in such a work environment?
Recently I read three extremely thought-provoking articles. Although none made me want to rush
out and buy stocks, they're certainly worth bringing to the attention of my readers.
The first: Jeremy Grantham's latest quarterly letter, headlined "The
Last Hurrah and Seven Lean Years" (.pdf file). I encourage everyone to read it, save it and
read it a few more times. This is one of the best investment articles I've encountered in my 30
years as a money manager.
Imagining the outcomes
Grantham does a particularly good job of explaining why trying to come up with guesses about market
outcomes -- a fool's game that those of us in the business are always engaged in -- is more difficult
now than it has been at many junctures in the recent past.
I won't try to paraphrase his view on where we are right now because, as he notes, in light of
the environment, one has to give one's best ideas a wide berth.
That said, Grantham does present his own probabilities for various outcomes. He also shares some
really interesting insights regarding investment "rigor mortis," a very seductive and dangerous
trap that catches nearly everyone on occasion and keeps them from moving
when it's time for action.
In addition, he introduces the concept of a recovery that has a "VL" shape, which I find quite
interesting. This is an economy "in which the stimulus causes a fairly quick but superficial recovery,
followed by a second decline, followed in turn by a long, drawn-out period of sub-normal growth."
Regarding all the stimuli government is handing out, Grantham makes a point that I have thought
about but not expressed: Stocks react to stimuli a lot more quickly than the economy reacts.
His expansion of that belief: "If the stock market is many times more sensitive to financial
stimulus in the short term than the economy is, then we could easily get a prodigious response to
the greatest monetary and fiscal stimulus by far in U.S. history."
My impression is that 401K donors who are mistakenly called 401K investors would be better off using
100 - your age formula with index fund like S&P500, Dow or total market fund and bonds (high yield bonds
like Vanguard probably can be used instead of S&P 500 as it for the last 10 years has returns less then
junk).
Some of the diversification problems stemmed from concentrated holdings of company stock. Experts
urge savers to hold no more than 10 percent to 15 percent of their accounts in company stock,
pointing out that they could sustain significant losses if the company runs into trouble or
goes bankrupt.
The Financial Engines study found that among savers eligible to receive company
stock, more than one-third had more than 20 percent of their holdings in the company's shares.
Some older workers had more than half their holdings in company stock, and workers with salaries
under $25,000 also held a disproportionate amount of company stock, the study found.
On the level of savings, the study found that just 7 percent of 401(k) participants were
saving the maximum allowed.
Much of that is common sense. (Think Enron: the time when your company stock will be least value
to you also will be the time you may need to borrow against your retirement account.)
Some of
it, likely, is the way the plans are offered. (Again, think Enron.) Public companies tend to offer
their stock as part of a "retirement plan," and many "investors" are told to invest in "what you
know."
However, the absurd claim in the lede of the AP piece ("Despite extensive efforts to educate
workers about saving for retirement") is belied by two realities. One is noted by Lux:
Look, Maw, those damned Kids don't know how to manage their (401)k Funds. When are they going
to learn that they have to spend 20 hrs. per Week evaluating good potential Investments. Listen
to them complain that they don't have the time–between raising children and working a 50-hour
Workweek. (italics removed)
the other comes from anyone who knows a bit of history and remembers that pensions have been historically
underfunded (or raided) by management. If trained money managers couldn't do a good job in the Glory
Days of Defined Benefit (and, make no mistake, a literal reading of economic theory would lead anyone
to believe those were the glory days), then expecting people who do not specialize in managing
money to allocate "appropriately" should be, on the face of it, absurd.
Finally, some of the problem
likely is due to constraint optimization issues. (Short version: You can only save what you don't
have to spend.) Let us rewrite this paragraph:
Nearly two-thirds of those earning less than $25,000 a year don't contribute enough to get the
full company match, the study found. But 24 percent of those earning $50,000 to $75,000 a year
and 12 percent of those earning more than $100,000 a year didn't get the full match, either.
as
Only slgihtly more than one-third of those earning less than $25,000 a year have enough disposable
income to get the full company match, the study found. Meanwhile, 76 percent of those earning
$50,000 to $75,000 a year and 88 percent of those earning more than $100,000 a year were able
to qualify for the full match.
You don't invest in the market until you have money you can afford to lose.
And a lot more people making $50,000-plus-a-year have money they can afford to lose than those making
less than $25,000 p.a. Which is what the data shows.
Don't take this too seriously. it is the coberly investment plan:
There is a reason they pay all that interest. money now is more useful than money later. Spend
it while you are young on things that will make you happy (a big tv or a big car will NOT make you
happy).
when you get to be about 45 or 50, and the kids are grown and the
house is paid for, start saving like mad. you are making peak earnings, you are too old for ski
trips, and you have learned how to be happy while spending almost nothing. In five
or ten years you can save about as much as you were going to get putting away that hundred dollars
a month at 3% or less over inflation.
worked for me.
coberly | 05.12.08 - 5:16 pm |
===
Whenever someone complains that the typical investor doesn't work hard enough on optimizing their
investment plan, I point at that there is an entire class of people who do nothing else but manage
investment plans. They subscribe to every known data source for investment plans. They have real
time feeds to all sorts of financial data. They have research staffs and budgets for hiring specialized
consultants. They have all that, and they still consider it good performance if they can track the
market indices. No, Joe Employee cannot do better than the typical fund manager, so if he is lucky,
he'll track the market indices.
There used to be a reason for buying your own company's stock under an ESOP plan. In the 1980s,
at least, the deal was that you could buy stock every six months, but you got a price 15% off the
lower price at either the start or end of the period. In other words, you were guaranteed at 15%
one time return, even if the company was heading for the sewer. Otherwise, I tended to avoid my
own company's stock, except when I had no choice. I was lucky in this. My company was sold, and
the pseudo-shares I had been buying turned into real money.
The discontinuance of the defined pension plans, as potentially bad as they may have been, the
rise of the 401K and IRA as alternatives has been a boon to the investment community, especially
the mutual fund industry. I don't see that we individual workers have done any better under this
revision. Why would we expect to do better if even the social security component were revised in
the same manner?
If memory serves me correctly, IRAs were initially created for the benefit of those who did not
have access to a defined pension plan. The 401K had a similar beginnig, but intended for employees
of businesses too small to provide an adequate defined pension plan. As soon as both systems were
in place the defined pention went bye-bye and the investment managers found themselves closing in
on Nirvana.
Jack | 05.13.08 - 11:02 am | #
Retirement red flags Study finds workers make 401(k) mistakes that may dash retirement plans
With few exception (warning about overexposure to the compnay stock, failure to get full matching
by employeer, etc) this is a regular yellow press baloney...
SAN FRANCISCO (MarketWatch) -- Is more than half of your 401(k) invested in your own company's
stock? In an ideal world, retirement savers would scoff at that question. But the world of retirement
savings is far from ideal, as revealed by the results of a new study released Monday of almost 1
million workers' 401(k) portfolios at 82 large firms.
One-fourth of 401(k) participants closest to retirement -- those 60-years-old or older -- invest
more than half of their workplace retirement plan in their company's stock, according to the study
by Financial Engines, a Palo Alto-based registered investment advisory firm that provides advice
and account management services to retirement-plan participants at large firms.
Some of those older workers take even bigger risks: 15% of 60-year-old or older workers invest
more than 80% of their portfolio in their company's stock. About one-third of the 82 companies in
the study offer unrestricted stock as a 401(k) plan option.
Lower-salaried workers also tend to rely on company stock, with more than half -- or 54% -- of
those earning $25,000 or less holding more than 20% in company stock.
In comparison, about 31% of those earning $25,000 to $75,000 hold more than 20% in company stock,
and 27% of those earning $75,000 or more do so.
"One of the reasons people have a lot of company stock is when you're looking at 10 [investment]
options, none of which you recognize, but you work for the company, familiarity makes it feel safer,"
said Jeff Maggioncalda, chief executive of Financial Engines, in a telephone interview. He added
that studies have shown investors, when asked whether their company's stock or the S&P 500 is more
risky, consistently point to the S&P 500.
Maggioncalda said the study's findings point to the importance of automatic 401(k) plans, in
which savers are automatically enrolled in specified investments and their contribution rates automatically
rise each year. Right now, most employers adopting automatic enrollment plans generally include
only new hires rather than existing savers.
The report, Maggioncalda said, shows that "people have issues they need help with. Employers
should not just apply the automatic 401(k) for the lucky people who are just starting out as new
hires. They should have automatic enrollment options for existing participants who have problems
right now ... and who have less time to fix those problems."
Investing in a single company can lead to dire consequences for retirement
savers, according to Financial Engines. Taking a sample $30,000 invested for 40 years, a saver with
80% or more in one company's stock would end up with 66% less money, on average, than a saver who
invested 20% or less in company stock, according to Financial Engines' analyses of workers' accounts.
Losing the match
Another red flag: Many workers are failing to claim free money offered by their employers,
with 33% of plan participants failing to save enough to get the full
matching contribution from their company. Of the 82 companies studied, 62 offer a
match, and the average match is 50 cents per dollar contributed, up
to 6% of salary.
And younger and lower-income workers are likelier to have low savings rates: The portion of savers
failing to get the full match jumps to 48% for savers under age 30 compared with 35% of savers in
their 30s, 31% of those in their 40s, 26% of those in their 50s and 28% for savers 60-and-older.
Looking at workers by salary level, 63% of those earning less than $25,000 a year fail to save
enough to get their company's full match versus 24% of those earning between $50,000 and $75,000
and 12% of those with salaries of $100,000 or more per year.
"It's really tough to see folks making less than $25,000 who could effectively get a 3% to 6%
raise" if they slightly increased their savings rate, Maggioncalda said.
According to a Financial Engines analysis, if a worker saving 1.9% of salary with a median account
balance of $5,872 continues contributing at that same rate (and thus receiving a partial company
match), that saver will have $46,779 after 20 years. But if the same worker increases the contribution
to 6% of salary (thus receiving the full employer match), the expected account balance would be
158% higher, at $120,905 after 20 years.
Older workers tend to save a higher percentage of their salary than younger workers: Savers under
age 30 save an average of 5.2% of their salary, according to the study, compared with an average
of:
6.3% among those in their 30s,
7% among those in their 40s,
8.5% among those in their 50s, and
9.1% among those in their 60s or older.
Risky business
While some workers are holding a dangerous level of company stock, others
are overly concentrated in a single asset class, or are choosing overly conservative allocations,
among other potential investing mistakes, according to Financial Engines' analysis, which assessed
risk level and efficiency for each individual portfolio based on the saver's time horizon and other
criteria.
And, while 53% of those with incomes below $25,000 were found to be making investing mistakes,
they weren't alone. Workers in higher income brackets made similar mistakes, according to the study,
including:
37% of those earning $25,000 to $50,000,
34% of those earning $50,000 to $75,000,
31% of those earning $75,000 to $100,000, and
33% of those earning $100,000 or more.
Of course, in some cases, an investor's penchant for a more risky, or less risky, portfolio might
not fit exactly into any one definition of best practices. For instance, a young investor could
opt to stick to very safe investments.
"It could be the case that ... you're a really conservative 25-year-old," Maggioncalda said.
That's O.K., he said, "as long as you know you're taking a lot less risk, which means you'll have
much lower expected growth, which means you'll have to save a lot more money than someone who has
more equity exposure."
The good news: 23% of those earning $25,000 or less had appropriately diversified portfolios,
as did 31% of those earning $25,000 to $50,000, 33% of those earning $50,000 to $75,000, 36% of
those earning $75,000 to $100,000, and 37% of those earning $100,000 or more.
Andrea Coombes is an assistant personal finance editor for MarketWatch, based in San Francisco.
There's some great investing advice out there, and of course, there's some pretty bad
advice as well. If you've ever heard "It doesn't matter how high the price is -- buy all the Enron
you can," that probably falls into the latter category.
While you can spend all day listing smart and useful investment advice, I got to thinking about
great advice that is limited to four words.
Let's check the results.
"Buy what you know" This is probably the second-most-famous four-word piece of investing advice. It comes from,
or is at least most popularly attributed to, Peter Lynch's One Up on Wall Street. In a timeless
article from several years ago, Jeff Fischer
writes at great length about
this phrase:
[I]t is most often read to mean buy the brands that you know, buy the companies that make
products that you like, and buy the company names that you always hear in daily life.
When large-cap stocks are soaring, this strategy, simple as it is, appears brilliant. "If
I just buy Coca-Cola (NYSE:
KO), General
Electric, and Hershey, I could double my money every three years!" Of course, when
large caps go into long periods of rest or retraction, the strategy requires patience and offers
less-than-blistering returns, especially if you "bought what you knew" as it was hitting a seven-year
peak.
Buy what you know is one-dimensional advice for three reasons. First, what you know
may not be worth investing in. Second, the practice of buying what you know is rarely interpreted
to mean buy the business model, the cash flow statement, and the balance sheet that you know
backwards and forwards. It too often is seen as "buy your favorite brand." Period. If you happen
to know and love Kmart, but you didn't learn about its financials, you [were] in a sorry situation
because you were an uninformed investor. Third, I've never heard the term "buy what you know"
coupled with anything regarding valuation. It seems to be "buy what you know -- at any price."
Thank you, Jeff. "Buy what you know" may help new investors get comfortable with the process,
but it simply won't help you pick particularly good stocks if you don't get into the valuation side
of the equation. Plenty of people bought Krispy Kreme because they "knew it," and that was a disaster.
Alternatively, in the late '90s, plenty bought Microsoft because they "knew it," but, because of
the valuation back then, they haven't been well rewarded despite the accomplishments of the company
in the interim. Plenty of other people have bought Starbucks because they knew it, and that's worked
out fantastically. Simply put, acting on "buy what you know" doesn't lead you anywhere in particular.
"Buy low, sell high" I'm pretty sure this is the most famous four-word piece of investing advice ever, and as guidance,
the phrase is unarguable ... yet largely useless. By definition, if you succeed in buying low and
selling high, you've made a profit. Any purchase is made with the expectation -- or at least hope
-- that in absolute dollar terms, you're going to be selling at a higher price than what you've
bought for. But since the advice itself gives no guidance as to what is "low" and what is "high,"
it can't be used without a whole lot of addendums. Buy stocks with low P/Es, or at 52-week lows,
or during bear markets, or any number of other interpretations of "buying low." Selling high might
or might not be useful advice. After all, as Philip Fisher has famously written and as adopted by
Warren Buffett, the best time to sell a stock, if it's properly researched, may be almost never.
We can all tell plenty of stories about someone selling a stock at a quick profit that seemed
high but turned out to be several hundred or thousand percent below what they could have made by
holding onto the stock. Tom Gardner frequently mentions Daktronics (Nasdaq:
DAKT),
Websense (Nasdaq:
WBSN),
Dell, and Whole Foods when confessing his own bad calls. Not to pick on Tom -- his results
speak for themselves. But these were mistakes that came out of the "buy low, sell high" mold.
"Buy an index fund" This is the most actionable, most mathematically supported, short-form investment advice ever.
If you look up The Motley Fool in the encyclopedia -- or at least on Wikipedia -- you'll find that
we are "famous for [our] view that, for the majority of people who have little time to keep track
of stocks, the best investment strategy can be summed up in four words: 'Buy an index fund.' "
And that remains true. If you've got little time to keep track of stocks, this really is the
best investment advice around. It's not perfect -- after all, you might be asking, "Which index
fund?" And then you'd want to specify certain characteristics, such as:
No load.
Low annual cost.
Low turnover.
Broad index.
That means a fund like Vanguard Total Stock Market Index (VTSMX), or the Vanguard Total
Stock Market ETF (AMEX:
VTI), which
coincidentally may hold a lot of what you know, including GE, Microsoft, Coca-Cola, Hewlett-Packard
(NYSE: HPQ),
Verizon (NYSE:
VZ), and Procter
& Gamble (NYSE:
PG).
When cornered at cocktail parties for investment advice, this is the one piece I usually provide.
After all, barely 25% of mutual funds beat the relevant market index over time. I don't think that
you can really improve on this advice if you're stuck using four words or fewer.
But you can spend more than four words on investment advice, and as with the other four-word
mantras above, doing so usually yields even better advice. Like the classic index fund, a managed
fund can have no load, low costs, low turnover, and strong diversification. It can, on rare occasions,
have managers capable of properly allocating capital and valuing businesses, thereby adding value
beyond the overall increases of the market. When you combine all of these factors, you get a fund
that improves on its index -- and helps you make money.
Such funds are out there. They take more than four words' worth of work to find, but Motley Fool
Rule Your Retirement has uncovered a number of them. Along with a selection of exchange-traded
funds that it recommends, as well as index funds beyond the S&P 500, our retirement newsletter focuses
on inexpensive, diversified ways to save and invest for a healthy and happy retirement.
For much more on planning for retirement, including tools, investment recommendations, and a
suite of discussion boards where you can ask questions to your heart's content, try Rule Your
Retirement for the
next 30 days,
free of charge.
This article was originally published on Jan. 13, 2006. It has been updated.
Bill Barker does not own shares in any of the companies
mentioned in this article. Whole Foods, Starbucks, and Dell are Motley Fool Stock Advisor
recommendations. Microsoft, Coca-Cola, and Dell are Inside Value selections. The Motley Fool
has a disclosure policy.
BOSTON (MarketWatch) -- What's the best way to motivate Americans to save, invest and prepare
for retirement? Some behavioral finance experts suggest using the carrot. Others suggest using the
stick. And still others suggest using a combination of carrot and stick.
As for me, I suggest the use of statistics. Consider just a sampling of the numbers that have
been released this year:
IRAs and 401(k)s
There's $4.23 trillion in individual retirements accounts, but that figure hides the fact that
very few Americans contribute to an IRA and even when they do the amount is small.
On average, just 10% of eligible Americans contributed to an IRA for the years 2000 to 2002,
according to the latest issue of EBRI Notes. And in 2004, the median contribution to a traditional
IRA was just $2,300, according to the Investment Company Institute. The maximum you could contribute
to an IRA in 2004, by the way, was $3,000 or $3,500 for those 50 and older.
Now you might say that's not so bleak given that working Americans are presumably saving for
retirement using an employer-sponsored plan, such as a 401(k), 403(b), 457 or Thrift Savings Plan.
But again, the numbers are somewhat depressing.
There are nearly 100 million Americans age 21 to 64 working full-time, full-year. But of that
number, just 60% or 58.4 million work for an employer that sponsors a retirement plan, and only
52.7%, or 50.8 million participate in a retirement plan.
That means roughly half of all working Americans don't participate in a retirement plan or don't
have an employer-sponsored plan in which to participate. It also means that a huge number of adult
Americans -- by my estimate 150 million of a potential 200 million -- aren't saving for retirement
in any meaningful way, if at all.
Retirement risks
According to the Society of Actuaries' 2007 Risks and Process Retirement Survey, roughly half
to 60% of retirees worry about three things: the cost of health care, the effect of inflation on their nest eggs and not being able to maintain a reasonable
standard of living for the rest of their life.
Those worries are justified given the lack of savings in America. But what's really bothersome
is the degree to which those who aren't worried should be.
Consider, for instance, health-care costs. Fidelity Investments estimated earlier this year that
a 65-year-old couple retiring today would need $215,000 set aside just to pay for medical expenses
over a 20-year span. And if that wasn't depressing enough, other estimates are even higher.
Paul Fronstin of the Employee Benefit Research Institute, for instance, said a 65-year-old couple
retiring today would need, assuming average life expectancy of 82 for men and 85 for women, more
than $300,000 set aside to pay for health-care costs (premiums and out-of-pocket expenses) in retirement,
and more than $550,000 if the couple lives to age 92.
What's even more depressing is that neither the EBRI nor Fidelity estimates factor in the cost
of nursing homes, long-term care or assisted-living facilities, or home health aides. And those
costs are staggering.
According to the MetLife Mature Market Institute, it costs $69,000 per year for a semiprivate
nursing-home room, $35,628 per year for a unit in an assisted-living facility, $19 an hour for a
home health aide and $61 per day for an adult day care center. Where's that money going to come
from?
Retirement expenses
Retirees and would-be retirees are also right to fret about maintaining their standard of living.
Consider, for instance, these numbers: The median household income (half above, half below) in America
is $48,451 and the average is $65,527, according to the U.S. Census Bureau. But in retirement, income
falls dramatically.
The average total income for those 65 and older in America is $25,610, and the median was a meager
$16,770, according to EBRI Notes. That means retirees are living on roughly one-third of their preretirement
income. And that's a far cry from the 70% to 80% income replacement experts suggest Americans need
to maintain their preretirement standard of living.
Besides not having the income to maintain a similar standard of living, retirees will face expenses
that are certain to rise faster than the average rate of inflation.
Consider, for instance, the results of the 2002 Consumer Expenditure Survey. On average, retirees
spent 32.6% on housing, 14% on food, and 13% on health care. But that's the average. What's interesting
is the degree to which money spent on health care in retirement changes over time.
For instance, those 55 to 64 spend 6.8% on health care, those 65 to 74 spend 11.2% and those
75 and older spend 15.1%. That percentage rises in part because the cost of health care is rising
twice as fast as the core rate of inflation (less energy and food), 5% vs. 2.3%, according to the
U.S. Bureau of Labor Statistics. But it also rises because older retirees tend to spend more on
health care than younger retirees.
Source of retirement income
So where do retirees get their income once in retirement? Again, the numbers are depressing (and
deceiving). On average, retirees get 39.8% from Social Security, 23.7% from earnings, 19.4% from
pensions and annuities, 15.4% from assets (IRAs and the like) and 1.9% from other sources, according
to EBRI Notes.
But the composition of the income changes dramatically based on income. Retirees in the bottom
fifth of income, those with less than $8,261 in 2006, got 87.6% of their income from Social Security
while those in the top fifth of income, those with greater than $34,570, got 36.4% from earnings,
22.6% from pensions, 20.5% from assets, and just 18.5% from Social Security.
The moral of story
If you are among the 150 million who are not saving for retirement, now would be a good time
to do so. If you are among the 50 million who are saving for retirement, now would be a good time
to save more.
If you are among those who aren't worried about health-care costs, inflation or maintaining a
standard of living in retirement, now would be a good time to start worrying.
If you are among those who worry about retirement risks, now would be a good time to do something
about it: Set aside money for health care, for instance.
And if you are among those who don't know what your sources and composition of retirement income
will be, now would be a good time to figure that out. After all, waiting to see how things might
work out isn't the world's best plan.
Robert Powell has been a journalist covering personal finance issues for more than 20 years,
writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual
Fund Market News.
CNBC anchor Mark Haines stated on air today at 11:00 am: "The two people I don't trust are realtors
and car salesmen. Not that they are dishonest. They just have a vested interest in keeping spirits
up."
Doesn't that take the cake?
With respect to Mr. Haines and the subject of "keeping spirits up",
readers know my views.
CNN calls themselves "The most trusted name in news" and CNBC is all about "The greatest story
never told". It's all a crock that nobody believes, so why they play this mindless game is beyond
me.
But -- and this is important -- it's only been in recent years that Wall Street has permitted
their best people to speak their minds -- as long as they cover themselves with disclaimers. We
need to encourage that.
Wall Street is full of brilliant minds, and these professional players don't all agree with their
colleagues, or with Talking Heads. We need to hear their differences of opinion, directly.
From the media, many of whom are on the sidelines cheerleading advertisers and promoters and
their friends, we need to tune out. If they were simply journalists, we should listen.
From readers comments:
If you view CNBC as 50% entertainment with some factual information as background, it isn't so
bad.
Anyone who blindly invests based on what they hear or read, without doing some of their own analysis,
is doing themselves a disservice -- they should get someone else to make their investment decisions.
But your main thesis here is right on. Analysts provide value by providing insight into why they
think a stock should be valued at some level, and we as investors are free to weight or reject those
varied opinions. A difference of opinion could result from a variety of different assumptions, and
our assessment of those assumptions is what makes markets move.
====
Yes, Wall Street is "full of brilliant minds". You can witness this by the "brilliant" performance
of the in-house mutual funds that the brokerages cram down the accounts of their hapless customers.
While this is a travesty, even worse is the current move afoot by the SEC and Congress to prevent
the retail investor or pension plans from putting any money into funds that can short the market
or use leverage.
The S&P 500 only recently recovered back to even after six years and a 40%+ drawdown. Of
course, that represents a excellent investment choice according to the regulators and the index
fund distributors. Just buy and hold into the sunset.
Q: I am in a quandary regarding my 401-K portfolio allocation. I am 56 years old and understand
that in my age category I should have a 60%-40% mix between stocks and bonds in my portfolio.
For the past couple of years, I have been mostly invested in equities but recently shifted to
the recommended 60-40 split --- except that right now the 40% is currently in a Money Market fund.
This is because investing in bond funds has seemed to be more speculative
than equities in these times.
My company 401-K plan provides me with 5 choices and a none of them includes owning bonds directly.
Our bond fund return cannot keep pace with the Money Market return. The best choice has been the
Equity Index Fund which is an S&P 500 Index Fund.
What do you recommend for people in my situation?
---B.D., Houston, TX
A. Your judgment has been excellent. Bond fund figures for the last three years have been
dismal and cash has been a better choice.
You might consider some research by Peter Bernstein. Disappointed with bonds, he found that a
75/25 stocks/cash allocation produced the same volatility as the traditional 60/40 stocks/bonds
allocation. In other words, if you hold cash instead of bonds, you can afford to hold more stocks
because the cash is more stable than bonds.
Another option would be to look among your fixed income choices and try to find a fund that was
what some analysts call "near cash"--- a very short term fund with an average maturity of 1-3 years
Regular stock promoting idiotism form mainstream press... I bet in Feb 2009 he need to eat this
article shredded into borsch
February 17, 2008 | The New York Times
IT has been a time to worry even the savviest investors. The credit markets have been in a crisis,
the domestic stock market has been shaky and overseas markets haven't been much better.
David F. Swensen manages investments for the $22.5 billion endowment at Yale.
What should an individual investor do?
Don't try anything fancy. Stick to a simple diversified portfolio, keep your costs down and rebalance
periodically to keep your asset allocations in line with your long-term goals. That is the advice
of David F. Swensen, who has run the Yale endowment since 1988, relying on a complex strategy that
includes investments in hedge funds and other esoteric vehicles. The endowment earned 28 percent
in its last fiscal year, which ended June 30, beating all other endowments. It finished the year
with $22.5 billion.
For most people, he recommends a very basic approach: use index funds, exchange-traded
funds and other low-cost instruments, and stick to your long-term asset allocation - even when the
markets are in tumult.
Don't be distracted by market forecasts, he said. "You have to diversify against the collective
ignorance," he said. "I think nobody is in a position to react to these big macro-issues. Where
is the dollar going to be or what is G.D.P. growth going to be in China? For every smart person
on one side of the question, there is another smart person on the other side."
For most individual investors, he said, copying the strategies of institutions like Yale is virtually
impossible: big investors have access to fund managers and arcane strategies that are beyond the
reach of most people.
"The only people who should get involved are sophisticated individuals who have significant resources
and a highly qualified investment staff," Mr. Swensen said.
"Most people do not have the resources and time to pick market-beating managers" of hedge funds,
private equity funds or funds of funds, he said. And he said that the techniques used by hedge funds
often result in higher taxes than those of index funds.
So he advocates another approach, which he outlined in the book "Unconventional Success: A Fundamental
Approach to Personal Investment" (Free Press, 2005). He proposes a portfolio of (what a genius,
this portfolio los more then 30% in 2008 --NNB Jan 26, 2009):
30% domestic stocks,
15% foreign stocks,
5% emerging-market stocks
20% in real estate
15% each in Treasury bonds and Treasury inflation-protected securities, or TIPS.
The real estate investment can be made through real estate index funds. Though the real estate
market has declined and your portfolio is below its target allocation to it, he said, don't try
to time the market. Go ahead and rebalance because no one really knows where the market's bottom
is.
Diversification will buffer a portfolio from declines in specific asset classes. For example,
he said: "If the dollar declines dramatically, you have foreign and
emerging-market equities. And a declining dollar may well be associated with inflation,
but a diversified portfolio would include TIPS," to provide a hedge. "That means if any of these
scenarios play out, an investor has sizable chunks of his portfolio that protect against them,"
Mr. Swensen said.
When possible, he said, rebalancing should be done in a tax-sheltered account, like an I.R.A.
or a 401(k), to avoid tax liabilities. "When you are putting fresh money to work," he said, "you
put it in an asset class where you are underweight and take money out of a class that is overweight."
He says it is fruitless for individual investors to pick stocks. "There is no way that
an individual can go out there and compete with all these highly qualified and compensated professionals,"
Mr. Swensen said.
... ... ...
Mr. Swensen says investors should forget market timing entirely. Once an individual sets up a
program, it should be rebalanced quarterly or semiannually, he said, "but it should be disciplined."
When the markets decline, try not to pay attention, he said. "Let yourself off the hook," he
said. "If you pursue the sensible long-term policy, look at it over
a 5- to 10-year period. Don't look at five months."
Sometimes, the questions we don't ask are more important than the ones we do.
Had someone asked, for example, "Can he hit?" the Red Sox might never have traded pitcher Babe
Ruth to the Yankees. Had someone asked, "Do we really need a New Coke?" we wouldn't still be making
New Coke jokes.
One question every investor needs to ask is, "How much money can I lose?" It's a particularly
urgent question in uncertain economic times - now, for example. So for the second column in our
series on dealing with stormy financial markets, we're going to talk about how to make your portfolio
as recession-proof as possible.
Let's start with the proposition that the more narrowly focused your portfolio, the larger the
potential gains or losses. Suppose, for example, you had invested in the Hey, Boy & Howdy fund,
which owned five stocks. If one of its stocks had been Google, then you would have made a great
deal of money. But if one of those stocks had been Enron, then you'd be sitting on some big losses.
Highly concentrated funds, particularly those that focus on one sector, enjoy the biggest potential
for outsize losses and gains. If you're worried about a downturn, you should look for funds with
many holdings. You'll give up the chance for a 100% gain in one year, but you probably won't lose
70%, either.
One easy choice would be Vanguard Total Stock Market Index, which holds 3,685 stocks and tracks
the MSCI US Broad Market Index. (Vanguard's rival, Fidelity, offers the Fidelity Spartan Total Market
fund, which has 3,411 holdings and tracks the Dow Jones Wilshire 5000 index.)
These funds will protect you somewhat if one stock, or even one whole sector, takes a bruising.
Keep in mind, though, that they're still stock funds and will follow the stock market faithfully
- even if it walks off a cliff. If you want further protection, you have to invest in something
that might not move in lockstep with the broad stock market.
You can use two statistical measures to determine how closely one type of fund tracks another.
The first is a fund's statistical correlation with another fund or a broad index. A 100% correlation
is a perfect match; a 0% correlation means the two funds' movements are unrelated. A negative correlation
means the two move in opposite directions.
Consider, for example, the Lipper large-cap core fund index, which measures the performance of
the largest funds in that category. The index has a 98.9% correlation with funds that track the
Standard & Poor's 500-stock index. If you own an S&P 500 fund and a large-company core fund, you're
not getting much diversification from owning the two funds.
Another measure, called r-squared, shows how much one fund's movements can be traced to the movements
of a benchmark, such as the S&P 500. The closer the r-squared is to 100, the more the returns from
the fund are attributable to the returns from the benchmark. The Lipper equity-income fund index,
for example, has an r-squared of 95.4% with Lipper's index of S&P 500 index funds. Again, pairing
the two types of funds in your portfolio won't give you a great deal of added benefit.
You can find both these statistical measurements at www.morningstar.com
, and many funds' websites provide the information, as well.
What types of funds don't correlate with the S&P 500? International
funds have only a 75% correlation with S&P 500 index funds. Still, you should remember
that when the U.S. stock market melts down, foreign markets melt right alongside us. Among sector
funds, the lowest correlations with the S&P 500 have been among gold funds, natural resources funds
and Japan funds.
But you get better diversification if you mix in funds that invest in different asset classes,
such as money market securities or bonds. Over the past three years,
funds that invest in Inflation Protected Securities, or TIPS, have had a negative correlation with
S&P 500 index funds. So have government securities funds. Municipal bond funds also
have a very low or negative correlation with S&P 500 index funds.
Some experts also consider real estate funds to be a separate asset class. In the past three
years, real estate funds have had a 53% correlation with S&P 500 funds.
If we were to construct a Cowardly Portfolio, then, we might consider
a 20% allocation each to a mix of U.S. stocks, international stocks, real estate, bonds and money
market funds. In broad terms, this gives us 60% in stocks, 20% in bonds and 20% in
money market securities, or cash.
For ease of calculation, we used Vanguard funds for a low-cost model portfolio. You can create
your own cowardly portfolio with funds from different managers, if you like.
The portfolio performs brilliantly in down markets and reasonably well in up markets. Had you
invested, for example, in the Vanguard Total Stock fund on Dec. 31, 1999 - the eve of the 2000-02
bear market - you'd have gained about 21% through the end of November. By contrast, the Cowardly
Portfolio would have gained 86%, thanks to gains in its other holdings, particularly real estate.
The past 12 months, however, the Cowardly portfolio has trailed the Vanguard Total Stock portfolio.
You can adjust the degree of cowardice in the portfolio by adjusting the proportions of your
total portfolio that you hold in the different funds. You can also improve
your returns by rebalancing periodically. The best method: Rebalance the entire portfolio if one
holding rises to 30% of your holdings, or falls to 10%.
If you have a long-term outlook (20 years or more) then you probably shouldn't build a portfolio
based on short-term gloom. In the long term, stocks will fare best. But if the question you're most
worried about is, "How much will I lose?" then consider a Cowardly Portfolio.
Water Undegrave discredits himself calling seismic shift "market freak-out".
Debt based expansion might run out of steam. The recommendation "But generally someone your age should
have roughly two-thirds of your retirement portfolio in a diversified blend of stocks and the rest in
bonds." is not suitable for the storm coming. I doubt that 66% of stocks can be considered a defensive
strategy in the current environment but it is better then 100% for sure :-). Also
the assumption that S&P500 outperforms bonds during any 10 years period is not always true and it will
definitely be false for the last ten years if S&P500 falls to 1300 level in 2008. Of course much
depends on you access to specific stock funds but generally 100-your age dictates opposite percentage
(44 stacks and 56 bonds). Pimco probably got higher return this year then S&P500. All-in-all with cost
averaging and starting from zero S&P500 is equal to the bond fund that returns on average 6.5% a year
if we are talking about the last 10 years.
Instead of panicking and dumping stock funds in a downturn, be cool and rethink your strategy,
says Money Magazine's Walter Updegrave.
Question: I'm 56 and have my most of my nest egg in stock funds. But with the stock market
crashing so much lately, I've become concerned and am considering switching
out of stocks. Do you think this is a good idea? - Sharon Bollmann
Answer: I certainly understand your apprehension about the stock market's behavior this
year.
After reaching an all-time high in May, the Standard & Poor's 500 stock index - which is a better
barometer for stocks overall than the more often watched Dow Jones Industrial Average - has undertaken
a series of white-knuckle ups and downs that's made investing in stocks a bit like riding one of
those loop-de-loop roller coasters.
And with a seemingly unending litany of bad news on the economic front - declining housing prices,
ongoing subprime woes, a slowing economy - you can't help but wonder whether we're in for another
stomach-churning dive from which it may take many months to recover.
This kind of situation is unsettling for all investors, but even more so for people like yourself
who are nearing the end of their careers. After all, the last thing you want is to see the money
you've worked so hard for, saved so diligently and invested so carefully get whacked with a big
loss just when you're in the home stretch to retirement.
But this isn't the time to give in to fear. Rather, it's a time to
re-assess your investing strategy and consider what you need to do to remain on track toward a secure
retirement.
If you're like most people in their mid 50s, you probably have a good 10 or more years before
you can realistically think about retiring. During that time, you've got to pull off a bit of a
balancing act.
On the one hand, you don't want to do anything to unduly jeopardize the savings you've accumulated
in 401(k)s and other retirement accounts. But you still need to make that money grow.
It's not as if you'll only be investing until age 65.
After calling it a career, you'll probably spend another 20 or more years in retirement.
Which means you still need to bulk up the value of your nest egg so
it can generate enough income to maintain your purchasing power until you're well into your '80s
or even longer.
So even though your gut may be telling you otherwise, you don't want
to abandon stocks. Nor do you want to embark on what may seem like a plausible strategy
of getting out now with the idea of jumping back in at a more opportune time in the future.
As I pointed out in a recent column, that sort of market timing is
very difficult to do and can easily backfire. A better strategy is to decide on a
mix of stocks and bonds that's likely to get you the long-term growth you need, but that also offers
enough protection so that your nest egg isn't totally scrambled should stocks take even more of
a hit.
The blend of stocks and bonds that's right for you will depend on a number of factors, including
the size of your nest egg, the value of other resources you have to draw on (Social Security, a
pension, home equity, cash value in life insurance policies, etc.) and how much risk you're comfortable
taking.
But generally someone your age should have roughly two-thirds of your retirement portfolio in
a diversified blend of stocks and the rest in bonds.
It's also important that you continue to contribute to 401(k) and other retirement accounts in
the last stages of your career. That may not seem like a very sensible thing to do when the stock
prices are falling and the economic outlook appears iffy.
But remember, the shares you buy while the stock market is down will
likely be the ones that will have generated the biggest gains a decade or more down the road.
And the money you invest during market setbacks could very well provide the spending cash you'll
need in your later retirement years.
One final note. While I've tailored my answer to people like you who are nearing the end of their
career, the fact is that a tumultuous market like this one presents a challenge no matter where
you are in your retirement planning.
So for those of you out there who have more than 10 years before you'll call it a career, you
can get a suggested retirement portfolio blend by clicking here, while anyone who's already retired
can get a recommend mix by clicking here.
But whatever stage of retirement you're in, remember: no matter what the market is doing, you're
always better off setting a reasonable strategy and following it rather than letting your gut or
your emotions lead the way.
$6000 is true for 2008 and 2009, not true for 2007 ($5000 for 2007)
November 29, 2007 | Kiplinger
Build tax-free retirement income. Contribute to a Roth IRA while you're working. If you're 50
or older next year, you and your spouse can each contribute up to $6,000 to Roth accounts--$5,000
in basic contributions plus a $1,000 catch-up-as long as you meet income requirements (in 2008,
your income can't exceed $169,000 if you're married filing jointly or $116,000 if you're single).
[link to Roth stories]
The toughest questions. The best calculators. The coolest strategies. And a lot more.
Starting in January, the first of an estimated 78 million baby boomers turn 62 years old and
become eligible for Social Security.
Time to reach for the aspirin.
Now in its eighth decade, Social Security is arguably more important -- and certainly more complicated
-- than ever before. Boomers, for the most part, are on their own when it comes to planning for
later life; pensions and related safety nets are disappearing from the workplace. Thus, Social Security
checks -- the closest thing to a sure bet in most retirement budgets -- are expected to play an
ever-larger role in older Americans' financial security.
The process of getting that check, however, is sure to cause headaches for boomers and bureaucrats
alike. The Social Security Administration's 1,300 offices nationwide already see 850,000 visitors
each week and field about 68 million telephone calls a year. Would-be retirees, meanwhile, are about
to discover that many factors -- taxes, a spouse's earnings history, life spans -- can muddy decisions
about how and when to file for benefits.
You can, of course, keep things simple and take the plunge on your 62nd birthday. (About half
of workers do.) Even if that's your plan, you owe it to yourself -- and your spouse -- to learn
about Social Security and how to get the most out of the system.
"Don't let Social Security just 'happen,' " says Joseph Matthews, a lawyer in San Francisco and
author of a guide to the program. "There really are a number of variables that people should consider
before they start."
The basics are available from the Social Security Administration. (More about that in a moment.)
But to supplement your education, consider the following -- some of the most interesting, obscure,
misunderstood and surprising parts of the 72-year-old program:
The most frequently asked question at the Social Security Administration
"How much can I earn and still receive Social Security benefits?" Based on a survey of visits
to the agency's Web site, more people -- 315,847 in the first six months of this year -- wanted
the answer to that question than any other.
The question refers to the agency's "earnings test" and the apparent penalty for collecting a
salary and Social Security at the same time. It works this way: If you are under your "full retirement
age" (the age at which you qualify for full benefits) when you first receive Social Security payments,
and if you have earned income, $1 in benefits will be deducted for each $2 you earn above the annual
limit. In 2008, the limit is $13,560.
In the year you reach your full retirement age, the "penalty" shrinks: $1 in benefits is deducted
for each $3 you earn above a higher limit, $36,120 in 2008. Then, starting with the month you reach
your full retirement age, the deductions end.
What most people don't realize, says Andrew Biggs, deputy commissioner for Social Security, is
that once they reach full retirement age, the agency recalculates their future benefits to compensate
for any benefits lost due to the earnings test. For most people, Mr. Biggs adds, "the earnings test
isn't a 'tax' so much as a delay in benefits, and so they shouldn't stop working or limit their
earnings in order to avoid it."
The most frequently asked question about Social Security in financial advisers' offices
"When should I file for benefits?" Invariably, that's the question planners hear first.
When it comes to the answer, the conventional wisdom is changing. Where many advisers once recommended
grabbing benefits at age 62 (at which point your monthly check is reduced permanently by as much
as 25%), experts today say extended life spans and the demise of traditional pensions argue for
waiting until your full retirement age, or later, to collect a paycheck. (You get your largest possible
benefit at 70.)
Even "foolproof" strategies are no longer looked upon as foolproof. "Let's say your doctor tells
you that you have six months to live," says Bruce Schobel, a New York actuary who worked in the
Social Security Administration in the 1980s. "So, it's obvious: You take benefits at 62, right?"
Maybe not. Because of Social Security rules involving spousal benefits, Mr. Schobel says, "taking
a reduced benefit at 62 could serve as a cap on the surviving spouse's payout, reducing that person's
future benefits by tens of thousands of dollars."
"So even an apparently simple decision becomes complicated," he says.
Calculators, of course, can help. (We discuss some of the better ones below.) But first, take
a few minutes to read a new report: "Rethinking Social Security Claiming in a 401(k) World," written
by James Mahaney and Peter Carlson, retirement specialists at Prudential Financial Inc. It's the
best discussion we've seen about filing for benefits and possible strategies for doing so. (Note
to the give-me-my-money-at-62 crowd: The authors conclude that changes in Social Security in recent
years "make the value of delaying the receipt of...benefits greater than in the past.")
The report, published in August, can be found at the Pension Research Council, part of the Wharton
School at the University of Pennsylvania. (Go to pensionresearchcouncil.org
and click on "Working Papers" and 2007. Registration is free.)
Coolest strategies you've never heard of for claiming benefits
One way many couples can maximize Social Security benefits over their lifetimes is for wives
to claim benefits at age 62, and for husbands to delay filing until almost 70, says Alicia Munnell,
director of the Center for Retirement Research at Boston College. (That's based on a number of factors,
including income levels, life spans and survivor benefits.) You can find Dr. Munnell's research
in the June issue of the Journal of Financial Planning. (See
fpanet.org/journal and click on "Past Issues and Articles.")
Of course, 70 is a long time to wait for Social Security. So, here's a way -- courtesy of Steve
Potter, a retired public-affairs specialist at Social Security -- to avoid the wait and still get
a sizable benefit at age 70.
The scenario: George, at his full retirement age of 66, expects a benefit of $2,000 a
month. His wife, Martha, at her full retirement age of 66, expects a benefit of $1,000 a month.
The strategy: Martha files for a reduced benefit on her own at age 63, or $800 a month. George,
at age 66, files for just a spousal benefit, based on Martha's earnings. He would get $500
a month as Martha's spouse. (Yes, Social Security allows George to get half of what Martha was
projected to receive at her full retirement age.) Then, at age 70, George applies for benefits
based on his earnings history. With the "delayed retirement credit" (the additional dollars
one receives for waiting until age 70 to claim Social Security), George's benefit would be 32% higher,
or $2,640 a month.
Social Security would stop George's spousal benefit of $500 a month because he's entitled to
the $2,640, based on his own earnings, at age 70. Again, for this to work, George must wait until
his full retirement age or later to file for a spousal benefit.
The nice part about this strategy is that George -- if he's trying to maximize his and Martha's
combined benefits -- doesn't have to wait three or four years beyond his full retirement age for
a paycheck; he can start collecting benefits at 66 based on Martha's earnings history -- and jump
to a considerably bigger benefit at age 70. As far as the "break-even" point goes -- the age at
which the accumulated value of benefits from this strategy will start to exceed the accumulated
value from both spouses filing for full benefits at age 66 -- it's 79. Beyond that age, the 63-66
strategy yields a larger total return. (This example assumes George and Martha are the same age.)
Note: Some Social Security representatives we spoke with weren't aware of this strategy. If you
try this at your local Social Security office -- and if the staff balks -- ask them to confirm the
strategy with Social Security headquarters in Baltimore, which confirmed it for us.
>
Best calculators and sources of information
Start with the Social Security Administration and its Web site, ssa.gov.
The calculators alone are worth the visit. Three benefits calculators -- "Quick," "Online" and
"Detailed" -- estimate payouts using different retirement dates and levels of future earnings. (Click
on "Calculate your benefits" on the home page.)
In addition, an "Earnings Limit" calculator illustrates how a salary -- if you file for benefits
before full retirement age and are still working -- might affect your monthly check from Uncle Sam.
A "Retirement Age" calculator shows how retiring early reduces your monthly payout (as a wage earner
or spouse). And a "Break-Even" calculator shows the age at which the accumulated value of higher
benefits -- for a person who claims Social Security, say, at age 66 -- will start to exceed the
accumulated value of lower benefits for a person who opts for Social Security, say, at age 62.
The site also provides extensive lists of frequently asked questions in 24 categories; offers
access to dozens of forms and publications; and, perhaps most important, allows you to perform a
number of tasks online -- including filing for benefits (and, thus, avoiding a trip to the Social
Security office). In all, a very valuable tool.
Another useful resource is analyzenow.com, a Web site devoted
to retirement issues. Started by Henry K. "Bud" Hebeler, a retired aerospace executive and author
of two books about retirement planning, analyzenow features a number of helpful articles about Social
Security and two calculators that can help users determine the best age to file for benefits.
Two other online resources: The National Committee to Protect Social Security and Medicare, a
Washington advocacy group, has a spot on its Web site called "Ask Mary Jane" (www.ncpssm.org/maryjane).
There, you can email a question to Mary Jane Yarrington, a congressional caseworker who joined the
group in 1986 as a senior policy analyst. (Before you write, check the archives for earlier questions
and answers.)
Second, Stanley A. Tomkiel III, a New York lawyer, is the author of the "Social Security Benefits
Handbook" -- the contents of which are available free at
socialsecuritybenefitshandbook.com.
Finally, if you prefer print, Mr. Matthews, the San Francisco lawyer, is co-author of "Social
Security, Medicare and Government Pensions," one of the best general guides to the program.
Biggest myth -- and most misused words
The biggest myth is that Social Security will go "broke" or "bankrupt" in coming decades.
The Social Security Administration, in its annual report to Congress this year, identified three
important dates regarding the health of the program. First, starting in 2017, the agency will begin
paying out more in benefits than it collects in revenue. Second, in 2027, Social Security will have
to tap the principal in its "trust fund" (its savings account, if you will) to meet its monthly
obligations. (The trust fund itself is a flash point in debates about the health of the program.
Some observers, including President Bush, say the fund, which lends excess revenue to the federal
government and receives special-issue bonds in exchange, is simply a box full of IOUs. But it's
a safe bet that when Social Security needs to draw on the trust fund, future Congresses and presidents
will make sure the Treasury doesn't default on those bonds.)
Finally, in 2041, the trust fund will be exhausted, at which point the agency will be able to
pay only about 75% of promised benefits.
It's certainly not a pretty picture. But at no point will Social Security collapse. Uncle Sam,
it's safe to assume, will continue to collect taxes in 2041 and beyond. Part of that revenue will
go to Social Security, which will continue to write checks. Again, starting in 2041 (as things stand
now) beneficiaries will wind up with payouts worth 25% less than current rules call for. And that's
grim.
But broke? Bankrupt? No.
Best source of information on how to fix Social Security
Earlier this year, the Center for Retirement Research at Boston College published "The Social
Security Fix-It Book." The cover of the 52-page booklet describes it as "everything the earnest
but over-burdened citizen needs to know. Cheerfully narrated and handsomely presented."
That quirky beginning belies what follows: the single best guide we've seen that explains why
Social Security is in the mess it's in -- and the leading proposals for restoring it to health.
You can download a copy free at crr.bc.edu. Keep it handy when
presidential candidates hold forth on their plans to fix Social Security.
Most arcane, but important, debating points
Speaking of presidential politics, the following issues could well figure in the fine print of
any "solutions" involving Social Security. Depending on a candidate's stance on these issues, his
or her particular solution could end up sounding very painful -- or just painful. Try dropping these
nuggets into the conversation at your next dinner party:
Time Horizons: Some policy makers argue that we should look ahead 75 years when estimating
the shortfall in Social Security's finances -- in which case, about $4.7 trillion is needed to close
the gap. Others argue for adopting an "infinite horizon" -- in which case about $13.6 trillion is
needed. (A trillion here, a trillion there...)
Changing Work Force: Some evidence suggests that older workers are remaining in, or rejoining,
the work force in greater numbers. If so, and if the trend continues, it could ease (somewhat) the
coming strains on Social Security. But there's no telling what baby boomers actually will do in
retirement.
Buying Power: Annual cost-of-living adjustments in Social Security are based on the CPI-W,
the consumer price index for urban wage earners and clerical workers. But groups including the Senior
Citizens League argue that adjustments should be tied to CPI-E, an experimental index for the elderly
started in the 1980s. This index tracks expenditures among individuals age 62 and older and better
reflects (theoretically) this group's higher spending on health care and other goods and services.
Biggest misunderstanding
The biggest misunderstanding is that your particular tax dollars are being set aside for you
at Social Security.
Social Security is not, and never has been, a savings account. " 'Your' money is not in 'your'
account," says Dennis Oliver, a retired Social Security Administration manager who now works as
a Social Security consultant in Cookeville, Tenn. Rather, Social Security is largely a pay-as-you-go
system, in which your tax dollars are used to pay current benefits. (Since the mid-1980s, Social
Security has been running annual surpluses that have gone into the trust fund.)
Consider Ida May Fuller, who received the very first monthly Social Security check in January
1940. She was 65 at the time. Ms. Fuller worked for three years under Social Security before retiring,
and the taxes on her salary totaled $22.54. By the time she died in 1975 at age 100, she had collected
$22,888.92 in Social Security benefits.
Biggest surprises
In 1983, Congress raised the age at which people qualify for full Social Security benefits. Once
pegged to age 65, the threshold is increasing gradually until it hits 67 for workers born in or
after 1960.
The problem: According to a survey earlier this year by the Employee Benefit Research Institute,
30% of all workers think -- incorrectly -- that they will be eligible for unreduced benefits at
age 65. Worse, 21% think they will be eligible for unreduced benefits before age 65.
Separately, for all the discussion about claiming benefits at age 62 or at full retirement age,
the decision isn't an either-or proposition. You can take benefits at any point -- any day, month
or year -- after 62. The longer you wait, of course, the smaller the reduction in your benefits.
If your full retirement age is 66, and if you file for benefits at 62, your monthly check will
be reduced about 25% from your full benefit; file at 63, the reduction is about 20%; file at 64,
the reduction is about 13.3%; file at 65, and the reduction is about 6.7%.
Best day of the year to visit a Social Security office
The Friday after Thanksgiving. Yes, the agency's local offices are open on that day -- and are
usually very quiet.
--Mr. Ruffenach is a reporter and editor for The Wall Street Journal in Atlanta and the editor
of Encore.
Clients often come to me with this same question, and I can't answer it without knowing how much
they are spending. Some clients making $100,000 per year are only spending $50,000, while others
are earning $110,000 and getting further in debt.
So you should really ask, What percent of my current annual expenditures should I expect to spend
in retirement?
The best place to start is determining how much you are spending in pre-retirement. If you're
not doing advanced tracking with a software program, then at least have a look at your checking
account.
Your current annual expenditures amount to all your income (take-home pay, dividends, etc...)
less what you put into savings.
Then you should think about what adjustments you'll make in retirement. Here are just a few life
changes that might dramatically reduce expenditures:
Housing: Did you just pay off the mortgage or are you going to downsize the house? The
savings could really add up here.
Education Expenses: Are you paying college for the kids and is this an expense that's
about to go away?
Auto expenses: Kiss that long commute goodbye, not to mention the bundle you'll save in
fuel and maintenance.
Clothes: Maybe you have no more expensive suits to buy and clean frequently.
Unfortunately,
retirement can bring about changes that increase our expenditures as well. All of that new found
time away from the office also brings additional opportunities to spend money.
Travel: I've found many retirees traveling across the country and the world. In some cases,
their pre-retirement expenditures can actually double.
Entertainment: Now we've got more time to golf or whatever we enjoy. If what we enjoy
costs money, we need to add it to our budget.
Healthcare: Maybe you're lucky and have an employer that pays healthcare insurance. For
the rest of us, we need to take into account insurance premiums, Medicare supplemental plans, out
of pocket costs and the like. And these costs are going up much faster than general inflation. Make
sure you factor this in to the retirement budget.
There are also some good tools out there to use in this process, such as the AOL Money and Finance
Retirement Estimator. They can give you a better idea of what your retirement expenses might be.
After I go over this with clients, I typically see that they are spending just as much after
retirement as before. That's just fine as long as you've built up the portfolio to support it.
There are times I'll show a client that their portfolio is not adequate to support their desired
retirement expenditures. The response I often get is that they won't continue to spend at this level
as they get older. This assumption can be risky since we often find other things to spend money
on later in life.
My advice is to figure out what you think you will spend in retirement based on your specific
needs and desires. Once you have this amount, add 10 percent to it, because we always seem to have
these unexpected expenses that come up.
I take a very conservative stance in this area with my clients. I tell them I'd much rather have
them come to me in 10 years and say they wish they had spent more, than have them tell me they are
out of money and ask what they do now.
Ask Money Magazine's undercover financial planner a question. Send e-mails to:
[email protected].
It reminds me of the index funds. You're buying 500 companies in the S&P 500 and whether there's
an Enron in there or whatever, you're holding it until you're forced to sell or S&P has finally
decided to eliminate it from the index.
...More turbulence, in other words, is a distinct possibility. And, collectively, investors are
heading into this uncertain period with highly aggressive portfolios.
Employees in 401(k) plans recently held nearly 70 percent of their accounts
in stocks, marking their biggest bet on equities since July 2001, according to Hewitt
Associates. And, many of those portfolios have gravitated toward some of the riskiest types of stocks.
The average account balance for a person in their 60s who makes between
$80,000 and $100,000 a year is just $230,000, according to Hewitt. One unexpected
event and that nest egg could be wiped out.
Vanguard LifeStrategy Income (NASDAQ:VASIX -
News)
This is a fund of funds that keeps most of its money in fixed-income portfolios: Vanguard Total
Bond Market (NASDAQ:VBMFX -
News) and Vanguard Short-Term Investment-Grade
(NASDAQ:VFSTX -
News).
But its equity stake can vary from 5% to 30% depending on the asset-allocation
calls of Tom Loeb and his team at Vanguard Asset Allocation (NASDAQ:VAAPX
- News), which gets 25% of assets here (Vanguard
Total Stock Market Index (NASDAQ:VTSMX -
News) accounts for the rest of stock holdings).
Loeb uses quantitative models to figure out how much of his portfolio to devote to S&P 500 stocks
and the Lehman Brothers Long-Term Treasury Index, and his calls have
been consistent and accurate over the years. (Currently Loeb's fund has about three
fourths of its assets in stocks, so this fund's equity allocation hangs around 20%.)
That give this conservative fund a little upside potential, but it's really designed to preserve
capital and generate income. The fund's bear market rank is better than 97% of its conservative-allocation
category peers and in the third quarter through Aug. 28 it eked out a small gain that put it ahead
of 96% of its peer group.
Investors who are further away from their goals or who are more risk tolerant can check out Vanguard
LifeStrategy Conservative Growth (NASDAQ:VSCGX
- News) and Vanguard LifeStrategy Moderate Growth
(NASDAQ:VSMGX -
News), which devote more money to equity funds
and have done well in bear markets relative to their peers.
A colleague of mine recently told me that this portfolio, which keeps most of its money in bonds,
was the first fund she ever bought. My first reaction was to say that it seemed awfully conservative
for someone whose retirement was still decades off. She retorted that she was looking for a one-stop
fund that wouldn't burn an inexperienced investor. Since then she has built a more age-appropriate
asset-allocation plan around this fund, but she has never regretted her first purchase because the
fund has been so reliable. It has lost money in just three of the last 20 years, has done better
than 97% of its peers in bear markets, and has succeeded in delivering a steady stream of income
with a portfolio of undervalued, high-yielding stocks and high-quality (mostly corporate) bonds.
That the fund has held up well (better than nearly 90% of its conservative-allocation peers for
the third quarter through Aug. 28) in the middle of a credit crunch with such a large corporate
bond stake is testimony to the security-selection skills of long-time fixed-income manager Earl
McEvoy and his team from Wellington Management. Wellington's John Ryan on the equity side is no
slouch either. He's leaving the fund next year but has a seasoned understudy lined up in Michael
Reckmeyer III. My colleague argues that there are worse newbie-investor mistakes than buying this
fund, and I'd have to agree.
Vanguard Short-Term Tax-Exempt (NASDAQ:VWSTX
- News)
This fund is cautious and consistent. Longtime manager Pam Wisehaupt-Tynan keeps the portfolio's
duration, a measure of interest-rate sensitivity, low and its credit quality high. Low expenses
allow the fund's conservative approach to work in its favor over time. Put too much of your portfolio
here and you could run the risk of not keeping up with inflation or not seeing enough appreciation
to meet your goals, but it can take the edge off a taxable portfolio. It's done better than 96%
of its peers in bear markets and outpaced almost 80% of them in the current quarter through Aug.
28.
Vanguard Balanced Index (NASDAQ:VBINX -
News)
Once again, simplicity and low costs work in a Vanguard fund's favor. A mix of 60% MSCI U.S. Broad
Market Index (essentially Vanguard Total Stock Market Index ) and 40% Lehman Aggregate Bond Index
has produced reliable absolute returns. It's done better than 86% of its peers in bear markets and
has bested about four fifths of them so far in the third quarter. The fund's correlation with the
overall market is higher, but it's still a solid core holding.
Vanguard Wellington (NASDAQ:VWELX -
News)
This is another old stalwart managed by the redoubtable Wellington Management. In June, my colleague
Chris Davis highlighted this one of Morningstar's favorite "sleep-at-night funds", or offerings
that don't keep you awake at night wondering what they are doing. Since then the fund has acquitted
itself relatively well. It posted a 1.9% loss for the third quarter through Aug. 28, but that was
still better than 82% of its moderate-allocation peers. Its long-term bear market rank also is still
better than 86% of its rivals. And like its sibling Wellesley Income it has delivered consistent
absolute results, losing money in just three of the last 20 calendar years.
Read more about Vanguard funds in our Vanguard Fund Family Report. To view a risk-free
trial issue, click here.
Dan Culloton does not own shares in any of the securities mentioned above.
SAN FRANCISCO (MarketWatch) -- In the past several years, retirement plans have been busy
adding mutual funds and expanding investment options. But more isn't always better.
"There are still very few 401(k) plans with a lot of investment options we'd enthusiastically
recommend," said Paul Merriman, of Merriman Capital Management, a registered investment adviser
in Seattle.
So what if your defined-contribution plan at work features a lineup of mutual funds that seems
lackluster
"I've never run across a 401(k) plan so bad that I would discourage someone from using it completely,"
said Raymond Benton, a longtime Denver-based adviser. "You should at least be able to find one fund
to invest in."
And that's important, as Merriman says, because "you want to take advantage of any matching contributions
by your employer."
So rather than compound the problem by making lousy choices within a lousy 401(k) plan, you can
make the best of your situation. Here are five suggestions:
1. Use a target-date or life-cycle fund only
Within 401(k) plans, many advisers suggest target-date retirement or life-cycle funds. These
include stocks and bonds, both international and U.S. Target-date funds fine-tune portfolio allocations
along preset timelines. As you get closer to retirement, they'll gradually reduce stock exposure
in favor of bonds.
Life-cycle funds are a bit different. An example is Vanguard LifeStrategy Growth Fund (VASGX
) . An investment board sets allocations between stocks and bonds with more aggressive investors
in mind. Sister funds are offered aimed at more conservative investors.
"Life-cycle funds stick with more static allocations depending on risk tolerance and investment
time horizons," said Valerie Antonioli, another Denver-based adviser. "You've got to actually move
out of one fund and into another if you become more conservative or aggressive."
Both types of funds might be best-suited for investors with smaller accounts, she added. "They generally
offer fairly basic choices in terms of diversifying a portfolio," Antonioli said.
By automatically leaving allocation and asset class choices up to fund companies, you're also
sacrificing an ability to make tweaks as your circumstances change.
Of course, that might not be such a limitation, given that investors tend to make the wrong moves
at just the wrong time, says Antonioli.
"For people with more saved up in their 401 (k) accounts, target-date or life-cycle funds alone
probably aren't going to be optimal," she said. "But these types of funds are better options than
just putting everything in something like a large-cap value fund or a real estate fund. They're
a good place to start."
The popularity of such options means that in all likelihood, some form of one-stop shopping is in
your plan. At least 50% of all defined-contribution plans now have either target-date retirement
or life-cycle funds, according to the Profit Sharing/401(k) Council of America.
2. Use a balanced fund
The odds improve if your plan has a more traditional umbrella fund. Such so-called balanced funds
include stellar long-term performers like Dodge & Cox Balanced Fund (DODBX
) and American Funds Income Fund of America (AMECX
) .
"Balanced funds of some sort are in almost all plans today," said David Wray, the profit sharing
council's president.
But they usually offer less diversification than most target-date and life-cycle funds, says
Patrick Geddes, chief investment officer at Aperio Group in Sausalito, Calif.
3. Stick to the index funds
Aperio, which develops and runs portfolios for advisers around the country, suggests that investors
consider creating their own simple portfolios using low-cost index mutual funds.
Stock index funds found in some 401(k) plans include Fidelity Spartan Total Market Index Fund
FSTMX) and Vanguard
Total International Stock Fund Index (VGTSX
) .
"You can really build a good, long-term oriented and well-diversified portfolio with three
basic index funds," Geddes said. "One should cover a broad range of top U.S. stocks, the
other provide exposure to foreign stocks and a third to bonds."
The same tack can be applied to actively managed funds. Although managers can shift into different
corners of the market when cycles change, they're also typically much more expensive than index
funds. Actively managed funds are also less transparent than index funds, says adviser Merriman.
4. Get help with your picks
While your own company or plan provider isn't the best place to turn for advice since they are the
ones that saddled you with the poor options in the first place, there are outside sources of aid.
For example, Merriman's Web site, FundAdvice.com, contains a 401(k) help section that reviews
more than 80 different corporate retirement plans, including U.S. government options. Some of the
private companies listed include Microsoft Corp. (MSFT
Microsoft Corporation.
There is also a money-market option that figures into the mix of the moderate and conservative
portfolios.
The site notes that the plan covers U.S. large-cap and small-cap growth stocks. But it also says
that value offerings are light in small-caps, both internationally and domestically. The plan also
lacks a dedicated emerging markets fund, point out the analysts. "It's rare we see a perfect plan,"
said Mark Metcalf, an adviser at the firm. "But most 401(k) plans have at least one good role player
you can use as part of a larger diversified portfolio." Focus on an overall allocation plan and
build from there, Metcalf adds. "Look for strong support players instead of a lineup of home-run
hitters," he said.
5. Work all your accounts into the mix
And don't forget to include Individual Retirement Accounts and possibly a separate taxable account
into the mix, says Bryan Lee, a Plano, Texas-based adviser.
"People have a tendency to focus on their 401(k) plans," he said. "But they can also take advantage
of other types of accounts like IRAs."
Says Metcalf: "Pick and choose from the best in each asset
class across all of your different accounts, from IRAs to 401(k) plans." That way, he adds, even
if your 401(k) leaves something to be desired your overall portfolio will still be solid.
Murray Coleman is a reporter for MarketWatch in San Francisco
You're not a kid. Stop investing like one. Your age demands that you become more risk-averse.
September 6, Money Magazine
How do you know when you've crossed the invisible line and you're not young anymore? Maybe it's
the first time you look at Billboard's top 20 list and don't recognize a single name. Or when your
kids start staying out later at night than you can keep your eyes open.
Or maybe it hits you when you realize that if the stock market falls
30 percent, as it does from time to time, you'll lose the equivalent of a year's pay, not a week's,
and you don't want to have to work forever to make the money back.
In the last case at least, there's a silver lining. It means you've managed to put away a substantial
sum, reaping the benefits of 30 or so years of steady saving and compounding returns.
But that's a once-in-a-lifetime deal. You will never get those 30 years back.
If you're a boomer, in other words, the math has started to work against
you: Whether you're 49 or 56 or 60, odds are you have more to lose than ever and less time than
ever to recover if something goes wrong.
So your age demands that you become more risk-averse. And with the market coming off record highs,
the housing market taking forever to find a bottom and a host of other troubling financial signals,
you've got reason to worry about stock prices tumbling.
Yet with many good years still in front of you, getting out of the market isn't an option either.
You need your savings to keep growing to outpace inflation and reach your goals.
How are you supposed to do all of these contradictory things at once?
Get some perspective
Although it may not feel like it, you probably have time to ride out a decline. Consider the
bear market that started in 2000, one of the worst ever. Standard & Poor's 500 dropped 49% over
nearly three years, and the index took more than seven years to fully recover.
Do you have seven years before you'll start drawing down your savings? Plus, you're not going
to withdraw the whole shebang on Day One but rather over 20 to 30 years or more.
Keep this in mind too: Drops of that magnitude occur only about every 30 years. Declines of 20%
to 30% are more typical, and on average the S&P 500 gets back to even 3.5 years after a pullback
begins, says Sam Stovall, chief investment strategist at S&P.
In every market drop of less than 15% since 1970 (there have been many), the index has fully
recovered within a year.
Do a gut check
That doesn't mean you shouldn't take action to minimize your losses in a pullback, especially
if you reach for the Tums every time you listen to the financial news.
"If you're worrying because you can't accept a market drop, now - before there's another big
one - is a great time to adjust your asset allocation," says Steven Sheldon, president of SMS Capital
Management in Houston.
To assess your age-appropriate tolerance for risk, ask a few simple questions. How much longer
do I want to work? Has my health declined? Do I have any large expenses fast approaching, like college
tuition or elder care for a parent?
These will give you an idea of how much money you'll need fairly soon and how securely it should
be tucked away.
Pick an asset mix that suits you - the sooner you need the money, the less you should hold in
stocks - then rebalance once a year to maintain that blend.
For help, check out the Asset Allocator tool. A conservative recommended mix for someone who
doesn't need current income and will retire in about 10 years: 40% large stocks, 15% small stocks,
15% foreign stocks, 25% bonds and 5% cash.
Minimize the downside
You want to spread your money among the broad asset classes of stocks, bonds and cash, obviously,
but you should also diversify within them. Your stocks or stock funds, for instance, should include
foreign shares and a mix of small, medium and large companies, especially big companies that pay
a dividend and have consistently grown earnings.
Your bonds should be Treasuries and high-grade corporates. An inflation
hedge like gold or Treasury Inflation-Protected Securities (TIPS) wouldn't hurt either.
How effective is broad diversification? Consider the Vanguard Wellington fund, which takes such
an approach. In the last bear market - one of the worst ever - this fund actually rose 2.4%. It
has lagged the S&P 500 since then but by only a small amount.
Then too, in the seven or so years that the large-cap S&P 500 was falling and clawing back to
even, foreign stocks rose 30%, small stocks doubled and real estate investment trusts more than
doubled.
The amazing truth: Folks who had properly spread their bets back in 2000 didn't feel much of
a pinch at all.
Don't sell after prices fall
When today's bull market finally ends - and it will - don't give in to temptation and sell. It's
not easy to stand firm. But selling after a drop almost always backfires.
In fact, if your nerves can stand it, buy more shares while prices are down. Although making
a big bet on a market bottom is reckless, a regimen of investing the same dollar amount every paycheck,
month or quarter lets you actually benefit from dips, corrections and bear markets.
This discipline can't work quick magic on large losses, but it virtually guarantees that you'll
bounce back faster. So instead of worrying about the next bear market, get ready for it and sleep
well - at least until the kids get home and wake you.
"... limit it [your company stock --NNB] to ~10 percent of your portfolio."
Under a law passed last year, you can even sell shares that your employer contributed to your
account, as long as you've been there for three years.
Being too conservative
Plowing too much money into low-risk choices like stable value, bond and money funds may seem
safe since it protects your 401(k) from market setbacks.
But it's dangerous in the long run because your savings won't grow enough to provide you with
an adequate income in retirement.
A better approach: Create a blend of stocks and bonds that provides
a cushion against price drops but also gives you a shot at the gains you'll need to amass a sizable
nest egg.
For help setting the appropriate mix for your age, check our Asset Allocator tool.
Doin' the smorgasbord thing
In an attempt to diversify, some people spread their money evenly across all the options on their
401(k) menu.
That doesn't produce a well-rounded portfolio any more than scarfing every item at a buffet assures
a balanced meal. You might wind up with too big a helping of growth or bonds, depending on your
plan's options.
What to do? First plug your choices into the Instant X-Ray tool at morningstar.com to see how
your portfolio breaks down by the major asset classes - large and small stocks, bonds and foreign
shares.
You can then compare your current mix to the blend our Asset Allocator recommends and, if necessary,
rejigger your choices to get your 401(k) on track.
Avoiding these errors won't guarantee you a giant nest egg. But you will be making the most of
every penny you set aside. And in the long run, that will pay off.
Employers have long hoped that simpler 401(k) plans would entice more workers to save. But for more-savvy
investors, that may not be good news.
Many companies have pruned the number of investment options
in their plans to keep workers from feeling overwhelmed by too much choice. General Motors Corp.
and Delphi Corp., for instance, recently cut these options by nearly half. Meanwhile,
other companies have loaded up their plans with a slew of target-date
funds -- one-stop shopping for retirement savers -- while shrinking the variety of other funds.
But simple isn't always better. In paring choices, companies may be reducing workers' ability
to diversify their assets, leaving them exposed to the downdrafts that sometimes roil stocks and
bonds simultaneously.
How would you feel about doubling or tripling your 401(k) contributions?
For some people, that may be the only solution if they want to maintain their current lifestyle
in retirement. The Center for Retirement Research (CRR) estimates that 36 percent of high-income households - those with a median income of $117,000 - won't be able
to live as well in retirement as they do today.
Among middle-income households, 40 percent are at risk of having to downsize, while 53 percent
of low-income households are likely to fall short.
That hasn't always been the case. "We're at the tail end of the golden era of retirement," said
CRR Director Alicia H. Munnell.
In a report released Tuesday, CRR notes that only 20 percent of those who were between ages 51
and 61 in 1992 were at risk of falling short of money in retirement. Today, 32 percent are.
One of the problems faced by economists is that everyone knows about economics. Most people are
ready to accept that a physicist, or a lawyer, or a historian knows something they don't. Economists
encounter no similar deference. If you introduce yourself as an economist, you will probably be
asked for a prediction about what is going to happen to interest rates, which the recipient will-rightly-not
take very seriously.
Politicians regularly express views on economic matters. Not just on the objectives of economic
policy, but on technical questions such as the relationship between the money supply and the level
of output. When they express similar opinions about questions in hard sciences-as with Stalin's
adoption of Lysenkoism or Mbeke's opinions on Aids -- it is understood that they have overstepped
the mark. Not so in economics.
Maybe economists do not deserve the professional respect accorded to physicists, lawyers or historians.
Perhaps economics is tosh, like spiritualism or scientology; perhaps what students learn in-demanding
and sought-after-undergraduate and postgraduate courses is mumbo-jumbo: perhaps the language of
economics is useful only in talking to other economists...
Socking away money for retirement is a great idea, but how much do you really need to save? How
long do you need to work to set yourself up comfortably in your golden years? Enter your information
below, the charts and numbers on the right will change as you go along, so try a few different numbers
and see how different scenarios might play out for you.
All amounts are calculated using today's dollar values. The rate of return on investments
is adjusted for a 3% inflation rate.
Below are sample for simulation "reasonably conservative investor" responses. The sample was done
of Sep 4, 2007 so the allocation looks a little bit strange for the market conditions but we have what
we have... What idiots programmed this junk ?
Here are the results of your profile questionnaire. The possible allocation models are Very Defensive,
Defensive, Conservative, Moderate, Moderately Aggressive, Aggressive, and Very Aggressive. Your
risk propensity suggests a Conservative portfolio allocated with the following mix:
401k
Revenue Sharing Controversy There are two big points in a recent article in Kiplinger.com on
the topic of hidden 401k
fees. The first is the issue of "revenue sharing" between a 401k fund choice and the 401k's
plan administrators. Apparently what happens is that large investment companies are essentially
offering a "kickback" to a plan administrator if they recommend the use of their funds. Last fall,
insurance giant ING settled, without admitting wrongdoing, an investigation by New York Attorney
General Eliot Spitzer into payments to a New York teachers union to endorse and promote ING annuities
in the union's retirement savings plan...
Will you ever be able to retire
- Cracked Nest Egg - MSNBC.com Traditional defined-benefit pensions spread that "longevity"
risk among a large pool of workers, using actuarial research on predicted life spans. Now annuities
sellers will fleece individuals: with individually managed plans, the longevity risk falls
fully on each retiree.
Think you
know what you need to retire Think again. Financial News - Yahoo! Finance -- should be read
with a grain of salt (there are definitely trying to sell annuities in this paper); this is a nice
example of how much CNN is hostage to financial industry, the most promising candidate out of three
classic candidates into class of parasites (FIRE - financial industry, insurance and real estate)
The term "irrational exuberance" derives from some words
that Alan Greenspan, chairman of the Federal Reserve Board in Washington, used in a black-tie
dinner speech entitled
"The Challenge of Central Banking in a Democratic Society"
before the American Enterprise Institute at the Washington Hilton Hotel December 5, 1996. Fourteen
pages into this long speech, which was televised live on C-SPAN, he posed a rhetorical question:
"But how do we know when irrational exuberance has unduly escalated asset values, which then
become subject to unexpected and prolonged contractions as they have in Japan over the past
decade?" He added that "We as central bankers need not be concerned if a collapsing financial
asset bubble does not threaten to impair the real economy, its production, jobs and price stability."
Immediately after he said this, the stock market in Tokyo, which
was open as he gave this speech, fell sharply, and closed down 3%. Hong Kong fell 3%. Then markets
in Frankfurt and London fell 4%. The stock market in the US fell 2% at the open of trade. The
strong reaction of the markets to Greenspan's seemingly harmless question was widely noted,
and made the term irrational exuberance famous. It would seem to make no sense for markets to
react all over the world to a question casually thrown out in the middle of a dinner speech.
Greenspan probably learned once more from this experience how carefully someone in his position
has to choose words. As far as I can determine, Greenspan never used the "irrational exuberance"
again in any public venue. The stock market drops around the world that occurred after his speech
on December 6, 1996 have all been forgotten, eclipsed by bigger subsequent events, but it was
those stock market drops that focussed public attention on the phrase irrational exuberance
and which caused it to enter our language.
The term irrational exuberance became Greenspan's most famous
quote, out of all the millions of words he has uttered publicly. The term "irrational exuberance" is often used to describe a heightened state of speculative
fervor. It is less strong than other colorful terms such as "speculative mania" or "speculative
orgy" which discredit themselves as overstating the case. I chose this phrase
as the title for my book because many people know instantly from this title what this book is
about.
Often people ask me whether I coined the term irrational exuberance,
since I (along with my colleague John Campbell and a number of others) testified before Greenspan
and the Federal Reserve Board only two days earlier, on December 3, 1996, and I had lunch with
Greenspan on that day. I did testify that markets were irrational. But, I very much doubt that
I am the origin of the words irrational exuberance. Actually, Greenspan is quoted in a Fortune
Magazine article in March 1959, long before he became Federal Reserve chairman, about "over-exuberance"
of the financial community. Probably, "irrational exuberance" are Greenspan's own words, and
not a speech writer's, and probably Alan Greenspan had written a draft of his 1996 speech even
before I testified.
Robert J. Shiller
Cowles Foundation for Research in Economics
and International Center for Finance
Yale University
30 Hillhouse Avenue
New Haven, CT 06511 [email protected]
Amazon.com Unexpected Returns Understanding Secular Stock Market Cycles Books Ed
Easterling One of the strongest
points emphasized by the book is that interest rates and inflation have never been stable for long,
and the recent condition of low inflation price stability is a historical anomaly.
The author uses a plethora of graphs and charts to prove that "buy and hold" doesn't always provide
the best returns. Obviously, then, it's better to pull out during the bear markets, but that's easier
said than done
[Sept 22, 2006]
Samuelson
Growing Economic Inequality Threatens U.S. Values - Newsweek Robert Samuelson - MSNBC.comThe rich are getting an ever-bigger
piece of the economic pie. In 2005, the richest 5 percent of households (average pretax income:
$281,155) had 22.2 percent of total income, reports Census. In 1990, the share was 18.5 percent;
in 1980, 16.5 percent. These figures exclude capital gains-profits on stocks and other assets-that
have most benefited the richest 1 percent. With capital gains, their pretax income averaged about
$1 million in 2003. That was about 20 times the average income of households in the middle of the
economic distribution. In 1979, the ratio was 10 to 1.
Please note that CCM Capital Appreciation C
was not involved in the
SEC charges
of fraudulent market-timing aimed at PIMCO nor was Bill Gross, PIMCO's chief investment
officer, who opines in this month's
Investment Outlook that the high fees charged by hedge funds make them "generally overpriced."
Bill Gross manages PIMCO's humongous Total Return Institutional Bond Fund, which has an expense
ratio of 0.43% and tracks the comparable Lehman index with an R-Squared of 95%. Vanguard has
an institutional fund that closely tracks the Lehman index for a 0.05% expense ratio.
Therefore, Mr. Gross gets about 0.38% for the active 5% of the fund,
which is a "true" expense ratio of 7.8%. It must be said that Mr. Gross delivers
an impressive alpha of 0.84 on that active 5%, so he could have a bright future in hedge funds.
Unfortunately, the use of "Lysenkoism" as an epithet has been degraded by overuse, especially
in absurd situations. I propose to restrict "Lysenkoism" to circumstances where a clear case
can be made for coercive enforcement of the belief system from outside the system (e.g.,
by state patronage). For example, if a concept spreads concurrently among the scientific communities
of several countries, it is almost certainly not Lysenkoism. One might feel like calling it
that, but the analogy with Lysenko would fail to apply.
The Last but not LeastTechnology is dominated by
two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt.
Ph.D
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by the Wall Street firm for the individual investor will continually increase in value, never plunge, and never be reduced by annual charges to pay Wall Street's fees for management and for transactions, throughout the worker's career until retirement.
The banks need another bailout and countless homeowners cannot handle their mortgage payments, but one group is paying its bills: the dead.
![[Going, Going...]](http://s.wsj.net/public/resources/images/ED-AD435_bogle10022005160412.gif)
PEOPLE STILL HAVE A CHOICE.
Although your employer (and especially the "planner" who gets the use of that money, often an insurance company such as Met Life) will try to talk you out of it, I believe that you can transfer part of the money (the vast majority of it over time) to a Roth IRA or traditional IRA (depending on your age and individual tax situation). If you make 1 transfer (rollover) per year (which I believe is the current limit) you can still take advantage of the employer matching in your 401k and yet transfer the majority of your money where you have more choices how to invest and lower fees (say for example at a discount brokerage such as Fidelity or TD Waterhouse)
Best way might be to consult an CPA or a CFP (Certified Financial Planner) before you make any moves. Here is one good link for info on transfers or the better word is "conversions":
http://www.goodfinancialcents.com/can-you-roth-ira-rollover-rules-from-401k/
Also a "heads up" post on how exactly a lot of these schemes work, and that's exactly what many 401k's are, SCHEMES:
http://grahambrokethemold.blogspot.com/2010/02/is-401k-really-good-for-you-or-just.html
A 50 minute documentary that explains very well how the fund companies (including ETFs) fleece and/or bilk people with fees:
http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/