As young people, Baby Boomers often opined that if we could ever get our parents’ mortgage rates, life would be grand. After all, Mom and Dad only paid around 5% – 6% for fixed 30-year mortgages. A few decades ago, Boomers were paying up to and including about 18% for mortgages. We all “knew” that we would never be so fortunate as to see those old 5% rates.
Guess what. It not only happened, but we actually beat that 5% rate over the past few years. Forgetting, for now, the unpleasant economic reasons why that happened, it was fun and profitable for those of us who fixed our mortgage rates, many under 4%.
Our recent economic upturn has caused the FED to gradually tighten monetary policy. Mortgage rates rose back up to the (once-desirable) 5% range. Then, a strange thing happened. When the calendar turned over to 2019 rates began to fall, even in the absence of any easing FED policy.
Suddenly, we again find ourselves in an era of (nearly-forgotten) low mortgage rates. In many geographic areas, 30-year fixed-rate mortgages are once again under 4% for qualified buyers. Further, although home prices have risen, the increase in home values remains manageable. In short, we have perfect conditions for purchasing a home right now.
Perhaps strangely, the national inventory of homes for sale is very small. This would generally result in rapid price appreciation, but price appreciation seems to be lagging. This has provided an opening for anyone who is thinking of changing homes to both sell their current home and buy a new home at a good price, and with great financing terms. It is a “Goldilocks” market for both buyers and sellers. Not too hot, and not too cold, it is “just right.”
Anyone contemplating a home purchase, or a home sale/purchase, should move quickly. Market conditions are virtually unprecedented in our lifetimes. No reasonable person would expect this situation to be anything other than short-lived. In our opinion, now is an excellent time for those who have been contemplating action to execute their plan.
Van Wie Financial is not a licensed real estate brokerage, and our expectations are based solely on experience and knowledge of financial markets and interest rates. Consult a real estate professional if you are contemplating a change in your housing situation. You may well be glad that you did it — right now.
Van Wie Financial is fee-only. For a reason.
The Journal of Financial Planningis the monthly publication for members of the FPA® (Financial Planning Association®). The Journal publishes scholarly articles regarding our profession, our clients, and the public at large, as well as statistics and practice tips. Adam is an officer of the local FPA® Chapter, and both of us have been dues-paying members for years.
In the current (March) issue of the Journal, there appeared a list of statistics regarding public opinion and preferences relating to selecting a financial adviser. I found them fascinating, and decided to summarize the statistics for our audience, along with my comments in italics.
Let’s see if anything here surprises you, or if these insights will cause you to re-think using an adviser, or a change in your current adviser.
- 65% of people surveyed say they mistrust the financial services industry. We have discussed for years whether the less trustworthy practitioners in the financial services arena are our best friends (for making us look good) or our enemies (for ruining the reputation of the industry). They jury is still out.
- A whopping 2% of people say that they trust financial advisers “a lot.” Looking back to the first point, it seems that the bad guys are bad for the industry-wide reputation. I can assure you that more than 2% of financial advisers are worthy of your trust. How many more than 2%, I really couldn’t say.
- Only slightly better than the 2% of people who trust advisers “a lot” is the 15% of people who trust advisers “a little.” This one confirms my opinion that untrustworthy practitioners and salespeople actually taint the profession.
- 21% of people understand the difference between an adviser who is a fiduciary and one who is not. This is perhaps the most important distinction you should learn, know and practice. The next point illustrates this perfectly.
- 93% of people believe that a financial adviser should be legally required to place the client’s interests ahead of their own. This the very definition of a fiduciary. See the connection? (We are fiduciaries.)
- Adding insult to injury, 53% of people mistakenly believe that all financial advisers are legally required to put the best interests of the client ahead of their own. THIS IS NOT TRUE.
- 50% of investors who work with an adviser know for certain if their adviser is a fiduciary.The rest of you – ASK!!!
- 45% of people who don’t work with a financial adviser say they don’t because they believe advisers are not trustworthy. What a disgrace! You should not be afraid to consult an adviser, but you’d better know how to arm yourself with facts.
Selecting a financial adviser who will ultimately become a good fit for you and your family does not have to be difficult and time-consuming. Go to the website NAPFA.org (website of the National Association of Personal Financial Advisers®) and click the link for “Find an Adviser.” There, you can search by City or Zip Code. There you will find a list of fee-only, fiduciary advisers.
The final statistic surprised me, because only 28% of people say that their personal definition of wealth is living stress-free with peace of mind. Really? Only 28%? Got a better idea?
Van Wie Financial is fee-only. For a reason.
In lieu of making this the shortest blog post in history (one word), I thought it best to contradict some of the current “wisdom” surrounding this recent liberal proposal. Precedent for voting age reduction was sent back in 1971, when President Nixon lowered the age from 21 to 18. The argument was that at 18 a person could be drafted and sent to Vietnam to protect us from the enemy.
I was part of that argument at the time, and to this day I stand by my support. Not that I am 100% happy with the results, but it seemed fair and reasonable at the time. One could argue today that the age should be upped to 21 until a draft is reinstated, but that genie is out of the bottle.
Today, there are some factions making their case for another reduction in the Federal voting age. Most of it involves payment of taxes, and almost all of that argument is fallacious. At age 16 or 17, it is true that many teenagers hold jobs while completing high school. The vast majority of them do not pay Federal taxes. Rather, the monies withheld from their pay (by law) is for Social Security and Medicare. These are not Federal tax payments; they are contributions to the individual’s own Social Security and Medicare accounts. In other words, insurance premiums.
With the passage of the Tax Cuts and Jobs Act of 2017, every taxpayer is granted a Standard Deduction in the amount of $12,000. How many teenagers earn more than that with a part-time, low-wage job? Very few, I’d estimate. In fact, any high school “student” earning more than $12,000 is likely be a high school dropout, who will remain a low earner for decades.
Politics seem to be driving the voting age reduction push. On balance, younger people tend to be more liberal, and many have fallen for the sales pitch of today’s “Democratic Socialists.” Liberals naturally seek to expand their voting base, and this proposal would likely do exactly that. Common sense suggests that this would be harmful to the Republic.
Understanding the impassioned pleas of today’s self-proclaimed “Social Justice Warriors” requires careful consideration and analysis. Their concepts of “fairness” and “economic equality” require healthy skepticism.
As good as it may sound, further lowering the voting age just doesn’t pass the “smell test.”
Van Wie Financial is fee-only. For a reason.
Two weeks ago, we discussed the problems faced by Social Security. To be blunt, the Social Security System is running out of money, and there is no cure in sight. Worse yet, there has been no actual money available for years, as incoming payroll withholding dollars go out immediately to current recipients. It is virtually impossible not to draw a comparison to the original Ponzi Scheme.
The original Trust Fund, created long ago to hoard cash for future benefits, was spent by an insatiable Congress. America’s demographics are exacerbating the problem, as recipients live (and collect benefits) longer, while fewer younger workers are available to pay into the System. It gets worse.
Even an attempt to discuss solutions to the problem is political suicide for elected officials.
Some degree of political discourse will be required to sustain the system as we know it. That leaves the American public in a quandary, wondering if they will receive promised benefits, either in whole or in part. What role will Social Security play in retirement planning? There is no easy answer.
As financial planners, we consider age a major factor in planning the role of Social Security for guaranteed lifetime income. Dividing the public into general age groups, we believe that anyone who is currently 55 or over will receive benefits according to the published schedule. Below that age, nothing is a certainty, as the probability of reductions in benefits looms large, as described by the Social Security Administration itself.
“The concepts of solvency, sustainability, and budget impact are common in discussions of Social Security, but are not well understood. Currently, the Social Security Board of Trustees projects program cost to rise by 2035 so that taxes will be enough to pay for only 75 percent of scheduled benefits.”
Americans under the age of 55 should be able to include 75% of planned benefits in their retirement planning calculations. However, unless demographics change in the workforce, the System is likely to encounter even greater problems in later decades. People entering the workforce today would be well served by planning on a totally self-funded retirement. Anything Social Security provides later on could be considered a lifestyle enhancement.
All of this depends on the long-term solvency of the United States of America. While the current trajectory of American debt is ominous, that is a discussion for another day. In military parlance, you go to war with the army you’ve got. We plan our futures (and yours) using parameters we can control.
Van Wie Financial is fee-only. For a reason.
Late playwright Tennessee Williams, who created such memorable works as The Glass Menagerie, A Streetcar Named Desire, and Cat on a Hot Tin Roof, once quipped that, “You can be young without money, but you can’t be old without it.” What did he mean, and was he right?
Personally, I think he “nailed it!” Why? In order to illustrate my thoughts on this, consider the stages of life and the corresponding stages of providing a living for ourselves and others.
Starting before birth, we are cared for by others. All of life’s necessities are unavailable to us without outside help from parents, other relatives, or total strangers. Humans must learn to become self-sufficient over the course of many years.
At some point we begin to contribute to our own maintenance. Lack of age, education, and experience generally dictates that we earn money with our labors. Physical labor is about all that most young people can offer in the workplace. Our “softer skills” remain relatively undeveloped for the next few years. The likeliest financial circumstance among young people is to be working for very low wages. This time of life is characterized as “pay as you go,” rather than wealth accumulation. It is not intended to be a “living wage.”
Transitioning into making a living more with brains than brawn is a function of age, education, and experience. As time goes by, the pace of transition depends upon our motivation and course of study, formal or otherwise. College, trade school, apprenticeship, or other form of skills development determine our pace and degree of transition from brawn to brainpower. In “middle age,” most of us are still in good enough physical condition to generate at least a portion of our income through physical prowess, but over time there is a notable shift toward “white-collar earnings.” Here we (hopefully) have begun to save for our future financial independence.
As we age and develop our skills, an increasing percentage of financial success is attributable to brain over brawn. This is something of a self-fulfilling prophecy, in that our brawny capabilities fade over time, and even more quickly as they become under-used. Individual abilities to provide for our own necessities become increasingly based on brainpower.
Over time, lost or diminished physical abilities directly affect our ability to sustain life as we know it. In other words, we need to transition to a financial “maintenance program,” using partly our previously-earned money.
Thinking about the Williams quote, my conclusion matches perfectly with Williams’ theory. Life without money is much more problematic at an advanced age, where earning a living with brawn is difficult at best. A lifetime of learning and saving is the formula for having money (and, therefore, security) when we get older. Apparently, Tennessee Williams understood this very well.
Van Wie Financial is fee-only. For a reason.
For weeks now, we have been discussing various claiming strategies for individuals to maximize their own Social Security benefits over their own lifetimes. Today we are discussing the systemic problems faced by the Social Security System itself. Sustainability is a popular word in today’s lexicon. In this case, it applies directly to Social Security funding, which is not sustainable without undergoing changes.
The primary funding problem with Social Security began when Congress decided to spend the money that was supposed to be held in a Social Security Trust Fund for a later time. Eventually, demographics began to strain the system’s finances, because fewer workers were supporting each retiree. This situation will be true for decades, as the Baby Boomer Generation is huge relative to subsequent generations.
As Congress spent the Trust Fund, they replaced the actual money with “IOUs”, which were pieces of paper stored in a file cabinet in West Virginia. For a few years now, Congress has been “repaying” the Fund by gradually removing those IOUs, without replacing the actual cash. Under current law, when the (paper) “Trust Fund” in the file cabinet is gone, every recipient, whether current or future, will receive only a reduced share of the of their earned monthly benefit payment. That implies a cut in benefits of more than 20% for all existing and upcoming recipients in a very few years.
Only an Act of Congress can save this from happening. For decades, Social Security has been called the “third rail of politics,” meaning that a politician who even discusses changing the System would be ‘unelected” at the polls. But now it HAS to happen. What form should it take? Tax increases, benefit cuts, or some combination; the final form is anyone’s guess.
We should all be ready to pay more into Social Security, and to get less out. Younger people will have to work longer to attain Full Retirement Age (FRA). Early filing age has been stuck at age 62 for the life of the System, even as FRA was raised. Early Filing Age will have to be raised. Gradually, the annual earnings limits to which Social Security withholding applies ($132,900 in 2019) will be raised, and eventually eliminated. This will postpone the needed reductions, but not by much.
How should an individual react to all this gloom and doom? It is difficult to say, and everyone’s case is different. Family circumstances, lifetime earnings, current jobs, income needs, net worth, etc. all play into decision-making. It is an excellent topic for a financial planning session with your fee-only CFPâ. By knowing your options, you can research and plan the method that best serves your particular needs.
Unfortunately, most countries have problems similar to ours. However, certain countries have taken steps to solve their problems, and some have had great success. Chile, for example, privatized their accounts in 1981, and now Chilean workers realize an annual investment return of about 9%, compared to our estimated 1.9% returns.
Perhaps more surprisingly, the system in England was privatized in 1979. The Netherlands also has an excellent private system. Australians have the Superannuation System that allows very large individual contributions. The Canadian System is a public system wherein the government actually invest the money!
Some degree of investment privatization for money paid into the system would seem to be a good start in the quest to sustain the viability of this core American social system. Does Congress have the wherewithal to accomplish this before it is too late? I only wish I were more optimistic.
Van Wie Financial is fee-only. For a reason.
This week, in our continuing Social Security series, we are discussing the “do-over” available to qualified Social Security participants. Many people have heard or read that Congress took away this interesting and helpful tool, but they are not completely correct. The “do-over” is now very limited, but it is not gone.
The original “do-over” referred to the ability of a participant who was collecting benefits to repay all benefits previously received (or since any prior “do-over” repayment), and to restart increased benefit payments, either immediately or in the future. In some circumstances, this could become very beneficial, due to the automatic increase in monthly benefits that occurs when filing is delayed or repaid.
Waiting to collect Social Security benefits past Early Retirement Age (62) is financially rewarding, as the System increases your monthly benefit for every month you delay filing. The annualized increase is about 8%, which constitutes an excellent guaranteed annual benefit increase. The (now defunct) unlimited “do-over” provision took advantage of this by increasing the benefit as if no benefits had been collected.
It sounds too good to be true, and perhaps it was. For years, Congress has been faced with the reality that Social Security is running out of money. Without exploring the reasons (we have covered that problem in earlier blogs), Social Security funding needs to be fixed in order to prevent recipients from suffering broken promises.
Let’s go back to the “do-over.” We mentioned that it was not entirely eliminated, Instead, every recipient has exactly one “do-over,” and it has a lifespan of exactly one year. Any time within one year of original benefits filing, a Social Security recipient can repay all benefits received, and re-file at any future time. The benefit level will increase by the same formula for delayed filing, as if no benefits had ever been paid.
One interesting feature of the “do-over” is that Social Security requires repayment of every benefit received, but does not require any interest or penalty payments. Knowing that one “do-over” is still available allows new and future Social Security recipients to have a change of mind as to working, relationships, or other life changes. In life, we don’t always get a second chance. In Social Security, we have retained one.
In the next few weeks, we will be covering more and more details about Social Security. Our efforts are aimed at teaching people about options existing within the System, and how to plan for their own personal best ways to collect.
Van Wie Financial is fee-only. For a reason.
Last week we wrote about Social Security Full Retirement Age (FRA), and today we are expanding on that topic. Full Retirement Age (FRA) is a moving target, depending on your year of birth. FRA currently ranges from age 65 to age 67, and is easily found by going to the Social Security website (ssga.gov). As we pointed out last week, people born before 1938 reached FRA upon their 65th birthdays. For later birth years, the FRA scale moves up in increments until birth years 1960 and later, where it reaches the maximum FRA of 67.
For generations, FRA was 65, and for “good” reason; most people didn’t live long. As strange as that may sound, the Social Security System was not designed to be a retirement income system. Rather, it was a “safety net” for those who defied the odds and lived well past average life expectancy. Since Social Security is an insurance-based system, and not a classic welfare system, it has been accepted as an integral part of the fabric of American society.
Many times you have heard and read from me that the design of the Social Security System is brilliant. Mostly. It has one major design flaw – it is running out of money. The original designers failed to foresee a few important societal changes:
- A steady increase in life expectancy resulted in people receiving benefits longer than expected
- Following the end of the Baby Boom, people began to have fewer children, so incoming funds were less than anticipated
- For decades, payments into the system exceeded outflow of benefits, so a Trust Fund was building to help the first 2 problems, but along the way, Congress spent the money and replaced it with IOUs
Politicians have repeatedly failed to address the problem, and in fact made it worse by tapping the Fund. Adding insult to injury, Social Security added many more benefit recipients, with no adequate additional funding mechanism. Disability recipients and dependents of deceased parents now take a toll on the System.
After spending the Trust Fund, the System became a “pay-as-you-go” Plan. In the private sector this is generally called a “Ponzi Scheme.” In government, it is called a self-financing system. It is not. Ponzi is much closer to the truth.
Like all large-scale social systems, Social Security was designed to accommodate our society through a steadily-growing population of workers. These people pay into Social Security on a daily basis, and the money they contribute is paid to people receiving benefits. Unfortunately, the new money does not fully cover the outflow, rendering the System on a collision course with bankruptcy.
In a nutshell, changes are coming to Social Security, like it or not. Prepare for them, and you will be fine. Ignore the inevitable, and you will be unhappy and dependent. Later retirement ages, higher withholding tax rates, and even reduced benefits are inevitable. No Congress and President since the Reagan years has had the courage to address the situation. They must do so, and soon.
In the next few weeks, we will be covering more and more details about Social Security. Our efforts are aimed at teaching people about options existing within the System, and how to plan for their own personal best ways to collect.
Van Wie Financial is fee-only. For a reason.
In this Blog series, we are covering a range of topics designed to educate Americans on important details of Social Security. Today’s topics is Full Retirement Age (FRA), which is not the same thing as Qualification Date. Those terms do not apply the same way for all Americans who are already qualified for benefits, or who may qualify in the future.
Last week we discussed the importance of qualifying for eventual benefits during your working life through attaining your Qualification Date. This happens when you have paid in to the System for 40 calendar quarters, regardless of age. Full Retirement Age (FRA) ranges from age 65 to age 67, depending on your year of birth. People born before 1938 reach FRA upon their 65th birthdays. For later birth years, the FRA scale moves up in increments until birth years 1960 and later, where it reaches the maximum FRA of 67.
FRA may be amended from time to time by Congress, with Presidential approval. The last major change to FRA happened in 1983, when the Reagan Administration implemented changes designed to postpone bankruptcy of the entire Social Security System for another generation or two. Whether and when it might change again is a topic for a later discussion.
As much as it may sound strange, your “Full Benefit” is not the maximum you may receive. It is simply the amount you would receive monthly should you start claiming benefits upon attaining your FRA. Social Security rewards people for filing later than their FRA, up to age 70. The rewards are significant, as benefits increase 8% for every year of delay past FRA. Interesting fact: Increases in benefit level due to delayed filing are not computed annually, but rather monthly. Every month of delay is rewarded with an increase of 1/12 of 8% of Full Benefit.
Conversely, Social Security allows for Early Benefits, meaning filing before FRA. The earliest age to claim benefits is 62, and the claimant receives a reduced benefit of 8% for each year prior to FRA. Again, this reduction is pro-rated by month, rather than by year.
Most people understand that Social Security will reduce your monthly benefit if you are taking early benefits and earning money at the same time (“still working” reduction). Many people are unaware, however, that no reduction will take place upon attainment of FRA. Further, no benefit is ever lost, as reduced benefits are actuarially “pushed forward” into your future benefit calculation. Some people believe that delayed benefits are lost, and that is simply not true. (Note that it can take up to 15 years to regain the entirety of your reduced benefits.)
Since it is not an automatic function to receive Social Security benefits at Full Retirement Age, and since benefits are not a fixed number, Social Security claiming strategy is an integral part of Personal Financial Planning. If your financial advisor is not able to competently discuss your options, you can call the Van Wie Financial Hour on Saturday mornings starting at 10:00 a.m., or send us an email through our website, strivuswealth.com.
In the next few weeks, we will be covering more and more details about Social Security. Our efforts are aimed at teaching people about options existing within the System, and how to plan for their own personal “best” ways to collect.
Van Wie Financial is fee-only. For a reason.
In this Blog series, we are covering a range of topics designed to educate Americans on the details of Social Security. The System is designed for Americans, and is rightfully theirs, assuming they qualify under the rules. Earning that right is the focus of today’s blog. It is not a rite of passage for a U.S. citizen to receive a Social Security benefits; it must be earned. There are no Participation Trophies.
Last week we covered the forty (40) “Quarters of Coverage” qualification period. Current recipients have already qualified, and future claimants must qualify under the 40-Quarter Rule, unless they are granted one of a few exceptions. The primary exception is for non-working spouses who have been married to a qualified participant for a requisite period of time (a critical provision for an orderly society).
We have previously written about the hundreds of thousands of Americans who have not qualified for Social Security benefits. These are largely workers who apply their skills and perform work as independent contractors. Whether paid in cash or by check, their wages are difficult for the government to track. Therefore, many of these workers simply ignore the reporting and tax-paying demands of the Internal Revenue Service and, by inference, Social Security and Medicare. They will not qualify for benefits unless they start paying taxes.
Citizens who are currently receiving Social Security benefits every month know many of the ins and outs of the System. We understand how some other people have let time slip away; it happens in the blink of an eye. Most of us, at least in our more contemplative moments, have compassion for these people. Most of them did not know what a future without Medicare and Social Security would bring. Society should be better at educating people about their financial futures and the rules to get there.
Modern American society has transformed from a pension-driven retirement system to a retirement system based mostly on individual responsibility (401(k), 403(b), etc.). Social Security, which was never designed to provide a stand-alone retirement income annuity, is an extra cushion or safety net. Without Social Security benefits, most older Americans would have trouble retiring at all, or at least would not be as comfortable. That is why qualifying is so important.
Given the high priority placed on qualifying for Social Security benefits, Americans should also understand how benefits are calculated. Unlike generic annuities, every person’s Social Security benefit is customized exactly to that person’s circumstances. The system rewards hard work and success, and so does not create disincentives to work.
Starting with the individual’s 41st quarter of paying into the system, benefits are calculated using the top 40 quarters of earnings. If a recent quarter’s earnings exceed any previous reported quarterly income, the new quarter replaces the smallest old quarter. This means that benefits increase as people work and pay more into the system. As I frequently point out to listeners and readers, Social Security is one of the best-designed systems I have ever studied. It is, however, extremely complex, and we all benefit as our understanding grows.
In the next few weeks, we will be covering more and more details about Social Security. Our efforts are aimed at teaching people about options existing within the System, and how to plan for their personal “best” ways to collect.
Van Wie Financial is fee-only. For a reason.