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.
Americans are reaching Social Security age at an alarming pace. We are the massive Baby Boomer Generation, and we are straining the finances of the Social Security System. For most of us, our Social Security benefits constitute an important part of our retirement income needs. Social Security is fundamentally a lifetime annuity system, and like all annuities, it is very complex. Maximizing lifetime benefits is our own responsibility, yet many Americans are woefully unaware of the myriad possibilities for collecting.
In this blog series, we are covering a range of topics designed to educate Americans on what is rightfully theirs, assuming they earned the right to participate. Once you are employed and paying into the system, the government does a credible job of letting you know that you are earning your way to future benefits. They are not so adroit at helping you maximize your own lifetime Social Security benefits, but we are here to help.
First, consider the term benefits, a commonly-misunderstood term used in the insurance industry. Benefits are payments made to owners of insurance or annuity products. You are entitled to those benefits, once all qualification requirements have been met. That simple definition is why Social Security benefits are actually an entitlement, which means that benefits will be paid to you once you have qualified. It is unfortunate that Americans have been misled by Congress to view the word entitled as meaning you get a handout for simply “showing up”. Those payments are actually Entitlements, wherein the capital letter “E” denotes programs that provide other-than-earned payments.
Qualifying for Social Security benefits is accomplished throughout your working lifetime by completing a minimum of forty (40) “Quarters of Coverage.” A qualified quarter is one in which you earn $1,360 or more, the current limit, which may be changed in the future. Upon completion of your 40th quarter (they do not have to be consecutive), you are qualified to receive a benefit upon reaching age 62. Your filing choices range from ages 62 to 70.
People who continue to work and accrue Quarters of Coverage above their initial 40 are rewarded so long as they earn more in the current quarter than in some prior quarter. In other words, the system includes, for calculation of benefits, the 40 highest-earning quarters in your lifetime of work.
Conversely, people who fail to complete 40 Quarters of Coverage are not entitled to a benefit. Exceptions to the 40-quarter rule are granted to non-working spouses of covered workers, a necessary part of any comprehensive social system. There are other exceptions, such as dependent children of deceased workers. Those are topic for future blogs.
Personally, my biggest surprise as I began to study the Social Security System came when I began to realize how brilliantly the system was designed. (Insert snarky comment about government-designed programs here.) If every person were to go to work, earn their Quarters of Coverage, and later collect lifetime benefits, designing the system would be easy. But life is far more complicated and unpredictable than that. Life’s complexities demand that a fair and honest social system accommodate hundreds of situations. The system does that, and does it well.
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.
Are Americans more charitable when they receive an income tax deduction for charitable contributions? That question has been argued ad nauseum since tax cuts in the Reagan Administration. Conclusions have been drawn on both sides, and there doesn’t seem to be a single answer. (Perhaps it is just too personal?)
The U.S. Tax Code has long provided an incentive for charitable givers, in the form of an itemized tax deduction for contributions to eligible charities. For taxpayers who itemize deductions on their returns, this directly decreased their tax bill. Was that tax deduction the reason these people supported their charities? Would they continue to give if that deduction were eliminated?
In the 1980s, many people objected to Reagan’s proposed dramatic tax rate cuts. Whether representing reasoning or rhetoric, the claim was that charitable contributions would be less financially rewarding, and therefore would shrink.
Did that happen? Actually, no it did not. Charitable contributions rose following the tax cuts. Presumably, this was the result of the “wealth effect,” meaning that good people found themselves with more disposable income. They continued to be willing to give, and apparently many were also feeling more able to part with their “extra” cash.
In the Tax Cuts and Jobs Act of 2017, a larger Standard Deduction was designed to eliminate itemizing deductions for many taxpayers. The effort was successful, in that only about 13% of taxpayers are expected to itemize on their 2018 returns, down from 30% the prior year. What will happen to charitable deductions remains to be seen when the 2018 statistics become available.
What if contributions do fall, as I expect that they will? (It is not the 80s any more.) Apparently, we are not alone, as two Members of Congress have addressed that very possibility by introducing the Charitable Giving Tax Deduction Act. The proposed Act would allow all taxpayers to take an itemized deduction, essentially adding all charitable deductions to the Standard Deduction amount. Chris Smith (R-NJ) and Henry Cuellar (D-TX) co-sponsored the bill.
For better or worse, Congress has long used tax policy to promote desired taxpayer behavior. As the old adage goes, if you want less of something, tax it, and if you want more of something, un-tax it. Smith and Cuellar appear to want a more charitable citizenry. We applaud them.
Van Wie Financial is fee-only. For a reason.
Above-the-line tax deduction – how many people understand that term? All tax deductions are expenses that reduce your taxable income, but there are two distinct categories; above-the-line and below-the-line. What is “the line?” The line item in question is on Form 1040, labeled Adjusted Gross Income, or AGI. Until Tax Years beginning in 2018, AGI wasthe last line on Page 1 of Form 1040. Beginning in 2018, it will be in an as-yet-to-be-determined location, once IRS finishes the redesign of all 2018 tax forms. Portions of your annual tax calculation depend on AGI for computations and limitations, so AGI is important to you as a taxpayer.
Reducing your AGI directly reduces your tax bill (less income = less tax). For tax purposes, a lower AGI is equivalent to not making as much money, except that you actually did. Above-the-line deductions reduce your AGI, and so are the most valuable subtractions. Everyone should understand how these subtractions apply, and how they affect your ultimate tax bill.
Only a few types of expenses reduce AGI. Contributions to Individual Retirement Accounts, or IRAs, are among the most flexible tax planning tools available. Contributions to (non-Roth) IRAs can be deducted on 2018 tax returns, but don’t have to be deposited until April 15th of 2019. That creates a long planning period for determining the tax-reducing value of actual contributions. It also provides extra time to generate the cash needed for those contributions.
IRS can divert some or all of your 2018 refund into an IRA of your choice. Doing so preserves your 2018 IRA deductibility, potentially even enlarging your contribution. For small business owners, other types of IRAs are even more flexible. Small businesses can still open a 2018 SEP IRA or a Personal(k) Plan in 2019, as well, and both have larger contribution limits than Traditional IRAs.
Tax deductibility is only the beginning of IRA benefits. Saving tax-deferred funds for retirement is an absolute necessity for people desiring eventual Financial Independence. Congress has long encouraged taxpayers to save for retirement through tax deductions and investment income tax deferrals. Don’t rely on Social Security as a complete retirement income plan.
While there are not many ways to reduce 2018 taxes after December 31, 2018, if you can save a few hundred dollars in 2018, why not do so?
Van Wie Financial is fee-only. For a reason.
This is an excerpt from a letter we sent out to our mailing list last week, and since then the market has continued to be tumultuous. Check out what we had to say, and if you like it, you can sign up for our mailing list at this link:
Politics and Economics. Both drive the market; one short-term and often irrational, and the other long-term and fundamentally accurate. Right now, politics is “trumping” economics. We are probably smarter to ignore politics, but that is difficult in tumultuous times like these. Nonetheless, cooler heads will always prevail, but when that will start is anyone’s guess.
Let’s look at today’s politics, which include:
- Partial government shutdown
- Impending re-implementation of divided government
- Troops apparently leaving Syria
- Ongoing “Trump Derangement Syndrome”
What about our economics?
- Record low unemployment rate
- Wages and Personal Income rising at fastest pace in over a decade
- Fastest GDP growth in a decade or more
- The USMCA replacement for NAFTA
- Corporate profits at record highs
- Unsold home inventories at historic lows
- Record Holiday travel and spending
- Gold prices low and steady (no panic buying)
- Leading Economic Indicators strongly positive
- Business and individual Confidence Levels near record highs
We continually ask ourselves the operative question, “What changed?” One thing we know for certain is that this market will reverse, and most likely when we least expect it to happen. Every day brings us closer to that recovery. Will it start today, this week, next week, or sometime in the near future? We are forced to wait and see. Selling equities in a period such as this will guarantee that paper losses become real. Further, human nature renders us timid to re-enter a rising market. Leaving a couple thousand DOW points “on the table” is never profitable.
We continually ask ourselves the operative question, “What changed?” The simple answer for these past few days is a resounding, “Nothing.” In response, our suggestion is to respond logically by doing no harm (the Investor’s Hippocratic Oath?). It isn’t easy, and it isn’t fun, but it is logical. Economics will emerge triumphant; it always does.
Better news is on the way. Meanwhile, enjoy the Holidays with family and friends. This, too, will pass.
Steve and Adam