Enlightened Financial Planning

Will Social Security Be There When I Retire?      May 5th, 2015

Social Security’s future solvency has become one of the most commonly-discussed issues in retirement planning—and for good reason.  Gallup polls show that an estimated 57% of retirees rely on Social Security as a major source of retirement income—a number that has held steady since the early 2000s.  But when Generation X and Y individuals plan for their future retirement, they’ll often ask their advisor to assume that Social Security won’t be there for them 20 or 30 years down the road.

However, if you look closely at the numbers, you see a very different story.  Up until 2011, the Social Security system actually collected more revenues from workers’ FICA payments than it paid out—and that has been generally true since the 1940s.  Most of the Social Security benefits that people receive today are simply a transfer; that is, the money is collected from worker paychecks (and, of course, employer matches), spends a few days at the U.S. Treasury and then is paid out to recipients.  The surplus has been used to pay government operating expenses, and for seven decades, the government issued “special issue federal securities” (essentially fancy IOUs that pay interest) to the Social Security trust fund.

In 2011, the program crossed that threshold where benefit payments slightly exceeded the amount collected.  Why?   Because the number of beneficiaries, compared to the number of workers, has steadily increased.  In 1955, there were more than eight workers paying into Social Security for every beneficiary. Today, that number is closer to three workers for every beneficiary, and by 2031, if current estimates are correct, that ratio will fall to just over two workers supporting every retired beneficiary.

When Social Security Administration actuaries crunch the numbers, they have to take into account the shifting demographics, and then make estimates of fertility and immigration rates, longevity, labor force participation rates, the growth of real wages and growth of the economy every year between now and 2078.  After adding in the value of the government IOUs, they estimate that if nothing is done to fix the system, the trust fund IOUs will run out in the year 2033.  At that time, only the FICA money collected from workers would be available to pay Social Security beneficiaries.  In real terms, that means the beneficiaries would, in 2034, see their payments drop to 77% of what they were promised.

In other words, the money being transferred from current workers to beneficiaries through the FICA payroll program, assuming no course corrections between now and 2033, will be enough to pay retirees 77% of the benefits they were otherwise expecting.

The government actuaries say that if nothing is done to fix the problem over the next 63 years, this percentage will gradually decline to 72% by the year 2078.

So the first takeaway from these analyses is that today’s workers are looking at a worstcase scenario of only receiving about 75% of the benefits that they would otherwise have expected to receive.  This is far different from the zero figure that they’re asking their advisors to use in retirement projections.

How likely is it that there will be no course corrections?  There are two possible ways that this 75% figure could go up.  One lies in the assumptions themselves.  The Social Security Administration actuaries have tended to err on the side of conservatism, presumably because they would rather be pleasantly surprised than discover that they were too optimistic.  But what if the future doesn’t look as gloomy as their assumptions make it out to be?

To take just one of the variables, the actuaries are projecting that labor force participation rates for men will fall from 75.5% of the population in 1997 to 74% by 2075, while the growth in female workers will stop their long climb and peter out around 60%.  If male labor force participation rates don’t fall, and if female rates continue to rise, some of the funding gap will be eliminated.

Similarly, the projections assume the U.S. economy’s productivity gains (which drive wage increases) will grow 1.3% a year, well below long-term U.S. averages and certainly below the assumptions of economists who believe that biotech and information age revolutions will spur unprecedented growth.  If real wages were to grow at something closer to the post-Great Recession rate of 2% a year, then more than half of the funding gap would be eliminated.  If the current slump in immigration (due to tighter immigration policies) is reversed, and the economy grows faster than the anemic 2% rates the Social Security Administration is projecting (compared to 2.5% recently), then the “bankrupt” system begins to look surprisingly solvent.

A second possibility is that Congress will tweak the numbers and bring Social Security’s long-term finances back in balance, as it has done 21 times since the program originated in 1937.  The financial press often cites the fact that the total future Social Security funding shortfall amounts to $13.6 trillion, but they seldom add that this represents just 3.5% of future taxable payrolls through 2081.  Small tweaks—like extending the age to collect full retirement benefits from 67 to 68, raising the FICA tax rate by 3.5 percentage points or making the current 12.4% rate (employee plus employer match) apply to all taxable income rather than the $118,500 current limit— would restore solvency far enough into the future that today’s workers would be comfortable adding back 100% of their anticipated benefits into their retirement projections.

How likely is it that Congress will take these measures, in light of recent partisan budget battles?  It’s helpful to remember that older Americans tend to vote with more consistency than younger citizens.  The more you’ve paid into the system, the more you expect to at least get back the money you were promised.

The bottom line here is that if you’re skeptical about Social Security’s future solvency, then you should pencil in 75% of the benefits you would otherwise expect—rather than $0.  Meanwhile, as you approach the age when you’re eligible for benefits, watch for signs that immigration restrictions are loosening, the economy is growing faster than the SSA actuaries’ gloomy projections, more people are working during traditional retirement years or yet another round of tweaks from our elected representatives.

By Bob Veres, publisher of Inside Information – the premier publication of financial industry trends and information for leading practitioners in the financial planning profession.


How to Make Good on Your Best Intentions      April 28th, 2015

Among many other things, your U.S. government keeps track of the most popular New Year’s resolutions (you can find them here: http://www.usa.gov/Citizen/Topics/New-Years-Resolutions.shtml), and the list is about what you’d expect.  At the top of the list is “lose weight,” followed by, in order of popularity:

Volunteer to help others

Quit smoking

Get a better education

Get a better job

Save money

Get fit

Eat healthy food

The Journal of Clinical Psychology, using a slightly different methodology, also found that “losing weight” was the number one resolution, followed by “getting organized” and “spend less, save more.”

But here’s the interesting part: the Journal found that just 8% of people are successful in achieving one or more of their resolutions in any given year, and 24% of us never succeed in achieving any of our resolutions year after year after year.

Why the high failure rate?  Using MRI technology, brain scientists Antonio Damasio and Joseph LeDoux studied what they called habitual behavior—that is, neural pathways and memories that become the default basis for our responses whenever we’re faced with a choice or decision.  These defaults, they found, are very difficult to change, and actually can be strengthened by efforts to “not do” things that feel natural or have been longstanding habits.

The lesson: Real change—actually succeeding in our resolutions—requires us to carve out new neural pathways.  We need to rewire our brains.

How?  Ray Williams, author of “Breaking Bad Habits,” offers a few suggestions that could dramatically raise your odds of success when it comes to resolutions.  First, he says, make your resolution specific and realistic.  Instead of resolving to “lose weight,” set a goal to lose 10 pounds in 90 days.  Then create a daily strategy for making that happen, taking small positive steps rather than expecting a big change to come over you all at once.  Many people quit their resolutions because the goals are too big and require steps that are too large—all at once.

Of course, you still have to actually take those individual steps, and it’s easy for them to get lost in the background noise of your daily life.  Williams recommends that if you’re truly serious about sticking to your resolutions, recruit an “accountability buddy” who you will have to report to on a regular basis.  You’ll find a way to get your resolutions on your own personal priority list, and do these things for someone else because you don’t want to admit that you failed to take the steps you promised to do.

It may also help to keep the goals in front of you—on your computer screen or tacked up in a place where you can see them.  This will remind you to ask yourself: what’s the one thing I can do today, right now, towards my goal?

Don’t give up when you slip—and you will. Simply continue working at your goal.

And finally: Recognize that creating new neural pathways in your brain is hard work—far more work than simply writing down a resolution.  Remember the failure rate, and gird yourself accordingly.

By Bob Veres, publisher of Inside Information – the premier publication of financial industry trends and information for leading practitioners in the financial planning profession


Lower Oil, Less Looking For it      April 14th, 2015

You already know that oil prices are lower than they have been in a long time, in part because U.S. oil production is higher than it has ever been, and still climbing steeply.  But you have to wonder how long these conditions will last, since lower oil prices make it less economical for oilfield services companies to drill.

The accompanying chart, courtesy of the oilfield services company Baker Hughes, may be the most dramatic illustration of economic reality you will see this month. It shows how the U.S. has increased the millions of barrels of oil per day that we’re pumping out of U.S. soil in the past four years.  Looking at the orange line rising ever-more-steeply, you wonder whether oil prices will ever go back up to previous levels.

But then you see the purple line, which tracks the number of active oil rigs that are out there looking for new sources of oil.  The last quarter of 2014 and the first few months of this year have created a dramatic bear market for drilling rigs in action.  In just two fiscal quarters, the number of rigs in the field has dropped almost by half, and there is no sign that the trend is slowing down.

What does that mean?  Nothing in the short term, since the orange line represents existing production.  But longer-term, you have to expect that fewer active rigs will mean fewer wells and, at the very least, a leveling out of that orange line.  Oil prices may be down today, but that doesn’t mean supplies will outrun demand forever.  Enjoy the low gas prices while you can.

By Bob Veres, publisher of Inside Information – the premier publication of financial industry  trends and information for leading practitioners in the financial planning profession



Providing for Pets      January 28th, 2015

This summer, the entertainment world lost one of its most prominent and popular figures: Joan Rivers.  When her estate planning documents were unveiled, it became clear that she was a careful planner of her legacy–and also a devoted pet owner.  One of the most interesting details of her estate plan was the careful provisions Rivers made for her pets.

Rivers left the bulk of her estate to her daughter Melissa and her grandson Cooper–an estimated $150 million in total value.  The two rescue dogs who shared her New York residence, and two other dogs who lived at her home in California, were beneficiaries of pet trusts, which included an undisclosed amount of money set aside for their ongoing care, and carefully written provisions that described the standard of living that Rivers expected them to receive for the remainder of their lives.

Traditional pet trusts are honored in most U.S. states, as are statutory pet trusts, which are simpler.  In a traditional trust, the owner lists the duties and responsibilities of the designated new owner of the pets, while the statutory trusts incorporate basic default provisions that give caregivers broad discretion to use their judgment to care for the animals.  Typical provisions include the type of food the animal enjoys, taking the dog for daily walks, plus regular veterinary visits and care if the pet becomes ill or injured.  The most important provision in your pet trust, according to the American Society for the Prevention of Cruelty to Animals, is to select a person who loves animals and, ideally, loves your pets.

The trust document will often name a trustee who will oversee the level of care, and a different person will be named as the actual caregiver.  In all cases, the trusts terminate upon the death of the last surviving animal beneficiary, and the owner should choose who will receive those residual assets.

Some states have different laws that require different arrangements.  Idaho allows for the creation of a purpose trust, and Wisconsin’s statute provides for an “honorary trust” arrangement.  There are no pet trust provisions on the legal books in Kentucky, Louisiana, Minnesota and Mississippi, but pet owners living there can create a living trust for their pets or put a provision in their will which specifies the care for pets.  A popular (and relatively simple) alternative is to set aside an amount of money in the will to go to the selected caregiver, with a request that the money be used on behalf of the pet’s ongoing care.

It should be noted that a pet trust is not designed to pass on great amounts of wealth into the total net worth of the animal kingdom.  The poster child of an extravagant settlement is Leona Helmsley’s bequest of $12 million to her White Maltese, instantly putting the dog, named “trouble,” into the ranks of America’s one-percenters.  Rather than confer a financial legacy on an animal, the goal should be to ease any financial burdens the successor owner might incur when caring properly for your loved animals for the remainder of their lives, including food and veterinary bills.

How long should you plan for the funding to last?  Cats and dogs typically live 10-14 years, but some cats have lived to age 30, and some dogs can survive to see their 24th birthday.  Interestingly, estate planners are starting to see some pet trusts extend out for rather lengthy periods of time, as owners buy pets that have longer lifespans.  For example, if an elderly person has a Macaw parrot as a companion, the animal could easily outlive several successor owners, with a lifespan of 80-100 years.  Horse owners should plan for a life expectancy of 25-30 years, and, since horses tend to be expensive to care for, the trust will almost certainly require greater levels of funding.  On the extreme end, if you know anyone who happens to have a cuddly Galapagos giant tortoise contentedly roaming their backyard, let them know that their pet trust would need to be set up for an average 190-year lifespan.

By Bob Veres, publisher of Inside Information – the premier publication of financial industry trends and information for leading practitioners in the financial planning profession.



Protecting Yourself Against Identity Theft      January 13th, 2015

 We’re hearing a lot more about identity theft these days—from hackers stealing credit card numbers from big banks and retail stores to individuals opening up credit card or bank accounts in your name, which they can use to write bad checks or make expensive purchases.  Criminal identity thieves may also take out a loan in your name for a car or even a house, and some have managed to receive Social Security benefits or tax refunds that rightfully belong to others.

In some cases, when arrested for some other crime, hackers have helpfully provided a victim’s name to the arresting officers, showing the police a falsified driver’s license with that person’s number and their picture.  They post bail and skip town.  When their victim doesn’t show up for a court date he was never informed of, he could be arrested.

How do you protect yourself?

According to the National Crime Prevention Council, the biggest threats are coming from places that might surprise you.  A study by Javelin Strategy and Research found that most identity thefts were taking place offline, where someone managed to steal your credit cards, or found social security information or credit card information in a dumpster, or filed bogus change of address forms to divert a victim’s mail to their address, where they can gather personal and financial data at their leisure.

Even more surprising, 43% of all identity thefts were committed by someone the victim knows.

An organization called IdentityTheft.net estimates that over 10 million people are victimized by identity theft each year, although that number may be boosted by the aforementioned mass hacking incidents.

The Council and an organization called IdentityTheft.net say that you do a reasonable job of protecting yourself by taking a few common sense steps that make it much harder for someone to make purchases in your name or withdraw funds from your accounts.

First, never give out your Social Security number, and don’t carry your social security card, birth certificate or passport around with you.

Copy your credit cards and your driver’s license, and put the data in a safe place, to ensure you have the numbers if you need to call the companies.

When you use a credit card to buy something in a retail store, take the extra copy of the receipt with you and shred it.

Create complicated passwords for your online bank and investment accounts, and don’t write them down on hard copy paper.  Try not to use the same password for every website you access.  (Can’t remember 50 complicated passwords? A free program called LastPass lets you save all your user names and passwords in an encrypted format, so you only have to remember a single strong pass phrase.  You can also store security questions and answers.)

Don’t let anyone look over your shoulder when you’re using an ATM machine.

Be skeptical of websites that offer prizes or giveaways.

Tell your children never to give out their address, telephone number, password, school name or any other personal information.

Make sure you have a virus and spyware protection program on your computer, and keep it updated.

Check your account balances regularly to make sure no unexplained transactions have occurred.

These simple precautions will keep you safe from many of the criminal efforts to hack into your life.  If you feel like you need additional protection, there are a variety of protection services on the marketplace, which basically all do the same thing: they regularly monitor your credit scores, looking for changes and odd debts that might be a clue that someone has stolen your identity, and check public record databases to see if your personal information is compromised.  Some will prevent preapproved credit card offers from being sent to your mailbox, patrol the black market internet where thieves buy and sell credit card numbers, and the fancier services will provide lost wallet protection, identity theft insurance and keystroke encryption software.

Which are the best?  A research organization called NextAdvisor has recently evaluated and ranked eight of these services, with costs ranging from $20 a month down to $7 a month.  The top rated was IdentityGuard (premium service price: $19.99 a month) which offers the most compete protection, including the aforementioned fancier services.  But seven of the protection systems, including TrustedID, AARP (a white-labeled version of TrustedID), LifeLock Ultimate, PrivacyGuard, IDFreeze and LegalShield all received good ratings; only Experian’s ProtectMyID was negatively reviewed for being expensive and only monitoring one credit reporting service.

Do you really NEED these services?  Possibly not.  However, with the growing publicity around identity theft, these firms have become very aggressive in their marketing efforts.  What they don’t tell you is that you can do many of the things they do on your own.  Every quarter, you can review one of your credit bureau reports for free, or—and this is easier—simply look at your statements and balances every day.  The more sophisticated services are a fancy replacement for promptly notifying your bank when a credit card is lost or stolen, or when a strange charge shows up because Citibank or the Target department store was using weak security protocols.

In the near future, as more transactions take place using thumb prints or other biometric security data, we may look back on this period as the Wild West of data security, a strange unsettling time when people had to worry about their lives being hacked by strangers.  Your goal is to arrive safely, unhacked, at that more secure period in our cultural evolution.

By Bob Veres, publisher of Inside Information – the premier publication of financial industry trends