We live in a world of “sound bite” news, snippets of information sans depth and rational analysis. We are distracted by tragic school shootings, Iraq, chaotic weather, athletic contests, celebrity meltdowns, and an American Idol election process. Rarely do we spot stories with profound implications for not only social, business, and tax
policy as a nation, but also our own financial futures and economic well-being.
Such a story popped up in USA T o d a y , 2/14/08. Written by Dennis Cauchon, the portentous headline re-vealed, “Senior benefit costs up 24%: ‘Health care crisis’ leads to 8-year rise.”
Based on an analysis by the paper, the cost of government benefits soared to a record $27,289 per senior citizen in 2007 — a 24% increase over the inflation rate since 2000.
For the first time, benefits for health care and nursing homes for seniors cost the government (read“taxpayers”) more than Social Security payments. The average Social Security benefit per senior in 2007 was $13,184.
Think about that for a moment…$13,184 a year… $1,099 per month. Better than nothing, however, that is NOT a retirement plan! According to The Futurist magazine (March-April 2008), only half of the baby boomers will be able to maintain their standard of living in retirement. One in four will be dependent on government (again, read “taxpayerfunded”) programs.
Here comes the train wreck. Taxpayers spent $952 billion in 2007 on elderly benefits, up from $601 billion in 2000, and the states spent another $27 billion more, primarily for nursing homes. Those items, not providing for defense or safeguarding the homeland, account for the biggest chunk of the federal budget.
And get this: costs leaping well in excess of inflation occurred during a period when the senior population as a percentage of total population held steady. Per USA Today, the portion of U.S. population age 65 or older has been constant at 12% since 2000.
The real senior boom takes off in 2011 when the first of 79 million boomers born between 1976 and 1964 reach age
65 and Medicare eligibility. The first boomers turn 62 this year and already some have applied for Social Security benefits, albeit at a discount from full retirement age levels.
Some say, “Not to worry, we have Social Security and Medicare Trust Funds to help support costs for a time.” W r o n g ! The politicians have spent the money on other things and stuffed the trust funds with “special bonds,” a.k.a. IOUs. When outgo exceeds income, general tax funds will be tapped to redeem the bonds and flow money through to recipients. If expenses jumped 24% over the inflation rate in the last eight years, what might happen 2008 to 2015 with inflation on the rise and the boomer entitlement bomb about to explode?
Year 2011 is a key date. That is when powerful politicians hope to see the so-called Bush tax cuts expire. Steve Moore of The Wall Street Journal did the math on Senator Barack Obama’s tax plan and investors have much to fear — a top per-sonal income tax rate of 39.6%, a combined income and payroll tax rate up to 52.2%, a 28% long-term capital gains tax, dividends taxed up to 39.6%, and a 55% maximum estate tax.
For those who say “the ‘rich’ should pay more,” here’s a wake-up call. In 2005, the latest year for which data is available, the top-earning 25% of taxpayers had an adjusted gross income (AGI) starting at $62,068. The top 25% earned 67.5% of the nation’s income but they paid $4 of every $5 collected by the IRS (86%).
In 2005, of 132.6 million tax returns filed, 42 million paid no tax and many received a refundable tax credit such as the Earned Income Tax Credit (EITC). Mr. Obama wants to double the number of workers eligible for the EITC and triple the benefit for minimum-wage workers.
Yes, if you are going to rob Peter to pay Paul, you can count on the vote of Paul. Every year, the Catholic Church has a worldwide collection to aid the poor called “Peter’s Pence.” Come 2011, the IRS version could be a Peter’s Pence Tax on the top 25% of taxpayers, cheered on by Paul. But there aren’t enough “rich” taxpayers to skin. The middle class will pay the bills in higher taxes and penalties stemming from lower economic growth.
Remember — government can create no wealth. People create wealth. Government can only take wealth from one group and transfer it to another. Government also can create faux wealth by printing money, a.k.a. debasement of the currency, inflation. Are you really happy with our weak dollar?
Dare we have the audacity to hope for a better outcome? Perhaps. But be advised to factor into your planning a “perfect storm” come 2011 of rising demands for taxpayer funded goodies along with income transfers, tax hikes, and a rising cost of capital.
You and your financial advisors will have to be proactive and creative in the formulation of strategies relative to pre-retirement planning, retirement income distribution tactics, investment policy statements, health care planning, business planning and succession issues, risk management, asset protection, and estate
planning.
CHANGE is a great slogan. The devil is in the details.
3930 East Jones Bridge Road Suite 150 Norcross, GA 30092 770-441-2603 (Fax) 770-441-7936
The Investment Coach 1994, Walker Capital Management Corp. Lewis Walker is President of Walker Capital Management Corp. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies.
Posted by hkelly as Financial Planning with Lewis Walker at 12:40 PM EST
No Comments »
The goddesses are getting older! Cher, Diane Keaton, Dolly Parton, Sally Field, Suzanne Somers, and Liza Min-nelli turn age 62 in 2008, among the leading edge of boomers who are redefining the aging process! The demand for Suzanne’s ThighMaster may yet soar!
Even George Bush, Bill Clinton, Donald Trump, and Jimmy Buffett hit age 62 this year. They may not be concerned with taking early retirement benefits under Social Security, but millions of boomers will be asking questions about benefits and retirement cash flows. Jimmy Buffett’s Parrotheads have added LandShark Lager, Margaritaville Tequila, and Margaritaville Cafes to the lineup in a determined effort to help boomers “hang on.” Will Margaritaville Senior Care Centers be next? “Just roll your scooter up to the bar, Homer!”
Officially, Margaritaville is located in the tropics somewhere between the Port of Indecision and Southwest of is order. Not a good place to be while you are making life-altering financial decisions. “Hey, honey, pour me another shot of tequila while I sign these retirement income distribution forms!”
A story in the national edition of the Washington Times (1/7/08) head- l i n e d :“Leading-edge boomers are jazzed about retirement.” That’s good! A positive attitude is a great first step. But how jazzy will retirement be?
A recent MetLife survey of 1000 adults born in 1946 revealed the following: 78% have grandchildren, 85% own their home, and 77% report good or excellent health. These statistics support trends evidenced by those preceding the
boomers. In retirement planning conversations, the big topic is the early years, the go-go phase, when activities, volunteering, perhaps continued working in some form, enjoying hobbies and sports, involvement with family and grandchildren, travel, etc., are contemplated. Physical health and financial health are important to actualization of matters of purpose.
What bothers boomers who on average think “old age” begins at 78? They worry about “illness, disability, wrinkles, aches, pains, age discrimination, under-appreciation, memory loss, mortality, and generally getting older.” Despite such fears, more than half of the group interviewed had taken no action relative to long-term care planning and other “what if?” questions.
Ask a boomer female if she loves her children and grandchildren and the answer is a definite YES. But does she want to be a problem for them, a financial burden, or have to live with them? Every time the response is an emphatic NO.
There may be an air of unreality in Margaritaville. If 77% indicate good health, the potential for longer life is
obvious. Yet the surveyed group reported an average net worth of $257,800, excluding their home, with an
annual income of about $71,400.
Assume that their lifestyle is pegged to the $71,400 income. Using the www.socialsecurity.gov web site for a simplified benefits calculator, our boomer making $71,400 who retires at age 62 and 6 months in 2008 would receive a monthly benefit of $1,262, or $15,144 per year. Where is the other $4,688 per month or $56,256 per year to come from?
With no other pension benefits the money must come from savings and/or continued work. Our boomer reports good health so long life and not running out of money before death becomes a concern. It is recommended that a person take no more than 4% to 5% of principal in annual cash flow so as to minimize longevity risk. At 4% to 5%, a liquid net worth of $257,800 will produce $10,312 to $12,890 per year in retirement cash flow. He or she isshort roughly $3,164 per month or $43,366 per year.
Full retirement age under Social Security for a boomer born in 1946 is age 66. The odds are, many will keep working until at least full retirement age so as to maintain medical insurance, continue saving, and go for a higher Social Security benefit later.
A survey by Tiburon Strategic Advisors (1/18/08) revealed that the most common method for determining the amount of savings needed for retirement by consumers is “guessing.” Talk about the Port of Indecision. Stop guessing! For every $50,000 per year in cash flow in retirement exclusive of a pension plan or Social Security benefit you need savings of $1,000,000!
The time to get serious about retirement planning is in your 40s at the latest. And guys, the average age of becoming a widow in this country is age 55 and we seem to run into more young widows by a substantial margin than we
do young widowers. Key breadwinners should divide gross earned income by .05 and that’s about how much life insurance face amount and/or liquid assets are needed to replace your salary. Tiburon says that “half of all consum-
ers believe that they do not have enough money to live comfortably in their retirement years.” Will your family have enough money to live in comfort and security if you check out of HotelThe time to get serious about retirement planning is in your 40s at the latest. And guys, the average age of becoming a widow in this country is age 55 and we seem to run into more young widows by a substantial margin than we do young widowers. Key breadwinners should divide gross earned income by .05 and that’s about how much life insurance face amount and/or liquid assets are needed to replace your salary. Tiburon says that “half of all consumers believe that they do not have enough money to live comfortably in their retirement years.” Will your family have enough money to live in comfort and security if you check out of Hotel Earth early?
Jimmy Buffett wrote a book, A Pirate Looks At Fifty, his reaction to his “Big 5-Oh!” birthday. That was 12 years ago! Our aging pirate now is looking at a Big 6-2! Time does fly, even in Margaritaville!
Tequila or planning? Some choice!
3930 East Jones Bridge Road Suite 150 Norcross, GA 30092 770-441-2603 (Fax) 770-441-7936
The Investment Coach 1994, Walker Capital Management Corp. Lewis Walker is President of Walker Capital Management Corp. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies.
Posted by hkelly as Financial Planning with Lewis Walker at 12:12 PM EST
No Comments »
No , we are not talking about Mike Huckabee, Bill Clinton as cheerleader for Parade Hillary, or even Barack
Obama. Barack is not from Hope, Arkansas, but he wrote The Audacity of Hope (still # 5 on the New York Times Paperback Non-fiction List).
We are talking about Ben Bernake whose Federal Reserve Bank engineered two interest rate cuts in nine days. “Hope” boosted the stock prices of banks, retailers, and homebuilders. Despite softening job data, the S&P 500 Index jumped 4.9% in the week ending February 1. Yes, dear investor, your January brokerage statements will look awful, but take a cue from another man of hope and patience, Warren Buffett.
The American economy may or may not be in recession but negative headlines create dour impressions. Busi-
ness and economic cycles are normal. The macro economy over time will expand or contract at various rates, even flat-line at times.
Decisions on a macro basis are misleading. If you look at sectors or even individual companies, there always
are “standouts” that present growth opportunities midst the wreckage, or perhaps because of it.?
Merger and acquisition (M&A) activity is picking up as declining share prices for traded companies sweeten tar-gets (Microsoft’s pursuit of Yahoo, for example). With a weak dollar, U.S. assets are on sale for holders of
foreign currencies. Witness the recent $40 billion invested in equity positions in Citigroup, Merrill Lynch, Morgan Stanley, and the Swiss bank UBS, taken by sovereign wealth funds of Kuwait, Singapore, and South Korea.
Warren Buffett smells bargains. While investors were headed for the exits, the Oracle of Omaha stunned Wall Street by indicating he would enter the troubled bond insurance business. He also committed $435.2 million to buy
NRG, a reinsurance unit of the Dutch banking behemoth ING. The deal signaled a possible trend of banks shedding non-core businesses to raise funds to battle the credit crunch precipitated by the subprime debacle. Buffett
also bought $2.1 billion in junk bonds issued by an electric utility, TXU Corp. Mr. Buffett is a disciplined cotrarian who sees economic distortions as an opportunity to put cash to work.
Stocks are as cheap as they have been since the late 1970s relative to bonds, a situation that generally results in a buying opportunity for investors. If we are in a recession, that, too, may spell opportunity for investors and money managers with cash reserves.
Ned Davis Research looked at the last ten recessions and noted that in the six months after hitting a recession stocks rose 24 percent on average. In recent conversations with professional money managers, we
have learned of increasing reallocations of cash into equities.
Cash as an alternative n-is delivering scant returns. Through February 1 yields on 2-year Treasury paper
dropped for the 7th consecutive week to 2.07%. Money market and CD yields likewise are falling. Ten year Treasury
notes offered 3.59%, a negative yield adjusted for taxes and inflation. ?
The stock market is a future-focused voting machine and investors know that it takes up to a year for lowerinterest rates to cycle through the economy. The impact of recent Fed actions and a potential stimulus package (except for the psychological effect) will not be felt before the 2nd half of 2008. The market tends to react well in advance of anticipated developments, pro and con.
Lower interest rates and the reduced prime rate will help those with interest-rate-sensitive debt, including
mortgages and home equity lines. Even the housing crisis should be put into perspective. A 1/25/08 headline in The
News-Pres s (Naples-Ft . Myers, FL), “Home Prices in Lee (County) plummet to end 07,” creates impressions of
impending doom. But look behind the headlines.
In 1994 the median home price in Lee County was $86,500. By 2000 the median price was $ 1 1 7 , 6 0 0
and the frenzy set in. P r i c e s peaked at $278,200 in December 2005. At the end of 2007, the median price was $257,000, down 7.6% from the peak. One couple in Ft. Myers reported reducing the asking price on their home for sale f rom $1.1 mi l l ion to $729,000. They bought the house in 2001 for $262,900.
Long term owners with fixed rate mortgages will ride out the storm. About 1000 homes and condos a month are going into foreclosure in Lee County, opening up bargains. Just think. For some guy freezing in Europe
who is wondering what happened to global warming, he can pick up a lovely $729,000, previously $1.1 million, home
in south Florida for a mere 492,434 euros (or 17,786,142 Russian Rubles). A Canadian can pick it up for 725,500 Ca-
nadian dollars, a deal in loonies!
Real estate flippers in Lee County lost phantom profits as they ended up “under water.” Lenders got nicked, but in many cases w r i t e -downs have been taken, and there is equity in the foreclosed real estate. The situa-
tion is not like an Enron melt-down where values go to zero.
Are we calling the market bottom and saying “the worst is over”? No, but the hopeful signs seen lately may be like the little green shoots popping up in my garden, a crocus perh a p s . Spring always follows winter, even an “economic winter.” Count on it!
3930 East Jones Bridge Road Suite 150 Norcross, GA 30092 770-441-2603 (Fax) 770-441-7936
The Investment Coach? 1994, Walker Capital Management Corp. Lewis Walker is President of Walker Capital Management Corp. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies.
Posted by hkelly as Financial Planning with Lewis Walker at 2:52 PM EST
No Comments »
