Lazy Money And The Hard Working People It Hurts

Let’s talk about inflation. Besides taxes, it is probably one of the most critical components to consider when developing any type of strategy. Yet, it is woefully unaddressed in most retirement plans, because it can be difficult to conceptualize. So let me start by asking you a few questions.

1.) Do You Think Inflation Will Be Lower or Higher in the Future?  In other words, do you think that inflationary trends will allow you to buy more with a dollar (go down) or less with that same dollar (go up)?

If we could go back 100 years from 1914-2014, that number rises to a staggering 2239.2%! We can do all kinds of calculations of inflationary trends over various time periods, but the real concern is are we prepared if the trend moves out of our favor and erodes our purchasing power?

The real concern is what a positive inflationary trend will do to the purchasing power of our money. So here is the next question,

2.) If you needed $2,200 of monthly income today, how much do you think you would need in 15 years to sustain that level of monthly income and standard of living?

If we assume a 3.5% average annual inflation rate, this would amount to a monthly need of $3,685.77 just 15 years from now. That is a 47% increase in monthly income needs. Have you planned for this?

What is Lazy Money, and why should I be concerned?

Lazy money is any funds sitting in a checking, savings, money market, or CD account earning little to no interest. This lazy money is most eroded by inflation. My final question will help illustrate why this is important.

3.) If you had $100,000 earning a 10th of a percent interest in a money market or savings account and assuming an average annual inflation rate of 3.5%, what amount of purchasing power do you think you would lose annually in that account?

At the end of the first year you could lose $3,400. After 5 years you have lost $18,268. $40,055 lost by year 10, and finally $96,960 eroded and lost in 20 years, because your money was not working for you. Yikes!

Let me share my vision of your lazy money. If you could please just imagine for a second one of your hard earned $100 bills. Right now, your $100 bill is laying in a hammock, with his fake little sunglasses, with his fake little arms, holding its fake lemonade, just living the life of Riley! Your money has retired more than you have! In some situations, your money isn’t retired or even just “lazy,” your money is in a coma!

Ladies and gentlemen, it’s time to put this money back to work! There are strategies that include financial vehicles,  that can provide safety and principal protection, tax-deferred growth and, in some cases, the ability to get increasing income in retirement.

If you would like to get more information on “lazy money,” then please reach out to ASA Group. We can help put your hard earned money back to work for your future

The Argument To Delay Social Security

(And Why It Can Help You Get More, And Keep More Of Your Benefit)

There are perfectly legitimate reasons for starting a reduced Social Security benefit early. In fact, that will prove to be the best move for many people. Unfortunately, for many others it will be a horrible mistake. One that will prove to haunt a great many people throughout their retirement. The key to understanding the importance of correctly timing the age when a person starts their Social Security benefit is to understand that you can significantly increase your monthly benefit by waiting.

If you are age 66 the maximum Social Security payment you can receive this year would be $2,513 per month.  That is one-third more than if you had started your benefit earlier at age 62.  And if you wait until age 70 to start the benefit is benefit would be about $3,350 per month which is one-third more than the age 66 benefit.  The difference between starting the benefit at the earliest age of 62 and the latest age of 70 is about $1,660 per month for life.

Each year you delay the start of Social Security the income amount scales up (until age 70).

 

Generally speaking, for decades the position of the financial services industry was in favor of taking a reduced Social Security benefit early.  Detailed present value calculations have often been used in break-even analysis to provide support for this position.  One failure of this work was that the impact of future taxation was minimized or not fully considered.

Advisors who understand the advantages of tax-efficient distributions from Roth IRAs and investment grade life insurance appreciate the importance of focusing on the after-tax results when comparing alternatives.  It is important to consider Social Security on an after-tax basis as well.  Because Social Security is extremely tax efficient, the more we can do to increase the amount of the benefit, the greater the potential tax advantages our clients can receive.

Under current law a minimum of 15% of the clients Social Security income will be tax free regardless of how much income the client has or the sources of that income. Better still, an advisor who understands how to generate additional tax-efficient income using Roth conversions and/or life insurance cash value loans could possibly increase Social Security’s tax free portion to 50% or better.  How much better?  For some clients strategies could be used that could make this income entirely tax free.

With proper planning, when you include the tax benefits, projected cost-of-living adjustments, spousal benefits and survivor benefits made possible by the Senior Citizens’ Freedom to Work Act of 2000, it is clear that many of our clients can “supersize” their retirement income simply by delaying the age when they claim their Social Security benefits.

Should everyone delay the start of their Social Security?  No.  But with the potential of providing ten thousand dollars or more of additional tax-efficient, inflation adjusted, lifetime guaranteed income for a client and surviving spouse these are strategies that many of you should at least consider.

The 6 Biggest Mistakes Retirees Make

(and how to avoid them!)

1)  Retirement Cash Flow Cannot Fund Lifestyle

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Among the biggest mistakes retirees make is not adjusting their expenses to their new budget dependent life. Those who have worked for many years usually find it hard to reconcile with the fact that food, clothing and entertainment expenses should be adjusted because they are no longer earning the same amount of money as they were while in the work force. For example, you might need to do a little less dining out and learn to enjoy more home cooked meals.

Many retirees also tend to forget to take into account healthcare and long term care costs that usually come into play as a person ages. A proper retirement income plan that includes financial vehicles designed to produce lifetime income can help significantly bridge the retirement income gap, and offer inflation protection along with peace of mind.

2) Failing to Move to More Conservative Investments

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Once you have retired, you can’t afford large negative swings in your savings. You regularly hear financial advisors recommending a long term strategy and touting the strategy of leaving money in the market regardless of the ups and downs.  That’s because over time, the market, while very volatile at times, has historically ended up rising in the long term. When you retire however, you have to think more short term as you will need to access the cash.  It’s still probably smart to keep some money in more aggressive growth investments, but not nearly at the level you did when you were younger.

3) Applying for Social Security Too Early

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Just because you are already eligible to apply for Social Security at 62 does not mean you should. If you start taking benefits at age 62 will get you about 25% less than what you would get on your full retirement age of 66. You will also get at least 32% less than if you wait until age 70.

If you have the means to pay your bills and are healthy, try to delay your application for retirement benefits for a few years more. The benefit increase is maxed out by 70 years old and will not increase any further, so that’s the target age you should shoot for.

4) Not Being Effective Tax-Wise During Retirement

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Having multiple retirement accounts may sound ideal but you have to remember that each retirement account is being taxed differently. If you have not factored taxes into your retirement distribution plan, you could end up paying more taxes that you actually have to.

Finding the most cost-efficient way of being taxed during retirement is a complicated manner so you might want to make sure that you have a trusted advisor to help you along the way.

5) Being House-Rich but Cash-Poor

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People often pay for their mortgage for most of their life and, by the time they retire, end up with a lot of equity in the home and with little cash left. While houses appreciate in value, the costs of upkeep including taxes, utilities, services, repairs and maintenance is too much for a retiree to handle. Once you have decided to get out of the work force, it is assumed that your children should have already moved out of your house. You can downsize your living expenses by selling your house and moving in to a smaller home that you can afford. You can also invest the remaining money on more predictable income in order to support your new retirement lifestyle. If you are still working, then be sure to pay yourself first and max out your savings before you consider paying down your mortgage. Hitting your retirement savings goals is more important than accelerating your mortgage pay off date.

6) Not Staying Active Socially and Physically

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Possibly one of the worst things you can do when you retire is become reclusive and inactive.  It’s important to maintain social connections and frequently enjoy the company of friends and family or join social groups and activities that will enable social interaction with peers. The mind is like a muscle – if it is not exercised, its capabilities will fade.  So in addition to continuing some sort of regular exercise habit, seniors should also exercise their brains. Reading books, solving puzzles and just simply engaging in conversation are all great ways to keep the brain sharp and functioning well into later life. Becoming reclusive and spending a lot of time in front of the television, while on occasion may offer relaxation, should not monopolize your time. Keeping active will not only help keep you mentally sharp and physically healthy, but will also elevate your mood and help you be happy well into your golden years!

Negative Interest Rates Coming Soon to a Bank Near You?

Economic Crisis. 3d red arrow graph falling and breaking in crack hole. Business fall.

Yes, you read that right.  Bloomberg Business recently reported that the Federal Reserve “wants to test how banks would handle negative interest rates.”

I’m not shocked by much in today’s financial world of stock markets going haywire, giant economies like China’s teetering on the edge of disaster, and the ever-present threat of the government raiding our tax-deferred retirement accounts.

But negative interest rates?!?

That means that if you have money in an interest-bearing savings account, CD, or a money market account in a bank, you would pay the bank interest, not the other way around…. which is the way it usually works.

If you think, “that’d never happen,” think again.   It’s happening “around the world.”  Bloomberg reports that “several of Europe’s central banks have cut key interest rates below zero and kept them there for more than a year.” The article lists Switzerland, Sweden, Denmark, and “now Japan is trying it.”

Actually, I’m more than shocked. I’m astounded…. and disgusted.    The European banks that have tried this have done so to “invigorate their economy” in times of “severe global recession.”  Proponents of this drastic move say that it will deflect inflation going out of control (remember the 1970s anyone?), but the jury is still out on whether this will work in the long-term.

But why would they do it, really?  As I dug a little deeper into the whole scenario, it became clear.  It has to do with how much banks are lending.  As one article bluntly put it, negative interest rates, “punish banks that hoard cash instead of extending loans to businesses or to weaker lenders.”    Ah ha!  There it is.  This hackneyed thinking goes that people will flock to banks to take out a loan, because instead of the banks charging you interest, they have to pay you.   (and how, exactly, do you qualify for something like that? Maybe you have to see if the bank qualifies under your criteria.)

This really is a desperate measure to stimulate the economy.  You take out a loan. You spend the money.  The economy grows.  If there were ever a financial house of cards, that would be it.

Some banks, the article points out, aren’t playing. They’re being charged a negative interest rate by their central bank, but they’re not passing it on to their customers—meaning those who have their money in savings in these banks.  These banks, rightly so, are afraid if they say, “you’re going to have to pay us to hold your money,” the consumer is going to pull their money out.

I don’t blame them.  Cash under the mattress all of a sudden sound like a viable option.  But the problem is, if banks are absorbing the difference between what the central bank is charging them versus what they’re giving you in interest, then their profit margin goes down making them even less willing to lend.

While that might sound all nice and good for the central banks, including our own Federal Reserve, I think it’s nonsense.

Americans don’t save money.  In a survey done in late 2015, 62% of Americans have less than $1,000 in their savings. That means basically six out of ten people don’t have a “rainy day” cushion to see them through hard times, like if they got really sick and couldn’t work for a while.   These six out of ten Americans will rely on their friends, family, and retirement accounts to see them through.

But how many of them really have retirement accounts that they could use?  Another study showed that 45 percent of working Americans don’t have retirement accounts.  So how many people have nothing to retire on except their Social Security?  (and Social Security isn’t going to give you a nice, comfortable retirement.)

So why would these people, who don’t save in the first place, be enticed to save if they have to pay the bank for the bank to hold their money?

They won’t.

Interest is how you make money on the money you’re put into a savings vehicle.  If you know you’re not going to lose any money in an account earning interest, then you know you’re money is going to be protected.  Most of the people I come in contact with prefer their money is safe.

I’m in that same group. I don’t like losing money.

There are alternative ways to keep your money protected, savings vehicles that earn interest for you, at a decent rate without risking your money.

The stock market used to be the biggest risk for your money. At least when the market is good, you get a reward.  If negative interest rates come home to roost here in the U.S. you’ll get all the negative impact of the stock market without any of its benefits.  That’s just plain crazy.

 

Social Security File and Suspend Deadline 4/30/2016

Last Chance to take advantage of the little known Social Security windfall strategy before it disappears forever!

The Social Security Administration (SSA) finally issued guidance last night on the file and suspend deadline that looms in April. Prior to the guidance, most interpreted that deadline as April 30th (which was the 180th day after the enactment of the Act) but SSA has indicated that the deadline is April 29th, NOT April 30th.
Individuals who are at least age 66 by April 29, 2016 and who are not currently collecting benefits may file and suspend benefits and be grandfathered under the former, more favorable rules. This election MUST be done in person at a local Social Security Administration office or by phone appointment. Failure to do so, even if the individual meets the criteria, will prohibit them from being grandfathered into the former rules. Those who make affirmative election by one of the two methods stated above will retain the following rights:
Benefits can be paid to an eligible spouse or eligible dependent on their record even while the primary worker is under suspension
Request a lump sum payment of all suspended benefits, should his/her circumstances change.
The communication also confirmed that those receiving ex-spousal benefits from a former spouse who has suspended benefits will NOT be affected by their former spouse’s suspension, unlike a current spouse who would experience a suspension if their spouse suspended.

ASA Income Optimization Planning
The cornerstone of our planning process is ensuring that our clients maximize their current and future income potential. For years, we have educated our clients about the file and suspend strategy as a means to create an immediate income stream while maximizing future income payments and gaining control over their lump sum Social Security benefit.
To find out if you or somebody you love should take advantage of this dynamic retirement income benefit before it is gone forever.