Fixing Social Security

From our July 2011 Creating Confidence Newsletter.

These days, as Congress debates the debt ceiling issue, Social Security is suddenly front page news again. If you want to see the lighter side of the debate, click here: http://www.youtube.com/watch?v=OAnI6y-xC84&feature=related.

The first thing to understand is that there IS a solvency problem with Social Security. Alice Munnell, Director for the Center for Retirement Research at Boston College University points out that, according to the Congressional Budget Office, the Office of Management and the Budget and the Government Accountability Office, the benefits promised to future retirees exceed the scheduled taxes that are projected to be taken in. In fact, last year, Social Security began paying out more in benefits than it received in payroll taxes--years earlier than projected, due to the 2008 Great Recession.

The second thing to understand is that Social Security is not going away; too many people today and in the future depend on it for a crucial part of their retirement income. Munnell notes that Social Security accounts for 87% of non-earned income for the poorest third of households over age 65, 70% for the middle third and 37% for the highest third.

So the question becomes: how can Congress bring Social Security back into revenue balance. To help illustrate some of the trade-offs, the American Academy of Actuaries web site includes a game that allows all of us to fix Social Security--you can make your own adjustments here: http://www.actuary.org/socialsecurity/game.html and discover a variety of ways to balance the books, some more painful than others. You could, for example, move up by one year the day when people have to wait until age 67 to claim maximum benefits, and after that index the retirement age to maintain today's ratio between expected retirement years and work years. This, alone, would solve 20% of the funding problem, and some would argue that it should have been done years ago.

As an alternative, you could reduce the annual cost of living adjustments in Social Security payments by half a percentage point. This would reduce the projected deficiency by 40%. Of course, it would also erode the purchasing power of elderly people who count on Social Security for a significant part of their income.

We could reduce benefits by 5% for future retirees, which would solve 31% of the problem.

Or we could reduce the benefit formula for the top half of earners, who theoretically are less dependent on Social Security in retirement. That would solve 43% of the projected Social Security deficit. It would also mean that people who are able to fund a comfortable retirement will get much less out of the system than they put into it.

On the other side of the ledger, we could incrementally increase the revenues going into the Social Security system. For instance, if we raised the payroll tax rate from the current 6.2% to 6.7% for employees and employers, 48% of the shortfall would go away. As an alternative, we could tax Social Security benefits like we do IRA and pension benefits, which would make up 14% of the projected shortfall.

As you can see, none of these proposals, by itself, will bring Social Security back to fiscal health. If you're looking for an out-of-the-box solution to add to the mix, consider an article in the Christian Science Monitor, where former U.S. Secretary of Labor Robert Reich notes that a big (and largely undiscussed) problem with Social Security is the shifting balance of workers paying into the system to retirees collecting from it. Forty years ago, he says, there were five workers for every retiree; today, there are three. In 20 years, perhaps less, the ratio will be 2:1--that is, every two workers in America will have to pay whatever is required to support one retiree's Social Security benefits.

How would you fix this problem? Reich proposes that we allow more immigrants into the U.S.--that immigration reform

As the deficit debate goes forward, you'll hear a lot more about how to "fix" Social Security. Consider this a cheat sheet on the options that various parties will eventually put on the table. We would love to hear your thoughts on how to solve this and other issues. During our planning process we put our heads together to come up with solutions that make lives better and more successful. Let’s encourage our government to do the same. If you have a good idea, let us know!

Sources:

Alice Munnell: http://blogs.smartmoney.com/encore/2011/07/11/saving-social-security-raising-taxes-vs-cutting-benefits/?mod=wsj_share_twitter

Robert Reich: http://www.csmonitor.com/Business/Robert-Reich-s-Blog/2010/0411/Immigration-Could-it-solve-Social-Security-Medicare-woes

Investing is an inside game

I read this March 20, 2010 post on The Research Puzzle blog with interest. It explains very well why investing is an inside game.

Investing for you is about your goals, your cash flow, your dreams and your financial status. Read and enjoy

http://researchpuzzle.com/

Will March bring the Luck of the Irish?

This week marked the 1 year anniversary of the current bull market. In the 13 bull markets experienced since 1930 that have lasted a year, return averaged 153% and total length averaged 4.4 years.

According to these statistics, the market has 54% more to go over the next 3+ years. This is one case where no one will complain should history choose to repeat itself! Happy investing.

Wills: The Cornerstone of Your Estate Plan

Alright, I admit I went to the archives for this one. What can I say, its tax season and everyone is a bit busy around here. I hope you don’t mind my knocking the dust off of this ever so important issue of estate planning.

During this month of St Patrick’s Day, I have taken a few minutes to reflect upon the vast changes that have occurred in how we view, accept, and move on after death. For many years, and even still today in some Irish villages, death was viewed as a new beginning for the unfortunate sole it had come to take. When reading old newspaper clips from Ireland, death often came in some dramatic fashion; a fall from the roof top, a trampling of a farm animal, or often in the midst of a jig and a good pint at the local pub.

A few days later, the entire town would parade through the village, following the deceased, wailing all the way to the final resting place. Within an hour of the burial everyone was back at the pub toasting and remembering Uncle Liam whether he really deserved it or not. They celebrated the grand afterlife, cherished the thought of the old bloke watching over them, and the family inherited what was rightfully theirs within days and moved on. Things are needless to say, much different now.

Today, if you care about what happens to your money, home, and other property after you die, you need to do some estate planning. There are many tools you can use to achieve your estate planning goals, but a will is probably the most vital. Even if you're young or your estate is modest, you should always have a legally valid and up-to-date will. This is especially important if you have minor children because, in many states, your will is the only legal way you can name a guardian for them.

Wills avoid intestacy and distribute property according to your wishes

Probably the greatest advantage of a will is that it allows you to avoid intestacy. That is, with a will you get to choose who will get your property, rather than leave it up to state law. State intestate succession laws, in effect, provide a will for you if you die without one. This "intestate's will" distributes your property, in general terms that may not be what you would have wanted. Wills allow you to leave bequests (gifts) to anyone you want. You can leave your property to a surviving spouse, a child, other relatives, friends, a trust, a charity, or anyone you choose.

Wills allow you to nominate a guardian for your minor children

In many states, a will is your only means of stating who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children's assets. This can be the same person or different people. The probate court has final approval, but courts will usually approve your choice of guardian unless there are compelling reasons not to.

Wills specify how to pay estate taxes and can help minimize taxes

The way in which estate taxes and other expenses are paid can be directed by your will. To ensure that the specific bequests you make to your beneficiaries are not reduced by taxes and other expenses, you can provide in your will that these costs be paid from your residuary estate. Or, you can specify which assets should be used or sold to pay these costs.

A will also gives you the chance to minimize taxes and other costs. For instance, if you draft a will that leaves your entire estate to your U.S. citizen spouse, none of your property will be taxable when you die (if your spouse survives you) because it is fully deductible under the unlimited marital deduction. However, if your estate is distributed according to intestacy rules, a portion of the property may be subject to estate taxes if it is distributed to heirs other than your U.S. citizen spouse.

There are many other advantages to having a will, and even more should one choose to complete the package with living wills and health care directives. These additions will protect your rights and desires should you ever become incapacitated or unable to communicate. So while things are much different today than they were years ago on the “Isle of Green” there is still much we can do to keep our legacy prosperous and easy to administer. So this March, take a few minutes to get your affairs in order. I for one like to imagine my heirs and well wishers toasting the night away at my wake then mired by taxes, intestacy, and family strife. The traditional lyrics below bring to mind the contentment one with only a will could have. Happy St. Patrick’s Day!

Oh all the money that e'er I had, I spent it in good company
And all the harm that e'er I've done, alas, it was to none but me
And all I've done for want of wit to memory now I can't recall
So fill to me the parting glass, good night and joy be with you all
~Traditional Irish Tune

by Andy Pulsfort

The Rip Off

Two weeks ago, I was in Washington DC speaking to a CEO roundtable. At the end of my talk, one of the participants said to me “I am sure you are worth every penny you charge, but I have been ripped off by a financial advisor and don’t know if I can ever trust another one. Do you have a case study on how to recover from a bad advisor?”

Great question. If you don’t want to be ripped off by an advisor or the financial system in general, you first have to start thinking about these things differently. Finding the right advisor is about personality, communication and knowing what you need. Do you need a wealth advisor to assist you in creating sustainable wealth? Or are you your own wealth advisor, and just looking for some special expertise in a narrow discipline?

Most of us are unknowingly looking for wealth advisors and hire specialty advisors. Let me explain.

Here’s a common scenario. I need tax advice, so I seek out a tax specialist, i.e. a CPA. My need for insurance is met by a specialist - my insurance agent. My new will is drafted by my legal specialist – my attorney. My investments are handled by another specialist – my stock broker. Question: Who is handling my wealth?

We treat all these facets of wealth management as separate…and they’re not. Creating sustainable wealth is most effectively done by beginning with the end in mind – the end being the freedom that comes with planning for a prosperous future.

If asked “Do you want to leave a legacy for your children?” your answer might be “Yes, absolutely.” But what if funding that legacy means you have to shave 10% off of your annual spending? Is that really what you want? The answer may still be ‘yes’, but without looking at the whole wealth picture, you would not have considered all the consequences to answering one narrowly focused question.

A good wealth advisor begins the process with a plan. He or she may call it a financial plan, a wealth plan, or in our case, The Prosperity Experience®. This plan is not a one-size-fits all; it must be tailored to meet the goals and intentions of the client. It includes a decision-making model that supports the person or couple in reaching their full wealth potential.

Specialty advisors like insurance agents, investment advisors and estate planning attorneys are brought in as needed to provide detailed expertise in a focused area. The wealth advisor may have these professionals in-house or they may be available via contract. Either way, the wealth advisor coordinates their work and uses the planning process with the client to facilitate decision making.

If you have been ripped off, there is nothing to do but get back on your horse and begin again, with the wisdom you gained from the experience. Take it slow. Trust your intuition. Do your homework. Find out who you are talking to.

Sustainable wealth creation is a lifelong process. While no single decision may change the trajectory of your wealth and prosperity, any single decision can. Don’t wait until you have made that one big, bad decision to begin again.

Mackey McNeill

Are you saving enough?

The solution to learning to save it to set yourself up for success. Start small, and make it fun. I discussed these ideas recently in an interview with Andrea Coombes of MarketWatch.

Scroll about ½ way down the page.

click here to read the story and watch the video

Mackey McNeill, CPA, PFS, IAR
CEO/President

Mackey Advisors
525 West Fifth Street
Suite 318
Covington, KY 41011
P 859-331-7755
F 859-331-4695
CultivatingProsperity.com

Saving unnecessary fees

A few days ago I received an inquiry from a national reporter. What are 5-10 "hidden" fees (service fees, for example) that the average consumer probably does not know he or she is paying? Are the fees necessary, or can consumers get out of paying them? These could include fees for unnecessary services tacked onto an insurance policy, bill, credit card, checking account, etc., that consumers should be able to opt out of.

Here are my “cliff notes:”

• Credit card – annual fee- get a free one instead – or pay an annual fee if you get benefits
• ATM charges… GRRRR! Maddening – shop around, some banks offer accounts w free ATM anywhere – or plan ahead and use your own bank
• Bank charges for withdrawal w/o a check – say you go in the bank and just make a withdrawal and don’t have a check on you
• Insurance – charge for towing expense – if you have AAA it is already covered on AAA
• Fee for a savings account – some banks charge a monthly fee for the account if it is small – shop around, use a credit union, or local bank – or just save your cash until you get enough to put in
• Check card fees… GRRR! Again – use cash instead – budgeting is easier w cash anyway
• Over limit fees on credit cards – watch your limit carefully so you don’t exceed it, even by a $1 – if you do, the fees can escalate quickly and compound
• Insurance – is your deductible high enough- $250? Can you afford $500 – if not yet, make a plan to save $500 and then raise your deductible – you can save your deductible sometimes in as little as 3 to 5 years
• Insurance- shop around – price your policy – while also being careful to deal with a AAA rated company – often you can save hundreds by shopping
• Overdraft – obvious – balance your account – and be careful
• Renting a car – insurance on the rental – get a free credit card that offers this coverage so you don’t have to pay for it when you rent
  
  May prosperity be yours,
  
  
  Mackey McNeill, CPA, PFS, IAR
  CEO/President
  
  Mackey Advisors
  525 West Fifth Street
  Suite 318
  Covington, KY 41011
  P 859-331-7755
  F 859-331-4695
  CultivatingProsperity.com
  

Listen and Watch - Financial News

Today was a busy day. This morning I taped a segment on the AICPA (American Institute of Certified Public Accountants) FeedThePig initiative. This iniative is geared toward improving financial literacy in the 25 to 34 year old age group. The site, FeedThePig.org is a fun and free site, with no commercial advertising.

Learn more by watching the interview with Alison Montoya on WLWT , the NBC affliliate in Cincinnati, tomorrow morning between 7AM and 9AM.

Crystal Faulker and her business partner and husband, Tom Cooney, host a radio show on wnku. Listen next week for the segment on Tips for Surviving and Thriving in the current economic climage.

May prosperity be yours,
Mackey McNeill, CPA/PFS IAR
President and CEO
Mackey Advisors
www.CultivatingProsperity.com
859-331-7755

Clean up your mail box, clean up your debt

The best way to not have the credit card blues is to use credit cards wisely.

For many people that means fewer cards and avoiding unsolicited credit offers.

Just like when you go on a diet, you don't keep cookies and pop in the house, the best credit card management involves keeping the cards from coming in your home in the first place!

It is easy to do. Here is how:

The credit bureaus offer a toll-free number that enables you to “opt-out” of having pre-approved credit offers sent to you for five years. Call 1-888-5-OPTOUT (567-8688) or visit http://www.optoutprescreen.com/ for more information. When you call, you’ll be asked for personal information, including your home telephone number, your name, and your Social Security number. The information you provide is confidential and will be used only to process your request to opt out of receiving pre-screened offers of credit.

May prosperity be yours,
Mackey McNeill, CPA/PFS, IAR
President and CEO
Mackey Advisors
Mackey@CultivatingProsperity.com
859-331-7755