Blog - Financial Literacy

Software for social security retirement planning

There are a few irrevocable financial decisions in retirement and the largest one for most people is selecting the filing date for Social Security retirement benefits (SSI). This is a critical decision that is best to get correct. Unfortunately, there are hundreds of scenarios to consider when making and optimizing this decision, especially if you are part of a legal couple. Instead of paying $1,500 to a financial advisor, you could choose free and cheap software to evaluate this for you.

Half of retirees file for SSI and begin drawing money before age 64. I presume most of these people have little other source of income and need the money immediately – so there is no decision to be made. However, for those with retirement assets, pensions, and possibly full or part-time work – there are strategies to maximize your monthly payment. Before April, 2016, there were many filing options and loopholes, but Congress closed those. 

Like everything, you get what you pay for. There is free software for SSI benefits, but THEY DO NOT provide claiming strategies, so they are a horrible choice. Some charge $29-$49 to subscribe for a month; or have free trials to examine if they are a fit for your circumstances.

Items to consider:

  • Your SSI payment is based upon your highest 35 years of earned income. If you are earning a high amount you can review your SSI statement to learn if working another year or two would dramatically increase your payment.
  • Each year after age 62 that you delay filing, and you keep working full-time, you can increase your payment by roughly 8%, until age 70.
  • How is your health and expected longevity? There are breakeven points for delaying your filing and it won’t be worth it if you don’t expect to live beyond age 80.
  • A spouse, or ex-spouse, may qualify for benefits on your income, and that is a “File” or “File & Suspend” issue separate from optimizing your benefits.
  • A significant element of retiring from work before age 65 is health insurance. You cannot apply for federal Medicare insurance until age 65 and it is relatively expensive to pay on your own until that date.
  • Beware that SSI is taxable and the more you make, the higher your monthly Medicare deduction will be. (I know someone whose monthly SSI payment is reduced by $945 per month for Medicare taxes.)
  • Do not ask SSI staff for assistance, they may not know all the rules and your entire financial picture.

Gold mining stocks are at a 50-year low

Creating a ratio by dividing the price of one asset by another is one way to determine if something is relatively cheap or expensive. For example, comparing gold/silver, stock market/oil, real estate/stock market, and numerous other ratios. In general, you are seeking an extreme low ratio to buy one and sell the other (as a pair trade) and when the ratio is extremely high, do the opposite trade. This is called relative value trading, trading one product (a long position) against another product (with a short position).

There is a ratio extreme right now between gold mining companies and gold; which has an average of 1.5 Gold Miners/Gold over the last 70 years. As you can view in the chart, gold miners have not been this cheap compared to the price of gold since the 1950s. Could the ratio go lower? Absolutely, much lower. However, the ratio has been moving sideways since 2016.

This could be a great trade as gold mining stocks usually move up 2-6 times over the price of gold, when there is a big run up in gold price. Be aware that junior gold mining stocks (ticker GDXJ) are more volatile and riskier than larger gold mining stocks (ticker GDX). One gold analyst said that, “If the price of gold make a new all-time high, then I’m going to buy gold mining stocks to get an added boost in return.”

How is your investing budget?

The Acorns investing app compiled a survey from 3,000 people on financial matters; from age 18-44. A few of the notable statistics they tallied are included below.

Respondents spent:

  • 34% more on coffee than investing ($2,008)
  • 44% more on holidays gifts than investing
  • 37% more on vacations than investing

Respondents on savings:

  • 25% do not save at all
  • 60% save less than $99 per month

What a surprise, 31% of respondents don’t think they’ll ever be able to retire.

It is my best advice that you never be average with your money: put more toward savings and investments than the average person who ends up in financial struggle due to a lack of savings and investments.

Connecticut’s politicians kill the state in under 10 years

During many social gatherings in Connecticut these days, there is a likelihood that at some point the conversation will turn to: outrageously-high property taxes, falling real estate prices, and moving out of the state. Why is there such an exodus from this formerly successful and wealthy state?

According to locals, below are some of the commonly mentioned reasons (in no particular order):

  • State politicians spend too much buying votes and hiring people – growing state and local staff 6 times faster than the population.
  • Foreign immigrants are overwhelming the state’s budget, reducing money for counties and townships. So property taxes have continued to ratchet upward (Norfolk alone went up 14.5%).
  • Hedge funds, who had moved their trading desks from Wall Street to Connecticut, all left when CT started specifically targeting them with high tax increases.
  • Large insurers have left the state to find a more business-friendly climate.
  • Increasing gun control laws drove out their most well-known manufacturers, Remington and Colt, plus several smaller firearms manufacturers.
  • Otis Elevator and Carrier Air Conditioning moved their headquarters from CT to FL.
  • GE moved its headquarters out of CT to Boston.

What Connecticut is facing today:

  • Worst economic growth in the country.
  • Huge state budget deficits.
  • Underfunded state government pensions.
  • Among the worst business climates in the country for number of taxes and their high rates.
  • The highest gasoline tax in New England.
  • Even the average cable bill has a $12 tax.
  • The worst probate court system in the country, incentivizing retirees to leave.
  • Net emigration from the state for the last 5 years, and it is increasing.
  • Many of the ritzy homes in Greenwich are for sale as wealthy residents flee to TX and FL with no income tax and far lower property taxes. But no wealthy are moving in to purchase real estate, so expensive real estate lies empty and languishes on the market.

Similar discussions about “moving to another state” due to “how horrible the government is here” are also commonplace in Chicago, San Francisco, and Seattle. It is best to continually evaluate state and local governments on how they affect your career and personal finances before these predictable cascades occur. 

Can you pay for 40 years of living expenses?

The modern concept of an actuarially planned and funded government pension for all working citizens began in Prussia by Otto von Bismarck in 1889. At the time, the average adult lifespan was age 70 – and retirement payments did not begin until, you guessed it, age 70. Therefore, most people did not expect to live long enough to actually receive any retirement payments. By the 1960’s, the average American expectation was that you would retire at age 65, and then hopefully live another 5-10 years. These 5-10 years of non-working are labeled your “Golden Years.” Today, financial planners are prepping their clients to plan on funding a retirement that may last 40 years beyond age 65. Financial planners call surviving beyond age 80 as “longevity risk,” where you may run out of money when you are least capable to do anything about it. (Today, there are 92,000 Americans older than age 100). Longevity Risk is based upon the life expectancy of reaching a particular age; note that half of Americans will outlive the statistical average lifespan, around mid 70s. For example, if you have reached age 55 today then you should expect to live until your mid 80s. The longer you live, the higher your personal expected life-span increases. There are people reading this who may live to age 105 and beyond. Needless to say, withdrawing money from retirement accounts for 30-40 years requires enormous amounts of assets to draw upon. Plus, old-age frequently correlates with increasing medical bills, procedures, and ongoing prescriptions.

The traditional approaches to reduce financial longevity risk include:

  • Working past age 65 to reduce the number of retirement years to fund.
  • Buying annuities to receive a monthly payment to offset stock market fluctuations.
  • Invest in “Retirement Target Date” mutual funds to outsource changing your portfolio.
  • Buy long-term care insurance to reduce the risk of the high-cost nursing care.
  • Reduce your investment account withdrawal rate from 4% to 3%, stretching your accounts to last longer.

Those may be helpful, but to me inflation risk is the critical (but invisible) problem to address. Rent, food, and healthcare increase in price over time. Even at a small 3% annual inflation rate, prices double in 24 years. So your fixed annuity or social security retirement, which may have been plenty of money when you first retired, will become increasingly paltry and possibly unable to support you in 20 years. Plus, you have another 20 years to fund with consumer prices doubling yet again. (Yes, there is a small cost-of-living increase to Social Security Retirement payments, but it is never as high as the real inflation rate).

Some of the ways to reduce inflation price increases are:

  • Purchase stocks that routinely increase their dividends each year. 
  • Own investments that can increase their prices with inflation – such as rental real estate.
  • Purchase “inflation protected” securities – usually bonds, treasuries, and ETFs.
  • Turn on the “reinvestment” option on some of your interest/dividend paying securities during retirement to continually ratchet up their rate of earnings.

Building up the financial assets to retire can be difficult and the potential longevity risk adds another layer of challenge to manage. But these issues must be addressed and planned in order to experience a comfortable retirement without running out of money beyond age 80.

Investing takes a detour into the ESG quagmire

Adhering to your personal values when selecting investments that you want to support or avoid is common. You may choose to skip investing in companies that provide sins, vices, or conflict with your personal values. For example, your list of stocks to avoid may be businesses involved with alcohol, cigarettes, gambling, marijuana, opioids, military defense, and pornography. There are many ways to screen companies; you could select stocks with only U.S. manufacturers or avoid products made or sold in a country run by oppressive governments like Cuba, Venezuela, or North Korea.

Investment funds and advisors seeking to market to investors’ tastes create mutual funds, ETFs, and lists that correspond with these criteria for easier investing. A big problem arises when these investing criteria move beyond the obvious toward popular but fuzzy terms such as rating a business’s sustainability, environmental impact, social justice, diversity, consumer privacy, engagement, green, inclusivity, responsibility, ethics, human rights, faith-based, corporate governance, etc. These terms are so subjective that you must ask the person using them exactly what they mean. And remember, these definitions change over time. The result of this confusion is that companies are being unjustly rewarded and punished with inaccurate labels by investment funds and advisors.

*Note, some of the common vernacular today is “ESG,” an acronym for environment, social, and governance criteria for investing; “SRI” for social responsible impact; “DI” for diversity and inclusion; and “CSR” for corporate social responsibility. While many institutions claim they have ‘vigorous and in-depth methodologies’ for scoring their ESG labels, the briefest glance at them reveals this is not at all true. Try to find the exact details on how they actually evaluate a specific criterion for a company:  

https://www.msci.com/documents/10199/123a2b2b-1395-4aa2-a121-ea14de6d708a

Some of the issues leading to erroneous ratings and investing conclusions from these ill-defined ESG terms occur because you are entering into the endless stormfront of:

  • Conflicting study results
  • Not evaluating all of the cradle-to-grave elements to a solution
  • Promoting several types of unfairness to reduce one type of potential unfairness
  • Failure to consider side effects and secondary / tertiary consequences
  • Political correctness hypocrisy
  • Subjective and biased trade-offs that are assumed, not reviewed
  • Junk science and mistaking correlation with causation
  • Popular misconceptions, fallacies, and error propagation
  • Requiring failed socialist precepts in governing policies
  • Wind/solar manufacturing and intermittency is usually solved with fossil-fuel energy
  • Poor behavior as one-time events vs. ongoing part of company culture
  • Demanding corporate policy changes for manufactured problems that do not exist
  • Judgments with incomplete information
  • Utilizing plastic vs. its alternatives that have a +400% higher carbon footprint
  • Unsettled science with conclusions that have been flip-flopping
  • Falsified data, fake allegations, and debunked assertions
  • Confusing efficiency with sustainability
  • No reporting data or visibility to actual behaviors that matter
  • Financial sustainability is sometimes just financially unaffordable welfare
  • Political propaganda overriding factual details
  • Mandating product improvements that physically do not exist
  • Plus numerous other issues (for brevity, I deleted over 20 additional points)

A certification example that highlights just a few of these problems is LEED certification (leadership in energy and environmental design). In the early 1990’s, the National Resource Defense Council developed LEED construction standards for buildings that reduce their environmental impact over regular construction. This became an international standard and popular for businesses to highlight their green commitment. Many governments provide tax credits only for LEED certified buildings. However, there is a long list of criticisms about LEED certified buildings, including energy and water usage being poorer than regular construction. For every architect that thinks LEED is on the cutting edge of progress, there are architects who claim: it requires inappropriate materials, does not respond to changes in technology, increases the cost and energy to build more than any efficiency can recover, suppliers may have bribed their way onto the approved list, that LEED has devolved into a scam to sell fake PR (called greenwash) to grab millions in tax credits. Some call LEED a taxpayer-funded fraud that worsens environmental impact – the opposite of the one item it was supposed to improve. There are similar criticisms for supply-chain certifications such as “Fair trade,” “Conflict Free,” “Biodegradable,” and even “Organic.”

When simply planting trees to “help the environment” is rife with reverse side-effects that overwhelm any benefits, critics of ESG labels claim that it is just the latest snake-oil in “Virtue Signaling” marketing by opportunists to the gullible. In a recent Youtube video, the founder of a large ESG financial advisory firm vilified an industry as being inherently unethical, and included any supplier related the industry. He published this without citations, evidence, or confirmation – just inflammatory remarks from some professional victims. Yet, with a single mouse click, I found contradictory evidence and the logical explanation for one of his “unethical outrages” he used to publicly malign an innocent industry.

ESG has caught the attention of the U.S. Securities and Exchange Commission. It is now investigating whether ESG Investment Funds are making false claims by looking into the criteria and methodology for rating a company for ESG. One SEC commissioner, Ms. Hester Peirce, says, “ESG has no enforceable or common meaning. They are relying upon research that is far from settled… We should be wary of a self-appointed crowd pinning a Scarlet Letter on a business for fun and profit.” This is not surprising because no company gets the same ESG rating by any ESG advisors.

Why are you investing at all? Likely to reach your financial goals – so you want to place money with the highest likelihood for it to become more valuable over time. Bloomberg did a 7-year backtest among the S&P 100 stocks. They compared the highest rated ESG stocks compared to the non-compliant ESG stocks and the result was the non-compliant stocks performed 50% better than the companies deemed “virtuous.” (Of course, there are other studies performed by ESG firms, with a clear conflict of interest, that make the opposite claim). Expressing your personal values in your investments can be important, and as an investor, you will likely come across ESG marketing materials from investment brokers and advisors. In my opinion, you should never allow anyone else to stamp a company for you with vague and possibly incorrect labels.

How professional investors respond to the U.S. bombing an Iranian terrorist leader

On December 31, 2019, Iranian military attacked the U.S. embassy in Bagdad. Three days later, a U.S. drone strike killed the planner, General Qassem Soleimani, who the U.S. claims was plotting another imminent attack. While most people are interested in the politics of the events, money managers have a professional duty to react, professional traders are looking for profitable trades, and retail investors many want to protect their portfolio.

What positions did these investors and traders examine and consider?

  1. France and Germany moved into Iran right after President Obama’s nuclear weapons development deal in 2015. So shorting French oil companies (or the French stock market) while buying U.S. oil companies is a pair-trade worth considering, and would already be showing profit.
  2. The military/defense ETF ticker symbol “ITA” holds several major military and aerospace companies. Many investors bought this ETF (which has gone up 3% in the last two trading days). Or, you could hedge this trade by also shorting the S&P 500 Index, on the expectation that the defense stocks would outperform the overall stock market.
  3. Some investors were just concerned with protecting their portfolio, buying February put options on the S&P 500 Index as insurance. Since puts are somewhat expensive, instead, some bought a vertical debit spread to lower their cost and risk for this hedge.
  4. Crude oil jumped up from $61/bbl by nearly $3 because Iran is a large oil exporter. Once the price backed off $1, some investors opened a short-term butterfly trade to profit from the spike up in volatility pricing for the crude oil options on futures.
  5. Another portfolio protection trade is to purchase gold. Gold has also been up about 1.5% in the last 2 trading days. (To execute this quickly, you can buy ticker symbol “GLD” with one click).
  6. Today, the option volatility for oil is higher than gold, which is in turn higher than the stock market. So there is an opportunity for a combination trade of selling oil options and hedging with buying either gold or S&P 500 options.

I’m sure there are many more ways to have traded this news event (did natural gas keep up? or will the Chinese/Indian stock market be hurt – the two largest buyers of Iranian oil? Will Tesla got a boost as a non-gasoline alternative vehicle). Having a plan to protect your portfolio at any moment is something you should always have ready. But depending upon the news of the day, there are opportunities to profit for those willing to evaluate and immediately place trades before the opportunity disappears.

Trump signs the SECURE Act

Washington just passed a new law regarding retirement accounts called the SECURE Act (Setting Every Community for Retirement Enhancement). A few of the notable elements include:

  • Offering incentives for small businesses to band together with other business retirement plans for lower-shared costs; offer part-time employees access to retirement plans, and provide automatic enrollment for retirement plans.
  • Increasing the age for Required Mandatory Distributions from IRA, 401(k), and 403(b) accounts. Withdrawals must be made (and income tax paid) according to a ratio starting at age 72, an increase from age 70 1/2 to reflect longer lifespans. Also, they removed the maximum age to contribute to a traditional IRA.
  • Annuities (which are already problematic and complicated products) are now allowed inside retirement accounts. In this location, there is an extra mess determining and handling whether any particular annuity meets the new criteria to be passed to a beneficiary. 
  • For inherited IRAs, there is now a withdrawal limit of just when it used to be that you could withdraw the money over the beneficiary’s lifetime (called a stretch IRA). This can change the arithmetic in favor of converting a traditional IRA to a Roth IRA for many people. So financial advisers are already experiencing a wave of Roth IRA conversions to eliminate the income tax paid by beneficiaries. (Not to worry, tax experts have a way around this with a Charitable Remainder Unitrust.)
  • Reduces the income tax on survivor benefits to children of fallen U.S. soldiers, from 37% to their parents’ lower income rate.

You can read the entire bill here: https://docs.house.gov/meetings/WM/WM00/20190402/109255/BILLS-116HR___ih.pdf

Who controls your financial assets/accounts?

There is a spectrum range from Total Control to No Control over your financial accounts and investments. The term “control” in this context refers to your money-management capability of: timing of purchases and sales, the type of account an investment is placed into, the options of available investments, having liquidity to get out of the investment/account, minimizing government restrictions, physical possession, and decision-making over the operations of the actual investment.

The most helpless position is having little or no control over your accounts or investments. It is best to save, build, acquire, purchase investments and accounts with the most control, given your knowledge and time to manage that investment, account, or business. The most personally disastrous financial problems occur with accounts where you have no or little control. This is because they can be reduced or eliminated without your input. Examples of this nature include your social security retirement or company/government pension. Within the last several weeks, General Electric froze their pension plan for 20,000 employees (they had already eliminated it for new employees back in 2012); France announced retirement pension cuts and there is still rioting; and Netherlands announced their retirement plan is in peril, and needs financial reform to remain solvent.

Let’s review a few normal investments of the average investor, ranking them for personal control:

No/Little Control

  • Social Security retirement benefits
  • Company pension

Minimal Control

  • 401(k), 403(b), 529, Health Savings Accounts that are held a prison of very limited mutual funds
  • Annuities

Average Control

  • Stocks, bonds, and mutual funds
  • Cash value in life insurance products

Moderate Control

  • Promissory notes secured by real estate
  • Savings accounts and bank certificates of deposit

Maximum Control

  • Cash
  • Physical gold and silver
  • Rental real estate
  • Small business where you have significant ownership

It is best to increase your knowledge and skill to acquire and add money to investments and accounts with the most control that you can.

How diversified is your portfolio?

60 years ago, if you owned 10 individual stocks and a few bonds, an investing expert would consider that a “well-diversified” investment portfolio. Several decades later, in the financial collapse of 2008, the Yale Endowment Fund had so many other types of investments that just 6% of the endowment was in stocks. There are several types of investments with a low correlation to stocks that would further diversify your portfolio. A few of them include:

  • Direct real estate
  • Commodity funds
  • Long/short hedged funds
  • Private equity
  • Funds of funds
  • Pre-IPOs
  • Arbitrage funds
  • High-frequency trading
  • Venture Capital
  • Mezzanine debt
  • Royalty Funds
  • Precious metals of silver and gold
  • Possibly cryptocurrencies
  • Plus many varieties and combinations of all of the above

Purchasing a stock index fund and a bond index fund takes no investing knowledge. However, it is also taking on a tremendous amount of risk today. This is due to a shockingly high price level of the stock market along with record lows in global interest rates set by central bankers.

A prudent investor might seriously consider lightening their U.S. stock market exposure as well as any medium to long-term bond funds. Then, they’d begin educating themselves on investing in some of the other types of investing classes. For the average investor, there are more online platforms to access these types of investments than ever before. This way, you can begin to invest in areas where the greatest and most sophisticated investment teams in the world are placing their money. By moving beyond just stocks and bonds, you’ll be joining the ranks of a modern “diversified investment portfolio.”

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