Observations on a sound retirement and kicking the can.
Vedran Vuk here, filling in for David Galland. I had an article ready for today, but at the last moment, our own Bud Conrad sent me his recap of the fiscal-cliff fiasco. To make sure this issue doesn’t set a record in length, I’m making way for Bud’s wisdom and always-excellent analysis. To hear more from Bud, also make sure to check out his recent interview with Jim Puplava on our growing debt and the end result of it, which is baked in the cake at this point.
Then we have an article from Dennis Miller on getting serious about your retirement goals. For those readers who aren’t familiar with Dennis yet, he’s the editor of our newest letter, Miller’s Money Forever. Unlike just about any other newsletter writer, Dennis is already in his retirement years. To take a jab at myself, I’d rather hear retirement advice from Dennis than some writer with thirty years till retirement.
Speaking of Dennis’ new letter, the latest issue of Miller’s Money Forever is coming out soon, in about ten days. Every monthly issue tackles another subject facing those in retirement or planning for it. We recently discussed the costs and benefits of annuities and reverse mortgages. In the upcoming issue we examine the pros and cons of owning real estate while in retirement. Furthermore, we’ve got a new pick in the portfolio with a great yield. Last month, we added a stable pharmaceutical with a 3.9% yield and have a few other good ones paying 5.4% and 4.8% yields. If you haven’t had a chance to do it yet, check out an issue for yourself. Now let’s get to Bud’s take on the fiscal cliff – perhaps it was a bullet dodged in the short run, but an opportunity was missed to hit the real target: runaway spending.
The Fiscal Cliff: An Opportunity Avoided
By Bud Conrad
The label “the fiscal cliff” evoked the fear that something terrible was about to happen if the previously legislated spending cuts and tax increases came into effect. From my point of view, our nation’s deficits and debt are growing at an alarming rate and need to be cut back. The reason these laws were enacted was to offer markets some hope that we would eventually work toward eliminating our serious deficits. But the prevailing opinion that such drastic decreases in our deficit would slow our economy and bring recession created the impression that this “cliff” must be avoided.
The chart below indicates the size of our federal government’s budget deficit. The blue bars reflect what would have happened if there were no legislative changes, and the harsh measures of tax increases and spending cuts occurred. The red bars reflects potential tax increases, the green spending cuts, and the purple is additional interest paid on the expanded debt as a result of bigger deficits. The cliff is seen in the rapid drop of the deficit in the first few years of the blue bars.
(Click on image to enlarge)
The result so far is that tax cuts have been extended for families making less than $450,000 per year (for individuals, it’s $400,000). Spending cuts have been delayed for two months, and the debt ceiling will have to be raised at that time. Compared to last year’s structure, the main result is a relatively modest increase of $650 billion in taxes on the rich. Spreading this over 10 years means that the budget is roughly $65 billion less per year because of the higher taxes. In essence, after all the political discussion and finger-pointing, the politicians did what I expected: they kicked the can down the road and made very little change compared to last year.
The next chart shows the same baseline blue bars with the rather large extension of Bush-era tax cuts to the lower-income households, plus some small additional spending items. Since the blue baseline includes the expectation of sequestering of spending, it is my expectation that the actual deficits could be higher when no cuts are made with some future exercise of government can-kicking. While this chart appears to have lower deficits than shown in the previous range of possible outcomes, the more accurate conclusion is that we are still facing huge deficits, and the politicians really achieved very little in managing our long-term deficit problem. When they get back to meddling, the final deficits could be a lot worse than this analysis.
After the markets closed on Friday, January 3 (when we were less likely to be watching), the Congressional Budget Office released an updated calculation on the size of the cost of the new legislation: it is now $600 billion worse than discussed. They left out the accounting for paying interest on the increased debt for the period of the calculation. I’ve included the interest-rate cost in the chart below where I estimated it as being larger in the later years of the chart. $600 billion turns out to be only a modest addition. It will turn out to be higher when rates rise.
(Click on image to enlarge)
Here are a few more details on what was decided:
• Employees will have up to $2,000 more taken out of their paychecks annually due to the expiration of the temporary payroll tax cut
• The estate tax will increase from 35% to 40%, with the first $5 million worth of property exempt from being taxed
• Capital gains and dividend tax rates will increase from 15% to 20% for higher-income earners
• Alternative Minimum Tax will be raised to affect only higher-income households
• Doctors will not see big cuts for treating Medicare patients
• Unemployed workers will receive extended benefits
It is also sad to report that Washington has been operating as business as usual, including extending many strange programs like support for NASCAR racetracks, rum import duties, and even special support for buildings in New York City near the World Trade Center. While deplorable, these items are small in the macro picture. One new emergency-spending measure that was not included is $60 billion for hurricane Sandy relief, which will surely be added to the deficit soon. The beat goes on, with the inevitable result that the deficit continues. Fiat currency systems have no built-in limit.
World markets applauded this relatively modest package, because it confirms the short-term positive results of government deficit spending. The Dow Jones Industrial Average was up 300 points the day after the crisis was “eliminated.” That means that the Federal Reserve will back up the federal government with more QE to keep the government rolling for the time being. Another result should be further downgrading of the US government debt by the rating agencies. Can you see a progression over another cliff? Downgrading raises the interest rate required by investors on US Treasuries; that increases the cost and the deficit. See the purple in the above chart? It will get worse than the CBO is letting on when rates rise.
I had been trying to ignore the massive, blanketed coverage by our media of this political circus. I knew ahead of time what the result would be from this deficit-cliff exercise. When it comes to holding the line against more government deficits, spending, and taxing, our government is dysfunctional. This event is more seminal than the results indicate: we can expect the politicians to repeat this process in a couple of months, and so on until there is a major loss of confidence in the dollar. There will be no return to fiscal responsibility. My point is simply this: we are already beyond the point of ever returning to a sensible, balanced-budget system. We may be distracted by wars, some crazy or false-flag terrorist event, or by even a natural disaster, but the conclusion is already inevitable: The US dollar will be toast; Treasuries are a dangerous investment; interest rates will start rising; and even the massive Federal Reserve manipulation supported by the banking cartels will be unable to overcome that. We will likely start in a slow fashion his year and will escalate out of control in the decade ahead.
We need to understand the implications of this recent event, and – as this small step confirms – that promises of future fixes will be complete shams. Remember when President Johnson said that there would be no repercussions from removing silver coins from our currency? A silver quarter alone is now worth around $5.50. And that’s not because silver is different; it’s because dollars are heading into the toilet. Protect yourself!
In the long run, the fiscal-cliff deal should not be celebrated as if it were a positive event. It is far from balanced, considering the much bigger government-debt problems that we face as a nation. In essence, this action was an opportunity to take real measures to curb our deficits, but the action taken has drifted us further along the path of fiscal irresponsibility.
How Can Baby Boomers Reach Their Retirement Goals?
By Dennis Miller, Editor of Money Forever
In May 2012, the Transamerica Center for Retirement Studies released its 13th annual Retirement Survey. A survey of over 3,600 workers showed that 56% plan to work after age 65, and 54% indicated they would continue working after they retire. The lead paragraph of the press release states, “American workers, shaken by the realities of the Great Recession, have adjusted their visions of retirement…”
In the detailed research report, the authors offered a new definition of “retirement readiness”:
A state in which an individual is well-prepared for retirement, should it happen as planned or unexpectedly, and can continue generating adequate income to cover living expenses throughout his/her lifetime through retirement savings and investments, employer pension benefits, government benefits, and/or continuing to work in some manner while allowing for leisure time to enjoy life.
Over the Christmas holidays I had several discussions with my baby-boomer-age children on this subject. My youngest son commented, “If I had been called for the survey, I would have responded like the majority.” He feels that his peer group is very much aware of the fact Social Security is a big question mark when they get to retirement age. He pointed out that the baby-boomer generation is different from their parents’ generation before them. Many married much later in life and did not have children until they were in their thirties.
He saw his parents accumulate the bulk of their retirement savings after the nest was empty – the time I refer to as the “sprint to the finish line.” By the time boomers’ nests are empty, they will only have a few years left to accumulate their retirement savings.
In effect, he understands that saving for retirement is a huge problem. At the same time, starting in the 50s one may be moving into peak earning years, but they are also faced with their peak family-expense years simultaneously.
His response was, “Understanding the problem is one thing. Many feel they are unable to do something about it.” Much like the generation before him, the here and now takes priority over something down the road 20 years from now. “Dad, it is really tough to try to save money with children who will soon be driving and then off to college. That costs a lot of money.” On that issue we agree.
So where do you start?
I struggled with that question for quite some time. They were looking at Dad for answers.
The first thing that came to my mind was to define saving. For many of us, we were brought up with the phrase “save up,” meaning we were saving our money so we could purchase something we wanted. One of my children’s friends was proud of the fact that both husband and wife both stopped stopping at Starbucks twice a day for coffee – they now make coffee at home and carry it in a thermos. They went on to say that the money they save equals their current boat payment. We agreed that may be one type of saving; however, it really was nothing more than a reallocation of capital.
Saving for retirement is much different. We define it as “accumulating capital for the sole purpose of creating wealth, to accomplish the goal of being able to achieve what the survey called ‘retirement readiness.'” This was capital earmarked for 20 years down the road and would be used for no other purpose. This is capital that must be accumulated above and beyond your normal living expenses.
How do we accumulate this retirement capital?
Being particularly bored on a long-distance international flight many years ago, I decided to make a list of all the material things I wanted out of life. I had just departed the United Arab Emirates and had seen some of the ostentatious wealth enjoyed by the sheiks and was thinking that it would be cool to have that kind of money. It turned out to be a two-page list. Then I figured out the cost of acquiring all the items on the list, plus the cost of maintenance. I came to one conclusion: I needed to win the big lottery annually! It was time for a dose of reality.
Understand the difference between needs versus wants. One does not have to be a miser to keep things in perspective. Baby boomers were taught to buy the biggest, most expensive homes they could afford because it was guaranteed to increase in value. For a few decades that was true, but not anymore. By the time you can really afford the McMansion, do you really need it? How many folks have we seen buy a McMansion as their children are becoming teens? A decade later, the nest is empty and maintenance, taxes, and just keeping it clean becomes a real challenge.
Do you really need all the latest computer technology, particularly when your current computer is working just fine? Do you have to have a new car the minute you pay your old one off? When your closet is so full of clothes that you have to start hanging some in the guest bedroom, it might be a clue.
My children agreed that much of what we discussed was a different way of thinking. Many in my generation realized that living within – and below – your means is a good thing when we retired; better the baby boomers get a 20-year head start.
Pay yourself first and learn to live on the rest. As I look back, the single greatest words of advice from a mentor about how to save would be that simple sentence. My wife and I would be living from month to month, but doing OK, and then a nice promotion or raise would come along. Two years later we would ask ourselves, “Where did the money go?” Once again we were living month to month, hoping for the next raise or promotion.
We finally ‘fessed up to ourselves and determined that the piano which is seldom used and the pool table that was now primarily used for folding clothes were perfect examples of our theory: “The more you make, the more you spend.” I will also readily admit that I was probably the worst culprit; if money was available, there was always something cool I could find to spend it on.
When my friend discussed the sentence with me, he really emphasized that you have to pay yourself first. By that he meant save the money where it is not easily accessible, or you will not accumulate any wealth – just more stuff. He was right.
The first step was to look for ways to save money as he suggested. For baby boomers, there are two obvious places to start. First is this: if you have a mortgage, can you make extra or larger payments? At the time, I was paid a monthly draw and then got a commission check each quarter. One thing my friend taught me was to write an extra house-payment check the minute the commission check was deposited; then we could figure out what we would do with the rest.
The second area is some sort of IRA or company retirement plan. The goal is to maximize your contribution to that plan as quickly as possible. Doing it all at once may not seem possible, but you can incrementally increase your deductions. My son told me of a friend’s wife who went back into the job market after being a stay-at-home mom. They immediately upped his contribution to his company’s 401(k) plan by 10% of her salary. They knew they could live on his salary; they had for years. In addition, she’s setting up her own IRA.
Commit yourself to being committed. I borrowed that line from a book written by Dennis Connor called The Art of Winning, in which he talked about winning the America’s Cup yacht race. It was a book I particularly enjoyed and profited from. There were times in my life where my wife and I would have to both discuss an issue and jointly make a commitment to do something different. Then it became our job to encourage and reinforce each other as we embarked on our new challenge.
Saving money for retirement is a process, not an event. Baby boomers don’t have the means to do it all at once, but they have to start somewhere. Start small, but make the commitment. As you watch your savings grow, the natural process is to find ways to make it grow faster. Many savers have told me it becomes a self-fulfilling prophecy: the more it grows, the more excited they become and the more it accelerates. One advantage of saving is the compounding effect. Many folks look forward to the day that their savings earns 10%, then 20% above and beyond what they are contributing.
Invest prudently. As you see your wealth begin to accumulate, you need to continually educate yourself about how to invest wisely. This too is a process, not an event.
A mentor once told me that I would accumulate wealth a lot quicker if I would quit trying to hit a five-run home run… there is no such thing. During the Internet boom, many of us wondered if we were the only ones not getting rich overnight. He used the baseball analogy to say that people who accumulate wealth are hitting singles and doubles regularly and consistently moving toward their goals. He was right.
In summary, for baby boomers the challenge is in front of you. You can control your attitude, your efforts, and your behavior. You have seen both boom and bust times and have learned how to survive in both environments. Savers will always find a way to save; the key is to get started now.
I hope you’ll consider following some or all of my tips above on savings. We all know that setting up a solid, reliable income stream is just as important to a comfortable retirement – and increasingly difficult in a world with 0% interest rates at the local bank. That’s why Vedran and I developed a simple 12-month investment income plan you can follow regardless of how much – or how little – you have to invest. And the best part is, if you follow the plan, you’re guaranteed investment income every month.
I’m not sure if this article will make you laugh or cry, but I’m sticking it into the Friday Funnies. The Washington Times chronicles the shock felt by many Democrats – and shared on several social-media sites – after seeing their higher payroll taxes after the fiscal-cliff deal was reached. I’ve copied a few of the choice reactions:
“What happened that my Social Security withholding’s [sic] in my paycheck just went up?” a poster wrote on the liberal site DemocraticUnderground.com. “My paycheck just went down by an amount that I don’t feel comfortable with. I guarantee this decrease is gonna’ [sic] hurt me more than the increase in income taxes will hurt those making over 400 grand. What happened?”
“My boyfriend has had a lot of expenses and is feeling squeezed right now, and having his paycheck shrink really didn’t help,” wrote “DemocratToTheEnd.”
“_Alex™” sounded bummed: “Obama I did not vote for you so you can take away a lot of money from my checks.” “Christian Dixon” seemed crestfallen: “I’m starting to regret voting for Obama.” But “Dave” got his dander up over the tax hike: “Obama is the biggest f***ing liar in the world. Why the f*** did I vote for him?”
Drive Thru Invisible Driver Prank
Correctly Forecasting Europe
What economic model correctly forecasts the outlook for the European economy: A double-dip recession, a V-shaped recovery, or something else?
The bathtub. A steep decline, then a period of stagnation, then it goes down the drain.
On Greece’s Tourism Economy
The economy of Greece is in ruins… but hasn’t it always been?
The Life of a Stock Trader
The pessimist sees the glass as half empty. The optimist sees the glass half full. The stock-market day trader just adds whiskey.
Bank Robbers and Robbers at the Bank
The good news is that, last year, the FBI reported a 20% decrease in the number of people robbing banks. The bad news is that there was a 100% increase in the number of banks robbing people.
The Banker and the Frog
A banker was walking in the park one day when she noticed a large frog sitting along the side of the pond.
As she was walking by, the frog suddenly piped up and said, ““Excuse me… but… ummm… would you happen to be a banker?”
The banker responded, “Why yes, I am a banker. Why do you ask?”
“Well,” says the frog, “I was a forecasting economist, and my forecasts didn’t turn out so well. The CEO I worked for put a spell on me and turned me into a frog. The spell can be broken if a banker will kiss me. Then I can return to being a forecasting economist.”
The banker paused for a moment, then reached out, picked up the frog, put him in her purse, and began walking along.
After a few minutes the frog piped up, “Hey, what are you doing? If you will just give me a kiss I can walk along on my own and you won’t have to carry me.”
The banker stopped, looked down at the frog, and said, “True… but you’re worth a lot more to me as a talking frog than as a forecasting economist.”
That’s it for today. David Galland should be back next week. But before I go, I have one more thing to share with you today. Upon occasion, David likes to share a cool song with our readers. Well, here’s a singer-songwriter who recently caught my ear – Slaid Cleaves. He might not be famous yet, but when you’ve got 68,000 hits on YouTube, you’re doing something right. Here’s his song Broke Down. Let me know what you think. Thank you for reading and subscribing to Casey Daily Dispatch.
Casey Senior Analyst