Paul Ferraresi

Will Social Security be there for you when you need it? Will the total amount be taxable income to you? Presently, up to 85% of the Social Security payment is taxable to most people.

The Social Security system is a “Ponzi scheme” system. That is, present workers have money deducted and said funds are sent immediately to the recipients. So, the trick is you need more and more workers into the system to pay the retired ones. There is NO money set aside in a “lockbox” as Al Gore promised many years ago. Congress over the years has taken excess monies in the Trust Fund and used it for other purposes, depositing an IOU into the Trust Fund.

So let me get this straight…you had Social Security tax money deducted from your paycheck to supposedly have it set aside for your retirement, but instead your money was sent to a retired person (Social Security is not set up like a pension or 401(k)). Now, since there is no money in the account for you when you retire, the Government’s system is that any payment you get will be taxed in order to pay back the IOU that Congress took out without asking your permission. If any other person or company did this scam, they would be in prison…Let’s see…Bernie Madoff, the Keating Five, Enron executives – on and on! Now, tell me again why you voted for these legislators?

Congress has known that Social Security is in a mess, but they have not had the guts to tell you. Yet, you are told every year that things are bad when you get your annual Social Security statement.

Here is a paragraph from the front page of my statement dated February 18, 2009:

“…Now, however, the Social Security system is facing serious financial problems, and action is needed soon to make sure the system will be sound when today’s younger workers are ready for retirement.

In 2017 we will begin paying more in benefits then we collect in taxes. Without changes, by 2041 the Social Security Trust Fund will be exhausted* and there will be enough money to pay only about 78 cents for each dollar of scheduled benefits”… (*These estimates are based on the intermediate assumptions from the Social Security Trustees’ Annual Report to Congress.)

Now look one year later at the February 12, 2010, statement:

“…Now, however, the Social Security system is facing serious financial problems, and action is needed soon to make sure the system will be sound when today’s younger workers are ready for retirement.
In 2016 we will begin paying more in benefits then we collect in taxes. Without changes, by 2037 the Social Security Trust Fund will be exhausted* and there will be enough money to pay only about 76 cents for each dollar of scheduled benefits”… (*These estimates are based on the intermediate assumptions from the Social Security Trustees’ Annual Report to Congress.)

In just one year, from 2009 to 2010, notice that the payout in benefits versus tax intake drops by one year; the fund become exhausted four years earlier, and the payout drops from 78 cents to 76 cents.

Social Security has been printing these reports yearly. So, some years in the future when there is no money to pay out to you, or you have reduced benefits…you can’t say…”but no one told me.”

I remember George W. Bush trying to push Congress and Americans to do something about Social Security in 2005, but everyone rejected his ideas to privatize part of the system, and 10-15 other remedies that he proposed.

As for your planning…well, I have all my clients develop their own “social security plan,” with their own money that they control.

Do not count on this system for your retirement.

How a person spends money is far more important than how he or she invests it. It is much easier to reach retirement goals by deciding how to live, rather than how to invest. Deciding what to do with the money we earn – how to spend it – is what brings about peace of mind, not how much we make or how much we have.

The late Loren Dunton, founder of the non-profit National Center for Financial Education in San Diego, wrote about his lifestyle decisions to buy new cars and spend weekends in Reno, instead of investing a hundred dollars each month in a mutual fund when he was in his late twenties. That fund would have been worth over a million dollars today.

AN EXPENSIVE CAR

Perhaps you think the difference between a full-sized car, fully-equipped, and a compact is only about $10,000. Actually, it is more like a million dollars. Consider this, borrowing $25,000 for a new car over four years will cost about $634 a month, while borrowing just $15,000 will cost only $381 a month.

If one saved the difference of $253 each month for 35 years, earning an 8% average rate of return, it would swell to $580,352. However, that is just the accumulation of the funds. What about the earnings as the funds are withdrawn during retirement?

If one were to get monthly payments of $4,479 from that sum from ages 65 to 90 (and some predictions say there may be over 250,000 people over the age of 100 in America in the 21st century), the total amount collected would be $1.3 million.

This is the magic of compound interest. However, it is not retroactive! One must save now to enjoy the benefits of compound interest in the future.

WAITING TO INVEST

For instance, if the difference in the example above were saved for only 25 years it would grow to just $240,000. Paid out at $1,857 a month, the total would be $557,000. It is amazing that the difference in saving an additional ten years is about a half million dollars. However, the monthly difference in payments of $2,622 monthly shows how today’s lifestyle decisions can be worth a million dollars in retirement years.

When should people begin saving money? Never soon enough. If ten years could mean a difference of $2,622 in retirement income each month, can you imagine what 15 or 20 additional years of savings would mean when you reach age 65?

JUST A LITTLE POSTPONEMENT

For some, no doubt saving now would be easier if there was more current income. People 17 to 23 years old may think: “Me save? Are you kidding? I am just getting my education and besides I want to have a good time. When I get out of college and start my career, I’ll start saving.”

People 24 to 30 may be tempted to think: “You don’t expect me to save now? I have only been working a few years. Right now, it is important to dress well. I’ll save later.”

From 31 to 42, the reasoning may go something like this: “How can I save now? I am married with small children. Perhaps when they are older I can think about saving.”

Those 43 to 55 wish they could save now. However, many just do not, saying they cannot because of children in college and education loans to pay.

From 56 to 65 most recognize the urgency to begin saving now. However, money is tight. It is not easy for people that age to better themselves. It is tough to break years of over-spending habits. “Maybe something will turn up,” many say.

At age 65 and older, it is too late to begin saving money. You cannot save when there is no income. Many older people live with their children and are dependent on Social Security, which is inadequate, since Social Security was only designed to be supplemental.

If the choice between cars can impact retirement income, imagine the possibilities when applied to lifestyle choices such as a home, vacations, dining out, entertainment, wardrobes, furnishings, etc.

Try to develop the art of money accumulation now. Begin by saving every day. Start today!

The segment of the American public that has been oversold and underserved can be defined as the mass affluent. This group has unique characteristics. Do you fit the profile of this group?

The mass affluent are people who:
• Save more than they spend.
• Seek to invest for the future.
• Worry about funding their children’s college education, but in most cases won’t impoverish themselves because they can cover costs through savings strategies, loans or personal income. In addition, many are not opposed to their children paying some part of their education costs.
• Worry about how they will replace their paychecks when retirement approaches, but in most cases will need to be encouraged to spend more money in retirement.
• Desire to leave a legacy to their children, not to charity.
• In retirement, seek to spend between $4,000 and $10,000 per month.
• Will have between $500,000 and $1.5 million in investable assets upon retirement.
• Would never consider calling themselves high-net-worth investors or millionaires.

Consider the following research: Russ Allen Prince and Associates just published a book entitled The Middle Class Millionaire, based on surveying middle-class Americans with investable assets between $1 and $10 million.

The mass-affluent community seeks advice on a wide array of planning issues. While they generally have investable dollars, they also want to explore how their money will affect their lives. However, many of the financial relationships they maintain are built on investment strategies, performance comparisons, technical analyses and tactical repositioning. These people feel the planning element of the relationship is missing, yet they struggle to articulate it, since their current advisor calls the existing narrow relationship financial planning.

Too many of these people visit our office with stories of how they felt like small fish in a big pond. They felt an initial sense of security aligning with a big-name firm, but when it came to having their financial planning needs addressed, the relationship would fall short.

The mass affluent seem to be stuck in a world where they want financial planning advice, yet what they buy is primarily investment advice.

When I work on retirement planning for my clients, they rarely consider their health costs in retirement. Since most employees are covered by an employer plan and are only charged a small percentage of the true costs, well, they think this will continue forever.

As of this writing, Medicare and Medicaid are available to seniors but it is not cheap and the costs to individuals continue to rise.

A recent study by the Employee Benefit Research Institute found that a 65 year old man, who retires this year, will need $68,000 to $173,000 in current savings to have a 50-50 chance of covering health premiums and out of pocket costs in retirement. If he wants a 90% chance, then, the amount of savings needed jumps to $134,000 to $378,000. The variance depends on whether a former employer subsidizes health costs in retirement.

The cost outlook is worse for women because they tend to live longer and need more health care. A 65 year old- woman who retires this year will need between $98,000 to $242,000 in savings for a 50-50 chance and $164,000 to $450,000 in savings for a 90% chance.

The study found that health care costs in retirement rose 9% for men and 16% for women over the past year.

These estimates do not include savings needed for long term care or for basic living. As I have stressed with my clients, you need to begin planning now. Remember these two items (health and long term care) are in addition to normal living expense.

Start today or you know the outcome… discipline or regret.

The summertime is a wonderful time to institute an educational system for your children. I am not talking about “text book” learning, but rather, your life experiences with money.

You have a host of examples that have accumulated over your lifetime. You can begin a simple mentoring program. The pressures and hectic activities the kids go through during the school year cease in the slower summer months.

For instance, many kids (possibly even you) that were latch-key kids, learned how to develop shopping lists, budgeting, reviewing bills, cooking, clipping coupons and how to use their allowance wisely.

I am sure you have your own stories that show simple ideas that you can teach and transfer a generation’s worth of financial knowledge. Obviously, children with financial skills and a history of being able to talk about money are better able to take on life. One method of education is an allowance. Do not tie the family chores to the money. Have the kids set up 3-4 “buckets” for their money: SAVINGS (say for college); Sharing (to contribute); Spending (for new purchases) and Spending later (for a later purchase).

Another method is to talk about bad habits of yours so they can learn. When driving to the mall with their kids, you may want to say out loud in the car: “I’m usually very tempted to buy clothes that are on sale, even if I don’t need them. Then I get home and wish I hadn’t bought them. So, I’m going to leave my wallet in the car. If I really want something, I can always come out and get my wallet.” Tactics like these can help your children understand how to value a dollar.

If the children run out of allowance money or want to buy an impulse item… let them “borrow” the money from you at a reasonable interest rate, but, they must put up some of their collateral until it is paid off… say a game or their computer. They can not use the collateral until the loan is paid off.

Oh, you say, that hurts and is “tough love.” Well, it is either discipline now or regret later.