Paul Ferraresi

Here are a few simple strategies to build your wealth:

• SPEND LESS THAN YOU EARN. You can’t make your money grow if you spend it all.
• LIST YOUR FINANCIAL PRIORITIES. Put your retirement at the top of the list.
• ESTABLISH AN EMERGENCY FUND. Low-risk, accessible cash will lessen the temptation to dip into retirement savings in an emergency.
• MAKE SAVINGS A HABIT. Even a little can add up, thanks to the power of compounding.
• PAY YOURSELF FIRST. Stock away at least 20% of your pay. Have the money automatically deposited so you’ll never miss it.
• CUT EXPENSES. It’s one of the fastest and best ways to make money. Clip coupons, buy second-hand on eBay, eat out less often. Funnel this “found money” into your investments.
• CREATE INCOME. Take a second job, rent out a room or downsize and invest the profits.
• INVEST REGULARLY. Use time and timing to get into the marketplace. If you don’t know how to invest, find out how! Go through training, read books, ask an expert and then apply your knowledge. Remember: Don’t work for money. Let money work for you.
• CREATE LONG-TERM WEALTH. Money in a savings account is safe, but inflation will erode its value. Stocks provide long-term growth.
• DIVERSIFY. The best way to balance your risk is with a portfolio that spreads your money out over a variety of financial instruments.
• REVIEW. Revisit your spending plan, savings and goals monthly to be sure you are on track.
• AVOID BAD DEBT. Don’t borrow for things such as vacations, clothing or furniture. Borrowing to remodel a home, on the other hand, may be good debt that can provide long-term financial benefits.
• BEWARE OF HIGH-INTEREST LOANS. Look at the total cost of repaying the principal and interest, not just the low monthly payment.
• GET OUT OF BAD DEBT. Otherwise, finance fees eat up principal that could be earning interest.
• HANDLE CREDIT CARDS WISELY. Keep only one or two cards. Transfer high-interest balances to zero-interest cards.
• PLAN TO RETIRE LATER. If you’re doing what you love, work is fun! You can work longer, work part-time or become a consultant.
• DELAY TAKING SOCIAL SECURITY. Benefits will be higher when you start.

One of the greatest frustrations I experience is trying to get clients to accept that they will live a long time after retirement.

In the past 25 years, medical breakthroughs, such as stents, have extended people’s lives without debilitating surgery. Weekly, you see in the media celebrities or the “average person” living well into their 100’s. In fact, the fastest growing segment of Americans are those living past age 100.

So how do you plan financially for this event? You work from age 25 to age 65…a mere 40 years to accumulate enough money to live 35 or 40 years after retirement. Funny, if you save 10% of your gross income in your working years, and, assuming no rate of return (common today in bank accounts) for the 40 years of work…you will have, at 65, four years’ worth of monies after retirement. If you save 25% of your gross, with the same factors, you will have 10 years of living expenses available at retirement. Both scenarios assume no inflation.

The authors of a new study, The Problem With Living Too Long, from the Institutional Retirement Income Council, report half of all females who are aged 65 today will live to almost 88. Thus, if you, as a 65-year-old female, guess you will live to be 88, then, that gives you only a 50/50 chance of not outliving your income. Statistically, a quarter of those women will live five years past age 88 and 10% will live to age 98. So, if you want a 90% certainty of how long you will live…better use age 98.

You are playing with loaded dice if you say, well, I’ll be dead at 85 and so I only need to plan financially until then. How will you pay your bills when you live longer? Are you going to call on your kids to fund your lifestyle? (They probably will be retired themselves.)

The better choice is for people to work longer, save more, or live on less now. This funding requirement should not be a surprise to anyone. You have had your entire lifetime to plan for your retirement.

Sit down with a professional advisor…this week, and have them map out at least a “rough and dirty” template as to the path you are on. I have done scenarios over the years where people have only a projected 5-30% of what they will need in retirement. They are in shock since they never thought about it. (Must be because they are too concerned over who will win on Dancing With the Stars.)

Start now…a small change can produce tremendous results.

The chart below will give you an idea of what you can expect:

THE LIFE EXPECTANCY GAMBLE
10% of all 65-year-olds will live into their 90s

65-year-old males:

50% will live to 85.99 — 25% will live to 90.78 — 10% will live to 94.74

65-year-old females:

50% will live to 87.97 — 25% will live to 93.17 — 10% will live to 97.64

65-year-old joint life expectancy*:

50% will live to 91.07 — 25% will live to 95.07 — 10% will live to 98.80

Source: Actuarial Consultants Inc. Data is based on 2013 mortality rates for people who do not hold annuities using IRS projections based on July 2000 tables from the Society of Actuaries.
*At least one spouse will live to the age indicated.

You can deal with this issue like the “ant or the grasshopper.”

Ah yes…discipline or regret.

The masterminds that conceived this plan were brilliant. The strategies used were simple…prey upon your fear and greed. You, as the “investor”, continue to be given fraudulent explanations, and, unfortunately, continue to invest.

Here is how it works. You invest a small amount of money over time. Eventually, you can start withdrawing the money. You will get your full investment back, in anywhere from 14 months to 60 months. The money will come back to you tax-free for as long as you live. Once you die, your spouse will get about one half of your payments until they die.

Sound too good to be true? Sounds like a Bernie Madoff pitch, or an overseas scam, or a Ponzi scheme???

Oh, there are a few other factors…you must make this investment for every day you work, it is dependent on new investors coming in every year, the plan sponsor has no liability if things do not work out, the plan sponsor can add new beneficiaries at any time, the plan sponsor can change the rules, including raising your required investment and making a portion of the benefit payment taxable. Most importantly, you cannot get out of the required investment. Upon investigation, you will find there is no money in the plan. They promised you they would put it in a “lock box”. The administrators have taken all the money out and spent it without your permission. There is only an “IOU” in the box that your neighbors, you, your children and grandchildren must pay back.

Are you getting interested, or, ready to walk away? Is this investment something you would place your hard earned money into?

Well, this “investment” you make is our Social Security system. If any Wall Street money manager offered this deal, they would be cellmates with Bernie Madoff. Yet, your representatives in Washington have been doing this to you for almost 70 years. Ah, yes….the failure of government programs. Any private pension plan that was set up this way would have the administrators put away for life.

The purpose of my essay is to have you plan now for the following:

(1) If you are 55 or older, you probably will get your “promised” benefits if you live a normal life expectancy. Expect 100%, not 85%, of the benefits to be fully taxable in the future.

(2) Social Security will be “means” tested. Thus, those at or somewhat above the poverty level, most likely, will get their benefits. Anyone above the “means” test number will not get the benefits, or, be excessively taxed, including penalties.

(3) For those under 55, do not count on Social Security as part of your retirement. Take aggressive action now to build your own retirement funding. Consider a non-qualified plan that can provide tax-free benefits, in the future, for you.

(4) Try to set up a “side business” now, even as you work full-time, so you can maximize amounts set aside for retirement to replace your “expected” social security benefits. Remember, you work from age 25 to 65 to accumulate enough money to live from age 65 to 105.

(5) Keep in mind if you save 10% of your gross income from age 25 to age 65, and assuming a 0% rate of return, you will have enough capital to live for four (4) years after you retire. At a 25% savings rate, (same 0% return), you will have 10 years of retirement capital. (Don’t laugh at 0% return. Most people are saving for retirement accounts in money market accounts, CD’s, and T bills. They are paying about ½ of 1% interest, less taxes and inflation….so your return is about negative 3% with a depreciating dollar.)

See your advisor today to get a plan in place.

Discipline or Regret!

“The grass may look greener on the other side but it still has to be mowed.”

Many times in this column I have explained that inflation has been bubbling for years but the media masks the truth. In addition, the government controls the formula that calculates inflation. That is, the monthly/annual “core” inflation rate does not include food, energy and housing. Who doesn’t eat food, use energy or live in some type of housing? Ridiculous. The government reports “tame inflation” of 3% or less using the core rate. Remember, the core rate is used to determine increases to social security recipients, for Medicare/Medicaid, pensions and union contracts. (Social Security recipients have just gone through the second straight year with no increase since the “core” rate was lower than the required threshold).

Some research from the King Report has shown the price increases in product/services from 2000 through 2010. Look at what the prices have done over the past 10 years:

Homeowners Insurance +108%
Real Estate Taxes +77%
One gallon of heating oil +150%
Average electricity bill +50%
Average gallon of gas +100%
Monthly Medicare Part B premiums +143%
Potatoes +67%
Eggs +93%
White Bread +50%

Washington pundits and the media continue to tell us there is no inflation. Hmm!

Make sure your investment portfolio is growing to provide for taxes and inflation. Your money in the bank account or money market account is earning ½% of 1%, less 25% taxes yields a little more than 1/3 of 1%. Now subtract 3% core inflation and you can see you are losing ground. Sure, the money is “safe”, but, you are going backwards.

To provide a visual for you, picture yourself rowing upstream at ½ mile per hour, (1/2 of 1% return), and not counting taxes, the river is flowing against you at 3 miles per hour (3% inflation). Although you are “safe” in the boat, you are losing ground and purchasing power.

Get it?

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.