No 2010 COLA Increase in Social Security - Is “Stimulus” Payment an End Run on the System

October 15, 2009. It’s official, there will be no social security COLA (Cost of Living Allowance) increase in 2010, the first time this has happened since 1975. The reason is simple, this year there was no increase in the Consumer Price Index (CPI-W) from the third quarter of 2008 to the third quarter of 2009, hence no need for a payment.

A press release from the Social Security Administration is advocating passage of a special 2nd round stimulus package for seniors, veterans, and the disabled (the same people who would have received a COLA). The amount of the payment in the Economic Recovery Act
Payment for 2010 would be $250, about a 2% increase to the average social security recipient. The press release has one of the great non-sequiturs of the season as its reason for recommending passage of the proposal: “Last year when consumer prices spiked, largely as a result of higher gas prices, beneficiaries received a 5.8 percent COLA, the largest increase since 1982. This year, in light of the human need, we need to support President Obama’s call for us to make another $250 recovery payment for 57 million Americans.”

So let’s see, prices went up in 2008 so we needed an increase, but in 2009 prices went down but the “human need” went up. Conservative critics are citing the special stimulus package as an end-run on social security system’s rules, building a slippery slope where annual increases come no matter what happens to prices. In our mind the criticism seems valid, particularly since the only recipients of this stimulus program would be social security recipients. If we really need another round of stimulus, let’s give it to everyone and preserve the integrity of the social security system rules.

What do you think?
Sound off in our Comments section below.

For further reference:
When to Start Taking Social Security
No Social Security increase planned for 2010

All States Not Equal When It Comes to Tax-Friendly Retirements

With many of us baby boomers increasingly worried about their finances in retirement, reducing what we pay in taxes is an attractive option. It’s one option that might not impact our lifestyles in any way. So, if you already live in a high tax state, voting with your feet to escape some of those taxes might be a good idea.

The principal state taxes you typically face in retirement are income, property, and sales taxes. Gasoline, cigarette, and estate taxes certainly exist, but they probably won’t be deal breakers for most people.

The various states that have income taxes differ considerably on how they treat social security benefits and pensions. Your particular situation could have a significant impact on the taxes you pay. For example, if you will get a large military pension you might want to consider a state that considers that income exempt. Some states tax social security (or part of it), and some do not. A few states only tax out of state pensions, while others give exemptions for some government pensions. Many states have a wide variety of exemptions for veterans, people over 65, etc. In some cases those could be big factors. The trick is to research the states you are considering, and know the tax situation before you move. For more specifics about which states tax what kinds of benefits, see Most Tax-Friendly States for Retirement.

Property tax is often the largest tax that retirees pay, so that factor is definitely worth considering in deciding where to live. States like Florida, California, and Arizona have programs that limit how much the appraised value of full time residents’ home can go up, which can be a very important protection. On the downside, these states are now having problems raising enough revenue, so who knows what might happen in their future fiscal troubles.

Income Taxes
These states do not have an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Tennessee and New Hampshire only tax certain amounts of dividend and interest income.

Sales Taxes
Alaska, Delaware, Montana, New Hampshire, and Oregon do not have any sales taxes. Note that in the states that do have sales taxes, local municipalities often have the right (and do) charge additional city sales tax.

State Tax Burden
The Tax Foundation reports on and ranks each state for its tax burden. You can find the entire list at the Tax Foundation Research.

Not the Only Consideration
A word of caution. Taxes should not be the tail that wags the dog. Being close to family should be a lot more important, as is the type of community and environment you want to live in. You can always change other factors to make ends meet: you can take a part-time job, move to a smaller or less fancy house, or move to a lower cost state.

More Help
Kiplingers has a terrific article on tax-friendly states at Yahoo Finance, along with many other factors you should consider about state taxes and your decision to move.
Topretirements has individual state guides to retirement, each of which has a detailed section on retirement tax factors for that state.
Barron’s article, “Fleeing the Tax Man“, is a great read that explains the flight from high to low tax states.

Debate Over How Much You Can Safely Spend in Retirement Simmers On

For many baby boomers one of the questions we have always loved to debate is about to change. The old question was - how much do we need to accumulate in savings to afford a comfortable retirement? The old question had a corollary which is also changin - when will we be able to retire and start spending?

These questions will change direction because retirement is either here for a lot of us boomers, or it will be here within just a few years. We will have saved and invested what we did, and that is what we have to work with. for many of us, our traditional careers are over. So now the question has mutated into - how much can we safely spend each year and not run out before we die in 30 years or so from now. The decision is a momentous one, because if we miscalculate we might end up working as a greeter at Walmart to make ends meet. Or almost as bad, we will reach the age when we can no longer do anything with a pile of money, but regret that we never took the trips or had the fun we actually could have afforded.

According to several financial analysts inteviewed in the New York Times, (How Retirees Can Spend Enough, But Not Too Much) the question of how much we can take of our 401ks, IRAs, and other retirement savings isn’t that clearcut. And it has even gotten a lot murkier since the recent stock market crash. Will our portfolios ever get back to where they were? Will future returns be assured as they have been in the past?

A rule of thumb used to be that 4% or 4.5% of the principal a year was the right number. So say we had savings of $200,000, that means that we could withdraw $9000 a year and add that to our Social Security and any other pension income. Using that formula we would be able to keep up with inflation, so every year we could safely give ourselves a 4 or 4.5% raise.

Now some experts are questioning that rule of thumb. Some suggest that the right withdrawal rate might be 5 or even 6%. As you might expect, after the experience of this down market that type of thinking has given a lot of people the willies.

Michael E. Kitces is a financial planner with Pinnacle Advisory Group and Jonathan Guyton is with Cornerstone Wealth Advisors in Edina, MN. They have different approaches to setting a withdrawal figure, although they share one principle: flexibility might be the key to finding the right number. If the stock market is overvalued, it might be a good year to take a little extra out of your retirement fund - maybe even 5.5 - 6.5%. The thinking is the market is about to head down anyway, might as well spend it as lose it. Similarly, if the market is severely beaten down (sound familiar?), then we might be looking at a good belt-tightening year. Save the capital now and it will probably come back. Guyton has another idea we like. Carve out a separate discretionary fund for special trips, projects, or down years. His idea gives us some fun money, we just have to realize that once it is gone it is gone.

You can find more about this question at the New York Times - www.nytimes/yourmoney
Also Robert Shiller’s data used in this story

For further reference:
Article: A Surprising Answer: When You Should Start Taking Social Security
Forum Discussion: When to Start Social Security (including buybacks)

Clunkers for Cash Program Gets Underway

Update - July 31: As of today the Cash for Clunkers Program has been so unexpectedly successful that 250,000 cars have been sold. Result: the program has run out of money, and the New York Times reports that the Transportation Department told dealers to stop taking new applications. But today (Friday) the House added $2 billion to the original $1 billion level. The Senate has not yet voted on it, but government officials said the program will continue running at least through this weekend.

July 27 - The program to take gas-guzzling cars off the road while stimulating new car purchases was so successful in Europe that it is now in place in the good old U.S. The law was signed by President Obama in late June and went into effect on July 27, after the resulting regulations were published in the Federal Register on July 24. Dubbed CARS by the government, The CAR Allowance Rebate System is a $1 billion government program that helps consumers buy or lease a more environmentally-friendly vehicle from a participating dealer when they trade in a less fuel-efficient car or truck. The program is designed to energize the economy; boost auto sales and put safer, cleaner and more fuel-efficient vehicles on the nation’s roadways.

Consumers will be able to take advantage of this program and receive a $3,500 or $4,500 discount from the car dealer when they trade in their old vehicle and purchase or lease a new one. Consumers you do not need to register anywhere or at anytime for this program. However, to find out eligibility requirements click here.

If you are a retiree or have a family member considering taking advantage of the program, here is a link to the government’s FAQs about the program.   Or call CARS Hotline at (866)-CAR-7891 (note, the hotline was overwhelmed when we called it today).

Pop Quiz: One question we can’t find the answer to - if you trade in an eligible truck but purchase a more efficient car in its place, are you eligible? If anyone knows the answer, please post in the Comments below.

Rethinking Retirement in a Recession

In the last year mentioning the word “retirement” often generates a pause or a snigger; it might even seem like you’ve made a sick joke. As in, “What retirement? My 401k has blown up, my job gone, and along with that my retirement dreams.”

True enough, millions upon millions of baby boomers are asking hard questions about their retirements.  Sadly for many of us, the new reality is here - we won’t have enough to retire on comfortably. For others the day of reckoning is all too close; they never saved enough. Even if there hadn’t been a global economic meltdown, they were never going to retire in the lifestyle to which they had become accustomed.

A July 4 article in the NY Times, “How to Make the Best of a Delayed Retirement“, offered interesting answers to some commonly asked retirement questions.  CBS MarketWatch has a slew of articles like “Can You Afford to Retire-Ever” and even a short video on “How Much Money Do You Need“.  Another article on MSN Money offers additional advice about Delaying Retirement. The good news from all these is that there are plenty of positive ways to take the new retirement realities in stride - through planning, imagination, and some hard work.    Here are some of the key points.

Eileen Zimmerman, the author of the article in the Times,  suggests setting  aside your fixed ideas about retirement. Perhaps your portfolio won’t allow you to completely retire. But you probably can find a flexible workstyle that will allow you the best of both worlds. You might be able to work from home on a flexible schedule, or even job-share. You could try a new career or position - maybe without the corner office of manager title or as much money - but it will pay the bills and give you something to do.

That brings up another point. Depression and general malaise all too often occurs when a person glued to their job suddenly finds herself without purpose or plans. Lynn Berger, a career coach and licensed mental health counselor in Manhattan and author of “The Savvy Part-Time Professional” was quoted on this point in the Times article:  “Many people experience a rapid decline in physical and mental health soon after retirement, due to lack of activity and purpose. ” Her point is that a gradual transition to retirement can be a good thing. It might also force you to do something that far too few retirees do before they retire - and that is plan out their objectives and dreams for retirement. In our experience humans aren’t built to do nothing, the happiest people among us tend to be those with a purpose.

The Times article also answers other interesting questions, including how to discuss your retirement (or non-retirement) plans with your boss. Hint: Do it and avoid surprises.

What are your retirement plans? Are you going to retire cold-turkey (or did you already)? Or will you gradually transition to retirement or  a new job? Share your experiences using the Comments section below.

For Further Reference:
How Much Can I Earn and Still Receive Social Security Benefits

No Social Security Increase in 2010

Update: October 15, 2010 - It’s official - no social security increase in 2010 - $250 payment pushed.
It will be the first time in 3 decades, but there will be no cost-of-living increase for social security recipients in 2010. Following a formula set by law to counter the effects of inflation, beneficiaries can usually count on getting a “raise” every year. Thanks to the economic slowdown, inflation is not a problem at the moment, hence the formula indicates no increase next year.

According to the AARP, beneficiaries have received automatic cost-of-living every year since 1975. The increase in 2009 was 5.8%. Controlling inflation should be a good thing for retirees because it means the prices they pay for goods and services are not increasing.

A “no increase” result has implications for Medicare beneficiaries who payPart B premiums.   Approximately 3/4 of recipients are protected from increases in their Part B premiums: their premiums cannot go up more than the dollar amount of their Social Security increase. The remainder of recipients can probably expect an increase in their premium from $96.40 to $119 in 2010.  Premiums for drug coverage could also go up.

About one in four (or about 11 million) beneficiaries are not protected from a Part B increase because they:

• do not have Part B premiums withheld from their Social Security income, or

• have a higher income and therefore pay a higher Part B premium, or

• recently enrolled for Part B.

For further reference:
AARP article on Part B Premiums

Congressional Budget Office blog on Zero Increases

When Should I Start Taking Social Security

Under Water Boomers Face a Dilemma - Rent or Sell

Oh baby boomers, what a mess we’re in now. Not only have our investment portfolios been hammered, but our real estate investments are hurting too. A recent study from the Council for Economic Research points out that both add up to grim news for baby boomers - particularly for those who planned on moving to start their retirement.

“The collapse of the housing bubble, which led to the current recession, has already destroyed almost $6 trillion dollars in housing wealth for homeowners,” said report co-author Dean Baker. “This reality is compounded by the recent collapse of the stock market. The result is that many baby boomers will only have Social Security and Medicare to rely on in their retirement.”

Underwater
The Center’s report found that 15% of homeowners aged 55 to 64 are “underwater” - that is they owe more on a mortgage than the house is worth. The situation is even worse for those 45 -54, where 30% have negative home equity. Boomers in certain parts of the country are more likely to be underwater than in others. South Florida, Arizona, and Nevada residents are most likely to have negative equity. As real estate woes spread across the country, however, negative equity will affect more and more people in the soon-to-retire population.

The Center also reported that overall net financial worth for the 45 -54 year old boomer group has has also declined - 45% over the last 5 years. Their median net worth declined from $172,400 to $94,200 in the period. Whereas 5 years ago this group had investment assets that could generate $14,000 in annual income, now the figure is only $8,000. The result is that many baby boomer households will enter retirement with little wealth beyond Social Security.

For Those Who Want to Move Now
The crisis has particular meaning for baby boomers who are thinking about moving in retirement. To buy retirement property now they face a tough choice - should they sell their homes now and tap their investment portfolio to fund the shortfall, or should they wait for prices to recover?

Richard E. Austin, a financial advisor with Lincoln Financial Advisors, said in the New York Times in March that for people who need to sell who expected “real estate prices to decline for years…. selling now could shield them from deeper losses.” Austin went on to say that “a better option” could be renting out the house rather than selling it, and waiting for real estate prices to rebound.

Topretirements tends to agree with Mr. Austin that renting is probably the better option. It carries the risk that real estate prices will not recover before you need to sell. But it also has the possibility that you could recoup at least the value of your mortgage in the future. In the meantime you could rent out your house (assuming that the rental market in your area is viable), while you in turn could neutralize some of your risk and conserve capital by renting in your new community.

What’s Your Opinion? Use the Comments feature below to share your ideas.

Taking the Mystery Out of When to Start Taking Social Security

Ask any 4 people when they intend to start taking social security benefits and you might get 4 different answers. Ditto with how long should you keep working and how that work will impact your social security benefits (short answer: working longer is usually a good thing for your benefits). Even when to start with Medicare is not well understood (and this is the easiest one to answer: everyone should sign up 3 months before their 65th birthday).

The Social Security Administration is actually doing a very good job of helping to educate the public and remove the mystery out of the issue. As they point out, it is NOT a “one size fits all” kind of question - everyone’s situation is a bit different. To that end the SSA has come out with a short but informative podcast that will be an excellent overview for most people. You can download the podcast and other materials using this link at the Social Security Administration

Topretirements has also developed an extensive article, “A Surprising Answer to When to Start Taking Social Security Benefits“. Our article has some good background and a raft of excellent links for further reference.

Short Answer:
It all Depends!

Give us your opinion either here in our Comments section (below), or in the Topretirements Forum Topic: When to Start Taking Benefits

Will Your Retirement Weather the Economic Storm?

—By now you have probably received your November 401k statements, and maybe you even had the courage to open them. If you haven’t lost 40% of your portfolio since last year, cheer up - you’re a winner!
This article will explore strategies for how you can weather the depressing economic turmoil that has engulfed us in late 2008. We would love to hear what you are doing and thinking about it too. Just go to our Forum and join the thread on “Retirement and the Economic Mess“.

There is no doubt that the economic mess is negatively affecting most retirements. Not only have trillions been shaved off of our financial portfolios, but the same statement applies to our respective real estate equity. People who have already retired are wondering how they are going to survive with diminished resources. Prospective near term retirees are questioning if they should delay retirement. And younger folks wonder if they ever will be able to retire.

Here are some possible strategies to consider:
- Don’t panic and sell. We like the advice we have heard elsewhere – you haven’t lost it until you sell it
- Keep investing. If you are working and contributing to your 401k or the like, keep putting money into equities. You might lose some in the short term, but if you believe in the American economy, today’s low prices will put you ahead some day. At least that’s what we think Warren Buffett would say
- Think about working longer. The more money you have in your investment portfolio, the more worry-free your retirement will be
- Get a part-time job. If you are retired or must retire soon, include plans for a part-time job. Not only will that give you a financial cushion, but it will keep you busy too
- Move to one location instead of two. Many retirees were hoping to be snowbirds – having one home in a warm location for winter and another for the warm months. If your resources don’t permit that, consider the Carolinas or Georgia where you might get the best of both
- Downsize to a more manageable home. Right now might not be the time to sell anything, but think about what makes sense for you long-term. In our opinion too many people hang on to their big suburban homes for too long – all those extra expenses (taxes, heat and A/C, maintenance) could be going toward something fun
- Get creative. So your first plan for retirement didn’t work out, or is on hold. Get ready with plan B!
- Look for bargains. If you will be able to afford living in a retirement community and you have the cash, think about buying now. In some sunbelt states 50% of the houses for sale are in foreclosure. The banks owning them aren’t sentimental, they want a sale. Advice we read recently on foreclosure purchases is to: focus on highest quality properties; look for languishing properties; make a good offer; offer to close quickly

Finding the Safest Investments in an Uncertain Market

Understatement: People nearing retirement have had good reason to be concerned in the last few weeks.

Our friend who likes to check on his stocks everyday has suddenly developed other interests. And who wouldn’t blame him. It’s no fund getting whipsawed - down in the depths one day, brought back to euphoria the next - only to have all hope snuffed out the following morning. Better to take up macrame.

Which leads so many folks to wondering what is a safe investment these days. Precious metals were red hot last week - for a while. Ditto for commodities. Stocks - only the bravest went there. Even staid money market funds, last refuge for the faint of heart, took big hits with net outflows of $173 billion for the week. The Primary Fund “broke the buck” - going below a net asset value of $1. Fortunately the Treasury Department announced a new insurance program like the FDIC for money market funds, helping bring stability back to that market.

All this uncertainty leads one to the question - is real estate a good investment now? Not being liquid, it is only for those with a long term perspective. Only time will tell when the bottom hits, although a few experts think it will come soon. We were cheered by one blogger’s report from Las Vegas that investors are cherry-picking foreclosed properties, snapping up the most desirable ones and bringing some measure of stability to the chaotic market there. If true, more of that would be a good thing to see!