Delaying when you start collecting Social Security benefits in the USA can enhance your personal financial situation. You may start collecting benefits at 62, but each year you delay collecting increases your payment by 5% to 8% (see below). If you retire before your “normal social security retirement age” (see below) your payments are reduced from the calculated monthly payment (which is based on your earnings and the number of years you paid into the social security fund). If you delay past that age you get a 8% bonus added to your monthly payment for each year you delay.
The correct decision depends on your personal financial situation and your life expectancy. The social security payment increases are based on life expectancy for the entire population but if your life expectancy is significantly different that can change what option makes sense for you. If you live a short time you won’t make up for missing payments (the time while you delayed taking payments) with the increased monthly payment amount.
The “normal social security retirement age” is set in law and depends on when you were born. If you were born prior to 1938 it is 65 and if you are born after 1959 it is 67 (in between those dates it slowly increases. Those born in 1959 will reach the normal social security retirement age of 67 in 2026.
The social security retirement age has fallen far behind demographic trends – which is why social security deductions are so large today (it used to be social security payments for the vast majority of people did not last long at all – they died fairly quickly, that is no longer the case). The way to cope with this is either delay the retirement ago or increase the deductions. The USA has primarily increased the deductions, with a tiny adjustment of the retirement age (increasing it only 2 years over several decades). We would be better off if they moved back the normal retirement age at least another 3 to 5 years (for the payment portion – given the broken health care system in the USA retaining medicare ages as they are is wise).
In the case of early retirement, a benefit is reduced 5/9 of one percent for each month (6.7% annually) before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month (5% annually).
For delaying your payments after you have reached normal social security retirement age increases payments by 8% annually (there were lower amounts earlier but for people deciding today that is the figure to use).
Lets take a quick look at a simple example:
Dylan Grice suggests the Cockroach Portfolio: 25% cash; 25% government bonds; 25% equities; and 25% gold. What we can learn from the cockroach
Government bonds protect against deflation (provided your money’s invested in solid government bonds and not trash). Equities offer capital growth and income. And gold, as we know, protects against currency depreciation, inflation, and financial collapse. It’s vitally important to maintain holdings in each, in my opinion.
The beauty of a ‘static’ allocation across these four asset classes is that it removes emotion from the investment process.
I don’t really agree with this but I think it is an interesting read. And I do agree the standard stock/bond/cash portfolio model is not good enough.
I would rather own real estate than gold. I doubt I would ever have more than 5% gold and only would suggest that if someone was really rich (so had money to put everywhere). Even then I imagine I would balance it with investments in other commodities.
One of the many problems with “stock” allocations is that doesn’t tell you enough. I think global exposure is wise (to some extent S&P 500 does this as many of those companies have huge international exposure – still I would go beyond that). Also I would be willing to take some stock in commodities type companies (oil and gas, mining, real estate, forests…) as a different bucket than “stocks” even though they are stocks.
And given the super low interest rates I see dividend paying stocks as an alternative to bonds.
The Cockroach Portfolio does suggest only government bonds (and is meant for the USA where those bonds are fairly sensible I think) but in the age of the internet many of my readers are global. It may well not make sense to have a huge portion of your portfolio in many countries bonds. And outside the USA I wouldn’t have such a large portion in USA bonds. And they don’t address the average maturity (at least in this article) – I would avoid longer maturities given the super low rates now. If rates were higher I would get some long term bonds.
These adjustments mean I don’t have as simple a suggestion as the cockroach portfolio. But I think that is sensible. There is no one portfolio that makes sense. What portfolio is wise depends on many things.
Many companies that have have plenty of cash chose to dilute stockholder equity instead of paying market rate salaries. They also do this to pay more than they would be willing to if they had to pay cash and take a direct earnings hit officially and unofficially. And they may do it to allow employees to delay paying taxes (I am not sure if this plays a part or not) – and maybe even avoid taxes using some financial games. Companies chose to give away stockholder equity under the pretense that those losses to shareholders can be hidden on financial statements (and they often are).
Thankfully SEC rules forced disclosure of such financial games in the last few years. Still “Wall Street” often promotes the earnings which pretend though employee costs that are paid with stock instead of cash are not costs to the business.
Google is cash flow positive by billions every quarter. Yet they have issued over 1% more stock each year.
Outstanding share balances in millions of shares
|Sep 30 2013||Dec 31 2012||Dec 31 2011||Dec 31 2010||Dec 31 2009|
This means Google has given away over 5.2% of a shareholder’s ownership from January 1, 2010 to September 30, 2013. If you owned 100 shares at the end of 2010 you owned .000315% of the company. At the end of the period your ownership had been diluted to .000300% of the company.
When the stock value is rising rapidly (as Google’s has) it proves to be much more costly than if the company had just paid cash in the first place. In Google’s case you would own 5% more of the company and the cash stockpile Google had would be a bit lower (Google had $56,523,000,000 in cash at the end of Sep 2013).
For companies that don’t have cash (startups) paying employees with stock options makes sense. When companies have the cash it is mainly a way to hide how much the company is giving away to executives and to provide fake earnings where only a portion of employee pay is treated as an expense and the rest is magically ignored making earnings seem higher.
Related: Apple’s Outstanding Shares Increased a Great Deal the Last Few Years, Diluting Shareholder Equity – Global Stock Market Capitalization from 2000 to 2012 – Investment Options Are Much More Confusing to Chose From Now – Google up 13% on Great Earnings Announcement (2011)
A report by the Dallas Federal Reserve Bank, Assessing the Costs and Consequences of the 2007–09 Financial Crisis and Its Aftermath, puts the costs to the average household of the great recession at $50,000 to $120,000.
The worst downturn in the United States since the 1930s was distinctive. Easy credit standards and abundant financing fueled a boom-period expansion that was followed by an epic bust with enormous negative economic spillover.
Our bottom-line estimate of the cost of the crisis, assuming output eventually returns to its pre-crisis trend path, is an output loss of $6 trillion to $14 trillion. This amounts to $50,000 to $120,000 for every U.S. household, or the equivalent of 40 to 90 percent of one year’s economic output.
They say “misguided government incentives” much of which are due to payments to politicians by too-big-to-fail institution to get exactly the government incentives they wanted. There is a small bit of the entire problem that is likely due to the desire to have homeownership levels above that which was realistic (beyond that driven by too-big-to-fail lobbyists).
“Were safer” says a recent economist. Which I guess is true in that it isn’t quite as risky as when the too-big-to-fail-banks nearly brought down the entire globally economy and required mass government bailouts that were of a different quality than all other bailouts of failed organizations in the past (not just a different quantity). The changes have been minor. The CEOs and executives that took tens and hundreds of millions out of bank treasures into their own pockets then testified they didn’t understand the organization they paid themselves tens and hundreds of a millions to “run.”
We left those organizations intact. We bailed out their executives. We allowed them to pay our politicians in order to get the politicians to allow the continued too-big-to-fail ponzie scheme to continue. The too-big-to-fail executives take the handouts from those they pay to give them the handouts and we vote in those that continue to let the too-big-to-fail executives to take millions from their companies treasuries and continue spin financial schemes that will either work out in which case they will take tens and hundreds of millions into their person bank accounts. Or they won’t in which case they will take tens of millions into their personal bank accounts while the citizens again bail out those that pay our representatives to allow this ludicrous system to continue.
Since I am living in Malaysia now, I pay attention to Malaysia’s economy. There are many reasons to be positive but the large consumer and government debt in Malaysia is a serious concern. They do have many administrators that say the right things, the question is going to be whether those statement define policy action or if they are ignored.
India and Indonesia have experienced large stock market declines and currency devaluations recently. The Malaysian Ringgit has declines 10% against the US $ in the last 3 months. Malaysia is holding up ok, but is venerable as these international loses of confidence often sweep over countries (and move from country to country).
There is a real risk that the current account could slip into a deficit for the first time since the fourth quarter of 1997, Macquarie Group Ltd. analysts said in a report this month.
“We are aware of this situation and we are aware of some of the measures to be undertaken to make sure that Malaysia remains in a surplus position,” Abdul Wahid said, without elaborating on the steps. “It is still a surplus and we are managing it.”
The surplus is narrowing on increased overseas investment and property buying, higher imports for infrastructure projects, lower palm oil and rubber export prices and the acquisition of new aircraft by Malaysian Airline System Bhd., the minister said.
The main foreign exchange earner recently seems to be selling property, that isn’t a good way to be earning foreign currency (selling assets). It is ok to do this to some extent, but relying on large inflows this way is very risky (and self defeating over the long term if it is too large). Even though palm oil and rubber exports are declining a bit, I believe they are still strong sources of foreign currency so that is good.
I think the current investing climate worldwide continues to be very uncertain. Historically I believe in the long term success of investing in successful businesses and real estate in economically vibrant areas. I think you can do fairly well investing in various sold long term businesses or mutual funds looking at things like dividend aristocrates or even the S&P 500. And investing in real estate in most areas, over the long term, is usually fine.
When markets hit extremes it is better to get out, but it is very hard to know in advance when that is. So just staying pretty much fully invested (which to me includes a safety margin of cash and very safe investments as part of a portfolio).
I really don’t know of a time more disconcerting than the last 5 years (other than during the great depression, World War II and right after World War II). Looking back it is easy to take the long term view and say post World War II was a great time for long term investors. I doubt it was so easy then (especially outside the USA).
Even at times like the oil crisis (1973-74…, stagflation…, 1986 stock market crash) I can see being confident just investing in good businesses and good real estate would work out in the long term. I am much less certain now.
I really don’t see a decent option to investing in good companies and real estate (I never really like bonds, though I understand they can have a role in a portfolio, and certainly don’t know). Normally I am perfectly comfortable with the long term soundness of such a plan and realizing there would be plenty of volatility along the way. The last few years I am much less comfortable and much more nervous (but I don’t see many decent options that don’t make me nervous).
One of the many huge worries today is the extreme financial instruments; complex securities; complex and highly leveraged financial institution (that are also too big to fail); high leverage by companies (though many many companies are one of the more sound parts of the economy – Apple, Google, Toyota, Intel…), high debt for governments, high debt for consumers, inability for regulators to understand the risks they allow too big to fail institutions to take, the disregard for risking economic calamity by those in too big to fail institutions, climate change (huge insurance risks and many other problems), decades of health care crisis in the USA…
A recent Bloomberg article examines differing analyst opinions on the Chinese banking system. It is just one of many things I find worrying. I am not certain the current state of Chinese banking is extremely dangerous to global economic investments but I am worried it may well be.
Across the globe, saving for retirement is a challenge. Longer lives and expensive health care create challenge to our natures (saving for far away needs is not easy for most of us to do – we are like the grasshopper not the ants, we play in the summer instead of saving). This varies across the globe, in Japan and China they save far more than in the USA for example.
The United States of America ranks 19th worldwide in the retirement security of its citizens, according to a new Natixis Global Retirement Index. The findings suggest that Americans will need to pick up a bigger share of their retirement costs – especially as the number of retirees grows and the government’s ability to
support them fades. The gauges how well retired citizens live in 150 nations, based on measures of health, material well-being, finances and other factors.
Top Countries for Retirees
- 1 – Norway
- 2 – Switzerland
- 3 – Luxembourg
- 6 – Finland
- 9 – Germany
- 10 – France
- 11 – Australia
- 13 – Canada
- 15 – Japan
- 19 – USA
- 20 – United Kingdom
Western European nations – backed by robust health care and retiree social programs – dominate the top of the rankings, taking the first 10 spots, including Sweden, Austria, Netherlands and Denmark. The USA finished ahead of the United Kingdom, but trailed the Czech Republic and Slovakia.
Globally, the number of people aged 65 or older is on track to triple by 2050. By that time, the ratio of the working-age population to those over 65 in the USA is expected to drop from 5-to-1 to 2.8-to-1. The USA actually does much better demographically (not aging as quickly) as other rich countries mainly due to immigration. Slowing immigration going forward would make this problem worse (and does now for countries like Japan that have very restrictive immigration policies).
The economic downturn has taken a major toll on retirement savings. According to a recent report by the U.S. Senate Committee on Health, Education, Labor and Pensions, the country is facing a retirement savings deficit of $6.6 trillion, or nearly $57,000 per household. As a result, 53% of American workers 30 and older are on a path that will leave them unprepared for retirement, up significantly from 38% in 2011.
On another blog I recently wrote about another study looking at the Best Countries to Retirement Too: Ecuador, Panama, Malaysia. The study in the case was looking not at the overall state of retirees that worked in the country (as the study discussed in this post did) but instead where expat retirees find good options (which stretch limited retirement savings along with other benefits to retirees).
See the full press release.
Related: Top Stock Market Capitalization by Country from 1990 to 2010 – Easiest Countries in Which to Operate a Businesses: Singapore, Hong Kong, New Zealand, USA – Largest Nuclear Power Generation Countries from 1985-2010 – Leading countries for Economic Freedom: Hong Kong, Singapore, New Zealand, Switzerland – Countries with the Top Manufacturing Production
Determining exactly what needs to be saved for retirement is tricky. Basically it is something that needs to be adjusted based on how things go (savings accumulated, saving rate, planned retirement date, investing returns, predicted investing returns, government policy, tax rates, etc.). The simple idea is start by saving 15% of salary by the time you are 30. Then adjust over time. If you start earlier maybe you can get by with 12%…
How Much to Save for Retirement is a very good report by the Boston College center for retirement research. They look at the percent of income replacement social security (for those in the USA) provides. This amount varies greatly depending on your income and retirement (date you start drawing social security payments).
Low earners ($20,000) that retire at 65 have 49% of income replaced by social security. Waiting only 2 years, to 67, the replacement amount increases to 55%. For medium earners ($50,000) 36% and 41% of income is replaced. And for high earners ($90,000) 30% an 34%.
Starting savings early make a huge difference. Starting retirement savings at age 25 requires about 1/3 the percentage of income be saved as starting at 45. So you can save for example 7% from age 25 to 70 or 18% from age 45 to 70. Retiring at 62 versus 70 also carries a cost of about 3 times as great savings required each year. So retiring at 62 would require an impossible 65% if you didn’t start saving until 45. But these numbers are affected by many things (the higher your income the less social security helps so the higher percentages you need to save and many other factors play a role).
Starting to save early is a huge key. Delaying retirement makes a big difference but it is not nearly as much in your control. You can plan on doing that but need to understand that you cannot assume you will get to set the date (either because finding a job you can do and pays what you wish is not easy or you are not healthy enough to work full time).
If you don’t have social security (those outside the USA – some countries have their versions but some don’t offer anything) you need to save more. A good strategy is to start saving for retirement in your twenties. As you get raises increase your percentage. So if you started at 6% (maybe 4% from you and a 2% match, but in any event 6% total) each time you get a raise increase your percentage 100 basis points (1 percentage point).
If you started at 27 at 6% and got a raise each year for 9 years you would then be at 15% by age 36. Then you could start looking at how you were going and make some guesstimates about the future. Maybe you could stabilize at 15% or maybe you could keep increasing the amount. If you can save more early (start at 8% or increase by 150 or 200% basis points a year) that is even better. Building up savings early provides a cushion for coping with negative shocks (being unemployed for a year, losing your job and having to take a new job earning 25% less, very bad decade of investing returns, etc.).
Investing wisely makes a big difference also. The key for retirement savings is safety first, especially as you move closer to retirement. But you need to think of investment safety as an overall portfolio. The safest portfolio is well balanced not a portfolio consisting of just an investment people think of as safe by itself.
Related: Retirement Planning, Investing Asset Considerations – Saving for Retirement Must Be a Personal Finance Priority – Investment Risk Matters Most as Part of a Portfolio, Rather than in Isolation
No, it is not time to sell Apple, if your portfolio is not already too heavily overweighted in Apple it would make sense to buy. There is about as much wrong with Apple today as Toyota 3 years ago, which means essentially nothing is wrong. Yes, neither company is perfect. Maybe people were carried away with how awesome Apple was, but I don’t think the stock price every was.
Apple was a great buy at $700. Of course in the same situation buying it at $500 would be even better. I think it is a great buy at $500 today. I think Apple is going to move ahead just as Toyota has the last few years. The people jumping around at every single rumor of a data point are going beyond reacting to each data point they are reacting to rumors of data points.
I could be wrong. If Apple’s earnings cave over the next 5 years people can claim they say early signals. After a long time watching investors react to data and rumors and speculation I think they are just being foolish. Even if Apple is deteriorating, there needs to be a much better explanation for why investors should believe that than I have seen.
The best reason to question Apple is how long of a run they are on. Figuring the “law” of convergence in mean should make investors wary. That isn’t really true but that idea – that you just don’t stay on such a run (especially when you are huge and the have the largest market capitalization in the world).
But that is more just saying Toyota can’t keep being awesome. There is some sense that most likely they will stumble. But the problem is it is more likely about every other company will stumble first. The winners keep winning more than they start failing. But they also do often start failing. 100 years from now there is a decent chance Apple doesn’t exist. But there is a greater change most of the other companies you can invest in won’t. And there is a greater chance most other investments will do worse than Apple. That is my guess. Other investors get to place their money where there mouth is and we will see in 5 and 10 years how things stand.
I’ll stick with Apple and Toyota and Google and Danaher and Intel and….
I am glad we have a “fiscal cliff” to finally get some reduction in the future taxes both parties have been piling on with abandon the last few decades. When you have enormous spending beyond your income, as the USA has had the last few decades, cutting current taxes is just raising taxes on your grandchildren to pay for your spending. Shifting taxes to your grand children is not cutting taxes it is shifting them to future generations.
If you want to really cut taxes you must cut taxes and not pass on paying for your cuts to your kids. It seems pretty obvious those that advocating cutting current taxes the last few decades were only interested in living beyond their means today and foisting the responsibility to pay to their grandchildren. That is despicable behavior.
The fiscal cliff is an opportunity to return to a budget that has the generation doing the spending paying the taxes (last seen in the Clinton administration). The fiscal cliff outcome is going to be far from perfect. But the result will be a much more honorable outcome than foisting ever increasing taxes on future generations to pay for our current spending.
Obviously, if you reducing how much you are adding to your credit card balance each month and start paying your bills that means you don’t get to live off your future earnings today. So you will suffer today compared to continuing to tax the future to pay for your spending.
I hope the compromise results in spending cuts and an elimination of the Bush generation shifting taxes (cutting taxes on the the current wealthy without spending cuts – so just taxing the future to pay for tax cuts today). It is unlikely the fiscal cliff results in us actually paying for our spending (the best possible result is not an elimination of adding to the taxes future generations must pay but just a reduction in the level of tax increases we are imposing on the future every year).
Lots of little things should be done to save a few billion (maybe it could add up to $50 billion a year if we are very lucky). But the serious spending cuts have to come from reductions in military spending, reducing waste in the health care system and making social security more actuarially sensible (social security is not part of the fiscal cliff discussions though). Reducing tax breaks also has to happen, unless absolutely huge spending cuts can be found which is not at all likely.