A Cautionary Tale

Losing a Bundle

A family frittered away a fortune in ten years. This story from the New York Times shows how easy it is for anyone to make poor financial decisions that make a big impact on their life.

http://www.nytimes.com/2010/11/26/business/26fall.html?_r=1&scp=1&sq=family%27s%20fall%20from%20affluence&st=cse

Social Security Rule Change

Do-Over is Done

The Social Security Administration last week ended the “do-over” provision. The do-over rule enabled people whose circumstances had changed -- maybe they found a new job, inherited some money unexpectedly or had a change of heart --  to pay back the benefits they had received and to delay receiving additional Social Security retirement benefits.  By doing so, they would receive much higher monthly checks when they did choose to retire.

The do-over involved repayment of the benefits received in a lump sum with no penalty or interest. In return, the recipient would receive the higher monthly benefits in the future. In extreme cases, by delaying receiving benefits from the early retirement age of 62 to age 70, the retiree could get a check twice as large counting cost of living adjustments. The total difference over a lifetime could amount to hundreds of thousands of dollars if the retiree and spouse live well into their 80s or 90s.

Only a fraction of the 50 million Social Security recipients were taking advantage of the do-over clause. The change in the rule was made after concerns were raised that it could be abused. The provision started receiving publicity in the financial press as an “interest-free loan.” The intention of the provision was not to provide people with interest-free loans, and therefore the SSA acted.

Only about 500 people a year were taking advantage of the rule and most were using it to adapt to their new circumstances. There was potential for abuse by people speculating with the money but that had yet to occur. Often overlooked by the press and commentators was that after taking taxes and  the administrative hassles into account, the interest-free loan generally wouldn’t have appealed to speculators.

The rule change, while it did not affect many people, highlights the importance of carefully analyzing one’s Social Security options before signing up for benefits. For nearly two-thirds of Americans, Social Security is the largest or second biggest asset in retirement and getting it right can make the difference in whether they’ll have a comfortable retirement.

Unlike some of the proposals to make big changes in Social Security retirement benefits, this rule change doesn’t require Congressional action. It is a rule that has been published in the Federal Register and as such it is effective immediately. But there is a sixty day comment period and the Social Security Administration could amend the rule afterwards.

Generally, changes to Social Security retirement benefits have taken place over a long time. From its inception in 1935, the full retirement age was 65. It has been increased to 66 now and is climbing gradually to 67 by 2027. This adjustment has been phased in gradually since the last big reform of Social Security in 1983.

A recent proposal to increase the full retirement age to 69 would not take effect until 2075 – in other words for today’s four year olds. Early retirement today starts at age 62 but with lower benefits than one would receive at full retirement age.

A common concern is that Social Security is facing insolvency. However, the trustees of the Social Security Administration report that they will be able to meet all obligations for several decades without any changes to the current benefit structure or funding and they expect Social Security to be secure long into the future.

http://blogs.forbes.com/janetnovack/2010/12/08/social-security-administration-kills-do-over-to-boost-benefits/

"The Investment Answer"

"A Dying Banker's Last Instructions"

The New York Times Business section has a front page article today about a long-time Wall Street banker who became a missionary for investing in a disciplined way with DFA index funds. 


http://www.nytimes.com/2010/11/27/your-money/27money.html?emc=eta1

New Social Security Proposal

 Reform of Social Security Considered

The President's commission reported preliminary recommendations for reform of Social Security. They call for ensuring the solvency of Social Security for the next 75 years and could be the basis for action over the next few years. By the end of that period, the age for full retirement would be 69 and there would be other changes including adding benefits for the lowest paid workers. There would also be adjustments to the calculations for cost of living adjustments.http://www.nytimes.com/2010/11/11/us/politics/11fiscal.html?_r=1&hp

The Real Cost of Inflation

Who’s Really a Conservative Investor?

My wife’s grandmother Libby would tell us how she and her husband could have a nice dinner and see a Broadway show in the 1930s for a few dollars.

It seems comical now but we all have some sense of what inflation is. During our lifetimes, prices have generally gone up, often dramatically. Stamp prices make this especially clear. At the end of 1975, it cost ten cents to mail a letter. Now it’s 44 cents, a four-fold increase.

Meanwhile, the Dow Jones Industrial Average has climbed from 800 to 10,000, an increase of twelve times, not including dividends. Over the decades, stocks have kept up with inflation and more.

Investments often considered “safe” investments – bonds and money market instruments -- have not. People who rely exclusively on bonds and bank deposits often consider themselves conservative investors. In reality, it’s not being safe to sit back and watch their purchasing power decline over time.

Another trap, in an era of low interest rates, it’s tempting to take more risks in bonds to get higher yields. Many banks did just that in recent years and lost billions. Consider what the true risks are before you invest, not afterwards.

Women and Social Security

Maximizing Your Social Security Benefits

Women have a vested interest in learning more about Social Security and making sure they and their spouses or other family members have made the right choices.

Women on average live longer than men and often find themselves alone in the later years of retirement. Social Security benefits are designed for survivors and for those who haven’t fully participated in the work force. Often, though, when considering what to do about Social Security benefits, people analyze the impact on one spouse in isolation and don’t look at the affect on the other spouse. Also, too, a complicated marital history needs to be carefully examined.

Many women drop out of the workforce during part of the child rearing years. In some cases, returning to the paid labor force in later years can still have a big impact on their 35 year Social Security record. In other cases, they may rely on their spouses’ earnings for their benefits. 

In any case, their decisions about when to take benefits and whose record to rely on can be complicated and yield significantly different results – often amounting to hundreds of thousands of dollars. Many people take benefits too early and it can be a costly mistake.

Generating Tax-Free Income

Roth Conversion Seminar

What You Need to Know About Roth Conversions Now

Thanks to the new 2010 Roth IRA conversion rules, anyone can create a tax-free
income stream in retirement. We’ll show you how to decide if a Roth is right for
you.

Wednesday, October 6, 2010
7:30 to 9 p.m.
Hilton Garden Inn
270 Route 59 West
Nanuet, NY 10954
(845) 623-0600

Featured Speaker: Larry Luxenberg

Larry is a Chartered Financial Analyst with 28 years experience as an institutional investor and
financial consultant. Larry specializes in retirement planning for Baby Boomers and strategies for
maximizing benefits for Social Security. A frequent speaker on retirement topics, Larry previously was
a securities analyst, mutual fund manager and hedge fund manager. He founded Lexington in 2001. He
has been widely quoted in newspapers and magazines and has appeared on CNBC and other television
and radio programs.

About Lexington Avenue Capital Management:

Lexington Avenue Capital is a full service
financial advisor offering financial planning and investment management specializing in retirement and
Social Security strategies. Investment Advisory Services provided through Partnervest Advisory
Services LLC, a Registered Investment Advisor. Lexington manages portfolios relying on institutional
class funds from Dimensional Fund Advisors (DFA). DFA manages assets exclusively for institutional
investors and clients of a select group of financial advisors. As of December 31, 2009, DFA assets
totaled $165 billion and it ranked among the top 10 U.S. mutual fund companies.


For additional information contact Lexington at luxenberg@lexingtonave.com

An Attractive Vehicle

A Roth IRA and Private Stock

Roth IRAs haven’t been embraced as fully as they should. They are an extremely attractive vehicle for many Americans. Part of the problem is that the reward comes after many years and patience doesn’t rank high among American virtues. Also, Roth conversions may require writing a check to the IRS sooner rather than later.

Recent tax law changes have made Roth’s particularly attractive for upper income households. Starting in 2010, the rules for establishing Roth conversions have been eliminated (limits for regular Roths are still in place). 

We have found Roth conversion accounts are a great place to hold private stock or other long dated assets that have a chance of significant appreciation.  The drawback of this option is that an investor loses the potential tax benefit of capital losses if the investment becomes worthless. If the investment appreciates significantly, though, the tax savings can be enormous. Using a Roth for this purpose also entails some attention to detail and additional paperwork. While the law permits this use, most custodians shy away from it because of the added complexity.  Some custodians do however specialize in non-standard assets and the effort to set this up can yield great returns.

Maximizing Benefits

Taking Social Security Seriously
 

For almost two-thirds of Americans, Social Security is more than half of their income in retirement. For most of the rest, it is an important part of their retirement spending. Despite the concerns we've seen reported in the press, Social Security is on a sound financial footing. With changes that we expect to happen over the next decade, the program should be around for a long time. Each year Social Security sends out $700 billion in monthly checks.

Given its importance, Social Security should be an integral part of everyone's retirement planning. Knowing the options for receiving Social Security payments and when to sign up is often complicated, especially taking into account the different ages of spouses, marital histories and other factors. We look at 13 variables in planning strategies for Social Security payments.

Getting the strategy right can make a difference of hundreds of thousands of dollars in lifetime benefits; sometimes between a comfortable retirement and concern in later years. Benefits are calculated based on a complex formula that involves a 35-year work history. Examining that record and taking corrective action years before retirement, can be important for many people.

Investing for the Long Term

The Power of Postponement

Although recent experience has been discouraging, compounding investment returns over many years yields truly amazing numbers. Consider how money grows in an IRA for a young person who leaves the money alone until retirement.

The maximum contribution to an IRA is $5,000 a year for someone under age 50 (the money must come from earned income although parents can replace the contribution). Take a 20-year-old who earned and saved enough to put $5,000 in an IRA. Let's invest that money in a broad index that gets 10 percent returns, the average of stocks over the last century. After 50 years, the account would be worth $587,000 (this doesn't factor in inflation).

If he waits ten years, until age 30, the total at retirement would be less than half, $226,000. At 40, it would be $87,000; at 50, $34,000 and at 60, the total grows to $13,000.

These are average figures and the results could differ significantly. But this shows three things: how long you invest - whether for yourself, your children or grandchildren - is critical; the benefits of tax deferral make a huge difference; and achieving the broad stock market returns has been a great goal.

Gloom and Doom

Is it a Good Time to Invest in the Stock Market?

We never know when to buy stocks. The future is always murky. There are always plenty of things to worry about. And yet we know that over the long term --- 10 – 15 – 20 years --- stocks have almost always done very well. Over the long term, there are few other ways to keep with up with inflation and to accumulate any wealth.

The public attitude toward stocks has soured recently because stocks have not done well. Since the recent high in late April, the broad U.S. stock market is down 14 percent with much of that coming in several spectacular and scary drops. The most recent decade was the worst for the stock market in at least 100 years – worse even than during the Great Depression of the 1930s.

The world economy has suffered through a prolonged global downturn; the worst since the 1973-74 global recession and possibly since the 1930s. Recently Nobel Laureate Paul Krugman, in his column in the New York Times, predicted that we may be in the early stages of the third prolonged global Depression of the last 150 years.

Should we be depressed? Should we avoid stocks? Should we put our investment dollars under  the mattress, buy gold, party because the end is near?

Such gloom may be warranted but we like to look on the bright side. We would agree that the global economy was on the precipice in September 2008. It’s possible that we could have a serious relapse into recession but the odds favor a subdued but durable recovery.

Based on U.S. history and lessons from around the world, it’s likely that high unemployment will persist for at least several years. Even so, the U.S. recovery seems to be well established and likely to persist. The sluggish nature of the recovery, perversely, is likely to extend its duration as happened during the 1990s. But lacking a crystal ball, we cannot discount a second dip recession or some other massive economic mishap.

Why then are we so sanguine about the long-term prospects for stocks? For twelve years, the Dow Jones Industrial Average has hovered around 10,000. In inflation adjusted terms, the Dow has suffered a serious decline. By historical standards this is a long time for the stock market to stagnate. Meanwhile, Gross Domestic Product – the source of profits and ultimately the bedrock of stock valuation – has climbed by more than 60 percent.

While we don’t know when the stock market will break out of its funk, we are confident that it will eventually. Only long-term investors, those with horizons of five years or more, should normally participate in the stock market and over the long-term we see little to suggest that stocks will depart from their historic upward trend. If we are eventually to return to that trend, the very bad period that we’ve been stuck in for so long, actually augurs well for the future. 

We consider a key to participating relatively safely in any stock market uptrend is to craft a broadly diversified global portfolio, which is a mainstay or our investment approach.