Rule Change

 No More Social Security "Do Over' Rule

The Social Security Administration has ended the “do-over” provision. 

The rule enabled people whose circumstances had changed -- they found a new job or inherited money -- to stop receiving their Social Security retirement benefits.  In return, they would receive higher monthly checks when they did retire.

The do-over required repaying benefits in a lump sum with no penalty or interest. In extreme cases, delaying benefits from the early retirement age of 62 to 70, the retiree’s monthly check would be twice as large counting inflation adjustments. Over a lifetime the difference could total hundreds of thousands of dollars if the retiree and spouse live into their 80s.

Only a tiny fraction of the 50 million Social Security recipients used the do-over clause. But there were   rising concerns of potential abuse of the rule. The financial press had emphasized the possibility of an “interest-free loan.” 

The rule change highlights the importance of carefully analyzing Social Security options before signing up for benefits. For nearly two-thirds of Americans, Social Security is their largest or second largest asset in retirement. Getting it right can make the difference in the financial security they enjoy in retirement.

An Investing Bargain

Try the Free Lunch 

The best bargain in investing is diversification: its free.

Most people nod agreeably when they hear that but then do the opposite. They can't resist buying a 'hot' initial public offering of a promising company that could lead to riches. Or they look up which mutual fund manager has a hot hand and climb aboard.

Unfortunately most IPOs or other well considered stocks may not tum out as well as we hope. Managers with the hot hand often find that it cools off occasionally with dreadful results.

Three years ago many experts considered AIG among the safest insurance companies in the world. In September. 2008. stockholders found out otherwise.

Meanwhile. investors who placed their faith in widely diversified mutual funds fared much better. While diversified investors got hurt in the crisis. their funds probably recovered. Those who relied on a handful of stocks were at much greater risk of never recovering. 

It comes down to the old story of the tortoise and the hare. While the hare might shoot ahead during the race. the tortoise is a much more reliable finisher. And if you want to take good care of your money. isn't that your aim?

http://www.lexingtonave.com/ 

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.