The Social Security Administration has eliminated the “file and suspend” benefit (also called the social security do-over) that we previously write about in March 2009.  The do-over benefits had allowed retirees to make money by retiring early, starting benefits at the earliest age, age 62.  Then, upon reaching full retirement age (around age 66, depending on birth date),  withdrawing from the system by repaying the benefits received without interest.  Then they would re-file and receive the full social security benefit based on their current age (e.g. age 66). There was no reason for the Social Security Administration to ever allow this benefit amounting to an interest free loan and manipulation of the system.  The Social Security Administration finally figured this out.

Immediately, if a retiree applies to become a recipient of Social Security benefits, he has twelve months from the date of the first payment to withdraw the application and repay entitlements received.  This can be done one time, in other words,  to correct a mistake.

Very few people actually used this social security loophole ( I would guess that few knew about it or understood it or had the repayment funds to enjoy it). During 2009 only 1,015 of these ‘withdrawal applications’ were filed.  The number dropped in 2010 as by the end of June only 345 had applied to repay and withdraw.

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First, the alternative minimum tax, was patched so that middle income senior citizens are not caught paying an incremental tax bill. For 2010, the AMT exemption amounts will be $47,450 for unmarried individuals and $72,450 for married individuals filing jointly. For 2011, the amounts will be $48,450 and $74,450, respectively.

Next, the bill extends the benefit of senior citizens using IRA funds to make charitable donations.   Seniors age 70½ and older can continue to contribute up to $100,000 directly from their IRAs to charity. The IRA charitable withdrawal isn’t deductible, but it is not included in taxable income for the year.  This is a very significant advantage to most senior citizens whose tax on social security and health expense deduction depend on keeping their reported income down.

The withdrawal counts toward the IRA owner’s required minimum distribution — the amount retirees age 70½ or older are required to withdraw every year.

If you have already taken a distribution from your IRA in 2010, you cannot use the provision to give to charity. But if you haven’t taken your 2010 required minimum distribution, you have until Jan. 31, 2011 to make a contribution directly to charity and have it count toward your 2010 required minimum distribution.

Last, there is a break on estate taxes, an issue of concerns to senior citizens who may have significant estates.  Rather than the $1 million exemption and 55% rate that would have applied to estates for 2011, the new law reduces these factors to an estate tax rate of 35% and an estate tax exemption of $5 million ($10 million for couples with proper estate planning).

So even though senior citizens can lament the fact they won’t get an increase in 2011 social security benefits, they did pretty well with this Congress.

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Municipal bonds can be a great source of retirement income and this post will keep you from getting ripped off.  The interest is high and tax free but the way municipal bonds are sold lacks regulation and disclosure and you’re about to learn what your broker will never tell you.

Municipal  bonds are not for everyone and are best suited to those who can get maximum benefit from the tax free savings.  The maximum beneficiaries are those in the 25% or higher federal income tax bracket  ( for 2010, single people with taxable income of $34,000 or more and , marrieds with taxable income of $68,000 and more).  If your taxable income is less than these amounts municipal bonds investing MAY not be advantageous because you could make more by investing in taxable bonds and paying the tax. In other words, taxable bonds typically pay more interest so someone in a lower tax bracket will be better off getting the higher interest, paying the tax and still come out ahead.

BIG EXCEPTION:  Because municipal bond yields DO NOT have a constant relationship with others types of retirement income options,  one must analyze at the time of investment which type of bond would bring you put ahead.  The next paragraph illustrates.

Getting 5% from a tax free bond in the 25% federal tax bracket is an effective yield of 6.66%.  Where else can you get anything close to 6.66% rated AAA?  Currently (9/16/10), municipal bind interest rates are out of whack and tax free bonds pay WAY MORE than they should relative to treasury bonds or high grade corporate bonds.  That MAY be because the smart money expects the issuers of municipal bonds to default (i.e. go bankrupt) and not be able to pay off their bonds. Or, it may be due to very significant purchases by foreigners of US Treasury Securities which have pushed their yields down to uncharacteristically low levels.

You can buy bonds issued by your state or any state (or any municipality).  While many suggest buying bonds just from your state because the interest will also be free from your state income tax, it is better to have diversification.  I live in California and don’t want my entire bond portfolio concentrated here given the State’s chronic inability to balance its budget.  So I buy tax free bonds issued by others states and I will pay state income tax on this (about 6% of the income I receive) but no federal tax.

Unlike stocks, the prices of tax free bonds don’t get published in the newspaper.  There are just too many issues to list in the paper and that’s what makes municipal bind investing less than transparent.  Add to this that there is no government requirement that forces your broker to show how much commission you pay to buy a bond.  The broker simply adds their markup to the price so your transaction cost is hidden.  However, you can avoid getting ripped off.  The Municipal Sales Rule Making Board tracks prices paid for municipal bonds in recent purchases.  By consulting their web site you can check the actual recent price paid by investors and dealers. That way,  you’ll know if your broker is giving you a fair price (1% to 2% commission is fair to pay).  Or, you can use the prices that have transpired to give your broker a limit price.  Just visit http://emma.msrb.org/ and enter the cusip number (the identifying number) of the bond you desire to research.

If you are buying $25,000 of an issue, it’s not unreasonable for a full service broker to mark up the bond 2%.  However, the markup will usually be 1% or maybe .5% from a discount broker.  You can do a search for bonds trading on the market at http://www.rbcbondsearch.com and www.bondsonline.com.  You need to know enough to set your criteria when searching for bonds you might want to own: term, type of bond, rating, etc.  The web site will produce a list of bonds meeting your criteria and show you the cusip numbers so you can look up recent prices.  To learn more  about any issue, you take its cusip number (its identifying number) and look it up at the EMMA web site http://emma.msrb.org, which not only has prices but also the offering memorandum for the bond, describing all aspects of the issue and annul statements since issuance and recent trading/price history.

Now you have basic tools for becoming a sophisticated municipal bond buyer and not getting ripped off on price.  In a later post, I will review the dangers of municipal bond funds.

Financial advisors who can assist investors with retirement income investments, ProspectMatch

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Municipal bonds can be a great source of retirement income and this post will keep you from getting ripped off.  The interest is high and tax free but the way municipal bonds are sold lacks regulation and disclosure and you’re about to learn what your broker will never tell you.

Municipal  bonds are not for everyone and are best suited to those who can get maximum benefit from the tax free savings.  The maximum beneficiaries are those in the 25% or higher federal income tax bracket  ( for 2010, single people with taxable income of $34,000 or more and , marrieds with taxable income of $68,000 and more).  If your taxable income is less than these amounts municipal bonds investing MAY not be advantageous because you could make more by investing in taxable bonds and paying the tax. In other words, taxable bonds typically pay more interest so someone in a lower tax bracket will be better off getting the higher interest, paying the tax and still come out ahead.

BIG EXCEPTION:  Because municipal bond yields DO NOT have a constant relationship with others types of retirement income options,  one must analyze at the time of investment which type of bond would bring you put ahead.  The next paragraph illustrates.

Getting 5% from a tax free bond in the 25% federal tax bracket is an effective yield of 6.66%.  Where else can you get anything close to 6.66% rated AAA?  Currently (9/16/10), municipal bind interest rates are out of whack and tax free bonds pay WAY MORE than they should relative to treasury bonds or high grade corporate bonds.  That MAY be because the smart money expects the issuers of municipal bonds to default (i.e. go bankrupt) and not be able to pay off their bonds. Or, it may be due to very significant purchases by foreigners of US Treasury Securities which have pushed their yields down to uncharacteristically low levels.

You can buy bonds issued by your state or any state (or any municipality).  While many suggest buying bonds just from your state because the interest will also be free from your state income tax, it is better to have diversification.  I live in California and don’t want my entire bond portfolio concentrated here given the State’s chronic inability to balance its budget.  So I buy tax free bonds issued by others states and I will pay state income tax on this (about 6% of the income I receive) but no federal tax.

Unlike stocks, the prices of tax free bonds don’t get published in the newspaper.  There are just too many issues to list in the paper and that’s what makes municipal bind investing less than transparent.  Add to this that there is no government requirement that forces your broker to show how much commission you pay to buy a bond.  The broker simply adds their markup to the price so your transaction cost is hidden.  However, you can avoid getting ripped off.  The Municipal Sales Rule Making Board tracks prices paid for municipal bonds in recent purchases.  By consulting their web site you can check the actual recent price paid by investors and dealers. That way,  you’ll know if your broker is giving you a fair price (1% to 2% commission is fair to pay).  Or, you can use the prices that have transpired to give your broker a limit price.  Just visit http://emma.msrb.org/ and enter the cusip number (the identifying number) of the bond you desire to research.

If you are buying $25,000 of an issue, it’s not unreasonable for a full service broker to mark up the bond 2%.  However, the markup will usually be 1% or maybe .5% from a discount broker.  You can do a search for bonds trading on the market at http://www.rbcbondsearch.com and www.bondsonline.com.  You need to know enough to set your criteria when searching for bonds you might want to own: term, type of bond, rating, etc.  The web site will produce a list of bonds meeting your criteria and show you the cusip numbers so you can look up recent prices.  To learn more  about any issue, you take its cusip number (its identifying number) and look it up at the EMMA web site http://emma.msrb.org, which not only has prices but also the offering memorandum for the bond, describing all aspects of the issue and annul statements since issuance and recent trading/price history.

Now you have basic tools for becoming a sophisticated municipal bond buyer and not getting ripped off on price.  In a later post, I will review the dangers of municipal bond funds.

Financial advisors who can assist investors with retirement income investments, ProspectMatch

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Many people are stupidly trusting and you may be so with your retirement advisor.  It’s essential to have trust for an economy to work, but it does not mean that trust must be blind and rely on your retirement advisor’s spoken word. Yet everyday we see results of this type of blind trust in the news, most commonly, all of the people who took real estate loans without reading the documents.  And then they think they are victims when the lender enforces the terms of the loan, when the lender expects the borrower to do exactly as they agreed to do.  Let’s just substitute the word moron for victim.

Of course they did not go to law school.  But when someone is handed a document that obligates them financially, any person with half a wit will read it and
a. ask questions about what they don’t understand and insist on clear and understandable explanations or
b. if they simply dont have the mental capacity, the educational background to understand what they read, then take the document a lawyer THEY hire and
c. if they cannot afford a lawyer to explain their obligations, then  they have no business making the transactions because it is beyond their financial means

There you have the “abc” of not getting fleeced and let’s see how it applies to your retirement advisor, stockbroker or financial advisor.

Unless your advisor is a registered investment adviser (only about 10% of the investment professionals hold such a certificate), then your retirement consultant is NOT obligated to act in your interest and watch out for you.  In fact, you signed an agreement with your financial advisor that contained this language:

“Your account is a brokerage account and not an advisory account.
Our interests may not always be the same as yours.
Please ask us questions to make sure you understand your rights and our
obligations to you, including the extent of our obligations to disclose conflicts |
of interest and to act in your best interest. We are paid both by you and, sometimes,
by people who compensate us based on what you buy. Therefore, our profits, and
our salespersons’ compensation, may vary by product and over time.”

In plain english, the above agreement says:

a. your broker is not obligated to look out for your best interest
b. the broker is a sales perosn and makes commissions by selling you stuff
c. he is not bligated to tell you about a better deal than the one his firm offers
d. he is not obligated in any way to tell you that the securities his firm pushes, he feels are crap
e. your broker is NOT your advisorand is not obligated to give you “good advice”
f. there are conflicts of interest between what is good for the brokerage firm and what is good for you
g. the broker is not giving you independent advice and earns different amounts by selling different products

I know your retirement advisor, the nice young man at the brokerage firm who speaks nicely, seems kind, wears nice suits, takes your calls and is very polite seems like he has nothing but your best interest at heart.  Hopefully, you are dealing with such an individual who has superior integrity.  BUT the agreement you signed with your retirement advisor and hgis firm says he has no duty other than to sell you whatever he can to make as much money for he and his firm within FINRA’s requirements of suitability.

Be responsible.  Don’t sign what you don’t understand and if you do, shame on you. You’re responsible for the consequences and you don’t get to blame others later when you lent your trust irresponsibly without proper understanding.

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Supplemental Retirement Income

Would you rather depend on others for your retirement income needed or depend on yourself? Most retirees depend on others for retirement income–social security, the bank, their pension, etc.  Unfortunately, you cannot control any of these retirement income sources so if you get screwed, it should come as no surprise.  Let’s discuss controlling your income in retirement.

Own or invest in a business.  You can do this at any age.  In your town, there are dozens of opportunities to get needed retirement income from a  business.  You don’t need to work in it–you can just be an investor.  For example, what is your favorite restaurant?  Would that be a business you would like to own or own part of?  Then ask the owner if he is looking for investors–maybe he needs cash to send his kid to college or maybe he wants to open another location.  What about your clothes cleaners?  Are they busy?  is this a business you would like to own or own part of?  Think about everyone you buy something from and if you think its a quality business you would like to own, then ask the owner if he wants an investor.  Your retirement income needs may be satisfied right in your own town.  These local business–restaurants, clothes cleaners–they generate plenty of consistent cash for the owners.  Typically, 20%+ of the revenues can be taken as income and can be the source of your retirement income needs.

Or maybe you’ve said to yourself “I wish there were a …… in my town.”  Well why not start it?  If its a big company or a franchise then call them right now. Would you rather get supplemental retirement income from something you can control or observe that’s right in your town, or invest in stocks, or bonds with people you don’t even know, who may have questionable ethics and be the next target of the Justice Department or SEC?

“But I don;t know anything about…..,,” you say. Well FIND OUT!.  Go to the library, get on the Internet, talk to others in that business.  Retirement planning knowledge does not come out of thin air.  It comes from asking and investigating.  Be interested in looking stupid (you need to get over the American hangup of looking stupid) and asking basic questions so that you learn what you need to know to secure your needed retirement income.

Alternatively, maybe one of those local businesses want to grow and will hire you to make their business grow, assuming you have no money to invest. Take your favorite restaurant.  Have them print up coupons that you will give out to everyone you know (you can also put them on the windshield of every car parked in town).  For each coupon that gets redeemed, the restaurant owner agrees to pay you $10 to supplement your retirement income.  Sure, that payment to you may consume their profit on the meal they serve but if the new customer is impressed, he comes back again and again and the restaurant owner earns hundreds of dollars over the years from his new patron.  Same with the cleaners you go to, the fruit stand, etc.

Its time you get out and about and see all of the many sources for retirement income needed.  Put on your supplemental income glasses and see all of the opportunities around you and stop looking for the job that does not exist.

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Maintain a Steady Keel

If you are at the outset of your retirement and are counting on your savings for income, you may be a bit disconcerted about the economy and seek some retirement planning advice. A dipping stock market and housing market, rising crude prices, and the government’s refusal to make meaningful moves, make fears of another recession real and have you worried. What you do not want to do is panic – especially in your investment approach.

A Panic Move
There are some who will pull all their equity investments and put them into a money market fund or CDs. They do not want to lose any of their previous years’ gains or, at least, any more than they have to this point.  They plan to live off their money market interest and count the time until equities begin to rise – perhaps after declining. Unfortunately, neither they nor I know when the worst will occur. That’s acting like a speculator which is only for day traders and specialists.  This is not good retirement planning advice to be short term oriented.

At 65 years old, you have n additional life expectancy of twenty one years. That gives a lot of time for inflation to undermine the dollar’s value. Inflation will cut sharply into the value of your nest egg – and its yearly returns if you are completely invested in CDs and money market funds.  Better retirement planning advice is to have a long term view consistent with a 21 year life expectancy.

A Better Plan
After setting aside one year’s living expenses in a money market fund, split the balance of your nest egg equally between income and stock market investments. You require those income investments to generate some of your retirement income. Choose a good income generating mutual fund or buy some bonds (more about the differences of individual bonds and bond funds in a later post). Be sure to ladder your bonds (i.e. some for 2 year maturity, some 4 years, some 6 years and so on)  so that you can take advantage of rising interest rates over the next few years as the shorter term bonds mature. Laddering will likely smooth out your bond income from interest rate gyrations that may occur.

Do your preparation on your equity investments.  Look for stocks or mutual funds that have a history of increase in good times and hold their value in bad (Fortune magazine does an annual ranking of such funds). It is your equity investments that should offset inflation to maintain the overall value of your retirement funds. Be sure to allocate your equity investments so all your eggs are not in the same basket under any economic outcome (i.e. diversify among several industries).  Note that mutual funds and stocks are open to risks, including the potential for principal loss but the best retirement advice is to maintain a long term perspective and not react to anything you see or hear on TV or what the market did this week.

Now sit tight and be frugal. Make use of savings tips to stretch your money. Be sure to re-balance your long term investments annually (so that you have half in income/bond investments and half in equities/equity funds) and maintain your ‘12 month’ living expense fund refilled.  You’ll be around for at least 2 decades after retirement so take some good retirement advice and plan your portfolio for the same long time horizon.

For financial advisors seeking tips on how to help clients and maintain their business during an uncertain economy:

Annuity Leads
Lead Generation
ProspectMatch
Prospecting System

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Your kids are likely far better investors than you.  The seek to learn investing on their own so as to avoid the dependence and fees of using a professional.

Young millionaires disparage the value of financial advisors per a recent study by Spectrem Group.  The study summarizes that millionaires under the age of 45 prefer self-directed investing and they believe the services of professional advisors to be over-priced.

The study polled three different age groups: age 41 to 45, 35 to 40, and under 35. The youngest group was most against using a financial advisor; 58% of respondents between ages 41 and 45 found the offerings of a financial advisor too expensive while an overwhelming 74% of those under age 35 felt advisors were over-priced.

Younger investors find the financial information they need on the Internet, according to Spectrem.  This means they are self-confident, self-taught and self-learners.  These are the traits needed for learning to invest well.

The thing that young millionaires have in common is that they are self-learners.  They know that they can easily learn investing from the Internet, magazines and books what any financial advisor can tell them.  Rather than pay someone to lose their money, these young success stories realize they can learn to invest on their own and have no one to blame for results.  And they can do so without paying fees.

They know that from the plethora investment choices, there are only two: stocks and bonds.  Every other product is just some combination or derivartive of stocks and bonds with a 70-page prospectus hiding fees so that the brokerage firms can take you to the cleaners.  If you do a little reading (yes, read the prospectus), you will learn how many fees are buried in the products maufactured by Wall Street and you will realize that all of these products are simply some version of stocks or bonds.  Learning about investing is simply reading.

It’s unfortunate, but of all financial advisors, brokers/wealth managers, whatever you want to call them (or they call themselves), maybe 10% to 15% can do anything of value for you.  The rest are just salesman of products they don’t even understand.  They have never read the prospectus for the junk they sell or understand if it’s even good for you.  If you want the best results, learn investing and take your investment education into your own hands.

Your kids have learned about investing and know that it’s probabaly best to do their own.  A good lesson.

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You may be curious as to how you can invest in China and also worried about doing so.  You of course hear about the real estate bubble in China and of course are worried about investing in a communist country.  You also know that fast growth markets are subject to high volatility in their economies.  But on the other hand, you know that China just passed Japan as the 2nd largest economy in the world and how long will it take until China surpasses the US?  You want a piece of the Chinese investing action.

Here’s a way to invest in Chinese growth that may make some retired or conservative investors feel better. The following three US companies have placed big investment in China and you can bet along with them:

• McDonalds opened 136 stores in China last year
• Yum! Brands (parent of KFC and Pizza Hut) opened 80 stores and reported sales growth of 11% (compared to no growth in the US)
• Walmart has more than 50 stores in China (and purchases $27 billion of Chinese goods for all of its stores, worldwide)

Although Chinese operations are a small part of these very large company’s portfolios, China will be a rapidly growing portion of these companies and allow investors to bet along side firms that have established themselves as shrewd investors.

Consider that while the US form of capitalism was a leading model for growth in the 20th century, our model may be outdated.  It seems like our politicians are lost and America is adrift, both politically and economically. The new “winning model” appears to be the model used in China–a centralized yet benign governing model. The government can make decisions quickly, does not waste time on debate and if it maintains a benign outlook on its population, may well have capitalized the winning model of the 21st century.

Advisors seeking new clients ProspectMatch

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The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all securities firms doing business in the United States. All told, FINRA oversees nearly 4,700 brokerage firms, about 167,000 branch offices and approximately 635,000 registered securities representatives.  Their job is to protect you, the investor, that you have a safe place to invest.  How well are they dong?

I did a Google search on “FINRA fines” and here’s what i found from the first two pages (there were 143,000 total results):

Finra Fines Deutsche Bank $7.5M In Subprime Case‎

FINRA Fines SunTrust $1.4M for Unsuitable Trades‎ -

FINRA Fines Terra Nova Financial $400000

Finra Fines Phoenix Derivatives, Others a Combined $4.3M – WSJ.com

FINRA fines Citigroup for supervisory violations  $1.5 million fine …

FINRA Fines Double In 2009 – Representing Investors – Blog Archive

FINRA Fines Morgan Stanley, Other Firms – On Wall Street

FINRA Fines H&R Block Financial Advisors for Inadequate …

FINRA Fines Citigroup $600000 for Failing to Supervise Trading …

FINRA Fines MetLife Securities, Affiliates – ABC News

The above is all fairly recent.  Do these fines against these firms indicate that FINRA is protecting you well OR that if protections were adequate, there would not be so many fines?  You will need to be the judge.

It is clear however, that these firms  (notice that many are large and well known to you) seem to be little interested in your benefit or profit and are complacent to break the rules.  And that’s the point of this post.  Don’t trust anyone in the investment or insurance industry without asking questions. It’s not that you should not trust, a necessary element for a healthy economy, but get all of your questions asked and issues explained to your satisfaction.  Don’t simply take anyone’s word for the facts.  Get the evidence before you invest or buy insurance.

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