As with federal budgets, we hear the same cries about the size of our trade deficits decade after decade. Ignore them. The arguments we hear for balanced trade are all fallacious. There is no need to balance trade. Trade happens because two parties find it advantageous to trade money for products. This is capitalism. It works better than any other economic system.
For an easy to understand analogy, you probably have a trade deficit with your supermarket, your department store, and every other business you buy products or services from because you buy more form them than they buy from you. Did your personal trade deficit with them mean anything? No. Everyone’s happy, so to speak. No one forced anyone else to make a ‘trade’ they weren’t happy about.
Some of the loudest voices about America fixing its trade deficits come from Western Europe. You know, the people who are so ‘economically educated’ that they average long term 10% unemployment or double the long term unemployment rate of the U.S. If they actually got their wish, that would mean America would buy less of their products so that trade could be balanced. If we buy less from them, then they would need to produce fewer products which would cause some of the people who work on those products there to be laid off and their 10% unemployment rate to sky rocket higher.
The U.S. just needs to keep focusing on growing its economy, especially by increasing worker productivity. We’re very good at it. That will keep investors (yes even investors from Europe) investing in the U.S. because our returns on investment are safe and high. Foreign nations and individuals with dollars in their possession that they may no longer want can only buy our products, services, financial instruments, or companies.
Don't fear the buying of American companies fear crowd. We buy their companies too. Those American companies that they buy come with American based assets and people that cannot be transported easily. So normally, they grow those companies right here in America, increasing not decreasing employment. When Japan had high real estate prices about 15-20 years ago, they were buying American companies like crazy. Lots of fear raised then too. However, the jobs stayed here and years later, many of those companies were sold back at a loss to Americans because they overpaid for them in the first place and real estate prices crashed in Japan, causing a cash crisis there.
Wednesday, February 27, 2008
Wednesday, February 13, 2008
Balancing the Federal Budget
Cries to balance the Federal budget from all sources have been heard for decades, even centuries. Seldom has the U.S. budget ever been balanced for any given year. It is almost constantly in deficit. Yet, after all this time, the sky hasn’t fallen so to speak. Why? If you think of your own budget, when you buy a large capital expenditure – a house, car, even furniture, most of us don’t pay for it entirely the year we buy it. So why, when the Federal government buys buildings, ships, airplanes, trucks, tanks, etc. that will last in most cases decades, should we expect those budget items paid off in the year bought?
Now, things that are consumed in the year bought (e.g. government employee wages, unemployment checks, food stamps, etc) should be paid in the year consumed. Therefore, just as is common for a person or family to take out a mortgage or loan for capital items and pay them off as we use them constricted by loan size to income, perhaps the same should be considered for government. Government annual income even in a good economic year is less than $3 trillion. Ideally, it's maximum debt limit should be $4.5 trillion and certainly no more than $6 trillion or double annual income. Same principles that a responsible bank would normally follow on a long term mortgage loan for you or me.
Given that government debt exeeds $14 trillion, the U.S. budget is already in very big trouble now! I think the debate about government deficits would be better understood and accurate if compared in this manner. So now that we know that we are in big trouble, how do we fix the problem?
First, a change in government accounting practices and attitudes needs to occur. We should separate immediate type expenses from long term investments. Immediate expenses must be paid in the year consumed (for example food stamps, medical expenses, government salaries and pension payments, etc.). No borrowing permitted. For the rest, ‘pay off’ those long term investments such as new government buildings, ships, planes, etc. (as if they were actual loans with set payment terms such as interest rate and length of loan) by assigning the required amount of tax revenues from the current year toward that ‘loan’ so that it would become clear whether or not we are still paying for investments bought in prior tax years that should have been paid off by now (and/or defaulting on our previous ‘loans’). Those are the situations that should cause us concern.
Next, we start with actual government revenues of less than 3 trillion dollars a year. We first budget enough money to pay principal and interest of our $14 trillion dollar plus debt off in 30 years. What's left is the maximum we can spend in any given fiscal year. All the short term and long term spending programs must be shrunk to fit that annual dollar limit.
How can we possibly do that? Let me first ask you this - if you earned $21,000 a year, spent $36,000 a year and had a debt of $145,000 or six times earnings, what would you do? You'd pick your priorities and cut back or a bank would do it for you probably evicting you from your home. Now add 8 zeros to each of those numbers, and you now have the current finances for the federal government. Now for the solution:
1. Go back to the 2006 budget for a start cut spending on each government program to those levels. It wasn't that long ago, so it shouldn't be that hard. That cuts about a trillion dollars a year in spending. I'm sure, a reduction in government employees to the number we had back then or less would be necessary.
2. Government subsidies for all sorts of reasons (agriculture, rural electricity, ethanol, green technologies, hiring police and firemen that local governments should be paying, etc.) total one trillion dollars a year. Cut all of them to zero. In some cases like agriculture, it may be prudent to cut back incrementally over a five year period to give farmers time to adjust without going bankrupt if it occurred too fast.
3. Cut the number of government workers by 20%, bring salaries and benefits in line with the private sector. Get rid of the IRS by applying taxes against paychecks with no deductibles, just like Social Security. No taxes on interest, dividends, or capital gains; therefore no forms to fill out plus a great effective way to boost capital investment and job growth which will increase collected govermnment tax revenues.
4. Turn over Medicare collections (but not necessarily Medicare itself) to insurance companies. Insurance fraud is 25% for government Medicare and less than 1% for inurance companies. That will save hundreds of billions in spending over a 10 year period.
5. Social Security - continue to buy Treasury Bonds with government gauranteed interest rates, but insteazd of using that money on government spending with no investment return, buy mutual funds, ETFs, bonds so that income does come back and can therefore pay off SS liabilities and probably with extra revenues to reduce debt and increase benefits going forward. So we have not privatized SS since we still have government gauranteed Treasury bonds. Even if the investments go down in value, that would still be more money to retire maturing bonds than zero which is what we have coming back today from past Treasury bonds that are forcing us to re-borrow. Put control of this investment program into several investment firms. The government is totally unqualified to manage it. No political investment goals allowed (e.g. no to mandated green energy investments). The only goal is to make conservative investments with long term high return potential. Also, include direct, illiquid investments that pay income and are not subject to stock market swings. Most people are unaware of these, but not the wealthy who manage to stay wealthy in every economic climate. They exist in energy drilling and mineral rights, real estate, equipment leasing, and a lot of other areas. Those investments can't be sold on the stock market.
6. Defense - it is a disgrace that we just passed a huge Defense budget for 2012 with a double digit increase. We spend more on defense than the next 20 nations combined. We have hundreds of unneeded military bases that need to be closed, but are kept open as "job makers" for political districts and states. We need to cut the Defense budget by one third and that will still leave us very strong.
Now, things that are consumed in the year bought (e.g. government employee wages, unemployment checks, food stamps, etc) should be paid in the year consumed. Therefore, just as is common for a person or family to take out a mortgage or loan for capital items and pay them off as we use them constricted by loan size to income, perhaps the same should be considered for government. Government annual income even in a good economic year is less than $3 trillion. Ideally, it's maximum debt limit should be $4.5 trillion and certainly no more than $6 trillion or double annual income. Same principles that a responsible bank would normally follow on a long term mortgage loan for you or me.
Given that government debt exeeds $14 trillion, the U.S. budget is already in very big trouble now! I think the debate about government deficits would be better understood and accurate if compared in this manner. So now that we know that we are in big trouble, how do we fix the problem?
First, a change in government accounting practices and attitudes needs to occur. We should separate immediate type expenses from long term investments. Immediate expenses must be paid in the year consumed (for example food stamps, medical expenses, government salaries and pension payments, etc.). No borrowing permitted. For the rest, ‘pay off’ those long term investments such as new government buildings, ships, planes, etc. (as if they were actual loans with set payment terms such as interest rate and length of loan) by assigning the required amount of tax revenues from the current year toward that ‘loan’ so that it would become clear whether or not we are still paying for investments bought in prior tax years that should have been paid off by now (and/or defaulting on our previous ‘loans’). Those are the situations that should cause us concern.
Next, we start with actual government revenues of less than 3 trillion dollars a year. We first budget enough money to pay principal and interest of our $14 trillion dollar plus debt off in 30 years. What's left is the maximum we can spend in any given fiscal year. All the short term and long term spending programs must be shrunk to fit that annual dollar limit.
How can we possibly do that? Let me first ask you this - if you earned $21,000 a year, spent $36,000 a year and had a debt of $145,000 or six times earnings, what would you do? You'd pick your priorities and cut back or a bank would do it for you probably evicting you from your home. Now add 8 zeros to each of those numbers, and you now have the current finances for the federal government. Now for the solution:
1. Go back to the 2006 budget for a start cut spending on each government program to those levels. It wasn't that long ago, so it shouldn't be that hard. That cuts about a trillion dollars a year in spending. I'm sure, a reduction in government employees to the number we had back then or less would be necessary.
2. Government subsidies for all sorts of reasons (agriculture, rural electricity, ethanol, green technologies, hiring police and firemen that local governments should be paying, etc.) total one trillion dollars a year. Cut all of them to zero. In some cases like agriculture, it may be prudent to cut back incrementally over a five year period to give farmers time to adjust without going bankrupt if it occurred too fast.
3. Cut the number of government workers by 20%, bring salaries and benefits in line with the private sector. Get rid of the IRS by applying taxes against paychecks with no deductibles, just like Social Security. No taxes on interest, dividends, or capital gains; therefore no forms to fill out plus a great effective way to boost capital investment and job growth which will increase collected govermnment tax revenues.
4. Turn over Medicare collections (but not necessarily Medicare itself) to insurance companies. Insurance fraud is 25% for government Medicare and less than 1% for inurance companies. That will save hundreds of billions in spending over a 10 year period.
5. Social Security - continue to buy Treasury Bonds with government gauranteed interest rates, but insteazd of using that money on government spending with no investment return, buy mutual funds, ETFs, bonds so that income does come back and can therefore pay off SS liabilities and probably with extra revenues to reduce debt and increase benefits going forward. So we have not privatized SS since we still have government gauranteed Treasury bonds. Even if the investments go down in value, that would still be more money to retire maturing bonds than zero which is what we have coming back today from past Treasury bonds that are forcing us to re-borrow. Put control of this investment program into several investment firms. The government is totally unqualified to manage it. No political investment goals allowed (e.g. no to mandated green energy investments). The only goal is to make conservative investments with long term high return potential. Also, include direct, illiquid investments that pay income and are not subject to stock market swings. Most people are unaware of these, but not the wealthy who manage to stay wealthy in every economic climate. They exist in energy drilling and mineral rights, real estate, equipment leasing, and a lot of other areas. Those investments can't be sold on the stock market.
6. Defense - it is a disgrace that we just passed a huge Defense budget for 2012 with a double digit increase. We spend more on defense than the next 20 nations combined. We have hundreds of unneeded military bases that need to be closed, but are kept open as "job makers" for political districts and states. We need to cut the Defense budget by one third and that will still leave us very strong.
Saturday, February 2, 2008
Saving and Improving Social Security
What if there was a way to achieve:
1. Greater benefits for all social security recipients, especially for the working poor who don’t receive much in benefits to begin with due to their lower contributions when working.
2. Eliminate permanently the possibility that Social Security will go bankrupt or forced to provide lower benefits than promised.
3. Eliminate (in the long term) the government liability of future social security pension benefits and all social security debt.
Would you be interested?
OVERVIEW:
The program I’m going to suggest is a fair, slow, multi-decade change that keeps the current Social Security program for today’s workers and retirees with a caveat for those still working. It utilizes at its core, the sound investment advice so often given to those eligible for IRAs or401Ks. The younger you start, the higher the multiplier of your investments by the time you reach retirement age. In other words, a person who contributes a fixed amount to an IRA annually at 20 years old will likely have several times the nest egg than a person who starts contributing to IRAs at age 40.
The proposed Social Security program starts with an investment in their name at birth. This will grow to much higher totals at retirement than any other program today because it will have over 60 years to grow by retirement age which no other current government program can offer. That (restricted) ‘gift’ to the newborn will get paid back as they enter the work force by helping to pay the Social Security costs of those on the traditional SS program. As ‘attrition’ reduces the number of people (over decades) requiring support through the old SS program, the SS taxes needed for it will eventually be less until it is nothing. However, up to today’s rates, those given the birth investment gift will not have their SS taxes go down to zero. Instead, those unneeded taxes will be invested in their names along with their company matches which is part of the SS laws today.
To prevent fraud especially from foreigners looking for a quick unearned benefit, only children of women who are American citizens (could consider also including mothers who are permanent residents) will be eligible for the SS birth investment.
DETAILS:
1. For every future person born to a mother who is an American citizen (may wish to also consider one who is a permanent resident), the government puts $10,000 into a special US Treasury bond with the same rate of return as a normal long term treasury bond. The difference is that instead of spending the money on government programs and nebver getting it back, the money is divided evenly into four pre-approved mutual funds. These funds and fund managers need to be approved and closely monitored by an appropriate government agency with a random double check type of procedure. Expenses of the funds and the government agency must be tightly controlled within high industry standards. Suggest no more than .002% of fund value. Cost to the government given 3-4 million births per year is $30-40 billion – a very small and affordable percentage of the federal government (take from the general fund, do not take this money from the social security fund).
At age 67, the fund value belongs to the person named. At this point, it may be wiser to give the person annual interest payments or an annuity rather than the lump sum which can be quickly squandered by some, leaving nothing for the rest of their lives. What would this be worth? If it grew at historical 10-11% long term averages of the stock market (i.e. doubles every 7 years), it could be worth well over $5 million!! If it grew at a more modest 6% long term average (doubles every 12 years), it would be worth over $400,000. Such amounts should help all retirees, but especially the working poor (or those physically unable to work or work full time) who earned barely enough to live on and consequently never received much in social security benefits. Those who pass away before age 67, since they never contributed to this fund, would have the fund returned to the government (this might eventually pay much of the costs of the program).
2. As the social security fund for the old program begins to exceed the benefits needed to be paid to recipients of the old program (i.e. as their number naturally shrinks eventually to zero), then the excess money goes to a fund for each individual then currently paying the taxes. This fund is an IRA (preferably Roth IRA) and companies continue to match their employees’s taxes as they do today. This fund is inheritable and never goes back to the government. Also, individuals can withdraw as early as age 59 ½ giving them their early retirement options in addition to supplementing the birth gift. It cannot be withdrawn for any reason before age 59 ½.
This also phases in from the old plan to the new plan (as less people are left on the old plan) to become the source of retirement funds through the government for any person not entitled to the birth gift (e.g. naturalized citizens). They get what they and their employers put into it plus investment growth. All investments must go to mutual funds or interest earning investments (not bonds though). No individual stocks. People who want to buy stocks or bonds need to do that outside this program.
3. The people receiving the birth gift of $10,000 must pay higher SS taxes if necessary to keep the old system afloat. That’s only fair to partially reimburse those who gave them the gift in the first place. As the need to pay higher taxes naturally goes away, the SS tax rate never goes below today’s current levels forcing all workers to save for retirement. The government’s liability eventually falls to zero. There is no danger of shortfalls to benefits though benefits are less definable – depends on growth rates of the investments. Overall, it will be a lot more in benefits than today’s system.
As necessary, tweak the current system as painlessly as possible. Examples include eliminating the social security early retirement age for workers under 40 or 45 or whatever the right age is. Possibly raise retirement age by 1-2 years (prefer to keep this temporary). Increase the maximum cap but don’t eliminate it (I don’t believe in onerous Robin Hood plans – they’re immoral). Many of these people may have other means of early retirement; some won’t. Same situation as today.
Have only the birth gift people pay extra social security taxes if necessary and feasible to keep the old plan afloat until it is no longer needed. If not feasabe, have them pay a bigger per person additional share than the rest. Social Security was meant to cover only some of a retiree’s needed income.
This plan comes much closer to covering all of a retiree’s needed income. This is more
and more important as company pensions have mostly disappeared. In addition, unlike
today, where social security tax money is immediately and completely spent leaving a big, non-invested, government I.O.U debt that must paid in the future through taxes and/or borrowing, the funds in the new plan will be real assets with real value and carry no governmental liability.
POTENTIAL COUNTERPOINTS AND RESPONSES TO THIS PLAN:
1. “We can’t afford it”.
Actually, we can. In the short term, the money is negligible and come from taxes and borrowing especially as other costs go down (e.g. Katrina Hurricane is paid for; or as we slowly withdraw from Iraq as conditions permit, those expense go away and this plan annually will be much less than them). The truth is we can’t afford not to do it. Social Security due to the good news that we live longer and in general retire no later and often earlier than previous generations cannot sustain itself in the long term. Expect average life spans to only increase continuing the
pattern of too few workers to support ever more retirees. Through no one’s fault, Social Security has become a kind of national pyramid scheme that will eventually collapse of its own weight.
2. “It’s risky”.
All investments are risky including the current Treasury bonds investments with only future taxes and loans as the only ‘asset’ to pay off their future liabilities. Mutual funds reduce the investment risk to acceptable levels while substantially increasing the eventual funds available for Social Security benefits. We could consider options to reduce risk further by allowing the birth gift to move (if chosen by those individuals who want it) to more conservative interest earning monetary funds. However, this excludes bonds which behave just like stocks (i.e. go down as well as up) and over the long run have historically generated substantially less returns on investment than stocks.
3. “Some people born in the same year and/or day will receive different benefits from the birth gift than others.” True, because their investments will not grow exactly the same. So what.
It is after all a ‘gift’. You should be grateful for whatever you receive. Whatever it is, it will be substantial. However, if this becomes a political impasse to legislation, another option would be to take all the $10,000 gifts for all the qualified birth citizens in a given year and put them into one big ‘pot’ of many mutual funds to use as they reach SS age to give everyone in that
year the same payout.
Have to be more careful with this approach. Previously, the ones who died before SS age had their gift funds returned to the government. Now what happens if it is part of one big pot? Secondly, as these people age, the few remaining say at age 90, might have millions of dollars each given every year from the big pot which is not the purpose of this approach. One approach could be to give occasional, actuarily justified cost of living raises as people age. Another would be to find a fair way to give the excess back to the government. I still like the individual gift better
than the big pot approach, but even this is infinitely better than what we have now
ONE FINAL COMMENT:
Don’t wait for the government to legislate this (because it may never happen) to do something wonderful for your children and grandchildren. It may never happen. If you can afford it, open up accounts now and in the future for your children and grandchildren, especially when they are born. It doesn’t have to be $10,000 ($500 has a reasonable shot of growing to $250,000 by age 63 if you invest it for a person at birth). It also won’t obviously be a tax free IRA (meaning there can be tax liabilities due to mutual fund capital gains and dividends, but these usually will be small). They also can spend it on what they want at any adult age (unless you do a controlling trust fund) without penalties (though l;ack of control is the part I really don’t like. It is much
better to wait to a normal retirement age to grow it to a big number (a young adult may be immature enough to just blow it on a car and have nothing for retirement).
NEXT STEPS
If you believe these ideas have merit, please forward to others in your Mailing list. Better yet, forward to your elected representatives in the Senate and The House of Representatives. Their email addresses can be found at:
http://dir.yahoo.com/Government/U_S__Government/Legislative_Branch/Congressional_Email_Addresses/. The email address for the President is:
comments@whitehouse.gov. Tell them you support this plan and request their feedback on what they like and don’t like about the plan. You may want to delete the one final comment section since it has nothing to do with legislation. Those of you that may receive this email with a very large number of forwarding addresses, instead of forwarding, consider copying and pasting and sending as a new email.
1. Greater benefits for all social security recipients, especially for the working poor who don’t receive much in benefits to begin with due to their lower contributions when working.
2. Eliminate permanently the possibility that Social Security will go bankrupt or forced to provide lower benefits than promised.
3. Eliminate (in the long term) the government liability of future social security pension benefits and all social security debt.
Would you be interested?
OVERVIEW:
The program I’m going to suggest is a fair, slow, multi-decade change that keeps the current Social Security program for today’s workers and retirees with a caveat for those still working. It utilizes at its core, the sound investment advice so often given to those eligible for IRAs or401Ks. The younger you start, the higher the multiplier of your investments by the time you reach retirement age. In other words, a person who contributes a fixed amount to an IRA annually at 20 years old will likely have several times the nest egg than a person who starts contributing to IRAs at age 40.
The proposed Social Security program starts with an investment in their name at birth. This will grow to much higher totals at retirement than any other program today because it will have over 60 years to grow by retirement age which no other current government program can offer. That (restricted) ‘gift’ to the newborn will get paid back as they enter the work force by helping to pay the Social Security costs of those on the traditional SS program. As ‘attrition’ reduces the number of people (over decades) requiring support through the old SS program, the SS taxes needed for it will eventually be less until it is nothing. However, up to today’s rates, those given the birth investment gift will not have their SS taxes go down to zero. Instead, those unneeded taxes will be invested in their names along with their company matches which is part of the SS laws today.
To prevent fraud especially from foreigners looking for a quick unearned benefit, only children of women who are American citizens (could consider also including mothers who are permanent residents) will be eligible for the SS birth investment.
DETAILS:
1. For every future person born to a mother who is an American citizen (may wish to also consider one who is a permanent resident), the government puts $10,000 into a special US Treasury bond with the same rate of return as a normal long term treasury bond. The difference is that instead of spending the money on government programs and nebver getting it back, the money is divided evenly into four pre-approved mutual funds. These funds and fund managers need to be approved and closely monitored by an appropriate government agency with a random double check type of procedure. Expenses of the funds and the government agency must be tightly controlled within high industry standards. Suggest no more than .002% of fund value. Cost to the government given 3-4 million births per year is $30-40 billion – a very small and affordable percentage of the federal government (take from the general fund, do not take this money from the social security fund).
At age 67, the fund value belongs to the person named. At this point, it may be wiser to give the person annual interest payments or an annuity rather than the lump sum which can be quickly squandered by some, leaving nothing for the rest of their lives. What would this be worth? If it grew at historical 10-11% long term averages of the stock market (i.e. doubles every 7 years), it could be worth well over $5 million!! If it grew at a more modest 6% long term average (doubles every 12 years), it would be worth over $400,000. Such amounts should help all retirees, but especially the working poor (or those physically unable to work or work full time) who earned barely enough to live on and consequently never received much in social security benefits. Those who pass away before age 67, since they never contributed to this fund, would have the fund returned to the government (this might eventually pay much of the costs of the program).
2. As the social security fund for the old program begins to exceed the benefits needed to be paid to recipients of the old program (i.e. as their number naturally shrinks eventually to zero), then the excess money goes to a fund for each individual then currently paying the taxes. This fund is an IRA (preferably Roth IRA) and companies continue to match their employees’s taxes as they do today. This fund is inheritable and never goes back to the government. Also, individuals can withdraw as early as age 59 ½ giving them their early retirement options in addition to supplementing the birth gift. It cannot be withdrawn for any reason before age 59 ½.
This also phases in from the old plan to the new plan (as less people are left on the old plan) to become the source of retirement funds through the government for any person not entitled to the birth gift (e.g. naturalized citizens). They get what they and their employers put into it plus investment growth. All investments must go to mutual funds or interest earning investments (not bonds though). No individual stocks. People who want to buy stocks or bonds need to do that outside this program.
3. The people receiving the birth gift of $10,000 must pay higher SS taxes if necessary to keep the old system afloat. That’s only fair to partially reimburse those who gave them the gift in the first place. As the need to pay higher taxes naturally goes away, the SS tax rate never goes below today’s current levels forcing all workers to save for retirement. The government’s liability eventually falls to zero. There is no danger of shortfalls to benefits though benefits are less definable – depends on growth rates of the investments. Overall, it will be a lot more in benefits than today’s system.
As necessary, tweak the current system as painlessly as possible. Examples include eliminating the social security early retirement age for workers under 40 or 45 or whatever the right age is. Possibly raise retirement age by 1-2 years (prefer to keep this temporary). Increase the maximum cap but don’t eliminate it (I don’t believe in onerous Robin Hood plans – they’re immoral). Many of these people may have other means of early retirement; some won’t. Same situation as today.
Have only the birth gift people pay extra social security taxes if necessary and feasible to keep the old plan afloat until it is no longer needed. If not feasabe, have them pay a bigger per person additional share than the rest. Social Security was meant to cover only some of a retiree’s needed income.
This plan comes much closer to covering all of a retiree’s needed income. This is more
and more important as company pensions have mostly disappeared. In addition, unlike
today, where social security tax money is immediately and completely spent leaving a big, non-invested, government I.O.U debt that must paid in the future through taxes and/or borrowing, the funds in the new plan will be real assets with real value and carry no governmental liability.
POTENTIAL COUNTERPOINTS AND RESPONSES TO THIS PLAN:
1. “We can’t afford it”.
Actually, we can. In the short term, the money is negligible and come from taxes and borrowing especially as other costs go down (e.g. Katrina Hurricane is paid for; or as we slowly withdraw from Iraq as conditions permit, those expense go away and this plan annually will be much less than them). The truth is we can’t afford not to do it. Social Security due to the good news that we live longer and in general retire no later and often earlier than previous generations cannot sustain itself in the long term. Expect average life spans to only increase continuing the
pattern of too few workers to support ever more retirees. Through no one’s fault, Social Security has become a kind of national pyramid scheme that will eventually collapse of its own weight.
2. “It’s risky”.
All investments are risky including the current Treasury bonds investments with only future taxes and loans as the only ‘asset’ to pay off their future liabilities. Mutual funds reduce the investment risk to acceptable levels while substantially increasing the eventual funds available for Social Security benefits. We could consider options to reduce risk further by allowing the birth gift to move (if chosen by those individuals who want it) to more conservative interest earning monetary funds. However, this excludes bonds which behave just like stocks (i.e. go down as well as up) and over the long run have historically generated substantially less returns on investment than stocks.
3. “Some people born in the same year and/or day will receive different benefits from the birth gift than others.” True, because their investments will not grow exactly the same. So what.
It is after all a ‘gift’. You should be grateful for whatever you receive. Whatever it is, it will be substantial. However, if this becomes a political impasse to legislation, another option would be to take all the $10,000 gifts for all the qualified birth citizens in a given year and put them into one big ‘pot’ of many mutual funds to use as they reach SS age to give everyone in that
year the same payout.
Have to be more careful with this approach. Previously, the ones who died before SS age had their gift funds returned to the government. Now what happens if it is part of one big pot? Secondly, as these people age, the few remaining say at age 90, might have millions of dollars each given every year from the big pot which is not the purpose of this approach. One approach could be to give occasional, actuarily justified cost of living raises as people age. Another would be to find a fair way to give the excess back to the government. I still like the individual gift better
than the big pot approach, but even this is infinitely better than what we have now
ONE FINAL COMMENT:
Don’t wait for the government to legislate this (because it may never happen) to do something wonderful for your children and grandchildren. It may never happen. If you can afford it, open up accounts now and in the future for your children and grandchildren, especially when they are born. It doesn’t have to be $10,000 ($500 has a reasonable shot of growing to $250,000 by age 63 if you invest it for a person at birth). It also won’t obviously be a tax free IRA (meaning there can be tax liabilities due to mutual fund capital gains and dividends, but these usually will be small). They also can spend it on what they want at any adult age (unless you do a controlling trust fund) without penalties (though l;ack of control is the part I really don’t like. It is much
better to wait to a normal retirement age to grow it to a big number (a young adult may be immature enough to just blow it on a car and have nothing for retirement).
NEXT STEPS
If you believe these ideas have merit, please forward to others in your Mailing list. Better yet, forward to your elected representatives in the Senate and The House of Representatives. Their email addresses can be found at:
http://dir.yahoo.com/Government/U_S__Government/Legislative_Branch/Congressional_Email_Addresses/. The email address for the President is:
comments@whitehouse.gov. Tell them you support this plan and request their feedback on what they like and don’t like about the plan. You may want to delete the one final comment section since it has nothing to do with legislation. Those of you that may receive this email with a very large number of forwarding addresses, instead of forwarding, consider copying and pasting and sending as a new email.
Achieving Personal Wealth Goals
Achieving Personal Wealth
Goals
Live enough ‘below your means’ so
that you can save and invest. Most of us will need it for
emergencies, children, college expenses, retirement, etc.. Starting
young increases your potential to build huge nest eggs for retirement
early. Also, life is a lot less stressful when you can pay all your
bills and still have money left over. Take advantage of government
and business 401K/IRA savings plans and company matches to savings
that may be available to you. If possible, favor Roth IRAs over
Traditional IRAs. A Traditional IRA saves you some tax money the year
you invest, but costs you taxes when you withdraw from it. Those
Traditional IRA withdrawal taxes, particularly if your investment has
grown significantly over 20 to 40 years or more can be enormous. And
you must start withdrawing, like it or not, at age 70 ½. With a
Roth IRA, you save no taxes the year you invest, which may cost you a
few hundred dollars, but have no withdrawal taxes when you retire
which can save you tens of thousands of dollars. And there are no
forced withdrawals. Plus your heirs who may inherit what's left of
your Roth IRA also pay no withdrawal taxes, but do for a traditional
IRA.
Most of us are not expert enough to buy and sell individual company stocks profitably. That requires daily monitoring of stock price and volume movements, plus knowing how to use them to determine when to buy and sell. Very complex and easy to get wrong. Splitting investments between several mutual funds and/or key indexes reduces risk. Learn about and invest in a market basket over time of value and growth mutual funds. Also funds that focus on either small, medium, or large size companies plus emerging markets, and index funds like the S&P 500 that performs better than 70% of all mutual funds (the ETF “SPY” is a cheap way to buy that index), plus all of the above. Nothing eliminates risk. Still want more diversity – try the ETFs – MDY (S&P 400 Mid-Caps) and SLY (S&P 600 small caps), and also QQQ (Nasdaq 100 – top 100 Nasdaq stocks; more of a technology play). For additional diversity and balance, there are also “growth” and “value” versions of the S&P 500 indices - just put a “G” for growth, or a “V” for value at the end of them (SPYG, SPYV, SLYG, SLYV, MDYG, and MDYV).
Most of us are not expert enough to buy and sell individual company stocks profitably. That requires daily monitoring of stock price and volume movements, plus knowing how to use them to determine when to buy and sell. Very complex and easy to get wrong. Splitting investments between several mutual funds and/or key indexes reduces risk. Learn about and invest in a market basket over time of value and growth mutual funds. Also funds that focus on either small, medium, or large size companies plus emerging markets, and index funds like the S&P 500 that performs better than 70% of all mutual funds (the ETF “SPY” is a cheap way to buy that index), plus all of the above. Nothing eliminates risk. Still want more diversity – try the ETFs – MDY (S&P 400 Mid-Caps) and SLY (S&P 600 small caps), and also QQQ (Nasdaq 100 – top 100 Nasdaq stocks; more of a technology play). For additional diversity and balance, there are also “growth” and “value” versions of the S&P 500 indices - just put a “G” for growth, or a “V” for value at the end of them (SPYG, SPYV, SLYG, SLYV, MDYG, and MDYV).
I
always recommend using the research tools and fund screeners many
brokerage firms and other websites give you to view how an asset you
are considering buying has historically performed. Look at year to
date, one year, 3 year, 5 year, 10 year, and since inception average
annual growth rates. If they performed well in all those timeframes
compared to the general stock market, then they were managed well in
good times and bad. Yields a higher probability (but no gaurantee) of
success in the future.
Stocks over the long run have
outperformed other financial investments. Keeping your costs down
increases your potential to save money. Think about this – the long
term average growth of the stock market over decades has been around
11%. That implies a doubling every six and half years (“72” rule
– divide the anticipated growth or interest rate into 72 to
determine how many years it takes to double).
In some of those periods stocks did better than double, while in others it did worse or even lost money. Also and very importantly, there is no guarantee that those results will be repeated in the future. Life is a game of calculated risk and the best we can do is evaluate the risk and play the best odds available to us. A $1,000 investment that averages that rate of growth is worth $16,000 in 32 years, $64,000 in less than 40 years, and $512,000 in 65 years! Think about a twenty something investing just $1,000 every year and lucky enough to earn that rate of return. Then 40 years from now, when that person retires, he she receives the equivalent of a $64,000 check every year retired. So many companies now do not offer pensions, but do offer company matching of your savings. Always take advantage of that gift. The amount of savings you need to contribute to assure your financial independence could be cut in half! Or you could invest the same amount of money to reach a higher level of savings at any age (think early retirement options that you may give yourself - nice to have even if you choose not to use it).
Invest $3,000 one time in a newborn child or grandchild and keep it there for 65 years and that child may have two million dollars at retirement if the 11% rate holds. $750,000 if the rate is only 8%. Wow – why wouldn’t you do that if you can afford it (and many of you absolutely can)?
There are a whole host of incremental choices on large purchases for houses, cars, vacations, colleges, furniture, etc. that can produce good satisfaction while possibly not being all that you originally wanted. Make prudent choices on quantity and price of less expensive purchases that can still build to significant dollars such as clothes, shoes, restaurant meals, entertainment, phone service, etc.. As time goes by, if your income grows, you can still follow the same policy of living below your means, while incrementally increasing your purchase choices due to that higher income. Don’t forget however, to also increase your savings at the same time. When you’re retired you may want to be able to afford more than just watching T.V. all day long and eating at home with little or no money available for entertainment or vacations.
The goal is to save enough to become self-sustaining (to be able to live the rest of your life off the interest or growth and eventually principle of your savings alone or in conjunction with pensions and/or Social Security). For instance, if you need $50,000 gross per year to live and you (and/or your spouse if relevant to your situation) receive or will receive at retirement $30,000 from social security plus pensions, then you have to generate $20,000 a year from other sources. At 4% interest, you need $500,000 saved not to touch the $500,000. Really you need much less, because you won’t live forever and you therefore can touch the principal. If you think you only will live 20 years after retirement, $400,000 is enough without any interest (the interest will cover taxes and some years if you live more than 20 years.
Also, you live on net pay, not gross pay. When you are retired, there are no social security tax deductions, possibly no life insurance and no disability deductions needed anymore, no charity and other deductions now taken from your paycheck. There is only federal taxes at a lower rate from when you worked and if less than age 65, medical insurance that increases substantially until you reach 65, then it goes down below what you paid while working. Therefore, your dollar amount to be self sufficient is even less. If you own a house not yet paid off but will be paid off by the time you are retired, your living expenses go down and you need even less income. Take an IRS tax booklet and your expected retirement income from all sources and calculate your annual net pay after taxes. Compare it to your net pay today. You might be pleasantly surprised.
If you invest part of your savings in stock/mutual funds while you are still drawing funds from it and it grows at better than 4% per year, you need even less. A financial adviser can help you do the math. The dollar total to raise may still seem daunting, but it is doable if you save each year and invest wisely. Shoot for 10% or more savings per year as your goal. Never less than 5%. Pay yourself this savings first from your paycheck, and then determine what choices (housing, cars, clothes, etc.) need to be made to support a reasonable daily standard of living for you and your family. Even if you don’t make your ultimate goals (and most of you with effort can probably far exceed them), you are still way better off than you would have been if you didn’t save.
In some of those periods stocks did better than double, while in others it did worse or even lost money. Also and very importantly, there is no guarantee that those results will be repeated in the future. Life is a game of calculated risk and the best we can do is evaluate the risk and play the best odds available to us. A $1,000 investment that averages that rate of growth is worth $16,000 in 32 years, $64,000 in less than 40 years, and $512,000 in 65 years! Think about a twenty something investing just $1,000 every year and lucky enough to earn that rate of return. Then 40 years from now, when that person retires, he she receives the equivalent of a $64,000 check every year retired. So many companies now do not offer pensions, but do offer company matching of your savings. Always take advantage of that gift. The amount of savings you need to contribute to assure your financial independence could be cut in half! Or you could invest the same amount of money to reach a higher level of savings at any age (think early retirement options that you may give yourself - nice to have even if you choose not to use it).
Invest $3,000 one time in a newborn child or grandchild and keep it there for 65 years and that child may have two million dollars at retirement if the 11% rate holds. $750,000 if the rate is only 8%. Wow – why wouldn’t you do that if you can afford it (and many of you absolutely can)?
There are a whole host of incremental choices on large purchases for houses, cars, vacations, colleges, furniture, etc. that can produce good satisfaction while possibly not being all that you originally wanted. Make prudent choices on quantity and price of less expensive purchases that can still build to significant dollars such as clothes, shoes, restaurant meals, entertainment, phone service, etc.. As time goes by, if your income grows, you can still follow the same policy of living below your means, while incrementally increasing your purchase choices due to that higher income. Don’t forget however, to also increase your savings at the same time. When you’re retired you may want to be able to afford more than just watching T.V. all day long and eating at home with little or no money available for entertainment or vacations.
The goal is to save enough to become self-sustaining (to be able to live the rest of your life off the interest or growth and eventually principle of your savings alone or in conjunction with pensions and/or Social Security). For instance, if you need $50,000 gross per year to live and you (and/or your spouse if relevant to your situation) receive or will receive at retirement $30,000 from social security plus pensions, then you have to generate $20,000 a year from other sources. At 4% interest, you need $500,000 saved not to touch the $500,000. Really you need much less, because you won’t live forever and you therefore can touch the principal. If you think you only will live 20 years after retirement, $400,000 is enough without any interest (the interest will cover taxes and some years if you live more than 20 years.
Also, you live on net pay, not gross pay. When you are retired, there are no social security tax deductions, possibly no life insurance and no disability deductions needed anymore, no charity and other deductions now taken from your paycheck. There is only federal taxes at a lower rate from when you worked and if less than age 65, medical insurance that increases substantially until you reach 65, then it goes down below what you paid while working. Therefore, your dollar amount to be self sufficient is even less. If you own a house not yet paid off but will be paid off by the time you are retired, your living expenses go down and you need even less income. Take an IRS tax booklet and your expected retirement income from all sources and calculate your annual net pay after taxes. Compare it to your net pay today. You might be pleasantly surprised.
If you invest part of your savings in stock/mutual funds while you are still drawing funds from it and it grows at better than 4% per year, you need even less. A financial adviser can help you do the math. The dollar total to raise may still seem daunting, but it is doable if you save each year and invest wisely. Shoot for 10% or more savings per year as your goal. Never less than 5%. Pay yourself this savings first from your paycheck, and then determine what choices (housing, cars, clothes, etc.) need to be made to support a reasonable daily standard of living for you and your family. Even if you don’t make your ultimate goals (and most of you with effort can probably far exceed them), you are still way better off than you would have been if you didn’t save.
Note that I never mentioned buying
bonds as so many stock advisers do. Bond prices gyrate just as much
as stocks and their long term growth averages are half that of
stocks. Also stay away from commodities which can gyrate up, and
especially down, faster and worse than stocks.
There is another kind of
investment that I recommend avoiding because it amounts to
investments in a single company that again can go to zero. They are
sold by “Certified Financial Advisers” who are not associated
with a brokerage firm. These are investments into “illiquid”
(meaning you can't sell them), income producing assets. Most of these
are a diverse array of different funds that are for fixed periods of
2-8 years that pay monthly dividends in the 6-8% range which you can
keep or reinvest in the same fund automatically), then are sold or
liquidated with principal and interest returned to investors, or
sometimes they are converted into a new stock that gets listed on the
regular stock market exchanges. Most funds give themselves a 1-2 year
option to delay liquidation in case the market is bad. If the market
is extremely good, they can self liquidate early to achieve higher
returns. There are also “legacy” (i.e. lifetime) illiquid
investments for energy drilling investments (stick with land drilling
to minimize risks). For the first year, you will be made a “general
partner” meaning that you can be sued and lose everything you own,
not just that asset. After one year, you are changed to a limited
partner and cannot be sued. Returns historically are were in the
8-12% range (now much less due to Fracking increasing energy
supplies), plus there are huge tax benefits. 80 to 100% of your
investment can be subtracted from your income (because you are a
'General Partner' the first year) unless you buy these from an IRA.
You get depreciation tax benefits for several years after that. It is
also a way to avoid taxes when converting a Traditional IRA into a
Roth IRA. A normal stock broker can't sell these. You need to use
financial advisers associated with national firms such as Madison
Avenue Securities. A good financial broker does 'due diligence'
research before recommending a fund to you to purchase. IRAs can be
used to purchase these funds but don't do energy drilling with IRA
funds since you lose the tax benefit since your IRA is already tax
deferred. Again, I wanted you to be aware of them so you are
financially educated, but don't buy them. Too many fail completely or
deliver losses.
Finally, the elimination of debt is a
solid way to work toward financial independence. By lowering your
bills, less income is needed to maintain a standard of living.
Normally, a home mortgage is the largest debt we owe. Some of us
attempt to pay off the mortgage early. A popular method is to overpay
your monthly mortgage payments since all the excess reduces
principal. Especially in the early years of a mortgage, a very small
percentage of your payment actually reduces principal. Most of the
payment goes to interest expense. There is a better way. When you
overpay your mortgage, you are in effect giving your mortgage lender
an interest free loan with the excess money. Instead, put that excess
money in a dedicated savings account. The interest you earn will help
you pay off the mortgage principal even sooner. Also, if injury or
loss of job results in a loss of income, you have something to fall
back on. When that investment is large enough to pay off the entire
mortgage balance, then consider, depending on your circumstances at
that time, paying off the mortgage.
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