Will You Outlive Your Money?

Exactly how much money will you really need by retirement? The Million Dollar Answer!

deadbroke

There are two inescapable facts of life: death, and taxes.

When I was a young boy, it seemed like the number of people who lived to the century mark was so small, the average person only heard about someone achieving about it in the news. If you were lucky you might reach the 80’s but living past that was extremely rare.  In most cases, you were going to die sometime in your late 60’s to mid 70’s, and that was that. No one lives forever. We may not like it, but we do have to accept it. None of us are making it out of this world alive.

No one in my family has ever reached 80 , although my aunt has outlived everyone in the family thus far, and will be 77 in November 2018. That’s eleven years longer than my mother, her oldest sister who died at 66, and two decades longer than my father who died at 57, less than 2 months shy of his 58th birthday.   

I’m no fool, no siree I want to live to be 103

Unlike my late father who never lived long enough to retire, I do NOT plan to work until the day I die. Accidents do happen, but failing that I’m in far better health than my late parents due to changes in diet and medical advances that keep extending life expectancy in the USA.

Growing up, one of the things I remember is Jiminy Cricket singing the song  I’m No Fool for a series of educational safety cartoons on the Mickey Mouse Club TV show. He sings the chorus four times, staring with “I’m no fool, no siree I want to live to be 23, I play safe for you and me ’cause I’m no fool!” The age changes as the song goes on, changing to 33, then 53, and ultimately, 103! I always remember thinking to myself that no one lives THAT long.   Now, I’m encountering many people in my day job who are well into their 80’s and 90’s and more and more people are closing in on that mythical 103 from that song. With advances in health science, medicine, and technology progressing at its current rate, I could possibly even live to be 123! Who knows?

That being said, will you have enough money saved for retirement to cover you and your spouse and bridge the span from your last day at the job to your last day on Earth? For most people in the USA, the answer seems to be no. A deafeningly loud, resounding, emphatic NO! According to a report from the Economic Policy Institute (EPI), the  average retirement savings of all working-age families, which the EPI defines as those between 32 and 61 years old, is $95,776. So that’s about less than 2 years salary for the average American worker.

A fool and his money are soon parted.

If you’re not saving for retirement in a combination of 401k type plans or IRAs, you’re a fool who’s depending on a government ‘safety  net’ which will not allow you enough money to live on comfortably, and probably won’t even exist several decades from now. This past Friday April 6th 2018, I got into an argument at work with a social justice warrior who basically said moving away from Social Security into the stock market was ‘madness’ because the Dow closed down almost 600 points and he was citing everything from the 1929 Stock Market Crash to a total economic hypothetical meltdown where the market hit ZERO and starving people are wandering the countryside to find blades of grass to eat.  There was no reaching the poor fool. Every explanation I offered was met with another wacko hypothetical theory. He even brought up concentration camps!  It is NOT my job to give history, economic, or civics lessons to people who have the sum total of human knowledge at their fingertips, yet prefer the mindless indoctrination that they have willingly subscribed too. All I can do is worry about myself and watch the tragedy unfold around me by all those fools living in a Utopian dream world.  

 I am the RICHEST man in my family. I attained my WEALTH not by theft, or deception. I EARNED MY MONEY. I did not inherit it, win it in a lottery, or receive it through a fictitious privilege. I worked for DECADES and invested 10% of my income from DAY ONE! No one held a gun to my head and forced me to do this, I did it. ME, MYSELF, I! Just as I took responsibility for MY choices, you must be accountable for your own decisions. Sitting around waiting for someday and spouting what-if scenarios are what fools do.

Social security is NOT the answer. Everyone in my family who depended on social security, (or still does as is the case of my last living aunt) has lived and ultimately died in poverty.  According to Social security, based on my current contributions at my full retirement age (67 years), my payment would be about $ 2,342 a month. If I wait until 70 I’ll get about $ 2,906 a month, but if I jump the gun and snag early retirement at age 62, it would ONLY be $ 1,641 a month. But here’s the real kicker: My estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2034, the payroll taxes collected will be enough to pay only about 79 percent of scheduled benefits.  79% of $1,641 is about $1300 rounded up.  I’m certain my rent will be more than that in 2034. If I rely on social security I’ll be the starving man roaming the countryside eating grass.

The Millionaire at large.

The Millionaire Next Door is a 1996 book by Thomas J. Stanley and William D. Danko. It details the financial habits of wealth Americans. These are people who did their ‘homework’ and don’t have money troubles. Although it is over two decades old at this point, the basic wisdom has not changed. Live within your means, don’t spend all your income, don’t waste your money, and invest! Fascinating as the Millionaire next door may be, he or she does not interest me. I’m concerned with the Millionaire under my roof. The Millionaire at large, A.K.A.  Michael James Oetting. At current projections, my 401k type retirement account balance should exceed a million dollars by the time I retire. I plan to retire LONG BEFORE 62, so I’m not even considering Social Security. I’m also probably going to retire before 59½ the minimum age you can make withdrawals from a 401k or regular IRA without incurring a 10% early withdrawal penalty. Now with a million dollars, if I maintain an average annual interest rate of 5% or greater, while making withdrawals of 4% annually, that would come to $40,000 per year without diminishing the million dollar balance which would still be increasing at 1%. This could continue up until the year I turn 70½ at which point I would be required by law to take the RMD or face the 50% penalty imposed by the IRS  on what I fail to take. That’s because, upon reaching this age, the IRS requires you to withdraw at least a minimum amount each year from all your IRAs and retirement plans—except Roth IRAs—and pay ordinary income taxes on the taxable portion of your withdrawal. If you don’t take withdrawals, or you take less than you should, you’ll owe a 50% federal penalty tax on the difference between the amount you withdrew and the amount you should have withdrawn. And you’ll still have to withdraw the required amount and pay any income tax due on the taxable amount. IF you ‘forget’ to do this, you can extend it to the following April 1 of the year after your turn 70½ as a ONE TIME late disbursement, but you’ll have to take out double that year, and pay double taxes should you do that because you would have to account for both the prior (late) year and the current year RMD. Failing that if you STILL missed your RMD, the IRS can waive the 50% penalty for good cause. To have the 50% penalty waived by the IRS you must correct your error. You must take the RMD amount that was not taken and file the IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. When you file this form, you do not have to prepay the penalty, but if the form is filed without payment of the 50% penalty and IRS determines that the penalty is owed, you could owe interest on the penalty payment. Form 5329 must be filed to start the statute of limitations clock. Attach a letter of explanation to Form 5329. The letter should include why the RMD was missed, the fact that it has now been taken, and that you have taken steps to be sure that future RMDs will be taken as required. This is also a onetime thing.  Do not make a habit of accidentally ‘forgetting’ either on purpose or by accident, because the IRS does not play games, and you will get financially burnt if you play with fire.

Just because you have to take the RMD doesn’t mean you have to spend it, you just can’t keep it in your retirement account. You can buy investment properties, put it in bonds or stocks in a brokerage account, donate it to charity for a tax-write-off, etc. Just don’t let the IRS take half of it away because you ‘forgot’. You can set up most plans to automatically issue the RMD and I would encourage you to also have them withhold the taxes on each disbursement so you don’t  end up owing the government taxes you don’t have the cash to cover. If you follow all these suggestions, your money should last as long as you do!    As always, I wish you happiness and success!

Millions and Billions and Trillions, oh my!

The economy and tax cuts simplified!

 

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The media often decries that tax cuts for the rich are unfair, and that the wealthy are greedy individuals who don’t care about poor people and don’t pay their fair share in taxes. We saw a lot of this in recent years from the Occupy Wall Street group as they tried to demonize the top 1%. The sad fact is that the majority of individuals in the USA do not understand the economy, personal finance, taxes, investments, or the stock market in general.

These are three undeniable facts:

  • Wealthy people create the most jobs and pay the most taxes.  
  • Poor people are poor because they don’t yet understand how to become rich.
  • Investing in the stock market has resulted in the largest creation of wealth in human history.

“(It’s) the economy, stupid” – James Carville

Let’s start off by differentiating between the economy and the stock market. They are NOT the same thing.  February 5th 2018 saw the largest single drop in the history of the Dow Jones, 1175 points.  And the two week period from the end of January to mid February amounted to a market correction, which is to say, a 10 percent drop. You did not see 10% of the business in America hang a ‘closed forever’ sign on their doors, nor did you see them fire 10% of their employees, or find the shelves stocked with 10% less goods.  This is because the economy is just as strong today as it was before the market dropped. The economy involves the sum of all the goods and services produced in this country every day. The stock market is something very different and doesn’t have anything to do with the economy at all.  The market reflects speculations by investors on the potential values of various companies based on imagined future profits. Nothing is produced on Wall Street except wealth. When you buy a stock, you are actually really just loaning that company money in the hopes of a future return on your investment. The stock exchange just facilitates and records that transfer of funds. The influx of currency gives the company capital which it can use to expand and grow the goods and services it produces. Hopefully.  As the famous investing disclaimer goes “past performance does  not guarantee future earnings”. This is why tax cuts for business and the wealthy can cause the market to fluctuate.  The perceptions of investors change, and the market reflects that change.  

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A median is the exact mid-point. In 2016 the real median household income was $59,039. That said, half of the households in the USA earned more, and half earned less.  The same can be said of tax payers. About 50% of the people in the country pay ZERO in federal taxes, while the wealthiest 1%  in the country account for a staggering  35% of all taxes collected. When you expand this group to the top 10% of wage earners, the taxes collected grows to 68%. Is it fair when a millionaire gets a larger tax cut? Absolutely! If taxes were ‘fair’ we’d all pay the exact same percentage regardless of our level of income.  

There’s no such thing as a free lunch!

On October 30th 2017, White House press secretary Sarah Huckabee Sanders kicked off a press briefing by reading an anecdote about reporters and a bar tab to try to explain who would benefit from the proposed Republican tax reform framework.  It was adapted from a piece that had been floating around the internet since the early 2000’s, Here is the original:

Suppose that every day, ten men go out for lunch and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.

The fifth would pay $1.

The sixth would pay $3.

The seventh would pay $7.

The eighth would pay $12.

The ninth would pay $18.

The tenth man (the richest) would pay $59.

So, that’s what they decided to do.

The ten men ate lunch in the restaurant every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball.

“Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily lunch by $20.00.”  So lunch for the ten men would now cost just $80.

The group still wanted to pay their bill the way we pay our taxes.  So the first four men were unaffected.  They would still eat for free.  But what about the other six men?  How could they divide the $20 windfall so that everyone would get his fair share?

They realized that $20 divided by six is $3.33.  But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to eat his lunch.

So the bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so the fifth man, like the first four, now paid nothing (100% off).

The sixth now paid $2 instead of $3 (33% off).

The seventh now paid $5 instead of $7 (28% off).

The eighth now paid $9 instead of $12 (25% off).

The ninth now paid $14 instead of $18 (22% off).

The tenth now paid $49 instead of $59 (16% off).

Each of the six was better off than before.  And the first four continued to eat lunch for free.  But, once outside the bar, the men began to compare the amount they got off.

The sixth man said, “I only got $1 off out of the $20 while the tenth man got $10 off!”

“Yeah, that’s right,” exclaimed the fifth man.  “I only got $1 off, too.  It’s unfair that he got ten times more benefit than me!”

“That’s true!” shouted the seventh man.  “Why should he get $10 off, when I got only $2?  The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all.  This new tax system exploits the poor!”

The nine men surrounded the tenth and told him they were angry that he got so much off while they each got very little.

The next day the tenth man didn’t show up for lunch, so the nine sat down and had their lunches without him.  But when it came time to pay the bill, they discovered something important.  They didn’t have enough money amongst all of them for even half of the bill!

And that is how our tax system works. The people who already pay the highest taxes will naturally get the largest benefit from a tax reduction.  Also, all of the taxes collected annually do not cover all of the spending by the Government the short fall of which is covered by borrowing money from foreign countries. Each year this deficit and the interest on the foreign loans adds to the growing national debt.  You can see this debt growing in real time at usdebtclock.org .  Currently we have a national debt of $20,633,000,000,000. This amounts to $63,000 per citizen OR $170,000 per tax payer ! The government needs to shrink the national debt and the only way to do that is by the elimination of all non-essential spending. We need to have everyone pulling their own weight. We can’t have half the country working and paying taxes for the other half of the country to sit home and not work. Government welfare programs must end. We simply cannot keep spending more money than we take in. You can spend your way into the poor house, but you’ll never spend your way into prosperity.    

TheNumbersDontLie

Now when you’re earning less than $60,000 a year, a million dollars is a lot of money.  Even if you earned $250,000 a year, a million dollars is still a lot of money. But when we talk about the US economy, the budget, and tax cuts, were are discussing billions (a thousand-million) and trillions (a million-million) and these numbers are larger than the average person can comprehend.  Let’s ignore the smaller numbers and shoot for the moon by explaining  the size of a trillion.

A single one dollar bill measures 6.14 inches. If you laid a trillion of them end to end, it measures 96,906,656 miles. This would exceed the distance from the earth to the sun. Even if you just stacked them one on top of the other, the distance would be 67,866 miles. This would reach more than one fourth the way from the earth to the moon. Mind blowing huh?

One of my favorite examples of explaining the US budget, taxes, and those ‘HUGE’ multi-billion dollar budget cuts is to shrink the example down to a household budget. You remove the 8 zeroes. I’m using numbers from the recent 2018 US budget and the current national debt .  

  • United States Tax revenue : $3,654,000,000,000
  • Fed budget $4,094,000,000,000
  • New debt $440,000,000,000
  • National debt  $20,633,000,000,000
  • Recent budget cuts which some politicians are proud about  $ 54,000,000,000

Now, remove 8 zeroes and pretend it’s a household budget.

  • Annual income $36,540
  • Annual spending $40,940
  • New debt on the credit card $4,400
  • Outstanding credit card debt  $206,330
  • Recent budget cut $ 540

Now look at those ‘household budget’ figures.  Knowing that you were in debt about 564% of your annual income, would you continue to spend 112% of what you earn? Would you decrease that by less than 1.5% and call that an accomplishment? You’d have to be way beyond crazy to think that was a good idea. Hopefully you now understand why we need to end the welfare state and stop demonizing the rich. As always I wish you happiness and success!