When Should I Start My Social Security?

FAMILY UPDATE

My oldest son, now fifteen, recently got his driver's permit. We try to practice a little bit each day. We are still sticking to the neighborhood. It's a little unnerving that he will drive a thousand-pound rocket around town. I guess all parents go through this stress.
We have a couple of indoor cats who like to escape. We've discovered that our adorable mini Goldendoodle is quite the shepherd. We just send him out and he herds them back into the house. It is really funny to watch.
I currently own 208 orchids. The one below, when in bloom, is the #1 out of all of them.

Here are five important questions and five important answers.

1. Dave, how do you invest your own money?

I maximize my 401k contributions and invest 100% into the stock market. Why? I’m 46 years old and plan on working for 20+ more years. If I use any other investment vehicle, I will have a lower return. By maximizing my contributions, I get a big tax break. For every $100 I contribute, I save about $35 in taxes. It really adds up!

2. The government requires you to take money out of your IRA at a certain age. How does that work?

Required minimum distributions (RMDs) are a tool the government uses to collect more taxes. It forces you to withdraw a certain percentage yearly from your IRA once you turn 73. It’s confusing because two years ago, the age was 70 ½, and last year it was 72. It will stay at 73 until 2032 when it will increase to 75.

The amount required to withdraw at age 73 is 3.7%. It slowly increases each year. At 80, you need to withdraw 5%.

3. Can I retire if I still have a mortgage?

Of course. Your mortgage payment is no different from a car payment. If your monthly retirement income can afford the mortgage payment, it is no different than any other monthly debt.

4. Should I pay extra toward my mortgage?

This answer might surprise you, but my answer is a strong "no."

This is the problem: once you put money toward your mortgage, there is no way to get it back out. Now that interest rates are so much higher, second mortgages and home equity lines of credit are very expensive. If you use a good-sized portion of your savings to pay off your mortgage, what happens if a considerable expense comes up?

Also, consider the fact that your current mortgage probably has a low-interest rate. It just doesn’t make sense to upend your financial picture by paying off a low-interest loan.

5. When should I take Social Security?

I’ve taught classes on this stuff for years. More and more, I am noticing that people are taking their benefits much too early. I know it can be hard to wait, but when starting benefits, you need to consider how long you might live. Believe it or not, if you are a healthy 65-year-old, your life expectancy is 90.

If you take your benefit at 62, you get 60% of the benefit you would get if you waited until age 70.

Let’s look at someone who is eligible for $2000 a month at their full retirement age (67 for most of you).

If you take it at 62, you will receive $1533 a month.
If you take it at 70, you will receive $2507 a month.

*All the following numbers assume a 2.5% cost of living adjustment per year (which has been the average for decades).

Let’s say you live until 80 in this scenario.

If you took it at 62, you would have collected $383,000.
If you took it at 70, you would have collected $404,000.

Let’s say you live until 90 (there is a 50% chance you will live this long)

If you took it at 62, you would have collected $697,000.
If you took it at 70, you would have collected $917,000.

Let’s say you live until 95 (there is a 33% chance for women and a 20% chance for men).

If you took it at 62, you would have collected $885,990
If you took it at 70, you would have collected $1,226,420

Let’s take it a step further. What if your full retirement age benefit is $3000 a month?

At 62, $2300 a month.
At 70, $4360 a month.

Let’s say you live until 80.

If you took it at 62, you would have collected $574,000.
If you took it at 70, you would have collected $606,000.

Let’s say you live until 90.

If you took it at 62, you would have collected $1,054,000.
If you took it at 70, you would have collected $1,376,000.

Let’s say you live until 95.

If you took it at 62, you would have collected $1,329,000
If you took it at 70, you would have collected $1,839,000

These numbers can be mind-boggling. It is absolutely possible that there are married couples out there that will collect $3,000,000 of benefits from Social Security during their lifetimes.

Don’t collect Social Security just because you want that extra spending money in your early 60s. It will really come to bite you later on.

Be Blessed,

Dave

P.S.- I am doing Social Security webinars each Saturday at 10:00 AM. If you like to register, please go to www.SocialSecurityRSVP.com.

 

Fighting Over Your Money

FAMILY UPDATE

We had a Superbowl party while my parents were down visiting from Pittsburgh. My wife's parents were there too, so we had all four grandparents together! What fun!
I allowed each kid to get one item of junk food for the party. They chose Doritos, chicken wings, chocolate, and a Superbowl cake. This is in addition to the homemade cookies Grammy made. When all four grandparents are there the kids should be spoiled as much as possible.
Unfortunately, it wasn't the best beach weather. The red tide was so strong on Sunday that you could barely get out of your car without your eyes watering.
Below is Senay's lacrosse photo. The season has started!

J. Howard Marshall II was a billionaire. He passed away in 1995. If you don't remember him, you probably remember his wife at the time of his death, Playboy playmate Anna Nicole Smith.

When Marshall died, he left her out of his will completely. The majority of his inheritance was left to his son. Anna Nicole Smith sued, claiming that Marshall had promised her half the estate.

The case went to the US Supreme Court. Twice. It took twenty years to resolve the issue. Finally, a probate judge in Texas denied the request to sanction Marshall's estate. Anna Nicole Smith did not get $44 million. The will and testament were preserved.

Now, let's talk about YOUR will and a few other important financial documents.

Is this stuff fun to think about? No. Is it something you’ve been putting off for years? Probably. Do you know it is important? Yes.

When it comes to legal documents you need to prepare for retirement, there are four basic items.

Your Last Will and Testament.
Your Health Care Advance Directive
Your Durable Power of Attorney
Your Trust documents

Your Last Will and Testament

All of you know what this means. It basically tells everyone who gets your stuff. For example, you may wish that all of your assets are split between your three kids.

Now, whatever passes through the will has to go through a process called "probate." Probate seems to be a scary word to people, but the concept is very simple. Before the money can be passed on to the beneficiaries, creditors get a chance to collect any unpaid bills.

The executor handles this process. If you have gone through this process, you know that it’s not a lot of fun. You should be very proud of yourself for putting up with the hassle. For large estates, this process can last for a year or more. Smaller estates can expect about six months before the assets are distributed. Remember, IRAs, 401(k)s, life insurance, and annuities do not go through probate. They go instantly to the heirs.

Homes, farms, and other real estate properties are notoriously a mess to leave to heirs. Probate is complicated. Kids fight. You need to have specific instructions as to what you want to be done with the house.

Your will may also include instructions on gifts to charities, scholarships or trusts you would like to fund and even your funeral wishes.

Health Care Advance Directive

Here’s something that is super fun to think about. Who gets to make medical decisions for you if you are unable to do so for yourself? This document better allows your loved ones to advocate on your behalf. It gives them access to all your medical records and allows them to authorize medical procedures.

And of course, this document outlines if and when it is time to pull the plug. (Like I said, not a really fun document.) If you remember the controversial case of Terri Schiavo, you know how important this document can be.

Schiavo sustained a cardiac arrest in 1990, leaving her in a permanent vegetative state. Her husband and her parents battled in court, and much of the nation battled along with them, until 2005. I don't care which side of the debate you fall on; the fact that it had to happen is heartbreaking. A Health Care Advance Directive can make an incredibly difficult moment just a little bit easier for your family.

Durable Power of Attorney

A durable power of attorney simply shows who can handle your financial affairs if you are unable to do it for yourself. Often a spouse is put into this position. You would be surprised at how many things a spouse cannot access without a power of attorney in place. Does Mom need money sent from her IRA to her checking account for important expenses if she is incapable? Without this document, you cannot make that transfer.

A common example is selling a parent's primary residence upon entering an assisted living facility. You need to have the ability to act as their representative.

This doesn’t only apply to elderly parents. It can also apply to a spouse with a sudden injury where he/she is unable to communicate their wishes.

Trusts

I’m sure you’ve heard the term "Trust Fund Baby." What does that actually mean? Trust documents give you control of your money from beyond the grave. Instead of dumping a pile of money into your kids' (or grandkids') laps all at once, a trust gives you control over how and when they receive the money.

Examples:

"Upon my death, my son gets 25 percent of the money when he turns 25, 25 percent when he turns 30, and the rest when he turns 35."

"Upon my death, my children may receive 5 percent of my trust value per year." (This is a common strategy for charitable trusts. If the money is invested, the portfolio should make an average of 5 percent, so that the trust fund will last forever).

Not only do trusts allow you to control your assets beyond the grave, but they can also protect your money from getting into the hands of people you don’t like.

"Upon my death, these trust funds may be paid out to my daughter and her children. In the event of a divorce, my son-in-law has no rights to this money in the trust."

Why is this important? If you dump a lot of money into your child’s lap when you die, and your child then gets divorced, their ex could go after half of the assets, including the inheritance. If the money stays in the trust they have no claim against those assets.

What if one child gives all the care to elderly parents? Should they get more of the inheritance? These documents would spell this out and hopefully stop any fighting between the kids.

What if your kids face a lawsuit? Trusts can help protect those assets.
What happens if your child dies, and their spouse gets all the money? Are you ok with that? Would you prefer it go to your grandchild? Or a charity?

I hope this at least gets you thinking about your own death. I’m just kidding. Don’t think about that.

It is so easy to ignore these issues. Just do it! Get it out of the way. Do you know who didn’t have any of these documents upon his death? Michael Jackson.

Can you imagine the mess? Can you imagine people coming out of the woodwork trying to get their "share" of the loot? He died ten years ago and court battles still rage.

Be Blessed,

Dave

P.S.- I am doing Social Security webinars each Saturday at 10:00 AM. If you like to register, please go to www.SocialSecurityRSVP.com.

 

Einstein Invested Too

FAMILY UPDATE

My oldest son just turned fifteen. That means he now has a driver's permit. He isn't especially thrilled that he has to learn how to drive in the lame minivan.
My parent's flights were canceled over the Christmas holiday (they were flying Southwest). They are coming down this weekend. We plan on having a fun Superbowl party with lots of junk food.
Last year I took a couple of kids to the grocery store to buy stuff for the Superbowl party. That was a big mistake. Before I turned around the cart was filled to the brim with unhealthy snacks. My son ended up eating Doritos and M&M's for dinner.
Also, February is prime orchid season.

If you’ve been reading my articles each week, by now, you know that I believe in the incredible power of the stock market. I’ve spoken, at length, about how investing in the stock market is essential to your long-term financial well-being. I’ve also spoken about how no one knows what the markets are going to do. No one. Anyone you see on TV or any article you read on the internet is pure conjecture. They are guessing. They might as well be using a crystal ball. In the short term, no one has ever had the ability to diagnose the markets. Don’t let them derail you. I can’t believe I am doing this but….. Now I am going to make a big prediction. Are you ready? A portfolio of stocks will double in value over the next ten years. Have I completely lost my mind? Are you sitting at the screen, staring in disbelief? It’s ok. I understand. But let me make a very logical argument why this prediction has a good chance of coming true. I like to think of myself as somewhat of an economic historian. So let’s take a look at the past century. From 1920 to 1930 the Dow Jones rose from 107 to 244 points. You may notice that the points more than doubled. They increased by 128%. So my prediction would have come true. Let’s look at all the other decades. 1930’s, the Dow went down from 244 points to 151 (or a 38% loss) 1940’s, the Dow went up from 151 points to 198 (a 31% gain) 1950’s, the Dow went up from 198 points to 679 (a 242% gain) 1960’s, the Dow went up from 679 points to 809 (a 19% gain) 1970’s, the Dow went up from 809 points to 824 (a 2% gain) 1980’s, the Dow went up from 824 points to 2801 (a 239% gain) 1990’s, the Dow went up from 2801 points to 11,357 (a 305% gain) 2000’s, the Dow went down from 11,357 points to 10,583 (a 7% loss) 2010’s, the Dow went up from 10,583 points to 28,868 (a 172% gain) "But Dave," you may be saying to yourself, "there are a lot of decades where the markets did not go up by 100%. How can you say my money would double in a single decade?" I have four words for you: dividends and compounding interest. You see, when you look at the S&P 500 and Dow Jones, the percentage changes do not include the dividends. It only reflects the point increase. Let’s take a look at the 1940s. At first glance it is not particularly exciting. A 32% increase over an entire decade is only 3.2% per year. But those stocks were also paying out dividends which are not included in the point increase. In the 1940’s the average dividend across all the companies in the Dow was 4.7%. That is a very big deal. The actual amount of money an investor would have made was: 3.2% stock price growth plus 4.7% dividend per year is 7.7% per year. Then we come to compounding interest. Albert Einstein famously said, "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it." Compounding interest is the idea that your money makes money on the money that it makes. Let’s say: Year 1: 10% investment return on $100 is $110. Year 2: 10% investment return on $110 is $121. Year 3: 10% investment return on $121 is $133…..you get the idea. In the 1940s, 7.7% compounding over ten years is a 110% increase. Your money would have doubled. If you include dividends and compounding interest, the only decades where your money would not have doubled were the 1930’s and the 1970’s and the 2000’s. So you would have doubled your money in seven of the last ten decades. You would have only lost money during the 1930’s (The Great Depression). So will my prediction come true? Will your money double in this decade? It certainly isn’t a guarantee but I still like my chances. Be Blessed, Dave

 

How to Lose Money By Not Losing Money

FAMILY UPDATE

Some sort of flu virus is hanging around our house. All three boys missed school. This is how you know your child is really sick (instead of faking to get out of school):
1. They want to cuddle Mommy.
2. They turn down a cookie and ask for applesauce and toast.
3. They tell you then don't want to play video games.
We were walking around Siesta Key last week and while looking around at the trees, we saw this: (can you see it? Hint: It's very patriotic).

It’s time to get back to the basics. It surprises me that people invest in the stock market with no real concept of how it has performed in the past. If you are relying on these financial vehicles to fund your retirement you need to understand the data. Otherwise it is very easy to get derailed by fear. Of course, past performance doesn’t guarantee future success. But when something has had the same returns for 200 years, you need to pay attention. Note: Whenever I refer to the "stock market" I am referring to the S&P 500 which represents the 500 largest companies in the U.S. Let’s look at what the stock market has done in each of the past ten years. 2012 +15.89% 2013 +32.15% 2014 +13.52% 2015 +1.38% 2016 +11.77% 2017 +21.61% 2018 -4.23% 2019 +31.21% 2020 +18.02% 2021 +28.47% 2022 -18.01% Takeaways: You would have made a fortune investing in stocks over the past decade. The money would have tripled. The "down" years are really put into perspective when you see the returns before and after. Markets are remarkably resilient no matter what else is going on in the world. Let’s look at longer time periods. In the past ten years, the market has returned an average of 12.51%. Over the past twenty years, the market has returned an average of 9.77%. The past thirty: 9.63% The past fifty: 10.31% The past seventy: 10.70% I’m noticing a pattern here. How is it that, over any meaningful time period, the markets have returned 10%? I mean, seriously, what could be more consistent and predictable? I often get pushback to these ideas. I hear, "Dave, I am older now, and I don’t have time to make the money back." First of all, you are going to live longer than you think. If you are a healthy 65-year-old your life expectancy is ninety. Secondly, if you play it safe in order to not lose money, I have bad news. Let’s look at someone who invested over the past ten years, versus someone who put their money in bank CDs. Original Investment: $10,000 Invested in stocks from 2012-2022 Final Value: $32,490 Original Investment: $10,000 Utilized bank CDs from 2012-2022 Final Value: $11,422 Everyone who tried to be safe and "not lose money" lost ALOT of money. I can’t drive this home enough. Many times, by trying to protect their savings, people like you lose vast sums of money without realizing it. In this scenario do you ever hear someone say, "I invested my money in CDs for the last ten years and I lost $20,000"? Of course not. Nobody thinks that way, but you simply cannot build real, sustainable wealth by sticking to guaranteed investments. The media has you completely fooled. This is yet another variable that can push you into making bad decisions. In order for you to pay attention to the media every day, they have to make it appear you need to pay attention to the markets every day. Imagine if they told the truth: "Today the markets may go up or may go down. It really doesn’t matter. What’s important is that over the medium to long term stocks will do well. There is no need for you to even know what the markets are doing. It doesn’t matter. You’ll be better off if you don’t pay attention. And now a message from our sponsor….." I’m pretty sure you would change the channel. Be Blessed, Dave

I am now doing virtual Social Security webinars each Saturday at 10:00 AM. If you know someone that should attend send them to www.SocialSecurityRSVP.com. Thanks!