RSSArchive for 2015



December 2015 Economic Update

Bill Mullen MBA, CFP® Presents:


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Changes in Social Security Benefits

Color-Picture-2004-3-204x300The Bipartisan Budget Act of 2015 took away a method for seniors to maximize their Social Security benefits. However, there are a few exemptions.

Prior to the act being signed on November 2, 2015, a person who was eligible for Social Security benefits and had reached Full Retirement Age (FRA)-mainly 66 for those born in 1949 or earlier-could file for benefits and suspend. Meaning, they were declaring that they were eligible to collect their full benefit but they did not want to begin collecting at that time.

This technique is called “Filing & Suspending”. It accomplished two things. First, it made a spouse or minor dependents eligible to collect auxiliary benefits up to half of what the person who filed and suspended, would have collected at their FRA. Second it allowed the filer’s benefit to increase at the rate of 8% per year up to the filer’s age 70.

The filer did have the option of changing his or her mind at any time after filing and suspending. They could request a lump sum payment of the delayed benefit. For example, a person whose benefit would have been $2,000 per month at their FRA, filed and suspended at age 66, but decided at age 68 that they wanted to start collecting monthly benefits, the Social Security Administration would start paying them $2,000 per month and would pay them a lump sum of $53,760. The calculation for the lump sum is as follows;

First year suspended ($2,000/month times 1.08) times 12 months  =             $25,920

Second year suspended ($2,000/month times 1.16) times 12 months =           $27,840

Total                                                                                                                                  $53,760

If the filer did not change his/her mind, at age 70 they would begin to collect $2,640/month (1.32 x $2,000) or $31,680 each year. Under the new law, file and suspend was changed effective May 1, 2016, meaning if you are not 66 prior to May 1, 2016 no one in your family will be eligible to collect benefits during the suspension period. Nor will there be an option to collect lump sum payouts.

A filer still has the option not to collect their benefit at their FRA so that the benefit will increase by 8% per year up to their age 70. This not only increases retirement benefits, it also could increase survivor benefits for a surviving spouse.

There is one other important date that was put into the Bipartisan Budget Act of 2015. That is December 31, 2015. Anyone who will be 62 by December 31, 2015 will be eligible to collect spousal benefits against a spouse who had filed and suspended at their FRA or had reached their full retirement age and was collecting their benefit.

One final note; there does not appear to be any changes in the Act affecting benefits for widows/widowers and/or eligible divorcees.

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Delaying Social Security Benefits can make a Significant Difference in Retirement Lifestyle.

Bill MullenAccording to the Social Security administration, a girl born in 2000 has a life expectancy of 84 years and a boy born in that year can expect to live until age 80. The numbers for similar births in 1900 were 58 and 52 respectively.

If you understand that the expectations of life longevity are understated for those who survive to age 25, people need to plan on living longer in retirement. For example a couple now age 65, someone born in 1950 when life expectancy was 71 for females and 66 for males (National Center for Health Statistics), now have a life expectancies of 87 and 84 years (Social Security Administration).

When a young couple starts a family, the concern is dying and leaving his or her family with lots of debt. That concern can be alleviated with the purchase of life insurance. When that same couple reaches retirement age, the concern is not dying. It is living for another 25-35 years and running out of money.

The options for solving that problem are not as easy as buying life insurance. Work longer; live on less; move in with your children; go on welfare. These are some of the options for people who did not start planning for retirement early enough. I continue to be surprised that many, many people do not understand that they will reach a point in their lives, if they live long enough, where they will not be employed with a paycheck arriving each week. The reasons are numerous-illness; no job available; pride. There is also the belief they can save enough in the last 5 years of working to last through retirement or still think they will eventually win the lotto, hope for inheritance and on and on and on with more wishful thinking.

Not too many decades ago, it was common for workers to retire at 62, start collecting Social Security and along with a pension and a small amount of savings, retire with some degree of comfort. Pension plans are not as common as they once were and the saving habits of the average American are not a habit at all. The replacement for pensions, defined contribution plans like 401Ks, are managed by the participant and often ignored and therefore not managed at all.

The one saving factor could be their Social Security benefit. More than likely it will not be enough to make their retirement years very comfortable but it could be extremely helpful. Delaying taking a Social Security benefit until age 70, could increase the benefit by 32% over that which they would have received at their Full Retirement Age (FRA). For example, if they were to receive $2,000 per month at their FRA, at 70 it could be $2,640. That is an increase of $7,680 a year.

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Drags on Your Portfolio Returns

Company BannerThe following is an article from my Weekly email.

As the New Year gets underway, you might be considering investing in an actively managed mutual fund. Most investors evaluate the cost of owning a mutual fund by looking at its expense ratio. However, there are four “hidden” mutual fund fees that are not captured in the expense ratio of which you should be aware. All costs, whether published or hidden, will  act as a drag on your ability to grow your nest egg. Below are some guidelines to help you better understand these hidden costs.

Transaction costs – Mutual funds and exchange traded funds (ETFs) are regularly buying and selling shares of companies that the funds own. And just like you have to pay a fee to buy or sell a share, so do mutual funds. Of course, they are buying on a much larger scale than you are. That helps them keep their costs lower on a per share or per transaction basis. Even with economies of scale, transaction costs really add up. And they are not factored into the expense ratio. Many experts put the average fund transaction cost at 0.5%.

Cash assets – Actively managed funds often keep a fair amount of the money invested in cash to cover redemptions and other expenses. Actively managed funds keep, on average, about 5% of their assets in cash. How does that affect your returns? There is a premium for equity over and above cash. In other words, you expect the return on equities over a long time period to exceed the return on cash. If a fund has 5% in cash, over the long term, it is going to cost you about 0.3% in lower returns.

Sales load – There are really two different kinds of sales loads. The first is loaded funds, where you have to pay a 5% fee to buy into the funds. The 5% sales charge goes to the brokers, who get commissions for selling you the funds. The percentage of funds that charge loads today is lower than it used to be. The sales charges are lower, too. Today, they’re typically around 5%.

Tax efficiency – Actively managed funds, by and large, are less tax efficient than index funds. If your money is in a 401(k) or an IRA, that does not matter. However, if you have money in taxable accounts, it can be important. Actively managed funds buy and sell shares more frequently than do index funds. These transactions occur for various reasons, primarily the result of the fund’s manager moving in and out of stocks in an attempt to maximize returns. This turnover makes actively managed funds less tax efficient than index funds. You can use MorningStar to see a fund’s pre-tax return and the tax-adjusted return. MorningStar actually calculates a tax-cost ratio for each mutual fund to give you a sense of how bad the tax hit will be for that mutual fund based on many factors; primarily capital gains because of the constant buying and selling.

Understand the long term cost to your wealth – Assume a 1.12% expense ratio for the average actively managed mutual fund. Add to that all the hidden fees discussed above, and it adds up to 2.27%. On the surface, 2.27% does not seem like that big a deal. But let us assume that stocks return 7%, a modest assumption based on historical data. If you lose 2.27% in an actively managed fund to all these fees, it will consume 33% of your total return over a lifetime of investing. This is the magic (or horror) of compounding. With these fees, you are losing 2.27% every year, but you are also losing the interest or growth you would have enjoyed had you not lost the 2.27% to begin with. In one year or even five years, that may not be a big deal. But in 10 years, it starts to hurt. In 20 to 30 years, as this problem builds up, it has more and more impact. And, you end up losing almost 33% of your returns.

1. –
2. – Forbes
3. – CFA Institute
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5. – PBS Frontline