There should be no surprise when I write that just about all of us has less wealth than we did 18 months ago. The stock markets have taken a dive. It will not be long before other parts of our economy follow suit. Jobs will become harder to get and keep. Real estate values will decrease; travel, autos and consumer goods will be less expensive and easier to get. We will be more reluctant to purchase them. People will feel poorer than they did in the Eighties and Nineties. So what's new?
Business cycles have been around for the history of modern economics. I can't tell you when "modern economics" began, but my guess is we can trace these cycles back to the beginning of the industrial revolution in the Eighteenth and Nineteenth Centuries. Any of us who thought things were different this time were just foolish. I am reminded of what I wrote a few issues ago. It was a remark made by an analyst who told us we should worry about the advice being offered when somebody tells us that this time things are different.
I have been
hearing about these bad times from my clients for about 18 months. I decided
to put a quantitative measure in front of you so you can actually see
how well you are faring.
To be in the top 1% (which means that 99 of every hundred families earn less money that you), your family income would need to be more than $373,000. To be in the top 5%, your income needs to be more than $147,000. To rank in the top 15%, your income would need to be more than $72,000.
Your net assets decreased, but what has that meant to your ability to maintain the same standard of living you enjoyed pre March 2000? Probably nothing. Until the next recovery (which is probably as inevitable as this recent downturn) it probably means less money for your estate. That is not really your problem.
I know we are not happy (I certainly include myself in this bunch) with the state of the economy. I am not suggesting a party to celebrate our good fortune. Do not despair. Most of you are doing better than most of the people in this country and certainly most of the people in this universe. You are doing better than your parents did, and you have achieved financial goals that you never anticipated as a child. Be cautious, but be happy.
I am not suggesting
you do nothing. We should have a plan at all times. Please read on.
I really have nothing new to offer you. I am actually enamored of the advice I have been giving you for the 15 years I have been writing this newsletter. These things include an asset allocation model that includes large companies (maybe 60%), smaller companies (maybe 30%), and the balance in international equities. I think that half of each asset class should be in index funds. I am a big believer that money you will need to use in the next 5 to 10 years should not be in the stock market. All this stuff is the same as always. In the last issue of MONEYWISE (I'll be happy to send you a copy if your archive copy was stolen or lost), I wrote about the types of funds you should consider looking at. I suggested value-oriented funds, and I explained what they are. I continue to recommend that type of fund. The growth stocks seem to be the worst performers in these troubled times.
If you are saving towards retirement or for specific goals, the stock market was never supposed to be a road to wealth. Well managed, we can have a reasonable expectation that we should have an average rate of growth above the savings account rate of return.
The history of market returns as measured by the Standard and Poor index of the 500 largest companies over 68 five-year rolling periods beginning in 1926 shows us that stocks had positive rates of return (and above the U.S. Treasury Bills) 59 times.
Finally, history has shown us that it is not possible for us to buy at the bottom of the market and sell at the top. It has been demonstrated over and over again that it is easily possible for us to sell at the bottom and buy at the top. If you don't have the discipline to do the right thing, you should probably buy good bonds. But that won't happen. The weakest among us will sell now to buy the bonds, and then when the next upswing is clearly and demonstrably in place, the bonds will be sold and you will buy stocks, probably at another high in the market.
continue investing. Dollar cost averaging always seems to work in your
favor. For us old folks, hang in there. Manage prudently and keep your
5 to 10 years of actual financial needs "in the bank."
There has been much written about Social Security. Discussions about the eventual bankruptcy of the system, privatization and variable benefits based on investment results are all part of the debate. Here is some information that should be useful to you when you think about this hot topic.
The largest annual benefit for a single person collecting at age of 70 is about $28,000 If you are single and will be collecting at age 65 and have earned close to the maximum amount of taxable (Social Security) wages in the years you worked, you can expect to collect about $20,500. If you want to know your exact projected benefit, you can file a form SSA-7004 available on line at ssa.gov. If you don't have access to the Internet, I can give you the form.
In 1975, Congress passed legislation designed to eliminate the need for periodic hotly debated legislation to increase Social Security benefits for changes in the cost of living or COLA. This new legislation provided for automatic COLA based on the consumer price index. This seemingly innocuous law is the reason that the benefit is so valuable and so expensive. In order to support the COLA, the premium payment by workers still contributing is high, and the amount contributed by long-term retirees was very low.
If a person retired at age 65 in 1975, he/she would have collected a benefit of about $6,300. His/Her lifetime contributions (theoretically) would have supported that benefit. Because of the COLA, that same person 26 years later is collecting about $20,500. Those of us currently working are paying for the additional benefit. In 1975, the maximum annual contribution by a worker was less than $900. In 2001, the maximum contribution by a worker is $4,985. There has been an increase of about 7% in what we pay in and an increase of about 4.4% in the benefits. Extrapolating the historical increases, in 26 years the amount a worker will need to pay could be $27,611 in order to provide a benefit to a retiring 62-year-old person of $62,800.
In 1975, Congress
also took action to reduce the benefits paid to retirees with substantial
other income (including tax exempt income). Benefits became subject to
the income tax. The effect of this tax is to reduce benefits available
to those with other ways of supporting their retirement.
will need to decide if the promise of an ever-increasing benefit to the
total retired population can be supported. If so, how will we support
it? The current system can work as long as we are committed to having
workers pay whatever is necessary to provide the benefits to retirees.
Perhaps benefits will need to be reduced further by decreasing the COLA
or increasing the amount subject to tax. These are the mechanisms that
are already in place. I don't hear much said about them. If we can't tax
workers to the extent necessary to maintain the current level of benefits,
then we will need to find ways to reduce the benefits available to identified
groups of retirees.
Beginning in 2002, the amounts of maximum allowable retirement deferrals will be increased for all types of retirement plans. All types of IRAs (Roth, deductible and nondeductible) will be increased from $2,000 to $3,000 and an additional $500 if you are age 50 or over.
Salary reduction limits have increased for 401(k)/403(b) plans from $10,500 to $11,000 and SIMPLE plans from $6,500 to $7,000. For 457 plans, the limit is raised to $11,000 from $8,500. For workers who have reached age 50, the additional amount allowed for all plans is $1,000, with the exception of the SIMPLE plan, which is $500.
For the self-employed the maximum limits have been increased from $25,000 to $35,000 based on earned income.
There are new credits for employers to encourage them to make plans available to employees. Employers may offer employees professional retirement advice without including that benefit as part of taxable income.
be certain to check with your employer so that timely elections can be
tax exemption amount goes to $1,000,000 effective for persons who die
after December 31, 2001. This can significantly affect planning for many
of my clients.
All of the
changes outlined below apply to 2002. The child tax credit has been increased
from $500 to $600. The adoption credit has been increased to $10,000 from
the current $5,000 limit.
The tax rates have been decreased by 1% in every category. You should notice a small increase in your take-home pay as a result of these changes.
The Education IRA has been improved. Now you can contribute up to $2,000 for each beneficiary. You can do this as long as you earn less than $190,000. If you want to use this money to pay for attending elementary and secondary school, that is all right.
When the Qualified
Tuition plans were created a few years ago, I wrote there was significant
interest in eventually making any growth on these funds tax-free. Effective
2002, this is the case. Also, funds may be rolled over from one plan to
another plan maintained for the same beneficiary.
A new deduction for qualified higher education expenses is available. Eligible taxpayers can deduct up to $3,000.
-If you haven't received your rebate check, you can telephone 866 241-7676;
-The '02 Social Security wage base is expected to be $84,900, a rise of $4,500. This would mean an additional $279 from the current maximum of $4,985. You can double the last two figures if you are self-employed.
Three months have passed since the WTC/Pentagon disaster. I wrote about the GENIE FOUNDATION serving as a conduit for getting money directly to the families of victims identified by contributors. Unlike most of the larger organizations, the money has flowed quickly to families identified by the contributors. I am pleased with our results. If you know a family of a disaster victim that is in need of support, please contact me. I will be happy to prepare the tax return (no fee) for any family who survives a victim of the attack. I want to take this opportunity to thank Lorraine Tozzo, president of the GENIE FOUNDATION, for her tireless effort administering this campaign.
On November 26, Kenneth R. Feinberg was appointed as "Special Master" of the September 11 Victims Compensation Program. This is the program that was passed by Congress to provide an alternative to law suits for the families of victims of the disaster. The law provided that regulations had to be issued by December 21, 2001 and the program had to be completed within two years. It is important for affected families to become familiar with this program. You can follow developments by reading the WTC tab on my web site on a regular basis.