Outside Economics

Social Security - When To Take It

Posted by Wendell Brock, MBA, ChFC on Thu, Jul 24, 2014

There is a great debate growing about when is the best time to start taking Social Security. There are pro's and con's on either side of the debate. But really, it all boils down to a very personal decision based on your specific situation.

Social Security Check

The factors of when to take Social Security depend on two considerations: 1) the quantitative information, your work status between age 62 and your full retirement age; your life expectancy; your marital status; and your desire to protect your assets; and 2) the qualitative information, what are your goals during retirement, when do you anticipate slowing down, will you have the stamina or interest to pursue things later in life, say, over age 80, etc. This will be a two part article, first I will discuss the quantitative factors how each of these may affect your personal situation, next week I will discuss, perhaps the more important, qualitative factors.

If you have not yet reached your full retirement age as defined by Social Security (for most people that's about age 66) and you are still working, it will probably not make sense to start receiving your Social Security benefits. Why? Because if you earn over the Social Security earnings limit, your Social Security benefits will be reduced. Once you reach full retirement age your benefits will not be reduced regardless of other income you may earn (although your benefits may be taxed.)

If you live to your standard life expectancy, believe it or not, you will get almost the same amount whether you take Social Security early, or wait until later to take it. To see how this works, it helps to look at an example using real numbers, such as the one below.

Steve is age 61 and he is deciding when to take social security. Here are the numbers from his Social Security statement showing what he will get at which age:

  • Age 62: $1,643 ($19,716 per year)
  • Age 66: $2,238 ($26,856 per year)
  • Age 70: $3,009 ($36,108 per year)

A 62 year old man has a life expectancy of nineteen years, or age 81. Social Security has a cost of living adjustment which provides an increase in benefit of 2% a year, but for now we’ll factor it without that. Here are the three possibilities:

  • Assume Steve starts receiving benefits at 62. He gets $1,643 per month, or $19,716 per year, for 19 years. This is a total of $374,600.
  • If he waits until age 66, he gets $2,238 per month, or $26,856 per year, for 15 years. He'll receive a total of $402,870.
  • If he waits until age 70, he gets $3,009 per month, or $36,108 per year, for 11 years. He'll receive a total of $397,190.

Clearly, if Steve lives to life expectancy, he maximizes his lifetime income by taking Social Security benefits at age 66. When you factor in the 2% annual increases, Steve would expect the following total amounts:

  • $450,320 if he started benefits at age 62
  • $502,720 if he started benefits at age 66
  • $514,800 if he started benefits at age 70

If Steve lives to age 81, he will maximize his lifetime income by waiting until age 70 to begin taking his Social Security benefits. In Steve's case, his break even age matches the average breakeven point which is 80, meaning if he waits until age 70 to begin benefits, he must live to at least age 80 to receive the same total dollars he would have received if he started taking benefits earlier. If you don't think you'll live past 80, you're better off claiming earlier. If you are married and think one of you will live past 80, it might make sense to delay.

Morningstar's Blanchett wrote a report, "When to claim Social Security" in The Journal of Personal Finance. He said "We find that females, married couples, retirees who expect to invest in relatively conservative portfolios during retirement, and retirees who have longer life expectancies are likely to benefit most from delaying Social Security benefits. On the other hand, retirees who have shorter life expectancies or invest more aggressively and believe they can achieve a relatively high return on their retirement portfolios would likely be better off taking Social Security earlier."

There are a lot of dollars at stake, and of course no one knows their life expectancy with certainty. However certain health and lifestyle factors will affect your own personal life expectancy. Just as an insurance company would do underwriting, I would suggest you do an analysis on your own personal life expectancy, using a life expectancy calculator that will ask you health and lifestyle related questions.

For singles, life expectancy is one of the primary factors to consider. For married couples, you have to consider more than just life expectancy. The way Social Security survivor benefits work, when you are married, upon the death of the first spouse, the surviving spouse can keep the larger of either their own benefit or their spouse's benefit. Because of this, there are ways for couples to coordinate how and when they each take benefits so they can get more as a couple.

I'm a strong believer in leaving an inheritance for my posterity. Using up retirement savings in lieu of potentially one day getting a larger Social Security check just doesn't achieve this goal. It makes more sense to use money that won't be there after I'm gone - i.e. Social Security - than to burn through things like cash savings, retirement account funds, and home equity. Personally, I'd rather try to save these assets, using Social Security (a source of income that I won't be able to pass on to descendants) to pay the bills rather than dipping into personal assets.

There are also a variety of strategies regarding Social Security. One is a switching strategy, which allows one spouse to claim another's benefits. For example, a married man who is 67 and doesn't need the benefits can claim his wife's benefits until he's 70, and let his own benefits continue to grow. When he turns 70, he can switch to his own benefits. Another switching strategy: A divorced woman who is 67 and had been married for at least 10 years can claim her ex-husband's benefits until she reaches 70, then switch to her own.

When to begin taking Social Security benefits is a very personal decision. Knowing the rules will help insure that you don't needlessly waste months of benefits that you could have received. If you have questions about when you should receive Social Security benefits, feel free to contact us for a free consultation. If you know of someone who may be at the threshold of this decision pass along this article to them, you may just save them some grief.

Note: Next week qualitative issues surrounding Social Security.

A Special thanks to Dan Perkins, PhD. who helped with these articles.

Topics: retirement, Social Security, Life Expectancy, Morningstar

Economic History - Lessons To Learn

Posted by Wendell Brock, MBA, ChFC on Thu, Jul 17, 2014

The Fed and the politicians as well as many modern economists featured in the main stream media continually hearken back to the Great Depression, as if that is the only time in history our country went through a decline in the economy. There have been other depressions that are noteworthy examples to compare and contrast with the Great Depression. Perhaps there is some instruction we can glean from the depression of 1920-21.220px Warren G Hardiing 1923 Issue 2c

This time period is continually ignored by the powers that be because it proves the absurdity of their policies. The conventional wisdom holds that without government countercyclical policy, whether fiscal or monetary (or both), we cannot expect economic recovery—at least, not without an intolerably long delay. Yet the very opposite policies were followed during the depression of 1920–21, and recovery was in fact quite swift.

That particular depression, although short lived, was as difficult and as steep in it's slump as that of the years of 1929-33. The simple difference is that it ended quickly. Here are some of the stats from that time period: From the spring of 1920 to summer 1921, nominal GDP fell by 23.9%, wholesale prices by 40.8% and the CPI by 8.3%. Unemployment topped out at about 14% from a preceding low of as little as 2%.

The depression also saw an extremely sharp decline in industrial production. From May 1920 to July 1921, automobile production declined by 60% and total industrial production by 30%. At the end of the recession, production quickly rebounded. Industrial production returned to its peak levels by October 1922. The AT&T Index of Industrial Productivity showed a decline of 29.4%, followed by an increase of 60.1% – by this measure, this depression of 1920–21 had the most severe decline and most robust recovery of any between 1899 and the Great Depression.

The climate was terrible for businesses – from 1919 to 1922 the rate of business failures tripled, climbing from 37 failures to 120 failures per every 10,000 businesses. Businesses that avoided bankruptcy saw a 75% decline in profits.

It is instructive, as well, to compare the American response in this period to that of Japan. In 1920, the Japanese government introduced the fundamentals of a planned economy, with the aim of keeping prices artificially high. According to economist Benjamin Anderson, “The great banks, the concentrated industries, and the government got together, destroyed the freedom of the markets, arrested the decline in commodity prices, and held the Japanese price level high above the receding world level for seven years. During these years Japan endured chronic industrial stagnation and at the end, in 1927, she had a banking crisis of such severity that many great branch bank systems went down, as well as many industries. It was a stupid policy. In the effort to avert losses on inventory representing one year’s production, Japan lost seven years.”

The U.S., by contrast, allowed its economy to readjust. “In 1920–21,” writes Anderson, “we took our losses, we readjusted our financial structure, we endured our depression, and in August 1921 we started up again. . . . The rally in business production and employment that started in August 1921 was soundly based on a drastic cleaning up of credit weakness, a drastic reduction in the costs of production, and on the free play of private enterprise. It was not based on governmental policy designed to make business good.”

Instead of “fiscal stimulus,” President Warren Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.” By August of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and was only 2.4 percent by 1923.

The federal government did not do what Keynesian economists ever since have urged it to do: run unbalanced budgets and prime the pump through increased expenditures. Rather, there prevailed the old-fashioned view that government should keep spending and taxation low and reduce the public debt.

Those were the economic themes of Warren Harding’s presidency. In his 1920 speech accepting the Republican presidential nomination, Harding declared:

“We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity. We promise that relief which will attend the halting of waste and extravagance, and the renewal of the practice of public economy, not alone because it will relieve tax burdens but because it will be an example to stimulate thrift and economy in private life.

“Let us call to all the people for thrift and economy, for denial and sacrifice if need be, for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic. There hasn’t been a recovery from the waste and abnormalities of war since the story of mankind was first written, except through work and saving, through industry and denial, while needless spending and heedless extravagance have marked every decay in the history of nations.”

It is hardly necessary to point out that Harding’s counsel—delivered in the context of a speech to a political convention, no less—is the opposite of what the alleged experts urge upon us today. Inflation, increased government spending, and assaults on private savings combined with calls for consumer profligacy: such is the program for “recovery” in the twenty-first century.

Not surprisingly, many modern economists who have studied the depression of 1920–21 have been unable to explain how the recovery could have been so swift and sweeping even though the federal government and the Federal Reserve refrained from employing any of the macroeconomic tools—public works spending, government deficits, inflationary monetary policy, TARP, bailouts, QE—that conventional wisdom now recommends as the solution to economic slowdowns. The Keynesian economist Robert A. Gordon admitted that “government policy to moderate the depression and speed recovery was minimal. The Federal Reserve authorities were largely passive. . . . Despite the absence of a stimulative government policy, however, recovery was not long delayed.”

While there were many problems with Harding's presidency, his counsel applies to us today just as much as it did back back then. Sound fiscal policies, whether in government or in our homes require us to practice the principle of thrift and sacrifice; to learn to live a more simplified life, with less extravagance, and to live within our means.

What do you think about the solutions the Fed and the politicians are offering us today? Do you see ways we can return to the wisdom of the past? Join in the discussion with your comments.

Topics: Economy, Economists, Great Depression

Fixed Income Market - Simplified

Posted by Wendell Brock, MBA, ChFC on Thu, Jul 10, 2014

Recently, I came across a great explanation/story about how bonds worked and I added an element that explained how derivatives worked.  I have never had a drink, I think the story is rather funny simply because I have over the years been to many business parties where the booze flowed rather freely and I could imagine this sort of thing happening.DerivativeAlgorithmic Trading

Bond and Derivative Market

An Easily Understandable Explanation of Bond Markets

Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Heidi's "drink now pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit.

By providing her customers' freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for whiskey and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALCOBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.

Enter the derivatives… a derivative is basically an insurance policy on the bonds that buyers get to help insure that the bonds will one day pay off. These policies are traded too on the securities markets, however they are completely unregulated. Because the policy insures the bond it helps strengthen the bonds’ rating. The unregulated nature of the derivatives allows for the issuing company to extend its self beyond what typical capital requirements of other financial institutions, making these financial instruments extremely risky. (The greater the risk, the greater the reward; natural risk and return economics.)

For example a bank typically has a leverage ratio of 8-10 percent capital so for every $1,000.00 they lend they keep $80-100 or a ratio of 10:1 or 12:1 in what is called tier-one capital. However some of the derivatives were written by institutions whose capital level was extended to as much as 40:1 on up to 100:1; so they were keeping as little as $10.00 for each $1,000.00 they insured. Derivatives are not offered by your typical insurance companies.

Now for the rest of the story…

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALCOBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks' liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her whiskey supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations. Her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

The size of the world derivative market, as of December 2013, is $710.182 Trillion; The world economy is $72-85 Trillion, the US economy is only $17.02 Trillion, it is an extremely big market!

The investors turn to the insurance companies who insured the bonds and demand that they too pay up, however because they did not keep enough capital to cover such large losses they implode and seek a bail out to keep from laying off thousands of employees and to keep the world markets open. After all without insurance on the bonds, no one would buy the bonds in the first place (even government bonds) and thus capital flows would completely stop. Totally crippling not just Heidi’s community of Detroit, but the world as we know it!

Fortunately though, the bank, the brokerage houses, insurance companies and their respective executives are saved and bailed out by a multi-billion dollar cash infusion from the Federal Reserve Bank and the Government.

The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-alcoholics.

If you want check if your portfolio holds derivatives let us know by clicking here.

Note: I could not find the original author of the story about Heidi's Bar to give proper credit; I added several paragraphs because the original story did not actually talk about derivatives - just bonds.

Topics: Bonds, Derivatives, Bailout

The Greatest Country on Earth - America

Posted by Wendell Brock, MBA, ChFC on Thu, Jul 03, 2014

Tomorrow is the 4th of July the day we celebrate as the day our great country was founded in 1776, when we declared our independence from England. I thought I would write a few of my feelings about our country. I was raised the youngest of seven children in Los Angeles, California. My parents met during World War II in Utah. My father was a photographer in the Signal Corps and in charge of the photographic departments on several bases west of the Rockies. My mother worked in one of those departments in Ogden.

I was raised with a great love for our country. My parents took this very seriously. As I learned more and more about our country’s history and founding my love grew. Having read many books on our founding fathers, Abraham Lincoln, and other presidents, I do have an appreciation and love of these great people.  When we spend time learning about the good in America we learn to love her.

Top of Mount WhitneyMy brother-in-law use to take me backpacking when I was a teenager in the High Sierras. There is no place like the High Sierras in the world (so I am told by the many people we met on the trail from other countries). The time spent there I learned again to love our country and its amazing beauty. I have traveled to many of the other states in the Union on business, and I am always amazed at what a wonderful country we have. It is truly special. I personally believe that God put all the right elements here so a nation could thrive and spread goodness throughout the world.

We have a constitution like no other country, with our republican form of government; yes we are a REPUBLIC, not a democracy. This constitution was the first in human history to declare that as individuals our rights came from the God who created us, not from a person or a government. These rights limited the government’s control over our lives and allowed us the freedom to develop ourselves as we chose.

military saluteWe have the world’s strongest best trained military. Now I know many people say we dwell too much on the military or spend too much on the military, etc. I have heard all of that, including we should not be in this country or that country, we should not be the world’s police force – we should just stay home and mind our own business. The reality of being the world’s police force is this, if we are not there to serve, some other super power will be called in to serve. So would we rather have China, Russia, or someone else in those countries? What would be the political frame work they would leave behind? Now I know that not everything is rosy with the military there are a few bad apples that commit crimes, etc. But by and large they are great people who serve and truly bless the lives of the people in those countries. An opportunity to help these struggling countries blesses everyone involved.

I have read several histories about the wars America has been involved in, I have visited several cemeteries where hundreds of thousands of soldiers are laid to rest. I have pondered on their lives being cut short by the conflict they were in, with deep gratitude I give thanks for their sacrifice and  the sacrifice of their families; I believe that the God of this land has a special place for them.

We have an amazing geography wherein we are able to produce food in abundance, like no other place on earth. Very few things won’t grow in America. What a great blessing to produce and eat so many different foods.

We have a country where people from other countries can become an American. Becoming an American is a very special thing and I would hope that all people who come would be contributors to this great country and not work to tear it down. We have so many people who wrongfully beat a negative drum that it is sad to see what they are missing. I would ask them to study deeply its history and learn about the people and hopefully they will discover what an amazing great country that God has blessed us with.

I could go on with many more things about the greatness of America, but time and space are limited. So I will invite you to find at least five of your favorite things about America and share them with your family and friends this weekend. Help others understand why you are grateful to be an American. And always ask God to continue to bless America.

Oh - and one more thing we have a great flag - I love our flag - long may she wave!

Topics: America, 4th of July, Independence day


Wendell W. Brock, MBA, ChFC

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