Wednesday, January 15, 2014

Financial Tropes Exposed - and Some New Year's Money Heads Ups!

Exposing widely circulated financial tropes is always a thankless task and an endless battle. You are fighting not only against the co-opted (by corporatism) MSM and its lackeys, but also the blow-dried yellers and screamers inhabiting the Business cable shows. These bozos tend to pop out sporadically to yelp at the hoi polloi and question why they are still "sitting on the sidelines". 

Thus, it come to the point one must expose some of this nonsense, even though one's audience may already have been convinced the Street's snake oil salesmen are telling the truth.

Under Financial Tropes Exposed:

1) You Need to Save $1.8 Million or More for Retirement

Yes it is true that many people aren't saving enough. But at the other end too many people are saving too much, and likely postponing retirement when they could already be enjoying it. One story that recently caught my eye appeared in MONEY magazine  (Jan. -Feb.) and concerned a couple with current total assets of $1.8 million - but for whom the magazine felt it incumbent to offer advice on how to save more!

But the couple may be wasting time and ending up like the subjects described last week in a New York Times Sunday Review piece. That concerned people in an experiment on consumption and waste being offered chocolate pieces contingent on how many hours they listened to white noise, instead of decent music. Every two hours listening to white noise earned a chocolate piece while listening to proper music earned nada. At the end of the experiment (on average for a given bloc of time) a large set of subjects had compiled an average of 10.4 chocolates of which only 5 were eaten, the rest wasted - they could not consume them later. Moral of the story? People over-worked and over-earned but inevitably under-consumed.

Applied to the real world of finance: most people never felt secure enough to stop working, they always wanted more because they feared losing it. Yet the evidence showed the 'more'  one gained or earned,  the more was usually wasted (or left unused). (In the case of a retired person, it would mean leaving a huge sum of assets behind which your 'heirs' may collect, or the state - if you die intestate)

Now, according to Morningstar Investment Management's David Blanchett, the evidence is in that working people are making the same error regarding saving for retirement.  He especially takes issue with the "80 percent replacement" rule which asserts that prospective retirees need to plan to replace at least 80 percent of their pre-retirement income. So if your pre-retirement income was $50,000 a year, you had to plan to be able to receive at least $40,000 a year. If your projected retirement is 25 years, then this means you need:

($40,000/ yr) x 25 years = $1, 000, 000

But by Blanchett's analysis this formula could lead some workers to over save for their golden years by as much as 20 percent.

2)  Put More Money Into Stocks AFTER You Retire.

This is an incredibly bad idea, so it was even more incredible to see Jane Bryant Quinn pushing it in the most recent issue of the AARP Bulletin. Quinn cites some new study which appears to show retirees are less likely to run out of money if they have more money in stocks - after they retire - as opposed to being "too cautious" and easing out over time.

The inescapable fact, however, is that the retired ordinary person (as opposed to the rich one percenter) has virtually no time at all to make up losses after a stock crash-  should it occur. He is then left to try to scrape by however he can - especially if 55% invested in stocks as one person suggests. A far better strategy, if one doesn't wish to outlive his money - is to save aggressively and then use savings to purchase immediate annuities. These then create a stream of income you're unlikely to outlive. It is preferable to stock-mutual fund dependency because you are not hostage to some phantom money stream that will gyrate with any and all external events in the markets. And if a correction or crash occurs, you can get through it.

3) You Don't Need a Will - You're Too Young

Incredibly, nearly 2 in 3 Americans have no Will. Though they may pout and whine about the "government" taking their hard earned money, this is where it all gets exposed as nonsense-- since without a will that's exactly what you're allowing to happen!  No one likes to think about the inevitable (except maybe the crazed fundies in their salvation and 'Hell' phantasms)  but think about it you must - especially if a  Bird flu pandemic were to be facing you.   Among the myths that people buy into:  

"Joint ownership of accounts, property etc. makes a will unnecessary". 

This is a common misconception. In fact, joint ownership alone often creates needless state or federal estate taxes and may result in gift taxes being due. It may also deny you complete control over your property while you're still living. Thus, joint ownership is a poor substitute for a will but can work well in conjunction with one.  

"A Will is not needed for a small estate".

On the contrary, the smaller the assets or estate the more important it be settled quickly, since delays mean increased expenses cutting down the proceeds. In many cases, an estate is larger than the owner realizes, and it's often undervalued. Still have all those 1952 TOPPS baseball cards? Well, they are part of your estate and if in near mint condition, now worth over $55,000.  

Can you prepare a will - last will and testament- on your own? Yes, but it's not a good idea. The reason is that many do-it-yourself wills are declared null and void by the courts.   My wife and I got our original will done soon after our marriage (1975)  by an attorney  in Barbados, it took ten minutes and cost $100 Bds. We got our will revised about ten years ago, to take into account family-beneficiary changes etc. It was done by a local attorney for about $200 and took less than a half hour.  

Given such an important piece of the typical American's financial puzzle, it is incredible that more haven't done it. It's especially incredible that folks who otherwise are hyper money careful, watching every penny, controlling their credit cards etc., are prepared to let tens of thousands slip out of their fingers (to the state) because they are too lazy to prepare a will!

Under Financial Heads Ups:

1) Be Aware of How the Affordable Care Act Affects Medicare:

Many seniors aren't aware of how the Obama Affordable Care Act starts affecting Medicare this year. The primary effects will be on all Medicare Advantage plans, which the ACA subjects to a $156 b decrease in spending over ten years, The changes will already be seen by many Advantage members in more limited options, including for primary care physicians (already "thousands" have been cut from networks in 11 states according to the AARP Bulletin).  Another change you're likely to see is higher premiums, which some plans are likely to impose in order to preserve existing benefits and choices.

2) Make a Plan to Foil ID Thieves:

This ought to be on almost everyone's radar after the recent TARGET fiasco, with nearly 120 million people compromised in some way.  Some of the measures are pure common sense, but it doesn't hurt to repeat them:

a) Never provide any personal info, like your Social Security number, to anyone you don't know - or over the phone.

b) Get off all mailing lists for "pre-approves credit cards" - as they're a gold mine for identity thieves. To opt out you can call: 888- 567-8688 toll free

c) Access your free credit report at least once per year at:

If you don't plan to apply for new credit or loans then freeze your report so crooks can't get new accounts in your name. (Type in 'security freeze' at the websites for Experian, Transunion, and Equifax.)

d) Ask your credit card providers to issue you new smart cards with EMV chip technology. If unavailable, then replace existing cards with ones with your photos.

e) Shred all documents that contain personal information - use cross-cutting shredders if you can.

Hopefully this advice will help to avoid money issues, problems in this new year.

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