Frozen Social Security Checks: It’s More Complex Than You Think

Frozen Social Security Checks: It’s More Complex Than You Think


Right off the bat, let me say that this situation applies to everyone! It’s as valid for those of us who are not yet receiving Social Security – if not more critical – as it obviously is for the roughly 50 million people who currently receive Social Security checks.


About 34 years ago, the federal government decided that since the prices of goods and services generally increase year after year – otherwise known as inflation or the cost of living index – Social Security benefits needed to reflect these changes in the cost of living. So the idea of a cost-of-living adjustment (COLA) was instituted in 1975.


Today, the Social Security Board of Trustees is projecting a moratorium on increases in our benefit checks for the next two years. To tell you the truth –like I always do – I have read the Associated Press report on this a couple of times and still have not found the reason for this decision.


As usual, though, there are those who argue that since inflation has been “negative” this year versus last year, the decision is fair. And there are those who say it is not fair. Perhaps you may be eager to know which group position I take? Let me give you some practical, factual information, accompanied by a little bit of speculation – what the heck!

Consumer Price Index vs. Reality

Theoretically, prices fell in 2008, when compared to 2007. Yeah! I know you’re falling off your chair in stunned silence, but that is what negative inflation means – in theory. Come on, folks, are your grocery prices lower today than they were a year ago? Those of you who are renters, did your rent escalate or decrease, since inflation’s been negative? I know the lease payments for our offices went up, without fail. And oh, do you remember how much movie tickets used to cost a year ago, versus what they are now?


In the interest of full disclosure, we are not on Social Security, so what happens with our office rent doesn’t really apply, in this case. What you must remember are the millions of seniors who do receive Social Security benefits while holding lease agreements similar to ours. Perhaps the seniors I consult with are weird, because the costs of their everyday stuff have increased since last year.

You Must Understand the Bigger Picture

According to the annual report published by the same Board of Trustees who said no increases for 2 years on May 12, 2009, Social Security will start going broke in 2016 and would basically be “exhausted” – I like to use the much-easier-to-understand phrase “dead broke” – by 2037.


Just a year earlier, the very same report by the very same Board of Trustees predicted 2017 as the “start going broke” date, rather than 2016. The dead broke year was also further out – four years to be precise – in 2041. I really hope that by next year these numbers do not move inch up yet again, becoming 2015 and 2033, and so on.


Michael J. Astrue, the Commissioner of Social Security, described this May 12 report as “disappointing, but not unexpected.”


A Little Common-Sense Speculation

Before I go any further, please notice that the Commissioner of Social Security said it is “not unexpected” that the trust fund will be “exhausted.”


Now, this is not me having access to privileged information, or mere speculative ramblings – this is information from the annual Social Security statement every America worker receives. The one that says “prepared especially for (your name).” The statement is signed by Commissioner Astrue, himself. Check yours – I tend to think he has a cute signature.


Now, would someone be crazy to say that Social Security is running out of money FAST and will be depleted, used-up, or bankrupt soon? Apparently not, as we continue to receive signed statements annually telling us about it.

A fixer by nature, I have thought of three possible solutions:

1. Increase the Social Security tax levied on workers and employers.
2. Reduce the benefits being paid out.
3. Create some combination of items 1 and 2.

This is a blog, so please feel free to share any other practical ideas you have about fixing the problem.

Of course there are those who say that by law, Social Security benefits cannot be decreased, so retirees should not worry. I agree with the law part, but I have three rhetorical questions:

1. Can those who passed the law change it?
2. What if there is no money to uphold the law? Period!?
3. If your pension’s administrators continue to send you annual statements projecting that the funds “will be exhausted” in such and such year, wouldn’t you be seriously concerned that it is actually happening?

Well, there’s always the possibility that the federal government will take care of all of us. But how? With money, of course. How does Uncle Sam make money? If you said from the taxes we pay, we are on the same page – which means you are following me so far.

Another Serious Fact

Our nation’s 10-year federal budget deficit, as projected by the White House’s Office of Management and Budget is running at an unimaginable $9 trillion. In laymen’s words, that means we are spending more than we have tax revenues to cover –$9 trillion worth!

So where do you think future tax rates are headed? If you’re thinking anything other than up, you are frankly fooling yourself. As for the government taking care of us via Social Security, I seriously don’t know.

My Free, Serious, Practical, and Sincere Advice

Regardless of how old or young you are, or your current tax bracket:

• Get your retirement funds out of the paths of taxable plans like 401(k)s, 403(b)s and IRAs as soon as possible. It does not make sense to delay taxation into the future when rates are likely to spike. We put our clients in vehicles that, when they access their money, do not create what the IRS refers to as “a taxable event” – meaning it’s tax-free, so they do not have to worry about tax rates.

• Plan on taking care of yourself – by yourself. Don’t count so much on the government. See it as a bonus instead of a necessity, because if you’re still counting on receiving your share, you might be devastated if the forecasts of the Social Security trustees turn out to be true – even partially.

This is the kind of candid advice we always offer our clients here at Laser Financial Group You see, we believe that practical concepts, rather than theory, should be incorporated into retirement planning – since people do actually retire in real life.

I am feeling like an incredible genius right now because almost all the principles on which we base our advice are turning out just as the doctor ordered. Well, not really. Come to think of it, it’s just plain old common sense at work, again!

Millions Get Swindled: 401(k)s turn into “104(k)s”

Millions Get Swindled: 401(k)s turn into “104(k)s”

You probably already know the conventional financial industry tagline about planning for a successful retirement. If your advisor is a regular industry guy or gal, it goes something like this:

You’ll need to get ahead of inflation so you have to invest in a well-diversified stock portfolio since they outperform other investments, meaning over the long haul, you’ll achieve your dream retirement. And as you approach retirement, your portfolio will be adjusted to reflect the years before retirement.

They refer to this as taking a more conservative stance to ensure that all your years of hard work will not go down the drain. As a financial strategist, I say this “wisdom” is debatable, if not outright flawed.

Before you read further watch this one-and-a-half-minute video from a recent “60 Minutes” episode:

These are real people, just like you and me, who trusted the “industry as usual.”

Here are my takes. But I must warn you – these are very candid, straight-talk opinions, supported by facts:

• How come people in retirement or close to it are exposed to that much stock market risk?


• What happened to the "we’ll make your portfolio conservative" promise?


• Who would even think it was worth it to save money in a 401(k) if, when they get close to enjoying the fruits of those years of labor, they knew they’d have to – unwillingly – work as a part-time cashier, greet mourners at a funeral home, or serve lattes in order to survive?

This is all part of a wider problem. According to a 2008 survey by the MetLife Mature Institute, one in four persons over the age of 62 said they wouldn’t/couldn't retire due to the economy. I'm guessing that right now you or someone you know is dealing with a jeopardized nest egg.

“Financial” Industry Response

In the light of all this, what does the financial industry tell those crushed investors?

Here are the direct words of David Wray, president of the Profit Sharing/401(k) Council of America: “A 401(k) is the absolute best way people can save for retirement.”

When asked to explain how the so-called best available vehicle could let tens of millions down, his response was “Nobody was saved in the current thunderstorm.” A totally preposterous, untrue, and frankly rude assertion.

One reason I know he's wrong: the clients of Laser Financial Group have not lost even a cent since the current stock market turmoil began. The way I see it, the very same people who duped and swindled investors by failing to keep their end of the bargain are basically now telling these investors, "Sorry. Tough luck. Take a hike. Hey, this is capitalism!"

I must point out that I in no way intend to attack Mr. Wray personally – but his outfit’s professional opinion is stupid and false.

Using 401(k)s is NOT the absolute best solution. I prefer to say that it's the best for those conventional industry professionals ... but for the realistic few like me, there are far superior options. Read my July 6, 2009, blog post for further details.

The CRITICAL Question

The broader question is how come investors are not pursuing the common-sense strategy we recommend for our clients, which gives them downside protection from the stock market, yet earns competitive index-based returns when the stock market is doing well – up to a predetermined cap?

Possible answers include:

• They don’t know that a strategy like ours even exists.


• Their so-called advisors don’t know about them.


• Their firms don’t offer them.


• They are not even licensed to sell them.


• They are not lucrative enough.

Perhaps you now see why I chose “swindled” for the headline on this blog post.

Those of you in the DC Metro area might already have read in the Frederick News-Post that I will be speaking at the C. Burr Artz Public Library in Frederick, Md., on Saturday, August 29 about this strategy, as well as how to accumulate and withdraw money, absolutely tax free – based on current IRS rules. For details and free tickets, call (301) 949-4449 or visit this link.

Here is the full 13-minute video of the “60 Minutes” program.

Unemployment Rate’s Up. Wait. Oops. Sorry – It’s DOWN!

Unemployment Rate’s Up. Wait. Oops. Sorry – It’s DOWN!

According to the much anticipated report issued by the Bureau of Labor Statistics on Friday, August 7, 2009, the unemployment rate stood at 9.4 percent, as of July 2009. It had decreased from the June number of 9.5 percent by a tiny little bit. You wouldn't have known it, though, if you'd been following the "experts."

On August 6 – the day before the report came out – I was able to get home around 5:30 p.m., which is really, really, REALLY early for me. So I decided to kick back and watch some news. I figured, “What the heck?”

As you might expect, economists, consultants, experts, and gurus everywhere. I mean really big, important people. Huge kahunas were all over the major TV networks, predicting that the unemployment number expected the next morning was going to be up a little bit from the June number of 9.5 percent, – not down.

Oh, no, definitely not down. They were predicting a lot of other things, but since they were using “expert” language, I did not really understand it all. As you know by now, they were wrong.

Don’t Get Me Wrong

I’m not saying these gurus are not worth listening to – not at all. Neither am I trying to tell you whom to listen to. But what I’m saying is that these experts do not have a crystal ball. Most of the time, they simply opine from their viewpoints, and often they say things that turn out to be w-a-a-a-y off. So you have to be very careful where you get your financial advice.

Pretty much on a daily basis, I help people clean up financial messes. These are ordinary folks who are not even sure how the messes happened in the first place. They were told, heard, or read some financial expert who said it was a great idea to:

• Pay off their mortgages quickly.
• Put as much as possible into their 401(k)s.
• Invest in the stock market, so long as they had a long-term focus.
• And much, much more…

In my opinion, it seems like those who are simply listening to so-called experts tend to be advised to do the opposite of the right stuff – and it boggles my mind almost daily as I consult with people.

Have you ever paused to wonder why everyone seems to be investing and striving to be wealthy, yet only a select few become truly financially independent?

As I pointed out in a column for the just-published, nationally syndicated Maryland Women’s Journal, the answer is plain and simple: for the most part, these conventional advisors are dead wrong.

I hope this little lesson of vowing that the unemployment rate was going up, when in fact it fell, will serve as a reminder that it is never a good idea to follow what you hear in the mass media on a wholesale basis.

Aspirin may be good for you – and countless others, for that matter – but if I, personally, take one tablet, I’ll wind up in the emergency room. The same is true regarding financial advice, or any advice. Just because it works for someone else doesn’t mean it’s the best thing for you!

And, oh, when the numbers were finally released around 8:30 a.m. on Friday, the experts had a reason (excuse?) for their predictions being off: A lot of people had stopped looking for work. I must point out to you that the Bureau has been using the same methodology of reporting forever – so that reasoning is basically nonsense.

As mere humans, we need to stop behaving like we – or the media gurus – have divine powers. Period! As always, it comes down to my two favorite words: common sense. You have it; use it.
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For a common-sense approach to wealth-building, avoid the traditional "experts." Call us today for your free consultation (301-949-4449) or visit our Web site: LaserFG.com.

You’ve Got to Be KIDDING!

You've Got to Be KIDDING!

That statement is in reference to this recently published New York Times article about a retirement boot camp run by two investment advisors who are partners in a financial advisory practice.

As you are already aware if you read my blogs regularly, I do not make a practice of engaging in any personal attacks, whatsoever. I commend good work, but I also challenge what I consider to be incorrect guidance that will not serve people well.

After many years as a financial strategist specializing in retirement planning, it is my very strong opinion that these two advisors are giving preposterous advice to the people attending their boot camps.

At Least We Agree on Something!

Well, we agree in part, anyway – to the position that retirees' expenses tend to increase, rather than decrease. But, in the cases I have encountered, that has extended past just the first two years. So many people are made to believe that because they are retired, they will spend less. By whom? Financial professionals who sell them qualified plans. Read the blog I posted on April 20, 2009, for my real-life experience.

One of the claims these boot-camp leaders make is that people must pay off their mortgages: “That’s a non-negotiable must-do before retirement.”

Damn it, have they any idea that to do so means the retiree's ability to receive mortgage interest deductions under Internal Revenue Code (IRC) section 163, will be completely eliminated?! Has it ever occurred to them to wonder why wealthy people still have mortgages? The average millionaire has only 11 percent of home equity – meaning their home is mortgaged at 89 percent.

I'm guessing that part of the boot camp goes something like this: “Um, you must pay off your mortgage because we do not want you to have to pay any interest. It is a stupid expense that must be eliminated!”

Which means they probably have no idea of the very simple financial principle called arbitrage: so far as a debt nets you a positive cash flow and increases your net worth, you should take on as much as is possible for as long as you can. These gals' practice is part of the Wells Fargo product offering, which interestingly enough exists today because of arbitrage. Amazing, isn’t it?

Let me put this way: Instead of – wrongly – teaching people to think about how much interest they are paying with their mortgage, smart advisors teach their investor clients to look at what they are simultaneously giving up – earning interest – by eliminating their mortgage.

If you are still not convinced that it may be a very bad idea to pay off your mortgage early, you might want to check out the August 2006 report issued by the Federal Reserve Bank of Chicago, “The Tradeoff Between Mortgage Prepayments and Tax-Deferred Retirement Savings,” in which they conclude that by accelerating their mortgage payments instead of saving, homeowners are “making the wrong choice.”

I cannot help but wonder how those folks who paid off their homes because they believed this completely misguided advice feel now, after watching the collapse of the real estate market eat away all those hard-earned equity dollars over the past couple years.

401(k)-Type Plans?

More advice from the boot camp leaders: “What we are doing is essentially moving money from their nonqualified accounts to their qualified accounts.” Their reasoning? Retirees generally tend to fall into lower tax brackets.

This is an unbelievable and antiquated thought process. While almost every thinking person is looking for ways to make their income tax free by shifting to nonqualified accounts, some advisors are advocating the exact opposite. I meet retirees almost daily who followed this kind of porous advice – and although they have reduced their total income, they are being clobbered with taxes.

Most so-called financial experts do not understand the simple fact that taxes are calculated based on “taxable income,” and it is perfectly possible – and happens more often than you would ever think – to have a lower total income but the same or even higher taxable income. See the quick example below.

You see, when you have no dependents to claim, no qualified contributions, and no mortgage interest to leverage, thanks to bad advice, your taxable income is more likely to be in trouble.

If you live in this country and think that, for some reason, it is a good idea to postpone paying taxes until you're retired because you're hoping for lower tax rates at that time, you’re fooling yourself. The responses to this NYTimes story were so overwhelming that further comments were soon shut down. One of the comments on the story, however, sounds more like real-life to me, as a financial strategist:

My wife and I have been retired for a number of years, taking distributions from our retirement accounts and collecting social security. Taxes are a huge concern. We don't feel as if we are spending a lot, but we are in the same tax bracket as when we were working. Now, we don't have all those deductions any more. It helps that social security and $20K for each of us in retirement account distributions are not taxed by NYC/NY state. But the federal tax on distributions has me wondering. True, we got a tax deduction and company match when we made those contributions. But all the years of capital gains and dividends are being taxed at high ordinary rates. I would think twice about putting $44K a year into a retirement account, as your article suggests.

I say, “Bingo! That’s the real-life situation. No further comments.”

“They don’t need as much life insurance (if any at all)”

That’s what these financial advisors, and others just like them, blindly claim. All I can say is that I am really sorry for people who fall for such short-sighted advice. I would encourage these advisors and those like them to familiarize themselves with the IRC, Sections 72(e), 7702, and 101 and stop helping their clients waste money in unnecessary taxes.

Why in the world would they defer very simple tax estimates (like potential taxes on a taxable income of such-and-such dollars) to accountants? I know they are not tax people – but that’s not the issue here. We’re not talking about the rocket-science of tax law. Every year, the IRS publishes tax thresholds for various taxable incomes. Using a simple calculator, an ordinary citizen can get just a general idea of what he or she will owe.

In fairness, I’d like to suggest that these boot camp gals include a new, really simple ninth module.

Let's go with their own example, used in the story, of a couple making $150,000 per year. Let's make two simple assumptions: they max-fund their 401(k)s with $44,000 and have a deductible mortgage interest of $14,000 per year. With all other things remaining constant, they would have a taxable income of $92,000 ($150,000, less $44,000, less $14,000). Based on 2009 brackets, the tax liability on a $92,000 taxable income is approximately $15,375.

Now, fast forward to their retirement. They have a reduced income of 70 percent of their pre-retirement income, which is now $105,000. Their taxable income, with no mortgage interest deduction (thanks to the boot camp advice) and 401(k) contributions, is $105,000. Using the same 2009 bracket, their income tax would be about $18,625.

And remember that since the 401(k) is considered “portfolio” income, it may expose up to 85 percent of their Social Security benefits to income tax as well. Weird, huh? You don’t have to be an accountant to own a calculator and be able to get a general gauge of your potential future taxes.

Read that retiree’s above comments again. That sounds a lot like the kind of issue I have to help my clients dig themselves out of on a daily basis. If you are facing similar challenges, please call our office at (301) 949-4449 or click here to request a FREE consultation. I will do my best to personally consult with you if you contacted us because of this blog.

An Open Invitation

I went to the NYTimes website to voice my strong dissent to the advice being dished out in this article, but was unable to do so because after just 21 comments – most of which were critical – the newspaper closed the comments section. You have to wonder why, in this day and age, that would happen. But I did not give up. I phoned and spoke with a person who promised they would get their boss to have the journalist call me back. Unfortunately, this has not happened yet.

Here's my invitation. I would personally love to publicly debate these boot camp investment advisors, or any other advisor/expert following this misguided school of thought and espousing that people should max-fund qualified plans, pay off their mortgages quickly, and cancel their life insurance in retirement.

Any way you look at it, this advice is simply WRONG! WRONG!! WRONG!!!

Hey, You Can’t Afford to Be Old Just Yet

According to a Hewitt Associates study, the median rate of return on 401(k) plans during 2008 was NEGATIVE 28.3 percent! The average 401(k) balance dropped from $79,600 to $57,200 at the end of 2008 – that’s a loss of $22,400 in just 12 months. Also, 44 percent of workers lost 30 percent or more of their savings.

In the 12 months following the stock market’s peak in October 2007, more than $1 TRILLION worth of stock value held in 401(k) and other qualified plans was wiped out, according to the Center for Retirement Research at Boston College.

If you have any investments in the stock market, I am willing to bet that you’ve called – or been calling – your financial adviser, paid close attention to the experts on TV, scoured websites, and/or devoured newspaper columns and financial magazines looking for some sort of cure for your depleting assets.

The Fallacy

I am also pretty sure that if your financial adviser mustered the courage to call you back, his or her response went something like this: “Your losses are only on paper. Focus on the long term, because in the long term – whenever that is – you’ll be okay.”

In essence, the message to you – which is really no kind of solution – is that you cannot afford to be old yet (i.e., think long term). You must delay retirement. But what if you are already retired? Are you still to wait for the long term?

The truth is, your losses – as well as those of millions of other investors just like you – are REAL. Once you lose in the stock market, that investment is lost forever. When the market recovers, you don't get the “old” money back; it is “new” money that comes in to replace the old.

These so-called financial experts cannot and should not be telling investors – or even implying – that if they hold their stocks long enough, the risk will disappear and they’ll always end up in great shape.

What Is Long-Term, REALLY?

As an investor, you want to ask this question of your advisor, so at least you can know their perception of the answer: “Mr./Ms. Advisor, how long, exactly, is this “long-term” you’re referring to?”

The fact is that investors who had their money in the stock market for 3 years or 30 years, alike, all lost significant portions of their nest eggs. So to profess that simply thinking long term is the answer is, frankly, false and bizarre.

Let me say it once again. Common sense tells me that you should NOT leave your retirement to chance. As a financial strategist, I have never suggested that it is in the best interest of my investors to put their retirement funds directly into the stock market – via stocks or mutual funds, because retirement is certain, and people’s livelihoods should be, as well. We therefore recommend and help our clients secure less volatile, more stable investments.

Imagine playing cards or slots at a casino where, at the end of your play, you were guaranteed to leave with no less than all the money you entered with (principal), plus 1 or 2 percent more. On the other hand, if you won, you got to keep all of your gains, up to a cap of 12 or 15 percent.

Is that an arrangement you could live with? This is precisely the strategy we advise for our clients.

Here is the million-dollar question: If you had been utilizing a strategy like ours during the market’s recent downturn, where would your retirement assets be today?
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Find out how to protect your investments and banish this idea of "long term" forever. Call us today for your free consultation (301-949-4449) or visit our Web site: LaserFG.com.