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REFORMING SOCIAL SECURITY
One of the most talked about topics in Washington these days is reforming the Social Security system. Politicians seem determined to make changes to the system now, before a crisis occurs.
Currently, the Social Security system is running large annual surpluses, but this will not last long. Once the baby boomers start retiring, around 2010, Social Security benefit payments will begin to exceed the annual taxes collected and the system will start drawing on past surpluses. Those surpluses will be exhausted by the year 2032 (Source: Social Security Administration, 1998).
The huge number of baby boomers who will be retiring in a short time period is causing this problem. Since the system is a "pay-as-you-go" system, current workers pay the benefits for current retirees. But the number of workers for each retiree will fall from 3.4 now to 2.0 by 2030 (Source: Social Security Administration, 1998). At current Social Security tax levels, income from taxes at that point will not be sufficient to pay the current level of benefits for all the new retirees. Compounding the problem is the fact that longer life expectancies result in retirees receiving benefits for longer time periods.
Even though the situation seems grave, the system will be able to pay 75% of the scheduled benefits after the trust fund is exhausted. Reform efforts are trying to ensure that the additional 25% of benefits can be paid (Source: Social Security Administration, 1998).
Reforming the system through privatization is receiving the most attention, but there are actually a variety of ways that the system may be changed. Some of the more frequently discussed changes include:
CUT BENEFITS. This involves reducing the benefits paid by the system, which can be accomplished in many ways:
INCREASE CONTRIBUTIONS. This involves increasing the funds going into the system, which may include:
PRIVATIZE ALL OR A PART OF THE SYSTEM. Various alternatives have been presented, ranging from setting aside a limited percentage of Social Security taxes in individual accounts, to fully privatizing the system, to letting the government invest some or all of the tax receipts in the stock market. While many view privatization as the preferred alternative, moving from our current pay-as-you-go system to a fully funded system may be difficult for the generation that implements the change. In essence, they must continue to pay benefits for current retirees while funding their own retirement.
At this point, no one knows how the system will eventually be reformed. While baby boomers can probably count on some Social Security benefits, those benefits are likely to be as generous as they are now. Thus, personal savings will become a more important component of retirement income. Call if you'd like to discuss your retirement strategy in more detail 1-800-878-4036.
It's hard to get used to: after the inflation worries of the 1970s and 1980s, inflation is currently under 2% (Source: Bureau of Labor Statistics, 1998).
What is an appropriate inflation rate? Most would agree that both high inflation and deflation (falling prices) are bad for the economy. While deflation sounds good, the danger is that consumers may cut spending because of lower paychecks, causing companies to reduce production. So while it is generally agreed that the extremes are bad, the more difficult question is whether the inflation rate should be 0%, 1%, 2%, 3%, or some other percentage.
It's hard to agree on an answer because inflation has not been behaving as expected. Typically, as unemployment rates drop below an optimal level, a short supply of workers causes companies to increase wages. Companies then have to increase product prices to pay those increased wages, resulting in increased inflation. But over the past few years, we have experienced low unemployment rates as well as low inflation. One possible explanation is that the optimal level of unemployment is actually lower than previously thought.
It is important for consumers to realize that the high inflation rates of the past may not reoccur for a while. Thus, it is no longer a sensible strategy to purchase items quickly before prices go up, incurring large amounts of debt to do so. Different strategies should be considered in a low-inflation environment:
Please call if you'd like to discuss the impact that the current inflation environment may have on your personal situation 1-800-878-4036.
The Securities Investor Protection Corporation (SIPC) is an organization created by the federal government with the objective of promoting public confidence in the securities markets.
Broker-dealers whose principal business is conducted in the United States, its territories, or possessions are automatically members of the SIPC. Firms that deal exclusively in U.S. government securities, mutual funds, variable annuities, or insurance, or provide investment advice to investment companies or insurance company separate accounts are not required to be members. Member firms provide the funding for the SIPC. In an emergency, the SIPC can also borrow, through the Securities and Exchange Commission, up to $1 billion from the U.S. Treasury.
While the SIPC does not protect investors from losses caused by fluctuations in market value, it does protect investors from losses due to a member's financial failure. Once a firm fails, all securities registered in customers' names are returned to those customers. Then customers receive, on a pro rata basis, all remaining cash and securities held by the firm. SIPC funds are then used to satisfy any remaining claims of customers, up to a maximum of $500,000 (up to $100,000 of this total is available to cover cash balances). If an investor has claims beyond the SIPC's coverage, he/she becomes a general creditor of the failed firm. These maximum limits apply to each separate account. Therefore, where a customer holds several accounts in different capacities, each account would be eligible for this coverage. For example, an investor with one account solely in his/her name and another with his/her spouse would be considered to have two separate accounts. However, two separate accounts registered solely in one name would be considered one account.
Securities that are covered by the SIPC include cash balances, notes, stocks, bonds, mutual funds, debentures, certificates of deposit, warrants, options, and registered limited partnerships. Shares of money market funds, while commonly considered cash by investors, are considered securities and subject to the higher $500,000 limit. Unregistered investment contracts and gold, silver, or other commodity contracts are not protected.
Analyzing and budgeting expenditures is often a dreaded exercise. Yet many people find that inefficient and wasted expenditures are major obstacles to saving for financial goals. To get the most benefit from the budgeting process, follow these steps:
1. FIGURE OUT WHAT YOU EARNED LAST YEAR AND HOW YOU SPENT THAT INCOME, BREAKING THE EXPENDITURES OUT BY CATEGORY. Looking back over an annual period will help you identify normal monthly expenses as well as irregular, periodic expenses, such as insurance premiums, tuition, and gifts. Canceled checks, credit card receipts, and tax returns will provide much of the needed information. However, you might want to keep a journal of all expenditures for a month if you can't account for large sums of money.
2. REVIEW YOUR EXPENDITURES TO SEE IF YOU CAN REDUCE YOUR SPENDING SO YOU'LL HAVE MORE MONEY FOR SAVING. It is often helpful to view your expenditures as follows:
3. PREPARE A BUDGET FOR FUTURE SPENDING THAT INCORPORATES YOUR FINANCIAL GOALS. Keep these points in mind:
Please call if you'd like help with your budget 1-800-878-4036.
It is difficult to achieve goals without creating a plan to help you reach these goals. You didn't achieve your professional success without a plan, nor would you think of going on vacation without an itinerary or travel arrangements. So why would you enter your future without a plan for your finances? Establishing a financial plan is an essential part in helping to ensure that you meet your financial goals. It's not a difficult process, but it does require some time and effort.
The first step in establishing a financial plan is assessing your current financial situation. I can help you by providing you with a form to use to list your assets and liabilities. I find that writing this information down on paper makes it easier for you to see where you are financially and visualize where you want to be in the future.
The next step is identifying your financial goals. Of course everyone wants to live to an old age with no fear of running out of money, buy you need to think in specific terms in order to establish goals you can work to achieve. Maybe you want to travel after retirement, move to a different state, or stay at home and enjoy your hobbies. I can help you think through what you want and tailor your financial plan to help ensure that you will have the money to enjoy the things you would like to do.
Once you have identified your priorities for the future, we need to decide how to help you reach those goals financially. This entails discussing your risk tolerance and investment strategies and sifting through the many investment vehicles to determine which products are most appropriate for your situation.
Please call me if you would like to take the steps to establish a financial plan 1-800-878-4036.
If you own investments with large capital gains, you may be wondering whether to sell the investments at the lower 20% capital gains tax rate or continue holding the investments for your heirs. The tax consequences of the two alternatives are:
In either case, your heirs must pay estate tax on the asset's value if your total taxable estate exceeds the lifetime estate and gift tax exclusion ($650,000 in 1999, increasing gradually to $1,000,000 by 2006).
While you shouldn't make investment decisions solely for tax reasons, the tax bill can be large when selling an investment with significant capital gains. Which alternative is better will generally depend on your expected rate of return on the current investment, the anticipated rate of return on the investment that would be purchased with the proceeds, and your expected life expectancy. In general, it may make more sense financially to leave an investment to your heirs if:
Please call if you'd like help reviewing your options for a particular investment 1-800-878-4036.
Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.
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