Dear Reader Vedran Vuk here filling in for David

first_imgDear Reader,Vedran Vuk here, filling in for David Galland. In today’s issue, Dennis Miller will start it off with the new budget proposal’s attack on your retirement. Regardless of which way the compromise goes, it won’t be good for the average Joe. Then, I’ll touch on a reader comment on one of our recent articles. Essentially, the comment was, “Why worry about learning finance and economics? Can’t I just hire someone to handle my investments for me like anything else?” I’ll explore where that’s true as well as the pitfalls in that perspective can be found.Before we get started, I want to tell you about our latest stock pick in Miller’s Money Forever; it has a potential dividend yield of 7%. Does that sound crazy? Would you have to take on too much risk, like a junk bond, to get that kind of yield? No, not at all. In fact, it’s a very conservative stock in a product that everyone knows. But there is a catch: to get that yield, you have to be patient.Our latest pick’s dividend yield is currently just below 3%. Considering that the yield isn’t enormous, most investors simply overlook it as a yield instrument. What they’re missing is that the dividend has been increasing at a rate of around 10% per year for the past 20 years. If the dividend keeps growing at the same pace for the next decade (and there’s good reason to think it will), the yield will be 7%. In our opinion, this stock is truly one of the last “set it and forget it” companies out there. Check it out now with a free trial subscription to Miller’s Money Forever.And without further ado, let’s go straight into Dennis’ article on the new threats from Washington to your retirement plans.Uncle Sam Has a Message for Seniors and SaversBy Dennis MillerSome people claim that our Social Security system isn’t broke. Technically, they’re right. The Old Age and Survivors Trust Fund (OASI) currently holds $2.5 trillion in special government Treasuries that can be redeemed at any time – in theory of course. But here’s the catch. What happens when the OASI needs those trillions of dollars to pay out benefits? Essentially, the government has to find the money to pay the face value of those Treasuries. So from that standpoint, Social Security is broke. The Treasury IOUs are not backed by any cash surplus, only by faith that the US government will somehow come up with the cash… probably by indebting itself further or by raising taxes.Social Security was created by the Federal Insurance Contribution Act (FICA) and sold as a government-managed insurance program. We pay “premiums” to the OASI during our working years (actually the government just snatches money from our paychecks), which are supposed to be invested and provide retirement income for the rest of our lives. Our retirement is supposed to come from the income on those investments.After taxing baby boomers for decades, the OASI is huge. But now that millions of those baby boomers are retiring, it’s time for our government to tap into that fund to keep its promises.The problem is that our government claims it can’t – or won’t – honor its commitment… no surprise there. In a nutshell, it recklessly spent the money it grabbed from our paychecks… money it was supposedly holding as a custodian. Rather than be honest or have the courage to raise other taxes to support its spending, the politicians stole money from our retirement insurance premiums to pay the bills. If folks in private industry raided their employees’ pension funds and spent that money, they would be in jail. Well, if the shoe fits…Here are the three items in Obama’s current budget proposal that are designed to address the issue:Chained Consumer Price Index (CPI); Additional contribution caps for IRAs and 401(k)s, and targeting those savers who have accumulated $3 million or more.While each proposal seems different, Gary D. Halbert recently penned an article alluding to the fact that all three are related. He wrote:“Liberal Democrats oppose the switch to chained CPI and demagogue it as a ‘war on seniors,’ while Republicans feel it’s a way to save Social Security as we know it. Democrats prefer eliminating the cap on salary subject to Social Security taxation (read: increase taxes) to using chained CPI, which they view as a cut in benefits. It seems that only in a politician’s mind can a slower rate of increasing benefits be called a ‘cut.’”So, expect your Congressional representatives to say something like, “These were the choices, and I fought hard to protect you.” In the end, they will reach a theoretical compromise and the public will get fleeced once again.Well, how about “NONE OF THE ABOVE?” All three of these proposed solutions would do more harm than good.Chained CPILet’s cut to the core issue of the CPI. It’s supposed to track prices of a consistent basket of goods that parallels the cost of living. In theory, when the CPI goes up, your cost of living should increase at about the same rate. But when the government attached benefit rates to the Index, it started to play games with the numbers.The official CPI is a joke. It is continually manipulated and just doesn’t match reality for most people. That’s because keeping the CPI lower than the true rate of inflation benefits the government in many ways.It decreases benefit payments to government retirees and Social Security recipients.It reduces the cost of Treasury Inflation Protected Securities (TIPS), which are tied to the Index.It is a de facto increase to the income tax, since tax brackets are adjusted for inflation.And of course, the politicos love it too. They do not have to face voters and cop to cutting benefits or raising taxes. Perhaps that explains why the credibility rating of politicians ranks below that of used car salesmen.When the Bureau of Labor and Statistics started fiddling with the numbers, the phrase “constant level of satisfaction” entered the picture. Alan Greenspan, in an attempt to justify the new substitution-based inflation formula, was credited with saying, “If the price of steak got too expensive, consumers may switch to hamburger.” No kidding. He is such an intellectual.A chained CPI would just be another boost to the numbers manipulation game. CNN released some disturbing statistics on the damage a chained CPI would cause:“Someone who started collecting the average Social Security benefit for a retired worker in 1999 would receive $12,972 in 2012. But let’s say the Social Security Administration had already been using chained CPI – that person would get only $12,336 this year, according to the National Academy of Social Insurance. That’s nearly 5% less.The difference gets bigger over time. According to the National Women’s Law Center, a retiree who was collecting $17,520 last year would see 6.5% less, or $1,139, by age 85, if chained CPI were in effect. A decade after, their payments would be 9.2% smaller, or $1,612.”The CPI should be renamed the “Consumer Payment Index.” It has little to do with a constant basket of goods. If it measures the cost of living at all, it’s only the cost of mere survival. What happens when the price of hamburger gets too high? Do we switch to chicken? Where does it end, dog food? We need to call the CPI what it is – an index concocted by the government to hoodwink voters because none of our elected officials have the courage to tackle the problems honestly.The chained CPI will probably make a lot of headlines. One political party will accuse the other of wanting to mess with the formula even further and reduce Social Security benefits; and one will accuse the other side of pushing for a tax increase.Here is what will likely happen. We will be hammered by the politicians trying to strike fear into our hearts. At the last minute, the “Mighty Mouse” politicos will come in to save the day and “rescue” us from the Chained CPI. The real motive is to make the other choices sound like a fair compromise.Raising the Income Cap on the Social Security TaxThe next proposal is to raise the cap on income subject to the Social Security tax. This will be sold as a way to reduce the deficit and save an underfunded program.Can anyone remember a tax increase sold to the public as a way to reduce the deficit that actually did just that? Regardless of the party in power, the deficit just keeps growing.This would be a simple 6.2% tax increase on income over $113,700 for both employees and their employers. For folks who are self-employed, the tax rate is 12.4%. High-income baby boomers already fear being “retired early” by employers looking to replace them with less expensive, younger workers. This would add another incentive for employers to cut out their highest wage earners.It’s the same old crap. One political party will scream that this is a tax increase, while the other will say the rich don’t pay their fair share. They will argue over the amount, then claim to come to a bipartisan compromise.Additional Contribution Caps on Tax-Preferred Retirement AccountsObama’s budget would “limit an individual’s total balance across tax-preferred accounts to an amount sufficient to finance an annuity of not more than $205,000 per year.” According to Matthew Hiemer’s back-of-the-envelope calculation in a MarketWatch post, this would affect around 100,000 American households.This looks like pure politics to me. These 100,000 families won’t get much sympathy from regular folks. Any politician who opposes this proposal risks being labeled an elitist, and those who support it will crown themselves the champions of the poor… just as an election is coming up.This is just another unwarranted attack on the rich who were successful enough to build up more than $3 million in their retirement accounts.Money in a traditional IRA or 401(k) is nothing more than tax deferred. When it’s withdrawn, the government still gets its ever-increasing share. And there are mandatory withdrawals once a person reaches 70 ½ years old, so that money will be taxed eventually. The government sounds like a petulant child, screaming, “I want it now!”What Should We Expect Next?Over the course of the summer, political emotions will rise as both political parties takes their stands. Then, at the last minute when all the hype has been milked, they will strike a convoluted compromise. Both parties will tell their constituents it was the best they could get, and ask for contributions so they can fix the mess after the next election.“NONE OF THE ABOVE” won’t be seriously considered, and more wealth will be stolen from hard-working Americans.In an attempt to limit any political hate mail, I offer this. I don’t want to hear a word about “fairness” until all elected federal officials scrap their retirement programs and put themselves under Social Security like the rest of us. Opensecrets.org reports that the average net worth of a Senator is $13.9 million and that of a member of the House is $6.5 million. Why should we pay for their fancy retirement and healthcare programs?Why Waste Time Learning About Investments?By Vedran VukA few months back, Dennis Miller had an article on MarketWatch encouraging retirees to get educated and involved in their investments. Though it’s tempting to let an advisor take the reins of our retirement, it’s one area where we must stay vigilant. In Dennis’ own words, “It’s one thing to delegate the responsibility for your financial health to a professional, but quite another to completely abdicate that responsibility.”In the comment section of Dennis’ article, a reader brought up an interesting point –though presented a bit abrasively. He said something like, “This is the stupidest article that I’ve ever read. When I’m sick, I go see a doctor. I don’t study medicine on my own. Why should I waste my time learning about investments when my advisor can handle my retirement account for me?”To a certain extent, he’s absolutely right. A complex society has a division of labor. If you’re sick, you go see a doctor. If want a house built, you hire a construction company. In fact, doing it yourself could in some circumstances be a life-or-death matter when it comes to health care. You need someone else’s expertise, especially if it’s something serious. And in these cases, the reader comment is completely correct.However, I wouldn’t compare your financial advisor to a doctor; instead I would compare him to your auto mechanic. If you never want to learn the slightest thing about cars, you can just take the mechanic’s word for the repairs every time. True, he’ll keep your car running and – if you have a very honest mechanic – you’ll be just fine. The same goes with financial advisors. If you can find someone with your best interests in mind, maybe you don’t really need to worry about educating yourself on financial matters. But if your luck in financial advisors is anything like my luck in auto mechanics, you’ve probably learned the hard and expensive way that trustworthy mechanics/advisors are highly sought after, but rarely found.Furthermore, just because you trust someone is no reason to completely let your guard down. Everyone who has ever been taken advantage of in the financial world trusted someone. More often than not, they trusted them so much that they thought nothing of the obvious red flags. For more on this subject, see my article on crooked financial advisors.Now, I’m not saying that everyone needs to become a grease monkey, and I’m not saying that you need to know how to model financial statements. I am saying that maybe it’s useful to know the very basics in order to save a lot of money along the way. If I simply followed a mechanic’s advice, I would likely be changing my air filter every month. I sometimes can’t even believe the gall of these guys. They’ll take out a completely clean filter, show it to me, and then tell me that I need a new one. BS!The exact same thing happens in the investment world. Oftentimes, shady advisors will push excessive trading to build up their commissions. Or – equivalent to the air-filter scam – they’ll suggest that your portfolio needs a little “rebalancing” every month to drive up their commissions. Again, the commenter is sort of right. Most advisors aren’t going to put your funds into complete garbage investments. They’re going to do an adequate job on the average. However, what really matters is the details – the unnecessary trading commissions, the mutual funds with high sales load fees, and the steep annual fund expenses. Technically, the advisor is taking care of your retirement, but at what price?The same idea applies with the auto mechanic. If you believe every recommendation from the mechanic, your car is going to keep running, but at what price? Knowing what you need and don’t need can save you a lot of money. Everyone has a comfort level of knowledge in a particular field. I know people who could go to a junkyard, pick out the parts, and fix a car by themselves. There are others who can change their own oil and can diagnose basic problems. And there’s some who just know the difference between a clean and dirty air filter.Regardless of where you are on your spectrum of financial knowledge, try to learn just a little something – even if it’s as little as the equivalent of knowing a dirty filter when it’s in front of you. It may save you lots of cash over the long run.The key to the issue at the heart of the comment is finding the right balance for you. Unless you’re planning to spend an enormous amount of time researching finance, at some point you have to put some trust in someone, whether it’s an advisor, mutual fund, or newsletter. Even as a trained professional, I have to put some trust in financial statements. Remember Enron and WorldCom? But that doesn’t mean that you should always blindly trust every recommendation and live completely oblivious to the investment world. That’s a sure way to lose money in the long-run. It might not necessarily mean a fortune lost, but if an advisor is chipping away 1% more than he needs to every year from your account, it adds up. For more on this topic, see the February issue of Miller’s Money Forever for tips on evaluating a good financial advisor.While a trusted, big-brokerage-firm advisor might do an adequate job of managing a portfolio, even the best are often clueless about eliminating the biggest risk to your wealth – your own government. If all your investments are sitting within the borders of your home country, then you’re at serious risk from new taxes… inflation… restrictions on how you can manage your money… and any number of other threats that you have no control over. Raising the income cap on the Social Security tax;last_img