Social Security Strategy - Couple with a Primary Earner

Congratulations you and your spouse are getting ready to start receiving Social Security benefits. The question is what is the best approach to optimize the benefit.

Let me illustrate with my personal situation. My wife sacrificed her career to raise children so her Social Security benefit will most likely be based upon half of my benefit. When I die she will receive more money, my benefit instead of 1/2 of my benefit.

A strategy to get the maximum amount of money is for me to file and suspend Social Security benefits then continue to work. My wife will then collect her portion bringing in more money into the family. I continue to work which increases the amount that I will receive in the future. This is possible because of the Senior Citizens' Freedom to Work Act of 2000.

Why does this make sense?

1. My wife starts collecting benefits to bring in more money.
2. As my benefit increases, my wife's benefit also increases while I am working.
3. The total amount of money received each month is higher when I retire.
4. After I die she will receive a higher monthly payment.

The catch is that I need to keep working until age 70 to get the most money. I better work at something that I love to do. It is lucky that I have been blessed and I am doing what I love to do.

Social Security Strategy - Payback Method

This Social Security Strategy involves paying back benefits to get a higher future monthly benefit. This strategy is not widely publicized and can make sense in specific cases.

Here is how it works. You have been collecting Social Security benefits for years and have reached age 70 in a situation where you have a large nest egg and desire more cash per month. Also the age of the spouse is importand and it may make sense if a spouse is considerably younger than you that has benefits calculated upon your contributions.

Scenario:

You retired at age 62 with a benefit check of $1,200/month. The amount would have been $1,600/month if you had retired at age 66. At age 70 the amount would have been $2,100/month.

At age 70 you decide that you want the higher monthly benefit and file Form 521. You can get it by paying back all of your benefit checks, about $115,000. Once all of the paperwork is done in a few months you can then get the increased monthly payment.

When does this strategy make sense:

1. You are going to live at least to age 85.
2. Your spouse's benefit is based upon your contributions and is much younger. In this case the spouse gets your benefit for the remainder of his/her life and lives a long life span.

In most cases this strategy does not make sense since nobody knows how long they will live. If you have this much money invested you likely will make more money by keeping it invested and drawing from the investment rather than giving it back to the government.

You owe it to yourself to consider this option in your retirement planning. Have a professional walk you through the scenarios to determine if this strategy works for you.

Newspaper Announcement

The business was announced in the Business Section of the Sunday, August 24, 2008 Hickory Daily Record Newspaper. Here is the announcement.

Investment advisory firm new to area

Hickory
Christian Stewardship Retirement, LLC, a North Carolina registered investment advisory company has begun operations here.
The company provides investment advisory and personal finance services including retirement planning for individuals and small business.
Larry Bleich, owner, is a registered investment advisor and a member of the International Association of Registered Financial Consultants. Pat Bleich is the office manager. Pastor James D. Ritch of Lenoir represents the company in the Lenoir area.
The company can be reached at (828)-896-5037.
ON THE WEB:
www.rareinvest.blogspot.com

Near Term Direction Commodity Prices

Last week commodity prices fell. Oil futures reached a 3 month low. Gasoline future went below $3/gallon. Gold sold for less than $800/ounce. In fact, almost all commodities are trending lower.

The question is for the near term, such as through the next few months, what is the direction of these prices. Three choices exist: higher, lower, or the same.

My belief is lower because of:

1. Increasing value of dollar which will make reduce import costs. The dollar is increasing because other global economies are slowing.
2. The growth in the countries trading in the euro went negative in the last quarter which means that these economies contracted slightly.
3. The Chinese government is slowing the economy.
4. The Chinese currency, Yuan RMB, has been steadily declining which makes Chinese made products more expensive.
5. Oil goes down because of: lower demand as economies slow, lower demand as US consumers reduce demand, and the actual cost to produce a barrel of oil has been reported to be about $50/barrel. Seeing oil below $100 seems very reachable.
6. Reducing oil cost has a synergistic effect on other commodity cost.

If money is leaving currency trading, where will it go? Time will tell us the answer. The nice thing is that the current inflation rate reported in July will be reducing as commodity price retreat.

Personally, I will be happier when gas goes back below $3/gallon. Won't that be a nice Christmas gift.

Balanced Mutual Funds

Investors have many options when it comes to investing in mutual funds to build a portfolio and can choose from a seemingly almost infinite number of funds. Once an investor determines their investment risk level, typically a model portfolio of securities are recommended including stocks, bonds, real estate, cash, etc. Typically, the model gives a percentage of each category.

With this knowledge an investor has 2 options:

1. Invest in a mutual fund that has this same blend of securities that meets this risk level.
2. Invest in a series of mutual funds and having at least one mutual fund in each category.

The advantage of a single mutual fund is that diversification can be achieved for a relatively small amount of money, such as $2,500. The disadvantage of this approach is you are at the mercy of the performance of the mutual fund manager at selecting the portfolio. If the fund manager selects poorly you have a poor result.

The advantage of a series of mutual funds is that you can select mutual funds for each category and greatly improve diversification. The outcome is no longer up to the performance of a single mutual fund manager. Diversification exists with having multiple fund managers.

Which option is best? If the amount to be invested is less than $5,000 a single mutual fund probably makes the most sense. If the amount is above $10,000 having multiple mutual funds probably makes the most sense.

Keys to selecting multiple mutual funds include:

• Understanding the securities in each fund
• Interactions with the other funds
• Having highly rated mutual funds

Bottom Line: Having diversification is good for an investor and a balanced mutual fund has its place. Better options probably exist when a larger sum of money is available.

Retirement Investing Lessons

The Monday August 4, 2008 Wall Street Journal had an article on the importance of proper investing for retirement. The title of the article was “When 401(k) Investing Goes Bad.” This article talks about West Virginia school employees who 17 years ago shifted from a pension plan with a defined benefit to a 401(k) defined contribution plan.

A defined benefit plan has the employer contributing and having a professional managing the money for retirement with the employer at risk to meet the retirement need. A defined contribution plan typically has the employer matching contributions of the employee and the employee assumes the risk to meet retirement needs.

This is a story that applies to many people. The article states that only 21% of full-time employees have a defined benefit pension plan in 2007 down from 54% in 2004. In 2007, 54 of the largest 100 US employers offered a defined benefit plan down from 58 in 2006.

For the people in the article, things have not gone well for all of the members. One person called it horrible. Most of the members felt poorly informed and they invested too conservatively. Many got guidance from people they knew and trusted who represented a life insurance company over lunch and during school hours. Those giving guidance were just representatives selling a financial product acting in an investment advisory role rather than being a Registered Investment Advisor.

The guidance given was to purchase a fixed rate annuity because it was safe. What happened over time was these annuities could not grow as fast if the money had been diversified and professionally managed in a defined benefit plan. The end result is people not having enough to retire in a manner that they desire or deserve.

The average 401(k) balance for people 60 & above in this group was $34,420. Not enough to replace the benefit from a defined benefit plan.

A couple of other issues are mentioned in the article. Some members did not contribute as much to the plan as would have occurred with the defined benefit plan. Some members took money from their 401(k) plan reducing their retirement account.

As employers move away from defined benefit plans and shift to defined contribution plans the employees have a greater amount of risk. This means people need to understand how much to invest and how to invest to meet a future need. In short they need professional guidance and a retirement plan.

Most investment professionals will choose a defined contribution plan over a defined benefit plan if investing with a long term time horizon because they should get a higher return. However, if a person does not know investing and the ramifications of certain actions, a defined contribution plan can lead to a very low amount of retirement savings.

Bottom Line: If you are in a 401(k) plan and do not feel comfortable about investing, get professional guidance and develop a retirement plan.

Beware of Hedge Funds

The Monday August 4, 2008 Wall Street Journal had an article on the performance of hedge funds. The title of the article was “Hedge-Fund Sluggers Strike Out.” Hedge funds are leveraged funds that tend to lack the diversification represented in Ecclesiastes 11:2.

A Hedge fund typically uses leverage, such as options, where a relatively small amount of money can control a lot more of a security. A person who can predict the future correctly can make a lot of money. Unfortunately, I do not know of anyone who can predict the future with 100% accuracy.

What this means is that when things are going up they go up faster than the rest of the market. Conversely, when things are going down they go down faster than the rest of the market. This is illustrated by the Boyer Allen Pacific fund that is down 28% for the year while it was up 52% during 2007.

At first glance it appears that this fund is up 24%, 52% - 28%. However, this is not true and can be illustrated by starting with $1.00. If it goes up 52% then the value is $1.52. When $1.52 goes down 28% the end value is $1.52 times 0.72 = $1.08. This fund is up 8%. Everyone is happy with a 52% return. Few people are happy with a 28% drop. At a 34% drop this fund will be even.

This year some hedge funds have reportedly gone bankrupt and some hedge fund managers have been arrested. Since nobody knows the future investing in hedge funds more closely resembles a form of gambling rather than a form of investing.

The lessons learned from this article are:

• Understand what you are investing in.
• Do not chase phenomenal returns made by a fund in one year because it may very well be followed by a phenomenal correction after you purchase it. Remember the story of the tortoise and the hare.
• Buying of a hedge fund is to be avoided by the average investor who can not afford to take this much risk

Barron's Financial Statistics

The August 4, 2008 edition of Barron's had useful financial statistics. We hear some statistics and their interpretation in the news but what are the rest of the numbers and what do they mean.

2nd Quarter GDP = 1.9%, 1st Quarter GDP = 0.9%: What does this mean? We are not in a recession

June rate of inflation = 5% annualized: What does this mean? We are not in a recession

Index of Coincident and Leading Indicators = Flat during the 2nd Quarter: What does this mean: We are not in a recession.

What are going up: Business Sales, Consumer Spending, Durable Goods, Factory Shipments, Non-Durable Good, Public Spending, Non-Residential Spending, & Exports to name some. These are all good things.

What are going down: Imports, Petroleum Capacity (Not producing at as high a rate to keep prices up), Auto Sales (In the news), & Residential spending (In the news).

What does this mean? Besides the news on auto sales and residential spending things are better than what most people would think. Do not focus on the news and recession fears and keep investing.

Retirement Savings Statistics

Retirement savings statistics are published on a regular basis in newspapers and magazines. Recently, some statistics were published on the front page of the Business section in the August 2, 2008 Charlotte Observer. The paper reported on a study done by Ernst & Young LLP done for the Americans for Secure Retirement.

• Nearly 3 out of 4 middle income households in the Carolinas that plan to retire in the next 7 years will outlive their retirement savings.
• 3 out of 5 new middle class retirees would run out of savings and have to reduce their standard of living by nearly 25%.
• Those planning to retire in the next decade would need to reduce their standard of living by more than 1/3rd.

Retirees will run out of savings because of fluctuating investment returns and longer lives.

My guess is that these statistics also hold for the rest of the country, not just for the Carolinas.This should be a wake-up call that all of us need to have a financial plan for retirement. The future is never predictable and we need to be prepared.