How the New Changes to Social Security May Affect You

How-Social-Security-Works-cartoonPresident Barack Obama signed the Bipartisan Budget Act of 2015 into law on November 2, 2015. The budget provides relief for sequester cuts and allows for increased investments to support economic growth and build a strong middle-class for the next two years. To offset the cost of additional discretionary spending, the budget had to make cuts or changes to certain programs, including the Social Security program. The adjustments to Social Security will eliminate the file and suspend and restricted application strategies that helped some couples increase their lifetime Social Security benefits.

The new Social Security laws will take effect May 1, 2016. For those individuals currently using the file and suspend or restricted application strategies, they will not be affected by the rule changes. In addition, those individuals that turn age 66 before April 30, 2016 may elect to use the file and suspend strategy, if completed before May 1, 2016. The restricted application strategy will be available for those individuals that turned age 62 by December 31, 2015.

The file and suspend strategy allowed for one spouse, who reached their full retirement age, to file for and immediately suspend his or her benefits. By doing so, the second spouse would be allowed to start receiving a spousal benefit. The suspended benefits of the first spouse would then accrue delayed retirement credits at 8% a year. Under the new rules, if an individual decides to suspend his or her benefits, all benefits payable on his or her earnings record to other individuals will be suspended as well.

The restricted application strategy was often used in conjunction with the file and suspend strategy. By filing a restricted application, a person could apply for just a spousal benefit while his or her benefits accrued delayed retirement credits. Under the new rules, filing for a spousal benefit will trigger a person’s own retirement benefit. The Social Security Administration will pay only the greater of the spousal benefit or a person’s own benefit.

These two strategies were actually unintended loopholes that extended from the “voluntary suspension” concept introduced by the Senior Citizen Freedom to Work Act of 2000. The idea was originally intended to allow seniors that had mistakenly applied to receive their benefits early, stop their payments and earn delayed retirement credits. This allowed for these seniors to continue working, or even rejoin the workforce, without the risk of reducing or eliminating their social security benefit. The Social Security Administration will reduce a person’s annual benefit, if under the full retirement age, by $1 for every $2 made over a certain dollar threshold ($15,720 for 2016). Earned income includes W-2 wages and net earnings if self-employed. It does not include pensions, annuities, investment income, interest, or government or military retirement benefits.

It’s important to note that even if you missed out on using one of these strategies, you still may receive your maximum benefit. According to an analysis done by Social Security Choices, a software company that helps individuals optimize Social Security strategies, only about 18% of the cases analyzed showed it was beneficial to use the file and suspend and restricted application strategies. In addition, if these strategies were implemented, it could take as many as 12 years until a cumulative benefit was received.

With Social Security benefits playing a large part in calculating financial independence, DWM has researched the new adjustments to better understand how our clients will be affected. Although the new laws will limit the amount of planning available, we will continue to analyze each client’s Social Security situations in an effort to maximize their benefits, as there are still options and strategies available.

Furthermore, any quantitative analysis is complicated by the risk that there will be future changes to Social Security, which could include “means testing”.   Individuals, whose retirement incomes exceed established thresholds, could have their future benefits reduced or eliminated. We anticipate that maximizing Social Security strategies will continue to be a moving target. We look forward to working with each of our clients as they approach “retirement age”.

Oscar Nominee “The Big Short” is a Winner!

AACeremonyMichael Lewis has done it again. My favorite author, whose “Moneyball” and “The Blind Side” were turned into great films, has teamed with Christian Bale, Steve Carell, Ryan Gosling and Brad Pitt to produce a wonderful movie which provides an entertaining, insightful review of the financial crisis of 2008/9 and answers the question: Was this financial calamity the fault of bad behavior or bad economic systems? The book (written in 2010) and the movie achieve their success by Lewis’s trademark technique of personalizing the tale, focusing on individuals who saw the rot in the system and tried to make money off that finding.

Christian Bale gives an outstanding performance as the real-life Dr. Michael Burry, a neurologist with Asperger’s syndrome, who became the eccentric manager of a small hedge fund. Through detailed research he discovers in 2005 that the U.S. housing market is extremely unstable due to subprime loans. He predicts the market will collapse in 2007 and realizes he can make a huge profit for himself and his clients by creating a “credit default swap.” (This is a considered a “short” because they profit if values decline).  Trader Jared Vennett (Ryan Gosling) hears of Burry’s plan and decides to jump in. And hedge fund manager Mark Baum (in a masterful performance by Steve Carell) decides to join in as well. Vennett and Baum realize that the continuing sale of “collateralized debt obligations” (“CDOs”) by the big banks is further perpetuating the impending market collapse. Ben Rickert (Brad Pitt), an advisor to a hedge fund run by two young men who have just placed their short, is disgusted by their celebration of an impending financial disaster that, by now, is evident.

The film digs into details of the housing bubble, including 1) the stripper who owned five houses 2) the rows of empty homes in developments in FL, CA and Las Vegas 3) the mortgage brokers laughing about the loans they are able to obtain for their customers with little to no income. And all the while, the salesmen at the American Securitization Forum in Las Vegas are still pushing the sales of synthetic CDOs (with phony AAA credit ratings) to the very end. The disaster comes and our “heroes” make a nice profit while millions lose their jobs, their homes and their lives are altered, perhaps forever.

The Big Short pulled back the curtain about the true causes of the real estate crash that greatly influenced the Great Recession. These include:

  • CDOs on subprime mortgages were at the heart of the crash
  • Due to low interest rates, asset managers turned to high-yield mortgage-backed securities. Most of them failed to do adequate due diligence and relied on credit rating agencies (who were in a conflict of interest because they were paid by the big banks).
  • Derivatives (such as “swaps”) had become a uniquely unregulated financial instrument.
  • The Wall Street Journal missed the big story even when it was brought to them
  • Hardly anyone went to jail for wrecking the economy
  • Few laws were changed to prevent another such debacle
  • When it was over, Wall Street wanted to place the blame on poor people, immigrants and teachers.

Wall Street would prefer we remember the crisis differently. In the WSJ opinion “Big Short, Big Hooey” on December 15, 2015, the movie was described as “partaking of what might be called the universal journalistic bias, namely to exaggerate.” The opinion from Rupert Murdoch’s paper would have us believe that:

  • It was all the government’s fault for promoting home ownership for all
  • The whole thing could have been avoided if only there were fewer government regulations
  • It wasn’t so bad, really.
  • A change in accounting rules could have avoided the crisis.

The fact is that The Big Short provides a clear assessment of blame: big banks behaved like criminals and for years got away with it.

It’s interesting, just last week, Goldman Sachs agreed to a civil settlement of up to $5 billion to resolve claims stemming from the crisis. Bank of America in 2014 paid about $17 billion in a similar settlement and JPMorgan Chase paid about $13 billion in 2013. In all, the banks paid more than $40 billion in settlements to resolve claims relative to the 2008/9 financial crisis. It appears that bankers don’t go to jail, their corporations just pay larger and larger fines.

The rise in dollar amounts in the last 10 years is extraordinary. Between securities fraud, tax fraud, environmental fraud and others, criminal penalties paid by corporations has risen from less than $1 billion in 2005 to over $9 billion in 2015, of which $7 billion was paid by banks. Penalties are really only a start; we would also like to see guilty bank executives prosecuted. Fines alone are not stopping bad behavior on Wall Street.

We hope you enjoy “The Big Short!” Even if it doesn’t take home an Oscar, it’s a winner.

DWM 2015 Year-end Market Commentary

Uncertainty imageIf you had to summarize the markets in 2015 with one word, it would be “uncertainty”. Much of the reason for the poor performance of stocks, fixed income, and alternatives can be chalked up to uncertainty…uncertainty of what the Fed was going to do with interest rates, uncertainty to when oil supply and demand will come into balance, and uncertainty surrounding China’s economy. In last quarter’s market commentary, we wrote about having just finished an awful August/September stock market drubbing, only to see equity benchmarks almost fully recover in October. Unfortunately, the good vibes didn’t last long as another sell-off commenced in December after the Fed raised interest rates for the first time in over nine years. The end result: 2015 going down as the first losing year since 2008 for many investors.

Here’s how the major asset classes fared in 2015:

Equities: The MSCI AC World Equity Index registered -2.4%. Emerging markets really took it on the chin, losing 14.9%, as represented by the MSCI Emerging Markets Index as falling commodity prices and the strengthening US dollar hurt these countries’ economies. On paper, the big cap US market benchmarks appeared to do better with the S&P500 only down 0.7% before reinvested dividends, but that is skewed by the outperformance of some of the largest capitalized names like Facebook, Amazon, Netflix, and Alphabet (formerly Google). Remove those names and the S&P500 would have similar figures to the Russell 2000 Small Cap Index (-4.4%) or the Russell Mid Cap (-2.4%).

Fixed Income: Fixed income investors aren’t jumping for joy at this year’s end. The Barclays US Aggregate Bond Index was up just a tiny bit, +0.6%; but the Barclays Global Aggregate Bond Index declined 3.2%. It was worse off in the high yield aka “junk” market which finished the year -4.5%. This index was weighed down by energy companies where long term solvency has come into question given these extremely low oil prices.

Alternatives: In theory, asset allocation using a diversified approach helps investors over the long run. This was a very untypical year in that the three major asset classes (equities, fixed income, and alternatives) finished the year with very similar small negative results, with the Credit Suisse Liquid Alternative Index down -1.0% for the year. We wouldn’t expect that trend to continue for 2016. For more detailed info on alternatives, please see our blog from last month at http://www.dwmgmt.com/why-alts/ .

At the time of this writing, the stock market is not off to a good start in 2016, with the Dow tumbling more than 1000 points in the first week, as the uncertainty of the Fed, China, and oil continues. But let’s chat about those three items.

  1. The Fed and interest rates: The Fed has indicated that it wants to keep raising, but at a very gradual rate. The last thing they want to do is harm the economy or US or global growth. In fact, Fed officials expect that rates will still be below 3.5% in late 2018. So this is not the same thing as slamming down on the brakes when going 80mph.
  2. China’s slow-down: This is not a one-time 2015/2016 event. China is undergoing a necessary and positive adjustment, shifting from an economy based on heavy manufacturing towards one based on service. This will take years to convert so investors should simply expect these type of headlines and not fear them.
  3. Oil prices: Consumers are loving these lower prices at the gas pump, but it’s creating havoc in the global markets. There’s a disequilibrium: demand is up, but supply is up more, way more! Many energy companies are suffering. Imagine if your paycheck got cut in half or more. It’s very hard to live on severely reduced income. You still have the same fixed costs. So what do you do? You can borrow money and hope for prices to recover, but they may not and you may go bankrupt. This ballgame is only in the middle innings and could get uglier. Fortunately, for the US consumer, these lower oil prices means extra money in our pocket which most likely leads to spending and boosting our economy even more.

2016 isn’t another 2008 in the making. Major market declines typically occur when the economy is heading south. That’s not the case as the US economy is one of the world’s healthiest right now: there’s strong job growth, solid inflation-adjusted wage growth, and cheap gas prices. For diversified investors, there are opportunities in areas where selling has been overdone and market cycles start to reverse. It’s been a rough start in 2016, but a long-term investor remembers to stay the course, be disciplined, and be rewarded in the end.

Uncertainty is the one thing that is certain about financial markets.  Expect it, but don’t fear it.

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

Giving Back in 2016

heart in handEveryone is talking about Mark Zuckerberg and his wife, Priscilla Chan, because of their remarkable philanthropic pledge to give away 99% of their Facebook stock in their lifetime.   The Chan/Zuckerberg Initiative generously provides some $45 billion as an investment in an LLC that is committed to helping solve some of the world’s problems. It is a new twist on charitable giving and is designed to change direction away from grant-making foundations where certain activities, like lobbying or contributing to campaigns, are prevented in order to keep their non-profit status. This new format allows for investments in for-profit businesses in fields like education and health care, which the Facebook founder and his wife believe will maximize their ability to achieve more of their philanthropic goals.

These kinds of stories can lead us all to thinking about our own charitable giving, especially as we start a new year. It turns out that it is good for you, too! According to a research study by Bank of America in 2015, giving of your time and money could be a key element to happiness in retirement. A study by The National Philanthropic Trust found that this country’s individual philanthropy has been increasing annually and Americans contributed $358 billion or $2,974 per household to charity in 2014. We have stepped up our charitable giving with an explosion of online contribution campaigns and gofundme pages, as well as through more traditional methods. We have our brazen consumption days like Black Friday, but now they are followed by ‘Giving Tuesday’ to celebrate and encourage charitable gifting. Americans are generous with their time as well and, in 2014, volunteering by Americans was worth $175 billion with 64.5 million of our citizens giving of their time. Seems as if this is a win-win for us all.

The end of the year is a popular time for making decisions about charitable giving as people have abundant holiday spirit and a good sense of their year-end balance sheet. As folks get caught up in the generosity that comes late in the year, this spirit can lead to impulsive contributions rather than a purposeful strategy. We think it is better to have a regular annual strategy for giving to ensure that your time and money are spent in ways that are as thoughtful and productive as possible. It is important to make sure your charitable dollars will have the most impact on the causes that you believe in all year long.

Including a disciplined approach to philanthropy in your financial plan can be both rewarding and make good sense for overall tax planning. It is a good idea to talk to your financial advisor, like DWM, and a tax professional to make sure that you are benefitting from any tax savings opportunities. There are some great plans you can use to make your charitable giving proactive and have maximum benefit. You can use donor-advised funds which allow clients to make contributions at one-time, but pay out over several years and to different charities, even if you haven’t yet determined the exact charitable recipient. You can also harvest appreciated assets by giving those assets to a charity or a charitable account which can help balance your investment accounts and avoid some of the capital gains taxes. Another possible approach is to make donations to charitable annuities or charitable remainder trusts where a donor can make a one-time gift, but look for some measure of returns on these assets. These accounts generally have some high costs associated with them and should be thoroughly and cautiously investigated before using them. Another option is to use your RMD as charitable contribution funds. At the end of 2015, Congress passed legislation to reinstate this income-reducing provision, which also can be used retroactively for 2015. These types of plans can be great tools for combining smart tax-planning and personal philanthropy.

One last reminder is that it is also wise to avoid gifting to organizations until you have properly vetted them for adherence to the causes they promote and for responsible administration of their budgets. There are several watch organizations, like www.charitywatch.org and media outlets, like Forbes, that rank charities on the success of accomplishing their missions. You may want to do some research to find out what a charity spends on administration versus what it spends on the goals of the organization before making a donation.

Having a consistent strategy in place will help guarantee that favorite organizations, like your alma mater or local church, don’t get left out of your generosity. As you start this New Year, we wish you all health, happiness and a plan for your financial freedom, including having the ability to give freely and wisely as you wish. We can’t all be as generous as Mr. and Mrs. Zuckerberg, but our giving can certainly have an impact on those causes that are closest to our hearts.