Why We Should All Be Thankful … and Have Won the Lottery

My wealth has come from a combination of living in America, some lucky genes, and compound interest. Both my children and I won what I call the ovarian lottery. (For starters, the odds against my 1930 birth taking place in the U.S. were at least 30 to 1.)…

~ Warren Buffett, From his “Giving Pledge” Speech, 2010

Buffett has often cited what he calls “winning the ovarian lottery,” which he feels Americans win the day they are born in the US. In lengthier speeches on the same topic, he cites the many aspects of your life which are determined at birth: the political and economic system you are born into, your health, sex, skin color and your level of intelligence.

While our country is certainly not perfect, we are thankful for its many virtues and the opportunities it has provided to so many of us. On this Thanksgiving Day, we hope you appreciate the good fortune that so many of us have, simply by being born in the US.

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We are truly thankful to our clients, who have placed their trust in our firm.

We are very thankful for the referrals that our clients and friends have made on our behalf to their friends and relatives.

We are thankful for the clients who have requested our advice and counsel in projects beyond investing and financial planning, such as helping them with their estate planning, review of insurance and the sale of businesses.

We wish all of you a very Happy Thanksgiving, which is shared with those who are most important to you.

 

Social Security Basics: What you Should Know

Social Security benefits are important. The amount you may collect from Social Security could be $15-30,000+ annually and lifetime benefits for a couple may be more than $1 million. That is significant.

How are Social Security benefits determined?

Benefits are determined by a formula, based on your highest 35 years of earnings. To be eligible for Social Security retirement benefits, you must be at least 62 and have earned at least 40 work credits during your lifetime.

If you have worked full time during your working life, you will have no problem meeting the work credit minimum. Work credits are earned at a maximum of 4 credits per year. Currently, you would earn the 4 credits with earned income of at least $4,800 in a year. Thus, you would need to earn at least $4,800 per year for 10 years, under current standards, to be eligible to collect retirement benefits.

As an example, if you always earned the maximum social security earnings amount (which for 2014 was $117,000) and retired in 2014 at age 65, you would receive $2,431 per month, or $29,172 for the year.

Planning tip: If you have not been in the workplace for a while, you may want to consider working part time for a number of years and earn at least $5,000 or more, to become eligible for benefits.

If you are married and your spouse is a consultant or owns his or her own business, and you provide services to the business, it would make sense to pay some wages/earnings to the second spouse, to gain Social Security credits.

When are you eligible to receive Social Security benefits?

Social Security benefits are based on “Full Retirement Age,” or FRA. This is the age when you can receive 100% of your Social Security retirement benefits. Historically, this was age 65, but it is gradually increasing to age 67. For those born before 1943, FRA is before age 66. For those born between 1943-1954, Full Retirement Age is age 66. For those born between 1955-1959, FRA is 66 plus additional months. If you were born in 1960 or later, your Full Retirement Age will be 67.

If you file for early retirement payments at age 62, your monthly benefits will be permanently reduced to approximately 75% of the FRA benefit amount. If you wait to receive benefits until after FRA, your benefits will increase by 8% per year, for each year after your FYA year, until age 70. If you were born between 1943-54, delaying your benefits until age 70 will increase your monthly benefit to 132% of your FRA benefit amount.

However, if you work while you are under your Full Retirement Age, any earnings between $15,480 and $51,480 will cause your benefits to be gradually reduced. For example, if you are 64 (under the FRA of age 66) and receiving Social Security, you can earn up to $15,480 and your benefits will not be reduced. You would need to earn more than $51,480 for all of your benefits to be stopped.

Once you reach your FRA, you can work and your Social Security benefits will not be reduced or affected at all, no matter how much you earn.

Annual Changes to Social Security benefits and paying into SS

Each year, Social Security benefits are revised, based on the rate of inflation. For 2015, monthly benefits will increase 1.7%. Due to very low inflation, annual increases have averaged 1.4% a year since 2010, which is half the 3% average annual increases during the preceding decade.

The maximum amount of earnings subject to the Social Security tax will be $118,500 in 2015, an increase from $117,000 in 2014. As an employee, you would pay in 6.2% of your wages, up to the wage limit. If you are a consultant or self-employed, the self-employment tax rate is 12.4%, up to the wage limit.

What should you be doing now?

If you have not yet started collecting Social Security, you should be reviewing your Social Security information and future benefit projections. You should verify that the earnings data on record is accurate. You should review this information with your financial advisor.

Social Security stopped sending everyone annual paper statements a few years ago. To review your data online, go to: www.ssa.gov/myaccount to establish your own Social Security account. Each individual needs to do this, it cannot be done as a couple. You will need to create a user name and password. Their password requirements are very strong, which is good. Be sure to save it, and they require you to establish a new password every 6 months.

Social Security may resume sending paper statements every five years, when you turn 40, 45, 50, for example. Statements are sent annually to those over 60, until you file for Social Security benefits. However, we recommend you establish and review your account online, at least annually.

If you have not worked for a long time, you should consider the long term financial benefit of working part time, or the potential impact additional earnings could have on your Social Security benefits. As life expectancies increase significantly, the amount of your Social Security benefits should not be underestimated.

Other matters

This post has covered many details of Social Security, but there are many exceptions. We hope this post is helpful, but please consider this as general information. We encourage you to consult with us, based on your specific situation, prior to making any decisions related to Social Security.

Annual Reminder: How to Verify Your Credit Information

At least annually, you should verify the credit information which is maintained by various credit reporting agencies. If you are married, each person should do this individually.

This is free, relatively simple and only takes 10 minutes to do.

The main website to obtain free credit information is: annualcreditreport.com. This site, governed by the Federal Trade Commission (FTC), will provide you with a link to get your credit report and you will need to answer a number of personal questions, for identification purposes. You may also call 877-322-8228.

This free credit report is not your “credit score.” It is the supporting information that the credit reporting agencies use to determine your credit score.

The Fair Credit Reporting Act guarantees access to your credit report information from each of the three credit reporting companies, once per year, for free. The best and only way to ensure that you are getting this information for free is to use this website, annualcreditreport.com.

Steps to follow:

  • Go to the website: annualcreditreport.com
  • Click on the red button: Request your free credit reports
  • The next page says: 3 steps to your free credit reports….need to again click on the red button at the bottom: request your credit reports
  • Submit your personal information
  • Select 1 of the 3 credit reporting agencies, click Next
  • Confirm the data by the reporting agency, click Continue
  • Answer a number of questions that are used to identify yourself , such as what street you have lived at or when was the last time you applied for a certain loan
  • The report is then provided. You can ignore the “Get Your Score” box, unless you want to pay for the credit score.
  • You should print the report.

You should do this from a secure computer, from which you can print the report. You should not do this from a public computer, or somewhere like a restaurant, mall or hotel.

The 3 major credit reporting agencies are Experian, Equifax and TransUnion. Using the above website, you are entitled to one report from each company every 12 months. You can obtain a free report from all three at one time, or order them one at a time during a 12 month period. If you want to be very diligent, we recommend requesting your free credit report information from each of the 3 companies at different times during the year, not all 3 at once.

You should review the information obtained, and inform the agencies if you note any errors. You should check to see if there are any credit cards or loans that are incorrect and that other data is accurate.

There are many companies that offer credit reporting and monitoring services. With the increase in credit card security breaches, these services may be worthwhile, but they come with a cost. For a monthly fee, you usually get monitoring, alerts and each service’s version of your credit score (which will vary in name and the score, based on the provider).

There are companies and services that may offer your actual credit score for free. One reliable source is the Discover It credit card, which provides your FICO credit score for free on each month’s credit card statement.

If you have any questions about these matters, please contact our office. We are always striving to provide you and your family with financial security.

The Investment Evidence is Compelling

How compelling does the evidence need to be, for you to act upon it?

Through the 5 years ending June 30, 2014, 87% of large-cap stock fund managers under-performed their benchmark, the S&P 500.**

Through the 5 years ending June 30, 2014, 74% of US stock fund managers under-performed their respective benchmarks.

The same trend follows for international stock fund managers. 70% of international stock fund managers failed to beat their benchmarks and 68% of emerging markets stock fund managers under-performed their benchmarks, over the same 5 year period.

Do you know how your mutual funds have performed versus their benchmarks over the last five years?

What does this evidence tell you?

This is more convincing evidence that our investment philosophy is the best long term approach for an overall successful investment experience.

What is our approach?  We believe in following the evidence, the academic research and information such as above. This means that in general, we do not recommend using active stock managers. By “active” managers, this means money managers and stock funds that do research and try to pick which stocks will do the best.

The evidence shows that most active managers under-perform their benchmarks over long time periods. The reasons may vary, such as their inability to consistently make correct picks over a long time period and their expenses and trading costs are too high.

We follow a different approach. We generally use a variation of indexing, called passive or evidence-based investing. If the “passive” funds we recommend beat or equal their benchmarks over time, our clients will be ahead of most “active” money managers. If the vast majority of active investment managers cannot outperform their respective benchmarks, then our strategy is logical and makes sense.

“Active management has never been in worse repute. This is the darkest of days,” says John Rekenthaler, vice-president of research at Morningstar, an independent evaluator of mutual funds.

This evidence should give our clients further confidence in our long term stock investment strategy.  Since we began as a firm, we have adhered to the principle of being globally diversified by recommending very low cost, passively managed mutual funds. We do not plan to change this philosophy, as long as the very strong evidence supports it.

 

** Data from WSJ, 11/4/2104, from S&P Dow Jones Indices, Article: “Investors Flee Active Stock Managers”