Archives for June 2, 2019

Most Americans rely on Social Security benefits for income in retirement.

And one big question that plagues them is: Will those benefits be there for me when I need them?

The Social Security Board of Trustees said in April that its reserves will be depleted in 2035.

That means, if nothing is done up to that time, the system will only be able to pay 80% of expected benefits for retirees.

“The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them,” Nancy A. Berryhill, acting commissioner of Social Security, said in a statement.

There are proposals to shore up the system, including the Social Security 2100 Act led by U.S. Rep. John Larson (D-Conn.).

“We’re going to do everything we can to continue to move this forward,” Larson said in an interview.

But some question whether Congress currently has the appetite to make the necessary changes.

That comes even as legislators could be poised to pass the most significant retirement reform legislation since 2006. That new law, known as the Secure Act, would change IRA distribution rules and make 401(k) plans more accessible for some American workers.

Proposed changes

The Social Security 2100 Act would extend the program’s solvency into the next century. Right now, the bill has more than 200 co-sponsors.

It is one of several proposals that have come up to address Social Security and Medicare in the past five years, according to Jamie Hopkins, director of retirement research at Carson Group.

“The Social Security 2100 Act is probably the only one that has garnered real attention and support,” Hopkins said.

The proposal would give those who are or will be receiving benefits a raise that is the equivalent of 2% of the average benefit. It would change the formula upon which annual cost-of-living adjustments are calculated, using instead the Consumer Price Index for the Elderly as a gauge for retirees’ expenses. It would also set the new minimum benefit at 25% above the poverty line.

The plan also would raise the limit for non-Social Security income before benefits begin to be taxed. The new limits would go to $50,000 for individuals and $100,000 for couples, up from the current $25,000 and $32,000 thresholds.

In order to pay for those changes, the bill calls for raising payroll taxes on wages over $400,000. Wages up to $132,900 are currently taxed.

It also calls for increased payroll contributions from workers and employers. That rate would increase to 7.4% from 6.2% and would be gradually phased in from 2020 to 2043. For the average worker, this would cost an estimated 50 cents more per week.

The plan has the support of Social Security reform advocates including the National Committee to Preserve Social Security and Medicare.

“We’ve really been supporters of many of the ideas that are incorporated in the bill for quite a long time,” said Max Richtman, the organization’s president and CEO.

Barriers to progress

The House Ways and Means Committee has held four hearings on Social Security so far. Once a full committee vote happens, it could move forward in the House.

“We’re hoping to have the full floor vote by the time we adjourn for the summer recess, which will allow people to be able to go back to their districts and talk about the Social Security plan,” Larson said.

From there, the issue would hopefully get picked up by the Senate.

Senators Richard Blumenthal (D-Conn.) and Chris Van Hollen (D-Md.) are supporters. Sen. Bernie Sanders (I-Vt.) and Rep. Peter DeFazio (D-Ore.) also put forward their own separate Social Security bill earlier this year.

“The questions remains will the president engage? I believe if he does there is a clear path forward to the passage of the bill,” Larson said. “If he doesn’t, I think this will be a major campaign issue.”

Hopkins said he sees a tough challenge for legislators who are trying to push these changes through. That is because there are not enough cuts to the system across the board, he said, such as benefit caps or tax reductions that would be necessary for Republican support.

“It could get passed through the House this year,” Hopkins said. “But it would, at least in the current make up, die in the Senate without some features being added to it.”

The other challenge is getting Congress to make the sweeping changes necessary, according to C. Eugene Steuerle, institute fellow and Richard B. Fisher chair at the Urban Institute.

For example, the Secure Act’s largest cost item is raising the age for required minimum distributions, which would eventually total roughly $1 billion per year, Steuerle said.

Social Security costs, meanwhile, are poised to increase by about $500 billion, from $1 trillion in 2019 to $1.5 trillion in 2029.

“Right now, there’s this refusal to address the issue as a whole,” Steuerle said. “It’s going to take a crisis. And even in a crisis, it’s going to take some leadership.”

‘Too big to fail’

That gets back to the question: Will Social Security benefits still be there for retirees?

The answer, experts said, is a definitive yes, though they will be reduced unless there is some kind of reform.

“Social Security and Medicare will be there, it’s just the promised growth rate in those systems is unsustainable,” Steuerle said.

For about one-third of retirees, Social Security represents their sole source of income. And for roughly two-thirds of retirees, Social Security represents more than half of their income.

“It would really be kind of devastating to the economy, the country, if Social Security were to just vanish, go away,” Hopkins said.

Social Security, one of the largest government expenditures year by year, is too big to fail, he said.

“It does need to be updated, but otherwise it functions extremely well,” Hopkins said. “It’s never missed a payment in its 80 years or so of existence.”

Brookfield Renewable Partners (NYSE:BEP) has done a remarkable job creating value for its investors over the years. The renewable-energy company has been able to consistently increase its cash flow to support 6% compound annual growth in its distribution to investors since 2012, which has helped boost the yield up to 6%. That steady dividend growth has helped power market-beating total annualized returns of 15% since its formation.

Brookfield Renewable believes it can continue creating value for its investors in the future no matter the market conditions. That was one of the key themes on the company’s first-quarter conference call, where CEO Sachin Shah laid out how Brookfield can win in both good times and bad.

We’ll continue being creative during the bull market run
After running through the company’s first-quarter results, Shah pivoted and began discussing its outlook. He started by looking at how the company would run its business if the currently strong market conditions continue. He stated:

Looking ahead, we believe the business is well positioned to deliver strong results during all points of the economic cycle. Should the current protracted bull market continue into the foreseeable future, we will continue to execute on the same strategy that we have pursued over the last number of years: looking for pockets of capital scarcity and unique multifaceted transactions in order to partner with other counterparties. In addition, we will continue to finance the business on an investment grade basis and leverage our operating expertise to enhance value through operational organic growth levers.

Brookfield Renewable likes to invest on a value basis, which is harder to do during bull market conditions. It has forced the company to get creative in finding deals that meet its high return standards. One way it has done that is by completing several complex transactions in recent years.

For example, it partnered with its parent, Brookfield Asset Management (NYSE:BAM), to take control of TerraForm Power (NASDAQ:TERP) after the wind and solar power company’s former parent went bankrupt. The two companies subsequently invested more money in TerraForm to help it buy a wind and solar company in Spain.

Brookfield Renewable’s most recent deal was a creative transaction with Canadian utility TransAlta (NYSE:TAC). Brookfield is investing $750 million Canadian ($557 million) directly into the company via preferred stock that will eventually convert into an ownership interest in TransAlta’s hydroelectric portfolio.

In both deals, Brookfield found outside-the-box ways to invest in high-quality renewable power assets so that it didn’t have to pay a high price.

We’re well positioned to pounce when market conditions deteriorate
Meanwhile, Shah noted: “Should the markets weaken, we believe our strong balance sheet, our liquidity, our robust asset sales program, and access to capital will reduce the need to issue equity to fund growth. Accordingly, we believe we are one of the few companies in this sector with a strategy and the financial flexibility to benefit during periods of both market strength and weakness.”

Brookfield Renewable has worked hard to maintain a strong financial profile during the good times in recent years so that it can pounce on opportunities that could arise if market conditions weaken. That’s why the company has been taking advantage of the currently healthy market for renewables by selling some of its assets.

Last fall, for example, the company sold a 50% interest in a portfolio of hydroelectric assets in Canada to a group of investors. That deal enabled it to unlock some of the value of these assets so that it could redeploy that money into higher growth opportunities. By cashing in on some assets when the market is willing to pay a premium, Brookfield will enter the next downturn with a strong balance sheet and ample liquidity. That will give it a competitive advantage over rivals, which might need to sell assets when market conditions deteriorate to shore up their financial profile.

Able to win in any market

Brookfield Renewable Partners has been a big winner over the years. That’s because the company makes sure it’s in the position to thrive in any market environment. It does that by maintaining a top-notch balance sheet and staying true to its value investing approach. That helps it avoid overpaying and stretching itself too thin during strong markets so that it has the flexibility to take advantage of opportunities that always seem to arise when conditions deteriorate.

Everyone has regrets.

You might wish that you had studied more in school, or that you hadn’t eaten that leftover pizza in the middle of the night. And there are certainly regrettable choices which, once made, are permanent. When it comes to our financial errors, though, it’s often possible to repair the damage – but the sooner you start taking action, the better.

In a new study from Bankrate, fully 76% of respondents admitted to having at least one big financial regret. Of those, 56% were disappointed by their choices on the savings front: Specifically, 27% wish they’d started saving earlier for retirement, 19% regret not saving enough for an emergency, and 10% said they hadn’t saved enough for their children’s college education.

How to avoid financial regrets 

“Saving money may seem impossible at times but taking a few proactive steps can safeguard you from potential hardship in the future,” said Bankrate.com Chief Financial Analyst Greg McBride in a press release. “Pay yourself first by setting up automatic deposits from your paycheck into a savings account and a retirement account such as your employer-sponsored retirement plan. Saving before you have a chance to spend will avoid those future financial regrets.”

The other big category – no surprise – involved the flip side of saving: living beyond our means and going into debt. Those surveyed were most remorseful about their excessive credit card debt (16%), student loan debt (11%), or having bought more house than they could afford (7%).

The most unfortunate finding in the survey might not be that three-quarters of us were willing to admit to a money-related regret, but rather that that only half of those who did are taking steps to do something about it.

Admittedly, 12% said they plan to get the next six months, while another 7% figure to begin addressing their issue between six months and a year from now. But 21% have no plans to address their financial regrets, which is a recipe for disaster.

It’s important to forgive yourself for the past. Fixating on your regrets won’t solve anything. Instead, take an inventory of where you stand, and start developing a plan.

What best steps can you take?

If you’re short on savings – or worse, in debt – start by assessing how much money you have coming in and how much you have going out each month. In other words, it is time to make a realistic and detailed budget. If you find there’s a surplus after you’ve covered your core expenses, it’s time to make increasing your savings or paying off debt a priority for those funds.

In nearly all cases, that’s also going to mean cutting your spending elsewhere. It goes without saying that if your discretionary spending includes eating out multiple nights a week, running up big bar tabs, or “retail therapy,” that’s where to start trimming the fat.

If, however, like many Americans you’re already operating on a tight budget, you either need to bring more money in or find deeper ways to cut. It’s generally easier to boost your income somehow than to cut your housing costs. You can develop a side hustle, start looking for a better paying job, or both.

No matter what strategies you choose, the key steps are acknowledging your errors and taking action to improve your situation. That’s probably the secret of those 24% of respondents who said they didn’t have any financial regrets to report. Because none of us do all the right things – but all of us can regroup and work to correct our mistakes

If your mom ever told you to avoid swimming after eating because the cramps it would cause would surely result in your drowning, you’ve probably known for a long time that not all advice is good advice.

We all want what’s best for our finances, but sometimes it can be tough to tell what’s right and what’s wrong. Finance can be a tricky topic, and there’s plenty of great advice out there to help you make the best decisions with your money. But although most advice may be well-intentioned, not all of it will improve your financial health. In fact, some of these tips are better left ignored, because they may actually do more harm than good.

1. Play it safe with your investments

On the surface, this sounds like exactly what you should do with your investments. Especially for those whose savings took a hit during the Great Recession, not many people would argue that you shouldn’t play it safe with your money.

That being said, there is such a thing as being too safe. If you’re worried about losing your money in the stock market, you may be tempted to stash your cash under your mattress (or at least in a savings account). The problem with that, however, is that savings accounts and other not-so-risky investments like CDs and money market accounts have lower rates of return (usually hovering around 2% to 3% per year). At that rate, your savings are barely keeping up with inflation, meaning that your money may actually lose value in the long-term.

That’s not to say you should throw all your savings into the next up-and-coming tech start-up, but it is possible to invest in the stock market while still limiting your risk. Index funds and mutual funds are collections of dozens or hundreds of different stocks, bonds, and other assets, and investing in these types of funds allows you to limit your risk while still reaping higher returns than you’d see with a savings account.

Of course, the stock market will always have its ups and downs. But over time, you should see an average return of anywhere between 7% and 10% by investing in relatively safe mutual funds. The key is to start saving early so your money has plenty of years to grow — and if there is a market downturn, your savings have time to bounce back.

2. All debt is bad debt

While debt in general isn’t great, not all debt is equal. In fact, some debt can actually improve your financial health and help you achieve your goals.

For example, unless you have mountains of cash lying around, you’ll probably need a loan to buy a home, and you may need to rely on student loans to get through college. But homeownership can increase your net worth, and a college education can help you earn a higher-paying job (thus also increasing your net worth).

High-interest debt (such as credit card debt) is the worst offender, because the longer it takes you to pay down your debt, the more your interest payments continue to skyrocket. If your debt is the result of careless spending, that’s also not a good sign — because if you’re spending more than you’re earning, that could lead to a host of financial problems.

Regardless of whether your debt is healthy or unhealthy, you still need to make your payments on time every month and work to pay the debt down. If you have high-interest debt, aim to pay that off first to eliminate those costly interest payments, then tackle lower-interest debt.

3. Slashing your expenses is the best way to save more money

If you want to be financially healthy, the golden rule is to spend less than you earn. So it only makes sense that if you want to save more money, you should cut back on your expenses.

In theory, that’s a great idea. In practice, though, it’s not so easy. While it is smart to cut back where you can, if you start slashing your budget to pieces and eliminating all the non-essential costs, that may not be a sustainable lifestyle. If you’re trying to lose weight by eliminating every type of food you love from your diet, you’re going to need willpower of steel to stick to that approach. Similarly, when it comes to financial health, if you completely avoid dining out, taking summer vacations with the family, and buying that morning latte, you’ll likely be miserable before long — and end up ditching the budget and falling back into your old ways.

That’s not to say that you shouldn’t make budget cuts. It may not be the best idea to splurge every day on expensive coffee or lavish yearly vacations, but that doesn’t mean you can’t cut back without eliminating what you love. Make cuts where you can, but also try to increase your income to save more money. It doesn’t have to be much; even a side hustle like becoming a dog walker or an Uber driver can help you earn an extra couple hundred dollars each month, and when you put all that income toward your savings, you won’t need to sacrifice the things you love.

There’s plenty of financial advice out there, some of it good and some of it bad. By weeding out the bad advice from the good advice, you can position yourself to save more money for the future and set yourself up for financial success.