Archives for December 25, 2019

On Christmas Day across America, millions of families will gather together to celebrate one of the seminal holy days of the Christian calendar. An important element of that celebration is the exchange of gifts and other expressions of generosity toward our family, friends, neighbors and many beyond our immediate circle who are less fortunate. Giving thanks through the act of giving lies at the heart of our understanding of Christmas.

But far beyond this specific occasional expression of giving, it turns out that human brains are hard-wired to be generous, and that doing so is actually good for us. Giving feels good because we are literally created to do it.

For Christians on this day, gifting recalls the ancient story of the three Magi bringing gifts to the newborn Jesus in an expression of thankfulness that reinforces our calling to live generously all year. But the instinctual need for us to give is as old as mankind itself and nearly universal across faiths. In Jewish tradition, charity or “tzedakah” is considered a mitzvah or commandment, one of the central obligations of the faith. Interestingly, the word translated “charity” in English literally means “justice” or “righteousness” in Hebrew.

For Muslims, almsgiving or “zakat” is one of the five pillars of Islam and requires that followers dedicate a fixed portion of their income to support others in need. The Quran instructs the faithful to “be steadfast in prayer and regular in charity”. Similar injunctions to giving occur in most other religions.

Yet while our various faiths instruct us to practice generosity, it may be that these religious precepts merely codify a genetically prescribed impulse that we as human beings are inherently programmed to practice. Science is discovering evidence that we are born to be givers.

Classical economic theory assumes that all people are relentlessly rational actors seeking to maximize their own welfare; “homo economicus” or Economic Man always works to maximize profits and minimize losses, a predilection that would presumably exclude giving to charity as being irrational. Researchers have long pondered the apparent contradiction evidenced by the real generosity in which actual humans routinely engage. New tools including functional MRI scanning allow these scientists to observe the response of the individual circuits in the brain that control particular responses like nurturing social behavior and stimulation of neural rewards. Results have consistently shown that we are made to be generous.

Scientists have demonstrated that acts of charity stimulate the parts of the brain that secrete certain chemicals associated with pleasure like serotonin and dopamine. Engaging in acts of kindness switch on the “feel-good” mechanism of the brain and create a sense of happiness and satisfaction that reinforces this behavior and encourages us to do it again.

In one of the largest academic studies, the Science of Generosity Project at the University of Notre Dame published their findings in a book called “The Paradox of Generosity”. According to their work, people who donate significant portions of their income have a materially lower incidence of depression, while those who donate time and effort are measurably healthier. Numerous other studies have likewise found that regular givers live longer, are generally happier and have deeper social attachments, suggesting that not only are we programmed for generosity but that we get paid for it as well. What could be better?

These findings are good news indeed for all but the economists who must go back to the drawing board to explain how we imperfect, irrational humans just can’t resist our compulsion to give.

A very Merry Christmas and best wishes for a wonderful Holiday Season to all.

Your expenses don’t end when your paychecks do, but creating a reliable income stream in retirement can be tricky. The right choices can result in sustainable income for the rest of your life. The wrong choices could leave you uncomfortably short of cash.

In fact, retirement includes so many important, potentially irreversible decisions that most people could benefit from a few sessions with a fee-only, fiduciary financial planner. (Fiduciary means the adviser is committed to putting your interests ahead of their own.) These ideally would start about 10 years before retirement. Understanding some key concepts could make those discussions easier — or keep you from making serious mistakes if you take a do-it-yourself approach.

MAXIMIZE SOCIAL SECURITY

Social Security will make up 60 percent to 80 percent of most retirees’ income, so maximizing those checks is essential, says actuary Steve Vernon, a consulting research scholar at the Stanford Center on Longevity.

Social Security checks can start at age 62, but abundant research shows most people are better off delaying. Waiting until 70, when benefits max out, is typically the optimal strategy for single people and the higher wage earner in a couple, says Vernon, author of “Retirement Game-Changers.” People’s situations can vary, though, so they would be smart to consult Social Security calculators to help them decide when to start. AARP’s site has a free one, or search for more sophisticated versions from Maximize My Social Security ($40 and up) and Social Security Solutions ($20 and up).

A planner might recommend tapping retirement accounts or working just enough to substitute for the income you would otherwise receive from Social Security.

CONSIDER OTHER GUARANTEED INCOME

Ideally, fixed expenses in retirement would be covered by guaranteed income, such as Social Security and pensions, so that your basic lifestyle isn’t jeopardized by stock market fluctuations. If those sources aren’t enough to cover basic costs, an income annuity could help fill the gap, says certified financial analyst Wade Pfau, author of “Safety-First Retirement Planning.”

Income annuities are insurance products that can offer a lifetime stream of monthly payments in exchange for a lump sum. Unlike variable annuities or other investments, the amount you get doesn’t vary if the stock market goes up or down.

Another option could be a reverse mortgage, a loan that can convert some of your home equity into a stream of monthly checks. If you have a lot of equity but still have a mortgage, a reverse mortgage could pay off your loan and eliminate those monthly payments.

PICK A SUSTAINABLE WITHDRAWAL RATE

Financial planners’ “4 percent rule” suggests withdrawing 4 percent of your portfolio the first year, adjusting the amount each year afterward for inflation. This strategy historically has posed a low risk of running out of money.

Some planners, however, worry that 4 percent may be too high given current low interest rates and high stock valuations. The “Spend Safely in Retirement” method, which Vernon created with the help of the Society of Actuaries, recommends using annual withdrawal rates based on the IRS’ required minimum distribution rules. The percentage rises slightly each year according to age. A 60-year-old might withdraw 2.72 percent, a 65-year-old would tap 3.13 percent and a 70-year-old would take 3.65 percent. The withdrawal would be made at the end of each year, then the money is moved into a savings account or other investment that protects the principal, so it’s available to spend the following year without risk of market losses.

Unlike the 4 percent rule, the “Spend Safely in Retirement” approach poses no risk of running out of money but can result in income that varies considerably from year to year. Retirees who have their basic expenses covered by guaranteed income might look at their portfolio income as a bonus, Vernon says. A bigger one can pay for splurges, while a smaller bonus might require cutting discretionary spending.

STAY INVESTED

Many retirees are tempted to move their money into “safe” investments such as bonds, certificates of deposit or savings accounts. Unfortunately, those investments may not keep up with inflation over time. Devoting at least 50 percent of investment portfolios to stocks — ideally using a low-cost target date, balanced or stock index fund — can produce more income over time, Vernon says.

Once you create a retirement paycheck, your work isn’t done. You’ll still need emergency funds for unexpected expenses and a strategy to pay for long-term care, among other tasks. But establishing a reliable income stream can help you meet your regular expenses in retirement without worrying you’ll run out of cash.

Early retirement is something that many people aspire to their entire lives. But there’s more to retiring early than just turning in your office keys and gathering up all your family pictures from your desk. You also have to think about what early retirement will actually be like and anticipate potential problems — before it’s too late to do anything about them.

Many people who’ve retired early have discovered three areas in which they weren’t adequately prepared. We’ll share them below, along with some ideas for how to address them.

1. Show yourself the money

Quitting your job means giving up your primary source of income, and so it’s important to understand exactly where you’re going to get the money to handle living expenses. Social Security isn’t typically available until your early 60s, so if you’re planning to retire well before that, you’re going to have to identify other sources of cash.

Even those who are fortunate enough to have other financial resources available still have to keep some things in mind. For instance, those who save in tax-favored retirement accounts like IRAs and 401(k)s have to deal with the early withdrawal penalties that often apply to those under age 59 1/2 who take money out. There are exceptions to those rules, but you’ll need to explore them completely in order to determine if they’ll provide enough cash for your expenses. Similarly, if your company offers a pension for retirement purposes, you’ll want to know when it might let you start collecting benefits and whether there are any adverse consequences from taking that money earlier than normal retirement age. The best financial resource is a completely accessible regular investment account, and so planning to have some of your money available is a smart move.

2. Taking care of your health

An even bigger obstacle to early retirement is figuring out how to get healthcare coverage. Most Americans get their healthcare through their jobs, and the ability to keep workplace coverage extends only for a short period after you quit. Meanwhile, Medicare coverage won’t kick in for most people until age 65. That creates a long potential gap during which any serious medical conditions could wipe out your entire savings.

Some solutions include using a spouse’s workplace coverage or seeking to find individual coverage on your own. However, individual coverage is often expensive for those who retire early. Although staying on with a former employer’s coverage under COBRA can work for some people, the relatively short time periods during which employers offer COBRA coverage don’t make it the ideal long-term solution.

3. Keeping your friends and social life

The workplace dominates American culture, and for many, spending time with workmates is a natural extension of their days. That can make retirement scary, as you risk losing the social network that you’ve relied on for decades. Even if you promise to stay in touch, it doesn’t always happen and is sometimes awkward when it does.

Most early retirees who’ve successfully made the transition point to the importance of keeping some of your old friends but making new ones as well. Being retired gives you flexibility that your working friends don’t have, so using your newfound time to meet new people can end up enhancing your social life. Yet it’s smart to keep longtime friends in your corner in order to handle problems that can benefit from someone who knows you well.

Be ready to retire early

Knowing that these early retirement issues are out there is half the battle. By thinking about them beforehand and taking steps to address them, you’ll be in a better position when you walk out of your workplace for the last time.

“This policy change is abhorrent and absolutely unjustifiable.”

“We all know that the cruelty is the point with this administration, but this sinks to yet another low.”

“This would be a crushing blow to me and my family.”

Those are just a few of the more than 1,700 official comments members of the U.S. public have left on President Donald Trump’s proposed Social Security rule change, which could strip lifesaving disability benefits from hundreds of thousands of people.

The proposal received hardly any media attention when it was first published in the Federal Register in November. But recent reporting on the proposed rule change, as well as outrage from progressive Social Security advocates, sparked a flood of public condemnation and calls for the Trump administration to reverse course.

Backlash against the proposal can be seen in the public comment section for the rule, where self-identified physicians, people with disabilities, social workers, and others have condemned the change as monstrous and potentially deadly. The number of public comments has ballooned in recent days, going from less than 200 to more than 1,700 in a week.

The public comment period ends on January 17, 2020. Comments can be submitted here.

“Cutting Social Security is murder and this immoral administration knows it,” wrote one commenter. “I will fight it every way I can.”

A commenter who identified as Karla Kirchner said Social Security is her “only source of income.”

“If I lose my checks, there will be nothing left to keep me alive,” Kirchner wrote.

The Trump administration’s proposal would add another layer of complexity to the process of obtaining Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) benefits.

If implemented, the rule change would require people categorized by the federal government as Step 5 recipients—typically older individuals with serious physical ailments or mental illness—and others to re-prove their benefit eligibility every two years.

Critics and policy experts warned that the goal of imposing more onerous eligibility requirements on disabled Social Security recipients is to slash people’s benefits. An estimated 4.4 million people would be subject to the new requirement if the Trump administration’s proposal takes effect, according to the Philadelphia Inquirer.

Alex Lawson, executive director of progressive advocacy group Social Security Works, wrote in an op-ed last week that “there is no justification for this policy.”

“The United States already has some of the strictest eligibility criteria for disability benefits in the world,” wrote Lawson. “More than half of all claims are denied.”

Lawson urged members of the public to call their elected officials and leave a comment on the Trump administration’s proposal because “if they are allowed to get away with this attack, it will be only the beginning.”

“They want to destroy every part of Social Security, including retirement benefits, and turn it over to their criminal friends on Wall Street. We must stop Trump’s plan,” Lawson said. “If we let the politicians in Washington, D.C., take away some people’s earned benefits, it means they can take away all of our earned benefits.”