April 26, 2012

Social Insecurity

Credit: David Castillo Dominici
Perhaps it was something I ate. Perhaps I tied my necktie just a little too tight this morning. Perhaps it’s the fact that I’ve gone without football for months now…

If you read my blog for some primarily “sunny” financial advice and occasional humor, I thank you. I must, however, warn you that today is going to be a little bit different. You see, I’m feeling a little like Alfred Hitchcock, Stephen King, and Edgar Allan Poe. I’m feeling like I need to share a piece of information that might not sit so well with you, but the sooner you hear “the horror,” the sooner you can come up with a different plan. Here goes:

You probably should not rely on your Social Security benefits to get you through retirement.

Why would I say such a thing? Well for starters, how much Social Security income are you expecting?

Go to the below Social Security Administration website and enter in your date of birth, current annual earnings or the amount from the last year you had earnings, and the month and year you expect to retire. Select “today’s dollars,” and take a deep breath.

Social Security Administration Website

Not very much, is it? I asked you to select “today’s dollars” because not many people see benefits continuing to increase long-term (as the "inflated (future) dollars" selection would have shown) with the current federal budget deficit.

Now that you know what to expect, could you live off that in retirement? No matter how much money you have made, the maximum 2012 Social Security benefit for a worker retiring at full retirement age (67 years old) is only $2,513/month. I know that’s about $30,000 annually, but is that enough for rising costs, your eventual declining health, and caring for your family? But wait, it gets scarier.

Even though you have paid into the system for years, Social Security income can be taxable! For 2012, if you file an individual tax return and your "combined income" is over $34,000 or if you file a joint tax return and your "combined income" is over $44,000, up to 85% of your Social Security benefits may be taxable. The only slightly good news is that your “combined income” is a sum consisting of your adjusted gross income, your nontaxable interest, and only ½ of your Social Security benefits.

The final scary point to consider is the future of Social Security. With people living longer, health care costs continuing to rise, and the Baby Boomers now receiving their Social Security benefits, the system as we know it is strained. Recent government estimates project that by as early as 2016, parts of the Social Security program could be unable to meet their obligations. The only way that could change would be by the government issuing more debt, increasing taxes, or more likely, cutting the amount of benefits. I’m not trying to predict what Social Security will be like in the future; I’m just warning you that the future monthly income number you saw for yourself could be overstated.

Retirees have probably already learned this lesson or are unfortunately learning this lesson the hard way, but if you are still working, you need to realize how little your probable Social Security income will be compared to your working income. Pensions are becoming more and more a thing of the past, so if you want to enjoy anything close to your current lifestyle in retirement, it’s up to you to build up your investments and save for retirement now.

Well I’m glad that’s off my chest! Please don’t worry too much though because I will soon be covering Individual Retirement Accounts, a potential tonic for your retirement income woes. Either way, next week I promise to be back to my old self and will post on something happier - how to save for a vacation!


April 17, 2012

A New Car! ...or Not?

Credit: M - Pics
You can acquire a car in lots of different ways. Some people buy with cash, some people buy with credit cards, some people buy with the help of an auto loan, some people lease, and some people even steal. Not many of us will ever be fortunate enough to win a game show and just walk away with a car. So, one of my wife’s friends asked what’s the best way to acquire a personal mode of transportation? Well, it depends - on your lifestyle and time frame, on your available assets, and on your “craftiness” at the dealership or car lot. Let’s take a look at how to best get that sweet ride.

Do you have to have the latest and greatest vehicle out there? Do you want to have a new car every 3 or 4 years once that new smell wears off? Are you just looking for a reliable form of transportation for the next decade?  As long as you are financially capable, these lifestyle preferences are neither right nor wrong, but you should at least consider their financial implications.

  • Leasing: If changing cars frequently is important to you, then you should consider leasing due to the lower monthly payments and lower probable maintenance costs, but you should also recognize that you will always have a car payment.
  • Buying: If you are planning on keeping the car for most of its life or paying towards owning something is important to you, then you should consider buying a car.
    • Buying Used: A used car will have a lower price, will depreciate in value at a slower rate, and will have less expensive auto insurance, but it could potentially have more maintenance costs since you would have a limited warranty at best and cannot know what the car has actually been though.
    • Buying New: A new car will have a higher price, will start depreciating in value quickly, and will have more expensive auto insurance. A new car will come with a longer term warranty, and like buying a used car, you will eventually own it.
Assuming your car lasts, buying your vehicle eventually means no monthly payments; just gas and maintenance expenses and the ability to sell something you own. Still don’t know whether to lease, buy-used, or buy-new? Let’s consider a car’s true cost and then your available assets.

A car does not cost what the vibrant-colored numerals say on the windshield, and it does not cost what the seller or dealer initially tells you it will. A car will actually cost you the sticker price plus sales tax (probably 5-8%), plus the price of any options or add-ons you may have agreed to, plus the interest you pay over time if you do not buy the car outright. You also will now have to acquire additional auto insurance, pay for gasoline, and be able to afford regular and unplanned maintenance. Now that’s too many variables for me to give you a useful numerical example, but the bottom line is, you need to estimate all the initial and monthly costs of a new car and look at your monthly cash flow and savings. If you see that the new expenses will cause your monthly cash flow to become negative or your current assets to start declining, you need to look at a less expensive new car, consider used cars, or consider leasing. You can save up and get that car you have always wanted next time, without straining or destroying your financial health this time!

Finally, assuming you have decided to buy a car, used or new, here are a few tips on how to get the best deal:

  • Do some research and know what kind of car you want before you go shopping.
  • Know what options and upgrades are available and what you want before you go shopping. Do not waiver on your decision when you start shopping.
  • Do some research and know how much the Manufacturer’s Suggested Retail Price (MSRP) is. This empowers you when the seller is telling you what a good deal you are getting.
  • Check your credit score and ensure that the reports are accurate before you go shopping.
  • Go to your bank and consider getting pre-approved for a car loan. This gives you an idea of how expensive of a car you can afford, what your monthly payments would be, and what your interest rate would be. This not only helps you decide how best to acquire a vehicle, but it also acts as a safety net and point of reference when negotiating financing with the seller. You hold the cards. See if the seller can beat or match your bank’s offer.
  • Plan when you shop. The end of the year when new models are arriving, the end of the month when sales quotas may not have been met, and even rainy days when no one else is buying a car are supposedly the best times to get a deal.

I hope this helps. Happy shopping!


April 10, 2012

Mega "Nil"-ions

Credit: FreeDigitalPhotos.net
A couple of weeks ago, the Mega Millions lottery jackpot exceeded $640,000,000. Did you buy any lottery tickets dreaming of owning your own island and having a fleet of sports cars at your disposal? I know I did.

The lottery was the talk of the office around the water cooler as people contemplated if they would have enough winnings to buy a stake in the Los Angeles Dodgers or if they could buy a house with nothing but closets for shoes. I remember watching the jackpot grow larger and larger with more and more media coverage to the point that a CPA and financial planner I know really well was even becoming giddy with anticipation. Then some people won. Then I had the idea for this post.

Let me be clear, unlike many financial planners, I have no quarrel with the lottery. My wife and I play ourselves, but only 1 ticket a piece and only when Mega Millions exceeds $300 million. It’s fun and it’s exciting. Those two dollars it costs us are easily made up by drinking water at dinner instead of a Coke one evening and have no impact whatsoever on our family’s financial status. I also appreciate the fact that the lottery program will hopefully one day help pay for some little Presleys to go to a college located in the serene town of Athens, GA. My only beef with the lottery is that some people unfortunately view it as a plausible retirement plan. They gamble to the point that it actually impacts their financial status - now and in the future. Sadly, there are people who do that.

According to a pair of surveys commissioned by the Consumer Federation of America and the Financial Planning Association several years ago, 21% of Americans believe that “winning the lottery represents the most practical way for them to accumulate several hundred thousand dollars.” According to Bloomberg, Georgia residents spent an average of $470.73 per person on the lottery in 2010. $470.73! Massachusetts, New York, Michigan, and South Carolina residents weren’t far behind. The Bloomberg article also points out that Georgia’s lottery payout averaged $.63 for every $1 played. Hold on just a second…

If I’m an average Georgia resident and spent $470.73 on the lottery, and let’s suppose I spent it all on January 1st agreeing not to play anymore other than my winnings for the rest of the year, what would be my investment return? Well, a $.63 payout for every $1 played would mean that on January 2nd I would have $296.56 (470.73 x .63), on January 3rd I would have $186.83 (296.56 x .63), on January 4th I would have $117.70 (186.83 x .63). Guess what? At that investment return rate, I would not be able to afford a $1 Mega Millions ticket by January 14th! This is also assuming I win every day January 1st - January 13th, and that is a bad assumption to make considering that according to Bloomberg’s study, “state-run lotteries have the worst odds of any form of legal gambling in America.”

According to ABC, the odds of winning Mega Millions on March 30, 2012 were estimated at about 1 in 176 million. The article points out that you have a greater chance of getting struck by lightning 500 times before you win Mega Millions. I’d like to point out that you also have a lesser chance of winning Mega Millions than:

- Dropping 2 grains of sand in exactly the same place consecutively, blindfolded
- Getting a royal flush on your first 5 cards dealt
- Dating a super model
- Bowling a 300
- Finding a pearl in an oyster
- Dying from using a right-handed product if you are left-handed

Do I need to tell you that if you took the before mentioned $470.73 that an average Georgia resident spends on the lottery and invested it at the beginning of every year in a prudently diversified portfolio with an average return of 8% over 30 years you would have around $57,000? That’s a pretty good jackpot in my book, and it comes with better odds!

Play the lottery from time to time. Have fun, but know when enough is enough. Remember that playing the lottery is probably not going to net you mind-boggling wealth, and repeatedly or substantially playing the lottery is likely hurting your financial situation, well, unless you win. 


April 03, 2012

What If You Were a Free Agent?

Credit: hin255
In December of last year, Albert Pujols signed a new contract with the Los Angeles Angels of Anaheim worth $240 million dollars over the next ten years, plus incentives. In March of this year, Calvin Johnson signed a new contract with the Detroit Lions worth $132 million dollars over the next eight years, plus incentives. Many of you who know me personally are well aware that I am an avid sports fan, and I must confess that all of these signings, trades, draft picks, and mega-deals got me thinking…

What am I worth?

I asked around to see how much I'm worth, and here is what I found:
According to the Atlanta Braves: $0
According to the Atlanta Falcons: $0
According to the Atlanta Hawks: $0
According to the Atlanta Thrashers: nevermind…
According to Lucy (the family dog): 1 cup of Purina per day and occasionally a chew toy
According to my mother and MasterCard: priceless 

All kidding aside, knowing how much you are worth is unbelievably important. It allows you to competently make big purchases and plan for retirement. It allows you to sleep better because you know where you stand financially. If you aren't an unbelievable athlete paid handsomely for your abilities, you are worth what you own minus what you owe. The difference you are left with is called your net worth.

To calculate your net worth, get some paper, start a nice spreadsheet, or check out the interactive template at the bottom of this page. List what you own including bank accounts, investment accounts, your 401(k) at work, the value of your cars, the value of your house, the value of your furniture, and that savings bond your grandmother gave you. After you feel like you have captured the value of most of your possessions, list what you owe. List credit card balances, student loans, mortgages, and that outstanding March Madness bet you still haven’t paid to your old college friend. Subtract what you owe from what you own, and you will know how much you are worth.

Now that you have calculated your net worth once, save your work and you will be able to easily update it as time passes. This will allow you to see if you’re headed in the right direction and if you are making progress towards your financial goals. You can also gain valuable insights like how much insurance you might need to protect your assets, if you need to reevaluate your estate plan based on the current exemption amounts, or if you are beginning to spend more than you are earning. You may also realize that the net worth of someone with a $300,000 house and a $200,000 mortgage might not be that different than the net worth of someone with a $3,000,000 house and a $2,900,000 mortgage.

Most people will never make “Pujols money” unless they find a winning Mega Millions ticket, but it doesn’t mean they shouldn’t know how much they are worth. I just figured my net worth, and I am happy to report it is somewhere between Lucy’s response and my mother’s!


P.S.: The Braves didn't do much in free agency this year, but they'll bounce back. Can't stop the chop! Go Braves!