covid-19 threatens social security€¦ · 1 ric edelman’s inside personal finance may 19, 2020...

Ric Edelman’s Inside Personal Finance MAY 19, 2020 RicEdelman.com 1

COVID-19 Threatens Social Security Everyone’s at risk – with the biggest trouble ahead if you turn 60 this year. For years, I’ve been warning you not to rely exclusively, or even primarily, on Social Security for your retirement income. The reason: The Social Security trust funds are being depleted.

Indeed, for the past decade, the Social Security Administration has projected that the two trust funds used to pay benefits would be extinguished by 2035. When trust funds are empty, the only source of funds to pay benefits to retirees is the revenue received from payroll taxes. Those taxes are sufficient to cover only about 75 percent of benefits. In other words, as the SSA has long been saying your Social Security retirement benefit will be cut by 25 percent, starting in 2035. More than half of the nation’s retirees get more than half of their income from Social Security; a 25 percent cut would throw millions of retirees into poverty and homelessness. That’s why I created the Funding Our Future coalition with the Bipartisan Policy Center. Now, with more than 60 partner organizations, our goal is to convince Congress to prevent those cuts from occurring. We’d been making progress over the past couple of years. Then the pandemic hit. And COVID-19 has made the Social Security crisis far worse. More than 35 million Americans have lost their jobs (so far) — dramatically reducing the amount of money collected in Social Security payroll taxes. This reduction in revenue,


according to my partners at BPC, means the trust funds are now projected to run out of money in 2029, not 2035. The situation has become dire. If Congress doesn’t act quickly, tax increases of 25 percent could be imposed on working Americans, retirees could suffer benefit cuts of similar amounts, or some combination of the two. These taxes/cuts could cripple efforts to rebuild our post-coronavirus economy. Nine years is closer than you think. There’s only one more presidential election after this November; the 2028 election won’t matter, as that president won’t take office until 2029 — after the cuts take effect. That’s why Congress must act now. The need for immediate legislation is especially true for everyone turning 60 this year. If that’s you, your Social Security benefits are going to be 13.6 percent less than you thought, according to a working paper just published by the Pension Research Council at the University of Pennsylvania’s Wharton School of Business. For example, if you made $50,000 annually while working, you’re going to get $3,900 a year less than you expected. And even though COVID-19 is temporary, this reduction will be permanent. This bad news is caused by the complex calculations that determine your monthly retirement benefit. You see, your Social Security retirement benefit is based, in part, on an average of your 35 highest years of earnings. But your earnings are adjusted, up to age 60, by an index of national wages. The index in your 60th year is what’s used to determine the monthly benefit for the rest of your life. And due to unprecedented unemployment caused by COVID-19, that index is projected to be 15 percent lower this year than the SSA had calculated. When you do the math, you discover that this translates into a 13.6 percent cut in monthly retirement benefits for everyone turning 60 this year. Even if average wages this year fall only half as much as the paper predicts — to 7.5 percent instead of 15 percent — this year’s 60-year-olds will still lose $2,000 a year in Social Security benefits, says Andrew Biggs, who co-wrote the paper. The situation is clear: Social Security is under major duress, and Congress needs to act immediately. And now is the perfect time. Congress is providing trillions of dollars in stimulus packages to rescue every aspect of the economy — households, major industries, small businesses, higher education, state and local governments, public pensions, health care and more. So, adding Social Security


to the list should be obvious and (given the open checkbook on Capitol Hill these days) easier than it might otherwise be to do. For you, here’s our advice:

1. Take note of the amount of your Social Security retirement benefit. a. If you’re not yet receiving Social Security retirement benefits, go to

www.ssa.gov and view your Social Security statement. See what SSA says your monthly check will be.

b. If you are currently receiving Social Security, take a moment to remind yourself how much that amount is.

2. Grab a calculator — there’s one on your smartphone — and reduce that amount by 25 percent.

a. If you are turning age 60 this year, reduce your benefit amount by 13.6 percent. Then reduce it again by another 25 percent.

3. Does the reduction in income threaten your ability to afford your current lifestyle (if you are already retired), or the lifestyle you plan to have in retirement? If so, contact your Edelman Financial Engines financial planner. We can review your situation and determine if your financial plan needs to be revised.

4. Contact your members of Congress and the White House and encourage them to work on a solution to the Social Security crisis now.


7 Actions You Can Take Right Now Yes, you can stay in control – even when events seem out of control. You might not be able to control the stock market, but you are in control of your personal finances. To help you, here are seven actions you can enact right now:

1. Build your cash reserves. A rainy day fund is always a good idea … and essential during this torrential downpour! Make sure you have plenty of cash to assure you can pay your bills without needing to withdraw from your portfolio while its value might be down. Plenty of cash? Depending on your circumstances, that could be as little as three months’ worth of spending, or as much as 24 months. The more secure and reliable your income, the less you need; conversely, the less secure, the more you need. And, note that we’re talking about monthly spending, not monthly income: The former should be a much lower number than the latter — so building your rainy day fund is a lot easier to do than you think. For help determining how much is “plenty” based on your personal situation, contact your Edelman Financial Engines financial planner. We can also help you decide the best place to stash your cash. 2. Refinance your mortgage to a 30-year fixed rate. The Federal Reserve has lowered interest rates to historically low levels. So, contact your mortgage broker or lender to see if refinancing can get you a lower rate for your mortgage. You might even be able to lower your rate without having to refinance. Lenders realize they need to offer lower rates to keep your business, so you might be able to get a rate reduction by simply asking for a lower rate. It’s called a “reset” or a “loan modification,” and lets you avoid the costs and hassle of a full-blown refinance.


Whether you refinance depends on how long you intend to keep your home and the cost of refinancing. Your current rate, payment and other loan terms also matter. We’re happy to review the data for you to see if you can save hundreds of dollars per month on your mortgage. 3. Consider changes to your auto insurance. How many cars do you own? Two? Three? During the crisis, you’re probably not driving nearly as much and maybe need only one car to go to the grocery store once a week. So, consider removing the collision coverage on your other cars and save yourself possibly hundreds of dollars a year. (Most states require liability coverage on all registered vehicles, even if they’re not being driven.) Also, updating your “miles driven” with your carrier may qualify you for a rate reduction since many calculate your premium based on the number of miles you drive per year. 4. Update your estate plan. COVID-19 is reminding us all of the importance of having an up-to-date estate plan. Patients on ventilators are sedated and thus unable to express their wishes regarding medical treatment. If you lack a medical advance directive and power of attorney, doctors might not manage your care the way you wish. This could force family members to make traumatic decisions — and they might disagree, causing great angst during the most emotional time. Therefore, please contact an estate attorney to get the legal documents you need. These include a will, advance medical directive and power of attorney. We can provide you with a list of local estate attorneys if you don’t have one. If you signed these important documents years ago, reread them to confirm they express your current wishes. Your views may have changed. Your estate attorney can quickly and easily revise your documents for you. And finally, review your beneficiary designations on your workplace retirement accounts, individual retirement accounts, annuities and life insurance policies. Your will does not control those assets, so make sure the people who are slated to inherit these assets are the people you currently want to receive them.


5. Consider increasing your life insurance. The mortality risk of COVID-19 is a reminder of the importance of making sure your family is financially protected if something were to happen to you. Please confirm that the amount of life insurance you have is sufficient to protect your family. 6. Consider a gap year for kids going to college. If you have children planning to attend college this fall, talk with them about taking a gap year instead. Attending college online while living at home — yet paying full tuition costs — might not be in the student’s best interest. Taking a year off and engaging in gap-year programs (Google “gap year”) could be a much better approach. 7. Halt monthly withdrawals from your portfolio. If you’re retired and taking monthly income from your portfolio, consider temporarily reducing or stopping those withdrawals so you don’t sell shares while prices are lower. Instead, rely on your cash reserves — which takes us back to action #1, above. For help in implementing these seven steps, talk to your Edelman Financial Engines financial planner. Neither Edelman Financial Engines, a division of Financial Engines Advisors L.L.C., nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.


Free Weekly Credit Reports Here’s some good news. The three major consumer credit rating agencies are making free credit reports available to everyone, every week.

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Should You Convert to a Roth IRA? Our longstanding advice hasn’t changed. There are two basic kinds of IRAs: deductible and Roth. Most people have money in the deductible, and some wonder if they should convert those accounts into a Roth.

Why bother? Because withdrawals from deductible IRAs are taxable, while withdrawals from Roths are tax-free. That makes conversion a no-brainer, right? Wrong. If you convert your deductible IRA to a Roth IRA, you’ll have to pay taxes this year on the amount of the conversion. That’s why the future withdrawals from the Roth will be tax-free: You’ll have already paid the tax. But isn’t paying a small tax now better than a big tax later? Nope. It’s a wash: The net after-tax value of your account will be the same. Converting does not increase your wealth, assuming you’re in the same tax bracket. Say your deductible IRA is worth $200,000, and it doubles between now and retirement to $400,000. You then withdraw the money, paying, say, 40 percent in taxes. That’s a $160,000 tax bill, leaving you with $240,000. If, instead, you convert your current $200,000 deductible IRA to a Roth, you pay that 40 percent tax right now. That’s $80,000, leaving you with $120,000. That amount then doubles, same as in the above case, and at retirement you have $240,000, which you can withdraw tax-free. As you can see, the deductible IRA leaves you $240,000 net of taxes, and so does the Roth. There’s no difference in your future wealth.


And that’s why we say, for most people, there’s no point to converting. Nevertheless, the idea of a Roth conversion is getting new attention these days. The reason: COVID-19 has caused stock prices to fall. With lower account values, the tax due on converting to the Roth is lower, too. Shouldn’t you quickly convert to the Roth while the taxes are lower? Uh, no. You’re still paying the tax. So, when the market and your account recover, there’s less of your money left, net of taxes, to benefit from the recovery. Here’s one more important reason we don’t like Roth IRA conversions for most people: Roth withdrawals are tax-free only because Congress says so. But COVID-19 is dramatically increasing the federal debt — and Congress will be under pressure to pay for that debt. Might Congress decide to tax Roth withdrawals in future years? If Congress does that, people who convert to the Roth today will discover that they’re paying taxes twice — once now when they convert, and again later when they make withdrawals. Before you decide to convert your deductible IRA to a Roth, talk with your Edelman Financial Engines financial planner.


WALK Your Way to Kindness All things are possible if you listen to your intuition. Ric and Jean Edelman share another acronym that’ll help you through the day.

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Check Your Credit Score You can now do it weekly for free. COVID-19 has caused the nation’s three major credit bureaus (Equifax, Experian and TransUnion) to let you check your credit report for free, every week. The pandemic has created new fraud risks for Americans, especially with millions working from home. Your internet connection might not be as secure as the devices you use at the office or workplace. Online crooks are taking advantage of opportunities to steal your identity, borrow money in your name, divert money from your online accounts and more. Creditors that aren’t getting paid might be posting errant information on your credit report, damaging your credit score. This can hurt your ability to borrow, rent or buy a home and even get or keep a job (especially if a security clearance is required). This is why you should check your credit record often — and now, you can do it for free every week. Go to www.AnnualCreditReport.com to get your free report. This was one of the 36 policy changes my colleagues and I here at Edelman Financial Engines recommended be put into place in response to the pandemic, and we’re pleased that every American can now access their credit reports often. Check yours today.

https://www.annualcreditreport.com/index.action

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STOCKS VS. ECONOMY Q: Can this economic crisis, and the massive government relief plan (most of which is yet to come) result in massive, rampant inflation over time, and could that cause the stock market to suffer longer than everybody is currently projecting? Well, nobody knows, of course. That's what's making the investment question so unnerving for the short term. I’d like to point out that you're making an invalid assumption. You're assuming that economic data directly affects the stock market. In fact, the economy and the stock market are different. Inflation is an economic issue, and yes, massive unemployment and subsequent government aid could impact the economy. But that doesn't necessarily translate into falling stock prices. Why? For one simple reason: The stock market doesn't care about the economy. Instead, the stock market cares about corporate profits. If companies are making money and are projected to make even more money in the future than they're

Q


earning today, stock prices will rise today. If investors think profits will fall in the future, stock prices will fall right now. The cruise industry is losing money right now, and some companies in that industry have said they might go out of business. Result: Their stock prices are down as much as 90 percent because investors expect the companies to continue doing poorly. But companies that make and sell hand sanitizer and toilet paper are enjoying record sales, and their stock prices are up because investors expect the companies to continue doing well. Unemployment data and inflation concerns are not part of investors’ calculations. So, draw a bright line between the economy and the stock market and you'll begin to understand why the stock market behaves the way it does.

NO WORRIES Q: Since so many people are unemployed, I assume there will be a huge decrease in employee and employer contributions going into 401(k)s and similar retirement accounts. Wouldn’t that cause a dramatic decrease in the market? Not to worry. Annual contributions to 401(k) plans are about $500 billion, and only about half of that money goes into stock funds. That’s $250 billion of new cash flow annually — only 1 percent of the value of the U.S. stock market (about $24 trillion). And most of that $500 billion is still pouring in because most workers are still employed. Even if all that money stopped entirely, other flows into the stock market would continue — from pensions, corporations and sovereign funds. So, find something else to worry about.

Q


History repeats itself I was doing some much-needed cleaning and found this Inside Personal Finance newsletter from March 2008. The headline comes straight from today. I thought you'd enjoy seeing this.

Thanks for sending. We got our clients through the ’08 global financial crisis, and we’ll get through this one, too!


The owner of an Illinois wheat mill claimed tax credits of $122,424 and $116,246 for 2011 and 2012, respectively. He said the tax credits were for “research activities” related to the production and sale of flour. The IRS disallowed the claim. The case went to trial. What did the tax court decide?

The Verdict

The court sided with the IRS, ruling that the mill owner could not provide sufficient evidence that his expenses were qualified under the law. He was ordered to pay the deficiency he owed for tax years 2011 and 2012. However, the court determined that the taxpayer was not liable for the accuracy-related penalties assessed by the IRS because he acted with “reasonable cause and good faith” when providing information to his tax preparer.

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covid-19 threatens social security€¦ · 1 ric edelman’s inside personal finance may 19, 2020...

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