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Layoff Plans: Use savings or start Social Security?

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The other day I realized that in theory I have enough in savings, should the legislature’s proposed destruction of the Great Desert University and the resulting layoff occur, to get by for about a year if I use the money I’ve saved to pay off the Renovation Loan to live on instead of paying the loan.

It’s an interesting and reassuring idea. But let’s consider: would it be better to use savings to live on before I reach full retirement age, when (assuming Obama doesn’t reduce everyone’s payments) I will be eligible for $1,472 a month ($17,664 a year)? Or should I, instead, take the amount for which I’m presently eligible, $1,156 ($13,872 a year), use it for living expenses until I’m 66 (full retirement age), and then raid my savings to pay it back so that I can reset my payments to the full $1,472?

I have $21,000 saved to pay off the loan’s principal, which is a 30-year fixed-rate affair with a tiny monthly payment. If it were added to my total retirement savings, it would add about $840 (at 4%) to $1,050 (at 5%) a year to my annual drawdown.

Which route would reduce my total retirement savings the least?

Let’s say I’m laid off in February. That would leave 27 months until I reach full retirement age.

If I take Social Security today, my benefit would be $1,156 a month, which is $13,872 a year.

So, if I do start taking Social Security in March 2009, I draw down $1,156 x 27 months, or $31,212. This is the amount I would have to withdraw from retirement savings to reset my Social Security payments to $1,472 at age 66, if I start taking Social Security right away.

If I do not start taking Social Security in March, but instead live for a year on the savings pot and then start drawing Social Security, at that time I have 15 months until I’m 66. Let’s assume I would still get the $1,156 I’m entitled to now, even though in fact it would be somewhat more:

$1,156 x 15 months = $17,350. This is the amount I would have towithdraw from retirement savings to reset my Social Security payments to $1,472 at age 66 if I defer taking Social Security for a year.

However, by this point I’ve already spent down $21,000 of savings: $21,000 + $17,350 = $38,340. This strategy—using savings to defer taking Social Security for a year—ends up costing me $7,128 more than starting Social Security right away!

If I kept the $21,000 and the $7,128 amount is folded into my retirement savings, I can draw down 4% or at most 5% a year: this would add $285 to $356 a year to my total retirement income from savings.

But…it’s not that simple: I’m presently paying $2,040 a year on the Renovation Loan. If I don’t prepay the principal, that goes on for another 29 years, costing me $59,160 (should I live that long). Well, $59,160 is quite a lot to pay toward a $21,000 loan, eh?

Still, I have to think about what’s in my pocket to pay for groceries. Besides, let’s get real: I’m not going to live another 29 years!

In terms of what I have to live on, irrespective of the actual cost of the loan, the full-retirement benefit is $3,792 more than the annual age 63 benefit. That’s $1,752 a year more than the annual cost of the loan. Meanwhile, if I hang on to my $21,000 and roll it into my retirement savings, it generates an extra $840 to $1,050 a year, for a total of $2,592 to $2,802 more than the loan costs.

Evidently, if these figures are correct, it would be better not to pay off the Renovation Loan but instead to start collecting Social Security right away.

In fact, if I delayed taking Social Security a year, the amount I would collect then would be larger and so the amount I’d have to pay back to the system would be larger, putting me at an even larger disadvantage if I’ve used up the $21,000 of savings.

Clearly, my best course of action is to keep my $21,000, retain the debt, and start collecting Social Security right away. Then pay back the amount I’ve collected by age 66, reset Social Security to the full retirement age amount, and draw down 4% or 5% of the $21,000 as part of my total retirement savings drawdown, for a total income from savings of about $18,600 to $23,300 a year.

This would create a maximum passive income at age 66 of $40,660. Not adjusted for inflation. I could live on that…assuming taxes haven’t reached the astronomical level by then.

A new day dawns

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We have a new President. Thank God!

I am not easily moved to tears by public events, but when this superb man stepped forward to take our country’s reins with tens of thousands of people cheering him on, my eyes were smarting. What a phenomenal historic moment. Never did I expect to live long enough to see a Black man in the White House. Nor, I might add, did I expect ever to see another American President who bears the promise of greatness within him.

What a speaker! That he called for integrity, a return to American values, and cohesive responsibility was, for me, the most stirring message of his speech:”For as much as government can do and must do, it is ultimately the faith and determination of the American people upon which this nation relies. What is required of us is a new era of responsibility.”

The challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. But know this, America—they will be met!

Yes! Yes, we can.

Integrity, Confidence, and Trust: A financial manager’s view of the economy and the future

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This is a guest post by Stephen Taddie, managing partner of Stellar Capital Management, LLC, located in Phoenix, Arizona. Stellar, which manages my vast fortune, has contrived to keep my shirt and my IRA more or less intact as the economy has crumbled around our ears. The essay, which provides some insight into what capital managers and financial advisors think of the events leading up to the current recession and offers some prognostication about the near-term economic future, was Mr. Taddie’s New Year’s message to the firm’s clients.

People in positions of power often claim to have integrity, and the public needs to have confidence in those people in order to trust the system. The sheer number of “ethically challenged” individuals who have surfaced lately makes it increasingly difficult to see through the haze of hypocrisy and to trust anything. At present, we are seeing a crisis in confidence so great that many investors are willing to accept a zero return just to have the U.S. government hold their funds.

If you take a quick glance around the country, you’ll find a governor who attempted to sell a senate seat, a self-anointed savior of the masses (also a governor) patronizing a prostitution ring, a senator convicted of several felonies almost winning an election, and numerous other government officials taking liberties, receiving special treatment or deals. Those in professional sports also continue to be ethically challenged, from athletes doping to referees influencing games for personal benefit. Hollywood and the music industry provide enough content year-in and year-out to keep thousands of magazines, newspapers, and web sites in business. Remarkably, we allow this type of behavior to continue by giving candidates our votes and contributions, as we buy tickets, magazines and memorabilia for morally bankrupt celebrities. Integrity has been all but lost in political maneuvering, convenient omissions, and downright deceit.

I left the financial industry out of the previous paragraph only because its problems have been so plentiful it needed its own paragraph! Bigger, better, more complex has been the cry from Wall Street for the last decade, and that has produced overpaid, ethically challenged executives; programs and products like hedge funds and subprime loans; and fund-of-funds and credit default swaps. The list goes on and on. As things grew more complex, investors found themselves further removed from their money and the people actually responsible for its well being. Although stockholders could always vote on the tenure and compensation of a company’s management, most investors are not in a position to do so in a meaningful way. When twice removed from the actual investment, as is the case when investing in a manager of managers program or in mutual funds, investors must rely on highly paid executives to vote on the tenure and high salary of other executives, in a more or less self-perpetuating cycle. for most individual investors, exerting shareholder control has become a thing of the past.

As Warren Buffet said, “It’s only when the tide goes out that you learn who’s been swimming naked.” Growth hides many structural problems and 2008 was a year of revelations. Take the case of hard-money lenders. In many parts of the country these firms were lending money directly to developers and builders and offering steady 12 percent returns to investors. A few years ago, Stellar interviewed two such local firms and, after substantial due diligence, decided to wait out the brewing storm. In general, we saw that these programs were losing sustainability because of lack of appreciation and new buyer interest in development projects. One firm, now in the headlines, lacked enough internal controls for our comfort, and we eliminated them from consideration. I’m sure other firms like ours made similar decisions;but some did not. More recently, Bernie Madoff’s complex “Ponzi” scheme made the headlines, leaving a mess for investors and regulators. In both cases, integrity was lacking and trust was betrayed. Other firms misrepresented the scope of their services, appearing to be sophisticated money managers on the outside, but when the tide went out, were found to be nothing more than high-priced marketers or “feeders” for the real manager of the assets, offering no real value to their clients.

To recover from the present economic ills, massive stimulus programs are being worked into the system. This has effectively put a safety net under the economy in an effort to restore confidence. As confidence replaces fear, a valid case can be made for either a “¾ V-shaped” recovery, where the economy recovers into a less leveraged, slower-growth version of itself; or a “W-shaped” recovery with a double-dip recession beginning near the end of 2010. Due to decreased leverage in the global economic system, a more typical “V-shaped,” or complete, recovery does not seem likely in this cycle.

Barring more surprises, the economy should transition from stimulus-driven economic activity to organically driven growth late in 2009, leading to a ¾ V-recovery. As we approach 2011, the prospects of higher tax rates due to “sunset” provisions in the current tax code could cause economic activity to accelerate. This would create an after-the-fact lull in economic activity, pushing it back to recessionary levels in 2011, leading to more of a W-shaped recovery. The eventual shape of the recovery depends on how and how much stimulus is deployed, the extent and timing of its removal, and other policies established to smooth the transition both here and abroad.

At some point, the investment markets will turn around. Since mid-November, the S&P 500 has risen about 20 percent, rebounding from “technical support” and building a potential “bottom” around the 900 level. Volatility has calmed down a bit, and liquidity seems to be returning to the markets. However, that has not stopped the yield on 10-year U.S. Treasury bonds from falling to levels not seen since 1955, and coming close to the lows experienced during World War II. The economy is still trying to find a stable footing, and economic data in the next few months will probably continue to be ugly, but the markets may have already discounted the expected data and may be beginning to look beyond the present abyss.

While we believe that world affairs are in better shape than they were during World War II, the bigger issue facing capitalistic societies today is “trust.” Without it, the economy will stumble; with it, it will thrive. When trust comes back to the system, investors will be less willing to park money in essentially noninterest-bearing Treasury bonds and more interested in making educated, longer-term investments.

Here’s to trust…Happy New Year!

January 1, 2009

The perqs of pinching pennies

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Spent some time this morning updating the Excel and Quicken books and realized things didn’t look nearly as dark as one might expect, given the current brouhaha over the economy.

On the other hand, we do recognize that any time now, the layoff ax, sharpened to a fine edge by a legislature in full Mme. LaFarge mode, may fall. So, I took a little more time to look over the current state of the safety net.

Four things have helped to weave that net:
1. I set up a “pool” account to hold my paychecks, from which I disbursed enough cash into one credit union account to cover my monthly recurring expenses, such as utility bills, insurance premiums, and workmen into one checking account and then, into a different account, enough to cover all my other expenses, which are charged on American Express and paid off at the end of each billing cycle. The disbursements are monthly. But my paychecks are biweekly.

The effect of this has been to turn those so-called “extra” biweekly paychecks into real-life, de jure extra income: the money to cover regular expenses comes out of two checks a month, and so a month with a third paycheck pours two weeks of net income into my “pool” account, where it sits and accrues.
2. I based the amount needed for monthly recurring bills on the maximumamounts those bills reach. My electric bill, for example, has reached $225 in the summer, but in December it was $63.52. Then I pinched pennies: this winter I’ve not run the central heating more than six hours, grand total, pushing each month’s bill well below what they were in 2007. I also cut my “all other expenses” budget by $300, even though I had enough income to cover the old, more generous budget.

Here, too, the net effect was to leave cash sitting in those “piggy-bank” accounts. This money has accrued by dribs and drabs over the past several months.
3. After I’d accrued enough cash to pay off the small 30-year fixed-rate second mortgage I took out to pay for renovations on the Investment House (the house my son and I are coinvesting in, part of whose mortgage is covered by rental income), I continued to put the monthly contribution into savings. I had been saving $200 a month for emergencies and indulgences. Reaching the loan payoff goal meant that I could start saving $404 a month.

Even though that doesn’t sound like much, it’s amazing how fast it adds up. Especially because…
4. My associate editor and I started a small side business, which has created a small but steady second income. All of the after-tax revenues from this activity went directly into savings.

The result: my emergency and indulgence savings quickly jumped from $600 to almost $4,000. Even after I paid $670 to insulate the Investment House and $330 for the Talbot’s clothing frenzy, I still have around $3,000 in that savings account.

When I surveyed my credit union accounts and added up the overage in each account, the total extra amount that has quietly built up over just a few months is $6,797!

That is 2.26 months’ worth of my present take-home pay: over two months of living expenses, and we’re not talkin’ Depression mode there. If I’m not putting $404 a month into savings and not buying booze and not shopping at my favorite gourmet emporium, that amount will stretch a great deal further.

Meanwhile, the amount that I’ve stashed to pay off the loan represents another seven months of take-home pay. Because the payments are so small as to be almost negligible, I’ve kept the money in savings instead of paying it off, figuring that if I need to cut expenses drastically I can use the money to get rid of the monthly payments. Or not: in a real emergency, I’ll have the choice of using some or all of the cash for survival.

If I had to do that and I were really in desperation gear, that 9.26 months’ of my current net income would go much further: it would support me for well over a year. Remember, that’s not counting freelance income and whatever part-time teaching I can scrounge from the community colleges. It doesn’t count Social Security, and it doesn’t count the $17,000 the state owes me for back sick leave, or the month’s worth of accrued vacation time for which the state will owe me.

So. Un-American though it may be, frugality has saved this worker’s little tail. If I’m laid off within the next few weeks or months, a threat that again looks very credible, I have a safety net that will keep me from falling to the ground and breaking into a million little sherds—because I’ve been living within my means. Well within my means: I’ve been spending enough less than I earn to stash a substantial amount of beat-back-the-wolf cash in savings.

Call me unpatriotic and call me naïve. But I still think this is not a bad thing. I still think if most Americans understood what simple frugality means—and that it does not mean living like Scrooge McDuck—we would all be in a lot better shape.

Well…all of us except a few zillionaires who took advantage of our late, great free-spending times.

McDuck portrait(link) by Carl Barks

The devastation of higher education in Arizona

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Here’s the University of Arizona president’s statement on the Draconian cuts our legislators propose to inflict on the state’s already constricted higher education system:

Earlier today legislative leadership put forward figures on possible cuts to higher education in the State of Arizona. They have suggested mid-year cuts to the university system that could total $243 million, approximately one-quarter of the entire budget, with a total reduction of $388 million into fiscal year 2010.

Mid-year cuts to the University of Arizona would total $103 million under this scenario.

These figures are so extreme that they would absolutely cripple higher education in our state. At the very time that our state needs to stimulate the economy, the Legislature is talking about absolutely devastating cuts to the most powerful economic engine in our state. If enacted, these cuts would compound the current economic challenges in our state and make it harder for Arizona to recover from the recession. This is simply irresponsible.

The state needs to protect its universities, not dismantle them, if it has any hope of building an economy for the future or aspiring to more than mediocrity.

We are very conscious of the difficult deficit challenge facing the state, and all three universities are prepared to do their part to cut budgets. But cuts of this magnitude wouldbring irreparable damage. It would force the closure of colleges, increase the costs for attendance, and ultimately cut access to the best hope of a better way of life for our young people.

Compounding the budget cuts are proposals to micro-manage the universities. This is simply unacceptable.

We plan to continue conversations with the governor and key legislators, and to focus on helping them understand the key role that The University of Arizona plays in spurring theeconomy, improving the quality of life in the state and affording access to upward mobility.

And we encourage every citizen of this state who cares about their quality of life, who wants their children or grandchildren to have an opportunity to attend a quality university, to speak up now and to speak loudly.

It is wrong to balance the state’s budget on the backs of its citizens’ children. That is what the massive budget cuts proposed for the state’s university system will do: penalize our young people for the crimes and stupidity of our country’s political and financial leadership. This is unfair and simplywrong.
The proposed Arizona State University budget cuts for 2009 and 2010 would be the largest higher education budget reduction in the state’s history. Cuts of this magnitude would require ASU to reduce costs by up to $126 million and $194 million next fiscal year.
If every student at ASU decided, voluntarily, to donate an equal portion to the State of Arizona to make up for these slashes, each student would have to cough up $1,880.59 this year and $2,895.52 next year. To survive, clearly ASU will have to raise its tuition by about those amounts.
These are not students who can afford private colleges or universities in other states. Most attend ASU because it’s what they can afford to pay for, and for many, the existing inflated tuition is a hardship. [If you have a relevant personal experience, insert it here; in any event, delete the following, which I’m leaving as a for-instance: My son wants to pursue a master’s degree at ASU but is given pause by the prospect of student loans that could put him in hock for decades.Not years:decades.Any increase will be a hardship for him. You can be certain that spikes in tuition of that size will keep him out of graduate school. He won’t be alone.] These proposed funding cuts and the tuition increases that will inevitably follow will bar many of Arizona’s young people from four-year degree programs, period.
ASU is prepared to do its fair share to help our state out of the budget crisis; however, these proposed disproportionate cuts are simply impossible to institute without gutting the university.
Seven hundred jobs have already been lost at ASU. The proposed drastic cuts to ASU’s budget will mean large numbers of university staff and faculty will lose their jobs. More programs will be dismantled, more course sections will be combined to make impossibly huge classes, and more classes will be eliminated. This will demolish the quality of higher education that our state has so desperately needed and for which legislative and educational leaders have worked so hard. It will set the state back two generations.

Crippling cuts will also severely compromise our state’s future, so much so it may never recover. Our legislators must realize the long-term consequences that are not easily reversible, such as lost business, workforce and related revenues. To fail to acknowledge this is not only poor public policy, it’s irresponsible and unconscionable.

Don’t wait. If you live in Arizona, write to your legislators now. If you have friends or relatives who live in Arizona, urge them to write. If you give a damn about young people, write to Arizona’s congressional leaders and governor. Our future depends on it. Our children’s future depends on it. Our grandchildren’s future depends on it.