Permanent Value

Week in Review 7/24/14

Bruce Doole
July 24th, 2014

Three Smart Fixes for Social Security and Medicare

The aging of America threatens the financial stability of the nation’s safety net programs. Last week Washington made a rare effort to help America’s fast-growing aging population. The U.S. Treasury and the IRS issued a new rule permitting people to use funds in their tax-advantaged retirement accounts to buy so-called longevity annuities—deferred annuities that typically don’t begin making payments until a person turns 80 or 85.

Many in Washington are pushing to raise the Social Security retirement age to 68, 69 or even 70. Still, longevity increases are not being shared by people with little education, lower incomes and, often, physically demanding jobs that wear out their bodies well before even the current full retirement age. So if we raise the retirement age, we also need to provide improved early retirement benefits for those who can no longer work.

Longevity and related healthcare issues will eventually lead to additional changes in the big three old-age safety net programs—Social Security, Medicare, and Medicaid. Few people in government have been willing to deal with these challenges. We do not have enough money to continue funding current benefit levels. Here are two aging and longevity reforms that you’ve heard less about but deserve serious consideration:

Social Security payroll taxes should be reduced for workers who stay on the job past full retirement age (this change should also apply to employers). Continuing to work will improve what are, for millions of baby boomers, looming financial shortfalls in retirement. The design would be tricky, to say the least, but it’s possible to do this in a way that lowers total government spending. Giving employers a financial incentive to hire older employees encourages them to do the right thing and covers any higher costs of employee benefits for this group.

A hybrid form of Medicare should be blended with employer health insurance to accommodate older persons who are still drawing a paycheck. The federal government will spend less than on pure Medicare. Employers will also spend less than for a purely private health policy. Older employees may spend more but they will have a job to help pay these bills. In the long run, these changes are well worth the cost.

Source: Philip Moeller, Money Magazine


  • Retail sales posted a 0.2% rise in June, falling short of an anticipated 0.6% rise. However, May data was revised upward from 0.3% to 0.5%.
  • Industrial production rose 0.2% in June, falling short of expectations of 0.4%.
  • Jobless claims fell 3,000 for the week of July 12 to 302,000. The four-week average is also down 3,000 to 309,000, a new recovery low.
  • Housing starts declined another monthly 9.3% in June following a 7.3% decrease in May.
  • Philadelphia Fed survey jumped 6.1 points to 23.0 for its highest reading since March 2011.

Source: Ivy Funds

Week in Review 7/17/14

Bruce Doole
July 17th, 2014

Retirement Planning in the 21st Century

According to a recent Gallup poll, the greatest financial fear of nearly 60% of Americans is the possibility of running out of money during retirement.  62% of respondents of a separate survey indicated they would be willing to take a large cut in their take-home pay if it meant they would be eligible for a guaranteed retirement benefit.  However, we worry about having enough retirement income and savings to live out our “golden years” in comfort, but we hardly take the steps necessary to achieve substantial capital accumulation for use later in life.  The threat remains of outliving our money.

Social security is hardly the answer. Social security is seriously dwindling; therefore, saving must take place proactively before retirement, while a person is an earner and a producer of wealth. Annuities are a viable and increasingly popular option to provide a steady income stream through retirement, but the costs, lack of liquidity and complicated taxation issues can be disconcerting to many clients. 401(k), IRA and similar plans are attractive and another step in the right direction.  Those with access to employer sponsored retirement savings programs are gaining more understanding and more trust in placing higher levels of income into retirement accounts, and with more employers matching or adding contributions, these accounts have become among the strongest wealth savings tools available to employed persons across the United States.

However, we can’t completely count on market performance of retirement accounts and deferred annuities. If a disability occurs, the income earner might not be able to work nor receive an income.  Their regular 401(k) contributions would cease, and they may find it impossible to afford their annuity plan.  Any total debilitation would be a struggle to financially survive today as well as into traditional retirement years.

Without the protection of a comprehensive disability insurance package that mitigates a potential loss in income, the ability to effectively accumulate wealth and savings for use in the later years of life is diminished. Furthermore, the standard age of retirement for Americans is now 67, but disability insurance professionals are currently witnessing a dramatic increase in clients working well into their 70’s.


  • FOMC Minutes indicate that taper is on schedule and likely will end in October if the economy follows forecast.
  • Jobless claims have held steady, down slightly to a lower-than-expected 304,000.

Source: Petersen International Underwriters/ Ivy Funds

Week in Review 7/3/14

Bruce Doole
July 3rd, 2014

Lifetime Giving

As a general rule, it’s better to give away money during your lifetime than to leave it to your heirs after you pass away. There are numerous ways to give money to your loved ones gift-tax free while you’re alive—and even if your gift is taxable, at least the recipient can enjoy the gift’s full value while you pay the taxes on it. In contrast, if your estate is subject to the estate tax, those taxes will come directly out of what your loved ones would otherwise inherit.

Picture four quarters on the table in front of you. If you die with all four quarters and you’re in a 50% estate tax bracket (the current top rate is 40%, so 50% is not unimaginable), your heirs are left with two quarters and the federal government gets the other two.1 That’s the estate tax in action.

Now imagine a different scenario. You start with four quarters and move two quarters aside, representing a lifetime gift to your loved ones. Take one quarter and move it to the other side of the table as the gift tax you would owe.1 Your beneficiaries have as much as they did in the first scenario, and you’ve still got a quarter left!

Gifting provides a couple of added bonuses. For one, any future appreciation on the gift is in the hands of the beneficiary and outside your estate. Plus, you get to participate in the enjoyment of the gift while you’re still around.

Good options for minimizing taxes include giving away up to $14,000 per recipient per year gift-tax free, and making payments directly to medical and educational providers on behalf of loved ones.

However, if you have a large estate, your strategy might also include making taxable lifetime gifts utilizing the lifetime exemption—or more if your net worth is very high.

A couple of caveats:
Lifetime gifting can be a great strategy, as long as you leave yourself enough to live on. For the gift to count, it has to be irrevocable, ‘so be sure to plan carefully with the help of a professional.
If the estate tax is ever repealed, as it was for the 2010 tax year, you may regret having paid gift tax now in an effort to minimize your estate tax. You have to do the best you can, based on what you know now, within the context of your goals.


• PMI manufacturing is at 57.5 for June versus 56.4 in May.
• Total existing home sales rose 4.9% to a seasonally adjusted annual rate of 4.89 million in May from an upwardly-revised 4.66 million in April.
• New home sales jumped 18.6% last month following a 3.7% increase in April.
• Consumer confidence moved to 85.2 in June versus a revised 82.2 in May. This is the fourth straight month that the index is over the 80 barrier.
• U.S. economy shrank by a 2.9% annual pace in the first quarter instead of 1% as previously reported, marking the biggest decline since early 2009.
• Durables goods orders fell 1.0% in May after rising 0.8% in April.
• Jobless claims declined by 2,000 to 312,000 in the week ended June 21.


Source: Charles Schwab/ Ivy Funds