Tag Archives: Social Security

A Client Asks: What’s the Benefit of Inflation?

One of our retired clients sent us a question recently.

“I can’t understand the FED condoning and promoting any inflation rate. To me inflation means that the value of money is simply depreciating at the inflation rate. Further, any investment paying less than the inflation rate is losing money. A quick review of CD rates and government bonds show it is a rare one that even approaches the promoted 2% rate. It seems to me to be a de-facto admission of wanting to screw conservative investors and forcing them into riskier investments… Where is there any benefit to the financial well-being of the ordinary citizens?”

I suspect that there are a lot of people who feel the same way. It’s a good question. Who wants ever rising prices?

Here’s how I addressed his question.

Let me answer your inflation question first. My personal opinion is that 0% inflation is ideal, and I suspect that you agree. However, lots of people see “modest” rates of inflation (say 2%) as healthy because is indicated a growing economy. Here’s a quote from an article you may want to read:

Rising prices reflect a growing economy. Prices typically rise for one of two reasons: Either there’s a sudden shortage of supply, or demand goes up. Supply shocks—like a disruption in the flow of oil from Libya—are usually bad news, because prices rise with no corresponding increase in economic activity. That’s like a tax that takes money out of people’s pockets without providing any benefit in return. But when prices rise because demand increases, that means consumers are spending more money, economic activity is picking up, and hiring is likely to increase.

A case can be made that in a dynamic economy you can never get perfect stability (e.g. perfectly stable prices) so it’s better for there to be more demand than supply – driving prices up – rather than less demand than supply – causing prices to fall (deflation). Of course we have to realize that “prices” here includes the price of labor as well as goods and services. That’s why people can command raises in a growing economy – because employers have to bid for a limited supply of labor. On the other hand wages are stagnant or even decline when there are more people than jobs.

But for retirees on a fixed income inflation is mostly a negative. Your pension is fixed. Social Security is indexed for inflation but those official inflation numbers don’t take food and fuel costs into consideration and those have been going up faster than the “official” rate. The stock market also benefits from modest inflation.

Which gets us to the Federal Reserve which has kept interest rates near zero for quite a while. It’s doing this to encourage business borrowing which is supposed to lead to economic expansion but the actual effect has been muted. That’s because other government policies have not been helpful to private enterprise. In effect you have seen the results of two government policies in conflict. It’s really a testimony to the resilience of private industry that the economy is doing as well as it is.

The effect on conservative investors (the ones who prefer CDs or government bonds to stocks) has been bad. It’s absolutely true that after inflation and taxes the saver is losing purchasing power in today’s interest rate environment. The FED is not doing this to hurt conservative investors but that’s been the effect. The artificially low rates will not last forever and the Fed has indicated they want to raise rates. They key question is when, and by how much.

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Setting Realistic Goals

How realistic are your goals?  Some people work hard and exceeded the goals they had when they were young.  Others find their goals forever out of reach.  For example, most people want to retire in their mid-sixties.  That’s a goal, but is it realistic?  Are they going to have a pension when they retire and, if so, how much is it?  When are they going to apply for Social Security, and how much are they going to get?  Will they need a retirement nest egg, and how much will be in it?

Career choices will have a big impact on these answers.  A financial plan will also provide many of these answers.  But a plan is only as good as the assumptions we put into it.  As the old saying goes: “Garbage in, garbage out.”

The rate of return you get on the money you put aside has a huge impact on whether you reach your goals.  Studies have shown that many people have an unrealistic expectation of the returns they can expect on their savings and investments.  With interest rates near zero percent, putting your money in the bank is actually a losing proposition after taxes and inflation.  Investing in the stock and bond markets may lead to higher returns.  But the long-term returns that many people assume they can get often leads to taking unreasonable risks.

There is nothing wrong with having high goals.  The best way to check to see if your goals are high, but attainable, is to talk to a fee only financial advisor.  Preferably one that is a CERTIFIED FINANCIAL PLANNER™.  They have the experience and the expertise to let you know if your goals are reasonable and what you can do to reach them.

Contact us for a “reality check” today.

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How well do couples communicate on money? – Part 7

Most happy couples think they communicate well. However, on the subject of finances, studies and experience has shown that they don’t communicate nearly as well as they think.

Many couples don’t know what their partner earns, how much they have invested, what it takes to retire and where their retirement income will come from.

Couples often disagree on the way their money should be invested and in too many cases one partner is in charge of investing and the other is kept in the dark.

Retirement is another issue in which there is a great deal of confusion. Many do not know what it takes to retire, have nebulous goals about retirement and even disagree about when to retire.

The lack of good communication leads to worries about financial disasters. Issues include health care costs, the effect of inflation on buying power, outliving their savings and the possibility that Social Security may not be there for them prey on their minds.

In the face of so much uncertainty, only one-in-five couples have a plan. One of the benefits of having a plan is that it makes it much more certain that they will achieve their goals. And that bring peace of mind.

Of course the earlier that people start to plan, the higher the probability that they will achieve their goals and have a healthy and frank discussion about financial issues. The best time to start is when you are young and it’s an excellent way for newlyweds to begin life together.

Thanks for your interest and we hope you will share this with your friends.

Korving & Company, the 2015 Suffolk Small Business of the Year is a family owned investment management and financial planning firm. We deliver a very personal level of service to guide, empower and assure our clients that their money is carefully managed to meet their long-term life goals.

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How well do couples communicate on money? – Part 6

Most couples think they communicate well, but research indicates otherwise when it comes to finances. Communication on financial issues between couples is especially poor, as we have discovered in previous essays.

Couples were asked what advice they would give to newlyweds and young couples about finances. Newlyweds usually do not put frank talk about finances at the top of their “to-do” list. That may be a big mistake.

The most common suggestions for young couples starting out in life together were:

  • Save as early as possible for retirement (57%).
  • Make all financial decisions together (41%).
  • Make a budget and stick to it (39%).
  • Make sure you have an emergency fund (38%).
  • Don’t hide expenditures (28%).
  • Disclose income, debts and assets early (24%).

One of the easiest ways of accomplishing all of these objectives is for young couples to consult a financial advisor as soon as possible. By doing so they will reveal their finances to each other, develop a budget that matches their income, agree on an investment strategy, and be given a roadmap to long-term financial peace.

Our final essay on this subject will summarize what we have learned.

Korving & Company, the 2015 Suffolk Small Business of the Year is a family owned investment management and financial planning firm. We deliver a very personal level of service to guide, empower and assure our clients that their money is carefully managed to meet their long-term life goals.

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How well do couples communicate on money? – Part 5

Most couples think they communicate well, but research indicates otherwise when it comes to finances. Communication on financial issues between couples is especially poor, as we have discovered in previous essays. Despite concerns about medical costs, running out of money, inflation and Social Security, most couples have not created a plan to deal with these worries.

The 20% of couples who have created a plan get the benefit of peace of mind, less stress, and a more cohesive relationship. Uncertainty and doubt around important financial issues creates stress within relationships.

Couples who have a retirement plan in place:

  • Are twice as likely to live a very comfortable retirement.
  • Are 50% more likely to be “completely confident” in assuming responsibility for retirement.
  • Are much more confident that their partner will be OK in retirement.
  • Are twice as likely to know how much they will need in retirement.
  • Are less concerned about unexpected health care costs.
  • Are much less likely to be concerned about outliving their savings.

Having a plan to reach your goals is much like going to the grocery store with a shopping list. You know what you need and are less likely to forget important items, nor are you as likely to buy things you don’t need.

Creating a plan forces couples to be open with each other about their goals, their finances, and the issues that may keep them from achieving those goals. Working with a Certified Financial Planner™ (CFP) to create a plan also brings an important measure of reality to the process. Professional guidance creates realistic assumptions about how much should be saved and the rate at which it should grow. A CFP can also help mediate differences between couples when issues arise.

Our next essay will focus on advice to young couples.

Korving & Company, the 2015 Suffolk Small Business of the Year is a family owned investment management and financial planning firm. We deliver a very personal level of service to guide, empower and assure our clients that their money is carefully managed to meet their long-term life goals.

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How well do couples communicate on money? – Part 4

Most couples think they communicate well, but research indicates that communication about finances is often not good. In our previous essays we have discussed common financial disagreements.

In this essay we will discuss some of the financial worries couples have.

Nearly three-quarters (74%) of couples worry about unexpected health care costs. For more than half, it’s their top concern. With people living longer than ever before, advances in medical technology and the skyrocketing cost of health care, this concern comes as not real surprise.

After health care, the next biggest concern for couples (51%) was outliving their retirement savings.

The negative effects of inflation and concerns that Social Security may run out were the next biggest concerns.

Despite these worries, only 20% of couples actually have a plan in place to address these issues! And over one-third (36%) haven’t even thought about planning!

Our next essay will take a look at those couples who have taken the time to create a financial plan.

Korving & Company, the 2015 Suffolk Small Business of the Year is a family owned investment management and financial planning firm. We deliver a very personal level of service to guide, empower and assure our clients that their money is carefully managed to meet their long-term life goals.

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How well do couples communicate on money? – Part 3

Most couples think they communicate well, but when it comes to their finances research indicates otherwise. Our previous essays on the subject have shown just how poor it typically is.

On the issue of retirement, nearly half (48%) of the couples surveyed had no idea how much they needed to save in order to maintain their current lifestyle once they retire.

Nearly half (47%) disagreed on the amount they need. Even more startling, those who were nearest to retirement – when changing course is the most difficult – disagreed the most!

Over half (52%) of the respondents had “no idea” what they would receive in monthly retirement income. Asked about Social Security, 60% either did not know, or were not sure, what they would receive. That includes the about-to-retire Baby Boomers.

Roughly one-third of couples disagreed on their retirement lifestyle. Half could not even agree on when they would retire.

Our next essay on this series will have a look at what financial issues couples worry about financially.

If this sounds like you or someone you know, contact Korving & Company.

Korving & Company, the 2015 Suffolk Small Business of the Year is a family owned investment management and financial planning firm. We deliver a very personal level of service to guide, empower and assure our clients that their money is carefully managed to meet their long-term life goals.

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How well do couples communicate on money? – Part 2

Most couples think they communicate well, but research indicates otherwise when it comes to finances. Of course, talking about finances can be a minefield. If one partner is frugal and the other spends freely, tensions can be high. Disagreements about money are one of the leading causes of divorce.

More than four out of ten couples (43%) did not know how much their partner makes. Many were off by over $25,000! This can have serious effects. If you don’t know how much income you make as a couple, how do you know how much you can reasonably spend?

Unless couples lead totally separate financial lives, not knowing how much they are earning together can lead to a lack of savings or even debt. This issue could be behind the alarmingly high amount of debt that people carry, often at exorbitant rates.

More than one-third (36%) of couples disagree on the amount of investable money they have. This usually happens when there is a division of labor between couples, where one partner is in charge of the investments.

However, our experience indicates that couples also disagree on the kinds of investments that are appropriate. In general, men tend to prefer riskier investments that women. This can lead to a good deal of stress and disagreement.

Our next essay will take a look at couples in retirement.

Korving & Company, the 2015 Suffolk Small Business of the Year is a family owned investment management and financial planning firm. We deliver a very personal level of service to guide, empower and assure our clients that their money is carefully managed to meet their long-term life goals.

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How well do couples communicate on money? – Part 1

A recent research report by Fidelity Investments studied how well couples communicated. The majority (72%) said they communicated very well. However, the study found that couples don’t communicate very well at all on finances, and many disagree on investing. The study included a wide range of ages. The couples were either married or in committed relationships. They ranged in age from 25 to retired.

Here is what the study showed:

  • 43% didn’t know how much their partner earns. 10% were off by over $25,000.
  • 36% don’t know how much they had in investable assets.
  • Nearly half had no idea how much they should to save for retirement.
  • 60% didn’t have any idea how much Social Security would provide for their retirement.

This proves to us that financial planning is very important; especially for achieving peace of mind and helping couples get on the same page about their finances.

We will be exploring this issue in upcoming essays.

If this sounds like you or someone you know, contact Korving & Company.

Korving & Company, the 2015 Suffolk Small Business of the Year is a family owned investment management and financial planning firm. We deliver a very personal level of service to guide, empower and assure our clients that their money is carefully managed to meet their long-term life goals.

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Delaying Medicare Part B

When you turn 65 you become eligible for Medicare and are asked to sign up. Medicare has a number of parts.

Medicare Part A primarily covers hospital care as well as skilled nursing facilities, nursing homes, hospice and some other services. There is no cost to the individual for Part A.

Medicare Part B primarily covers services (like lab tests, surgeries, and doctor visits) and supplies (like wheelchairs and walkers) to treat a disease or condition. There is a monthly charge for Part B.

If people choose to continue working after age 65 and if they are covered by a group health plan they may not sign up for Part B.

If they do not sign up for Part B at age a 65, they may be subject to a “late enrollment penalty.” According to Medicare.gov

Your monthly premium for Part B may go up 10% for each full 12-month period that you could have had Part B, but didn’t sign up for it.”

However, this penalty does not apply of you can prove that you had medical insurance coverage for the time you declined the Part B.

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