Low interest rates throw wrench into retirements

[NW-Bound]

So, to pay zero Federal tax, taxable income would have to be around $20,000 or so, correct? I would find it difficult to live on that in California.

I have not looked closely, but same as other posters, I don't think I will have problems keeping my taxable income low, while having living expenses several times that amount. As I stopped my part-time work earlier this year, in 2013 I will be living 100% off my after-tax accounts. I expect to be paying very little income tax if any, this year and next. Most of that money has already been taxed!

Quite a bit of dividends are in IRAs and 401ks, which I have no need to tap until the age of 59-1/2. That saves me the trouble of setting up 72t distributions. Even my after-tax cash is in I-bonds, whose interests are not taxed until I withdraw.

I will need to look into doing Roth conversion.

 

[Coolius]

If your income is coming mostly from qualified dividends and capital gains, you pay 0% tax on that income until your total adjusted income reaches something like $65K per couple, quite a break!

Audrey, it must be advancing age, and call me dense but I can't see how you arrived at your $65K number.

OK, as example:

Total income comes to , say, $50K

$30K comes from stock dividends. $10K from Long Term Capital Gains. $10K bank CD interest. Assume no other income.

Federal tax exemptions : $7,600 for a ( retired ) couple both below 65.
$12,000 standard deduction Married Filing Jointly

Total deductions are $19,600. Thus taxable income is $50,000 - $19,600 = 30,400.

Federal tax on this amount is 10% on first $18K = $1,800 plus 15% on the rest = $1,860. Total fed tax = $3,660. ( plus rounding errors )

Everything is within the 15% bracket, which is the cap on LTCG and qualified dividends, right? So on a $50K income, fed tax bill is $3,660.

What am I doing wrong? Sorry if the answer is obvious, I just can't see it......

 

[kumquat]

Mortgage rates are very low at present. How about other borrowing rates, car loans, credit cards etc. ?

I really have no idea what the historic rate difference is between what banks lend money at and what they borrow at, and how that relates to what rates they pay savers. The Fed is keeping interest rates at near zero rates which means banks are borrowing at very low rates, but how much of the difference are they pocketing compared to the past.

I have no idea, I just expect the banks are ripping off their customers as usual.

Maybe, but the Canadian banks are rewarding their owners.

 

[kaneohe]

Audrey, it must be advancing age, and call me dense but I can't see how you arrived at your $65K number.

OK, as example:

Total income comes to , say, $50K

$30K comes from stock dividends. $10K from Long Term Capital Gains. $10K bank CD interest. Assume no other income.

Federal tax exemptions : $7,600 for a ( retired ) couple both below 65.
$12,000 standard deduction Married Filing Jointly

Total deductions are $19,600. Thus taxable income is $50,000 - $19,600 = 30,400.

Federal tax on this amount is 10% on first $18K = $1,800 plus 15% on the rest = $1,860. Total fed tax = $3,660. ( plus rounding errors )

Everything is within the 15% bracket, which is the cap on LTCG and qualified dividends, right? So on a $50K income, fed tax bill is $3,660.

What am I doing wrong? Sorry if the answer is obvious, I just can't see it......

like most things, it's not obvious unless you know the answer
just using round numbers for simplicity and out of laziness
AGI = 50K
Deductions/exemptions = 20K
Taxable Inc = 30K
Tax is calculated separately on LTCG/QDIV so subtract that out
less 40K (assume all div are QDIV)
Taxable Inc1 = 0 (-10K actually) on which tax is 0
LTCG/QDIV= 40K , all of which is within the 15% "bracket" as you said
Tax rate for LTCG/QDIV = 0% for these LTCG/QDIV
therefore tax on LTCG/QDIV = 0
total tax = 0

note that 15% bracket goes to 70+ K this yr on TAXABLE income
so your AGI could conceivably go to 90K and have 0 taxes w/ right kind of income
This might not work next yr if tax laws change.

 

[Alan]

Maybe, but the Canadian banks are rewarding their owners.

Rewarding share holders for big profits is not the same as decent interest on savings accounts.

Five of Canada’s Big Six banks raised their payouts this week. The increases will put an additional $563-million in the pockets of their shareholders over the next year.

How are savings rates for regular savers holding CD's and savings accounts? Maybe dividend rates are the same thing in Canada?

 

[ShokWaveRider]

I would beg to disagree with the majority here. We are assuming the average retired person is financially savvy. I would say exactly the opposite, living here in Florida I certainly come accross a few. I would say the majority of them do not even own a computer, like an 80% majority. All they know is CD investment, interest bearing savings etc., and have never ventured into equities unless their 401ks were put there by a corporate adviser unbenounced to them.

Most of the folk here live of SS and whatever they can take from their 401ks or IRAs. Yes there are pockets that you see on TV like "The Villages" etc., but they are in the top 20%.

There are lots of developments in FLA that are simply trailor parks for the retired. I would bet a few everything bagels that they do not have any equity investments, and most of their cash (if they even have any) is in CDs or Savings accounts.

Now this is just the retired! what about the 80% of regular folk who put little bits and pieces into the back when they can and again, certainly are not savvy enough to manage investments.

Sorry and all, but I agree with the articles main point. The poorer are getting poorer and the rich richer. The Upper Middle class where I think most of us fit are muddling through and the middle class are getting poorer too.

The ONLY thing low interest rates benefit is basically the economy. OK a few folk have favourable mortgage interest rates if they qualify and cheap car loans, low(er) credit card rates. ERGO benefitting the economy.

Now do not get me started on who the 15% dividend tax benefits, certainly not tose 80%'ers mentioned above.

Just my Opinion... I could be wrong.

 

[rescueme]

I would say the majority of them do not even own a computer, like an 80% majority. All they know is CD investment, interest bearing savings etc., and have never ventured into equities unless their 401ks were put there by a corporate adviser unbenounced to them.

And I would venture to say that many of those that are in the "old-old" retirement ages (say late 70-90's) a 401(k)/IRA was not even offered - or needed. While IRA's were introduced in 1974 for those that did not have an employer retirement plan, most of us who worked for an employer that did (even if it was eliminated later on) could not make contributions until 1982 (BTW, DW/me were both age 34 at that time).

In the "old" days (of my long gone parents/grandparents) who retired with a private pension (non-government) and SS. There was no need to understand investing as related to IRA's or 401(k)'s.

Heck, DW/me did not get involved with our own investment vehicles until our late 30's, when our respective company defined benefit (e.g. pensions) were eliminated.

I still remember going to a bank last year to pay my property taxes (they are one of the collection agencies in our area) and it happened to be on the last day of the month. The service desks and waiting area was filled with "Q-Tips" (grey haired ), complaining about the low interest rates they were getting on their CD's. For them, it's a different way of lilfe.

 

[Alan]

I would say the majority of them do not even own a computer, like an 80% majority. All they know is CD investment, interest bearing savings etc., and have never ventured into equities unless their 401ks were put there by a corporate adviser unbenounced to them.

I agree.

I have a 67 year old good friend who lives reasonably well on his dead wife's teacher's pension and his SS. A few weeks ago he told me he wishes I would take on his $200k of savings and invest it for him as he is earning next to nothing in CD's and doesn't trust FA's after being burned in the past. I certainly won't do that but I can't really even give him some advice since he doesn't do anything more than e-mail on his PC, and has no interest in doing anything financial over the internet so he can't even buy I-Bonds or shop around for better CD rates. Each year we sit down together and do his taxes and he won't even file electronically let alone put in his bank details for electronic payment or refund.

 

[MooreBonds]

I agree.

I have a 67 year old good friend who lives reasonably well on his dead wife's teacher's pension and his SS. A few weeks ago he told me he wishes I would take on his $200k of savings and invest it for him as he is earning next to nothing in CD's and doesn't trust FA's after being burned in the past. I certainly won't do that but I can't really even give him some advice since he doesn't do anything more than e-mail on his PC, and has no interest in doing anything financial over the internet so he can't even buy I-Bonds or shop around for better CD rates. Each year we sit down together and do his taxes and he won't even file electronically let alone put in his bank details for electronic payment or refund.

I understand your reluctance to give him advice, but why not give him a simple suggestion like putting part into (pssst) Wellesley, and part into a low-cost dividend ETF or two? A pretty decent 3%+/- overall yield, and some (hopefully) growth to match inflation?

That would be a very simple 'set-it-and-fuggetaboudit' portfolio, where he can simply call up Vanguard twice a year to have his cash balance in his MM account sent to him in the mail, if he's truly not savvy enough to log into his Vanguard account on-line...

 

[ziggy29]

I agree.

I have a 67 year old good friend who lives reasonably well on his dead wife's teacher's pension and his SS. A few weeks ago he told me he wishes I would take on his $200k of savings and invest it for him as he is earning next to nothing in CD's and doesn't trust FA's after being burned in the past. I certainly won't do that but I can't really even give him some advice since he doesn't do anything more than e-mail on his PC, and has no interest in doing anything financial over the internet so he can't even buy I-Bonds or shop around for better CD rates. Each year we sit down together and do his taxes and he won't even file electronically let alone put in his bank details for electronic payment or refund.

I've more or less inherited all the tax and investment duties for my mom after my father died (who always did those things). It's not a huge amount -- maybe $400K between savings and IRAs -- but between pensions and SS she doesn't need to touch it.

Just before my dad died in 2005 he went to 100% cash in his IRA so my mom wouldn't have to manage investments. I offered to help her manage investments on it in late 2008 (before the carnage was finished but after most of the worst of the damage already occurred). The IRA was already at Vanguard so I just used a combination of TIPS (bought at their late 2008 lows, cha-ching), plus a combination of Wellington and Wellesley (and a little cash) to achieve roughly a 30/70 allocation. Very easy. She doesn't care for the market risk but I've reminded her that the alternative is earning 1% on all that money (if that), and she's never had to touch the principal (even her RMDs are going to a taxable Vanguard account) so there's little risk of having a need to "sell low", especially since she aleready has long term care insurance. So I think I talked her off the ledge and convinced her that 30/70 is just fine, especially since the gains she's seen since I started allocating the capital.

 

[Alan]

I understand your reluctance to give him advice, but why not give him a simple suggestion like putting part into (pssst) Wellesley, and part into a low-cost dividend ETF or two? A pretty decent 3%+/- overall yield, and some (hopefully) growth to match inflation?

That would be a very simple 'set-it-and-fuggetaboudit' portfolio, where he can simply call up Vanguard twice a year to have his cash balance in his MM account sent to him in the mail, if he's truly not savvy enough to log into his Vanguard account on-line...

I've actually told him that. I've explained to him that my pension is supplemented by the dividends from my Wellesley account which I never trade, and that my cash savings are in I-Bonds. But he won't create and manage his own accounts on-line, even with my help, and I'm not prepared to do it for him. Knowing his financial details to do his taxes is uncomfortable enough for me, I don't want to know his account names and passwords.

I just want to keep our friendship based on playing tennis twice a week and going out to dinner now and then. I mention his situation since he is one of the many that do suffer from low interest rates.

 

[Alan]

I've more or less inherited all the tax and investment duties for my mom after my father died (who always did those things). It's not a huge amount -- maybe $400K between savings and IRAs -- but between pensions and SS she doesn't need to touch it.

I think your mom is very fortunate to have a son like you that can manage her investments for her.

 

[samclem]

Knowing his financial details to do his taxes is uncomfortable enough for me, I don't want to know his account names and passwords.

He could do everything by mail, and the accounts could be rebalanced and the next year's money withdrawn at the same time you do his taxes with him. Even the calculations (for rebalancing) could be done with pen and paper if he's not comfortable with spreadsheets.

But all that is easy for me to say--it addresses the practical issues but not the important ones. If he doesn't have a full understanding of the investment strategy you are proposing, how will he react when his account balance drops a bit? And what is your time worth? You're probably taking the right course in providing tips and ideas regarding what and how he could do this himself.

I'm handling my MILs accounts for her, and even that is a bit uncomfortable for me. There's always a "better" asset allocation (in retrospect), or a tax angle I haven't considered, etc. I just do what I can and treat her funds as I'd want mine treated if I were in a similar situation. I know I wouldn't get involved to this extent for any friend/acquaintance.

 

[Nords]

I have a 67 year old good friend who lives reasonably well on his dead wife's teacher's pension and his SS. A few weeks ago he told me he wishes I would take on his $200k of savings and invest it for him as he is earning next to nothing in CD's and doesn't trust FA's after being burned in the past.

Over the last 20 years I've watched my FIL go from being a frequent equities trader (individual stocks & mutual funds) to nearly 100% CDs. When he went through the 2000-02 and 2008-09 recessions he gradually lost all tolerance for market risk and volatility. Today he won't touch the stock market because of "all those cheating bahstids" and he's even suspicious of the banks that hold his CDs.

This paranoia does not keep him from complaining vociferously about low interest rates. Apparently they're also run by rule-breakers who were born out of wedlock.

But he won't create and manage his own accounts on-line, even with my help, and I'm not prepared to do it for him.

We need an Early-Retirement.org name or phrase for those people.

You know the ones: they realize that you're well down the road to financial independence, and they're all hot to learn about ER. You e-mail them the E-R.org URL and tell them how to [-]sign up for[/-] max out their 401(k) contribution. They're excited. They pester you for more info about Vanguard, Bogleheads, and Rick Ferri's asset-allocation books. They're thrilled. They go back & forth with you on the topic for a couple weeks.

Then other things come up and you drop the subject for a while.

A year later they realize that you're well down the road to financial independence, and they're all hot to learn about ER. You start to e-mail them the E-R.org URL and realize that you did this a year ago.

They you find out that they haven't even signed up for their 401(k) yet...

 

[Alan]

If he doesn't have a full understanding of the investment strategy you are proposing, how will he react when his account balance drops a bit? And what is your time worth? You're probably taking the right course in providing tips and ideas regarding what and how he could do this himself.

I'm handling my MILs accounts for her, and even that is a bit uncomfortable for me. There's always a "better" asset allocation (in retrospect), or a tax angle I haven't considered, etc. I just do what I can and treat her funds as I'd want mine treated if I were in a similar situation. I know I wouldn't get involved to this extent for any friend/acquaintance.

I know/knew plenty of folks who panicked when the market dropped, and they sold out. I expect my friend would be of that mindset.

I just want to play tennis. We are well matched on the court and have great games - this morning he beat me in a tie-break 7-6 in a set that lasted almost 90 minutes - great fun and excellent exercise.

We are not as well matched in how we handle our finances and I don't want to risk spoiling our friendship.

 

[mickeyd]

Today's monetary policy penalizes savers with low returns for their savings. At the same time the worth of the assets decreases because of a declining dollar.

When we were in our accumulation phase for many years, we came up with an unorthodox way to save: Save until it hurts; continue to save thru the pain; if it hurts too much, back off; after a bit of time, crank up the savings rate again until it hurts etc., etc.

In retrospect the pain was never that bad, but the positive results are evident today in retirement. We are prepared for all financial eventualities. (I think)

 

[Chuckanut]

He could do everything by mail, and the accounts could be rebalanced and the next year's money withdrawn at the same time you do his taxes with him. Even the calculations (for rebalancing) could be done with pen and paper if he's not comfortable with spreadsheets.

But all that is easy for me to say--it addresses the practical issues but not the important ones. If he doesn't have a full understanding of the investment strategy you are proposing, how will he react when his account balance drops a bit?

+1

I think the best one can do is to tell the person what you do to invest your money, and offer to give him more details if he is interested in. Ultimately, he must do it himself. As my old grandpappy said. There are three sure ways for a men to end a friendship:

1. Loan money to your friend.
2. Talk your friend into some investment that can't miss.
3. Have an affair with his wife.

 

[Alan]

+1

I think the best one can do is to tell the person what you do to invest your money, and offer to give him more details if he is interested in. Ultimately, he must do it himself. As my old grandpappy said. There are three sure ways for a men to end a friendship:

1. Loan money to your friend.
2. Talk your friend into some investment that can't miss.
3. Have an affair with his wife.

We've talked regularly about retiring since we got to know one another in 2005, with us both planning on retiring in 2010. Pension plus investments for me at 55, and him at 65 with his wife's pension and his SS. He's shown no interest in anything else and doesn't even have 401k or IRA. (The small company he worked for never offered a 401k).

The sad thing was that his wife retired in 2008 on full pension, no health problems, but 18 months later was diagnosed with cancer and died in 2010. Fortunately they opted for 100% survivor benefits on her pension.