Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Oldster Tax
Old 07-15-2012, 05:53 PM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
mickeyd's Avatar
 
Join Date: Apr 2004
Location: South Texas~29N/98W
Posts: 5,880
Oldster Tax

(Again Bogleheads locked me out on this item, hope it fits here.)

Not sure how all of this will affect my finances, but this surely looks like a tax, smells like a tax, sounds like a tax. Hope I will not step in it!

Now the down side of saving for the future begins to show it's ugly head.

Quote:
So here’s a tough question: How much would the standard of living of retirees decline if current conditions persisted into the distant future?
Is this how it would affect every retiree? No. Retirees with smaller nest eggs would be less affected because more of their income comes from Social Security and less from investments. Retirees with more in savings, however, would be more affected because a larger proportion of their income comes from savings.

How will lower returns affect you?

It all depends on your income, marital status, whether you own or rent, whether you have a mortgage, etc.
http://assetbuilder.com/blogs/scott_bur ... t-you.aspx
__________________

__________________
Part-Owner of Texas

Outside of a dog, a book is man's best friend. Inside of a dog, it's too dark to read. Groucho Marx

In dire need of: faster horses, younger woman, older whiskey, more money.
mickeyd is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 07-15-2012, 05:58 PM   #2
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,078
Quote:
Originally Posted by mickeyd View Post
(Again Bogleheads locked me out on this item, hope it fits here.)
I think they are trying to tell you something...
__________________

__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Old 07-15-2012, 06:03 PM   #3
Recycles dryer sheets
 
Join Date: Jan 2012
Posts: 65
Quote:
Originally Posted by mickeyd View Post
(Again Bogleheads locked me out on this item, hope it fits here.)

Not sure how all of this will affect my finances, but this surely looks like a tax, smells like a tax, sounds like a tax. Hope I will not step in it!

Now the down side of saving for the future begins to show it's ugly head.


http://assetbuilder.com/blogs/scott_bur ... t-you.aspx

I have actually been very surprised at how little "uproar" there has been (at least as reported in the media, or addressed by our political class) by those who are dependent upon higher interest rates to generate income to fund their golden years. The policy of driving interest rates down is basically redistributing income from savers in favor of debtors. And I just paid off my mortgage a year ago---how dumb can I be?
__________________
ProGolferWannabe is offline   Reply With Quote
Old 07-15-2012, 06:09 PM   #4
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,424
The link is to a Scott Burns article about low returns. The title is eye-catching but a bit sensational.
__________________
MichaelB is offline   Reply With Quote
Old 07-15-2012, 06:09 PM   #5
Moderator Emeritus
 
Join Date: Oct 2007
Posts: 4,929
Quote:
Originally Posted by ProGolferWannabe

I have actually been very surprised at how little "uproar" there has been (at least as reported in the media, or addressed by our political class) by those who are dependent upon higher interest rates to generate income to fund their golden years. The policy of driving interest rates down is basically redistributing income from savers in favor of debtors. And I just paid off my mortgage a year ago---how dumb can I be?
I'm OK with it. See, I recall this period where 10 year Treasuries and all the things that key off them were paying a whopping 10% every year.

The gotcha was that the inflation rate was considerably higher. 10% doesn't look so good against 15% inflation.

Be careful what you wish for. You just might get it...
__________________
M Paquette is offline   Reply With Quote
Old 07-15-2012, 06:48 PM   #6
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
I think the difference between "tax" and "different economic conditions" is that this time federal govt isn't levying a new method to collect your money and then spend it on something else.

Instead the federal govt is keeping interest rates as low as possible so that they don't have to give Treasury owners their money back.

Quote:
Originally Posted by mickeyd View Post
(Again Bogleheads locked me out on this item, hope it fits here.)
Quote:
Originally Posted by REWahoo View Post
I think they are trying to tell you something...
... that they need more moderators, or less moderation?
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 07-15-2012, 07:05 PM   #7
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by Nords View Post
Instead the federal govt is keeping interest rates as low as possible so that they don't have to give Treasury owners their money back.
Which includes Social Security. I wonder how much the Fed is taking into account how much the ongoing War on Savers is going to deplete SS much faster because it's earning almost no interest...
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 07-15-2012, 07:23 PM   #8
Thinks s/he gets paid by the post
Helen's Avatar
 
Join Date: Oct 2004
Location: Portland
Posts: 1,343
Quote:
Originally Posted by ziggy29 View Post
Which includes Social Security. I wonder how much the Fed is taking into account how much the ongoing War on Savers is going to deplete SS much faster because it's earning almost no interest...
But there is no surplus of SS to be growing from interest earned.
__________________
Helen is online now   Reply With Quote
Old 07-15-2012, 08:31 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,815
I'll agree that pushing down interest rates helps borrowers and hurts savers. I'm not sure how much of this is the Fed and how much is the market.

The particular rate that the Fed can control is the very short term. Few of us think that our retirement savings should be in money market accounts.
I know they have been trying to hold down longer rates ("twist"), but I don't know how much impact they've had. Fill in the blank: If the Fed were not trying to keep 10 year rates down, the 10 year Treasury yield would be _____ .

Re Burns' calculation, I see that he uses 3% inflation with a nominal 1% bond yield. I think that longer TIPS are still priced to yield something around inflation, certainly not a negative 2%, so it seems he's being rather pessimistic on that assumption.
__________________
Independent is offline   Reply With Quote
Old 07-15-2012, 08:45 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Quote:
Originally Posted by Helen View Post
But there is no surplus of SS to be growing from interest earned.

SS does receive interest on the government bonds it holds. It's all part of the SS laws. And it has quite a lot of those bonds ($2.7 trillion).

http://www.ssa.gov/oact/progdata/fundFAQ.html#n2


"The rate of interest on special issues is determined by a formula enacted in 1960. The rate is determined at the end of each month and applies to new investments in the following month.
The numeric average of the 12 monthly interest rates for 2011 was 2.417 percent. The annual effective interest rate (the average rate of return on all investments over a one-year period) for the OASI and DI Trust Funds, combined, was 4.401 percent in 2011. This higher effective rate resulted because the funds hold special-issue bonds acquired in past years when interest rates were higher."

Not too bad. And the bonds are redeemable at any time at face value.

and here's the summary from the 2012 SS report:

http://www.ssa.gov/oact/TR/2012/tr2012.pdf

"
At the end of 2011, the OASDI program was providing benefits to about 55
million people: 38 million retired workers and dependents of retired workers,
6 million survivors of deceased workers, and 11 million disabled workers
and dependents of disabled workers. During the year, an estimated 158 million
people had earnings covered by Social Security and paid payroll taxes.
Total expenditures in 2011 were $736 billion. Total income was $805 billion,
which consisted of $691 billion in non-interest income and $114 billion in
interest earnings. Assets held in special issue U.S. Treasury securities grew
to $2.7 trillion."
__________________
Animorph is offline   Reply With Quote
Old 07-15-2012, 09:59 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,450
Quote:
Originally Posted by MichaelB View Post
The link is to a Scott Burns article about low returns. The title is eye-catching but a bit sensational.
To be honest I think it understates the problem and we see it on the forum all the time. Tax is really too mild a term, I prefer "The Feds war on savers", and sadly it is one of the few wars (e.g. drugs obesity) that I think Uncle Sam is winning hands down.

I reluctantly have gone along with Fed desire for me to put my assets in more speculative things, stocks, junk bonds, real estate, tech starts ups.
But I have a great deal of sympathy for the many folks on the forum who have saved all their live with expectation of a say 5% interest rate which slightly exceeds inflation of 2-3%. The are now forced to work longer, dip into their principal, and/or accept a much lower income stream in retirement.

All this to bail out both the people who borrowed too much and the banks who foolishly lent them money.

To add insult to injury the Fed's balance sheet is now loaded to the gills with low yielding Treasury bond which I fear we the savers will eventually pay for again via inflation or some other mechanism.
__________________
clifp is offline   Reply With Quote
Old 07-15-2012, 10:25 PM   #12
Thinks s/he gets paid by the post
MooreBonds's Avatar
 
Join Date: Aug 2004
Location: St. Louis
Posts: 2,091
Quote:
Originally Posted by clifp View Post
To be honest I think it understates the problem and we see it on the forum all the time. Tax is really too mild a term, I prefer "The Feds war on savers", and sadly it is one of the few wars (e.g. drugs obesity) that I think Uncle Sam is winning hands down.

I reluctantly have gone along with Fed desire for me to put my assets in more speculative things, stocks, junk bonds, real estate, tech starts ups.
But I have a great deal of sympathy for the many folks on the forum who have saved all their live with expectation of a say 5% interest rate which slightly exceeds inflation of 2-3%. The are now forced to work longer, dip into their principal, and/or accept a much lower income stream in retirement.

All this to bail out both the people who borrowed too much and the banks who foolishly lent them money.
But do you really think it's an outright planned goal to attack the ability of savers to live off of their assets?

This is not a communist society. If people truly didn't want to accept a 0.1% APY on a 1 year CD....then they would instead put the money in something else. The CIA isn't holding a gun to their head and telling them "sign on the dotted line....or else!".

If people didn't accept such paltry yields, then they wouldn't help create the demand that helps in part to shape the current yield curve. If people weren't accepting these crazy low interest rates, then the Fed wouldn't still have 2x and 3x bid coverage on each and every Treasury auction - the coverage would be less than 1x.

Because there is such a global demand for ANY term deposit, it helps drive down rates low. True, part of this demand is artificially created by the Fed - but the Fed can only do so much. Is their % involvement enough to create the demand imbalance to severely suppress interest rates? (just like one OPEC producer shutting down could be a small drop in oil output, but enough to move the equilibrium such that oil spikes $20/barrel) Partly yes, and partly no, but I wouldn't guess that they have as much effect as we might give them credit for.
__________________
Dryer sheets Schmyer sheets
MooreBonds is offline   Reply With Quote
Old 07-15-2012, 11:22 PM   #13
Full time employment: Posting here.
 
Join Date: Oct 2009
Posts: 942
Moorebonds-

What you are forgetting in your analysis is that foreign central banks (think Japan and China) are significant buyers of treasuries and their purchases are made for reasons other than rates (ie-currency manipulation).
__________________
LARS is offline   Reply With Quote
Old 07-15-2012, 11:45 PM   #14
Moderator Emeritus
 
Join Date: Oct 2007
Posts: 4,929
Quote:
Originally Posted by LARS
Moorebonds-

What you are forgetting in your analysis is that foreign central banks (think Japan and China) are significant buyers of treasuries and their purchases are made for reasons other than rates (ie-currency manipulation).
Well, and the large amount of US currency that they receive in exchange for the products that they supply to the US.

The economist Milton Freidman noted that the trade deficit exists as it is matched by investment coming in to the United States; purely by the definition of the balance of payments, any current account deficit that exists is matched by an inflow of foreign investment.
__________________
M Paquette is offline   Reply With Quote
Old 07-15-2012, 11:50 PM   #15
Thinks s/he gets paid by the post
Helen's Avatar
 
Join Date: Oct 2004
Location: Portland
Posts: 1,343
Quote:
Originally Posted by Animorph View Post
SS does receive interest on the government bonds it holds. It's all part of the SS laws. And it has quite a lot of those bonds ($2.7 trillion).

Thank you so much for the information. I did not know that.

This is an interesting thread.
__________________
Helen is online now   Reply With Quote
Old 07-16-2012, 06:21 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
 
Join Date: Feb 2006
Location: Washington, DC
Posts: 8,638
I don't believe there is a war on savers, just collateral damage. If the Fed wasn't practicing QE maybe we would be better off but maybe our equities would be halved instead and unemployment would be 15%. The bottom line is that we (Government, banks, citizen buyers) blundered our way into a depression and things don't look rosy on the way out. At least we ERs are not worried about being laid off.
__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is offline   Reply With Quote
Old 07-16-2012, 07:58 AM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Mulligan's Avatar
 
Join Date: May 2009
Posts: 7,376
I certainly don't view it as a tax, but it has lead to unfortunate results for many older traditional CD investors. It does potentially set them up for failure in chasing yield in bond products they do not understand, or getting whacked in another market swoon. It certainly isn't a right of savers to earn their
6% CDs, as interest rates have been low in decades gone by in the last century. But in more recent times it has been pretty easy to find CD rates higher than inflation rate. And even if it wasn't, a typical older investor would be better off with 5% inflation and 5% CDs, than 1% inflation and 1% CDs, I believe. As we have suggested in an earlier thread inflation rates can be controlled by retirees and be kept below official government measurements.
__________________
Mulligan is offline   Reply With Quote
Old 07-16-2012, 10:38 AM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Brat's Avatar
 
Join Date: Feb 2004
Location: Portland, Oregon
Posts: 5,913
This is an interesting discussion because asset allocation theory would have our IRAs with around 70% in bonds. I could just buy Wellesley and call it a day but I expect an eventual significant drop in bond values with an increase in interest rates in the intermediate term so am leery funds with bonds. I am wondering about alternatives such as original issue bonds, CDs and/or dividend paying stocks.

My research of analysis of dividend ETFs/funds wasn't encouraging. I looked at the yield of S&P 500 index funds and noticed that it is heavy in dividend paying stocks. Both bond funds and stock funds have initial investment risk but if interest rates go up there is no prospect of a bond's value increasing while a stock may recover in time.

Original issue bonds are expensive to sell so I would only buy those to be held to maturity. With interest rates so low CDs are almost more attractive for the intermediate term because at worst you loose your interest and may be nipped for a small fee if you wish to redeem prematurely.

I would appreciate comments by others.
__________________
Duck bjorn.
Brat is offline   Reply With Quote
Old 07-16-2012, 10:49 AM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,676
Quote:
Originally Posted by ProGolferWannabe View Post
I have actually been very surprised at how little "uproar" there has been (at least as reported in the media, or addressed by our political class) by those who are dependent upon higher interest rates to generate income to fund their golden years. The policy of driving interest rates down is basically redistributing income from savers in favor of debtors. And I just paid off my mortgage a year ago---how dumb can I be?
One reason for the lack of uproar -- with rates coming down bond returns got goosed. For example, the 1 year return for intermediate Treasuries is 8.6%.

It is when rates truly flatten out and then start up that the "savers" will express their unhappiness.
__________________
Lsbcal is online now   Reply With Quote
Old 07-16-2012, 10:51 AM   #20
Thinks s/he gets paid by the post
 
Join Date: Nov 2011
Posts: 2,359
Quote:
Originally Posted by MooreBonds View Post
Because there is such a global demand for ANY term deposit, it helps drive down rates low. True, part of this demand is artificially created by the Fed - but the Fed can only do so much. Is their % involvement enough to create the demand imbalance to severely suppress interest rates? (just like one OPEC producer shutting down could be a small drop in oil output, but enough to move the equilibrium such that oil spikes $20/barrel) Partly yes, and partly no, but I wouldn't guess that they have as much effect as we might give them credit for.
Per the following link, during the past 20 years the Fed has been the primary driver of interest rates, and in turn stock prices:

"The Federal Reserve announces what it's going to do to interest rates eight times a year at Federal Open Market Committee meetings. These are scheduled in advanced and well-publicized, so investors know exactly when the goods are coming.

"Since 1994 (when the Fed started publicizing its moves), the S&P 500 has risen from 450 to 1300. But remove the 24 hours just prior to FOMC announcements, and returns fall to almost nothing."

http://www.fool.com/investing/genera...k-market-.aspx
__________________

__________________
GrayHare is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 11:40 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.