The Independent Investor: Budget Deal Craters Social Security Strategies

The congressional budget deal that was passed last night will have a dramatic impact on several Social Security strategies. If you have been using, or considering using, the file and suspend clause to increase your Social Security payments, think again.

Back in February of this year, I wrote a column on "How to make the most out of Social Security." I explained that you could improve your total social security benefits, as well as your spouse's, by almost 13 percent by the time you both reach the age of 70. It's called "file and suspend" and occurs when the Social Security claimant files for benefits and then suspends receiving them, while collecting benefits for a spouse.

The ability to file and suspend was granted under the Senior Citizens' Freedom to Work Act of 2000. Although at first the strategy for married couples was an obscure oddity, overtime, especially in the past couple of years, it has become almost main stream with a growing number of financial planners and accountants recommending the strategy to their clients.

The impetus to change these "unintended loopholes" came about in President Obama's budget proposal for fiscal year 2015. The administration argued that these loopholes were simply "aggressive Social Security claiming strategies which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits."

Senate Majority Leader Mitch McConnell, a Republican from Kentucky, said closing the loopholes would result in $168 billion in long-term savings.

It is hard to dispute these allegations, although a study by the Center for Retirement Research at Boston College found that only 46 percent of the benefits flowed to the top 40 percent of wealthy households. A couple aged 66 years old that used the file and suspend strategy would potentially be able to make more than $200,000 combined in extra benefits over their lifetime.

With that kind of return, not only the wealthy but anyone who could was jumping on the bandwagon.

There are other changes as well in the legislation. It appears that anyone who turns 62 next year or later would lose the right to collect just spousal benefits, for example. Another provision of the legislation would place a surcharge on higher-income recipients of Medicare.

What has surprised most professionals about the legislation was the speed in which these provisions will be implemented. Normally, changes such as these would give taxpayers plenty of time to adjust. Many who were already claiming these benefits would expected to be grandfathered and only new claimants would be impacted.

Preliminary indications are that in this case the changes would be enacted immediately and no one will be grandfathered but the situation is still fluid. The House passed the legislation 222-167 and now the bill moves to the Senate. Since Nov. 3 is the deadline on the debt ceiling, (when the government's borrowing authority runs out) this budget must be passed no later than next week.

There is still time for some backroom horse-trading in which retirees would be given more time, say six more months or so, before the changes went into effect. Clearly, if you are using one of these claiming strategies, a call to your financial planner or accountant is in order sometime soon to see what the fall out will be once the budget is passed.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: Water Scarcity Not Only California's Problem

Just about everyone is aware of the California water crisis. You may be tempted to simply dismiss this on-going event as a local problem, but it isn't. Our world is running out of water and we are on the brink of a freshwater shortage.

At least that is the conclusion of NASA, in a recent report that argues that even giant lakes are disappearing. The agency believes that sometime within the next 35 years the globe will be facing a long and protracted drought of epic proportions.

You might say, "So what? We have plenty of time to come up with solutions. Besides, the 'authorities' will handle it." A look at what is happening in California might dissuade you of that view. Take the Sierra Nevada snowpack, which supplies much of that state's water needs in places like Los Angeles, San Francisco and the Central Valley farms. The snowpack is at a 500-year low. It won't be rebuilt anytime soon.

California is the nation's largest agricultural producer and exporter. It grows more than a third of all our vegetables and two-thirds of our fruits and nuts. The Central Valley, an area roughly 450 miles long and 60 miles wide, is also the U.S.'s top dairy producing region. Thanks to the drought, the water bill for just one 10-acre farm was $33,000 last year versus $3,200 the year before. Farm losses this year could total $2.8 billion.

But it is not only the economic loss that must be calculated. The damage to wildlife is enormous. At least 18 species of fish, including salmon and trout, face extinction. Five million birds or more migrating along the Pacific Flyway are also at risk of starvation and disease.

You may or may not believe global warming is behind this crisis, but leaving aside this debate, both sides cannot dispute that the overuse of groundwater from aquifers is a leading factor worldwide in the coming crisis. Aquifers are underground layers of rocks, sand and silt that store fresh water. These natural wells can be thousands, if not millions, of years old. We have been pumping water out of these wells for eons. Entire cities have sprung up above these natural wells and that has become a problem.

Some aquifers are shallow enough to be refilled through precipitation over time. Unfortunately, for places like California, where the area is experiencing both record lows in rainfall and snow (in addition to record heat) that process is not occurring. And even if it was, the key word in replenishment is time.  Many cities, states and countries are running out of time. Even worse, many more aquifers are deep underground and once depleted are gone forever.

People in Iran, Brazil, and the United Arab Emirates, to name just a few affected areas, are already suffering from this water shortage. Without water, food becomes scarce, employment disappears and political unrest springs to the forefront. Some argue that the conflicts in Syria are more about the lack of water and all the hardship that it creates than it is about politics or religion. Scientists also point to groundwater contamination by pesticides, fertilizers and even hydraulic fracking as another cause of water shortage globally.

As for the "authorities", although California has known of their water shortage problem for decades, it was only this year that Gov. Jerry Brown implemented the state's first water-use restrictions. Restrictions, by the way, are not solutions. Combating this coming worldwide drought will require money, years of effort, and both radical and innovative responses by everyone.

Many solutions are already available. Solar-powered water purifiers, desalination plants, leak monitors, CO2 cleaners, even technologically innovative shower heads are available. What is lacking is the will to implement these solutions now.

Today's politicians are hoping that this year's El Nino will provide enough rain to break California's drought so that the water shortage problem will go away. This out-of-sight, out-of-mind approach to this impending challenge is about what we can expect from our "authorities."

In the meantime, while we wait for this crisis to develop, why don't you begin by doing your part? Go spend the money to at least buy a new water-efficient shower head. Over the course of the next decade, it could save the world thousands, if not hundreds of thousands, of liters of water every year.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: The Pumpkin Patch Thrives in America

The pumpkin harvest is in and America's farmers assure us that there will be enough supply available for October and maybe even through Thanksgiving. The Christmas holiday season may be a bit more problematic.

Heavy summer rains in parts of the Midwest and elsewhere, as a result of El Niño, have crimped production of this year's pumpkin crop. Illinois, by far the largest producer of pumpkins in the country, has been especially hard hit. Over 80 percent of all commercially grown pumpkins in the U.S. are grown within a 90-mile radius of Peoria. Morton, a small town outside of Peoria, for example, processes 100,000 tons of pumpkin every year. That amounts to enough canned pumpkin to make 50 million pies.

Americans love their pumpkins. Beginning in October, families make their annual trek to their local farm for that perfect pumpkin. Farmers not only bank on that event, but have expanded on that local tradition by offering consumers other harvest experiences such as a trip through their corn maze, petting zoos and haunted farm houses.

Pumpkin-flavored or scented products are also a big business. Starbucks has sold more than 200 million pumpkin-spiced lattes since introducing that drink back in 2003. Candles, pillows, pasta sauce and even pumpkin tortilla chips start showing up in grocery stores about this time.

As Halloween approaches, windows, doorsteps and porches are sprouting jack-o'-lanterns carved from pumpkins. More and more communities are holding carving contests that have elevated this member of the squash family to a work of art. The practice of pumpkin carving is centuries old and originated in Ireland. "Stingy Jack," a mythical Irishman of unsavory character, tricked the devil on several occasions, or so the story goes, with serious consequences. Jack was banished from both heaven and hell and sent roaming the Earth for eternity with only a burning coal to light his way.

Ever resourceful, Jack put the coal into a carved-out turnip. As the myth took hold, believers in England, Ireland and Scotland began making their own versions of Jack's lantern by carving scary faces into turnips, potatoes and even beets. They placed them in windows and doorways to frighten away Stingy Jack and other evil spirits around this time of year. Immigrants from the United Kingdom continued the tradition and found that pumpkins, a native fruit grown in this country for 5,000 years, made perfect jack-o'-lanterns.

The pumpkin business overall is only worth about $150 million a year in the U.S. Economically, pumpkins are a low-cost (but also a low-margin) product that requires a lot of room to grow. Acreage planted in pumpkins could be used instead for higher profit produce. As a result, only a little over 51,000 acres of these orange beauties are harvested each year. Unfortunately, the rain has reduced this year's crop by about one-third.  

The Department of Agriculture believes there will still be plenty of pumpkins to supply our needs through Thanksgiving, but there may be some shortages after that. In which case, just to play it safe, buy a few extra cans of pumpkin pie filling early, so you can be sure to have that dessert on hand for the holidays.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

Independent Investor: Millennials — The Misunderstood Generation

Millennials are feeling good about their financial future, says one survey. Another poll tells us that this same class of Americans is giving up on getting rich. Both can't be right and yet they are.

The first thing you have to understand is that attitudes change depending upon one's circumstances. In a recent poll by Bloomberg, for example, 47 percent of Americans between the ages of 18-35 believed that they do not expect to live better than their parents.

That is understandable if, for example, you happen to be living under your parent's roof (and 15 percent of millennials are). It is darn difficult to imagine living better than your folks under those circumstances. This is especially true if your own parents owned a home at your age. But is this a permanent situation or will higher income and a relaxation of strict mortgage lending standards change their perspective in the future?

Student debt can also impact a young person's attitude. How can one save for the future or put a down payment on a home when every spare cent you make is earmarked to pay off that student debt? However, over time, that debt will disappear, if and when it does, will the millennials attitude change as well?

While one poll paints doom and gloom, another, this one by Wells Fargo, "How America Buys and Borrows," came to the opposite conclusion. Their survey reflects optimism with 28 percent of millennials viewing their current financial situation favorably versus 24 percent of the general population. The survey goes on to say that nearly one-third of millennials plan to buy a home in the next three years compared to the general population's 19 percent.  In 2014, 84 percent of millennials said their financial situations were stable to strong and 94 percent expected their personal financial situation to get better or stay the same.

You can find the same contradictions throughout the workplace. Polls tell you that social media has turned these millennials into team players. At the same time, this same group hates to be managed and is allergic to ideas of careerism. Some research will tell you the opposite: that competition is their driving force and they do not have much faith in their co-workers.

I could go on and on, but what explains these contradictions, in my opinion, is trying to generalize about a generation when much of what is going on is simply part of the aging process. A generation whose birth dates span 20 years (from 1980-2000), will experience changes in attitudes as they grow older and acquire more experience, especially in the work world.

Today we all want to apply our modern behavior studies and technologically sophisticated marketing tools to pigeon-hole a demographic group that is changing all the time. Like generations before them, the Millennials who have been on the job 10 years will have a different perspective (and income) than those just starting out.

Does that explain away all the differences between the Baby Boomers, for example, and this Generation "Y," of course not? In prior columns, I have identified many differences, such as their reliance on social media to communicate and access knowledge and news. Consumption patterns are clearly different from choosing less than more in living space, in valuing experience over acquiring "stuff" and in many other attitudes involving everything from social values to raising children.

The point is to sort through fact from fiction and identify the generational differences, which may not be as large as we think, and the more transitory and age-related changes that every generation experiences.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: The Stock Market & You

If one listens to the chatter throughout the financial media, you are most likely at your wits end in worry. No matter how much we may tell ourselves that this is not another 2008, the gnawing doubt in the pit of our stomach remains.

Let me say categorically that we are not entering another financial crisis. The stock market is not going to drop 50 percent from here, no matter what some strategists are saying. If you have been reading my columns since 2007, you know that when it's time to raise cash I say so. This is not one of those times.  You may not agree with me, (although you want to) so let me give you some food for thought.

Although the stock market and the economy do not necessarily perform in lock step, over time, they tend to trend in the same direction. The U.S. economy is growing moderately, employment is rising and there is nothing on the horizon that indicates that the economy is changing direction. This is decidedly different from 2008.

On the other hand, the stock market over the course of the last year or so may have gotten a bit ahead of itself. It is this discrepancy that is behind the present correction within the financial markets. As the economy continues to grow and interest rates begin to rise, investors are searching for a price level that more accurately reflects this new environment.

This adjustment period is almost over. The ultimate level in which investors finally agree that stocks represent "fair" value may be here or a 100 points lower on the S&P 500 Index. If your time horizon is anything longer than next week, that level should not be as important as the longer term direction of the market. To date, there is no evidence that the stock market has changed its long-term trend, which is up.

Over the past several years, most investors have experienced fairly good gains in their portfolios. To some extent, the market's stellar performance since the financial crisis has conditioned investors to expect more of the same. Anything less fills us with consternation. The problem is that expectation is not based in financial reality. Markets go up and markets go down.

It would be just wonderful if you (or your financial adviser) could time the market: selling at the top and buying at the bottom. Unfortunately, no one has been able to do that consistently in my experience. Investing is a process where no one catches the bottom (or the tops) but instead invests along the way. Normally, the best time to buy is in an environment like we are experiencing right now. Conversely, it is absolutely the worst time to sell (although emotionally that's just what you want to do).

How do you keep from making emotional decisions with your portfolio that you will regret later on? Stop looking at your account every day or week. Does knowing what you gained or lost on a daily basis help you make investment decisions for the long term?  Compare your attitude toward the stock market with how you look at the real estate market.

 Ask yourself this question, how much is your house worth today? You don't know, do you? And yet, for most of us, our house is worth more (in many cases several times more) than our financial portfolio. If your house were to fall by $10,000 by the end of this month, would you sell it? Of course not - because it is a long-term investment. In order to invest successfully, you must view your financial investments in the same way.

Don't get me wrong, losing money (even if it's only paper losses) hurts like the Bejeezus, The pain of losing is far worse than the jog of gaining. It's just how we humans are built. Just remember, we have all been here before and those who have stayed the course have benefited the most. This time will be no different.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.