Showing posts with label Personal Finance. Show all posts
Showing posts with label Personal Finance. Show all posts

Monday, April 23, 2018

Rethinking Charitable Contributions


If you used to itemize your deductions, last year’s massive tax law changes may affect the optimal way for you to make charitable contributions. Three major modifications in the law are responsible for the changed situation:

(1) The 2018 standard deduction increased substantially. It’s $12,000 single/ $24,000 married, which is significantly higher than in 2017. For those over age 65, the standard deduction increases to $13,600/$26,600 (assuming both members of the couple are over 65).

(2) The deduction for state and local taxes is capped at $10,000, regardless of whether you are single or married (a clear marriage tax penalty in a bill that is otherwise very friendly to families, especially if you have children – go figure).

(3) The provision for Qualified Charitable Distributions (QCDs) was made “permanent” in the new law, meaning taxpayers no longer need to wait until December to find out if Congress will extend the provision.

The combination of (1) and (2) means the standard deduction will now apply to a significant number of individuals who itemized deductions in the past. Charities have their fingers crossed that these people will not reduce their contributions because they have “lost” the deduction for them. It also means that the group of people who benefit from “doubling up” contributions changes.

The “doubling up” strategy involves developing a contribution schedule that crosses two calendar years. If your itemized deductions are less than the new standard deduction but greater than 50% of it, you might benefit by moving all deductions you can from year 1 to year 2 (or vice versa). For example, let’s say you routinely make $10,000 in contributions each year and under the new law that means you will take the standard deduction. Instead, make no contributions in year 1, and on January 1 of year 2, donate the carryover $10,000. Then donate year 2’s $10,000 sometime before the end of the year. If the $20,000 donation is sufficient to allow you to itemize in year 2, then you’ve converted some nondeductible contributions into deductible ones and reduced your overall taxes.

Also effective is delaying optional medical expenses (in standard deduction years) or pushing them forward (in itemizing years). To a lesser extent, timing the payment of real estate taxes or state income taxes might also help.

What’s up with Qualified Charitable Distributions?

Making the QCDs permanent means anyone who must take the Required Minimum Distributions (RMDs) from an IRA and donates to 501(c)(3) organizations might benefit. Once you turn age 70-1/2, current rules on IRAs, 401(k)s and the like require you to take certain minimum annual levels of distributions or pay a huge tax penalty. As with any such distribution, RMDs are taxable to the extent they do not reflect a return of nondeductible contributions.

QCDs apply only to standard IRAs and allow you to DIRECTLY donate up to $100,000 per individual to qualified 501(c)(3) charities and exclude the donation, to the extent it was taxable, from income. What’s the benefit?

(1) If you take the standard deduction, this provision allows you to effectively deduct what would otherwise be nondeductible contributions. A clear win.

(2) Even if you do itemize, making a QCD reduces your adjusted gross income. That reduction may help you avoid the Medicare High-Income Surcharge, possibly reduce the proportion of Social Security benefits that are taxable, and reduce the limit before medical expenses can be deducted.

(3) Because you’ve reached the age requirement for RMDs, you were going to have to take money from your IRA anyway, and this might be the most efficient way to do it.

What are the rules for QCDs?

(1) You must have reached age 70-1/2 before the distribution is made.

(2) It must come from a regular or rollover IRA, not a SEP or Simple IRA in which employer contributions are still being made. They can’t be from a 401(k) or 403(b).

(3) The receiving organization must qualify as a 501(c)(3) organization (not all charitable organizations do, and private foundations and donor-advised funds are not eligible)

(4) The contribution must come directly from the IRA. If you cash out the IRA and make a contribution with those funds, it will not count. Many IRAs offer a check-writing privilege and that technique will work because the check is coming directly from the IRA. Otherwise, you’ll have to donate securities from the IRA.

(5) Had you not used this technique and instead deducted the contribution in the normal manner, it must have been entirely deductible (e.g. you can not receive any benefit from your deduction—so make sure to reject that coffee mug from NPR and turn down those tickets to the charity ball.)

QCD Implications

Since 401(k)s and 403(b)s do not qualify for QCDs, and if you make considerable charitable donations to 501(c)(3) organizations, you can consider rolling over the qualified plan into an IRA to take advantage of the QCDs.

Increasingly, states income taxes use different rules than Federal income tax law. Any analysis of your contribution strategy must include how any change affects your state income tax in addition to the federal effects.

If you are approaching 70-1/2, QCDs are one more thing to think about as you determine whether to take your initial RMD in the year you turn 70-1/2 or wait and take it by April 1 of the following year.

Warning

We’re talking taxes here, and these are my understandings of the rules. I’m not a lawyer or accountant, and I’m not providing any advice. You really must check with your own tax advisor before making any decisions (or make sure to do your homework).

Wednesday, February 24, 2016

Six Steps to Help Prevent Financial Abuse of the Elderly

I have been working on two short stories this month. Although the stories are very different, they share two similarities. Both involve my series character Seamus McCree and crimes against the elderly or mentally diminished.

Fellow Writers Who Kill blogger Tina Whittle and I are writing one of the stories together. That one is for an anthology expected to be titled 50 Shades of Cabernet. The co-authoring thing is a new experience for me, and I am enjoying it. (I hope Tina is, too.) The second story is my planned submission to the fourth Guppy Chapter of Sisters in Crime anthology titled Fish Out of Water.

This need of mine to write about financial abuse of the elderly is not new. Perhaps it stems from my current responsibility to handle my mother’s finances, and I am more aware of the potential. Maybe it’s because I write about financial crimes. Criminals always follow the money, and today’s retirees as a group have a lot of money. Maybe it’s because news articles have suggested the way we now treat elder abuse is similar to the way we used to treat child abuse: severely underreporting the extent of the crime, blaming victims, allowing institutional practices to remain unchallenged. Whoa! That’s a charge.

Consider these facts:

Much as child abuse often happens within the family, according to AARP, nearly 60 percent of the Adult Protective Services cases of financial abuse nationwide involved an adult child of the elderly person.[1] According to a study sponsored by the Journal of Internal Medicine, friends and neighbors account for another 17%, and paid home aids 15%.[2] In this study, only 10% of the reported cases are perpetrated by strangers.

We don’t know for sure what percentage of total financial abuse is reported. Victims are often unaware. When they do realize they are victims, they are often too embarrassed to report the crime. Sometimes they are afraid to report the crime, fearing physical or psychological abuse from the perpetrator. Those suffering from dementia, depression, or disabilities are most at risk.

Sometimes the abuse is hard to catch, taking the form of “loans” that are never repaid, cheating not only the victim, but others who should have shared in the estate. Often the crime is simple theft, extracting money from an ATM, writing checks to themselves, buying stuff with the victim’s credit cards.

Taking a few simple steps can make it more difficult for perpetrators of elder financial fraud.

(1) As early as possible make sure you (and your parents, if alive) have an estate plan in place, including a will (and/or living trust) and health directives. Discuss your wishes with family so everyone knows what is to happen if you can’t take care of yourself in the future. This may be an uncomfortable conversation with your loved ones, but bright sunshine on your finances helps makes it harder for the mold of later abuse to take hold.

(2) Be wary when “new best friends” enter the life of a loved one. Any hint of “sharing” finances or the new friend “taking care” of finances should shoot off rockets of concern.

(3) Institute checks and balances wherever possible. Only a small percentage of lawyers and financial advisors are crooks, but alarm bells should go off if your lawyer recommends a financial advisor or vice versa. Independently verify referrals. Conversely, you may be able to use a lawyer or financial advisor as a resource to help prevent financial fraud.

(4) Use technology to help monitor spending. Credit card companies provide transaction alerts, which can provide early warning of a stolen number. If you worry about a relative who is still independent but potentially at risk, you can purchase monitoring services to spot unusual activity. An example is EverSafe.[3] (I mention them only as an example of what can be purchased. I have not used them and have no personal knowledge of how well they perform.)

(5) If one family member is responsible for a parent’s assets, make sure a second person has the ability to review transactions, asset statements, etc. I use DropBox to store my mother’s credit card, bank and mutual fund statements so one of my sisters can look over my shoulder. This protects Mom and also allows my sister to easily take over if something happens to me.

(6) If anything seems suspicious, ASK QUESTIONS.

Is financial crime against the elderly a concern for you, either for yourself or a relative? What have you done about minimizing risk of abuse?

~ Jim

This post first appeared on Writers Who Kill 2/21/16




[1] http://www.westernjournalism.com/elder-financial-abuse-near/
[2] http://www.springer.com/gp/about-springer/media/springer-select/older-adults-are-at-risk-of-financial-abuse/30696

Friday, October 2, 2015

No Social Security COLA Adjustments for 2016

Unless something really wacky happened to cost-of-living in September that I don’t know about, Social Security recipients will not receive cost-of-living benefit increases for 2016.

Here’s the math:

The benefit increases only occur if the average CPI-W for July, August and September exceeds that for the highest previous average for the same months (which occurred in 2014). In 2014 the three CPI-Ws were

234.525 for July 
234.030 for August 
234.170 for September

702.725 total for the three months (average 234.242)

In 2015 we already have:

233.806 for July 
233.366 for August

Meaning that to equal the 2014 total of 702.725, we’d need September to come in at 235.553. However, the cost of living adjustments occur only in 0.1% increments, which means a small increase in the average won’t trigger a COLA adjustment. It has to minimally round up to 0.1% and that requires the total to be at least 703.077. September’s CPI-W must come in no less than 235.905 to trigger a COLA adjustment, and to do that cost-of-living must have jumped over 1% in September!

The CPI-W is not seasonally adjusted, so it is more volatile than some other measures of cost-of-living, but a 1% jump did not happen in a month when gasoline prices continued to decline.

We’ll know for sure on October 15 at 8:30 A.M. Eastern Time, but the bottom line is: No Social Security COLA adjustments for 2016.

~ Jim

Friday, November 7, 2014

Protecting Your Identity in a Cyberworld

The headlines continue to shout examples of major retailers, banks and insurance companies whose databases have been hacked, providing the hackers with your personal information. What can you do about these breaches of security?

Short of dying or cutting yourself off from all commerce, you can’t do anything to stop the security breaches, but by preparing you can limit their damage to you when they occur.

It will happen; your credit card information will be stolen.

The most important first step to protect yourself is to assume your credit card information will be stolen.

It is going to happen. It may happen the old-fashioned way and someone steals your wallet and grabs your credit card. Maybe a restaurant worker has a magnetic strip reader and necessary tools to duplicate your card. Maybe the bank is hacked, or the retailer or insurance company. Maybe your computer is stolen or someone snags your userID and password while you are online. Or your “safe” cloud backup is hacked. It doesn’t matter how it happens; what matters is how prepared you are for it.

The best way to limit the damage is to have strong safeguards in place before your information is compromised.

Create Strong Passwords: 

Yes, you’ve heard it a thousand times, but if you haven’t already done it, do it now: create unique, strong passwords for every online account. Strong passwords include at least one capital letter, one small letter, one number, and one symbol and are a minimum of eight characters long. You can use a program that develops long unmemorizable passwords and keep track of them for you. Alternatively, you can develop your own, based on a system that you remember, but that will not be obvious to someone who comes across your written list.

Of course you keep a written list; you’re human, aren’t you?

You can develop a system that you will remember given a password clue. Here’s an example. Your password list has “4T” next to Chase.

Your actual password is aHc16@jmj#X arrived at by taking the first three letters of the company (cha), writing them backwards (ahc), capitalizing the 2nd letter (aHc) adding a standard (to you) 7-digit group (16@jmj#) and then (the code part—4T) which means the letter at the end will be 4 after T and since T is capitalized, so will be X (the 4th letter after T).

If you lose your list of passwords, no one is going to figure out that Chase 4T means aHc16@jmj#X and BOA 2c would convert to aOb16@jmj#e. Yet after just a few days, you’ll know your passwords for almost all websites without having to look them up. With such a coding scheme, you should keep a note detailing your conversion key in your safe deposit box so upon your demise your executor can sort out what your passwords are and access your accounts.

Also note that however a thief/hacker obtains your information for one account, they won’t be able to figure it out for other accounts.

Set up Credit Card Alerts

Most major credit cards and many retail cards allow you to set up alerts so whenever your credit card is used, you get an email. For example, Chase allows alerts for the following transactions:

  • Any charge on the card over a specified amount (I use $1.00, so I see them all.)
  • Any international charge.
  • Any online, telephone or mail charge.
  • Any gas station charge.

They have a number of other alerts available (credit limits, bill paid, etc.) I chose to receive an alert for any balance transfers (since I don’t transfer balances, I’d learn of the fraud immediately.)

The point of these alerts is to catch a problem early. Thieves often put through a small charge to make sure the credit card information is working, and, if successful, follow up with a series of larger charges. If you spot any suspicious activity, immediately contact the credit card company’s fraud group. Usually, they will cancel your card and issue a new one. Once, (years ago with a corporate card) they asked to keep the card active so they could follow the merchandise and attempt to apprehend the criminals. They issued a new card for my purchases.

Utilize a single credit card for automatic payments

Designate one credit card for use in automatic payments: utility bills, cable, newspaper, whatever recurring payments you set up. This isolates your automatic payments from your every day credit card use.

It’s a pain to have to change all your automatic payments. Making this division means that when the card you use for regular purchases is compromised (in my case usually because I left it somewhere), you don’t have to bother with notifying other companies.

Credit Rating Agencies

The three credit rating agencies, Equifax, Experion and TransUnion, have tools to help you protect your credit. You should request your annual free credit report from each as a matter of course. (I suggest spreading them out every four months to give yourself the best coverage.) Should you spot any incorrect or suspicious information, follow-up with the company and make sure to keep all documentation.

The agencies also have methods to limit access to your credit information. Putting them in place will make it much more difficult for you to get new credit and in some cases will make it hard to obtain new services (cable for example) because the provider checks your credit before agreeing to sign you up and that check is blocked. However, if you are concerned about unauthorized persons or companies accessing your credit, a freeze will solve the problem.

If you suspect your personal information has been compromised, you can have the three companies put on a Credit Fraud Alert, which notifies companies to contact you before approving any credit. Experian’s, for example, lasts 90 days – unless you have been a victim of fraud—in  which case they have a seven-year extension with proof of the fraud.

Summary: (1) Recognize your information will be stolen (2) Implement strong passwords (3) Set up credit card transaction alerts for early warning (4) Make sure to utilize free credit rating agency tools.

~ Jim

Tuesday, June 24, 2014

The Effect of Canada’s New Anti-Bitcoin Law

While traveling in Canada, I came across an article about bitcoins. It turns out while the U.S. has held hearings about bitcoins and other virtual currencies, Canada has recently (June 19, 2014) actually signed legislation. To be fair, the law affects all virtual currencies without mentioning bitcoins by name, but be sure they are the main reason the bill was passed.

Prior bitcoin posts

For those not familiar with bitcoins, I have two previous blogs. This one dealt with my skeptical view of bitcoins as a possible investment. The second one followed up with breaking news about a bitcoin depository going bankrupt, costing its customers a bundle.

Regulation as a bitcoin risk

I had not specifically mentioned it earlier, but regulation by various countries may be a significant risk to whether bitcoins or any other virtual currency becomes generally accepted as a payment mechanism.
The price of bitcoins over the long term will be negatively impacted to the extent they are not readily available in minimum-friction transactions and positively affected if they are usable with minimal transaction costs.

One purported advantage of bitcoins is that their value is determined by supply and demand, so they do not rely on any government to determine their value. That is not the same as saying governments are not able to affect its value, as I discuss below.

Canadian Law

In Canada, the main legislation dealing with money laundering is the Proceeds of Crime Money Laundering and Terrorist Financing Act (PCMLTF). The newly passed legislation brings bitcoin use under the jurisdiction of that Act. This means (and remember my usual caveats, I am not a lawyer and in no way should anything herein be considered legal advice):
1. Businesses utilizing bitcoins in Canada must now register under PCMLTF.
2. Businesses registered under PCMLTF must maintain extensive transaction records to prevent money laundering.
3. Canadian financial institutions are prohibited from establishing and maintaining bank accounts for customers involved with bitcoin businesses that are not registered under FINTRAC.
4. Foreign businesses that operate in Canada (including online) must comply with the Act.

Impact on Bitcoin Use

Although not sufficiently knowledgeable to perform a detailed analysis of the Canadian Act, I can foresee two major impacts on bitcoin use in Canada.

1. Once the Act is implemented, the costs of doing business using bitcoins in Canada will increase significantly. A business will need to register under PCMLTF and that will probably require consultating with expensive experts. Unless someone develops a boilerplate solution this will significantly increase transaction costs.

2. The Act eliminates one of bitcoins purported advantages: the ability to hide from the government transactions affecting Canadian entities (and to a lesser extent individuals).

Risk of More Countries Adding Similar Regulation

Because of the money laundering possibilities of bitcoin, I doubt Canada will be the last country to regulate their use by introducing expensive registration and reporting requirements. If (and when) more countries follow course, bitcoins will either (a) disappear, (b) become used primarily within countries with loose banking regulations (where gray money already collects), or (c) be driven underground and become controlled by criminal elements for whom the downside of breaking laws is less than the upside of hiding transactions.

One mitigating possibility is for countries to adopt uniform regulation, thereby diminishing the costs of worldwide compliance. Not likely in the near term.

Recent bitcoin prices

Since the Canadian bill’s signing, the price of bitcoins has dropped from $599 the day before passage to $585 on June 23. This follows soon after a nearly 11% drop earlier in the month after the U.S. announced it would sell 30,000 bitcoins seized from Silk Road.

Of course, if you had bought your bitcoins in January 2013 at $13.36, you would still have a tidy profit. If you had bought at the all-time high of $1,124.76 on November 29th of that year, you would have lost almost half your investment.

I’ve done neither and will continue to watch bitcoins from the sidelines, although there is a part of me that really would like to sell them short.


~ Jim

Monday, May 19, 2014

Carrying Costs

By the time this blog is published I will have (hopefully) completed my three-week journey from southern home to northern home. In previous years I have posted online pictures of the stuff we bring back and forth each year. As a published author, I bring my inventory of books. As a reader, I bring my TBR pile (which was especially large this year as it included both Left Coast Crime and Malice Domestic books). Since we are on the road for some time, we need traveling clothes for multiple days. Then there are the things that we only have one of and want in both locations. I cart my camera, various lenses, binoculars, and telescope. Jan brings her sewing machine and supplies.

The weeks before our migration we try to eat ourselves out of food. Whatever remains we give away unless we can use it on the trip, or they are staples such as mustard, ketchup, butter sticks, and the like. Those we put in a cooler and cart back and forth along with OJ for Jan’s breakfast, cheese and yogurts for our lunches, and a soda or two.

Waste not; want not. Right?

Well, yes, until we get to the financial concept of carrying costs. To keep those condiments from spoiling, we must ice them down. Bags of ice (they were 10 pounds, now they are 7 or 8 pounds) now cost something over $2. On average we need one a day. Twenty-three days on the road totals over $50—way in excess of the value of the stuff we carted in the cooler.

Why it took me until this trip to apply my MBA to the carrying costs of condiments, I can’t say, but on the third day of this trip it dawned on me that we had not considered the total cost of that ketchup and mustard, etc. when we chose to haul them around with us.

We do things by habit, don’t we? We’ve always packed the condiments for our migrations, but in previous years we took only a few days on the road between places. Using a net present value analysis we probably saved money, although not as much as we likely thought. This year we followed our routine by rote and this time the decision did not make good financial sense.
This got me thinking about how I often run on autopilot without reflecting on the real financial or psychological costs of keeping to an old routine. The unexamined life is like a sea-going ship that is never placed in drydock to have its hull scraped of barnacles. Once we get up north where I will have quiet time, I plan to spend some good porch time considering what other barnacles I need to scrape off in order to make my life-travel less burdened. 

What about you?

~ Jim

(This post originally appeared on Writers Who Kill 5/18/14)

Saturday, March 15, 2014

8 Ways To Spend Less & Save More

Today we are trying an experiment. Amy Matt found me on the internet and asked if she could write a guest blog. I decided to give it a try. Below you'll find her thoughts on spending less and saving more. Here's her self-introduction:

Hi. My name is Amy Matt and I am known for my over-supportive behavior for living a frugal life. The reason is that there was a terrible time in my life when I had to encounter excessive debt. I am happy to be guest posting here today. Please visit my blog to learn more of me or read more of my posts.
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We are indeed in the age of spending. There are just so many wonderful things available that we trade our money. Spending less in a spend-happy world then seems a stretch. And saving? Forget it. Something always comes up. Right?

No. I challenge that belief, and use it as a foundation to justify the following eight tips on spending less, and saving more.

1. Do not create debt

How much would you save if you incurred no debt, and spent within your means? That jolt in your chest represents a realization. You would save a lot, wouldn’t you? But how do you do it?

There are two circumstances that justify debt: when you’re up against a wall, or when the value of your purchase will increase more than what you will pay in interest. That increase is direct or indirect. For example, borrowing to buy a used car may make sense if public transit can’t get you to and from a new job whose increase in pay is much greater than the car payments.

2. Be frugal, but not cheap

Spend less without sacrificing your quality of life. Remember that above all your happiness is most important. Happiness yields positive results. Think of different ways to keep doing the same thing.

For example, eat an appetizer at home, and split an entre at the restaurant with your significant other if you like to eat out. Buy used instead of new. Watch Hulu and Netflix rather than cable. Split the Internet bill with other residents in your vicinity. Borrow from the library rather than buying a book or movie. Get creative and your bank account will thank you. For more of frugal tips, check out Frugal Magazine.

3. Change your thinking

Convert all your purchases into hourly equivalents. Let’s say you make $12 per hour. A purchase that runs $84 is equivalent to seven hours of your time.

Was it worth it? Was that a little depressing? Good. It will make you see that the value of your money is more than just paper in hand; it is also your time. That perspective will change your idea of value, and help you make more responsible spending decisions.

4. So-and-so has it! Why can’t I?

So what? Yes it’s great, it’s shiny (more often than not), and man, does it ever (appear to) make life easier. How nice would it be to have that?

How many times have you made that purchase, only to have the item in question disappoint, and gather dust in the corner? You can either look rich, or be rich. Time wills out in the end because you cannot have both. Decide what really makes you happy – hint: it’s not possessions – and spend, or don’t spend, accordingly.

5. Educate yourself!

These days, useful financial tools abound to help with investing, retirement planning, etc... Unfortunately, many investments are empty promises. Be cautious.

The Internet is an excellent resource for sharpening your financial knowledge. Just be sure they are reputable before you share the information in your wallet. Once I was facing a huge debt problem and I used a professional consultancy to help me by looking into my situation.

6. You knew it was coming – clip those coupons!

Do you know what a coupon is? It’s the company, manufacturer, or supplier paying part of the cost of your product on your behalf. You get to keep your 50 cents, further fattening your bank account, one calorie at a time.

But don’t be wasteful. Only use coupons on products you need, and not at the sacrifice of more cash. In other words if your generic toothpaste costs $1.99, and you have a coupon for 50 cents off for a brand name, but even with the coupon it is still more expensive than your generic brand don’t go for it. You’re living wisely as it is.

7. You’ve heard this one before – pay with cash

Statistics say that you are likely to spend up to 30 percent more if you use plastic, or checks, as opposed to cash. A wallet full of cash creates an awareness of how much you are spending without an effort, like balancing your accounts. You can see and feel your money leaving your hands. That feeling cannot be had without serious effort when using your credit cards, or checkbook.

Challenge yourself. Use cash for one week. At the beginning of the week calculate how much you will need to get through the next seven days. If you have habits like a cup of coffee every day, put that in. Live your week. At the end of the week do you have excess? Did you have to take out more? Why? What did it feel like? Have you noticed a difference in how you feel about your money? Good. Think on that.

8. Live like tomorrow is your last day, but invest like you’re going to live forever

Making money by investing over the long term is easy, but overnight? You might as well flip a coin to guess whether the markets will go up or down. Patience is a virtue, and a fine trait for growing your money. Even in the worst of times, the market rebounds eventually. Hang tough!

~ Amy Matt

Wednesday, February 26, 2014

Bitcoin Exchange Goes Missing

Timing is everything, as the saying goes. On Tuesday, February 25, exactly one week after I ran my blog about the risks of Bitcoins,  Mt. Gox, one of the larger worldwide exchanges, turned off the lights on its website exchange. For those who kept their electronic accounts with Mt. Gox, this is equivalent to me wandering over to my local Wells Fargo Office ATM and discovering it and the bank were no longer there and there is no FDIC insuring my savings.

Here’s an article from Reuters with a bit more information, but by the time you read this, it may be out of date.

This may be a temporary situation done to protect the website from hackers. Or it may be something worse. I have not a clue. Regardless of the final outcome, my conclusion from the earlier article stands: “While I’m waiting to see how that turns out, I won’t be holding bitcoins. Too much risk.”

~ Jim

Tuesday, February 18, 2014

A Skeptic Looks at Bitcoins

One of my rules for evaluating potential investments is how well I understand them. Unless I have developed a basic understanding of the investment and its attendant risks, I’m not willing to invest in it. No amount of written and verbal advice given by “experts,” is sufficient to overcome my need to understand. After all, these selfsame experts are the ones who have missed numerous bubbles.

The value of Bitcoins is market-based, determined by supply and demand. Supply is purportedly regulated by the software. There are currently approximately 12.4 million bitcoins, and the programming calls for a maximum of 21 million. That means the currency is designed to inflate almost 70%, but at ever-slower rates until finally reaching the 21 million maximum.

Bitcoins, unlike gold or silver for example, have no industrial use; they have no intrinsic value. They are like wampum: they are only worth what two people in a transaction agree they are worth. Humans do not have a great record at determining monetary worth when something has no intrinsic value. This is not a 21st century problem, as evidenced by the tulip bulb craze in the early 17th century. Even when something has intrinsic value (gold, silver, real estate), we humans often go hog wild—or conversely can’t see the value in the dirt below our feet.

To summarize, bitcoins have no intrinsic value and are programmed to inflate. That does not sound like a winner to me. But wait, there’s more! In addition to the inherent risks of buying with no intrinsic value, bitcoins contain exogenous risks as well.

Unfortunately, I have very little clue—and, if they are honest, no one else does either—what the exact characteristics of those risks are.

For example, what prevents those “in charge” of the open source coding from deciding to increase the number of available bitcoins past the current 21 million limit, continuing to inflate the currency? I’m sure those in charge insist it can’t happen. But it is certainly a real risk, and I can’t quantify it.

How secure is the system from hackers? I have a firm belief that if humans made it, other humans can break it. This theory applies to more than just the system that creates new bitcoins according to a predetermined schedule. How safe is your bitcoin account? If someone raids your bank your loss is covered (up to certain limits) by the bank or their insurance. Will the same hold true for your digital bitcoin wallet? Who pays those insurance costs? How secure is the insurer? I have no clue.

If the value of bitcoins stabilizes so that its conversion to traditional currencies is primarily determined by inflation in the traditional currency, it would make bitcoins a perfect inflation hedge. That would have utility. However, with a maximum of 21 million of the little critters—and at a recent price of $628—total currency in circulation will max out at a bit over $13 billion. The world’s annual output of goods and services is something north of $70 trillion. US Debt—the world’s “safe” place for parking money—is over $17 trillion.

So there we have it: an entity with no intrinsic value, a currency guaranteed to inflate 70%, with lots of potential risks for which there are no guarantees. Investing in bitcoins sounds to me like making a bet based on the greater fool theory.

Does that mean we should ignore bitcoins all together?

No. They might soon have transactional value. Right now if someone in the U.S. buys one of my novels or my bridge book and uses a credit card, I pay the transaction costs. Using my Square credit card reader, the fees are 2.75% if I swipe a credit card and 3.5% if I enter the transaction manually. Square doesn’t work for foreign transactions.

If someone comes up with a methodology that reduces my transaction fees and allows for instant conversion of bitcoins back to U.S. dollars so I don’t have a currency risk, I’ll adopt in a flash. And since bitcoins are not individual country centric, I could use them abroad without the foreign transaction fees charged by most credit cards.

Bitcoins may be the opening salvo over banks’ and credit card companies’ bows. Technology continues to attack the value of intermediaries—those people and corporations that stand between buyer and seller. If entrepreneurs find a way to reduce the necessity of intermediaries and their attendant transaction costs, it will have major ramifications.

When people first used the internet to exchange messages, most had no clue how dramatically the internet would change the way we do business. The same may be true with bitcoins, and venture capitalists are already making their bets. It is too early to tell how this will all turn out, but it’s too important to ignore.

While I’m waiting to see how that turns out, I won’t be holding bitcoins. Too much risk.


~ Jim

Monday, January 20, 2014

Credit Card Safety

Target managed to divulge credit card information on –oh say, 110 million of their nearest and dearest friends. Upscale Neiman-Marcus allowed a breach in their security as well, showing that there are no gated communities when it comes to credit card data theft.

Other than cancelling all your cards, there is nothing you can do to completely secure your credit card information. So, what can you do to protect yourself?

You could sign up for a service like Abine’s, which promises secure credit card online shopping by setting up a one-time use credit card for you. That way, when the next retailer loses its records, the thieves won’t get useful information. Of course, should Abine itself be hacked…you see my point about nothing being safe.

Here’s the approach I use. I have three credit cards, all of them free reward cards of some sort or the other. I use one, my Everyday Card, for all online and in-store purchases. I have set up alerts to send me an email (I don’t text message, but that is another alternative) whenever they process any online, phone or mail charge. Another alert notifies me of any brick and mortar charge over $25. Any international charge triggers an alert. One credit card would send me alerts for any gas station charge, but I don’t bother with that one.

It takes virtually no time for me to delete the emails when they come in since I’ve just made the transaction. And, if someone else makes a charge on my card, I know quickly and can report it to the credit card company.

I use card two, my Automatic Payments Card, for all the (surprise) automatic monthly payments: phone bill, electric, gas, cable, internet, health care, what have you. If something happens with the Everyday Card, I do not have to go online and change all the credit card details for these automatic payments. This saved me much aggravation a couple of years ago when I was pumping gas and managed to slip the credit card into a nonexistent pocket, thereby leaving it on the ground for someone to recover. Later that day when I discovered I had lost it, I canceled that card, but didn’t have to fool around with my auto-charges.

I also have alerts set up for the Automatic Payments Card, since utilities have also periodically allowed folks to hack their data. For that matter, banks have lost data themselves on their credit cards. If this card is compromised by one of my vendors, I’m stuck with changing all my automatic payments. So far that hasn’t happened.

Card three is my emergency card. When I am local, I keep it at home. If I am traveling, I carry it with me, but don’t keep it in the same place as my Everyday Card in case I lose that card (or my whole wallet, which I’ve managed to do more than once in my life.)

I don’t want to minimize the trauma of credit card theft, let alone identity theft. But with all the electric zeroes and ones running around where all kinds of bad guys can read them, I don’t propose to try to beat them, just make it unprofitable for them to steal my stuff.

Another hazard with credit cards is someone setting up one in your name without your knowledge. Once a year you may request a free credit report from each of the three main credit agencies, Experian, Equifax and TransUnion. I’ve set up my calendar to remind me to spread my requests out four months apart. They hold similar, although not exactly the same, information. I review the report primarily to assure no one has posted an unwarranted black mark on my record, but if someone had set up a card in my name, I would find out when the report showed a card I didn’t recognize. You can put holds on the agencies providing credit information to anyone, which will prevent someone establishing credit in your name, but that provides some hassles of its own and I haven’t bothered.

How about you? Any tips you want to share?


~ Jim

Tuesday, December 17, 2013

Delaying Social Security Benefits Revisited

Roughly a year and a half ago, I wrote about my decision to delay the start of my Social Security benefits. http://blog.jamesmjackson.com/2012/07/delaying-start-of-social-security.html In that article I argued that for those of us fortunate enough not to have to live off Social Security payments, we should  concentrate more on our risk of outliving our money rather than on the risk of dying too early and not spending all we could have. In the intervening months between the first article and this one a lot has happened politically and in the financial markets that make some question whether my decision to delay payments is still valid.

I think it is.

Politically, we are another eighteen months closer to running out of money in the Social Security Trust Fund with no hope of Congress acting in a manner to avert the problem. Many Republicans are back to ballyhooing their flawed idea of individual retirement accounts replacing traditional Social Security benefits (after all, the stock markets are hitting new highs) and Democrats are on this issue the “party of no”—as in they want no change, regardless of expert testimony that the current approach is unsustainable.

As each day passes, more Baby Boomers hit retirement age, making it harder to change their benefits. As a large demographic that votes, they can throw their weight around with targeted lobbying by organizations such as AARP. Given the demographics, it will take significant political will to make changes in Social Security. The 113th Congress has shown no political will or wisdom, and there is no reason to think the 114th will be better.

Congressional inaction continues to increase the risk of the Social Security Trust Fund running out of money. So with all that, why shouldn’t you do the Boomer thing of take the money and run.

Without Congressional action, the Social Security actuaries project the retirement Trust Fund will be empty around 2033. That does not mean Social Security benefits must stop. However, it does mean the benefits will become strictly pay-as-you-go: total payments (the benefit checks) can’t be more than the total income (the retirement portion of FICA taxes).

As I illustrated in the earlier blog, by deferring the start of Social Security payments until normal retirement age (66 for me, 67 for those born after 1959 and something in between for those born in 1955-1959) you maximize the portion of your assets indexed to inflation. Let’s say your Social Security normal retirement benefit starting at age 66 is $1,000 a month. If you begin payments at age 62, you will receive only $750 a month. Assume inflation runs at 3% every year (that won’t happen, but it could average out to about that). Here’s what you would get at various ages:

Age
With Age 62 Retirement
With Age 66 Retirement

Age
With Age 62 Retirement
With Age 66 Retirement
62
750
0

80
1,277
1,702
65
820
0

85
1,480
1,941
66
844
1,126

90
1,716
2,288
70
950
1,267

95
1,989
2,652
75
1,101
1,469

100
2,306
3,074




During the first four years you are unambiguously better off if you start your Social Security benefits at age 62. Over those four years you will receive around $37,500 in benefits. Assuming a risk-free return equal to the inflation rate, those payments would have an accumulated value of approximately $39,000. You’ll need that money to reimburse yourself for the greater normal retirement benefits you could have been receiving had you delayed your Social Security retirement. Your accumulated pot of money (continuing to grow with interest but shrinking with the make-up payouts) runs out around age 77. From then on you are less well-off compared to deferring Social Security retirement.

Because the Trust Fund will not run out of money until 2033, anyone born before 1956 who delays payments will have already reached their break-even point and thus be ahead of the game before the Trust Fund hits zero. Once the Trust Fund runs dry, and if there is no other change in Social Security, benefits must be cut by roughly 25% to balance benefit payments with FICA taxes. Note that if you delayed the start of benefits, you will continue to receive considerably more from Social Security each month compared to what you would get if you started benefits as early as possible because the cuts are proportional. Using Age 85 from the table above, if you took your benefits early a 25% cut reduces your monthly benefit from $1,480 to $1,110. The benefit those who deferred receive declines from $1,941 to $1,456.

Does that mean you can best hedge all political risk by deferring the start of Social Security retirement? Not necessarily. The scenario above assumes an across-the-board 25% haircut. While that’s what people are currently discussing, it is possible that the cuts could come from the top down by imposing a cap on the monthly benefit. Even in this take-from-the-rich-and-give-to-the-poor scenario, those my age are still better off delaying the start of retirement because the cut occurs after we have reached our break-even point. Younger folks will need to evaluate when it’s time for them to make the take early/defer decision. Also, Congress could enact this type of benefit cut earlier. It’s not likely, but it is possible, and if they did, it could delay the breakeven date, making it less attractive.

From my perspective at the end of 2013, the politics of the last year and a half have not changed my decision to continue to delay the start of my Social Security retirement benefits.

Recently someone smirked that if I had only taken early Social Security and invested those payments (after-tax) in the stock market, I would be monetarily far ahead. Investment gains would defer the break-even point—maybe even to eternity.

There are two problems with this argument. First, it uses an ex post facto analysis. When I made the decision to defer I did not know what the stock market would do. This looking at what actually happened and saying what I should have done is similar to saying that in December 2002, I should have sold my house, borrowed to the hilt, and invested it all in Apple at $14 bucks a share. Then, in perfect market timing, I should have sold the stock on December 17, 2012 at $700. [And even sold it short that day if I were so prescient.]

Social Security provides an almost risk-free investment. (It used to be risk-free until some Tea Party advocates decided having the US government default on its debt was acceptable.) Since my reason for delaying Social Security benefits is to insure against running out of money if I live too long, I should not then foul the comparison of a risk-free return and one investing early payments in a risky proposition such as equities. Doing so defeats the strategy of taking out longevity insurance. This faulty thinking is the same that caused many defined pension benefit plans to invest heavily in equities to “hedge” against morality risk. While stock markets rose, it looked brilliant, but in the recent past it proved disastrous for companies and governments alike. Some plan sponsors have frozen future benefits, and eliminated non-guaranteed benefits—not an option for an individual.

So unless I learn that I am suffering from a disease that significantly decreases my life expectancy, I plan to stick with my decision and defer the start of my Social Security benefits until I turn 70.


~ Jim