3 Things 8-18-25

 Thing One

Aged Facts Are Still Facts

Ten years ago, Wharton Professor Mark Siegel wrote an article for the opinion page of the Wall Street Journal about how poor a money manager the federal government is as it relates to producing wealth for us with our Social Security and Medicare contributions. It made mincemeat of the idea that wealthy people don't "pay their fair share" by showing that they weren't getting near the amounts in benefits that their contributions should have entitled them to. Again, his assesment is ten years old but it's just as on-point now as it was then. See below:

"One commonly held belief about the Social Security system is that baby boomers and the generation that preceded them are making out like bandits, draining both the Social Security and Medicare trust funds and leaving little for younger generations.It is also widely believed—fervently so in some quarters—that the rich don’t pay their “fair share” of Social Security, since the earnings subject to the program’s taxes are capped each year. (The maximum amount of taxable earnings this year is $118,500.)Do these notions—particularly the latter—stand up? Last month I turned 70 and, thanks to my earnings, became entitled to Social Security’s maximum benefit, currently $3,500 a month, or $42,000 a year. And so, if I live to 90, I will receive $840,000 worth of (inflation-adjusted) benefits.Over the past 50 years, according to the Social Security Administration, the combined taxes paid into the system by me and my employers equaled $329,640.This sounds like a good deal—the benefits I would collect over the next 20 years are more than twice what I put in. But the benefits are only about one-third the $2.27 million I would have accumulated had the taxes instead been invested, over time, in a stock index fund.Moreover, the benefits I would collect are even less than the $1.28 million I would have accumulated if my “contributions,” as Social Security taxes are euphemistically called, had been placed in U.S. Treasury bonds. This number is particularly important, because the Social Security Administration bought government bonds with my (and others’) taxes to build up its trust funds. In effect, the government made almost one-half million dollars more on my Social Security taxes than they will pay me if I live another 20 years.What about Medicare? Over the past half century, my Medicare taxes exceeded $1 million, more than three times my Social Security taxes. That’s because since 1994 there has been no cap on the income subject to Medicare taxes. I have calculated that these taxes, invested in Treasury bonds, would now have accumulated to almost $1.75 million.I do not know the most expensive health-care coverage that I could buy at my age, but the so-called “Cadillac” coverage, upon which the government will apply a stiff surtax, is $10,200 a year. Even if I purchased super-premium, all-inclusive medical coverage that cost $20,000 or even $30,000 a year, I will never begin to make back the money that I paid the government to take care of my medical needs.There’s another issue. As I continue to work, I will pay both Social Security and Medicare additional tens of thousands of dollars. I won’t get any extra benefits from these taxes.So are affluent seniors making out like bandits? Not at all. The bandit is the federal government, which provides benefits that are millions of dollars short of what anyone whose earnings are at or above the tax cap easily could have accumulated on his own."

Thing Two  

Why Buy Life Insurance

There's an old saying in the life insurance business, "Buy term, and invest the rest."  The thought behind the phrase is pretty simple.  Insurance is for mitigating risk.  Investing is for creating a return on invested capital.  Don't mix the two unnecessarily.  If you need to buy insurance, you should buy the least expensive kind and only buy it for the amount of time that you've determined you need it. That analysis will lead you to term insurance, at least initially. Then if you have money left over you should invest it in a manner that minimizes your expenses and is consistent with your tolerance for risk.But how do you know if you need insurance?  Well, if you were going to be tested on that question for the purpose of obtaining an insurance license, you'd be expected to be able to identify the eight reasons below:.............1 - To protect your family in case you die prematurely.  This is the most basic reason for purchasing life insurance.  People die unexpectedly all the time.  If that person happens to be the primary breadwinner in a family, that death might create undue financial hardships in terms of liabilities that persist after death like mortgages, car payments, etc,.  And even if that person isn't the primary breadwinner, the untimely death might create financial issues where none existed previously like childcare, homemaking, and even the loss of any secondary income.  Income replacement properly summarizes reason number one for purchasing insurance.2 -  To create an estate.  You might determine that you will not be able to leave behind the type of estate that you would like to.  You can use life insurance to "create" an estate to pass on, provided you can pay the premiums.  The earlier you make this decision the better as age and health sell life insurance.3 -  To protect an estate.  When you die, your heirs will have to pay taxes on what you pass to them.  If you would like to keep the government from taking too much of what you had planned to leave your loved ones, you can buy insurance for the purpose of paying the estate taxes, thereby relieving your heirs of that burden.4 - To guarantee insurability.  Many young parents (and grandparents) who are worried about potential health issues purchase insurance on their young children to establish insurability while they're young and inherently more insurable.  The idea is that as they get older they can always increase the coverage amounts of existing policies without providing evidence of insurability through health exams. That means that if they develop health conditions later in life, they're already covered.5- To create a cash value savings account.  With anything other than a term policy, there is the opportunity to build up a cash value by routinely paying the premiums.  This is a kind of forced saving account and, in my opinion is the worst reason for buying insurance.6 - To protect a s business if a key person dies.  Business owners will often purchase key person insurance policies to protect themselves against the untimely demise of a key employee.  The specific knowledge, skills, and abilities of the deceased individual are typically not easily replaced, but the proceeds from key person policy can help buy the business time to rebuild the lost knowledge by providing capital for additional resources and training.7- To protect remaining partners in a business if one partner dies.  There are cases where one partner dies and it would be impractical, for any number of reasons, for the surviving partner to continue in the business with any of the deceased partner's heirs.  Policies known in the business as buy-sell agreements allow for this by making funds available upon a partners death to "buy out" the heir's interest in the business.8 - As a part of employee's compensation package.  There are times when a business buys life insurance on an employee, who is usually an executive, as a fringe benefit to that employee. 

Thing Three

Just A Thought  

"Success is being excited to go to work and being excited to come home." - Will Ahmed