Answer: Poor financial planning

AmericanBanker.com reported this week that many National League Football players — who will collectively make $4 billion this season — make poor financial choices.

In fact, statistics show that MORE than 70 PERCENT of professional athletes are financially challenged or bankrupt within three or four years of retirement.

Amazingly, perhaps the Main Street retiree is better off — but only marginally so.  Research Institute (ERBI) conducted a retirement survey in conjunction with the American Savings Education Council and Mathew Greenwald & Associates.  The report found that 45 percent of all U.S. households have less than $25,000 in assets excluding their home), yet two-thirds of all workers expect to live as comfortably in retirement as they did when they worked. The reality is that the average person would use up that $25,000 in two or three years – even with their Social Security benefits.

What to Do?

Given their celebrity status and affluence, the football players are working on solving the problem.  In 2007 the pro football union started a program to help players evaluate financial advisors — helping them find advisors with adequate training, knowledge and prudence.

But what about the Main Street retiree?  NewRetirement.com has many tools to help the average investor assess their own retirement plans.  The Retirement Action Planner will identify products and strategies to extend your retirement finances and also offers a service to match you to a prescreened Financial Advisor.

But what is the ultimate financial advice for the NFL player and the average retiree?  Go long*!

* Plan for living a long time and providing adequate resources for that long life.

While planning for retirement it is always important to set goals for your future, and the article brings up some clairvoyant questions you must ask yourself.  “The first question assumes you have all the money you need –how would you live your life today? In the second, you are told that you have five years to live: what would you do with that time? And the final question aims right at the heart.  You have 24 hours left on earth –what did you miss? Whom did you not get to be?” These questions allow you to step back for a minute and decide what is vital to your future, which in many cases does not have to do with financial concerns.  Once you can decide what you truly want out of life, then you can set out the course for a retirement plan that will help you meet your goals.

Mr. Hebeler’s advice is also very insightful because retirees rarely budget for wear and tear items.  If you put in the expenses for replacing or repairing cars, air conditioners, and your home, then you will have a much clearer picture of your necessary retirement finances.

The IRS also declared it was keeping many of last year’s tax deductions, some of which also are determined by inflation figures.

Several deductions for 2010 are unchanged and others change slightly. They include:

• The value of each personal and dependency exemption available to most taxpayers is $3,650, unchanged from 2009.

• The new standard deduction for heads of household is $8,400, up from $8,350 in 2009. For other taxpayers, the standard deduction remains unchanged at $11,400 for married couples filing a joint return and $5,700 for singles and married individuals filing separately. Nearly two out of three taxpayers take the standard deduction rather than itemizing deductions, such as mortgage interest, charitable contributions, and state and local taxes.

• Various tax bracket thresholds will see minor adjustments. For example, for a married couple filing a joint return the taxable income threshold separating the 15 percent bracket from the 25 percent bracket is $68,000, up from $67,900 in 2009.

• The annual gift tax exclusion remains unchanged at $13,000.

Here are some noteworthy findings from the report:

–  Only 41 percent of Hispanic workers say they have saved money for retirement.
–  Only 25.6 percent of Hispanics are covered by employer-sponsored retirement plans, compared to 42.5 percent of whites and 40 percent of
African-Americans.
–  Of the Hispanics receiving Social Security benefits, almost 80 percent rely on these benefits for at least 50 percent of their retirement
earnings.
–  Among people 65 and older receiving Social Security, on average Hispanics receive about $2,124 less in earnings than non-Hispanics.
– Between 1979 and 1999, middle-class Hispanics households increased nearly 80 percent. In the same period, the group of Hispanic households earnings between $40,000 to $140,000 grew to include about one-third of the total Hispanic households nationwide.

In other news, a new Charles Schwab report states that nearly half (44%) of retirees claim to be supporting at least another individual financially.  While this exhibits the generosity of retirees it is also evidence that retirees are not practicing proper retirement planning.  Everyone, of course wants to help their family in whatever way they can, but it is paramount to worry about your own finances instead of your family’s.  Helping them in the short term is fine, but imagine once you are gone then how are they going to figure out their finances in the future.  Setting the right example through debt consolidation and reducing expenses, is the most prudent decision to ensure your family’s financial future. 

And finally, to add to the launching of the socialsecurity.gov site to which I mentioned in the post “Apply For Social Security Benefits Online.” It appears that Patty Duke has brought back her role as Cathy Lane from the 1960’s sitcom The Patty Duke Show to get baby boomers online to apply for Social Security benefits. While the characters she plays in the Public Service Announcements are signing up for social security, Patty, aged 62, says she will be waiting a few more years to start receiving benefits.  This is especially a good call if you are healthy and believe you will live a long life.  In fact there is s great article from the Center for retirement Research at Boston college entitled, “How Much Do Households Really Lose By Claiming Social Security at Age 62?”  Don’t fret if you have started collecting Social Security at 62 and have since changer your mind because you have the ability to restart your Social Security benefits. Here is a nifty little Social Security calculator that will help you decide when the best time to start receiving benefits.  Oh and if you would like to see the ads please visit socialsecurity.gov/pattyduke

In other news, in regards to a USA Today posting on 401(k)’s it seems that the IRS may just reduce the amount you are allowd to contribute to your 401(k) in 2010 to $16,000.  This is truly upsetting news considering now is the time that people are going to have to put as much as they can back into their savings because they had to delve into during the recession. Let your Congressmen know that this should not happen, now is the time to save away for the future!

This is along the lines of the Barron’s interview. Private indebtedness increased 300% faster than GDP from 1970 on. Total public and private sector debt is over 355% of GDP. This debt cannot be serviced out of current cash flow; we either need to restructure the debt on a massive level (bankruptcies, refinancing of short term to long term debt) or inflate so nominal GDP increases fast enough to service existing debt.

Still, given the commodities induced inflation scare in the middle of ‘08, the path of inflation might not be a given or a free lunch either. High inflation would probably squeeze margins for companies in the face of weak demand and increase the amount of money needed for living expenses, leaving less for debt servicing by consumers.

I imagine the Fed really is trying to walk a fine line between deflation and inflation. Either course would wreck the economy for years to come. However, the Fed will feel real pressure from congress. What congress wants is another matter altogether. Treasury and the administration I think understands that you can’t keep gorging banks on loans to get it out of this mess. That’s why the Geithner TARP revamp didn’t have specific requirements for increased bank lending from government money. But they’re hesitant to take decisive action on this. People know some of the largest banks are insolvent but we’re still playing the Fannie and Freddie game of last summer with them. Congress of course wants increased lending and wants Fannie and Freddie and FHA to swallow or guarantee every defaulting loan out there and for the Fed to drive mortgage rates down to 0. The administration also had to reign in their own party in the overreaching salary caps put into the economic stimulus bill.

The question is not just economic anymore, but also political so I don’t know if massive private bankrupcties will be tolerated well either. I think I heard something like 2000 economists signed a letter against Smoot-Hawley during the great depression but that peice of protectionism went through anyway.

What’s your vote – deflation or inflation or do we get a series of bankruptcies and write downs first?

Courtesy of Yi