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Cypen & Cypen
January 3, 2013

Stephen H. Cypen, Esq., Editor

1.      HI, MY NAME IS CLIFF, WHY DON’T YOU DROP OVER SOMETIME?:  Bloomberg News Service reports that the House passed a bill late night January 1, 2013, to avoid income tax increases for more than 99% of households, and pull the nation back from the now infamous “fiscal cliff,” approving Senate-backed legislation in a 257-167 vote just after 11 p.m. the same night.  On January 2, 2013, President Obama signed the American Tax Payer Relief Act of 2012/HR8.  The next battle will revolve around the budget, and the need to raise the nation’s $16.4 trillion debt ceiling.  Many American families took it on the chin, as the largest impact is the end of a 2% payroll tax cut, which will eat up U.S. workers’ paychecks.  (That tax cut’s lapse will bring in more than $100 billion, and is the main reason why 77.1% of U.S. households will face higher taxes this year.)  Nevertheless, it would have been worse, as the last-minute deal extends income tax cuts for 99% of U.S. households, raising taxes only on the income of individuals up to $400,000, and of married couples of up to $450,000.  Those top earners will see a marginal tax rate rise to 39.6%, from 35% last year. Those same households would pay higher tax rates on their dividends and capital gains, including private-equity managers’ carried-interest income (a major issue for large institutional investors like pension funds).  Including taxes from the Patient Protection and Affordable Care Act (ObamaCare), the top rate will rise to 23.8%.  The deal does extend expanded unemployment benefits and continues refundable tax credits for low-income families and college students. Limits on itemized deductions and personal exemptions are also back, at $250,000 for individuals and $300,000 for married couples.  The law sets the top estate-tax rate at 40%, splitting the difference between the parties’ positions. The per-person exemption will be more than $5 million, and indexed for inflation.  (What about portability?).  At bottom, the burden of higher taxes will fall hardest on the top 1% and particularly on the top 0.1% of taxpayers. Those making more than $2.7 million will pay an average of $443,910 more in 2013, or 26% of the additional burden.  Households with less lofty income (between $500,000 and $1 million) will pay an average of $14,812 more.
2.      HAVE PENSIONS BETTER PREPARED AMERICA FOR RETIREMENT THAN 401(K)S?:  There are two major types of retirement plans:  defined contribution, plans like 401(k)s, and defined benefit plans, like pensions.  Both have flaws and advantages. Pensions are supposed to guarantee a level of income during retirement, but they make kicking the can down the road incredibly easy, creating underfunded obligations that have helped hamper companies like General Motors.  DC plans are much more transparent -- what you see is what you get -- but given low levels of median household income growth and meager savings rates, they leave most participants ill-prepared for retirement.  The Motley Fool recently proposed the question of which is better to Joseph Dear, chief investment officer of California Public Employees’ Retirement System.  Here is some of what he had to say:  

  • DB plans have some incredibly significant advantages over DC plans.  
  • One of the things not recognized in DB plans that is really important is they are one of the largest sources of long-term patient capital in the economy.  They can invest in companies and not sell out tomorrow or in the next five seconds, they can buy and hold.  That is why private equity investment is very important for DBs.  They can do things like venture capital that are high risk and high return, but some of these venture capital firms become enormous.  Remember, somebody funded Google.  
  • The pension dollar that DB plans pay out to the beneficiary is about two-thirds investment, a pretty good deal for taxpayers. You get a safe retirement, an economic security for public workers at a cost to the taxpayer of about 15 to 20 cents per dollar.  
  • Critics of DB plans say that all the risk is on the taxpayer and none of it is on the worker, then so they want to flip it over and have DC plans be the answer where all risk is on the worker. Well, risk transfer is a good public policy topic to talk about, but if you do it in DC space and expect individual workers who in many instances are totally intimidated by choices they have in investment, is that really the right way to handle it?  And then you add on investment structures that are really designed for the advantage of investment managers, not of individuals.  Here he is talking about fees, and you can end up with somebody making exactly the same contributions in a DC plan and getting a much lower benefit than he would in a DB plan simply because of how it is structured. 

So, if you want to talk about alternatives to DB, he thinks they need not look at DC, but look at systems that address that risk stance far differently, but make it possible for non-experts to be given a set of choices they are capable of making and that will enable them to have adequate retirement when they decide to stop working.
3.      LESS THAN HALF OF PRE-RETIREES EXPECT TO LIVE THEIR DESIRED LIFESTYLE IN RETIREMENT:  Only 48 percent of U.S. pre-retirees (non-retired aged 55-70) believe they will be able to live the lifestyle they wish in retirement, according to a study from LIMRA.  The study found that three-in-ten pre-retirees have not started any basic retirement planning.  Looking at five retirement planning activities identified as critical for retirement, no single activity had been accomplished by the majority of pre-retirees surveyed.  LIMRA research has consistently shown that working with an advisor can help organize retirement planning efforts.  The study found those who worked with advisors were twice as likely to have accomplished at least some planning activities, particularly the more complex aspects of planning, such as calculating future assets available in retirement and estimating how long those assets will last.  The challenge for the retirement industry is to convince more pre-retirees that sound planning truly can boost the likelihood that they will live the lifestyles they have imagined.  Some of these activities can be difficult, but they are essential -- and help is available. 
4.      2012 GENERATIONAL RESEARCH:  Financial Finesse Reports has released its 2012 Generational Research.  Over the last few years, researchers have documented how U.S. employees have generally emerged from the Great Recession with improvements in the day-to-day money management but with a continuing shortfall in their retirement readiness.  However the Great Recession has not left all age groups in the same place.  Each generation faces its own unique set of strengths, weaknesses, opportunities and challenges when it comes to retirement planning: 

  • Those under 30, commonly labeled the Millennial Generation (also known as Generation Y), are doing a relatively good job managing their current cash flow but need a longer term perspective that makes planning for retirement more of a top priority. 
  • 30-44 year olds, who roughly correspond to Generation X, earn more income than Millennials but have been hit particularly hard by the Great Recession, and are now struggling to balance saving for retirement with the immediate needs of raising a family and paying a mortgage.
  • 45-54 year olds, who are mostly late Baby Boomers, are doing better than Generation Xers with their day-to-day money management, and are doing the most in providing for their families through life insurance and college savings, but are largely ignoring hidden threats posed to their own financial wellbeing, such as the cost of long-term care. 
  • Finally, 55-64 year-old early Baby Boomers are generally in the strongest financial shape across the board, but must focus more on managing their investment portfolios as they approach the critical distribution phase of their retirement planning.

The report examines both the primary data and outside research to explore each of these issues in more detail, and highlight some future trends.
5.      SOCIAL SECURITY UPDATE FOR 2013:      Tom Margenau of Creators Syndicate has written a year-end column for the past fifteen years that summarizes the Social Security changes and updates scheduled to take place the following year.  Almost all Social Security beneficiaries are familiar with the most popular and publicized upcoming change: the increase in monthly benefit checks for 2013 due to the automated cost-of-living adjustment.  All Social Security checks are going up 1.7 percent in 2013. COLA is based on Consumer Price Index for Urban Wage Earners and Clerical Workers. The average monthly retirement check will be $1,261 in 2013, a $21 increase from the 2012 level. The Social Security taxable earnings base will go up from $110,100 last year to $113,700.  In other words, anyone who earns more than $113,700 this year will no longer have Social Security payroll taxes deducted from his paychecks once he has met that threshold.  Most people need 40 Social Security work credits ("quarters of coverage") to be eligible for monthly benefit checks from the system. In 2012, people who were working earned one credit for each $1,130 in Social Security taxable income. But no one earns more than four credits per year. In other words, once you made $4,520, your Social Security record has been credited with the maximum four credits or quarters of coverage. In 2013, the one credit limit goes up to $1,160. 
6.      STUDY FINDS AGING DOES NOT IMPAIR DECISION-MAKING:  Contrary to conventional wisdom that cognitive function declines beginning in the mid-forties, aging does not correlate with deteriorating ability to think for ourselves. These findings are from "Healthy Brain, Healthy Decisions: The MetLife Study of Decision-Making Potential," one of the first projects to investigate the connection between cognitive health, aging and decision making capacity.  Among the study's key findings are the following: 

  • Healthy aging adults show no decline in decision-making.   Older decision-makers were as logically consistent as younger decision-makers.   
  • Strategic learning capacity may actually increase with age.  All age groups were comparable as strategic learners.   
  • Strategic learners are less likely to fall victim to bias toward riskier options.   Participants who performed well in sifting important information on the strategic learning measure, a tool used by researchers, made more logically consistent financial decisions.
  • Conscientious decision-making intensifies with age.  A self-assessment revealed older decision-makers were more conscientious than those in the younger age group. 
  • Risk tolerance can be linked to cognitive ability.  Overall, men and women performed equally at logically consistent decision-making and at strategic learning. 
  • There were differences between men and women in the relationship between decision-making and traditional measures of cognitive function.  Men with average cognitive function demonstrated the highest risk-seeking (lowest logical consistency) in decision-making of any group.
This study was conducted by Center for BrainHealth at the Ages, The University of Texas, Dallas, and the University of California, San Francisco.
7.      A BAD DAY AT HALLMARK:    I must admit, you brought religion into my life.   I never believed in Hell until I met you.
8.      DEFINITIONS: CONFERENCE ROOM: A place where everybody talks, nobody listens and everybody disagrees later on.
9.      QUOTE OF THE WEEK:   Our lives improve only when we take chances - and the first and most difficult risk we can take is to be honest with ourselves.  Walter Anderson
10.    ON THIS DAY IN HISTORY:   In 1870, construction begins on the Brooklyn Bridge in New York; completed May 24, 1883.
11.    KEEP THOSE CARDS AND LETTERS COMING:  Several readers regularly supply us with suggestions or tips for newsletter items.  Please feel free to send us or point us to matters you think would be of interest to our readers.  Subject to editorial discretion, we may print them.  Rest assured that we will not publish any names as referring sources. 
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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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