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Size Matters, Especially in Retirement

Retirees are getting hit from all directions with hidden taxes, reduced purchasing power, increased healthcare, gas, food, and necessity costs. The size of our annuities, savings accounts and investments are shrinking due to a dramatically increased money supply when we truly need them to maintain our standard of living. I mentioned in my last column that we are receiving a 1.7% COLA in January; certainly a welcomed increase especially when we did without a COLA for two consecutive years.

Retirees often depend on interest from Certificates of Deposit (CD), savings accounts, and investment income to supplement their annuities. Because our government spends far more than it brings in, they now borrow 33 cents of every dollar it spends, our interest income has just about vanished. Have you noticed this lately?

We as a nation borrow over 4 billion dollars a day and owe over 4 trillion dollars in interest on that debt. This borrowing and the Federal Reserve’s penchant for printing money creates a hidden tax on all of us. This is why when you go to the bank to renew your CDs they only offer much less than 1% for a 1 year CD. Even long term CDs are paying insignificant returns these days. The 3 to 5% that we should be receiving is a hidden tax.

The government eliminates our CD and savings income by artificially maintaining low interest rates. Through interest rate manipulation government borrows long term at very low rates which decreases the interest payments they must pay to China and anyone else who buys our Treasury Bills, Notes and Bonds. This is what some call “redistribution of wealth” and believe me it isn’t what some say it is. The claim is that anyone making under $250,000 a year will not pay more taxes is false. EVERYONE who has a savings account, CDs or money market account suffers from wealth redistribution. We are all funding our nation’s debt.

A site visitor asked how increasing the money supply affects our savings. Size does matter! I can best relate this to a company that announces a 2 for 1 stock split. Typically, a company splits it stock because the price has increased to a point where the purchase of the stock is prohibitive for many if not most investors. What this means is that a company with say 1,000,000 shares outstanding that is selling for $100 a share decides to split 2 for one and issues each stockholder of record 1 additional share of stock. Now the company has 2,000,000 shares outstanding and because the value of the company is the same the share price decreases half to $50 per share. This happens frequently in the investment world.

In my opinion here is the difference from what the Federal Reserve is doing compared to when a company issues a stock split. When the Federal Reserve dumps more money into our economy our GDP remains constant. Nothing has changed to increase production or employment. They simply print more money to buy more bonds or mortgage backed securities from government. This effectively dilutes our currency so it is worth less. When the Federal Reserve prints more money they don’t say; hey Joe you have $25,000 in CDs so we are going to give you $25,000 more because we are effectively splitting (diluting) the currency. No, they give it to government instead, a transfer from you to Uncle Sam. It’s as simple as that. So, when someone says you aren’t paying more taxes because you make under $250,000 you will know what is really happening. The same goes for healthcare, we all will be paying higher taxes under the new Health Care Affordability Act according to the US Supreme Court and the current administration presented their case and said it was a tax, a tax on everyone! A tax is defined by Webster as “a charge usually of money imposed by authority on persons or property for public purposes.”

Since retiring I go grocery shopping with my wife and anyone who shops sees just how costs over the past 4 years are out-of-control. We first stop for gas and pay double what we did to fill up four years ago. At the store companies attempt to hide the increasing costs by decreasing the container size or unit count for many products. Just look at the size of what use to be a gallon of ice cream or a large container of coffee. They shrink the size to keep prices lower yet the cost per item is still increasing because the cost to produce, package, and transport the goods to market have skyrocketed.

The statistics are mind numbing when you look at where we are now compared to four years ago. Middle class income has dropped by $4,000, gas prices have doubled, home values decreased 11%, federal debt has increased 51% to over 16 trillion dollars, unemployment health care costs have increased 23%, more Americans are in poverty, we still have 12 million unemployed, and there was a 46% increase in food stamp recipients!

We offer a number of ways to save in retirement on our site. Today more than ever we need to have our house in order to withstand whatever is coming our way.

Dennis V. Damp, Veteran and Host of www.FederalRetirement.net

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The information provided may not cover all aspect of unique or special circumstances, federal regulations, and financial information is subject to change. To ensure the accuracy of this information, contact your benefits coordinator and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our article is not intended nor should it be considered investment advice. Our articles and replies are time sensitive. Over time, various dynamic economic factors relied upon as a basis for this article may change.

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David Dejewski

Dennis – you’ve hit many important points. Many of these points are behind my decision to leave my GS-15 job behind and focus full-time on my investment firm. The yields we’ve gotten from educated investment in real estate across the country have far exceeded anything available in CD’s, mutual funds, stocks or other common investment vehicles. I’ve literally doubled one of my own retirement accounts in 3 years.

Employees today need to be aware that our wealth (and ability to create wealth) is being attacked on several fronts. FInancial education – the kind not taught in schools – is increasingly important for survival.

Solid investment opportunities still exist, but the troughs most people drink from are being tapped dry. $100,000 today is not the same as $100,000 was five years ago, or what it will be five years from now.

I like the 2 for 1 split analogy. It works well in this context. Thanks for sharing!

Dennis V. Damp

Thanks David for your input. We also provide detailed financial planning guidance on our site and offer a free downloadable report titled How to Be Financially Prepared When You Retire that readers will find helpful. This report includes a spreadsheet feds can use to run their personal numbers to see where they stand. We also offer a free report titled How to be Emotionally and Physically Prepared When You Retire. I agree, there are many ways to counter today’s low interest and return rates and real estate is certainly a consideration.