Two Serious Pieces Of Financial Advice
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2024-05-13 07:00 by Karl Denninger
in Macro Factors , 724 references Ignore this thread
Two Serious Pieces Of Financial Advice
[Comments enabled]

Let's do the easy one first: There are plenty of people talking about taking Social Security early because it is likely to "go broke."

I'm going to make an assumption here: You're either not working or intending to not when you take it.  If you are working and have employer-provided health insurance then this doesn't apply to you, but if not it most-certainly does.

The problem with taking Social Security early is that Social Security distributions count toward MAGI and thus will reduce your Obamacare (PPACA) subsidy.  Right now the former "cliff" that whacked you at about $40,000 of income (cutting the subsidy off entirely) has been abated by pandemic-era law changes but those are scheduled to expire in a couple of years and they might not be renewed.  Indeed they are a serious part of the fiscal trouble that the Federal Government is in right now with its deficits -- and letting them expire requires doing nothing where extending them will require actual passage of a bill.  Choosing to take Social Security cannot be taken back and if you get nailed by this the cost will be extraordinary, as the older you are the worse medical insurance costs become.  This could, quite-trivially, eat half or more of your Social Security check so do not ignore it -- this risk is very real and for nearly everyone, unless you have no other income, it makes taking it prior to 65 flat-out silly on a cost basis since you cannot control whether that subsidy cliff will return and you can't change your mind either.

This risk goes away at 65 and is replaced with a known and inescapable one in that you both qualify for basically have to enroll in Medicare, which is typically (if you take Social Security) deducted directly from your check.  While there is plenty of risk in that program as well both in terms of payouts and costs at least at 65 you're not subject to, at a modest income, having an enormous clawback that could easily expose you to $20,000 a year worth of insurance expense or more, entirely wiping out your Social Security payment!  That risk absolutely does exist prior to 65 so pay very, very careful attention.  Note that if you're working now that three year period is still at-risk because you could, of course, lose your job.

I have had plenty to say about the political and cost-shifting aspects of both these programs over the years -- and if we don't get the medical side under control Medicare will collapse -- or worse, drag the entire federal government down the sewer with it.  But that's a subject for another time and, frankly, likely one for the other side of the blog.

The second is this piece here from CNN on college costs.  

Here's my two cents on this article:

That which you wish to gift your child in the form of college expense is fine, but you should never go into debt or cosign any of their debt for that expense, and it is very, very important that you drill into your kid's head that whatever pie-in-the-sky views they have of a profession it can change from under them in very bad ways with little or no warning.  If your child is truly in the top five or ten percent of capability within a given field they'll be ok most of the time provided the upper end of the field has an earnings potential sufficient to cover the expenses but many such fields don't and most don't unless you're in that top five or ten percent.  Further, essentially all fields are always under some sort of attack, whether deliberate or not.

It isn't just offshoring, the "promise" of AI and similar -- but that is certainly part of it.  It is also just the odds of society generally in that technological advancement and change is not predictable, it takes place over decades and yet you put in four or six years which sounds like a reasonably-stable period of time but in today's world it is not.  When I was younger if you could code you were in pretty good shape.  But what passes for "coding" today among most isn't what I'd consider paper-bag worthy and unfortunately industry has figured out how to offshore or H1b that so if you're not in that top 10% you got problems.  Never mind the risk that you are trained to use some set of technology that becomes a "runt" a few years later such as occurred with mainframes and minicomputers when I was younger.

This is a tolerable risk if you go to school without taking on debt as you still learned something of value, it likely can apply somewhere else (even though not entirely) and thus while nobody likes having the rug ripped out from under them through no fault of their own life goes on.  If you've taken on six figures worth of debt and this happens you can be ruined and you can't file bankruptcy in these cases to discharge it either.

That's something we should have never done but we did and it is why the cost of school has exploded upward.  You can't fix that today but you don't have to play that game and shouldn't with your future.

There are reasonable loan options -- Stafford, for example. But the rest are not, particularly those involving parent co-signatures.

In addition think long and hard about whether college makes sense at all.  There are trades that will never go away and can't be offshored.  Is that a perfect answer?  No, but it is something to consider and in many cases can lead to a six-figure income quite rapidly.

Reality is that ultimately most people who really do well didn't do it going to college and getting a job.  They did it starting and running a business which may or may not have included college as a source of inspiration, connections and ideas.

Finally, do realize that with the wild-eyed price escalation in multiple areas of the economy over the last 20 years (not just the last four!) there is every reason to believe we are on the verge of a serious and long-term economic dislocation.  Exactly what form it will take and what fields will be ruined -- or advanced -- is not possible to determine with enough reliability to bet on it successfully. There is an enormous difference in outcomes if you find yourself in a tough spot and have $20k in liquid cash and no debt as a young person .vs. being $100k or more in the hole and having no cash at all, literally living on a credit card's float with less than $500 in your bank account.  You do not want to be in the second group but a huge percentage of Americans are of all ages and if you put yourself in that position you're one piece of bad luck away from disaster.

Time is the one commodity nobody can get more of, no matter how much money they have or make.  Its common to believe, for example, that if you're a 20 year old woman you can pursue business interests until you're 30 and then settle down and start a family.  This is foolish.  It's even more foolish to think as a young man that you can go find yourself a partner, marry her and start a family when you're 40, having spent the previous 20 years advancing your earnings potential.  Yes, you can be one of the exceptions that has it work out, but the odds are not in your favor.  Figure out what's important; if its business and accumulating money then fine, but don't kid yourself that this comes without cost or that you can chase those other things "later" and it will all work out.  It probably will not but there are myriad people who will try to sell you on exactly that, often for their own purposes whether financial or simply to stroke their own egos.

Youth is a time of idealism and people prey on it.

Don't be the prey.