David Crosetti's  Instablog

Maybe it's just me, but lately I'm beginning to feel like the world has been turned upside down.

I've noticed that there are many newer visitors to Seeking Alpha and on the other hand, many of the old timers (and I realize that SA has not been around a long time) seem to have moved on to other things.

I miss many of those older commentators and writers. Occasionally they will show up with a comment or two, but for all intents and purposes, many seem to have gone away.

In their place is a new crowd. I like new crowds. They have so many ideas and thoughts about investing that are just so wrong. They remind me of me thirty years ago! They seem to think that the stock market is nothing more or less than some casino game and that it is one that they can consistently beat--because they are smarter than the game operators.

I used to think that way. I remember when I was stationed in the beautiful A Shau Valley in Vietnam, how I was going to change my life for the good. I was going to become rich and by the time I was 50 (if I got home alive), I was going to go out and take on the challenge.

Forty years later, it's been a good run. I'm still working. Still trying to make more money. I can't stop. I love the challenge. I love learning the game.

Last night, as I do on most Friday nights, I recorded the closing values of my different portfolios. Now I'm a DG investor. Boring stocks, no growth, something that only a moron would consider a good investment strategy.

Now, my spreadsheet tracks the value of each portfolio every month end. The last column on the right is the percentage gain vs. the portfolio values 12 months ago. In effect, it's a rolling 12 month number.

While the month is not over yet and things change daily, since Aprils month end, the portfolios are up more than 10% in two weeks.

I think this market has further to run. I'm not chasing anything in particular right now, but I am sitting on my holdings. A correction of 10% would reduce my unrealized gain by exactly the amount that it has increased by over the last 10 trading days.

But you know what? My dividend checks keep coming in, just like waves at the beach. Over and over and over again. They keep growing with no "corrections." They keep growing at a rate that is greater than inflation. They have finally reached a place where the dividend income I receive is greater than my current salary. That is a fantastic place to be.

When I retire, I will not be drawing Social Security. I will be taking withdrawals of dividend income from my IRA in an amount that will be less than my current salary. You see, my wife, who is younger than I am, is getting promoted to an Assistant Principal's job in our county school district. She is getting a nice raise, to boot over her current administrator's salary. That raise allows me to withdraw less dividend income from my IRA, so that we will continue to have the same amount of income as we did last year.

The Social Security, meanwhile will be growing in "value" by 8% a year until I turn 70. That's as big as my benefit is going to get. My wife will be able to use my benefit as a strategy in that she can take half of my benefit or 100% of her own, whichever is greater.

In the meantime, my dividend income in the IRA will continue to grow--as I am taking out less than the total dividends received--my account will be subject to RMD at my turning 70 1/2, but that's cool because I still have a Roth working and being added to and I will never have to take money out of it at all.

Money drawn from the IRA over and above our needs will be channeled back into my Roth and my wife's Roth. Kind of a self directed conversion plan. It's almost like a perpetual motion machine!

But then again, that's the reason I started DG investing and the reason I stay at it. How about you?

May 16, 2013 12:02 AM EDT

Jim Roumell is founder of the investment management firm Roumell Asset Management LLC.

In the aftermath of 9/11, many young, strong Americans enlisted, willingly agreeing to sacrifice their lives if necessary to protect our country's interests. Today's wealthiest Americans have the same opportunity to put their country's interests before their own. Politicians should not shy away from asking them to put forth not their lives but what are, for them, their modest Social Security checks.

The philosophy of the investment management firm I founded 15 years ago focuses first on a company's balance sheet and second on its income statement. This approach has served our clients well. The current debate over entitlement reform is incorrectly preoccupied with Americans' income statements when their balance sheets should be the focus. Many in the top 2 percent of earners - those with annual income of $250,000 - reside in places with high costs of living and don't feel particularly wealthy. They make a fair point. With the exception of select deductions that dramatically reduce the effective tax rates of wealthy households, income is fully taxed in today's anemic economic climate. Net worth is a more reliable indicator of real wealth but is curiously absent from discussions of Social Security reform.

Gallery

Tom Toles on the budget battle: Collection of cartoons on the federal budget and economy.

By Federal Reserve estimates, there is about $67 trillion of household wealth in the United States. According to the Congressional Research Service, 74 percent of this, or $50 trillion, is controlled by 10 percent of the population. Wealth is much more skewed than income. The top 1 percent own roughly 35 percent of the country's wealth but only 17 percent of its income. My fear is not that we end up looking like Europe but rather that we look like the bifurcated societies of Latin America.

The wealth and income makeup of our society can be likened to a long game of Monopoly: A handful of players have done phenomenally well, owning Boardwalk, Park Place and the like; the rest are frustrated, somewhat demoralized but desperate to become competitive in the game. When I played Monopoly as a child, the winners would often offer the losers money, property or debt write-offs to encourage another round of play. America's winners face the same dilemma: Do we want to encourage more rounds of play for ourselves, our children and grandchildren by putting the U.S. retirement system on a clear path to solvency without hurting those who have not participated in the financial rewards of the game so far? To be clear, notwithstanding the game's current outcome, Larry Kudlow is correct when he asserts that "Free-market capitalism is the best path to prosperity," because creating wealth is society's first order of business.

Here's the math. According to the Wall Street Journal, the top 1 percent of the United States' 115 million households have a net worth of $6.8 million or greater. The top 5 percent have a net worth of $1.9 million or greater. If just the top 1 percent of wealthiest households gave up their Social Security income, assuming two-thirds of these households are of retirement age and will receive benefits averaging $30,000 a year, more than $200 billion would be saved in the first 10 years. That would contribute greatly to resolving the projected funding gap. If Social Security is gradually phased out for the wealthiest 5 percent of households, beginning with just a 10 percent benefit reduction, the savings climbs to nearly $500 billion over 10 years. Remember, wealthy households received a windfall of sorts with the recent changes to estate tax law, a tax pioneered by Republican Theodore Roosevelt, and continue to benefit from a discount of as much as 40 percent in calculating estate taxes when privately held businesses are passed on.

Some will say, "That's my money; I paid into Social Security." There are at least three reasons they ought to reconsider. First, it is a gift to be fortunate enough to give back to your country. When confronted with an existential threat from a foe, our troops step up; the looming shortfall between Social Security's revenue and obligations represents a serious threat to our future. Second, wealthy people have benefited greatly from the rise in general asset values over the decades, and the worldwide easing of monetary policy by central banks is sending the balance sheets of the wealthy further skyward. Third, entitlement spending on Social Security will increasingly crowd out public investments necessary to maintain a growing economy and stable society for future generations.

Yes, there would be challenges to implementing such an approach. But current law already requires wealthy households to generate a balance sheet for estate tax purposes. Add in thoughtful measures such as a reasonable new age limit and "chained CPI," and the Social Security shortfall could be solved.

After Jonas Salk invented the polio vaccine, Edward R. Murrow asked, "Who owns the vaccine?" The doctor answered, "Well, the people, I would say. There is no patent. Could you patent the sun?" Even against the backdrop of hedge fund managers demanding that their income be taxed at capital gains rates or the carried-interest boondoggle, our leaders fail to ask for sacrifice among those who can most afford it.

Nearly two-thirds of Americans 65 and older receive half of their income from Social Security, and more than 20 percent live on it entirely. These individuals often worked for modest sums but did necessary work while others, myself included, built businesses and made investments. We shouldn't let them down or rob future generations of the investments needed to secure their future.

Introduction:

I have been thinking about retirement for some time now. Recently, at a family reunion of sorts, I had a conversation with a relative who I hadn't seen in a while. She retired a year earlier. I mentioned to her that one of the things I liked about retirement in Mississippi is the fact that the state does not tax Social Security income or income from pensions, IRA's, or 401k accounts.

She informed me, in no uncertain terms, that Social Security income was taxable and that she paid taxes on it and she wasn't very happy about it. Contrary to my normal argumentative nature, I decided to just go and make myself another pulled pork sandwich and find someone else to visit with.

What I Know:

I have to admit, she got me thinking about Social Security taxes and I decided that I needed to look into it a little bit more, before I began taking it and being surprised. If there's one thing I don't like, it's suprises.

So, I decided to look at the tax consequences of Social Security and I found out some interesting things about the program and how it is taxed. Here is a link to the Social Security website.

http://www.ssa.gov/

You will have to pay Federal taxes on your Social Security benefits if you file a Federal tax return as an individual and your total income is more than $25,000. If you file a joint return, you will have to pay taxes if you and your spouse have a total income of more than $32,000.

But, there is some good news. Social Security exempts 15% of your benefit from taxes. That means that only 85% of your Social Security is subject to Federal income taxes--not the entire amount.

Dig a little further and you will find this

1. file a federal tax return as an "individual" and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits. If that income is more than $34,000, up to 85 percent of your benefits may be taxable.
2. file a "joint return," and you and your spouse have a combined income* that is between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits. If that income is more than $44,000, up to 85 percent of your benefits may be taxable.

What You Should Know:

For all intents and purposes, there are three times when you can begin to draw Social Security income. If, like me, you were born between 1943 and 1954, you can draw Social Security at age 62 (a reduced amount); at age 66 (full retirement age); or at age 70 where you will receive the maximum Social Security benefit (as high as it will get).

Every year, you should be getting a document from the Social Security Administration that outlines your contributions and your retirement benefits. If you don't have one, you can go online to their website (linked above) and get your statement directly from them with secured access.

In my case, here's how the numbers shake out. I could have begun drawing Social Security at age 62. My monthly benefit would have been $1848 a month. By waiting until age 66, which would be my "full retirement age" that income would be $2379 a month. Now, if I wait to get my maximum benefit at age 70, that monthly income would be $3191 a month or $38,148 a year.

Other considerations you will need to be aware of:

1. Are you going to draw Social Security and still work? Well, that presents a few issues as well.

If you are under the "Full Retirement Age" you can earn up to $15120 a year in gross wages (in 2013). Your Social Security income will be reduced $1 for every $2 over $15120 that you earn.

In the year you reach "Full Retirement Age" (66 in my case) you can earn $40,080 in gross wages (in 2013). Your Social Security income will be reduced $1 for every $3 over $40,080 that you earn.

After you have reached the Full Retirement Age--that is you have turned 66--then you are allowed to continue working, receiving income from your job and have no reduction in your Social Security benefits.

Summary and Conclusion:

I did some additional research with the state of Mississippi and I have discovered that Social Security is not taxed by my state. Additionally, my state does not tax pension income, nor does it tax income taken from 401k plans or IRA's. You should check your own state's treatment of retirement income and Social Security in order to put together a plan of action that makes the most sense for your particular situation. Here is a link to a website that breaks down tax treatment in all 50 states. Well worth the look.

http://www.kiplinger.com/tool/retirement/T055-S001-state-by-state-guide-to-taxes-on-retirees/index.php

Looking at your own situation, you cannot plan your Social Security game plan soon enough. Take the time to sit down with your CPA or an Elder Care Attorney and explore your options.

In my next article, I will be exploring a decision to wait until age 70 to begin receiving Social Security benefits. As a Dividend Growth investor, I want to show you an option that you may not have considered.

That option is waiting until age 70 to receive the maximum benefit from Social Security, and using your DG retirement portfolio (be it 401k, Traditional IRA, or Roth) as your vehicle to a better retirement with minimal taxes.