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Saturday, October 16, 2010

No Social Security COLA for 2011

The Social Security Administration announced "There will be no increase in Social Security benefits payable in January 2011, nor will there be an increase in SSI payments."  Press Release
COLA Computation
  • The last year in which a COLA became effective was 2008. Therefore the law requires that we use the average CPI-W for the third quarter of 2008 as the base from which we measure the increase (if any) in the average CPI-W. The base average is 215.495, as shown in the table below.
  • Also shown in the table below, the average CPI-W for the third quarter of 2010 is 214.136. Because there is no increase in the CPI-W from the third quarter of 2008 through the third quarter of 2010, there is no COLA for December 2010.
CPI-W for—
2008 2010
July 216.304 213.898
August 215.247 214.205
September 214.935 214.306
Third quarter total 646.486 642.409
Average (rounded to the nearest 0.001) 215.495 214.136
Remember that the price of oil peaked during the three months in 2008 (See chart below) when the COLA for 2009 was set at 5.8%. With oil prices the past three months about half their peak value, CPI is slowly catching up but still below the 2008 calculation. The good news for seniors is they benefited from a higher SS payment than they would have received if the 2009 COLA was set a few months later after the price of oil crashed to $35 at the end of 2008.

Since this blow-up of CPI in 2008 due to high oil prices, I've reported CPI by month in my newsletter in a table so you can see what to expect. CPI peaked in July 2008 at 219.964. I show this value in Red. This September the CPI recovered to 218.439, still slightly below its 2008 peak. CPI for 2008 was only up 0.1% but Social Security beneficiaries got a 5.8% adjustment because of the spike in oil prices. They were very, very lucky to get a 5.8% raise while the rest of the country got fewer hours or lost jobs during the recession.
This table Automatic Social Security Cost-Of-Living Adjustments by Year clearly shows the January 2009 adjustment of 5.8% was the largest since July 1982!
Since actual CPI was effectively lower than what Social Security recipients were getting paid for, taxpayers were very generous to retired people at a very good time... during this recession. My guess is the CPI will make a new high in the next few months and COLAs will show up again next year for 2012.
Here is another chart showing oil prices vs the S&P500.
click image to see a larger version

Current Oil Prices and New Graph
Click for a chart and current quote for crude oil prices.

Social Security COLA Press Release

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 179% (a double plus another 79%!!) vs. the S&P500 UP a small 16.2% vs. NASDAQ  UP a tiny 12.6%   (All through 10/16/10)   FREE SAMPLE

In 2009, "Kirk's Newsletter Explore Portfolio" gained 33.5% vs. the DJIA up 18.8%
2010 YTD the "Explore Portfolio" is up 7.6% YTD

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Thursday, October 07, 2010

Fixed Income - Bond Fund Risks

Here is a good article from Vanguard titled Risk lurks in the search for current income.
Key Points:
  • If someone moves from a money market fund yielding 0.11% into a bond fund yielding 2.52%, he or she would pick up 2.41 percentage points in current yield. On a $10,000 investment, that equates to $241 a year, assuming interest rates remain steady.


  • If rates were to increase by, say, 4 percentage points to 6.52%, the impact to a bond fund with an average duration of 4.3 years means the share price would drop by 17.2% (for a total drop in account balance of $1,720 on the $10,000 investment), all else equal.
In my own account and in "Kirk Lindstrom's Investment Letter" portfolios, I am totally out of bonds and bond funds not indexed to inflation.  I own and recommend TIPS, TIPS funds, Series-I Bonds, CDs with FDIC and CASH in money funds and other savings accounts.   American Express Bank is offering 1.30% and I've seen higher with a bonus at CapitalOne Bank through Costco.

In 2009 Vanguard's TIPS fund, VIPSX, gained 10.8%
In 2009 Vanguard's GNMA fund, VFIIX, gained 5.3%
As of yesterday (10/6/10)
VIPSX is up 9.05% YTD
VFIIX is up 7.08% YTD

I dumped my Vanguard GNMA (VFIIX) fund almost 2 yrs ago in my Vanguard ROTH and bought the TIPS fund VIPSX. Total gain as of yesterday  for VIPSX was 22.5%!

The REIT index fund at Vanguard, part of my core portfolios recommended for conservative and aggressive investors, is up 22.55% YTD!  It gained 29.6% in 2009 but lost 38% in 2008 so it is volatile.

Also make sure you read Vanguard Lowers Admiral Shares Minimum to $10,000

Key points:
  • Vanguard has reduced the minimum amount required to qualify for Admiral™ Shares to $10,000 for most of our broad-market index funds and $50,000 for actively managed funds, down from the previous $100,000 minimum.
  • Admiral Shares cost significantly less than traditional fund shares, and their expense ratios are among the lowest in the mutual fund marketplace.
Now all my core portfolio funds will have even better returns!

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 171% (a double plus another 71%!!) vs. the S&P500 UP a tiny 14.5% vs. NASDAQ UP a tiny 8.7% (All through 10/7/10) (More info - FREE Sample Issue)

Subscribe NOW and get the October 2010 Issue of "Kirk Lindstrom's Investment Letter" for FREE!
(Your 1 year, 12 issue subscription will start with next month's issue.)

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