Posts Tagged Social Security

SOCIAL SECURITY–PRIVATE ACCOUNTs

With Mitt Romney selecting Congressman Paul D. Ryan (R-WI) as his Vice Presidential Running Mate, we can expect to hear more about “Private Accounts”. Representative Ryan had proposed this (a common theme for Republicans) previously and it would apply for workers of Age 55, or under. Initially, it has been suggested that four percent of the FICA (or Payroll) Tax would be eligible.

If this works like the Retirement Plans that Federal Employees can pay into, participants would have the ability to chose from a number of Index Funds. With Index Funds, participants’ money is generally invested across the total spectrum of companies within the particular Index(s) (i.e. S & P 500, Russell 3000, EAFE, etc.)–both the good and the bad. But, the problem might be with selection and conviction. Here, I see similarities with the selection of 401(k) investment options.

Although many employers try to educate their employees–as to how to invest and select complementary investment options–I believe that most employees do not have a clue as to what is in their Retirement Plans. As a result, they often tend not to review it when the Quarterly Statement arrives, let alone more frequently. Think about it: if you do not understand the various options, how do you pick-and-chose among them? As a result, many participants don’t make any changes.

Lack of Conviction has been a real killer for many participants. When the markets have a sell-off, such as in 2007-2009, some shift everything into Cash. And, having been burned once, they never re-allocate their portfolio. Accordingly, there are many participants who have virtually no growth toward retirement. Think of the yield on your Money Market Account or CDs.

Another problem is the common knock on mutual fund investors–especially those who frequently move in and out of various funds. When they see how their funds have performed historically (from their statements), they wonder why their account hasn’t done the same. Unfortunately, they invest at the top of the market and, then, they sell after it has dropped.

Once again, if you work with a Financial Advisor–or have access to the Morningstar.com web site–pick a combination of investment funds that have performed well–and are complementary. As always, past performance doesn’t necessarily guarantee future results.

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EARLY SOCIAL SECURITY IN A WEAK ECONOMY

Given the slow recovery from The Great Recession of 2007-2009, some people who might have had trouble finding a job are filing for early Social Security, at age 62 or after. Obviously, if you file early, you will receive less on a monthly basis. Normally, it would only make sense if you have a spouse who has Health Care Benefits since, prior to age 65, you would not qualify for Medicare..

Well, if you fast forward, a little-known point is that the retiree can always turn-off the Social Security and start to build-up future benefits again. So, let’s say that a year or two from starting benefits, and then you do get a job, you do have this option.

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WILL YOUR RETIREMENT PLAN BE ENOUGH?

There is an interesting, somewhat autobiographical Retirement Planning sketch, “My Faith-Based Retirement”, in the NY Times.  In it, Joe Nocera cites that his Retirement Plan was cut in half due to a Divorce, and then he endured the bursting of the DOT-Com Bubble (2000), and the inference to further devastation by the World Trade Center Attacks (2001) and the Great Recession (2008-09).

As a veteran reporter, he took the opportunity to interview Teresa Ghilarducci, a Behavioral Economist at The New School, in New York City.  She confirmed that the state of his Retirement Plan was not unique, especially for people who have encountered other, non-market factors, such as the Divorce.  As you can see, from the linked article, many people have just not put enough money aside for that day when the paychecks stop coming in.

Mr. Nocera writes:  “Ghilarducci told me that the average savings for someone near retirement in America right now is $100,000. Even buttressed by Social Security, that’s not going to last very long.”  And, as a person gets closer to retirement, taking control of The Plan becomes more important.  Let’s hope that it’s not too late!

Over the years, I have met many people who say they:  “…have a retirement plan..or an IRA”; but they don’t have the foggiest idea as to what type of Plan they have–how much is in it, or how it is invested.  Furthermore:  are they missing-out on matching funds; if it is a pension, is it now frozen (meaning the corporation is no longer contributing to it); could they be making larger contributions (if applicable) and are they managing how their Plan is invested (again, if applicable).

Besides not monitoring a company-sponsored Plan and their personal Traditional or ROTH IRA(s), many people believe that Social Security will provide the bulk of their Spending in Retirement.  In years past, Social Security was more of a major factor–even though it was never intended to be the only component.  Nowadays, however, Social Security will probably cover only about 30% of what they need.  And, how many people actually review what their monthly Retirement Benefits will be, as sent by the Social Security Administration

I would suggest that, around the time you gather your financial information in order to file your Federal Income Taxes, you also assess your Retirement Plan–to include overall amount accumulated; what income you will receive from which sources and how the assets are invested (if applicable).  Your estimated Social Security Benefits can be estimated on the Social Security Administration’s web site.  (Keep in mind that that monthly number is subject to change.)

Once you have assessed your Approximate Income in Retirement, try to identify your regular expenses and, if necessary, which you can reduce (if necessary) and which you cannot.  Also, if you are (let’s say) within ten years of Retirement, what are your plans (i.e. travel, part-time job, volunteer work; start a business or hobby, etc.).  These Plans in Retirement might either add to your expenses or, perhaps, provide additional income.

Be sure to note that the Monthly Benefit that you  will receive from Social Security will differ depending on how much you earned and how long you worked.  For someone retiring at age 66 (Full Retirement Age), in 2012, the Maximum Monthly Benefit would be: $2,513; however, it could be much lower for many participants, based on your earnings while employed.

Consider gathering your various potential sources of Income in Retirement: Estimated Social Security Benefits; Pension (if any); Retirement Plan statements and records of other Financial Assets.  Also, estimate your Retirement Spending needs and be sure to include any financial assistance that you would be providing to elderly or disabled family members.  Then, schedule an appointment to review them with your Financial Advisor.

If you are a do-it-yourselfer, and you are anxious about your Retirement Plan, just go over to that bathroom mirror and confront yourself.  Basically, let’s say that you are hitting Age 60, like Mr. Nocera; well, if you have been remiss in your planning for this very important event, what makes you think that you will do so now?

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