by | June 13, 2012 · 7:58 am

It’s All About Your FRA

Your Full Retirement Age (FRA) is the age when the government states that you should retire.  In 2012, you are FRA at 66.  Here is the basic concept: the longer you wait to collect, the more you get each month.  And once you collect, your decision is forever.  

You have three choices when to collect your check: Early, Full, or Delayed.

EARLY (62)

You can retire at 50 if you want to, but the earliest you can collect SS is 62.  And your benefit will be reduced- permanently- if you collect early.  Specifically, your monthly check will be reduced by approximately .5% for each month that you collect prior to your FRA.

If you collect at 62, you will get 75% of your full benefit.*

FRA (66)

The government defines the age that you ‘should’ retire, and it’s known as your Full Retirement Age (FRA).  Once you attain that age- for most baby boomers it’s 66- you can collect 100% of the benefit you have earned.

FRA=100%

Delay past 66

Each year that you can delay taking your benefits beyond FRA, your monthly check will increase by 8%.  That means that if you can wait until 70, you get 132% of the benefit.  That’s an increase of 8% per year.  Not a bad investment!  Also, the amount of your check will stop increasing when you turn 70 so if you haven’t started to collect at 70, you are actually losing out.

Delay past FRA= Government guaranteed 8% annual increase to age 70

 

A quick example:

Assume FRA is 66, and you will be entitled to $1000/mo at FRA.

 

  • At 62 you will get $750/month.
  • At 66 you will get $1000/month.
  • At 70 you will get $1320/month.

So, should you collect early or wait?  Now we have the numbers to do the math, but there is still a bit more to figure out.  Next week we’ll discuss how your plans to work past 62 play a role in your decision.

Get your numbers right now: Social Security Administration Estimator

You can estimate several different ages side-by-side.  You will need to enter some personal info, including your SS#, but don’t worry- the system doesn’t store your information.

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by | June 6, 2012 · 7:09 am

3 Stages to Earning your Social Security benefit

1.       You must earn 40 credits.  

You earn your check over your career

Generally working for 10 years earns you the 40 credits:  $1120 in earnings earns 1 credit, and you can earn 4 credits annually.  Technically you can earn 4 credits on January 1st…  But you can still only earn 4 credits annually.

2.       Your check is based on the average your highest 35 years of income, up to the social security maximum.

It’s an average of 35 years, so if you only worked for 30 years you will add 5 zeros to your earnings total and your benefit check will be smaller.

Also, working part time in retirement as a greeter at your local grocery store will NOT reduce your check even though you are only earning a fraction of your previous salary.  Remember, the check is based on your 35 HIGHEST years of income.

3.       You pay into the system

Currently, you pay 4.2% in social security tax each paycheck, up to a maximum annual amount.  In 2012 that amount is $110,100.  So even the filthiest of the rich, who make millions of dollars this year, will only be paying SS tax on the first $110,100.  That’s the same reason why there is a maximum monthly benefit you can receive. 

 

DYK: The maximum monthly SS check in 2012 a 66 year old can collect is $2,513/month- even for Mr. Filthy Rich

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by | May 30, 2012 · 9:46 am

The Real Problem with Social Security

The newspapers will tell you that the Social Security trust fund is going to run out of money in 2033.  That’s a load of hogwash!   The truth is the trust fund simply exists for accounting purposes.  Social security is actually a welfare benefit that comes straight out of the budget expenditures.  But the truth doesn’t sell newspapers- fear sells newspapers!  Baby boomers have no fear- Social Security running out is not the problem.

The real problem with Social Security is that people don’t understand how to decide when to collect. 

Don’t collect without doing the math!

Deciding when to collect is one of the biggest decisions a person will ever make, and most people don’t take the time to make an educated decision.  In fact, most people decide to collect early- according to the Social Security Administration’s 2010 annual supplement:

74% of people collecting retirement benefits are collecting reduced amounts.

Did you know that waiting to collect at 70 can translate into over $280,000 more a lifetime than if you collect at 62?  That’s a ton of money!   To calculate that, I assumed an unmarried 66 year old who can collect $2000/month and lives to age 100.  Running the numbers tells me that if they live to 90 the difference is $143,280.  If they live to 85 it’s $74,880…you can easily calculate these things. 

Age is not the only thing to consider when you are evaluating when to collect.  Next, you must factor in a few other variables, like working in retirement, your marital status, and life expectancy…only then can you make an educated decision. 

So why do so many people collect early?  Here are the 4 main reasons:

  1. They need the money. 
  2. They don’t trust the system. 
  3. They won’t live much longer
  4. They don’t understand how to do the math

Stay tuned for a series of posts discussing everything you need to know in order to figure out when you should begin to collect.  Then I will walk you through a number of strategies to potentially maximize your monthly social security check.

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by | August 12, 2011 · 7:13 am

This is not 2008!

Many people are drawing parallels between this current market selloff and the credit crisis that nearly ended in depression a few years ago.  I don’t see any.

The downgrade of the US AAA rating is nothing like the collapse of Lehman Brothers, Bear Sterns, or any of the other firms that went under.

The credit crisis of 2008 was systemic.  It was the culmination of the housing bubble and the realization that that every bank had been lending gobs of money to absolute idiots in order to fund the purchase of houses they couldn’t afford.  And this had been going on for years.

The entire world suddenly woke up and found that there were bonds rated AAA but comprised of junk quality mortgages.  Nobody knew which investment was quality and what was toxic, and nobody wanted to own anything-  At all.

The market crashed.  Business, and the economy, nearly came to a complete halt .

Corporations laid off 3,000,000 people in 2008-09.      Then came Tarp, QE1, QE2…the economy was on life support.

Flash forward to today: 

If you want to buy a house in 2011 you need to have sparkling credit, 10 years of income history, 20% down, and the ability to lend the bank more money than you are trying to borrow.

Corporate America cut every wasteful expense, reduced inventories, curtailed spending, and today’s companies are lean operating machines.  That is why earnings beat expectations in the first 2 quarters of 2011.

Today we are adding 150,000 jobs per month. True, it will take a long long time to gain 3 million jobs back at that rate, but we are going in the right direction.

Additionally, interest rates are still low and inflation is still relatively tame.

This market selloff/crash is all about fear.  There is no more stimulus- zero – and that is scary.  But zero stimulus is a good thing; now we get to see the economy stand on its own.  Couple the removal of stimulus with several other potential bogey monsters that loom on the horizon (Greece, inflation, rising interest rates) and fear is understandable.

But these monsters are not new. Things are not substantially different than they were 2 weeks ago.  Fear and greed are what make the markets move, and right now fear is winning.  In 6 months this market swoon will be a distant memory.

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by | May 23, 2011 · 6:25 am

Understanding Bond Risks

As investors, we have a variety of opportunities to determine where to place our money and ‘bet’ on the markets. For an aggressive investor, the stock market has been the venue of choice. For conservative investors, bonds have had the upper hand.

The famous cowboy/philosopher Will Rogers always said “I’d rather have a return of my money than a return on my money”  Hopefully this quick guide to bond risks will help you invest in bonds and receive not only a return on your investment, but more importantly, a return of your investment.

Over time, the markets have expanded their offerings from traditional holdings of stocks and bonds to more creative opportunities and higher risk assets. Still, bonds have not changed their stripes over the years. These have traditionally been stable, secure investments that have offered a predictable stream of supplemental income.  This is because a bond is issued with a fixed payment rate of return over a specified period of time- typically until the bond matures.

 However, there are still risks to consider. Let me name a few:

  • Inflation Risk: Because of their relative safety, bonds tend not to offer extraordinarily high returns. That makes them particularly vulnerable when inflation rises.
  • Interest rate risk: Bond prices have an inverse relationship to interest rates. When one rises, the other falls.
  • Default Risk: A bond is nothing more than a promise to repay the debt holder. And promises are made to be broken. Corporations go bankrupt. Cities and states default on muni bonds. Things happen…and default is the worst thing that can happen to a bondholder.
  • Downgrade Risk: Sometimes you buy a bond with a high rating, only to find that Wall Street later sours on the issue. That’s downgrade risk.If a credit rating agency such as Standard & Poor’s and Moody’s lowers their ratings on a bond, the price of those bonds may fall.
  • Liquidity risk: The market for bonds is considerably thinner than for stock. The simple truth is that when a bond is sold on the secondary market, there’s not always a buyer. Liquidity risk describes the danger that when you need to sell a bond, you won’t be able to.
  • Reinvestment Risk: Many corporate bonds are callable. What that means is that the bond issuer reserves the right to “call” the bond before maturity and pay off the debt. That can lead to reinvestment risk.

If you want some more information about how individual bonds are priced in your account, check out Bonds and Your Brokerage Statement.

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by | May 19, 2011 · 7:54 am

Saving For Retirement When You’re Paycheck-to-Paycheck

The first Ask the Investment Guy submission- and it’s from a real person!

Investment Guy, I know that starting a 401K or 403B or IRA is beneficial, but I currently live paycheck to paycheck. I’m 34- how can I make this happen? – Kevin

Hi Kevin- Thanks for asking! That’s a great question. Living paycheck to paycheck certainly makes this goal seem intimidating, but it’s attainable with a little bit of effort. Recognizing the need to save for retirement is an awesome first step. In order to save for retirement while your cash flow is tight requires commitment and sacrifice; once you are committed, read on.

Where is your money is currently going?

If you haven’t already created a budget, do so.  It’s an interesting exercise that will show you exactly where your dollars are going each month, and maybe you can find some wasted expenses to redirect towards saving. I’m not going to suggest you cut your diet down to ramen noodles, but maybe brown bagging your lunch every day is an opportunity to save a few bucks. It’s little things that go a long way. (here are 2 budget templates: one is for families , another if you are single)

How much to contribute:

Anything is much more than nothing- and it doesn’t have to be a lot. Can you afford $20/week?  Contributing $20/week with market growth of 5% over the next 30 years will total more than $66,000! Additionally, at the end of the year you will see an account statement with a bottom line number representing your progress. If you want to really improve your odds at a successful retirement, each year you should try to increase your contributions by a few dollars.

Make automatic contributions

Set up contributions to occur automatically straight from your paycheck or checking account. This keeps the money out of your hands and instills the discipline of consistency.

Behold of the power of tax deduction…

If you contribute $20 to a 401k, this money goes into your account before taxes are taken out.  Therefore, assuming a 20% tax bracket, your take home pay only goes down $16 and you saved $20 in your 401k for an additional $4 to you each week.

… and tax deferral

Inside of your retirement account the IRS allows you a free pass from paying taxes on gains that are owed in non-retirement accounts. In exchange for these tax benefits, you are waiving access to these dollars until you are 59 ½ at the earliest. These may seem small, but over time are powerful. It’s also one of the very few ways to legally avoid paying taxes.

Finally, if it’s simply not possible to find the extra money in your current budget, maybe you can try these 2 harder approaches: ask your employer for a raise of $20/week (ya never know) or find a second job for a couple of hours a week. If you ask me, it’s better to bust your hump while you’re in your 30’s instead of working into your 80’s.

Good luck Kevin!

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by | May 10, 2011 · 10:18 am

New Feature: ASK THE INVESTMENT GUY

Got investment questions?  Want answers?  Ask away!

Submit your questions for our new feature Ask The Investment Guy here:

We will use only non-identifiable information in any post.  All personal information is strictly confidential- your privacy is of utmost important to us.

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