This blog post is actually the first of a trilogy having to do with Social Security. The second is about the Taxation of Social Security Benefits, and the third is, Will Social Security will be There When I Retire?
The Social Security benefit program is officially called OASDI – Old Age, Survivor, and Disability Insurance. As the name suggests, it consists of two parts – the disability income part, and the retirement income part.
The program is funded by payroll taxes under the Federal Insurance Contributions Act (FICA): 7.65% of your gross pay, matched by your employer, on your earnings up to $137,700 in 2020. This means that, on that same amount, your employer withholds $10,534.05 from your pay, and matches that amount equally. Technically, the social security amount is 6.2% and the Medicare amount is 1.45%, and these total to 7.65%. If you earn more than...
If you dropped dead tomorrow your family would be in a world of hurt. You know this. Yet you haven't purchased life insurance. Why not? Before you get into it, check out Part I and Part II of this 3-part series.
Why Haven't You Purchased Your Life Insurance?
You think you have enough insurance coverage through work. Do you know how much is there? Typically anywhere from $50K to $250K. Is that anywhere near sufficient?
It isn't the product that bothers you but the process. You put the life insurance agent/broker in the same category as a stereotypical used car salesman. He’s got greasy hair, you’re his newest best friend in the world, and he wants to know, What do I need to do to get you into a policy today? You think he’s out solely to earn a commission. You have nothing against anyone making a living, but you just don’t...
Having great investment portfolio returns may not get you to your retirement goals. You could have (in theory) spectacular returns every year for 20 years and still not realize the retirement you want. Do we like strong investment performance? Sure. Should stellar performance be your goal? Not necessarily. Goals-based investing should be the approach. The investor starts from the endpoint and works backward toward today.
In doing retirement planning, first begin with the lifestyle you want to enjoy. Then figure out how much it’ll cost you. Then evaluate your current investments to see if they’ll do the job. Your portfolio return in this approach becomes the means, not the end. In other words, start with your goals, figure out how much it’s going to cost you, and determine how you should invest to accomplish those goals.
This approach is very different from performance-based...
Original Medicare is a creation of the Johnson administration in 1965. Medicare is health insurance for those aged 65+. There is a premium associated with coverage, and this premium is deducted from the Social Security Benefit. As with any government program, there is nothing easy to understand about Medicare. In this blog entry, I’ll cover the highlights.
Please don’t confuse Medicare with Medicaid. Medicare is health insurance. Medicaid is a state welfare benefit, though partially funded with federal dollars. The Medicare beneficiary is age 65. Someone who has been receiving social security disability for more than 2 years is also covered. Coverage is for individuals, so a retiree of age 65 cannot cover his spouse of 63 on the same policy. This spouse will have to wait two more years to elect coverage.
Basically, Part A covers...
Employer-sponsored retirement plans can be split into two groups:
As the name suggests, the salient feature of any defined contribution plan is the input – how money goes into the plan. Money goes in from employer contributions and matching, employee deferrals, and forfeitures from those not vested.
On the other hand, the DC plan is defined not by the inputs, but rather than by the output. The Florida Retirement System pension option is a defined benefit plan. I explain this a little more fully in my video.
With any defined benefit plan, all the investment risk is with the employer and not the participant. When I say the risk is with the employer, I mean the State of Florida. FRS invests the retirement plan assets in such a way that it is able to pay out what has been promised. The employer is guaranteeing the...
It used to be the case that you went to work for one employer and remained with that employer for the entirety of your working life. You received a pension from that employer when you retired – in other words, you continued to get paid a lesser amount even though you’d stopped working.
This arrangement is no longer the norm – people expect to change jobs several times during their working lives. A 401K retirement plan suits this kind of work environment. When you leave one employer, you can move your 401K funds into the 401K of your new employer, or over to a Traditional IRA. In any event, the responsibility for providing a retirement income lies firmly with the worker!
Contributions are limited by IRS regulation. The maximum deferral that a plan participant can make in 2020 is 100% of salary up to $19,500. If you are age 50 or older, you may be able to make an...
In Part I of this 3-part series I gave a brief history of the life insurance industry.
Here in Part II I'll go over the main applications for life insurance policies. Next, in Part III, I'll discuss some of the behavioral issues in obtaining coverage.
So what are some of the uses of life insurance? First and foremost, a death benefit to one’s survivors. It is a risk transfer mechanism. If you die before you've been able to financially provide for those financially dependent upon you, the life insurance policy will do so. Other common applications:
It is not uncommon for a commercial lender to require that a borrower take out a life insurance policy in the amount of the loan payable to the lender.
Many cash value policies can be structured to be over-funded in earlier years, and pay out a tax-free stream of income...
This retirement savings vehicle gets its name from Section 457 of the tax code. It is a type of non-qualified deferred compensation. The employee defers money into the 457 account on a pre-tax basis. Any growth in the account doesn’t get taxed until it is ultimately withdrawn years down the road, in retirement. Withdrawals are taxed then at ordinary income tax rates.
Where do you find a 457 deferred compensation plan? At government entities, and less commonly, non-church controlled tax-exempt organizations. Consequently, you won’t find a 457 plan at a for-profit corporation.
If your employer sponsors a 457 plan, how much can you put in? Same limits as with 401ks and 403bs: up to 100% of compensation, capped at $19,500 in 2020.
If you have two jobs, one with your city, and another with a private company, you can contribute to both retirement plans. You have two separate and...
I came to financial planning as a profession in my 40’s, having made a mid-life transition from retail management. I worked in both department stores and specialty retail and generally enjoyed the work. I always enjoyed Christmas in the stores – the music, the new fragrances, the decorations, and generally upbeat anticipatory atmosphere.
Christmas time was grueling, however. The amount of merchandise that comes into a store through its loading dock, and then out the doors in the customers’ shopping bags, is enormous. It is very physical work, in that all that merchandise needs to be unpacked, displayed, and stocked around the store. The associates who wait on you generally have competing priorities imposed upon them: great customer service, while getting the new merchandise out of the bins and on the racks, and looking out for thieves.
You knew all year this was...