Tag Archives: Retirement

Social Security Benefits for Children

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In October of 2022, more than 3.8 million children received Social Security benefits because one or both of their parents are disabled, retired, or deceased. These benefit payments to children total more than $2.6 billion every month.

Sadly, many children don’t get the benefits for which they are eligible, writes Devin Carroll.  Most people don’t know about the qualifications and rules for this special benefit, so they don’t know to apply for the children in their lives.

Who Is Eligible for Social Security Benefits for Children?

A child who is your biological child, adopted child, or dependent stepchild  is eligible for children’s benefits if:

  • you become disabled
  • you retire
  • you die
  • and, the child is:
    • unmarried, and
    • under age 18, or
    • 18 or 19 if a full-time student in secondary school through grade 12 (see note below), or
    • 18 or older and disabled with a disability that started before age 22.
      Note: A 2022 report by the Office of the Inspector General found that the Social Security Administration erroneously terminated the benefits of students who turned 18. 

How Much Is The Benefit?

If you become disabled or retire, your qualified child is eligible for up to 50% of your full retirement age benefit.

If you have kids at home, and are thinking about filing for Social Security, filing early before full retirement age (RFA) could make more sense because your children cannot collect a Social Security benefit until you file.

Consider the difference in lifetime benefit amounts for a couple with the following circumstances.

Roger is 62 and his wife is 46. They have two kids at home, ages 8 & 10.  Roger is financially well off enough to stop working and can be flexible on what age he begins to collect Social Security.

If Roger waits until his full retirement age, he’ll get $2,000 per month. If he files now, he’ll only get $1,500 per month.   He ran the numbers and figured out that if he lived to 90, he’d receive an additional $70,000 in benefits for delaying filing until 66 instead of filing at 62.

For most people, this math shows that it makes sense to delay receiving benefits. However, this does not account for the benefits paid to the children. While the children are eligible for benefits based upon Roger’s retirement, the kids cannot get benefits until he files.   Roger’s family would be able to collect thousands of dollars more in lifetime benefits if Roger files early and turns on the benefits for his children.

Here’s how…

If you run Roger’s full retirement age benefit through the family benefit calculator, you’ll arrive at a maximum benefit of approximately $3,500 . If Roger files at 62 he’ll receive $1,500 and each of his children would be eligible for $1,000 in children’s benefits. That additional $2,000 per month ($1,000 for each of the children) is only available if Roger files for Social Security.

Whenever a minor child receives a Social Security benefit, the Social Security Administration pays the benefit to a representative payee or  a parent (or legal guardian) who is responsible for managing the benefits on behalf of the child.

Before a recent law change, all representative payees were required to file an annual report. However, due to a recent change in the law, the SSA no longer requires most parents or guardians to complete an annual Representative Payee Report.

Even though the SSA doesn’t require an annual reporting, they do have the following cautioning language. “All payees are responsible for keeping records of how the payments are spent or saved, and making all records available for review if requested by SSA.”

If you haven’t spent all the money, the SSA will require you to send it back to them when your child turns 18. This is because your child is considered an adult in their eyes and they will begin to deal directly with them.

References:

  1. https://www.socialsecurityintelligence.com/social-security-benefits-for-children/#more-2900

The Best Filing Age for Social Security Benefits

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Filing for Social Security benefits at age 62 can offer a greater financial benefit in tax savings and capital accumulation than filing at 70 in the right circumstances, states Devin Carroll, author of “Social Security Basics: 9 Essentials That Everyone Should Know”l

There are several factors or variables you should consider:

  1. You want to make sure your money is going to last throughout your 30 years or more of retirement
  2. You want to make sure your Social Security filing decision is coordinated with your other financial assets and income
  3. You want to know if a Roth conversion would work for you (and how much to convert)
  4. You need a better estimate of a year-by-year retirement income plan
  5. You want to make sure that your retirement income strategy won’t cost you unnecessary local, state and federal income taxes
  6. You want to make sure you understand the right sequence to access your taxable, deferred and Roth retirement accounts

 

50/15/5 Budget for Saving and Spending

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Key takeaways

  • Consider allocating no more than 50% of take-home pay to essential expenses.
  • Try to save 15% of pretax income (including any employer contributions) for retirement.
  • Save for the unexpected by keeping 5% of take-home pay in short-term savings for unplanned expenses.
  • Budget. The 50/15/5 rule is Fidelity’s simple guideline for saving and spending: Aim to allocate no more than 50% of take-home pay to essential expenses, save 15% of pretax income for retirement savings, and keep 5% of take-home pay for short-term savings.

50/15/5 Budget is an easy plan for managing your saving and spending

50/15/5 Rule Budget are simple guidelines for saving and spending and managing your money. Track your money using 3 categories:

  • Allocate no more than 50% of take-home pay to essential expenses,
  • Save 15% of pretax income for retirement savings, and
  • Keep 5% of take-home pay for short-term savings.

Fidelity Investment’s research found that by sticking to these guideline, there is a good chance of maintaining financial stability now and keeping your current lifestyle in retirement.

Essential expenses: 50%

Some expenses simply aren’t optional—you need to eat and you need a place to live. Consider allocating no more than 50% of take-home pay to “must-have” expenses, such as:

  • Housing—mortgage, rent, property tax, utilities (electricity, etc.), homeowners/renters insurance, and condo/home association fees
  • Food—groceries only; do not include takeout or restaurant meals, unless you really consider them essential, i.e., you never cook and always eat out
  • Health care—health insurance premiums (unless they are made via payroll deduction) and out-of-pocket expenses (e.g., prescriptions, co-payments)
  • Transportation—car loan/lease, gas, car insurance, parking, tolls, maintenance, and commuter fares
  • Child care—day care, tuition, and fees
  • Debt payments and other obligations—credit card payments, student loan payments, child support, alimony, and life insurance
    • Keep it below 50%: Just because some expenses are essential doesn’t mean they’re not flexible. Small changes can add up, such as turning the heat down a few degrees in the winter (and turning your AC up a few degrees in the summer), buying—and stocking up on—groceries when they are on sale, and bringing lunch to work. Also consider driving a more affordable car, carpooling, or taking public transportation.
    • Consider a high-deductible health plan (HDHP), with a health savings account (HSA) to reduce health care costs and get a tax break. If you need to significantly reduce your living expenses, consider a less expensive home or apartment. There are many other ways you can save. Take a look at which essential expenses are most important, and which ones you may be able to cut back on.

Retirement savings: 15%

It’s important to save for your future—no matter how young or old you are. Why? Pension plans are rare. Social Security probably won’t provide all the money a person needs to live the life they want in retirement. In fact, we estimate that about 45% of retirement income will need to come from savings. That’s why we suggest people consider saving 15% of pretax household income for retirement. That includes their contributions and any matching or profit sharing contributions from an employer. Starting early, saving consistently, and investing wisely is important, as is saving in tax-advantaged retirement savings accounts such as a 401(k)s, 403(b)s, or IRAs.

How to get to 15%: If contributing that amount right now is not possible, check to see if your employer has a program that automatically increases contributions annually until a goal is met. Another strategy is to start by contributing at least enough to meet an employer match, and then if you get a raise or annual bonus, add all or part of these funds to your workplace savings plan or individual retirement account until you have reached the annual contribution limit.

Short-term savings: 5%

Everyone can benefit from having an emergency fund. An emergency, like an illness or job loss, is bad enough, but not being prepared financially can only make things worse. A good practice is to have enough put aside in savings to cover 3 to 6 months of essential expenses. You can start with $1,000 or a month’s worth of expenses, and then gradually build up to 3 to 6 months’ worth. Think of emergency fund contributions as a regular bill every month, until there is enough built up.

While emergency funds are meant for more significant events, like job loss, we also suggest saving a percentage of your pay to cover smaller unplanned expenses. Who hasn’t been invited to a wedding—or several? Cracked the screen on a smartphone? Gotten a flat tire? In addition to those, there are certain categories of expenses which are often overlooked; for example, maintenance and repairs of cars, field trips for kids, copays for doctor’s visits, Christmas gifts, and Halloween costumes, to name a few. Setting aside 5% of monthly take-home pay can help with these “one-off” expenses.

It’s good practice to have some money set aside for random expenses so you won’t be tempted to tap into your emergency fund or pay for one of these things by adding to an existing credit card balance. Over time, these balances can be hard to pay off. However, if you pay the entire credit card balance every month and get points or cash back for purchases, using a credit card for one-off expenses may make sense.

How to get to 5%: Having this money automatically taken out of a paycheck and deposited in a separate account just for short-term savings can help a person reach this goal.

50/15/5 Budgeting guidelines serve as a starting point

Our guidelines are intended to serve as a starting point. It is important to evaluate your situation and adjust these guidelines as necessary. If you’re close to the 50/15/5 target spending and saving amounts, good job. And for those staying within the guidelines, any remaining income is theirs to save or spend as they would like.

Some ideas: First, pay down high-interest debt. For other goals, like paying for a child’s college or wedding, you could use the remaining income to save for them. And finally, for those who want to retire early or haven’t been saving diligently, putting it toward retirement savings may make sense.

The good news is that it isn’t about micromanaging every penny. Analyzing current spending and saving based on our 3 categories can give you control—and confidence. Most everyone’s financial situation will change over time. A new job, marriage, children, and other life events may change cash flow. It’s a good idea to revisit spending and saving regularly, particularly after any major life events.

References:

  1. https://www.fidelity.com/viewpoints/personal-finance/spending-and-saving

Retirement: Longevity Risk

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In the TIAA Institute and George Washington University’s Global Financial Literacy Excellence Center (GFLEC) measure of Americans’ financial literacy, nearly two-thirds of U.S. adults were unable to correctly answer the one question that is perhaps the most pertinent when it comes to retirement financial planning: expected life expectancy.

The exact wording of the question depended on whether the respondent was male or female. For males, the question was:

“What is life expectancy among 60-year-old men in the U.S.?” Respondents were given four choices:

  • About 16 more years (age 76)
  • About 22 more years (age 82)
  • About 28 more years (age 88)
  • Don’t know

Female respondents received the identical question, except that it focused on the life expectancy of the average 60-year old woman, and the multiple choices listed different ages.

The correct answer for men is about 22 more years—until the age of 82. For women it is 25 more years, until age 85. Only 37% of all respondents got the question correct.

These results help to explain why relatively few retirees use annuities as part of their retirement planning and financing. If they don’t appreciate the very real risks of outliving their money (longevity risk), then they will tend to under-emphasize the benefits of a guaranteed lifetime income provided by annuities.

It’s worrying that this percentage is so low. As Annamaria Lusardi, a George Washington University professor and GFLEC’s Academic Director, pointed out, “if we want to create better retirement outcomes, we need to start by making sure people understand how long they are going to live in retirement.”

References:

  1. Mark Hulbert, Most People Can’t Answer This One Life-and-Death Question, Barron’s, January 14, 2023.

Retirement Dilemma and Social Security Benefits

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In the past, the primary retirement goal for most Americans was to have an employer provided secure pension and guaranteed healthcare insurance lasting for as long as they lived, writes Martin Neil Baily, senior fellow at the Brookings Institution and former Chairman of the Council of Economic Advisers under President Clinton, in a Barron’s article.

Today regarding retirement, Americans must fend for themselves, relying on their own savings and investments, and figuring out how to avoid running out of money.

With little fanfare, America has moved from a world of traditional pensions, where risks were absorbed by employers, to a system of individual retirement accounts where families must manage uncertainty including the fact that none of us knows how long we will live and what large expenses we may face, especially in healthcare.

There has been transformation in America’s retirement system from traditional pensions to individual retirement accounts and employers’ 401K plans.

The risks for a secure retirement have been partly mitigated by Social Security and Medicare, the foundation of the American retirement system. The programs have, for the most part, been successes, sharply lowering the poverty rate among the elderly and providing a backstop for middle-income households. For decades, Social Security and Medicare have lifted American seniors, survivors, and people with disabilities out of poverty.

Unfortunately, these federal programs are not on a sound financial footing thanks in part to Washington‘s dysfunction. The Social Security* trust fund for retirement and survivors’ benefits is expected to run out of money and reduce benefits to recipients in 2033, while the Medicare** hospital fund could run out in 2028. Thus, older Americans can now add policy uncertainty to their list of risks to retirement.

Americans are willing to take on the challenge of managing their own retirement, but they need additional federal government help to do it.

The first step towards solving the ‘retirement dilemma’ is for Americans to save enough, consistently. The best way to do this is through automatic retirement savings plans, like 401(k) plans. Employees would be enrolled in the plan automatically when hired, with contributions taken out of paychecks unless they chose to opt out. The self-employed can set up their own plans but it would help if state governments, or the federal government, would operate retirement savings plans open to everyone.

Current tax law favors retirement savings, but the benefit of this tax break, worth over $250 billion a year, accrues mostly to the rich. Tax reform should redistribute the benefit more equally to encourage middle-income families to save.

Saving a solid retirement nest egg is not enough. Savers don’t know what returns they will earn on their savings. Family members don’t know how long they will live (people often underestimate their lifetimes). They don’t know if they will need in-home care, or if they will have to enter an expensive nursing home. (Many families hoard their financial assets for fear they will need all their savings for end-of-life care).

What may be needed to help fix retirement is a good financial advisor, and a reformed retirement system.

Annuities are a way to avoid market and length-of-life uncertainty, but at present it is hard to find the right annuity at the right price. Employers should negotiate with providers to offer their employees the option of putting some of their retirement savings into an annuity that guarantees regular monthly payments, either throughout retirement or to protect against running out of money at the end of life. It is a way of creating an individualized “pension” plan.

Today’s workers need a retirement plan that is flexible and can move with them. The downside means that retirees are exposed to a lot of economic and market risks. Yet, reasonable policy reforms can invigorate insurance markets to help ameliorate risks. Employers owe it to their employees to make it easier to build a secure retirement.

References:

  1. Martin Neil Baily, The Way Americans Retire Has Changed Forever. Why Saving a Nest Egg Isn’t Enough. Barron’s Magazine, February 17, 2023.

* Social Security is a federal benefits program that pays benefits to retirees and workers who are disabled, as well as their family members and survivors. It is financed through a 12.4% tax split among employers and employees; self-employed individuals pay the entire 12.4%.

This tax money is deposited into the two Social Security trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. The Social Security Administration pays current benefits and administrative costs out of these trust funds.

As early as 2034, Social Security trust fund will no longer be able to pay full benefits scheduled under current law. Although the trust funds’ projected shortfalls are typically attributed to lower birth rates and increased life expectancies for workers.

** Medicare has been a successful component of the American social safety net.

As of September, 65.1 million people were covered, 85 percent of them elderly. 
It is also expensive: During fiscal 2022, the program accounted for $710 billion in federal spending, which was 11.4 percent of the $6.2 trillion total, according to the Congressional Budget Office.

By 2028, the Medicare trust fund, which pays for hospitals, skilled nursing facilities and hospices, and is financed by payroll taxes, is expected to be exhausted.

Inflation: Core Consumer Price Index

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Inflation is measure of the increase in the cost of living which can erode the value of your money, and more importantly – the goods, services, rent and mortgages that you can purchase with that money.

The U.S. Bureau of Labor Statistics showed that falling gasoline prices helped lead to a second consecutive lower annual U.S. inflation reading, but the consumer price index still edged up by 0.1% in August, contrary to the 0.1% drop expected by economists polled by The Wall Street Journal, writes MarketWatch. The core Consumer Price Index (CPI), which strips out food and energy prices rose by a much sharper 0.6%.

The year-over-year food index component of the CPI was up 11.4% in August. Higher food prices “reflect very tight global supply/demand dynamics,” says Jake Hanley, managing director and senior portfolio strategist at Teucrium. Rising costs don’t impact all households the same way. Some families may have a personal inflation rate that’s lower (or higher) than the national average, depending on what they buy.

Rising costs don’t impact all households the same way. Some families may have a personal inflation rate that’s lower (or higher) than the national average, depending on what they buy.

“Fuel prices have continued to be a major component in inflation figures, but while gasoline prices have cooled considerably over the last 3 months, diesel prices have remained fairly elevated,” says Patrick De Haan, head of petroleum analysis at GasBuddy. Diesel prices are a “major component of inflation in other areas of the economy, such as the cost of groceries.”

“Fuel prices have continued to be a major component in inflation figures, but while gasoline prices have cooled considerably over the last 3 months, diesel prices have remained fairly elevated,” says Patrick De Haan, head of petroleum analysis at GasBuddy. Diesel prices are a “major component of inflation in other areas of the economy, such as the cost of groceries.”

“Fuel prices have continued to be a major component in inflation figures, but while gasoline prices have cooled considerably over the last 3 months, diesel prices have remained fairly elevated.” — Patrick De Haan, GasBuddy

Diesel and natural-gas prices have remained high, despite a retreat in recent weeks, and fuel costs are a key component when it comes to growing the food the nation needs. Diesel engines power about 75% of U.S. farm equipment and transport 90% of farm products, according to data from the Diesel Technology Forum. 

Diesel “will likely remain at historical premiums to gasoline—and could see more disconnect if this winter is cold due to diesel and heating oil being essentially the same product, keeping demand elevated,” De Haan says.

Wall Street economists see the U.S. Federal Reserve lifting interest rates higher than they previously expected following the latest U.S. consumer price inflation data. Economists at TD Securities said they now expect the Fed to raise its benchmark rate by 75 basis points next week.

References:

  1. https://www.marketwatch.com/story/high-fuel-costs-will-continue-to-contribute-to-the-rise-in-food-costs-11663100705
  2. https://www.marketwatch.com/story/the-biggest-fed-rate-hike-in-40-years-it-might-be-coming-11663097227

Social Security Administration (SSA) Benefits Increase in 2023

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Social Security Administration announced that the COLA will increase Social Security benefits by 8.7% beginning January 2023 — the largest since 1981. 

Approximately 70 million Americans will see a 8.7% increase in their Social Security benefits and Supplemental Security Income (SSI) payments in 2023. On average, Social Security benefits will increase by more than $140 per month starting in January 2023.

A COLA at the this level is almost unprecedented. There were only three other times since the start of automatic inflation adjustments that COLAs were higher (1979-1981)

The Social Security Administration (SSA) will mail COLA notices throughout the month of December to retirement, survivors, and disability beneficiaries, SSI recipients, and representative payees.

But if you want to know your new benefit amount as soon as possible, you can securely obtain your Social Security COLA notice online using the Message Center in your personal my Social Security account. Your personal my Social Security account gives you immediate access to important information and tools.

According to The Motley Fool, December 2022, the Social Security Administration estimates monthly payouts for an assortment of beneficiaries will be as follows:

  • Average retired worker: $1,681/month
  • Average worker with disabilities: $1,364/month
  • Average aged couple, both receiving benefits: $2,734/month
  • Average widowed mother and two children: $3,238/month
  • Average aged widow(er) with no children: $1,567/month

Here’s what these same monthly Social Security checks will look like once the 2023 COLA takes effect in January:

  • Average retired worker: $1,827 ($146/month increase)
  • Average worker with disabilities: $1,483 ($119/month increase)
  • Average aged couple, both receiving benefits: $2,972 ($238/month increase)
  • Average widowed mother and two children: $3,520 ($282/month increase)
  • Average aged widow(er) with no children: $1,704 ($137/month increase)

For a majority of recipients, a triple-digit monthly “raise” is on the way, explains The Motley Fool.

January 2023 marks when other changes will happen based on the increase in the national average wage index. For example, the maximum amount of earnings subject to Social Security payroll tax in 2023 will be higher. The retirement earnings test exempt amount will also change in 2023.

There are few, if any, federal agencies that impact the lives of the American people to the extent that the Social Security Administration (SSA) does. Millions count on SSA—retirees who worked hard their whole lives, people who are no longer able to work due to disability, and many more.

SSA’s programs touch the lives of almost every person in the nation. SSA employees work diligently to ensure that they receive critical benefits and other services, and it is my honor and privilege to lead them in their efforts.

References:

  1. https://blog.ssa.gov/social-security-benefits-increase-in-2023/
  2. https://www.ssa.gov/news/newsletter/
  3. https://www.fool.com/retirement/2022/10/18/how-much-social-security-checks-increasing-in-2023/
  4. https://seniorsleague.org/week-ending-october-15-2022/

Social Security Trust Fund

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Social Security’s Trustees project that the trust fund will be depleted in 2034. At that point, 71 million beneficiaries could face across-the-board Social Security benefit cuts of 23 percent if elected leaders fail to act.

With the retirement of baby boomers and lengthening life expectancies, programs critical to older Americans, such as Social Security, will come under significant strain in coming decades. Social Security’s Trustees project that the combined Old-Age and Survivors Insurance and Disability Insurance (OASI) trust fund will be depleted in 2034. At that point, 71 million beneficiaries could face across-the-board Social Security benefit cuts of 23 percent if policymakers fail to act.

Social Security is the primary source of retirement income for million of Americans. But without action, it will lack sufficient resources to pay for all of the benefits promised under current law.

Almost every American worker pays a dedicated payroll tax, which entitles them to benefits when they retire or become disabled. But as the population ages, fewer workers will be paying taxes to support each Social Security beneficiary, thereby endangering the program’s finances.

Understanding the importance of the Social Security program for low-income Americans is a critical aspect of reforming the program in a fair and equitable way.

In 2018, Social Security was responsible for lifting almost 22 million Americans out of poverty, nearly 15 million of whom were seniors age 65 and older.

Options for improving the financial outlook of Social Security’s retirement program include:

  • Increasing payroll taxes. Raise the payroll tax rate from its current level of 12.4 percent (half paid by employees and half by employers) on wage earnings subject to the tax. In 2022, earnings up to $147,000 will be taxed.
  • Raising the full retirement age. Propose increasing the retirement age above age 67 for younger cohorts to account for future gains in average longevity.
  • Reducing initial benefits. Change the amount that retirees can receive when they first apply for benefits. Many proposals combine a reduction in benefits for high earners with an increase in benefits for lower earners. (This is known as “progressive price indexing.”)
  • Adjusting benefits after retirement. Slow the growth of retirees’ benefits over time by changing the cost-of-living index. Many economists believe that Social Security currently uses an index that overstates inflation, so benefits grow faster than the true cost of living. They propose replacing the current index with chained-CPI, which is a more accurate measure of inflation. (That change would also apply to other inflation-indexed federal retirement programs and tax provisions.)

These proposals are intended to put Social Security’s finances on a long-term sustainable footing.

References:

  1. https://www.pgpf.org/finding-solutions/retirement

Social Security cost of living for 2023 could increase 8.7%

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Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. New York Times

More than 70 million Americans receiving Social Security benefits could see the largest annual cost-of-living increase in more than four decades in 2023, considering the government CPI inflation data.

The Social Security Administration will announce the formal 2023 figure around October 13, after the release of September CPI inflation data. However, the August CPI point to a Social Security cost-of-living adjustment, known as the COLA, of 8.7 percent, according to an estimate by the Senior Citizens League that lobbies for seniors and reported by The New York Times.

The COLA is calculated annually using a formula detailed in federal law. It uses one of the broadest government measures of inflation, known as the Consumer Price Index for Urban Wage Earners and Clerical Workers‌, or CPI.‌

Social Security averages together the CPI figures during the third quarter of each year, and compares that with the previous year’s figure. For example, the 2023 COLA will be calculated by averaging together the CPI figures for the third quarter of 2022 and comparing that with the same averaged figures for 2021.

Rapid inflation typically results in trouble for equity stocks and the overall market. Financial risk assets have historically performed badly during periods of inflation, while tangible assets like real estate have held their value better.

References:

  1. https://www.nytimes.com/2022/09/14/business/social-security-cola-increase.html
  2. https://www.ssa.gov/
  3. https://www.whio.com/news/trending/social-security-boost-cost-of-living-increase-2023-pace-be-largest-since-1981/

Social Security is a program run by the federal government. The program works by using Social Security taxes paid into a trust fund to provide benefits to people who are eligible. Eligibility for Social Security retirement benefits starts at age 62 (the earliest you can receive them) to age 70 (when you hit your greatest amount).