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How Are Social Security Benefits Calculated?

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Social Security Benefits

You’re going to retire in the relatively near future. You intend to get some or all of your retirement income through social security benefits. How will that work? Many people aren’t quite sure how the Social Security Administration calculates their benefits. If you don’t understand that, then you might not know how much post-retirement income you can expect. And without that information, it’s very hard to plan for the future.

How Social Security Benefits Are Calculated

The Social Security Administration explains that they calculate social security benefits by taking the following into consideration:

  • The amount of money that you have earned in your lifetime from employment.
  • They adjust this amount to consider how average wages of changed over the years.
  • They base the adjustment on the 35 years you earned the most money during your lifetime.

Then it says, “we apply a formula to these earnings and arrive at your basic benefit” amount.

While the words sound straightforward, this is all a little bit confusing. After all, you probably don’t know how to adjust your wages for changes in wage rates across thirty-five years of employment. Moreover, this tells us nothing about the “formula” they apply.

Digging Deeper Into These Calculations

In order to better understand, we need to dig deeper. The Social Security Administration publishes an Annual Statistical Supplement that includes an appendix that provides us with more information about how social security benefits are calculated. The 2019 version explains that a basic calculation:

  • Assumes that you didn’t take any disability time during your working years. Further assumes that you didn’t work after becoming eligible for retirement.
  • They use “wage indexing” to calculate your lifetime earnings. This is how they figure out what you earned, adapting decades-old wages to modern standards of living. They base the adjusted amount on the year that you turn 60. For example, as of 2017, someone who earned $20000 in 1990 would have that count as over $47,000 towards their lifetime earnings based on the “wage indexing” math. You can see further examples of Wage Indexing math on this page.
  • Now about that “formula” – this is a weight of giving weight to “provide a higher replacement of earnings for lower-wage workers” in retirement. The SSA says that “the formula for persons aged 62 in 2019 is 90 percent of the first $926 of AIME; plus 32 percent of the next $4,657; plus 15 percent of the AIME over $5,583.”

So, as we dig deeper, we see that social security benefits are calculated based on what you earned (at today’s current value for those earnings) for the 35 highest-paid years of your career. This number is then adjusted with that “formula.”

What Can Change These Basic Social Security Benefits?

However, additional things can increase or decrease your basic benefits. Varied factors include:

  • Early retirement; if you retire at age 62, you can still get benefits but they’ll be lower than if you wait to retire until age 65
  • Late retirement; if you retire later than 65, you’ll typically increase the amount of benefits you can receive
  • Continuing to earn money after age 61 but still retiring at 65
  • Long periods of not working during your working years
  • Cost-of-living adjustments for the years after you’ve turned 65
  • Military service, pensions, railroad work and other factors that impact the Social Security tax you’ve paid

This is complicated stuff. No wonder many people aren’t sure how social security benefits are calculated! There is a worksheet here that can help you calculate all of this.

Get an Estimate of Your Social Security Benefits

The link above will take you to a worksheet that you can print out and fill in yourself. It should provide you with an accurate representation of what you can expect to earn in social security benefits. However, if that’s too much work for you at the moment, you might instead wish to use the Social Security Administration’s Retirement Estimator.

This is not going to give you the exact number. It fails to take into consideration many of the more complex details about how social security benefits are calculated. That said, it can give you a good starting point to guess what you are likely to earn in social security income. To keep things even simpler, although perhaps not quite as good of an estimate, the SSA also offers a Quick Calculator.

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How to Retire Well in Iowa

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how to retire well in iowa

Choosing a place to retire can be an exciting time, but it’s also a serious undertaking. How far your money will go is impacted by a variety of factors, influencing how much it takes to retire well in a given area. Many soon-to-be retirees want to find an affordable location that offers the kinds of amenities they require. While they may spend time exploring traditional retirement states, many overlook amazing options like Iowa. The Hawkeye State has a ton to offer. Plus, your money can go further there, allowing you to retire well for less. If you want to see why Iowa should be on your list, then read on to learn how to retire well in Iowa.

Cost of Living

Each state has a cost of living score, comparing its affordability to the national average, which is set at an even 100. When a state has a score below 100, that means it’s cheaper to live there than the national average. Often, this means a retiree’s savings can go further or last longer there, something that may be critical if you have a tight budget.

Iowa’s overall cost of living score comes in at 91.4, which is significantly below the national average. However, Iowa really shines in when it comes to housing costs. For that segment, Iowa’s score is 76.0, marking it as one of the most affordable states for homebuyers.

In Iowa, the average home value is $154,727. In comparison, the national average sits at $248,857. That’s more than a $94,000 difference.

While some fear that the lower home value represents an issue with a property’s quality, that isn’t necessarily the case. At times, it simply means that the going rate for homes is lower overall, allowing you to secure a nice property for less than what a comparable house would cost in a different state that had a higher cost of living.

Iowa also does well in other sectors. It has a score of 96.3 for groceries and a 97.6 for transportation. For utilities, Iowa comes in as average, which a score of 100.0. The only area where Iowa is more expensive than average is healthcare, which landed at a 102.4. However, since it is more affordable in essentially every other sector, the slightly higher costs in the healthcare area have little impact on overall affordability.

Tax Considerations

Whether you’re working with a limited amount of retirement savings or have a significant sum set aside, tax rates matter. If you choose a state that has higher taxes, you’ll have to dedicate more of your retirement funds to cover those expenses. That means you’ll have less money available to support your preferred post-retirement lifestyle, and that isn’t always ideal, particularly if you have a tight budget.

In Iowa, there is a state income tax. However, you don’t have to pay taxes on your Social Security benefits. Military retirement is also tax-exempt.

Other types of retirement income are potentially taxed. Depending on your situation and filing status, you may be able to exclude up to $6,000 as an individual, or $12,000 if you’re married, of retirement income that comes from IRAs, annuity, pensions, or other plans. Generally, those who are at least 55 years old are eligible for some level of exclusion.

Beyond the exclusion, you do pay income taxes on your retirement income. Iowa has a bracket system. Income tax rates come in at 0.33 percent to 8.53 percent, so how much you pay varies depending on your income level.

Iowa also has a sales tax. The lowest rate, as set by the state, is 6 percent. However, each jurisdiction can charge an additional 1 percent, if they so choose. Overall, this rate is comparable to the rates set by most other states.

Individuals who are 65 or older are also eligible for a property tax credit. Usually, the Iowa Homestead Credit reduces the assessed value of the home (for tax purposes only) by about $4,850. This can result in a savings of $100 to $200 on your property tax bill, depending on your jurisdiction’s rate.

Part-Time Job Opportunities

Generally, retirees can find part-time jobs in Iowa with a reasonable amount of ease. Even in the wake of the pandemic, Iowa’s unemployment rate (as of July 2020) came in at 6.6 percent. That’s below the national average of 10.2 percent for the same period.

Before COVID-19, the unemployment rate was also below the national average. In February 2020, it was a startlingly low 2.8 percent.

However, that doesn’t mean the landscape isn’t more challenging today than it was previously. Additionally, until the COVID-19 event completely calms, the situation remains precarious. As a result, retirees today may have a harder time landing a part-time job, though that may subside down the line.

Best Cities for Retirees in Iowa

If you’re looking for a great city in Iowa to call home during your retirement, you have quite a few options. The town of Clear Lake is a popular choice, offering a small-town ambiance and welcoming vibe. Ames is another lovely choice. It’s conveniently located near Route 35, is highly affordable, provides a great feel, and it just 30 miles from Des Moines.

For retirees who want to be closer to a big city, Windsor Heights, a Des Moines suburb, is a solid choice. West Des Moines is a similarly excellent option.

It’s also wise to keep Mount Vernon, Clive, and Johnston on the table. They each have a great atmosphere, though each in a unique way.

How Much Money You Need to Retire Well in Iowa

Since the state has an affordable cost of living, you don’t need as much stashed away to retire well in Iowa. While the exact amount it takes to stay comfortable does vary depending on the city you select, if you have around $57,938 a year available, you should do well in Iowa. Covering your needs shouldn’t be an issue at that income level, and you can also get quite a few wants if you have access to that much cash.

Do you have any tips on how to retire well in Iowa? Share your thoughts in the comments below.

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Should You Include Cryptocurrency in Your Retirement Plan?

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crypto currency in a retirement plan

Retirement is often treated as a numbers game. The more diverse your investments, the “steadier” it is supposed to grow. There are a lot of different investments people use to achieve this aim, but cryptocurrency is a new one. While not too many are jumping on this train, there are some that think cryptocurrencies are bound to grow over time. To help you decide if this is right for you, it is important to know what your options are, and how cryptocurrency in a retirement plan differs.

Long-Term Investing Principles

Long term investments should be low-risk, low-reward. This means that you probably aren’t going to strike it rich in a year off of your retirement accounts, but you can count on slow, steady gains. The goal of a retirement account is not to really need to think about it. “Set it and forget it” is the MO here. So, while higher risk can lead to better gains in the short run, they also require more supervision that you may not want to deal with. This doesn’t mean you can’t invest in those things, but don’t dedicate your retirement funds to it.

Cryptocurrency Market Behaviors

This is a tough section to write, because there is no standard. Outside of the bigger coins, cryptos are all over the place. What you can see from looking at Bitcoin, the big kid on the playground, is sharp spikes followed by sharp downturns. They are relatively random, and pretty extreme.This makes them questionable retirement choices, and not particularly suited to the long-term safety goals of a retirement account.

The 30-Year Rule

A principle to keep in mind is that most investments will see a net gain after 30 years. While the research on this wasn’t done with cryptos, and they aren’t that old, take this with a grain of salt. Typically, though, this rule applies to almost everything. The reason for that is, despite ebbs and flows, the value of most investments trends upward. Ceilings get higher, and so do floors. That doesn’t mean that all investments are created equal, though.

This doesn’t mean that cryptocurrency in a retirement account is a good idea. Basically, it just states that you might not lose everything over time. You’ll want to optimize as best you can, though, so it would be a much better idea to invest elsewhere. Accounts like Roth IRAs and 401ks offer tax advantages that will make them a much more lucrative pick on average. Index and mutual funds offer higher average gains, and great diversification by their very design. All of these would be a better place for your retirement cash. You can save your gambling money for cryptocurrencies.

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How to Retire Well in Kentucky

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how to retire well in kentucky

When soon-to-be retirees who are open to relocating to make their most of their golden years think about places to settle down, Kentucky doesn’t commonly come to mind. However, if you are looking for an affordable place to retire that has a lot to offer, Kentucky needs to be on your list. By heading to the Bluegrass State, your retirement dollars could go further. Plus, there is a multitude of outdoor recreational activities, beautiful landscapes, and lovely cities just begging to be explored and enjoyed. Whether you are trying to choose a place to retire or have already decided that Kentucky is the place you want to be, here’s what you need to know to retire well in the Blue Grass state.

Cost of Living

A state’s cost of living lets you compare how expensive the area is in comparison to the national average, which is always set with a score of 100. In Kentucky, the overall cost of living comes in at 94.2, which is good news for retirees. That means it’s cheaper to live in the Blue Grass state, allowing your savings to go further.

One area where Kentucky really shines is housing. For that segment, the state has a score of 82.0. The average home value comes in at $149,987. That’s almost $100,000 less than the national average, which sits at $248,857.

While some may assume that lower housing values mean the homes are of lower quality, that isn’t necessarily the case. It can also mean that the going rate for properties is lower in general, meaning a nice house costs less than a comparable property in a higher cost state.

But housing isn’t the only sector where Kentucky’s prices are less than the national average. It also comes in below 100 for groceries, utilities, transportation, and healthcare, which is essentially every major category that most retirees would have on their minds when choosing a destination.

Tax Considerations

Taxes can take a big bite out of your retirement savings. As a result, it’s important to examine the tax implications of heading to a particular state.

In Kentucky, there is a state income tax. However, Social Security Income is exempt, which could be a big help to retirees on a budget. Railroad Retirement Board benefits are also exempt.

Additionally, there are partial exemptions for other forms of retirement income, such as pensions, 401(k) funds, or IRA withdrawals. If your total withdrawals fall under the annual limit set by the state – currently $31,110 – they are entirely tax-exempt. If your withdrawals go above the threshold, then a portion will be subject to the income tax rate, which is set at 5 percent.

Kentucky does have a sales tax as well. The rate is 6 percent on qualifying purchases, including most retail and digital property sales, along with certain services. There are no local sales taxes, so the rate is consistent across the entire state.

For property taxes, individuals who are 65 or older may qualify for the Homestead Exemption. With this, through 2020, up to $39,300 of a property’s value is deducted for tax calculation purposes. The exemption is reassessed every two years to adjust it for inflation, and the next adjustment will be effective starting in 2021, potentially changing the size of the exemption.

Part-Time Job Opportunities

Part-time job opportunities are often available in Kentucky. Even in the post-COVID-19 landscape, the unemployment rate in Kentucky isn’t as high as some other regions of the country. As of July 2020, the unemployment rate was 5.7 percent. While higher than the pre-COVID-19 period, that’s far below the July 2020 national average, which was sitting at 10.2 percent.

However, the workforce landscape is still a bit precarious. It isn’t clear whether there will be a resurgence that could lead to short-term business closures or hiring shifts. As a result, retirees may experience challenges essentially everywhere when it comes to landing a part-time job.

Best Cities for Retirees in Kentucky

If you want to retire well in Kentucky, there are plenty of cities and towns that could offer you a great lifestyle. If you prefer larger metro areas, both Lexington and Louisville could be great choices. Many of the Louisville suburbs – including Windy Hills, Graymoor-Devondale, Indian Hills, and Hurstbourne – are also popular, providing proximity to city amenities with a more residential, relaxed feel.

For quaint towns, Fort Thomas is a fun choice. The area offers up a lot of charm, as well as a genuine community-oriented atmosphere. Crestwood is another excellent choice, providing a small-town feel while being close to Louisville.

How Much Money You Need to Retire Well in Kentucky

Thanks to Kentucky’s lower cost of living, you can retire well in the Blue Grass state for less. While exactly how much you’ll need does vary depending on the city or town you choose and your unique needs, having about $59,713 a year available should allow you to live pretty comfortably. You should have enough to cover your needs and also quite a few wants, allowing your retirement to be enjoyable without breaking the bank.

Do you have any other tips that can help someone retire well in Kentucky? Share your thoughts in the comments below.

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How to Retire Well in Connecticut

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how to retire well in connecticut

If you want to be able to enjoy the changing of the seasons each year. Retiring in Connecticut may be a dream come true for you. The state has a lot of offer residents. Which includes well-appointed cities, delightful small towns, and beautiful landscapes. Depending on how you’d like to spend your retirement. Connecticut may have everything you’d need to enjoy your golden years. However, you want to make sure you’re financially prepared for the location. If you’re going to retire well in Connecticut. Here’s what you need to know.

Cost of Living

When it comes to the cost of living. Connecticut is above the national average. In fact, with its score of 124.2, Connecticut is in the top ten most expensive states in the nation.

Housing and utility costs are particularly high in Connecticut. Coming in with scores of 138.3 and 134.9, respectively. However, none of it’s remaining score categories (groceries, transportation, and healthcare) come in at or below 100. Which means Connecticut is higher than the national average across the board.

On the housing front. The average home value in Connecticut is $259,855. That’s just slightly above the national average of $248,857. For rentals, the median price is $1,800 per month. Which is $150 more than the national average of $1,650.

Overall, living in Connecticut costs more essentially across the board. That means retirees need to have higher incomes in order to remain comfortable.

Tax Considerations

Connecticut does have state income taxes. Which isn’t ideal for retirees who may want to have a part-time job as a source of income. However, there is an exemption for Social Security benefits as long as your federal adjusted gross income (AGI) is below $75,000 if you’re filing single. Or under $100,000 if you’re married and filing jointly with your spouse.

It is important to note that retirement account withdrawals are subject to Connecticut state income tax, which come in between 3 and 6.99 percent depending on your tax bracket. Similarly, public and private pensions are taxed at the standard rate.

Further, Connecticut does have a sales tax. The statewide rate is 6.35 percent, with a handful of exceptions that have different rates (ranging from 1 to 9.35 percent). Unlike some other states, that rate is statewide, as local jurisdictions cannot impose more.

Additionally, there are property taxes that homeowners have to contend with, making Connecticut even more costly if you want to buy a house. However, individuals age 65 and older do qualify for property tax credits, reaching as high as $1,000 for individuals and $1,250 for married couples.

Part-Time Job Opportunities

There are part-time job opportunities for retirees in Connecticut usually. However, COVID-19 has dramatically altered the employment landscape. Widespread unemployment means many people are exploring job opportunities, which can make it difficult for anyone to find a new job.

Should the pandemic resolve, the part-time job picture may be brighter. However, until that occurs, retirees may face challenges in nearly any state.

Best Cities for Retirees in Connecticut

If you want to retire well in Connecticut, choosing the right city is essential. It ensures you have access to the right amenities and that your money will go as far as possible.

Greenwich is a popular option, thanks to the city’s high availability of recreation centers and doctor’s offices. Ridgefield, New Milford, and Westport are also strong contenders, bring a lot to the table and having a competitive cost of living when compared to the state average.

How Much Money You Need to Retire Well in Connecticut

Since Connecticut has a higher cost of living, you’ll likely need more money to retire well there than in some other states. While the city you choose does play a role in how far your cash goes, you may want to plan to have at least $78,730 available as yearly income. That way, you can handle all of your needs and have plenty for wants, ensuring you can enjoy your retirement with greater ease.

Do you have any tips that can help someone retire well in Connecticut? Share your thoughts in the comments below.

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If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started. If you want to be able to customize your blog on your own domain and need hosting service, we recommend trying BlueHost. They offer powerful hosting services for $3.95/month!

Can You Still Win If Your Employers Cuts off Their 401(k) Match?

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Employers Cuts Off 401(K) Match

During hard financial times, such as the situation created by the COVID-19 pandemic, employers may cut their 401(k) match to save money. For employees, this can initially be quite concerning. After all, it reduces the amount of money being set aside for their retirement, potentially making it harder for them to achieve their goals on time. However, employers cutting off 401(k) matching isn’t the end of the world. It’s still possible to come out okay. If you are questioning whether of not you can still win if your employers cuts off their 401(k) match? want to make sure you continue to win the retirement savings game, here’s what you need to know.

Matching Isn’t Required

First, it’s important to understand that offering a 401(k) match isn’t a requirement. Companies generally provide matching retirement funds as a retention or recruitment tool, ensuring they can entice top-tier professionals into working for them. There is no law that says an employer has to make one available.

The only time when you may be able to fight the ending of a 401(k) match is if there is something in your employment agreement that guarantees one. However, this scenario would be incredibly rare, so there is a good chance the company is acting within its legal rights.

Making Up the Difference

Employees have the ability to make up the difference of employers cutting off 401(k) matches. However, it does have to be an active decision.

First, you may be able to increase your 401(k) contribution at work. This would allow you to keep investing in the same manner, centralizing your retirement-related savings and keeping your monthly deposits at a similar level.

Currently, employees can contribute up to $19,500 a year. If you are 50 years old or older, you can also make catch-up contributions up to $6,500 a year.

Second, you could fund an IRA instead of increasing your 401(k) contributions. You’re allowed to contribute to both kinds of plants every year. But, with an IRA, you may have more options and overall control.

Plus, if you qualify for a Roth IRA, your deductions aren’t tax-deductible, but your withdrawals can be tax-free. This could be beneficial if you may have a higher tax liability in retirement than you do currently.

In total, you can contribute up to $6,000 in an IRA. If you’re 50 years old or older, you can also make an additional $1,000 in catch-up contributions.

In either case, making up the difference may mean having to tighten your budget. While this can be hard to manage, it’s wise to do what you can to keep your retirement on track if you have that option.

Reexamine Your Allocations

The current investment landscape is a bit volatile. As a result, your portfolio may not be ideally balanced based on your preferences.

You may want to take a moment to examine your allocations for two reasons. First, you may have investments that aren’t ideal in today’s climate. Second, there could be opportunities for significant gains in certain sectors, particularly those that have been hard-hit by the pandemic but are likely to recover.

However, you don’t want to make any panic-based changes. Most people’s portfolios have seen their values change significantly, but that doesn’t mean their initial investments still aren’t sound. While COVID has shaken up the markets, there’s a decent chance they will recover in the coming years, allowing the value of your portfolio to return to relatively normal.

Don’t Tap Your 401(k)

When your employer cuts off 401(k) matching, it may be tempting to withdrawal funds from your account. After all, it isn’t going to be growing as quickly, so you may think that makes it a good time to use the cash for other purposes.

The issue is, if you’re younger than 59 ½, you’ll probably get hit with a 10 percent early withdrawal penalty. There are a few exceptions that allow you to avoid the penalty, but they tend to be incredibly strict.

Additionally, removing money means you are missing out on long-term, tax-deferred growth. Even if you stopped making all contributions today, the value of your 401(k) could still go up over time.

Plus, even if your employer isn’t offering 401(k) matching at the moment, that might not be the case for the long-term once. Once its financial situation settles, it may reinstitute the match.

Finally, if your current employer doesn’t bring its match back, you can still win. If you find another company that is offering a 401(k) match, and secure a position there, you may be able to roll your 401(k) over into their plan. That way, you can keep all of your savings centralized and get a coveted benefit back.

Be Vigilant

If your employer suspends 401(k) matching, make sure to remain informed of any other changes they make to your benefits, both positive and negative. You want to know quickly if your company is bringing matching back, allowing you to adjust your savings strategy at the proper time.

Similarly, knowing whether other benefits are being cut is just as important. More cuts could indicate the company is struggling to stay afloat. If that’s the case, you may want to boost your emergency savings or start exploring new opportunities, in case the worst-case scenario happens and the business has to shut down.

Additionally, you may end up having to shoulder a larger financial burden because you don’t have access to certain value-providing perks. It’s important to know that is coming if that is the situation, giving you a chance to make budget adjustments or change your actions based on what’s best for you.

Did some of your employers cut off their 401(k) match? Did it change the way you save for retirement? Share your thoughts in the comments below.

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