Retirement

You’ll See More Changes to Social Security in 2019 Than Just a COLA

October 14, 2018 By Amanda Stewart Leave a Comment

Social Security beneficiaries are finally getting some good news. It was recently announced that there will be a 2.8% cost-of-living adjustment (COLA) for beneficiaries in 2019. However, that is only a small portion of the changes being made to Social Security next year.

1. The Social Security Cost-of-Living Increase

Yes – Social Security beneficiaries will see a 2.8% increase starting January 2019. This increase has been made to adjust for cost-of-living. The Social Security Administration estimates this will increase the average beneficiary’s monthly earnings by about $40. The average monthly benefit paid in 2018 was $1,422, the SSA estimates the average payout will be $1,461 monthly in 2019.

2. Taxable Earnings

The next big change for Social Security next year will be the maximum taxable earnings. The maximum taxable income will increase from $128,400 to $132,900. Social Security tax sits at 6.2% for employees and employers. So, if you earn $150,000 in Social Security-covered employment, you’ll have to pay SS tax on $132,900 of it. This change also increases the maximum Social Security tax an employee could pay from $7,960.80 to $8,239.80.

3. Maximum Social Security Benefits Will Be Higher

Another huge change in Social Security for 2019 will be the maximum possible benefit. Someone claiming Social Security at full retirement age (66) can claim as much as $2,861 per month. This will increase even more if the retiree waits longer to claim. If they begin claiming four years from now, at the age of 70, their benefit would start at $3,776.52. Not to mention, they’ll be able to benefit from any cost-of-living adjustments made between now and 2023.

4. Earning Test Limits Will Increase in 2019

Social Security beneficiaries will also be able to earn more money from a job without affecting your benefits in 2019. The changes for earnings limits in 2019 are detailed in the chart below.

Age	2018 Earnings Test Limit	2019 Earnings Test Limit
You’ll Turn 66 After 2019	$17,040/yr. ($1,420/month)	$17,640/yr. ($1,470/month)
You’ll Turn 66 in 2019	$45,360/yr. ($3,780/month)	$46,920/yr. ($3,910/month)

Individuals who have reached the full retirement age will not be impacted by the earnings test. Those who will turn 66 in 2019 will have $1 of their benefits withheld for every $3 in excess earnings from employment. Only earning made in the months before your 66th birthday will be considered. Individuals who have not yet reached retirement age but are claiming benefits will have $1 withheld for every $2 in excess earnings.

5. Social Security Credits Will ‘Cost’ More

To be able to claim Social Security benefits, you need to earn 40 Social Security credits. You can only earn four credits per year. Each credit will equate $1,360 in earnings in 2019 (a $40 increase).

Social Security Benefits By Age

The formula used to determine how much you’ll receive in Social Security benefits depends on the year you turn 62 years old. For instance, if you turned 62 in 2012, that year’s formula would be used to determine your benefit. Of course, you’ll also be entitled to any other cost-of-living adjustments made as well. People turning 62 in 2018 can expect the benefits detailed in the chart below (via The Motley Fool).

Annual Income	Age 62	Age 65	Age 66	Age 68	Age 70
$20,000	$771	$958	$1,052	$1,192	$1,361
$30,000	$967	$1,202	$1,319	$1,495	$1,706
$40,000	$1,163	$1,445	$1,586	$1,797	$2,051
$50,000	$1,358	$1,687	$1,852	$2,099	$2,395
$60,000	$1,554	$1,931	$2,119	$2,402	$2,741
$70,000	$1,695	$2,106	$2,312	$2,620	$2,990
$80,000	$1,787	$2,220	$2,437	$2,762	$3,152
$90,000	$1,879	$2,334	$2,562	$2,904	$3,313
$100,000	$1,970	$2,448	$2,687	$3,045	$3,475

Don’t forget, eligible Americans can begin claiming Social Security benefits between the ages of 62 and 70. Those choosing to start receiving benefits before the retirement age of 66 will have their benefits permanently reduced. On the other hand, individuals who waiting to start claiming SS benefits will have theirs permanently increased.

So, there is some good news for Social Security beneficiaries in 2019. However, it is important to keep in mind that, while there are many positive changes being made to Social Security this year, Medicare has not yet released an announcement about changes Part B for 2019. So, these increases in Social Security may be overshadowed by Medicare premium increases. Only time will tell.

Readers, what do you think about the Social Security changes for 2019?

Taxes In Retirement Can Make a Big Difference

October 2, 2018 By Doug Carey Leave a Comment

Have you given much thought to where you’ll want to live in retirement? If you’re reading this in February in Minneapolis, you might be giving it a lot of thought. On the other hand, if you live in Phoenix, you may have decided you already have it squared away.

There’s a lot more that goes into the decision-making process than climate, of course. This recent Money magazine piece delves into another aspect: how far your retirement savings will go.

Cost of Living is Important

It’s no secret that the cost of living will vary from one place to another. If you are at or near retirement age and are planning to move somewhere, you have to have some idea about what the cost of living will be there. A glance at the map above confirms what you probably would guess: Generally speaking, the coasts are expensive (in red), and the south is cheap (in blue).

How Much Do You Really Need for Retirement?

Let’s start with a few of criticisms of the piece.

First, the authors assume 0% returns on retirees’ portfolios after retirement. While this may sound conservative, it’s simply not realistic – and anyway would be unacceptable for a lot of potential retirees if it were. It also assumes no change at all in the cost of living over time, which isn’t generally how this works. Last, within one state’s borders, the cost of living could vary widely. It’s expensive to live in New York City, but what about out in the countryside of New York state? You can’t really tell here.

But you have to start somewhere in deciding on where to live in retirement. Is the house too big for us? Is the winter too cold to deal with at our age? Where should we go? And of course the cost of living will be a part of those conversations.

Housing, Healthcare, and Taxes

In this article, the biggest components of cost of living are housing and healthcare. Another potential biggie is state taxes. If you move to Florida or one of six other states that don’t charge state income taxes, you might really notice a difference – especially if you’re coming from a place where the marginal tax rate is more like 9% or 10% on the high end.

If you think you’ll be earning a lot of taxable income in retirement, those marginal rates (and the base rates too, probably) are going to matter. But having a good estimate of your spending as well as your income in retirement should be a big part of your calculus when you’re looking at switching states. This is because states generally need to make up for that lack of (or low) income tax somehow, and one obvious place to do that is other types of taxes, such as sales taxes. If you’re going to be spending a lot on living expenses in retirement, those sales taxes might be a bigger factor than the state income tax.

Consider Income Tax

As the map in the image above indicates, a million dollars in one state is not the same as a million dollars in another. Along the same lines, high taxes on one person may not be high taxes on another.

Moving to a state with no income taxes will not automatically reduce your income tax bill. As with so many things investment and finance related, the answer to whether it might help you is “it depends.” (And we haven’t even touched on property taxes here, which can also make a huge difference, just as they do before retirement.)

Running The Numbers

Using WealthTrace, we can take a look at what a lower tax rate could mean for a plan (and you can create an online retirement plan yourself).

In our example, a relatively well-off couple is hoping to retire in about a year. They are 59 years old and have $7 million in invested assets. Their estimated annual living expenses are expected to be in the $225,000 range.

The couple lives in a state with a fairly high average income tax rate of 7% (that average accounts for their marginal rates, which go up as income goes up). Assuming they stay put, the WealthTrace Monte Carlo simulations says they have an 81% chance of a successful retirement plan.

But they could do better. If they were to move to a state with no income taxes, things look materially better.

What’s happening here? At its core, reducing taxes means reducing spending. Any drop in outflows, whether on taxes or anything else, will give a retirement plan that much more chance of succeeding.

One Piece Of The Puzzle

As we mention above, taxes – and the cost of living in general – are just one thing to consider. Another factor, for example, that could be a topic for a whole different article: the availability of quality health care. Moving where the cost of living is low may not do you a lot of good if you can’t find good doctors.

When putting together your retirement location priority list, be sure taxes are on it alongside health care, climate, and whatever else is important to you.

What other expenses have you considered in your retirement plan? Share with us in the comments below!

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What You Need to Know About Trump’s Proposed Changes to Required Minimum Distributions

September 6, 2018 By Amanda Stewart 6 Comments

Retirement savings are extremely important. Millions of Americans use IRAs and 401(k)s to save up for their golden years. These tax-deferred accounts provide a tax break now. The agreement is that they’ll pay taxes on it in retirement. Once you begin to withdraw from your IRA or 401(k), there is a required minimum distribution. You must adhere to the distribution to avoid paying a hefty penalty.

For years, people have looked at these laws as unfair. After all, many people save their entire lives to be able to retire comfortably just to be hit with fines. However, President Trump has signed an executive order that will lead to a change in these rules. The new change is mainly loosening the requirements for minimum distributions.

About Required Minimum Distributions

Required minimum distributions (RMD) are put into place to limit the tax benefits retirement savers are able to receive. RMD rules state you must begin taking withdrawals from retirement account the year you turn 70 1/2. Account holders must calculate the amount they have to take out each year, regardless of whether they need it or not. For many people, this has increased the likelihood of running out of money during retirement.

President Trump Calls for Changes

Last week the president signed an executive order calling for the Department of Labor and Department of Treasury to consider two things. First, he wants to raise the age when people are required to start taking the RMD. Second, Trump would like to find a way to make it easier for small businesses to offer retirement plans for employees.

He has given the Department of Treasury six months to consider pushing back the age because many Americans are outliving their retirement. The current average life expectancy in the U.S. is 78 1/2. Additionally, he has given the Labor Department six months to consider easing regulations that would allow small businesses to offer retirement plans. This would give the opportunity to save for retirement to more than 42 million employees in the U.S.

Financial advisors helping retirees are hopeful that the order will lead to more relaxed RMD rules or, even better, the removal of the rules altogether. However, even if the executive order pans out, it could take years for the rules to change. It also isn’t clear whether a simple rule change can be done without congressional approval.

Either way, if you have an IRA or 401(k) that you don’t need to tap into right away, these changes could make a huge difference in your financial plan for retirement. For many, it would mean having more security than ever.

Readers, what do you think about President Trump’s proposal?

Average Retirement Savings Are Not Enough But There’s Hope

September 6, 2018 By Doug Carey 1 Comment

Although economic growth and incomes are up over the past year, average retirement savings are worse than ever. A recent study that analyzed savings data shows that the typical American household is woefully unprepared for retirement.

At first glance, the average retirement savings for American households looks reasonable at over $160,000. However, the median tells a much different story. The average value is skewed much higher by the ultra-wealthy. By using the median value, we can see how the typical household is doing. It’s not pretty.

The median value for the average retirement savings in American households is only $11,700. This means that half of these households have saved less than this amount.

Save Early, Often, And To A Tax-Deferred Retirement Account

You may have heard it before, but the key to having enough money in retirement is to start saving as early as possible. But most people have no idea how much they need to save in order to retire when they want. Some even think they can retire early, but have never run any numbers to confirm that this is possible.

There is also the problem that many Americans are not even saving to a tax-deferred retirement account. This is costing some people thousands of dollars over time and can completely change their retirement picture.

The Numbers Might Surprise You

Not so sure? Here’s how important it is to save to a tax-deferred retirement account early and often.

I used the WealthTrace Retirement Planner to look at a case study. I set up a plan for a couple that is 32 years old and saves $4,000 per year, all to taxable accounts which have a current balance of $8,000. Their asset allocation is 75% in stocks and 25% in long-term bonds. They want to retire when they are 67. Their projected annual spending in retirement is $58,000.

I generated a retirement plan for this couple and saw that they are projected to run out of money by age 75. This is a serious problem for them and it means they are not doing enough to shore up their retirement.

Why Average Retirement Savings Run Out Of Money

This couple is in serious trouble and there are three main reasons why.

One issue is that they are only saving to their taxable accounts and not to a tax-deferred retirement account. If we switch their savings over to an IRA, they won’t run out of money until they are 88. This is just how important tax-deferred retirement vehicles can be.

This couple should also be taking more risks given their young age. There is no need for them to be 25% in bonds for retirement. They should be more like 90% in stocks and 10% in bonds. Stocks always outperform bonds over a long enough time horizon, and this couple has 35 years until they retire.

They should also do everything they can to save more money for retirement. I found that if they boost their savings up to just $7,000 per year instead of the $4,000 they currently save, they wouldn’t run out of money until they are 110 years old.

Save For Retirement Every Paycheck

Everybody should be auto-depositing at least some of their paycheck for retirement. That way you don’t even see the money and there is less of a temptation to use it. Saving with discipline is so important over the long run. It also should go without saying that if your company offers a 401(k) plan you should contribute at least up to the maximum amount where your company matches your contribution. These company matches are free money, and you should utilize it as much as possible.

Underfunded Pensions-Be Prepared

August 3, 2018 By Doug Carey Leave a Comment

It is becoming more and more clear that that many cities and states will never be able to fulfill their pension promises. Over the past 20 years most states and many cities have been increasing pension benefits. These benefits plus health care for public employees is at an unsustainable pace. This will eventually lead to underfunded pensions.

underfunded pensions

Because of the gigantic hole that many cities and states now have, it is pretty much a certainty that we will see many Detroit-like bankruptcies in the near future.

Underfunded Pensions Deficits Are Massive

The current estimate for how large the pension deficit for cities and states is tops the $5 trillion mark. Incredibly, that is equal to nearly 1/3 of the United States’ annual GDP.

We have seen cities already slash the pension benefits by up to 55%. As an example, the city of Central Falls, Rhode Island did in 2011. This is probably a worst-case scenario for many cities. Even a 10% hit to pension payments can devastate a retirement plan.

Retirement Planning What-Ifs

Between those of us who worry about our promised Social Security benefits and those who now fear their pensions might be cut, it is difficult to plan for retirement these days. However, we can at least run some what-if scenarios to see how much pain we might be able to handle if our promised benefits don’t come to fruition.

To test out how a typical retirement plan might be impacted by a cut in pensions, I ran some scenarios in the WealthTrace Retirement & Financial Planner. These scenarios can be run by anybody, without the need to hire a financial advisor.

I set up a 57 year old couple that has a retirement age goal of 67. Their Social Security is projected to be $42,000 total each year. The wife has a promised pension of $45,000 per year in retirement. They projected their annual expenses to be $73,000 each year once they retire. Their IRAs have a combined $30,000 in them.

Because of their combined income from Social Security and the pensions, they can cover their expenses fairly easily every year in retirement as you can see below.

underfunded pensions 2
But what if the city that is paying out the pension declares bankruptcy? I ran some what-if scenarios on this situation. The scenario shows where the pension payments are cut by varying amounts. You can see the results below.

underfunded pensions

You can see that as their pension is cut by 20%, their probability of meeting all of their retirement goals begins to drop quickly. This probability is determined by using Monte Carlo analysis. This analysis which runs 1,000 scenarios on their plan, shifting the rates of return on their investments in every year based on historical data. If their pension is cut by 40%, they are guaranteed to run out of money in retirement.

What Can Be Done?

If you or your spouse are depending on a public pension, you should research the health of your city or state. Are they way underfunded? If so, you might want to run some scenarios on your pension. This will help you to see how much of a hit you can take. It is also best to have a safety buffer built up in an IRA or 401(k) plan. In the sample case I ran, the couple only had $30,000 saved. I found that if they had instead saved $250,000, they could withstand up to a 45% cut in their pension.

Are you receiving a pension? How is it working for you? Please let us know in the comments below.

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Government Jobs vs. Government Contractor Positions-Which is Best?

July 19, 2018 By Tamila McDonald Leave a Comment

government jobs

In total, there are approximately 2.1 million non-postal civilian federal employees working in 2018. Meaning over 2.1 million government jobs. On top of that, there are a significant number of government contractors, though the exact number isn’t known.

There is often significant debate regarding whether federal employees or contractors are better off financially. Each situation has its own benefits and drawbacks, including in areas like hiring speed, pay, benefits, job security, and more. However, it is possible to form a strong career from either side of the fence, but it’s wise to examine the details closely before making a decision.

Let’s Talk About The Obvious-Salaries

The majority of federal workers fall under the General Schedule (GS) classification and pay system. The jobs fall between GS-1, the lowest, and GS-15, the highest.

A positions assignment in the GS system dictates earning potential at that level. Each segment has ten steps, each of which represents a 3 percent pay increase. On average, it takes 18 years to go from step 1 to step 10 in a particular GS grade. However, performance management guidelines allow outstanding employees to progress faster.

Federal employees benefit from having a predictable earnings table. It’s possible to anticipate how much you can earn throughout your entire career, barring shifts between GS grades. Additionally, locality pay can increase earnings, compensating for an area’s higher cost of living.

Contractors aren’t subject to the same pay structures. Since they aren’t federal employees, companies that provide contractors are free to do as they will. While many believe that contractors earn substantially more, that isn’t always true.

Whether you earn more or less as a contractor, in comparison to being a federal employee, depends on numerous factors. Your chosen profession plays a big role as well as if a position is long-term or simply for a project. Those with highly specialized skills may earn more as a contractor, but that’s never a guarantee.

What About Benefits

One of the often touted benefits of government employment is the benefits package. Federal employees gain access to retirement plans, paid time off, life insurance options, medical coverage, and more. These offerings are also set by the government, providing a level of stability.

The retirement benefits are usually cited as one of the more robust offerings. The Federal Employee Retirement System (FERS) functions as a pension or annuity, providing a defined benefit upon retirement.

The calculation is generally simple. For the FERS Basic Annuity Formula for those who retire at age 62 with at least 20 years of service is 1.1 percent of your average salary over your three-year highest paid period per year of service. That means if you work 30 years, and your highest three-year average is $60,000 per year, your annuity is $19,800 annually or $1,650 per month.

Additional Benefits of Government Jobs

Augmenting your annuity with the Thrift Savings Plan (TSP), a more traditional investment model, is also an option, as well as Social Security. Some are also eligible for an annuity supplement.

Paid time off is also a major benefit, especially since you earn more vacation time the longer you stay a federal employee. New workers earn four hours for every 80 hours they work. That usually means you accrue a day of annual leave every four weeks, or 13 days a year.

After three years, that goes up to 19.5 days per year. With 15 years of service, a federal employee accrues 26 vacation days annually. And that doesn’t include sick leave, which is another four hours per pay period.

Plus, leave doesn’t always have to be used the year it accrues. You can bank up between 30 and 90 days of annual leave, depending on your location and the level of the position. Paid federal holidays also come with the deal, and you don’t have to spend leave.

Contractor positions often come with benefits, but they vary in nature. Since contractors work for another company on paper, that organization dictates what is available. This means different contracting businesses can provide varying amounts of leave and they control what other benefits they offer.

Job Security

Federal jobs are typically some of the most secure available. While the size of the government does change, these shifts are usually small. Plus, most federal employees can’t be fired on a whim.

Contractor roles are generally shorter term in nature. The length of the contract, which commonly lasts a few years, dictates the amount of job security available. In some cases, the renewal of a contract creates a more stable situation, but you can’t rely on that happening.

Hiring Speed

The largest drawback of trying to get a federal government job is the speed at which they hire. The government is notoriously slow when it comes to their hiring process, so it can take months to learn if you got the job.

Most government job announcements feature closing dates, representing the last day you can submit an application. After a job closes, most agencies provide applicants with an update within 15 to 30 days. However, that isn’t a requirement, and some take much longer.

That means, if you apply the first day a job comes open and it doesn’t close for another two weeks, you should expect to wait at least a month before learning if you made it through the initial screening. After that, coordinating the interview process, additional screenings, background checks or security clearances, and the generation of a job offer can add weeks to months onto the process.

Even current federal employees are subject to these waits, so you don’t see any reprieve once you are in the system.

Hiring decisions for contractor roles are typically much faster. While the level of scrutiny can be high, particularly when it comes to background checks or security clearances, they often move through the steps more quickly. Often, hiring times for government contractors mimic similar roles in the private sector, so the wait is much shorter.

Should You Become a Federal Employee or a Contactor?

Ultimately, both paths can lead to viable careers. However, it’s wise to review what your skills are worth in both areas before deciding. Compare the GS pay rates that match your target role to those you can land as a contractor. Review the benefits packages to see if they meet your needs or compensate for lower pay. Determine how long you can wait to find out if you got the job, and then decide how to proceed.

Do you have a government job or are you a government contractor? Tell us about your experience in the comments below.

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