Photo courtesy of Ryan Tauss on unsplash.com
The Social Security Administration has set the maximum taxable wage base for 2015 at $118,500. This represents an increase of $1,500 over the 2014 wage base of $117,000, an increase of 1.28%.
Social Security COLA for 2015 Set at 1.7%
The Social Security Administration announced today that the annual automatic Cost Of Living Adjustment (COLA) for Social Security benefits in 2015 will be 1.7%. This is comparable to the 1.5% COLA for 2014, and is the 5th time in the past six years that the adjustment has been less than 2%. Look for more articles in the near future with details on earnings limits, bend points, and other factors affected by the COLA.
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The Benefits of Financial Planning
If you’re wondering about whether or not you need to do some financial planning, either on your own, using resources on the internet, or by hiring a financial planner, you might want to know what the benefits of financial planning are.
From my perspective of many years providing financial planning and advice to folks, there are three primary benefits of financial planning: Organization, Efficiency, and Discipline. We’ll talk about each of these in order.
Organization
One of the most important benefits of financial planning is ORGANIZATION. Statistics tell us that fewer than 25% of Americans know their financial net worth. In addition, (prepare to be astounded) the average individual’s credit card debt is over $8,000. Think about that for a moment…
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New For 2014 Taxes: Health Premium Tax Credit
We knew when Obamacare went into place that there would be new requirements for income tax filing, and one of the first to deal with is the health premium tax credit. This will require the use of a new form, Form 8962.
Health Premium Tax Credit
For this tax credit you will need to reconcile your advance credits that you have received in the form of reduced subsidized healthcare premiums.
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Should You Worry About the Dow?
The last few weeks have shown that the market is certainly volatile. Once at a peak of over 17,000 the market has pulled back to just over 16,000. While this certainly makes for news (notice how I didn’t say interesting news) I wanted to give our readers a little perspective on why I (nor they) shouldn’t care.
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Understand Deemed Filing to Avoid a Surprise in Your SS Strategy
There’s nothing worse than feeling as if you have your Social Security filing strategy all lined out, when a rule like deemed filing rears its ugly head to throw your strategy off track.
Here’s an example: Steve and his wife Edie are ages 66 and 61 respectively. The plan is for Steve to file for his Social Security benefit now (at his Full Retirement Age), and for Edie to file for her own benefit when she reaches age 62. Then Edie will wait until she reaches Full Retirement Age of 66 to file for the Spousal Benefit based on Steve’s record, which will increase her benefit by $500 at that time.
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Yoda Would Suggest a Low-Cost Index
“Use the low-cost index, Luke…”
Recently a colleague told me that he’d “give that a try”. I responded (tongue in cheek of course) “Try not. Do or do not. There is no try.” In case you don’t recognize it, that’s a line that Yoda gives to Luke Skywalker in the Star Wars “Empire Strikes Back” movie. Yoda was pointing out to Luke that if he simply “tries” to undertake the action, he will not succeed. I think it shows that Yoda would also suggest a low-cost index mutual fund for investing.
If you think back to the excellent article that Sterling wrote a few weeks ago, “Not All Index Funds are Created Equal”, Sterling used a particular load mutual fund as an example. The objective of the fund (paraphrasing here):
Seeks to match the performance of the benchmark…
Let’s analyze that objective. The “benchmark” in question is an index, in particular the S&P 500 index. And the term “seeks” can be interpreted as “tries”. So the fund tries to match the performance of the S&P 500 index. It is the act of “trying” that causes costs to go up. All that “trying” by the fund manager(s) costs money after all – there are yachts to buy don’t you know?
So anyhow, if our objective as investors is to match the performance of the benchmark, why not invest in the benchmark via a low-cost index fund rather than in a fund that wastes a lot of effort (and money) “trying” to match the benchmark?
I think Yoda would heartily approve.
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Book Review – Pension Finance
M. Barton Waring does an excellent job in his book Pension Finance. The book essentially covers what’s wrong with the way conventional accountants and actuaries think using conventional math and accounting practices to justify the payments (or lack thereof) funding corporate and municipal pensions.
A concept talked about at length in the book is the idea of long-term average returns and how many pension actuaries rely on them to determine funding. Mr. Waring would argue that there is too much reliance on the long term average returns thus allowing pension actuaries to fund their pensions with less money due to assuming higher rates of return.
Instead, one of the areas that may help the crippling pension system in the US is to get realistic about long term returns and use a combination of a smaller returns, and bigger contributions (among others).
The book is heavy on the analytic side (great for our quant readers) but offers substantial insight in plain English on what led to the current pension crisis while offering a mathematically possible solution that relies on real numbers and not hypothetical long term average returns.
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Ten Essential Tips for a Bright Financial Future
See a lawyer and make a Will. If you have a Will make sure it is current and valid in your home state. Make sure that you and your spouse have reviewed each other’s Will – ensuring that both of your wishes will be carried out. Provide for guardianship of minor children, and education and maintenance trusts. If you have divorced and remarried, make sure that your retirement account beneficiary designations are up-to-date reflecting your current situation.- Pay off your credit cards. Forty percent of Americans carry an account balance on their credit cards or other personal credit – this is not good for your financial future. Create a systematic plan to pay down your balances. Don’t fall into the “0% balance transfer game” as it will hurt your FICO score. Credit scores matter not only to credit card companies but to insurance companies and future employers as well; you can avoid an unpleasant increase in your insurance rates by managing your credit wisely.
- Buy term life insurance equal to 6-8 times your annual income. This is primarily true for younger folks who have financial obligations to cover with future income. Most consumers don’t need a permanent policy (such as whole life or universal life). Also consider purchasing disability insurance; think of it as “paycheck insurance.” Stay-at-home spouses need life insurance, too! Note: Each family’s needs are different. Some families have a need for other kinds of life insurance, so you should review your situation carefully with an insurance professional (preferably two or more) before making decisions in this area.
- Build a 3 to 6 month emergency fund. This helps you to keep from having to charge up your credit cards when life’s emergencies strike. In the interim, before you’ve built up your fund, you can establish a home equity line of credit before you need it – this can take the place of part of your emergency fund.
- Don’t count on Social Security too much. Since the projections show that in the future the most that can be paid out for Social Security obligations is around 77%, you should adjust what you expect to receive – especially if you are age 50 or younger. Make up for this by funding your IRA each and every year. If you don’t fund these accounts annually, you lose the opportunity to increase your tax-deferred savings. Fund a Roth IRA over a traditional IRA if you qualify.
- If offered, contribute to your 401(k), 403(b) or other employer-sponsored saving plan. Just the same as with your IRA, if you don’t take advantage of the opportunity to defer funds into these savings vehicles, you lose the opportunity. In addition, if you don’t participate in the plan, you lose the chance to receive the matching funds from your employer.
- Use your company’s flex spending plan to leverage tax advantages. If you don’t use your flex plan annually, you lose the opportunity – and the tax advantages – for that year.
- Buy a home if you can afford it. Maintain it properly. Build equity in your property. You’ll have much more to show for your money spent than a box full of rental receipts! This is also about more than your financial future – studies show that home ownership adds to peace of mind and improved quality of life.
- Use broad market stock index funds to reduce risk and minimize costs. Indexes are a simple way to diversify, and they can have very low costs but you have to pay attention to make sure you’re getting a low-cost index. Diversification reduces risk of single securities (see #10) and reducing costs is one of the best things you can do to improve your overall investment results. If you have limited options, for example in your 401(k) plan, make sure that you diversify across a broad spectrum of options.
- Don’t over-weight in any one security, especially your employer’s stock. As a rule of thumb, keep exposure to any single stock to less than 5% of your overall portfolio. If you over-expose to a single stock and that company goes bankrupt, you’ve lost a significant portion of your portfolio. It can happen easily, history is littered with good companies that went bad.
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Minimize taxes by adjusting your portfolio
Since the markets have had some downturns lately, now could be a good time to make some adjustments to your portfolio, rebalancing and the like, that may help to minimize taxes. In doing so you can possibly get a bit of advantage in your tax bill from a loss you’ve experienced in your investments.
If you have taxable accounts, that is, accounts that are not tax-deferred (like IRAs or 401(k) plans) when you sell your investments there is capital gains treatment on your gains and losses. If you have losses and gains in your taxable account, when you realize these losses and gains by selling the holdings, your losses are subtracted from the gains, and if the result is positive (net gains), these gains are taxed at the preferable long-term capital gains rates. I say this is preferable as the rate is less, often much less, than ordinary income tax rates.
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It’s Never Too Early to Teach Your Kids About Money
Lincoln memorial cent, with the S mintmark of the San Francisco mint. (Photo credit: Wikipedia)
I have two daughters and it has given me the pleasure of seeing them grow up and get excited about even the little things like chasing butterflies or finding a lucky penny. My kids find lucky pennies all the time. In fact, they find lucky coins all over the place. Some are by chance as we’re walking down the sidewalk and other times it’s a lucky coin that I may place in an inconspicuous place so they stumble upon it and find it (sometimes it’s fun creating luck for my kids).
Whether they find the coin by luck or otherwise, it gives me a great opportunity to teach them. After the excitement of the find goes away, they get even more excited when I ask, “Where should we put that lucky coin?” With glee they almost always reply, “In the piggy bank!”
I feel parents can teach their kids about money even if it’s starting with something as small as a penny. From lucky coins to birthday money it’s OK to teach your kids about saving a little bit, giving a little bit and spending some as well. I don’t think there’s too-young an age to start doing this. And by starting early, your kids will get excited about saving and this can potentially be less burdensome if they were to try at say – age 21.
Some readers may question how they can teach their kids about money or even feel that they can’t be effective teachers since they may not be as financially stable or literate as they would like. They needn’t worry. It’s an excellent way for parents to learn with their kids and they can both enjoy the benefits of working together. Parents can learn and then teach by example and simultaneously show their kids how to save.
As kids grow up, parents can then teach them how to save from the piggy bank to the savings account and even investments such as stocks, bonds and IRAs. Having been taught the basic fundamentals of just saving and not spending all their money, kids can learn the value of investing, and the miracle of compound interest.
Finally, teaching your kids about money ultimately empowers them to control their money, and not have their money control them. They’ll grow up seeing money as a tool, as a currency, and as an asset they can accomplish great things with – not as a conundrum, enigma, or something to worry or argue about – or worse, something they fear.
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IRS Notice 2014-54: Will This Clarify NUA Basis Allocation?
Photo credit: diedoe
Recently the IRS issued a Notice, 2014-54, which details some information regarding the allocation of pre-tax funds from a qualified plan (such as a 401(k) plan) into a Roth IRA. This is a clarification of a question that has been on the minds of folks in the financial services industry for some time, and it’s a good result. Now the question becomes: does this help to clarify NUA basis allocation strategies?
If you’d like additional detail on Notice 2014-54, you can find the actual text of the Notice by clicking this link.
What I find interesting about this Notice is that this is the first time that the IRS has used this interpretation of the rules referenced specifically in IRC Section 402(c)(2), which is the code section I’ve referenced before regarding allocation of basis for Net Unrealized Appreciation (NUA) treatment for employer stock. (See more information in this most recent article NUA Allocation Twist – Not as Easy as it Looks.) The problem (outlined in the article) has been that plan administrators are unwilling to attempt applying the allocation of basis in an NUA transaction because there has never been any guidance from the IRS on such an allocation of basis. Notice 2014-54 may be the first step toward such guidance.
I’ve sent queries to the best minds I know in the retirement plan law universe to get additional insights into this concept – and as yet have not received a confirmation either way. I think this is a step in the right direction, but don’t get too excited yet.
I’ll keep you posted.
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File & Suspend and Restricted Application are NOT Equal
Note: with the passage of the Bipartisan Budget Bill of 2015 into law, File & Suspend and Restricted Application have been effectively eliminated for anyone born in 1954 or later. If born before 1954 there are some options still available, but these are limited as well. Please see the article The Death of File & Suspend and Restricted Application for more details.
We’ve discussed the Social Security filing options of File & Suspend and Restricted Application many times before, but it seems that folks continue to confuse these two options. It’s easy to see why: one (File & Suspend) can be used to enable the other (Restricted Application). Also, neither option is available until the individual is at least at Full Retirement Age (FRA). It’s important to know the difference between File & Suspend and Restricted Application though – primarily because if you confuse the two when talking to the Social Security folks, you’ll have a much different outcome than you expected and hoped for.
Let’s start by defining each option. Keep reading…
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Be Careful of Average Returns
Standard Deviation Diagram Created with raw PostScript by Pat Beirne, 5/1/06. Based on an original graph created in Adobe Illustrator by Jeremy Kemp, 2/9/05 (Photo credit: Wikipedia)
When saving and investing for retirement many folks as well as advisors helping those folks plan save and invest for retirement generally will have the conversation that includes how much they can save per month or year, how much they need at retirement and how long they have to save until retirement.
Essentially, all of the ingredients in the previous paragraph boil down to a phrase mentioned many times in financial planning classes as well as courses in finance, investing and business: the time value of money.
The time value of money helps individuals and businesses figure out how much they need to save, earn, and spend in order to achieve certain financial goals. What it boils down to is what is a dollar worth, if not spent today, and instead invested and allowed to grow for tomorrow (the future).
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Paper Social Security Statements are Back
The best laid schemes o’ mice an’ men
Gang aft agley— Robert Burns
To a Mouse, on Turning Her Up in Her Nest with the Plough
Photo courtesy of Sylwia Bartyzel on unsplash.com
As with many great ideas, in practice the concept of exclusive electronic delivery of Social Security benefit statements seems to have gone “agley”. Apparently a very small percentage of folks actually took advantage of the online version of these statements (primarily my client base, I’m guessing). As a result of this and apparent feedback from customers, advocates and Congress, Social Security is resuming the physical delivery of paper Social Security Statements.
The new delivery schedule will be based upon the age of the potential Social Security benefit recipient, with statements being sent automatically 3 months before your 25th, 30th, 35th, 40th, 45th, 50th, 55th, and 60th birthdays. You will only receive this statement if you are not currently receiving Social Security benefits AND if you have not registered with a mySocialSecurity account (the online statement portal).
You can still receive a Social Security statement from the online system at any time, as often as you wish. This is accomplished by going to the address www.socialsecurity.gov/myaccount. Just keep in mind that you will not receive a mailed paper Social Security statement thereafter once you’ve signed up. Online is the only method that you will be able to receive this statement once you’ve signed up, or once you’ve begun to receive benefits from Social Security.
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Five-Step Reallocation
Since there’s been an appreciable run-up in stocks over the recent past, now may be a good time to reallocate your investment allocations in your retirement plans and other accounts. You’ve probably heard of reallocation before – but what does it really mean?
Reallocating is the process of changing your current mix of investments to a different mix. It could be that you’ve changed your risk assessment and wish to have more stock and fewer bonds, vice versa, or your investments have grown in some categories from your original allocation and you need to get the mix back to where you started.
At any rate, reallocation is a relatively simple operation, and research tells us that it is important to reallocate regularly, such as on an annual basis. Below are five steps that you can use for a simple reallocation in your accounts.
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Predicting the Market is Like Predicting the Weather
If you’ve ever planned for a day out, picnic, family day or relaxing day outside chances are you turned on your TV, radio or grabbed your smartphone app and got an idea of what the weather was going to be for the day of your trip.
When you looked you got a prediction, based on the probability of what the weather patterns have shown in the past and you got an idea of what your day would look like. And sometime in your life, what was predicted to be a bright sunny day was laden with storm clouds, rain and gloom.
Trying to predict the market is like predicting the weather, only more confusing, more expensive, and less likely to get your desired outcome.
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7 Questions About Divorcee Social Security Benefits
Photo courtesy of Gabriel Santiago on unsplash.com
Included in the myriad of questions that I regularly receive from readers are questions about how a divorced person can collect benefits based upon his or her ex-spouse’s Social Security record.
For a divorcee (as with many married couples) sometimes the ex’s benefits represent the lion’s share of the couple’s SS record. Because of this, many divorcees are very interested in knowing what benefits are available to them, and when.
In addition, even when the divorced spouse in question is not the higher earner there are questions about benefits that can be quite difficult to find answers for.
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Why Spending a Little On You Is Ok
Read any financial column or blog and chances are the writers (including yours truly) have advocated that readers save their income, reduce expenses and get rid of debt. Sometimes this valuable information can get interpreted as you can never spend any money on yourself for little things here and there such as a meal out or grabbing a movie with a friend.
These little things can help keep you on track for your bigger savings targets by allowing you a bit of autonomy and a chance to enjoy the money you’re working hard to earn and save.
Think of it this way: let’s say someone is going on a diet and they absolutely refuse to eat any type of sweet, junk food or anything that would keep them from getting to the proper fitness level or weight they are looking to achieve.
What can (and usually does) happen is by denying themselves even the smallest little treat or dessert they eventually cave in and break their diet and binge eat on sweets, junk food, etc., often ending in a worse situation than they started.
The same can happen if we deprive ourselves the pleasure spending a little something because we want to. If we deprive ourselves too long, we can binge spend and completely lose sight of our goals or worse, be tempted to swipe the credit card to make up for the deprivation.
Now, this isn’t a green light to simply spend, it’s more of a cautionary yellow that says it’s ok, but don’t spend out of control.
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IRS provides advice for avoiding phone scams
Photo courtesy of Thomas Lefebvre on unsplash.com
There has been a rash of phone scams going on this year – scammers posing as IRS agents that is. I haven’t personally received any of the calls, but I’ve had calls from several clients who have gotten these calls.
They can be very disconcerting, to say the least. In the typical phone scam, the caller contacts you out of the blue, and seems to have information about your home address, or bank, or other somewhat personal information. They then tell you that you owe a pile of taxes and you have to pay up now or the local police will be on the way to see you. They will readily take your credit or debit card information right now, over the phone.
The flip side is that they’ll say you have a refund coming and will ask for your bank account information so that they can transfer it to you, right away!
Sterling Raskie, MSFS, CFP®, ChFC®
The latest in our Owner’s Manual series, A 401(k) Owner’s Manual, was published in January 2020 and is available on 
A Medicare Owner’s Manual, is updated with 2020 facts and figures. This manual is available on 
Social Security for the Suddenly Single can be found on Amazon at 
Sterling’s first book, Lose Weight Save Money, can be 
An IRA Owner’s Manual, 2nd Edition is available for purchase on Amazon. Click the link to choose the 
Jim’s book – A Social Security Owner’s Manual, is now available on Amazon. Click this link for the 
And if you’ve come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed “advisor’s advisor”.