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Social Security Bend Points in 2013

Nov 9th, 2012

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When the Social Security Administration announced the Cost of Living Adjustment (COLA) for 2013, this also allowed for calculation of the bend points for 2013.

Bend points are the portions of your average income (Average Indexed Monthly Earnings – AIME) in specific dollar amounts that are indexed each year, based upon an obscure table called the Average Wage Index (AWI) Series. They’re called bend points because they represent points on a graph of your AIME graphed by inclusion in calculating the PIA.

If you’re interested in how Bend Points are used, you can see the article on Primary Insurance Amount, or PIA. Here, however, we’ll go over how Bend Points are calculated each year. To understand this calculation, you need to go back to 1979, the year of the Three Mile Island disaster, the introduction of the compact disc and the Iranian hostage crisis. According to the AWI Series, in 1979 the Social Security Administration placed the AWI figure for 1977 at $9,779.44 – AWI figures are always two years in arrears, so for example, the AWI figure used to determine the 2013 bend points is from 2011.

With the AWI figure for 1977, it was determined that the first bend point for 1979 would be set at $180, and the second bend point at $1,085. I’m not sure how these first figures were calculated – it’s safe to assume that they are part of an indexing formula set forth quite a while ago. At any rate, now that we know these two numbers, we can jump back to 2011’s AWI Series figure, which is $42,979.61. It all becomes a matter of a formula now:

Current year’s AWI Series divided by 1977’s AWI figure, times the bend points for 1979 equals your current year bend points

So here is the math for 2013’s bend points:

$42,979.61 / $9779.44 = 4.3949

4.3949 * $180 = $791.08, which is rounded down to $791 – the first bend point

4.3949 * $1,085 = $4,768.47, rounded down to $4,768 – the second bend point

And that’s our bend points for 2013. Enjoy!

Posted on Nov 9th, 2012

by author: jblankenship.

Posted in: #noTOP, cost of living adjustment, Social Security, social security administration, social security benefits.
Tagged: cost of living adjustment · Social Security

Financial Bloggers Encourage Americans to Save 1% More

Nov 8th, 2012

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United States (Photo credit: Wikipedia)

We’re now up to ~~five~~ six posts published in support of the movement to encourage all Americans to commit at least 1% more to retirement savings this year as they make their benefit elections. We have several more bloggers who are going to put their posts up soon. See the original post for details on how to join the action: Calling All Bloggers!

Listed below are the articles in our movement so far:

From Michele Clark: Employer Retirement Accounts: 2013 Contribution Limits

From Roger Wohlner: Need Post-Election Financial Advice? Try the 1% Solution

From Sterling Raskie: A Nifty Little Trick to Increase Savings

From Theresa Chen Wan: Saving for Retirement: The 1% Challenge for 2013

From Mike Piper: Investing Blog Roundup: Saving 1% More

From Robert Wasilewski: Increase Savings Rate By 1%

Thanks to all who have participated so far – and keep those links coming!

Posted on Nov 8th, 2012

by author: jblankenship.

Posted in: Links, retirement savings.

A Nifty Little Trick to Increase Savings

Nov 7th, 2012

by sraskie.

8 comments

A nifty little trick that can be part of your savings plan is simply this: once a debt is paid off, still treat that payment as a bill – but now direct that bill payment to your bank account, IRA, or employer sponsored plan.

Here’s how it works: Let’s say you have a car payment of $250 per month. You’ve worked hard to get the debt reduced and eventually (maybe even early) you pay off your loan on the car. What a feeling! Instead of allocating the money to be spent elsewhere, such as buying another car or spending it on other items you probably don’t need, consider taking that $250 per month and reallocating it to yourself. The easy thing about this is that you’re already used to paying it, you’ve already budgeted for it, why not pay yourself? Also, you can consider putting the payment to yourself on auto-pilot, meaning that the money goes directly from your paycheck or bank account to your IRA, 401(k), etc.. Psychologically, it’s a lot less painful (and physically easier) to have money sent automatically from an account than to physically have to write a check.

Another idea to consider is that, should you have additional debt after you’ve paid off your car, consider taking that “former” car payment and paying down the other debt that you have. There are few guarantees in life – one of them can be guaranteeing yourself a rate of return. How? The faster you pay down a debt, the less interest you’re paying. Take for example a car loan of 5%. If you want to guarantee yourself a 5% return on your money, pay that loan off as early as possible. Although you won’t see a 5% credit to your bank account like you would on a 5% savings account, you will feel the benefits of doing this when you’re done paying off a loan 2 or 3 or even 5 years early, and can redirect what would have been “interest” money to your lender, back into your pocket.

Posted on Nov 7th, 2012

by author: sraskie.

8 comments already - add to the conversation!

Posted in: financial planning, interest rate, IRA, retirement savings.
Tagged: financial planning · IRA · retirement savings

Calling All Bloggers – Let’s Increase America’s Savings Rate in November!

Nov 5th, 2012

19 comments

I’m sure that I’m not alone in the financial planning world with my concern about the rate of saving toward retirement across this great land. Recent figures have shown that we Americans are doing a little bit better of late, at a 5% savings rate versus around 1% back in 2005 – but this is a dismal figure when you consider how most folks are coming up short when they want to retire. Rather than sitting by idly and wringing my hands, I thought maybe something could be done to encourage an increase in savings – if only by 1%, this can be a significant step for lots of folks. And now, in November, is the perfect time to do this, as most corporations are going through the annual benefit election cycle, so the 401(k) (or 403(b), 457, or other savings plan) is right at the forefront for many folks.

I’m proposing that all financially-oriented bloggers sharpen up their electronic pencils and write a column to encourage folks to increase their 401(k) savings by at least 1% more than last year. I’d suggest taking a new look at this situation, perhaps suggesting ways that people can free up money to devote toward savings, for example. I know you folks have a lot of great ideas, so don’t let my lame suggestions limit you!

In order to keep it oriented toward the benefits enrollment period for many companies, we should probably produce these articles between now and Thanksgiving. Of course, most folks can make an increase to savings at any time, but while employees are looking at benefit options is a good time to strike while the iron’s hot. If you’re interested in joining this action, send me a note at jim@blankenshipfinancial.com and let me know when you’ve posted your article. I’ll keep a list of all of the articles with links on a blog post at my blog – this way anyone who’s looking for ideas on how to increase savings can find a multitude of ways to do so.

Thanks in advance for your help!

Posted on Nov 5th, 2012

by author: jblankenship.

19 comments already - add to the conversation!

Posted in: 401 k, 403 b, blogger action, budgeting, Links, retirement savings.
Tagged: 401 k · 403 b · links · retirement savings

IRS Warns of Phony Websites

Nov 5th, 2012

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It pays to be careful out there on the interwebs. You never know what you might be getting into if you don’t pay close attention to the addresses that you click on. Recently the IRS issued a warning about certain scams that have been making the rounds recently. The funny thing is, they had to issue their warning a second time because they initially posted an incorrect address.

At any rate, the text of the IRS’ Corrected Special Edition Tax Tip 2012-13 is listed below:

Don’t Fall for Phony IRS Websites

The Internal Revenue Service is issuing a warning about a new tax scam that uses a website that mimics the IRS e-Services online registration page.

The actual IRS e-Services page offers web-based products for tax preparers, not the general public. The phony web page looks almost identical to the real one.

The IRS gets many reports of fake websites like this. Criminals use these sites to lure people into providing personal and financial information that may be used to steal the victim’s money or identity.

The address of the official IRS website is www.irs.gov. Don’t be misled by sites claiming to be the IRS but ending in .com, .net, .org, or other designations instead of .gov.

If you find a suspicious website that claims to be the IRS, send the site’s URL by email to phishing@irs.gov. Use the subject line, “Suspicious website”.

Be aware that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

If you get an unsolicited email that appears to be from the IRS, report it by sending it to phishing@irs.gov.

The IRS has information at www.irs.gov that can help you protect yourself from tax scams of all kinds. Search the site using the term “phishing”.

Posted on Nov 5th, 2012

by author: jblankenship.

Posted in: financial planning, income tax, irs, Links.
Tagged: income tax · irs · links

How is the Maximum Social Security Benefit Calculated?

Nov 2nd, 2012

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Each year when the Social Security Administration announces the Cost Of Living Adjustment to benefits for the coming year, with similar ballyhoo they announce the maximum benefit amount available for the coming year. For 2013, the maximum Social Security benefit for someone reaching Full Retirement Age (FRA) in that year will be $2,533, an increase of $20 over 2012.

In the wake of these announcements a couple of weeks ago, a reader (thanks, DS!) sent me a question:

Why is it that the maximum Social Security benefit only increased from $2,513 to $2,533? This is only an increase of 0.8%, while the COLA increase indicated that benefits would climb by 1.7%?

This is a drawn out and complicated situation to explain, but I think it’s important to fully understand. First, you have to realize that when the Social Security folks publish this maximum amount, they are talking specifically about someone who reaches Full Retirement Age in the year being reviewed. For 2012, that would be someone born in 1946; for 2013, the person was born in 1947. As such, the calculations are based on different maximum wage bases.

The way that the maximum benefit for a particular year is calculated is based upon the maximum wage base for the year, as well as the applicable COLAs that would apply after the PIA (Primary Insurance Amount) has been calculated for that individual.

Maximum Benefit Calculation for 2012

For calculating the maximum benefit amount for 2012, we’re looking at an individual who was born in 1946, turning age 66 in the year 2012. The table below indicates the maximum wage bases for each year from his age 22 in 1968, through 2011, because his maximum benefit was determined last year. The third column indicates what the wage base equates to in terms of indexed income – this is based on the Average Wage Index (AWI) Series.

Year	Max Wage Base	Indexed Wage Base
1968	$ 7,800	$ 54,109
1969	$ 7,800	$ 51,152
1970	$ 7,800	$ 48,734
1971	$ 7,800	$ 46,402
1972	$ 9,000	$ 48,763
1973	$ 10,800	$ 55,069
1974	$ 13,200	$ 63,530
1975	$ 14,100	$ 63,143
1976	$ 15,300	$ 64,095
1977	$ 16,500	$ 65,213
1978	$ 17,700	$ 64,809
1979	$ 22,900	$ 77,104
1980	$ 25,900	$ 80,000
1981	$ 29,700	$ 83,347
1982	$ 32,400	$ 86,181
1983	$ 35,700	$ 90,546
1984	$ 37,800	$ 90,550
1985	$ 39,600	$ 90,985
1986	$ 42,000	$ 93,719
1987	$ 43,800	$ 91,875
1988	$ 45,000	$ 89,960
1989	$ 48,000	$ 92,304
1990	$ 51,300	$ 94,295
1991	$ 53,400	$ 94,630
1992	$ 55,500	$ 93,529
1993	$ 57,600	$ 96,244
1994	$ 60,600	$ 98,608
1995	$ 61,200	$ 95,747
1996	$ 62,700	$ 93,517
1997	$ 65,400	$ 92,168
1998	$ 68,400	$ 91,601
1999	$ 72,600	$ 92,093
2000	$ 76,200	$ 91,592
2001	$ 80,400	$ 94,390
2002	$ 84,900	$ 98,688
2003	$ 87,000	$ 98,710
2004	$ 87,900	$ 95,301
2005	$ 90,000	$ 94,140
2006	$ 94,200	$ 94,200
2007	$ 97,500	$ 97,500
2008	$ 102,000	$ 102,000
2009	$ 106,800	$ 106,800
2010	$ 106,800	$ 106,800
2011	$ 106,800	$ 106,800

When the top 35 years of wage base are averaged, we come up with an annual average wage base of $92,172, or a monthly average wage base (also known as the Average Indexed Monthly Earnings or AIME) of $7,681. Applying the bend points to this (see the Bend Point article for details) we come up with a tentative PIA of $2,293. To this we apply the COLAs from the point when the individual reached age 62 (in 2008): 5.8%, 0.0%, 0.0%, and 3.6%. These are compounded, so the increase by COLAs is 9.61% (1.058 * 1 * 1 * 1.036 = 1.0961). Multiplying the tentative PIA (Primary Insurance Amount) by these COLAs brings us to the maximum benefit amount of $2,513 for 2012.

Maximum Benefit for 2013

To calculate the maximum benefit for 2013, we are now working with an individual who will reach age 66 in that year, born in 1947. Below is the table for this individual’s maximum benefit:

Year	Max Wage Base	Indexed Wage Base
1969	$ 7,800	$ 53,474
1970	$ 7,800	$ 50,946
1971	$ 7,800	$ 48,508
1972	$ 9,000	$ 50,975
1973	$ 10,800	$ 57,568
1974	$ 13,200	$ 66,413
1975	$ 14,100	$ 66,009
1976	$ 15,300	$ 67,003
1977	$ 16,500	$ 68,173
1978	$ 17,700	$ 67,750
1979	$ 22,900	$ 80,603
1980	$ 25,900	$ 83,631
1981	$ 29,700	$ 87,131
1982	$ 32,400	$ 90,091
1983	$ 35,700	$ 94,655
1984	$ 37,800	$ 94,659
1985	$ 39,600	$ 95,115
1986	$ 42,000	$ 97,969
1987	$ 43,800	$ 96,045
1988	$ 45,000	$ 94,046
1989	$ 48,000	$ 96,494
1990	$ 51,300	$ 98,573
1991	$ 53,400	$ 98,924
1992	$ 55,500	$ 97,774
1993	$ 57,600	$ 100,610
1994	$ 60,600	$ 103,081
1995	$ 61,200	$ 100,093
1996	$ 62,700	$ 97,762
1997	$ 65,400	$ 96,354
1998	$ 68,400	$ 95,760
1999	$ 72,600	$ 96,275
2000	$ 76,200	$ 95,753
2001	$ 80,400	$ 98,675
2002	$ 84,900	$ 103,162
2003	$ 87,000	$ 103,191
2004	$ 87,900	$ 99,626
2005	$ 90,000	$ 98,406
2006	$ 94,200	$ 98,477
2007	$ 97,500	$ 97,500
2008	$ 102,000	$ 102,000
2009	$ 106,800	$ 106,800
2010	$ 106,800	$ 106,800
2011	$ 106,800	$ 106,800
2012	$ 110,100	$ 110,100

The reason that this table is different from the one above (look at the indexed wage base for each year) is because the index is always normalized to the year when the individual reaches age 60 – when the PIA is originally calculated. When we average the top 35 indexed wages for this series, we come up with an average of $96,888, or an AIME of $8,074. Applying the 2012 bend points to this AIME, we come up with a tentative PIA of $2,404. To this we add the COLAs for the years from 2009 to 2012: 0%, 0%, 3.6% and 1.7%. This aggregates to 5.36% increase, up to $2,533.

What does this mean?

Because of the way these calculations are done, and what the Social Security folks mean by them, it’s not really important to compare these two numbers to one another – it’s not even the same person that we’re looking at. In actuality, a PIA for someone who earned the maximum salary over her entire working life and who reached age 66 in 2012 would be increased to $2,556, exactly 1.7%.

So – when calculating the maximum amount that you will have available to you, keep in mind all of the nuances in the calculation process, and make sure that you are working on your own circumstances, not the sample that SSA is putting forth as the “maximum”.

Posted on Nov 2nd, 2012

by author: jblankenship.

Posted in: cola increase, cost of living adjustment, Social Security, social security benefits.
Tagged: cola increase · cost of living adjustment · Social Security

Retirement Plan Contribution Limits for 2013

Oct 31st, 2012

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The IRS recently published the new contribution limits for various retirement plans for 2013. These limits are indexed to inflation, and as such sometimes they do not increase much year over year, and sometimes they don’t increase at all.

This year we saw across-the-board increases for most all contribution amounts, and as usual the income limits increased as well. This provides increased opportunity for savings via these tax-preferred vehicles.

IRAs

The annual contribution limit for IRAs (both traditional and Roth) increased from $5,000 in 2012 to $5,500 in 2013. The “catch up” amount, for folks age 50 or over, remains at $1,000.

The income limits for traditional (deductible) IRAs increased slightly from last year: for singles covered by a retirement plan, your Adjusted Gross Income (AGI) must be less than $59,000 for a full deduction; phased deduction is allowed up to an AGI of $69,000. This is an increase of $1,000 over the limits for last year. For married folks filing jointly who are covered by a retirement plan by his or her employer, the AGI limit is increased to $95,000, phased out at $115,000, which is a $3,000 increase over last year’s limits. For married folks filing jointly who are not covered by a workplace retirement plan but are married to someone who is covered, the AGI limit for deduction is $178,000, phased out at $188,000; this is an increase of $5,000 over 2012’s limits.

The income limits for Roth IRA contributions also increased: single folks with an AGI less than $112,000 can make a full contribution, and this is phased out up to an AGI of $127,000. For married folks filing jointly, the AGI limits are $178,000 to $188,000 for Roth contributions, up by $5,000 over 2012.

401(k), 403(b), 457 and SARSEP plans

For the traditional employer-based retirement plans, the amount of deferred income allowed has increased as well. For 2013, employees are allowed to defer up to $17,500 (up from $17,000) with a catch up amount of $5,500 for those over age 50 (unchanged from 2012). If you happen to work for a governmental agency that offers a 457 plan in addition to a 401(k) or 403(b) plan, you can double up and defer as much as $35,000 plus catch-ups.

The limits for contributions to Roth 401(k) and Roth 403(b) are the same as traditional plans – the limit is for all plans of that type in total. You are allowed to contribute up to the limit for either a Roth plan or a traditional plan, or a combination of the two.

SIMPLE

Savings Incentive Match Plans for Employees (SIMPLE) deferral limits also increased, from $11,500 to $12,000 for 2013. The catch up amount remains the same as 2012 at $2,500, for folks at or older than age 50.

Saver’s Credit

The income limits for receiving the Saver’s Credit for contributing to a retirement plan increased for 2013. The AGI limit for married filing jointly increased from $57,500 to $59,000; for singles the new limit is $29,500 (up from $28,750); and for heads of household, the AGI limit is $44,250, an increase from $43,125. The saver’s credit rewards low and moderate income taxpayers who are working hard and need more help saving for retirement. The table below provides more details on how the saver’s credit works:

**Filing Status/Adjusted Gross Income for 2013**
Amount of Credit	Married Filing Jointly	Head of Household	Single/Others
50% of first $2,000 deferred	$0 to $35,500	$0 to $26,625	$0 to $17,750
20% of first $2,000 deferred	$35,501 to $38,500	$26,626 to $28,875	$17,751 to $19,250
10% of first $2,000 deferred	$38,501 to $55,500	$28,876 to $44,250	$19,251 to $29,500

Posted on Oct 31st, 2012

by author: jblankenship.

Posted in: #noTOP, 2013 tax year, Annual limits, contribution limit, IRA, Roth IRA.
Tagged: 401 k · annual limits · contribution limit · IRA

Book Review: The Chinese Way to Wealth and Prosperity

Oct 29th, 2012

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The Chinese Way to Wealth and Prosperity

You’d have to be living under a rock to have not noticed how the Chinese people have pretty much taken over all the top spots in most all pursuits – athletic, artistic, educational, financial, and most other areas of life.

This book, by Michael Justin Lee, a Chartered Financial Analyst and formerly the nation’s first Financial Markets Expert-in-Residence in the US Department of Labor, seeks to explain the reasons behind the success of the Chinese in so many areas of life. Mr. Lee delivers concrete examples of how this likely has come to be.

Admittedly, the success that the Chinese people are experiencing is not limited solely to the Chinese, and the author points this out – it appears that much of the basis behind this success comes from Confucian teaching, which influences many other Asian countries. It’s not surprising that Japan, Taiwan, Hong Kong, and other Eastern countries are experiencing similar success, and all are strongly influenced by Confucian teachings, as well as Buddhist philosophies.

Many of these teachings, ingrained in the family, are similar to notions that you might feel are common knowledge in the categories of “doing what’s right” that you’ve heard your entire life. For example: getting an education, thinking beyond your own generation, keep your debt to a minimum, and deferring gratification. Confucian principles take these ideas to another level altogether, and this is among the reasons that Asians have had such success in so many areas, according to Lee.

Mr. Lee does an excellent job of explaining these ideas, giving examples of how the various facets of life for the Chinese have prepared them to become as dominant as they have. I quite enjoyed the way he presents his information – and I believe there are lessons to be learned from this book for everyone.

History has shown that this sort of superiority changes in cycles. Not that long ago, China was among the lower classes in terms of many of these categories, and countries such as the US, Germany, and Great Britain claimed top spots. I suspect that such cycles may continue to occur, as success often leads to excesses, which often leads to downfall. I guess we’ll see what happens!

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not. If you find the information in this review useful, let me (and McGraw-Hill) know!

Posted on Oct 29th, 2012

by author: jblankenship.

Posted in: Book review.
Tagged: book review

Long Term Care Insurance – Protecting Your Nest Egg

Oct 24th, 2012

by sraskie.

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Long term care is a topic few people know about and a topic even fewer people are prepared to deal with in the future. As the average life expectancy increases in the US, more and more people – from Baby Boomers to X and Y geners – are going to be confronted with the need for and planning for long term care.

According to the Medicare website, about 9 million men and women over age 65 will need LTC this year – that number expanding to 12 million by 2020. According to the Department of Health and Human Services, people who reach age 65 will have a 40% chance of entering a nursing home and 10% of those will stay there for more than 5 years. This, of course, can get expensive. This is where an LTC policy can make sense.

There are two types of LTC policies that a person may obtain: Tax Qualified and Non-Tax Qualified. Non-Tax Qualified policy coverage starts when a person is stated have a medical necessity by a doctor and corresponding insurance company representative. These “triggers” start the claim period and benefits.

Most individuals will purchase Tax Qualified policies. The premiums for these are deductible for income tax purposes (subject to the 7.5% floor) and the coverage goes into effect when a person is incapable of performing at least two out of six activities of daily living – or ADL’s. These ADL’s or policy “triggers” are bathing, eating, dressing, toileting, transferring from bed to chair and continence. Also, substantial cognitive impairment will also trigger a claim.

Although walking is considered an ADL for non-tax qualified policies, it IS NOT an ADL for a tax-qualified policy.

Benefits can range from custodial care, skilled nursing care, home care, hospice care and comprehensive care depending on the type of policy purchased. Premiums will be adjusted accordingly depending on the type, nature and scope of the coverage. Policies will also have different elimination periods (time deductibles) of 30, 60, 90 and 180 days. A longer elimination period will mean lower premiums, but will also mean more time to wait until benefits begin. Here is where an emergency fund can be very useful. 3-6 months of living expenses can help offset a long elimination period.

It should also be noted that Medicare DOES NOT cover custodial care – it is specifically excluded.

From a planning standpoint, not having LTC can quickly erode a lifetime of savings, investing and legacy planning. It can be a useful hedge to help keep a retirement portfolio in place, but can also (if not most importantly) keep undue stress off of a family that may feel obligated to care for a loved-one, if a LTC plan is not in place. It also goes without saying that it is impossible to get an LTC policy once cognitive impairment or an ADL has appeared.

Generally, the optimal time to consider LTC is after the age of 50. However, people may want to consider it earlier if they have a family history of mental illnesses (Alzheimer’s and or dementia) or if family members want to get together and “pool” the premium payments among siblings for their parents. This can assure less stress in the future by not having to feel obligated to take care of a loved one, and can also purchase the best care you’d like to see a loved-one have. It can also mitigate responsibilities of family members who live closer to aging relatives, while others live further away.

If you’re considering LTC, it’s important to ask your questions and do your due diligence. How much does the policy cost, what does it cover, what is the daily benefit, etc., are all excellent questions. You may also consider the financial stability of the company offering the policy and length of coverage as well. Don’t be afraid to ask questions. A competent LTC advisor will be happy to help answer your questions and do the best for your needs.

In the end, you can sleep a little better knowing that you’ve just hedged and protected your future, your legacy and your retirement, while lowering your stress.

Posted on Oct 24th, 2012

by author: sraskie.

Posted in: health insurance, Insurance.

Factors to take into account when planning Social Security filing

Oct 19th, 2012

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As with the overall process of planning for retirement income, there are certain important factors external to Social Security benefits that you need to take into account while planning when to file for benefits. In the list below I will detail some of these factors and why they are important to the process.

Important Factors When Planning Social Security Filing

Pension income. Pension income must be considered with special care when planning your Social Security filing strategy. Often, pensions will increase in value up to a certain age of commencement and then there are no increases after that age. Coordinating your pension with your Social Security benefits can enhance your overall income stream – since a pension is generally a guaranteed source of income for yourself and possibly your spouse.

In addition, since many pensions are not indexed for inflation, meaning that there are no Cost-of-Living-Adjustments (COLAs), it probably makes a great deal of sense to maximize the amount that you can receive from this source. Depending upon your needs, starting Social Security benefits earlier could provide you with the income you need in order to maximize your pension.

Personal Assets. Funds that you have saved over the years can help you to bridge the gap between your current age (if you’re stopping work) and the age that maximizes your Social Security benefits (and pension benefits, as noted above). While it may be difficult to stomach, it may work in your favor to start taking some funds from your retirement plans (IRAs, 401(k)s, and the like) or taxable investment or savings accounts.

This is the reason that you’ve set aside this money over the years – taking distributions from these accounts so that you can delay other benefits may make all the difference. The point is that delaying to increase the amount(s) of your guaranteed income streams is likely very much worth the amount you are taking from the accounts in the long run.

Earnings from working. As you likely have realized, working part time in your retirement could be a good way to maximize your income. As with all income-producing efforts, work, even part-time, can be a very valuable asset. For other types of assets to produce income, there must be a store of value existing in order for the income to flow. In Social Security benefits the store of value is your earnings history; the same goes for pension benefits. With retirement accounts, the amount of savings you’ve built up is the store of value.

Working, at any age, utilizes the store of value of your own experience, skills, and knowledge. Continuing to work produces income from that store of value, income that otherwise would go unrealized.

General health. If your health is declining and the expectation is that your life-span will be somewhat less than the average, this can influence your need to start Social Security benefits earlier rather than later. However, as we’ve discussed in the past, it is not only your own health (e.g., longevity) that is important to consider. The health of your dependent beneficiaries is just as important, if not more so, especially if your Social Security benefit is large enough for others to depend upon it after you’ve passed.

Income requirements. The amount of income that you need to get by and pay your ordinary expenses can also influence your time to file for Social Security benefits. If you just can’t make ends meet using all of your other sources of income, it might be necessary to file for your Social Security benefit before it is maximized.

Posted on Oct 19th, 2012

by author: jblankenship.

Posted in: baby boomers, IRA, Social Security, social security retirement.
Tagged: baby boomers · IRA · Social Security

Investing in Taxable Accounts vs. IRAs

Oct 17th, 2012

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When investing beyond an employer-sponsored retirement plan, you have a choice to make, between using an IRA, a Roth IRA, or a taxable, non-deferred investment account. In making this choice your primary consideration should be the tax implications.

It’s easy to understand the current tax implications: if you invest in a traditional IRA and your contributions are deductible, you are saving the income tax of the deductible contribution. In all other choices, there is no current tax impact. For non-deductible contributions to a traditional IRA, or regular contributions to a Roth IRA, or saving in a taxable account, you are paying income tax as you’ve earned the money, regardless of what you do with it.

The second area to consider tax implications on all of these types of accounts is when there is income produced from the investments within each type of account. Income produced includes capital gains from sales as well as dividends and interest. In an IRA or Roth IRA, when income is produced there is no tax impact, as all tax is deferred. In the case of the taxable investment account there is current impact in terms of dividend taxation or capital gains tax. Presently capital gains are taxed at a maximum rate of 15% – but this could change, depending upon what Congress decides to do.

Many investments in taxable accounts can maintain tax deferral until you sell the security. Mutual funds often distribute capital gains annually, but stocks and ETFs often don’t produce capital gains until you sell the security – so you don’t have to recognize the income until you’re ready to sell.

The other, most important, impact is the rate of tax on your distributions over time. With your taxable account, again you are only subject to the capital gains tax (today at maximum 15%), while in a traditional IRA your deductible contributions and growth on the account will be subject to ordinary income tax rates. These rates max out at 35% (in 2012) but could be as high as 39.6% if the rates are increased in 2013 (and possibly higher).

Roth IRA distributions (as long as they’re after age 59½) have no tax at all – and the same goes for non-deductible contributions to your traditional IRA. Of course, since the non-deductible contributions are likely mixed in with growth and deductible contributions, so the non-taxed portions will be pro-rated with the entire distribution.

With all of this in mind – over the longer term it is very important to put as much of your savings as you can into Roth-type accounts, and then as your current tax situation requires, put money into tax-deferred accounts and/or taxable investments. For most folks, in the long run, the taxable accounts prove to be the best option to choose – at least under current tax law.

Posted on Oct 17th, 2012

by author: jblankenship.

Posted in: 2012 tax year, capital gains tax rates, contribution limit, IRA.
Tagged: capital gains and losses · capital gains tax rates · IRA

Errors on Your Tax Return? Here’s How to Fix Them

Oct 15th, 2012

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Often we discover long after filing that we’ve made errors on our tax returns. And too often the idea of resolving the problem seems too daunting to undertake, so we ignore it, deciding to just let things go. This can cause problems if it turns out that the error results in additional tax owed – so it is usually in your best interests to fix the error and go on with your life. On the other hand, if the error resulted in paying too much tax, you should get what you rightfully deserve (in terms of the overpaid tax.)

Recently the IRS published their Summertime Tax Tip 2012-05 which details tips on how to resolve these errors on your tax return. The actual text of the tip follows:

IRS Offers Tips on How to Fix Errors Made on Your Tax Return

If you discover an error after you file your tax return, you can correct it by amending your return. Here are 10 tips from the Internal Revenue Service about amending your federal tax return:

1. When to amend a return. Generally, you shoudl file an amended return if your filing status, number of dependents, total income, tax deductions or tax credits were reported incorrectly or omitted. Additional reasons for amending a return are listed in the instructions.

2. When NOT to amend a return. In some cases, you do not need to amend your tax return. The IRS usually corrects math errors or requests missing forms – such as Forms W-2 or schedules – when processing an original return. In these instances, do not amend your return.

3. Form to use. Use Form 1040X, Amended US Individual Income Tax Return, to amend a previously filed Form 1040, 1040A, 1040EZ, 1040NR or 1040NR-EZ. Make sure you check the box for the year of the return you are amending on the Form 1040X. An amended tax return cannot be filed electronically.

4. Multiple amended returns. If you are amending more than one year’s tax return, prepare a separate 1040X for each return and mail them in separate envelopes to the appropriate IRS processing center (see “Where to File” in the instructions for Form 1040X). Note from jb: often when you need to file an amendment for a return prior to the most recent year, the amendment may have an impact on the subsequent returns, requiring additional amendments to be filed.

5. For 1040X. The Form 1040X has three columns. Column A shows original figures from the original return. Column B shows the changes your are making. Column C shows the corrected figures. There is an area on the back of the form to explain the specific changes and the reasons for the changes.

6. Other forms or schedules. If the changes involve other schedules or forms, attach the corrected form(s) or schedule(s) to the Form 1040X. Failure to do so will cause a delay in processing.

7. Additional refund. If you are amending your return to get an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.

8. Additional tax. If you owe additional tax, you should file Form 1040X and pay the tax as soon as possible to limit interest and penalty charges.

9. When to file. Generally, to claim a refund, you must file Form 1040X within three years from the date you filed your original tax return or within two years from the date you paid the tax, whichever is later.

10. Processing time. Normal processing time for amended returns is 8 to 12 weeks.

Posted on Oct 15th, 2012

by author: jblankenship.

Posted in: income tax.
Tagged: income tax

Can I Switch to My Spouse’s Benefit At FRA?

Oct 12th, 2012

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This is a question that comes up pretty frequently, in several different flavors. Basically, here’s the full question:

I started benefits at age 62, and now I’m 66 (Full Retirement Age) – can I switch over to my spouse’s benefit now that I’m age 66? And will it be based on his benefit when he was 66, or his benefit now. (He’s 70 now, and has been collecting benefits since he turned 66.)

There are a couple of questions being asked here, and I’ll cover them one-by-one.

Can I switch to my spouse’s benefit?

The wording here is troubling, because the asker specifically wishes to “switch” to another benefit. If an individual is already receiving retirement benefits, the spousal benefit is not a “switch”, but rather an “addition” to the retirement benefit.

The second issue is implied, and maybe not troublesome to the question at hand. The Spousal Benefit at Full Retirement Age (FRA) is 50% of the other spouse’s Primary Insurance Amount. The implication is that the asker could receive the same benefit as her spouse – and this is not the case. Half of the other spouse’s Primary Insurance Amount (PIA) is the maximum Spousal Benefit.

So here’s how the Spousal Benefit is calculated:

half of the other spouse’s PIA minus your own PIA;
if you’re younger than FRA the result will be reduced to as little as 65%;
if you’re at or older than FRA, there is no reduction to the result of the first step;
the resulting amount is added to your own benefit, to result in your total benefit.

See the article, Social Security Spousal Benefit Calculation Before FRA for more detail on how exactly this all works.

What Will My Benefit Be Based On?

In the example question from above, the asker indicates that her husband filed for his own benefit at age 66, and now he’s age 70. So what amount is a spousal benefit based upon?

In this case, the amount of the spousal benefit would be based upon the amount that the husband is currently receiving – assuming that he had filed at exactly his own age 66, Full Retirement Age. If he filed at exactly that age, his benefit is equal to his Primary Insurance Amount (PIA) – which over the intervening four years has been increased by Cost of Living Adjustments (COLAs).

If the husband in question had delayed his benefit to age 70 to receive the Delayed Retirement Credits (for more on Delayed Retirement Credits, DRCs, see the article A File and Suspend Review at the link), then the spousal benefit that that asker would receive would be based upon the amount that the husband would have received had he filed at FRA, which would have increased by COLAs.

Hope this helps to clear up this question!

Posted on Oct 12th, 2012

by author: jblankenship.

Posted in: Delayed Retirement Credit, DRC, Social Security, Social Security spousal benefit, Spousal Benefit.
Tagged: DRC · Social Security · spousal benefit

The Value of Your Social Security Benefits

Oct 5th, 2012

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As you consider your Social Security benefits and when you might begin to draw them, keep in mind that the benefits you’re receiving are actually akin to an annuity – a stream of income that you will receive from the time you start the benefits throughout your life. As with an annuity, if you live longer than average, you will receive much more than the original value (premium) of the annuity. If you have a way to increase the amount of the stream of income, by delaying start of the benefits, the overall amount that you eventually receive will increase as well (assuming you live longer than average).

Let’s say that your Social Security benefit would be $1,500 at Full Retirement Age. If you started your benefit early at age 62, your benefit would be reduced to 75% of that amount, or $1,125; if you delayed your benefit to age 70, the benefit amount would be increased by 32% to $1,980.

If you started receiving benefits at age 62 and you lived to age 75, the total benefit that you receive over your lifetime would be $189,000 – not including Cost of Living Adjustments. In a similar manner, calculating the total lifetime benefit if you started receiving benefits at Full Retirement Age (FRA, age 66 for folks reaching that age these days) comes out to $180,000 if you live to age 75. Waiting to age 70 to start benefits results in a lifetime benefit (to age 75) of only $142,560.

So if you only live to age 75, it makes the most sense to start your benefits as early as possible. But read on…

What’s interesting about this sort of calculation is that if you live beyond age 75, say to age 80, now your lifetime benefits are starting to be greater by delaying a bit. If you start at age 62, the total lifetime benefit would be $256,500 through age 80; starting at 66 results in $270,000 over your lifetime. Delaying to age 70 still results in a lower lifetime benefit at this age – only $261,360.

So if you happen to live even longer, let’s say to age 90 – now the later you’ve delayed results in the greatest overall lifetime benefit. Starting at age 62 results with a total lifetime benefit of $391,500; 66 amounts to $450,000, and beginning at age 70 yields $498,960.

What about the value of that income stream in today’s dollars?

There’s another calculation that we financial guys do when evaluating things like annuities – it’s known as a Net Present Value (NPV) calculation. Essentially what we do is to take the value of the cash flows and use a set rate of return to determine what amount of money we’d need in order to produce those cash flows at those times in the future.

So, for our example above, using a rate of return of 5%, we come up with the following net present values of the cash flows:

Age to start	NPV to age 75	NPV to age 80	NPV to age 90
62	$133,632	$163,152	$204,404
66	$138,991	$186,834	$253,691
70	$120,598	$198,360	$304,631

As you can see, the NPV increases for your delayed receipt of benefits starting with a lifespan of age 80, and becomes more pronounced if you live even longer. As we saw with the total lifetime benefit, there’s a higher value to the cash flow if you start early only if your lifetime is relatively short – in this case, to age 75.

Conclusion

This is the reason that we financial-types often recommend delaying receipt of Social Security benefits. As the figures above attest, there can be a substantial lifetime benefit increase if you life beyond age 80 – in our example it comes to over $100,000 by changing your start date from age 62 to age 70 and you live to age 90. Of course, if you don’t happen to live beyond age 80 (and who knows how long you’ll live?) starting earlier will likely result in the greater benefit for you in your lifetime.

Given that folks are living longer and longer these days, you should really consider delaying Social Security benefits as your strategy. Keep in mind that we’re only talking about a single person’s benefits – for a couple, the calculations become infinitely more complex, as we have to account for two lifetimes, two potential benefits, and spousal and survivor calculations. We’ll get to that next time…

Posted on Oct 5th, 2012

by author: jblankenship.

Posted in: Delayed Retirement Credit, Early Filing, Social Security, social security retirement.
Tagged: delayed retirement credit · early filing · Social Security

My credit card meets Carly Rae

Oct 1st, 2012

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So, is it just me? I try not to be too terribly difficult to work with. I go along with most requests without any roadblocks, but every once in a while something comes up that just drives me bats.

Problem is, this seems to be something that crops up more and more often. All too often I come across this issue – maybe not every day, but very regularly. What is it that I’m talking about? Let me borrow a line from Ms. Carly Rae Jepson to help explain:

Hey! I just met you…
(And this is crazy)
… but here’s my number,
so call me maybe?

Okay stop being freaked out that I happened to know the lyrics to that song. I just happen to know things, among those things are the lyrics to many a song, inane or otherwise described. Ask anyone who has taken a long road trip with me – included in my repertoire is the complete lyrics of CW McCall’s Wolf Creek Pass. As such, the Pass often makes an appearance on such trips.

It’s all in the cards

Wow, I can sure digress, can’t I? Let’s get back to what I was talking about before – the matter that just drives me crazy these days. I’m talking about credit card processing.

Recently I was signing up for a conference, filling out the form to pay for it. This particular conference had not invested the effort into online processing, opting instead for a Word doc with a simple form to be filled in and emailed. Of course the form asked for all of the pertinent credit card information, including the name on the card, the full card number, expiration date, and zip code. Then, the pie’ce de re’sistance: the CVV code. This is the 3- or 4-digit code from the back of your card.

I recognize why this code is there, it’s for the card not present sort of transactions that we all encounter these days, providing an additional bit of security to ensure that the person using the card actually has possession of the card. I agree with the use of it when necessary, but I also know that it’s not always necessary.

I process credit cards regularly from clients paying for services over the phone, and my processor has clearly noted that use of the CVV code is optional when processing a transaction. Since this is the case, I never require the client to give up this information over the phone. In these circumstances, it serves no purpose (but that’s still not what my problem is).

It’s all about the security itself. In these days of online access for just about everything, it is just irresponsible to request all of this information in a manner that is so unsecured as an email-attached document. In the case of the outfit that is running the conference I mentioned earlier, there is literally no excuse: they have infinitely-adequate resources to enable this transaction to be completed online in a secured fashion.

However, they chose to use the unsecured method of the Word doc. So when I got to the blank requesting the CVV code, I simply wrote to call if absolutely necessary. Not long after I sent the email, there was a response email asking me to call with the code. Busy at the time, I called back a couple of hours later. The person who I needed to talk to had left the office for the weekend, and she had left instructions with her backup to take the number. Still okay with me, until the backup said I’ll just write this down on the application and give it to her on Monday.

Crap. I told her no thanks, I’ll send a check. Which is exactly what I did.

The problem

The problem here is that the CVV code is really your only last defense. If you give that away, especially in a fashion that provides an enduring record, you may as well have sent your credit card over to whoever it is.

When you enter your CVV code in a secured automated processing system, the code is only held for a moment, passed over to the processor and then eliminated. Because of this, if the system you’re using is fully secure, you are not giving up control over the information.

On the other hand, if the numbers are written down, you have given up complete control over your card and its defenses. When this is coupled with the prospect of living on a Post-It note attached to your file over the weekend, you can see why I was squeamish.

Processors are required to only maintain the CVV code until the transaction is complete and, per my own experience, it’s optional.

Here’s my adaptation of Ms. Jepson’s lyrics:

Hey! I don’t know you (maybe you’re in an Internet cafe’ in a third-world country?)…
(and this is crazy)
… but here’s all of my credit card numbers (including my CVV),
so rob me blind, maybe?

How it’s supposed to work

So, back to the thing that drives me bats. It’s actually two things:

If you’re processing credit cards other than over the telephone, go the extra mile and install your processor’s online transaction system in a secured location. This way your system will handle all of the security, and you don’t have to worry about a breach. Better yet, use a third-party secured system such as Paypal or Intuit to handle the processing so that there’s an additional buffer between you as the proprietor and the processor of the information.
If you must handle card transactions offline, do it over the telephone while entering the information into the processor’s system. But by all means don’t ask your customers to submit their last defense information via unsecured email and Word doc attachments. And most of all, don’t leave someone behind to handle this information by just writing it down to be left on your desk over the weekend.

As a consumer, you can insist that only a third-party processor is used (such as Paypal), or even better, you could use one of the virtual or one-time-use credit card numbers. These are available from lots of sources, such as your own credit card issuer, and even paypal contact. The one-time-use card allows you to ensure that the number is only used for that particular transaction and never again. How secure is that??

As it becomes more pervasive in our world we’ll continue to run across these situations. Even though I don’t like to do it, I do give the number out when I know the transaction is being processed directly. But this only happens when there is no secured online option – or better yet, a Paypal option. Absent this, I’d prefer to send a check, or at last resort take my business elsewhere. Or maybe I’ll put in the effort to get on board with the one-time-use card option.

Posted with Blogsy

Posted on Oct 1st, 2012

by author: jblankenship.

Posted in: credit cards, financial planning.
Tagged: credit cards · financial planning

Taking Distributions from Your IRA In Kind

Sep 26th, 2012

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When you take a distribution from your IRA, whether to put the funds in a taxable account or to convert it to a Roth IRA, you have the option of taking the distribution “in kind” or in cash.

In cash means that you sell the holding in the account or simply take distribution of cash that already exists in the account. This is the most common method of taking distributions, and it is definitely the simplest way to go about receiving and dealing with a distribution. Cash is cash, it has only one value – therefore the tax owed on the distribution, whether a complete distribution or a conversion to a Roth account.

On the other hand, if you choose to use the “in kind” option, you might just save some tax on the overall transaction. The reason this is true is due to the fact that the amount reported on your 1099-R for the distribution is the Fair Market Value (FMV) of the distribution.

Quite often, when you have holdings in your IRA that have very limited liquidity or marketability, the actual value on any given date could be discounted quite a bit from the eventual or Net Asset Value (NAV) of the holding.

For example, if you held shares in a limited partnership (LP) that makes investments in leveraged real estate, meaning that the real estate holdings are encumbered by mortgage loans, the value of the overall holding will first be reduced by the outstanding non-recourse (mortgage) loans against the assets. Secondly, if the property is limited in its marketability (and what property isn’t these days?) there could be a reduction in the FMV for liquidity and marketability.

Let’s say that the LP owned several properties that amounted solely to vacant real estate that is to be eventually sold to developers. The property was purchased several years ago with the idea that developers would quickly be willing to purchase and develop the tracts, as the area was growing quickly. Then the property values dropped off drastically and development in the area dried up completely.

When you originally purchased the shares in the LP, you invested $100,000, and your shares are encumbered by an additional loan of $100,000 – so the original NAV of your holdings is $200,000. Now that the property values have dropped off by 40%, your holdings effectively have a value of $120,000. When a qualified appraiser reviews and values the property in the LP, the Fair Market Value (FMV) is set at exactly 60% of the original NAV. In addition, the loan balance against your shares is now down to $90,000.

If you decide to convert your holdings of this LP to your Roth IRA in kind, here’s how the FMV would be calculated for tax purposes: your FMV of the overall holdings of $120,000 (60% of the NAV) minus the encumbrance loan of $90,000, for a total value of $30,000. So this is the amount that is reported on the 1099-R for the value of your holdings being converted.

Then (hopefully), after a year or so, fortune once again smiles on your LP, and developers come a’callin’. Now they’re willing to pay full value plus a premium of 30% on the original values of the properties – for a total of $260,000 value on your shares. So effectively you have a property that cost you a total of $100,000 initially, is now worth $170,000 (your $260,000 minus the $90,000 loan), and you only had to pay tax on $30,000 of the value – the rest is tax free!

Granted, this is an extreme set of circumstances that uses the tax laws to your advantage, but it represents an example that, with some adjustments, could be a real world happening. If you happen to be investing in esoteric-type investments that might have wildy-fluctuating FMVs over time, this could be a good strategy to look into. Just make sure you have a trusted advisor on your side who is familiar with this sort of activity – you don’t want to mess this one up, as the tax and penalty downsides can be substantial.

Posted on Sep 26th, 2012

by author: jblankenship.

Posted in: IRA, ira funds, Roth conversion, roth ira.
Tagged: IRA · roth conversion · roth ira conversion

Tax tips for college expenses

Sep 24th, 2012

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Most all college students are back on campus by this point but the benefits that you can receive from various tax credits will not become apparent until you pay your taxes next year. It’s important to know what tax credits you may be eligible for early on, so that you keep good records as you pay these college expenses. Recently the IRS published their Summertime Tax Tip 2012 – 25 which details tips for students and parents paying college expenses. The actual text of this tip is listed below.

Back-to-school tips for students and parents and college expenses

Whether you’re a recent high school graduate going to college for the first time or a returning student, it will soon be time to head to campus, and payment deadlines for tuition and other fees are not far behind.

The IRS over some tips about education tax benefits that can help offset some college costs for students and parents. Typically, these benefits apply to you, your spouse or dependent for whom you claim an exemption on your tax return.

American opportunity credit. This credit, originally created under the American Recovery and Reinvestment Act, is still available for 2012. The credit can be up to $2500 per eligible student and is available for the first four years of postsecondary education at an eligible institution. 40% of this credit is refundable, which means that you may be able to receive up to $1000, even if you don’t owe any taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment.
Lifetime learning credit. In 2012, you may be able to claim a Lifetime Learning Credit of up to $2000 for qualified education expenses paid for a student enrolled in eligible educational institutions. There is no limit on the number of years you can claim the Lifetime Learning Credit for eligible student.

You can claim only one type of education credit per student in the same text year. However, if you pay college expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. For example, you can claim the American Opportunity Credit for one student and the Lifetime Learning Credit for the other student.

Student loan interest deduction. Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, you may be able to deduct interest paid on a qualified student loan during the year. It can reduce the amount of your income subject to tax by up to $2500, even if you don’t itemize deductions.

These education benefits are subject to income limitations, and may be reduced or eliminated depending upon your income. For more information, visit the Tax Benefits for Education Information Center at IRS.gov or check out Publication 970, Tax Benefits for Education.

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Posted on Sep 24th, 2012

by author: jblankenship.

Posted in: american opportunity tax credit, education expenses, income tax credit, lifetime learning credit.
Tagged: american opportunity credit · education tax credits · lifetime learning credit

How is the Social Security Survivor Benefit Calculated?

Sep 21st, 2012