Getting Your Financial Ducks In A Row Rotating Header Image

3 Ways of Dealing Without Recharacterization

Dec 20th, 2021
by jblankenship.
1 comment

Photo credit: jb

As of the passage of the Tax Cuts and Jobs Act of 2017, recharacterization of a Roth IRA conversion is no longer an option. What can you do to now, to simulate the benefit had by recharacterization of a conversion?

It should be noted that regular contributions to a traditional or Roth IRA can still be recharacterized – it’s only a traditional IRA-to-Roth IRA conversion that is disallowed.

If you recall, the primary reason that you would want to recharacterize is if you converted funds and then, by the time you pay the tax, the holdings that you converted have dropped in value. So, instead of paying tax on something that is much less in value than previously, for a Roth IRA conversion you can recharacterize the conversion up to October 15 of the following year (see Help Mr. Wizard – I didn’t wanna do a Roth Conversion for more details on recharacterization).

While you can no longer just recharacterize and “reset” things when you face a situation like that with a Roth conversion, there are ways to reduce the risk associated with your Deemed Roth Account Conversion (since you are not eligible to recharacterize the conversion).

For one thing, you could use dollar-cost averaging to spread the risk of market fluctuations over several points in time through the year. Simply split your intended conversion amount into four amounts (or 12 amounts, if you want to do it monthly), and convert one of those amounts each quarter, for example. This way if the market drops through the year, you’re converting funds at the lower values.

Another option would be to spread the date-specific risk over several years, by converting smaller amounts each year. This would also reduce the risk of adverse market results, and spread out the tax over several years (if possible).

Timing the conversion for late in the tax year will give you the opportunity to fully (to a degree) understand the tax impact of the conversion. With little time remaining in the tax year, presumably there will be little in the way of fluctuation. This is the opposite of the recommendations that used to apply, which was to do your conversion early in the year to potentially take advantage of a recharacterization event, or (more hopefully) realize significant gains on a your converted sum.

Yet another choice could be to convert only those assets that have very low volatility, such as bonds. The probability of a major drop in value is much lower for these assets, so your need for a recharacterization would be far less likely. Sell your bond holdings in the IRA, convert the funds over to Roth, and then re-purchase the bond holding again in the Roth IRA.

There are many other, more complicated ways to reduce your risk against such a situation, but these are a few that are easily implemented. Hopefully this will help you in your process of converting retirement plan assets to Roth.

Posted on Dec 20th, 2021
by author: jblankenship.

1 comment already - add to the conversation!

Posted in: investing, IRA, retirement plan, Roth conversion, tax.
Tagged: · ·

Talking to the Social Security Office

Dec 13th, 2021
by jblankenship.
1 comment
hidden fees

Photo credit: jb

I often recommend talking to the Social Security Administration (SSA), either at your local office or on their hotline, to review your particular situation.  But this advice comes with a caveat… you need to know as much as you can about your options, and what you are entitled to do, so that you are well-armed when you speak with the SSA.

This is because the SSA representatives’ default advice is often to recommend the option that provides you the largest benefit today. The reason for this may be because it is in the SSA’s best interest for you to make your move now, because you’re on the phone with them, so you must be interested in getting benefits right away.

This also could be the case because a very high percentage of the eligible benefit recipients do not wish to delay receiving their benefit. So the folks you talk to at the SSA office are playing the averages by assuming that that’s what you want to do.

It is for these reasons that it makes very good sense to know as much as possible about your situation and the options that you have available (and what you are entitled to) before you talk to the SSA. Explain to the representative what you’re planning to do, and have them run the numbers to tell you what your benefits will be in the scenario(s) you’re suggesting.

Use the internet’s resources to find out what strategy works best for your particular situation. If you’re married, for example, there may be coordination strategies to think about. The same is true if you are divorced after at least ten years of marriage and not remarried. If you’re a widow(er) or your ex-spouse has died, even more coordination is available. Learn about your possible strategies and choose the right one for you. Then talk to SSA about it.

It pays to be informed – this is especially important when it’s something as confusing and complicated (with so much potential gain and loss) as your Social Security benefits.

Posted on Dec 13th, 2021
by author: jblankenship.

1 comment already - add to the conversation!

Posted in: Social Security.
Tagged:

What to do with a Year-End Bonus

Dec 6th, 2021
by jblankenship.
No comments yet

Photo credit: jb

This article originated from a reader question…

Suppose I get a $5000 bonus before the end of the year, would I be better off giving it away or putting it in 401k to avoid tax consequences, putting some in Roth IRA (if I still qualify), paying the tax bill on a conversion of some rollover IRA $$ to a Roth, paying my child’s tuition bill (too late for 529 now) to avoid debt, or replacing the 10-year old heating and A/C system to lower ongoing utility costs?

The specifics of this question are unique to the individual who asked the question, but the reasoning behind the response can be tailored to fit many other circumstances. What follows is an example of the process that I typically go through to assist folks in the process of understanding the impacts of various choices…

Assumptions

To start off, we need to make some assumptions about the situation that will guide us through the process. The reader who posted the question leaves us with a few clues that help us understand his tax situation – he’s made reference to income level with the “if I still qualify” parenthetical comment, so we should assume that the tax bracket for the bonus money is relatively high, close to the limit for Roth IRA contributions, which for 2021 puts him in the 24% bracket. In addition to the marginal tax rate, we’ll assume that the asker is married, filing taxes jointly. We’ll also assume that the asker’s spouse is already contributing to a retirement plan (so a Spousal IRA contribution is not in play). So in all cases the net after-tax bonus is assumed to be $3,800 (24% or $1,200 is used for taxes).

We also assume that in retirement, the tax bracket will be lower than it is currently, making tax deferral today more beneficial – meaning that we want to pay as little tax as we can today if we can pay tax on that income tomorrow.

Other assumptions include: the asker of the question has not maximized his contributions for the year to a 401(k), or a Roth IRA; the child (student) has not exhausted his student loan options, and funds can be borrowed at an unsubsidized rate of 6.8%; the cost of purchasing a new heating and A/C system for the home in question is $7,000; and lastly, there are funds available from other sources to pay for the needed heating and A/C unit or the tuition bill (if a loan is not used).

Analysis (*2021 tax provisions in use)

Donating – This would give you a tax deduction, so it would reduce your overall tax by $912, if he otherwise is eligible for itemization (his total itemized deductions are above $25,100). Otherwise, he can deduct up to $600 without itemizing.

Contribute to 401(k) – In this case, given the relatively high tax bracket, there would be a tax reduction (from all other options) of $1,200, allowing the reader to put the entire $5,000 to work in the retirement account. The assumption here includes the fact that you expect your tax bracket to be lower in retirement than it is presently – since when you take the money out of the 401(k), it’ll be taxed as ordinary income, thereby reducing the benefit of this tax reduction today.

Roth IRA contribution – If the asker of the question has not made his Roth IRA maximum contribution for the year and all other tax reduction and deferral options have been exhausted, this might make a great deal of sense. However, since there are other alternatives to look at, the Roth IRA contribution might not be the best option to use in these circumstances – since the tax cost of the money is relatively high.

Paying the tax on a Roth IRA conversion – Again, given the tax bracket involved here, a Roth IRA conversion is probably not a good idea. This amount of $3,800 could pay the tax for up to $15,833 of Roth Conversion, but as we have discussed in other articles, at the 24% bracket this is a somewhat costly conversion. It is assumed that in retirement his tax bracket could be less than the 24% current bracket – so only a very long period of deferral in the Roth account would prove beneficial.

Paying your child’s tuition – Paying the tuition bill could be a good use of these funds, because you would likely be eligible to use the American Opportunity Tax Credit on the tuition payment, giving you a credit of up to $2,500 directly against your overall tax, although the amount attributable to the net (after-tax) $3,800 would be $2,400 at most. This would eliminate the tax on the bonus altogether and give you an additional $1,200 in tax credit.

Replacing the aging heating and A/C – A 30% tax credit is available on the purchase price of eligible Qualified Residential Energy Property, up to $1,500. The cost of the installation is not allowable for the credit, this would be added to the basis of the property. For the net $3,800 from the bonus, the credit would be $1,140. In addition, assuming that the current system in place is far less efficient than a new system, this might equate to as much as an annual reduction of $200 or more in your annual heating and cooling costs.

Putting it all together…

Now that we’ve looked at the tax benefits of the options available, let’s compare them all side-by-side:

Donation – $912 tax reduction

401(k) – $1,200 tax deferred

Roth Contribution or Conversion – no current tax benefit

Tuition – $2,400 tax credit

Heating & A/C – $1,140 tax credit, plus ongoing $200 reduction in heating/cooling costs

So – the best route to go with this bonus, purely from a tax benefit standpoint, is paying the tuition bill. This would give you all of the withheld tax back, plus an additional $1,200 in tax credits. However, if you already have other funds set aside to use to pay the tuition, you might use those instead, and then use the bonus for one of the other options. (It should also be noted here that, if you haven’t taken advantage of your employer matching contributions in your 401(k), that might be the best possible place to use the bonus money.)

In the case of the heating and A/C system – this is a matter of priority… if the system truly needs replacing (beginning to show signs of failing), then you might put it higher in the priority order above the tuition or the 401(k) plan. For example, the student or the parent could get unsubsidized loans to pay for the tuition bill, since the interest on these loans can be deducted from taxes in the future, and then use the bonus (and the tax credit) to pay for the heating and A/C system.

Other options that you might consider for these funds would be: pay down high interest debt (credit cards, auto loans, or student loans), spend it on your own education (a master’s degree could make a significant difference in your future income), improve your “emergency” fund, or consider starting your own small side business. You could also use a portion of your funds to treat yourself and your family to a vacation, or perhaps some other leisure pursuit that will improve your life or provide other intangible benefits.

Of course, all of these options require you to put your own priority system to work. We’ve covered the tax implications – now it’s up to you to decide what makes the most sense for you. If it is of a high priority for you to make donations to a charity of importance to you, this might be the best option for you.

Posted on Dec 6th, 2021
by author: jblankenship.

No comments yet - start the conversation!

Posted in: financial planning, reader questions, tax.
Tagged: ·

GPO and WEP – When Do These Apply?

Nov 22nd, 2021
by jblankenship.
3 comments

In earlier articles we talked about the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP). These two rules within the Social Security Administration’s procedures reflect reductions to Social Security benefits for receiving pension benefits from a job where your salary is not subject to Social Security withholding. Usually these are federal, state, or local government jobs, including teaching jobs at public institutions. The WEP applies to your own Social Security benefit and pension, while the GPO applies to your spousal or survivor’s Social Security benefit and your own pension.

The WEP may impact you if you are receiving a pension from a non-covered job and you also are qualified to receive Social Security benefits based upon your own record. The same holds true for Spousal benefits based on your record – if you are receiving a non-covered pension and your spouse is eligible for Spousal benefits, these can be reduced by the WEP as well. Survivor’s benefits and spousal benefits (where you’re receiving the non-covered pension and the Social Security spousal or survivor benefit is based on your spouse’s record) are NOT subject to the WEP. For 2022 the maximum WEP reduction is $512, but it can be much less (even eliminated) depending on how long you worked in the Social Security-covered job and how much money you made there.

The GPO may impact you if you are receiving a pension from a government job and are qualified to receive Survivor’s or Spousal benefits based upon your spouse’s or ex-spouse’s record. Your Survivor benefit may be reduced by an amount equal to two-thirds of the amount of your pension.

Posted on Nov 22nd, 2021
by author: jblankenship.

3 comments already - add to the conversation!

Posted in: Social Security.
Tagged:

Windfall Elimination Provision (WEP) for Social Security

Nov 15th, 2021
by jblankenship.
68 comments
windfall of peppers

Photo credit: jb

If you have worked in a job where your pay was subject to Social Security tax withholding, and also have worked in another job where Social Security tax is not  withheld, such as for a government agency or an employer in another country, the pension you receive from the non-Social Security taxed job may cause a reduction in your Social Security benefits. This reduction is known as the Windfall Elimination Provision (WEP). It’s named such since it was enacted to eliminate the “windfall” that would otherwise be received by a worker who fit into this description. Without the WEP, the worker would effectively be double-dipping by receiving full benefits from both the pension and Social Security.

This provision primarily affects Social Security benefits when you have earned a pension in any job where you did not pay Social Security tax and you also worked in other jobs long enough to qualify for Social Security benefits. However, federal service where Social Security taxes are withheld (Federal Employees’ Retirement System) will not reduce your Social Security benefits, since Social Security tax is applied to earnings. The WEP may apply if:

  • you reached age 62 after 1984; or
  • you became disabled after 1985; and
  • you first became eligible for a monthly pension based on work where you did not pay Social Security taxes after 1985, even if you are still working.

Here’s How WEP Works

True to form, the Social Security Administration doesn’t make it easy to figure all this out…

You must start out by understanding your Primary Insurance Amount, which begins with your Average Indexed Monthly Earnings (AIME), and then take the Bend Points for the current year into account. For 2022 the first Bend Point is $1,024 and the second Bend Point is $6,172. As we discussed in the article on Primary Insurance Amount (PIA), the amount of your AIME that makes up the first Bend Point is multiplied by 90%; the amount between the first Bend Point and the second Bend Point is multiplied by 32%; and finally any amount above the second Bend Point is multiplied by 15%. These three figures are added up to create your PIA.

However – if WEP applies to your situation and you reached age 62 after 1989, the 90% factor (applied to the first Bend Point) can be reduced to as little as 40%. Effectively, this reduces the PIA by as much as $512 per month (for 2022). The reduction factor was phased in if you reached age 62 between 1986 and 1989.

Exceptions

Again true to form, the SSA has exceptions to the rule. If it turns out that your service in the Social Security taxed job was for 30 years or more and you earned “substantial” wages (substantial is defined as $27,300 for 2022 and has been indexed over the years), then your 90% factor is not reduced at all. If you had substantial earnings for at least 21 years but less than 30 years, the 90% factor is reduced by 5% each year between 21 and 30 years that you had “substantial” earnings in the Social Security-taxed job, starting at 45% for 21 years of substantial earnings.

Additionally, the WEP doesn’t apply to Survivor’s benefits or Spousal benefits (but the Government Pension Offset does). Other exceptions include the following:

  • You are a federal worker first hired after December 31, 1983;
  • You were employed on December 31, 1983 by a nonprofit organization that did not withhold Social Security taxes from your pay at first, but then began withholding Social Security taxes from your pay;
  • Your only pension is based on railroad employment; or
  • The only work you did where you did not pay social Security taxes was before 1957.

Parting Shots

There is a limit to the amount that your Social Security benefit can be reduced: no matter what your factor has been reduced to (from the original 90%), the resulting reduction cannot be more than 50% of your pension based on earnings after 1956 on which you did not pay Social Security taxes. Likewise, if your AIME is less than the first bend point and all of your PIA is within that 90% bracket, the minimum Social Security benefit is 50% of your original PIA.

And lastly, the WEP also applies to Disability benefits from Social Security, using the same factors.

Posted on Nov 15th, 2021
by author: jblankenship.

68 comments already - add to the conversation!

Posted in: federal employees retirement system, primary insurance amount, Social Security, social security administration, social security benefits, social security tax, wep, windfall elimination provision.
Tagged:

Government Pension Offset for Social Security

Nov 8th, 2021
by jblankenship.
8 comments
offset peppers

Photo credit: jb

There’s a somewhat confusing situation that occurs when a spouse is receiving either a Spousal benefit or a Survivor’s benefit from Social Security while at the same time is receiving a pension from a federal, state, or local government. This is specifically so if the pension being received is from a job where Social Security taxes (OASDI) were not withheld. This situation triggers the Government Pension Offset, or GPO.

What happens is that the Social Security Administration will reduce the Spousal or Survivor’s benefit by a factor equal to two-thirds of the government pension that he or she is receiving. This is called the Government Pension Offset, or GPO (yay, another acronym from the Social Security Administration SSA!) The GPO is often confused with the Windfall Elimination Provision (WEP), but they are different provisions.

Why?

Eligibility for Spousal or Survivor’s benefits are based upon your spouse’s record with the Social Security administration. If your own benefit is greater than the Survivor’s or Spousal benefit, of course you would not be receiving the Survivor’s or Spousal benefit. You can only receive either your own benefit or the Survivor’s or Spousal benefit, whichever is greater.

If you are receiving a pension from a government job that did not require you to have Social Security tax withheld, your own Social Security record doesn’t reflect the income earned from that job. The government pension is designed to take the place of Social Security benefits – at least to some degree. This particular quandary was first addressed in 1977 with the amendments in that year – but it really went too far at that stage.

1977 Amendment

Government pensions from jobs not subject to Social Security tax withholding are designed to be equal to partially pension, and partially compensation intended to replace Social Security benefits for the retiree. In 1977 an amendment was made to the Social Security Act to address the fact that, otherwise, a Spousal benefit or Survivor’s benefit would be compensating the Spouse more than the system originally intended. The 1977 Amendment offset (reduced) the Social Security Spousal or Survivor’s benefit by one dollar for each dollar of pension received from government work that was not subject to Social Security tax. This only applied if the pension was from a job that the Spouse or Survivor worked.

1983 Amendment

In the 1983 Amendment (which is the current set of rules), the Government Pension Offset (or GPO) was improved for Spousal and Survivor’s benefits. Instead of the original dollar-for-dollar offset, now the Social Security Spousal or Survivor’s benefit is only reduced by two-thirds of the government pension amount. This more accurately reflects the fact that the government pension is part pension and part compensation to replace the Social Security benefit.

When Does the GPO NOT Apply?

It’s possible that your particular situation may provide for your Spousal or Survivor’s benefit to not be impacted by the Government Pension Offset. Listed below are several situations that will permit the GPO to not apply:

  • If you are receiving a government pension that is not based on earnings;
  • If you are a state or local employee whose government pension is based on a job where you were paying Social Security taxes
    • on the last day of your employment and your last day was prior to July 1, 2004; or
    • during the last five years of employment and your last day of employment was July 1, 2004 or later. Depending upon the circumstances, fewer than five years could be required for folks whose last day of employment fell between July 1, 2004 and March 1, 2009 inclusive.
  • If you are a federal employee, including Civil Service Offset employee, who pays Social Security taxes on your earnings. (A Civil Service Offset employee is a federal employee who was rehired after December 31, 1983, following a break in service of more than 365 days and had five years of prior civil service retirement system coverage);
  • If you are a federal employee who elected to switch from the Civil Service Retirement System (CSRS) to the Federal Employees’ Retirement System (FERS) on or before June 30, 1988. If you switched after that date, including during the open season from July 1, 1998 through December 31, 1998, you need five years under FERS to be exempt from the GPO;
  • If you received or were eligible to receive a government pension before December 1982 and meet all the requirements for Social Security Spousal benefits or Survivor’s benefits in effect in January 1977; or
  • If you received or were eligible to receive a federal, state or local government pension before July 1, 1983, and were receiving one-half support from your spouse.

Unlike WEP, there is no way to work your way out of the impact, other than the aforementioned final five years covered option.

Posted on Nov 8th, 2021
by author: jblankenship.

8 comments already - add to the conversation!

Posted in: government pension offset, GPO, Social Security.
Tagged: · ·

Combining IRAs with Other Retirement Plans

Nov 1st, 2021
by jblankenship.
2 comments
combination of trees

Photo credit: jb

Quite often, we are faced with multiple options for retirement savings. With these decisions, it is important to understand what options are actually available to you – such as, can you contribute to both a 401(k) or 403(b) plan and an IRA in the same year?

Combinations

If you have a retirement plan available to you at your employer (401(k), 403(b) or traditional pension), depending upon your income you may be able to contribute to an IRA (a traditional, deductible IRA) in the same year. See Facts & Figures for the income limits.

Depending on your own circumstances, these income limits may be relatively low, so the likelihood of having the deductible IRA available to you is limited. On the other hand, the income limits for Roth IRA contributions are much higher, so for most this is a viable option.

If your income is higher than the limits for a Roth IRA contribution, you still have another option available to you: non-deductible traditional IRA contribution. In this contribution there is no income limit at all. The primary value you receive from this sort of contribution is in the tax deferral that any growth in your account receives – as your investments accrue growth (hopefully) you will not have to pay tax on that growth until you withdraw the funds.

In addition, there are often cases where you may have more than one employer plan available to you. The limitation here is that you can contribute fully to either a 401(k) plan or a 403(b) plan up to the limit, but only one limit applies to all of these plans you may have available to you. Depending upon your employer, you may also have a 457 (generally only available to governmental units) with a separate annual limit available to you.

Regarding mixing Roth IRA and traditional IRA (either deductible or nondeductible), you also have only one annual contribution limit available to you for all IRA contributions. The combination of all IRA contributions cannot be greater than that limit.

All of these limitations also apply to the catch-up provisions for folks age 50 or better. Use the following table to help you better understand the combinations of accounts that are available to you. To use the table, you first determine which type of account you presently have available to you in the left column – and then move across that row in the table to see which other additional accounts are available to you and with what limitations (the numbers refer to the footnotes below the table). If the answer in the box is “Yes”, you can, without income limitation, contribute to the other plan.

401k 403b 457 IRA Roth Nondeductible
401k 1 1 Yes 2 3 Yes
403b 1 1 Yes 2 3 Yes
457 Yes Yes Yes Yes Yes Yes
IRA 2 2 Yes 4 4 4
Roth 3 3 Yes 4 4 4
Nondeductible Yes Yes Yes 4 4 4
Footnotes:
1: a single contribution limit applies for the year, no matter how many 401(k) plans you are eligible to participate in
2: within income limits, if you are eligible for a 401(k) or 403(b) plan, you may also be eligible to contribute to a deductible IRA
3: within income limits, participation in a 401(k) or 403(b) plan has no impact on Roth IRA contributions
4: for all IRA contributions (Roth, traditional deductible or nondeductible) contributions are limited by the annual limit.

Spousal IRAs

If your spouse is not employed by an employer that sponsors a retirement plan (including a traditional pension), you may be able to make either a traditional deductible IRA contribution or a Roth IRA contribution – up to the limit for the year for all IRA contributions for this individual. This assumes that you have the earned income to support that IRA contribution (and any of your own, if this is applicable).

Posted on Nov 1st, 2021
by author: jblankenship.

2 comments already - add to the conversation!

Posted in: 401 k 403 b, combinations, contribution limit, employer plan, IRA, retirement plan, retirement plans, retirement savings, roth ira contribution, roth ira contributions, traditional deductible ira, traditional ira contribution.
Tagged: ·

How to Bypass Mandatory Withholding on a 401(k) Distribution

Oct 18th, 2021
by jblankenship.
3 comments
withholding honeysuckle

Photo credit: jb

Just ferinstance, let’s say you need to take a withdrawal from your 401(k) plan – and you’re eligible, either by way of your plan allowing in-plan distributions or the fact that you’re already retired (but you still have the money in your former employer’s 401(k) plan). But here’s the rub: when you take a distribution from a 401(k) plan, the IRS requires that the plan administrator withhold 20% from the distribution. If it’s a significant amount being withheld, it can be a long time before next April when you file your tax return to get the withholding refunded (as long as you’ve covered the tax in some fashion).

Is there are way around this withholding? Of course there is – I wouldn’t tease you like that!

Getting Around the Mandatory Withholding

Cutting to the chase: if you had your money in an IRA and took a distribution, the IRS would not require withholding. But how do you get it to the IRA? Didn’t I just say that the IRS require withholding when you take money out of the 401(k) plan?

Well – not in all cases. If you do a trustee-to-trustee transfer (also knowns as a direct rollover) to an IRA, no withholding is required. So, as long as you do this correctly, you can effectively take the distribution and you don’t have to have any withholding at all. Of course, since you’ll eventually be taxed on the distribution, you probably should have something withheld, but depending on your circumstances, the rate of the withholding may be something far less than 20%. You might even make up the difference (again, depending on the circumstances) by increasing your W4 withholding, or making an estimated tax payment from other sources.

Once you’ve completed the direct rollover to the IRA, you’re free to take a distribution at any time.

Since IRAs are not subject to the mandatory 20% withholding by the IRS, and further since a direct, trustee-to-trustee rollover from a 401(k) plan is also not subject to the mandatory withholding, you can bypass the withholding requirement in the described manner. Just make sure you have a plan to cover the tax on the distribution somehow.

Posted on Oct 18th, 2021
by author: jblankenship.

3 comments already - add to the conversation!

Posted in: IRA, retirement plan, tax.
Tagged: · ·

The Primary Insurance Amount (PIA)

Oct 11th, 2021
by jblankenship.
12 comments
rule

Photo credit: jb

Just because there can be some confusion over the PIA, I am writing this particular article to (hopefully) help reduce the confusion. In an earlier article – Social Security’s PIA – What is this? – we worked through how PIA is calculated, I’m just giving it another treatment here, to help clarify.

Primary Insurance Amount

As you know from the other article, the PIA is based upon your Average Indexed Monthly Earnings (AIME), which is the average of your highest 35 years of earnings, indexed for inflation, and expressed as a monthly figure. The AIME then has bend points applied in the year that you reach age 62, in order to calculate the Primary Insurance Amount (PIA).

This PIA is equal to the projected benefit amount that you would receive if you started benefits upon reaching your Full Retirement Age (FRA). The actual amount that you receive if you take your benefit at FRA would likely be different due to Cost of Living Adjustments (COLAs) that would be applied between age 62 and FRA – but the PIA is not changed.

The only way that the PIA is adjusted from the original calculation is if the projection has changed. The projection made at your age 62 assumes that you continue working, earning the same amount as your last reported year, and as such your AIME is not changed during that period. If you happen to have already worked your 35 years by that point and do not work after age 62, your PIA will be pretty close. But your PIA will be adjusted if you work from age 62 to FRA and your earnings are either 1) greater than one of the other 35 years used in your AIME at age 62; or 2) being added to the AIME calculation because you didn’t have a full 35 years of earnings when the PIA was calculated at age 62.

Likewise, if you do not work from age 62 to FRA or you work for lower wages than your AIME projection assumed (and you had fewer than 35 years of earnings as of age 62), your PIA at FRA could actually be a bit lower than the original projection. This might happen because your original PIA calculation depended on your future earnings being equal to your most recently-reported earnings, replacing lower or zero earnings years in your current history.

Calculating Benefits

When your actual benefits are calculated, your PIA is the starting point. Then all COLAs are applied, if you’re older than age 62. After this, your age when you initiated benefits is taken into account – if it was before FRA, there will be a reduction; if after FRA, an increase. This increase or decrease is applied against the COLA-adjusted-PIA, resulting in your monthly benefit amount. That’s all there is to it.

Posted on Oct 11th, 2021
by author: jblankenship.

12 comments already - add to the conversation!

Posted in: PIA, primary insurance amount, Social Security.
Tagged:

How to Check Your Social Security Benefits

Oct 4th, 2021
by jblankenship.
1 comment

Photo credit: jb

A reader of this blog recently suggested that it might be helpful to include an article on how to check up on your Social Security benefits. Long ago, we used to receive a paper statement of Social Security benefits in the mail each year, but that has changed. Now, you might receive a mailed paper statement right around your 60th birthday, but it’s very simple to check your benefits at any time via Social Security’s website.

It’s quite simple to check out your up-to-date information in the Social Security system – at least the retirement estimates. Simply go to the Social Security website, and select “Create Your Own my Social Security Account Today” – if you haven’t already created your own account. If you have already created an account, just skip down to Checking Your Benefit.

You’ll then be asked to fill in your information, including your Social Security number, birth date, and other pertinent information. Following the instructions, you’ll soon have your my Social Security account created.

Checking Your Benefit

Now you can log in to the account. This will be a two-step verification process, where they’ll send you a code on your email that you’ll have to submit in order to complete the login process. Then you’re in!

Once you’ve logged in, you can look at your Social Security statement, in order to estimate your retirement benefits and other possible benefits, as well as to review your earnings history to make sure all of the information is correct. The information on earnings in the statement is condensed, but you can view the complete earnings history via the online system (not a .pdf as the statement is).

You can do lots of other things once you’ve set up your account, including filing for benefits when you’re ready to do so. You can order a replacement card, estimate your retirement benefits in various scenarios, and much more.

So that’s all there is to it! Reviewing your Social Security benefits regularly is a good idea, so you can get a good idea of what benefits you can expect, as well as note how recent earnings has an impact on the future benefits estimates.

Posted on Oct 4th, 2021
by author: jblankenship.

1 comment already - add to the conversation!

Posted in: Social Security.
Tagged:

No, You Can’t Contribute Stocks to Your IRA

Sep 20th, 2021
by jblankenship.
No comments yet
pie, peach

Photo by: jb

Have you ever wondered – “Hey, I have this taxable stock account with my favorite stock (or mutual fund, or bond, or CD, or what-have-you). Can I just transfer the stock over to my IRA as an annual contribution?”

In a word, NO. Contributions to IRAs are only allowed in cash. In order to complete the contribution, you’d have to liquidate the security holding, paying any tax on capital gains, and then use the cash proceeds to make your contribution.

The reason for this is simple – if you contribute the actual stock to an IRA from an account that is not already tax-deferred, any built-in gain escapes taxation. If the contribution was to a Roth account, there would never be taxation (under most circumstances), and you’d be trading capital gains taxation for ordinary income tax deferral and future taxation in the case of a traditional IRA.

Keep in mind, this doesn’t apply to rollovers – even the indirect “60-day” rollovers. You can rollover securities holdings from one IRA (or qualified retirement plan) to another IRA in-kind. If it’s done indirectly (not a trustee-to-trustee transfer), the same securities must be used with the roll-in.

So, for example, if you had an IRA with $50,000 worth of ABC stock, you could distribute the stock (transfer in-kind, rather than cashing it out) to a taxable account, and then within 60 days contribute (again, in-kind) the same stock to another IRA. During that 60-day period, you could do any number of things, such as collect interest or receive a dividend from the stock, which would be taxed at dividend rates. As long as you complete the transfer of the exact same stock within the 60-day window, there is no tax owed on the transfer.

Let me point out that I don’t recommend this sort of activity, I’m just explaining that it is possible.

Posted on Sep 20th, 2021
by author: jblankenship.

No comments yet - start the conversation!

Posted in: investing, IRA, retirement plan, tax.
Tagged: · ·

Avoiding Taxation of 401(k) Loan

Sep 13th, 2021
by jblankenship.
4 comments
401(k)

Photo credit: jb

Hopefully you already know this – if you have a loan from your 401(k) plan and you leave employment, either on your own or if you’re terminated, the loan is considered a distribution from your plan, and therefore taxable. It’s important to note – this only applies when you leave employment.

Here’s an example:  you have a 401(k) plan with a balance of $200,000. You wish to take a loan from the plan in order to pay for your child’s college tuition – and so you take a total of $20,000 from the plan. It’s your intent to pay this off over the course of the next couple of years with the proceeds from some appreciated stock – you were delaying the sale of the stock since the stock is poised to run up quickly in the next year or so. Unfortunately, two months later your company decides to let you go – downsizing and all, you know.

Rather than calling the 401(k) loan due and payable immediately, the loan is classified as a distribution – meaning that, not only are you out of a job, you’ve got an extra $20,000 of income that will be taxed now, money that you’ve already spent on tuition. If you’re under age 55 (yes, 55, since you’re eligible to take a distribution after age 55 without penalty after leaving employment), the funds will also be subjected to the 10% early distribution penalty. Topping off the fun facts here is that you likely didn’t think to have any additional tax withheld or an estimated tax payment made, so you’ll likely get hit with a penalty for under-withholding of tax when you file.

So what can you do?

Since you have the appreciated stock (or really, funds from any other source), you can roll over the substituted funds into an IRA. The rule used to be that this had to occur within 60 days, but since the beginning of 2018, you have much longer to take care of this rollover. You can actually delay this rollover until your tax filing deadline for the year, including extensions, as you complete the rollover without penalty. This will effectively negate the distribution, and no tax or penalty will be owed.

Of course, if you sell appreciated stock you will owe tax on the capital gains – but presumably this is far less than the ordinary income tax (plus the penalties!) on the loan. If the capital gains tax is significant you’ll want to either adjust withholding for the remainder of the year and/or make estimated payments of tax in order to avoid the penalty for under-withholding. If you’ve delayed the rollover into the following year (2022 in our example), you can avoid the capital gains taxation until the end of that tax year as well.

Rounding out the example, let’s say you took the loan in January of 2021, and in March you were let go from your employer. You actually have until October 15, 2022 (yes, next year!) to fully rollover the loan balance into an IRA in order to avoid the taxation and penalties associated with the distribution. If you encountered capital gains taxes in producing the money to rollover, you could wait until as late as October of 2023 to pay that tax.

You should consider the additional impacts of taking this distribution – see the article Not So Fast! 9 Special Considerations Before Rolling Over Your 401(k) for more details on what you need to keep in mind as you make a rollover from your 401(k).

Posted on Sep 13th, 2021
by author: jblankenship.

4 comments already - add to the conversation!

Posted in: IRA, retirement plan.
Tagged: ·

Valuation for Roth IRA Conversions

Sep 6th, 2021
by jblankenship.
5 comments
5 cents

Photo credit: jb

You’ve read all about Roth IRA conversions, and you know a lot about the questions that one must resolve in order to make one of these conversions work out for you. But have you considered how the valuation rules will impact your decision process?

Valuation of your IRA

If you have IRAs that contain both pre-tax and post-tax contributions and you’re looking to take a distribution (such as for a Roth Conversion), you know that you have to look at all IRAs in aggregate in order to determine what amount of the distribution is taxable and how much is tax-free. But when do you determine the valuation of the account?

It’s kinda tricky – and probably not what you were thinking. Your IRA balances are determined as of the end of the tax year in which the distribution occurs – so if you make your distribution in 2021, the balance as of 12/31/2021 is what is used to determine your IRA balances. This amount will include any amount that has been distributed to you in 2021, either in the form of a cash payout, or as a conversion to a Roth IRA.

For example, if you had two IRAs, one that is completely taxable (all deductible contributions and growth), totaling $20,000, and the other is made up of $10,000 in non-deductible contributions and $10,000 in growth and other deductible contributions. The total value as of December 31 is $40,000, with $10,000 being non-deductible or after-tax contributions. So any distribution you made during the tax year from either of these IRAs would be 25% tax free (since 25% of the accounts is after-tax).

Simple Enough, Right?

Well, maybe not. The problem with the valuation method comes in when you consider what happens over the course of the year – especially if you’ve made a distribution early in the year.

How about if you had the accounts mentioned above in the example, and nothing had changed as of January 15. You enact the conversion at that time… and then time goes on, and your investments perform as they might throughout the year. Then on December 31 of the current year, your IRAs are now worth a total of $50,000 – and your non-taxable portion is still only $10,000. Since this has occurred, now only 20% of your conversion will be tax-free, which may make a difference in your computations. In this case you have the comfort of knowing that your original conversion amount may have grown in value (assuming similar growth in all accounts), so the new growth since the conversion will receive tax-free Roth treatment.

And what if, after the conversion your accounts reduce in value? Adjusting our example, let’s say as of December 31 the accounts are now worth a total of $30,000. This means that a higher percentage of your conversion distribution was non-taxed, a total of 1/3 at this point. This might be to your advantage (less tax paid) but it also might mean that you’re paying tax on an amount greater than the value of your accounts – especially if your account(s) downturn continues. In a case like that, in the past you would have until October 15 of the following year to recharacterize the conversion in order to not have the tax bill on the lower amount. Unfortunately, since recharacterization has been eliminated from Roth conversions, you are now stuck with the situation as it is.

So as you can see, the timing of your conversion versus the timing of the valuation of your IRA accounts can have a large impact on the way your Roth Conversion plays out for you. Consider this information wisely as you plan your conversion strategy…

Posted on Sep 6th, 2021
by author: jblankenship.

5 comments already - add to the conversation!

Posted in: IRA, Roth conversion, tax.
Tagged: ·

Payback When You’ve Earned Too Much

Aug 30th, 2021
by jblankenship.
No comments yet
earnings test

photo credit: diedoe

In an earlier post, we talked about the Social Security Earnings Test, which is applied when you are receiving your benefit early (before Full Retirement Age) and you earn over certain limits. Briefly, in the years before the year you reach FRA, when you earn salary in excess of the limit, the Social Security Administration will withhold your benefit in an amount equal to $1 for every $2 over the specified limit. In the year that you will reach FRA, the reduction is equal to $1 for every $3 over the limit. (See the original article at this link for details on how this works.)

While a portion of your benefit is, in fact, withheld for the earnings, there is an eventual “payback”… when you reach FRA, your reduced benefit is recalculated, eliminating those months when your benefit was withheld. The recalculation is done as if you delayed filing for the number of months that your benefit was being withheld.

There’s a misconception that you actually receive back the dollars that were withheld due to your over-earning. That’s not how it works – you actually get credit back for the months when your benefit was withheld. This is much the same as how the “do-over” option works, except that you’re not paying it back to the SSA, they’re just never giving it to you.

So, for example, let’s say you took your benefit at age 62 (reducing the benefit to 75% of your PIA) and you had earnings that caused the SSA to withhold four months’ worth of benefit each year for the four years between age 62 and 66. When you reach FRA you would actually improve your benefit by 7.22% – because your reduction would be adjusted to 82.22% of your PIA.

Posted on Aug 30th, 2021
by author: jblankenship.

No comments yet - start the conversation!

Posted in: Earnings Limits, earnings test, Social Security.
Tagged:

Social Security Earnings Test

Aug 23rd, 2021
by jblankenship.
8 comments
earnings

photo credit: jb

As you know, you can receive Social Security retirement or survivors benefits and continue working. If you happen to be less than Full Retirement Age (FRA) and you earn more than the earnings test, your benefit will be reduced. (Note: these reductions are not really lost, you will get credit for the withheld benefits at FRA.)

Earnings Test

If you’re at or older than FRA (age 66 if born between 1946 and 1954, ranging up to 67 if born in 1960 or later) when you begin receiving retirement or survivors benefits, you may earn as much as you like and your benefit will not be reduced. If, however, you are younger than FRA, your benefit will be reduced $1 for every $2 you earn over $18,960 (in 2021) before the year of FRA. The Social Security benefit will be reduced by $1 for every $3 you earn over $50,520 in the year of FRA, up until the month you reach FRA. These limits are adjusted every year with cost-of-living indices.

The income we’re talking about here is W2 (employee) income or self-employment income, referred to as earned income. Non-earned income, such as interest, dividends, pensions, retirement withdrawals, or rents received are not included for the purpose of the earnings test. Plus, in the first year that you start benefits, only that earned income after you’re receiving benefits is counted, on a monthly basis. Any income received before you start receiving Social Security benefits is not counted toward the earnings test.

For example, let’s say your benefit is $700 per month ($8,400 for the year) and you are 63 years old, starting benefits at 62. You work part-time and earn $22,000 during the year, which is $3,040 more than the earnings test. The Social Security Administration will withhold a total of $1,520 from your benefit ($1 for every $2 over the limit). This is done by withholding your Social Security benefit for three months, January through March of the following year – for a total of $2,100 being withheld. Beginning in April you’ll receive your full $700 benefit. In January of the next year you’ll receive $580 extra for the additional amount that was withheld above the $1,520. If you advise SSA of your income expectation in the coming year, the withholding will be done during the year of the income, rather than the following year. If your actual income differs from the expected income you reported, it will be “trued up” in January of the following year.

If this was the year you’ll reach FRA – for example in June, and your earnings through May were $52,000 ($1,480 more than the limit), $494 would be withheld from your $8,400 benefit which is accomplished by withholding your first check of the year, and the additional $206 will be refunded to you in January of the following year.

First Year

In your first year of Social Security benefits, you can earn as much as you like before you start to receive benefits. Then, for each month after you start your Social Security benefit, you are limited by the monthly amount (listed above) divided by 12. For 2021 that is $1,580 per month.

So, if you’re under FRA and worked for 8 months of the year in 2021 and started Social Security benefits in September, you can earn up to $1,520 each month (September thru December) without benefits being withheld. If you earn above that limit in any month, for each $2 over the limit, $1 will be withheld. This will occur with your first check(s) in the following year.

For every year thereafter (until your FRA year), the earnings test is applied on an annual basis, rather than monthly. So as long as you don’t go over the $18,960 limit (for 2021) you have no benefits withheld. As with the monthly test, for each $2 over the limit, $1 will be withheld.

FRA Year

In the year that you’ll reach FRA, there is an annual limit applied to your earnings. If you’re reaching FRA in August 2021, you are limited to earning no more than $50,520 prior to the month you reach FRA. For every $3 over that limit, $1 will be withheld.

Starting with the month you reach FRA, there are no earnings limits.

Posted on Aug 23rd, 2021
by author: jblankenship.

8 comments already - add to the conversation!

Posted in: benefit, earnings test, Social Security, social security retirement, survivors.
Tagged: ·

Using Capital Gains and Losses to Help With a Roth Conversion

Aug 16th, 2021
by jblankenship.
2 comments
red stapler

photo by: jb

Most of the time, when analyzing the prospect of a Roth conversion, the best outcome occurs when the tax is paid from non-IRA sources. For many folks this shoots down the entire prospect, as there is no available cash outside of IRAs to use to pay the tax on the conversion. Taking the cash from the IRA in the form of a distribution can result in a 10% penalty, which can kill the whole plan, making it far more expensive in the long run.

One source of funds that you may not have considered is within your non-IRA investment accounts – especially if you have inherent capital gains and losses (even moreso if you have carried-over capital losses that wouldn’t otherwise be utilized readily).

Offsetting Gains With Losses To Produce Cash

Here’s how it works: You sell your “loss” positions, establishing a capital loss for tax purposes. Then you can sell your “gain” positions in like amounts, giving yourself a tax-free source of cash, since the loss will offset the gain for taxation purposes.

For example – imagine that you have a $100,000 IRA that you’d like to convert to Roth. Running the numbers, you’ve come to realize that the conversion will cost $25,000 to complete. In addition to the IRA, you also hold some non-IRA money, in the form of two investments. One of these investments has an inherent loss of $20,000, and the other has an inherent gain of $30,000.

By selling out of the “loss” position completely and selling just enough of the “gain” position to offset the tax loss you’ve realized, you have effectively created a tax-free source of income in the amount of $20,000. This still leaves $5,000 if you’re planning to convert the entire amount.

After you’ve finished with your conversion activities (and after 30 days has passed so that you don’t run afoul of the wash sale rules), you can re-invest the leftover money in those same investments, keeping your allocation at least similar to what it was before.

At this stage you have three choices, assuming you don’t have an extra $5,000 laying around:

  1. You can choose to only convert a portion of your IRA – the amount that you can generate tax-free money to pay tax upon.  In our example, this would be $80,000.
  2. You can use more of the cash that you freed up from the sales of your non-IRA gain and loss holdings. After all, the tax rate on the capital gains would only be 15%, so that would keep the extra costs at a minimum.
  3. You can convert the entire amount and take distribution of the additional $5,000 to pay the extra tax. Actually you’d need to pull out $5,500 in order to pay the penalty on that amount that you’re distributing, if you’re under age 59½.

Of these three, I’d recommend option 2, which is the outcome where you complete the conversion of the entire amount without having to pay additional tax or penalty on the money that you’re using to pay the tax on the conversion. Yeah, that last sentence belongs in a museum. Happy converting!

One thing more to consider

As you consider a conversion, you need to keep in mind that the overall income tax on your return will be increasing. In general this just means you’ll have to pay more tax. More income equals more tax, simple as that, right?

Unfortunately there are other things to keep in mind. The most costly is your healthcare insurance – primarily if you’re on Medicare or an ACA (marketplace-subsidized) insurance plan. Each of these two types of healthcare insurance have income limitations that could apply as your income increases. Be sure to check on the limitations of your policy (or program) before you make the leap.

Posted on Aug 16th, 2021
by author: jblankenship.

2 comments already - add to the conversation!

Posted in: investing, IRA, Roth conversion, tax.
Tagged: ·

6 Steps to Start Paying Off Personal Debt Today

Jul 26th, 2021
by Robyn Goldfarb.
No comments yet

Today’s post is brought to you by my colleague Robyn over at A Dime Saved.

Wiping debt way with a sponge

‘A man in debt is caught in a net’ – wrote John Ray.

Molehills of personal debt build mountains of worry.

Debt is a problem. Living in debt is stressful and tiring. Constantly paying off creditors and having years of debt repayments makes many people unable to live their life fully or even celebrate significant life events. It makes them desperate for money and angry.

Debt has caused a third of all millennials, or 34 percent, to hold off on buying a home and 31 percent to delay saving for retirement. It has also affected millennials’ family structure. Fourteen percent of millennials have delayed getting married due to debt, and 16 percent have delayed having children. (Source: Poll: Majority of millennials are in debt, hitting pause on major life events (nbcnews.com)

If you are one of the many people who are struggling with mountains of debt, then you may want to start paying some of it off and starting to climb out from under the crushing pressure.

The solution is to come up with a repayment pattern that accommodates your regular savings as well as your repayment. I have compiled the following steps for you so that the road to the repayment of your debt will not be a boring one.

These tips can also be used to save money or to start changing your financial future- whether you are or are not in extreme debt.

So, here it is:…

 

6 Steps to Start Paying Off Personal Debt Today

Motivate Yourself

It can be very dull and depressing, waking up every morning and working hard with the sole aim of repaying the personal debt. So you need something positive to brighten your thought and instill meaning in your schedules.

If all you do is pay up your debt and mortgage, month in and month out, then all that preoccupies your mind is debt. You tend to think about nothing else. Doing that will depress you, and start focusing on the negatives of your money situation. Being depressed and stuck is not the right frame of mind to take practical and actionable steps towards paying off personal debt.

Visualize how you want your life to look and imagine what your life will be like once you get rid of your debt. Picture that and focus on that to get you motivated to start this difficult journey. Extreme frugal living is easier when you are motivated to succeed.

Pay Yourself First

Paying yourself first is essential and crucial to your financial success.  For a successful debt-payoff plan to work, you need to make sure that you won’t get back into debt. How do you do this? By ensuring that you won’t get into debt again. There is no point in paying off debt to find yourself back in the same position in a few years. Set yourself up for success by saving some money and putting money away for emergencies and for the future. Let your money start to work for you now, so you don’t fall back into debt.

This is a classic approach that I honestly urge you to adopt; you should absolutely start a savings program. Why would I start saving while I still owe others? Because if you don’t start saving for yourself and putting yourself first, then you will never get ahead. You will always be stuck in the quagmire of debt and obligation.

Create a Budget

Of the 100% that constitute your income:

You pay yourself the first 10%; this is your savings plan

55% will go to buying things you need

5% will go into your play account

20% will go to repaying your loan

10% will go for charity, or tithe, or whatever you believe it’s a right course

I know 10% to charity sound awkward to some people in debt, but believe me, it works wonders.

Make Lists and Plans

Another crucial step towards repaying your personal debt is to make a comprehensive list of all the people and organizations you owe. Then, decide who and what should get paid first. There are different theories and thoughts of which debts make the most sense to be paid off first.

Two of the most common theories are the Debt Snowball and the Debt Avalanche. It really does not matter which one you pick as long as you pick one and stick to it! If you have a particularly predatory debt or if you have a debt that particularly weighs upon you, then you should pay that one off first.

The main point is to have a clear point and guidelines of how you are attacking your debt. Know how much you owe, to whom you owe it, and in what order you are paying them back. The most basic way to succeed is to have a plan.

Make Contact

If you owe money to individuals, then at this point, you will need to talk to each of them after you have carefully mapped out the repayment pattern. Be very honest and considerate with yourself and with them. You will need to be prepared as some of them may welcome your plans and thoughtfulness, while a few others may be disagreeable and needier. You must be friendly but stick to your project.

Tell each of them to the effect that, ‘this much I can repay you each month, but no more.’ give them a timeline of when you think you will be able to repay. Write it down for them, so they know you are taking this seriously. they will respect the fact that you are attempting to pay them back clearly and logically.

Suppose you have very large loans to companies that are old or way too large ever to repay; maybe consider talking to them to discuss a settlement or an alternative payment plan. Please discuss this with a  certified financial planner in advance, as there are tax implications that you should be aware of. Many companies are willing to settle large amounts as they are willing to get some money instead of the risk of none.

Create Good Habits

Now comes the hard part. Stick to your budget and payment plan. Make sure that you never spend more than you budgeted for and always make good choices with your money. You can look for ways to make extra money that you can use to speed up your repayment plan or to cover unexpected expenses. Keep your eye on the goal: to get rid of your debt. Each dollar you save and each penny that you earn is one step closer to freedom from debt. So keep working on the program and sticking to the plan. You can do it!

Using a cash budget is an extremely effective way to stop overspending and to help you stick to your budget. Using cash makes it harder for you to overspend and helps you get in the habit of sticking to a clear budget. Try it and see if it works for you. Please don’t get too caught up in rewards and coupons and hacks: stick to the plan and work it.

The Bottom Line

Confucius said, “He who will not economize will have to agonize.” the choices we make with our money today affect our tomorrows. When we rack up extra spending today, then we are hurting our future selves. The actions we take today will have very significant ramifications on our future. Debt only grows and grows. Not taking care of debt will only hurt you later on- this is not a problem that will just disappear! Use these tips to help you get out of debt today!

 

 

Posted on Jul 26th, 2021
by author: Robyn Goldfarb.

No comments yet - start the conversation!

Posted in: debt.

The Richest Man in Babylon: Summary, Pt 9 of 9

Jul 19th, 2021
by jblankenship.
No comments yet
The Richest Man in Babylon

Photo credit: jb

This article is Part Nine, the final portion of our series of the lessons from George S. Clason’s bestseller The Richest Man in Babylon. Did I just hear a collective “FINALLY!”? If you’d like to go back to the beginning and catch up on the earlier lessons, you can start with the first article in the series by clicking this link.

The Luckiest Man in Babylon

In this final chapter, Clason ties all the lessons together with the story of Sharru Nada, a rich merchant, who tells his young companion, Hadan Gula, the grandson of his business partner, the story of how his grandfather had become such a successful merchant.

In a nutshell, the grandfather and Sharru Nada had each found themselves in dismal financial straits. Learning from one another and from listening to the successful people around them, each applied the lessons we’ve discussed throughout this series. With time, effort, patience and discipline, each man gradually improved his situation. Times arose where they were able to help one another out, and eventually they became business partners, successful in every venture they undertook. (Honestly, read the book if you want the whole story – it’s a good, quick read – you’ll not regret the time spent.

The Lessons

Here are the lessons we’ve learned throughout the review of this book:

  • Part of all you earn is yours to keep. Another way to put this is: pay yourself first. Begin a savings plan with a portion of all you earn.
  • Take advice only from those experienced in the matter of your questions. Don’t ask your barber for advice on surgery, and don’t ask a surgeon for advice on building a house.
  • Take advantage of compounding of returns. Don’t spend the earnings that your savings accounts generate; reinvest your dividends.
  • Control your expenses – learn to “get by” on only a percentage of what you earn.
  • Invest with wisdom. Understand the investments that you make, and make certain that the reward is worthy of the risk in all you invest in.
  • Own your own home. This has both a financial and a spiritual benefit.
  • Invest with an eye to the long-term. Make certain that your investing activities will provide you with an income in your old age.
  • Always improve your ability to earn, either by improving your skillset in your job, or by increasing your knowledge of investment activities.
  • Learn to recognize situations when you can take advantage of “good luck”. Take action with good insight, don’t procrastinate.
  • Know when to be cautious, especially with regard to loaning money to family and friends.
  • Plan in advance for events that might cause you harm – ensure that you’re insured against disaster in all its forms.
  • Have a good advisor or advisors to help you understand all of the negative “clamor” around you. This can help you to maintain your discipline in good times and bad.
  • Having the right attitude (“the soul of a free man”) can make all the difference in your outlook on life – and therefore on the results you achieve.
  • If you find yourself in a debt situation, put a systematic plan in place to eliminate the debt, but not at the expense of your saving plans. Use organization, communication, and discipline to work yourself out of the debt hole and regain your status among your acquaintances and colleagues.

That’s the list that I’ve developed of the primary lessons from this book. I hope that if you weren’t already familiar with the book that this series has sparked an interest for you. I’d love to hear stories from anyone who has benefited from the book – as well as if you found other gems within its pages that you’d like to highlight. Just leave your stories in the comments section below.

Posted on Jul 19th, 2021
by author: jblankenship.

No comments yet - start the conversation!

Posted in: financial planning, TRMIB.
Tagged:

The Clay Tablets From Babylon: The Richest Man in Babylon, Pt. 8 of 9

Jul 12th, 2021
by jblankenship.
No comments yet
The Richest Man in Babylon

Photo credit: jb

This article is Part Eight in our series of the lessons from George S. Clason’s bestseller The Richest Man in Babylon. If you’d like to go back to the beginning and catch up on the earlier lessons, you can start with the first article in the series by clicking this link.

The Clay Tablets From Babylon

This chapter* is fancifully comprised of several letters back and forth between an archeologist, digging up the ruins of old Babylon, and his colleague at St. Swithin’s College of Nottingham University. (Imagine a scene from one of the Indiana Jones movies…) The subject of the letters is a collection of clay tablets that the archeologist has had delivered to the college – supposedly the record of our old friend Dabasir’s financial affairs. If you don’t recall, Dabasir was introduced to us in the previous chapter, The Camel Trader of Babylon. In that lesson, we learned that having the right attitude can take you where you want to go in life. In these clay tablets, we find the details of how Dabasir worked his way out of debt.

In the letters, the professor at St. Swithin’s is telling his colleague the archeologist that the details written on the clay tablets has opened his eyes to a new way to deal with his own financial affairs… and then in a subsequent letter he explains that the formula used by old Dabasir has, in fact changed his life.

Here is the lesson: If you find yourself dealing with a debt situation that is out of control, the only way to “fix” it is to organize your information and begin attacking the problem. Old Dabasir details on the clay tablets how he used the first rule, saving one-tenth of all his earnings, to begin building up his savings. Then, he made a list of all of his creditors, including the amounts owed. He took this opportunity to visit each creditor, explaining that he could not currently pay off the debt completely, but that he was undertaking to gradually pay off all of his creditors. He took his list of debts to show them, and explained to each that this debt would be serviced by two-tenths of his earnings, each debt in proportion.

Some of his creditors rebuked him – saying they needed all of the money returned immediately. Others were happy to hear that he was working his way out of debt. In the end, none of the creditors had any choice but to accept his offer – which he attended to religiously. Each time he earned some money, one-tenth went into his savings, two-tenths was split among his creditors evenly, and the remaining seven-tenths he and his wife used for food, clothing, and other needs.

The surprising thing, to both Dabasir and later the professor at St. Swithin’s, was that getting along on 70% of his earnings was not as difficult as he thought it would be. Soon enough, in both cases, the debts were disappearing, and the savings were accumulating. In due time, both men retired all of their debts, had increased savings, and had learned to live on much less than they earned. These are keys to financial success.

There’s no magic to it – but for some reason those particular proportions work well and provide success to anyone who undertakes such a plan. Very important to the success of this plan is to write down your debts, and to talk to your creditors to explain your plan. Don’t skip this step, as you’ll either cause problems for yourself when the creditors don’t understand, or you’ll underestimate the size of your debt. Writing it down will put you in a position to track your progress as you begin retiring the debt, as well – which can be very helpful to keep you motivated through the process. Sticking to the plan – having discipline to carry it out – is all that remains for you to succeed.

Three facets – Organization, Efficiency and Discipline – are used to resolve this problem. Organizing your debt information so that both you and your creditors understand it. Efficiency is necessary to manager your own life on only 70% of your earnings. And Discipline is required to maintain the payoff schedule, as well as the savings activity, throughout good times and bad.

One more chapter awaits, this one called “The Luckiest Man in Babylon” – and it brings many of the lessons together in one concise place.

*Note: in my current copy of the book, this interplay with the archeologist and the colleague is not included, but only the actual information from the tablets, along with Dabasir’s narrative. I left the original (to me) description intact as it helps to explain and drive home the point of the message.

Posted on Jul 12th, 2021
by author: jblankenship.

No comments yet - start the conversation!

Posted in: financial planning, TRMIB.
Tagged:

← Earlier Posts Newer Posts →