The Basics of Social Security Retirement Benefits

retirement just aheadIf you’ve worked for many years, you may be ready to start a new, more relaxed phase of your life: retirement. However, before giving your employer your final notice, understand how Social Security retirement benefits work for you.

What are Social Security Retirement Benefits?

Social Security retirement benefits are monthly payments made to workers who have paid Social Security taxes and earned Social Security credits. Most people earn the maximum of four credits per year. Credits are based on how much you earn – for example, in 2006, you would receive one credit for each $970 you make. The amount of earnings needed for a credit increases annually.

The number of credits you need to receive retirement benefits depends on the your date of birth: if you were born in 1929 or later, you will need 40 credits, which totals ten years of work; if you were born before that, fewer than 40 credits are needed.

If you took time off during your working life, don’t worry about losing the credits you earned – they remained on your Social Security record and when you returned to work, were added to more qualifying credits.

Benefits Plus Savings

Bear in mind that Social Security benefits are only meant to make up part of your retirement income. When planning, the general rule of thumb is you will need about 70 percent of your pre-retirement earnings to maintain your current standard of living. Social Security retirement benefits generally replace only about 40 percent of that sum.

So where should the remaining 30 percent come from? Savings (such as money you’ve set aside in a 401(k), 403(b), IRA, or other investments), and if your company offers it, a pension plan.

Effect of Retirement Age on Benefits

The age you begin to receive your benefits determines how much you get each month. The longer you wait, the bigger the check:

Full Retirement

Full retirement age for people born before 1938 was age 65. Due to greater life expectancies, the full retirement age is increasing gradually, and will reach age 67 for those born in 1960 or later. Retiring at this age will ensure the retiree receives full benefits.

Early Retirement

Regardless of your full retirement age, you may start receiving benefits as early as age 62. If you retire early, though, your benefits will be permanently reduced based on the number of months you receive checks before you reach full retirement age. Early retirement gives about the same total Social Security benefits over a lifetime as full retirement, but in smaller monthly amounts, since they take into account the longer period they will be paid out.

Delayed Retirement

Many people continue to work past their full retirement age. If you do, your Social Security benefits can be increased in two ways: (1) Each additional year of work adds another year of earnings to the Social Security record. Higher lifetime earnings may result in higher benefits; (2) Benefits will be increased by a certain percentage (depending on your year of birth) if you delay retirement. The increase ends at age 70.

How Much Can Be Received

Benefit amounts are based on earnings averaged over your working career. Therefore, the higher your lifetime earnings, the higher your benefits will be. There is no need to guess what your benefits will be either – the Social Security Administration is required by law to provide a personalized benefit estimate to each worker once per year.

In most cases you do not have to pay taxes on Social Security benefits. They only would be taxed if you have substantial income in addition to your Social Security benefits.

Who May Receive Benefits

Retirement benefits are for both you (the person who worked and earned credits) and for qualifying members of your family. This includes:

• A widow or widower
• Current and former spouses of retirement age
• Spouse under retirement age, if responsible for the earner’s minor child
• Minor children
• Adult disabled children

So are you ready to retire and begin receiving your Social Security benefits? Only you know for sure. Just be sure you make your decision after you have analyzed your financial situation thoroughly.

Copyright © 2006 Balance

Coverdell Education Savings Accounts

College_SavingsCoverdell Education Savings Accounts are a tax-advantaged way to build funds for your child’s education. They may be used along with other investment accounts, such as 529 plans and education savings bonds.

Who may use a Coverdell Most people can use a Coverdell plan, though if your modified adjusted gross income is very high (between $95,000 and $110,000 for single filers and between $190,000 and $220,000 for joint filers) the amount you can contribute is reduced or phased out entirely. For example, if you are single and your income is somewhere between $95,000 and $110,000, then you can deposit half of the maximum into the account. The maximum contribution amount is $2,000 per year, and you can make this annual contribution until your child—the beneficiary—reaches 18.

Tax rules change, so be sure to contact the Internal Revenue Service at www.irs.gov or call them at (800) 829-1040 for the most current information.

Tax benefits Coverdell plans come with some excellent tax advantages. Though contributions aren’t tax deductible, the investment earnings accumulate tax-free, and qualified distributions are totally exempt from federal income tax. In many cases you can also claim the Hope Scholarship and/or the Lifetime Learning tax credit in the same year you withdraw funds.

Qualified expenses You can use the funds in a Coverdell for primary, secondary, and postsecondary education expenses—in other words, kindergarten though graduate school. Qualified costs include tuition, fees, tutoring, books, supplies and equipment, room and board, uniforms, transportation, and sometimes computers.

If you don’t use the money for qualified expenses The money you save and invest in a Coverdell must be used by the time the child reaches age 30 or the earnings will be taxed as ordinary income plus a 10 percent penalty. If the plan’s beneficiary dies or becomes disabled, non-qualified distributions will be free of income tax. If you cannot use the money for the student you were initially saving for, you may roll the account over to another Coverdell account for a different family member.

How to open a Coverdell You can set up a Coverdell at many financial institutions, mutual fund companies, and brokerage houses. Once you open the account, you can immediately begin to invest the money and build funds. Unlike 529 plans, your investment options are virtually unlimited. You can buy and sell all bonds, stocks, and mutual funds with the money in your account. As the plan’s owner, you—not an account manager—make the decisions.

Therefore, it is important to understand at least the basics of investing so you can make wise financial choices, or consult with a financial advisor to help you make knowledgeable decisions. You don’t want to put your savings at so much risk where the funds may not be there when you need them, nor do you want to keep your money in investments that have such limited growth potential that there won’t be enough for your child’s educational needs.

Education costs can be very expensive, and saving for these expenses at a tax advantage just makes sense. The sooner you—and your child—will be able to reap the reward of early investing.

 

Copyright © 2007 Balance

 

A First-Year Money Management Guide for the New College Grad

Asian female graduate giving money in classA young adult’s first months out of college are about personal freedom and finding one’s path as an adult. Building solid money habits is a big part of that.

Most grads are managing money alone for the first time—finding work, places to live and if they’re in the majority, figuring out how to pay off college loans. For many, these are daunting challenges. If you are a young adult—or know one—here are some of the best routines to adopt from the start:

Budgeting (http://www.practicalmoneyskills.com/budgeting/) is the first important step in financial planning because it is difficult to make effective financial decisions without knowing where every dollar is actually going. It’s a three-part exercise—tracking spending, analyzing where that money has gone and finding ways to direct that spending more effectively toward saving, investing and extinguishing debt. Even if a new grad is looking for work or waiting to find a job, budgeting is a lifetime process that should start immediately.

A graduate’s first savings goal should be an emergency fund to cover everyday expenses such as the loss of a job or a major repair. The ultimate purpose of an emergency fund (http://www.practicalmoneyskills.com/emergencycalc) is to avoid additional debt or draining savings or investments. Emergency funds should cover at least four to seven months of living expenses.

Retirement may seem a distant spot on the horizon after graduation, but success depends on saving and investing as soon as possible. New grads can benefit from the IRS’s Withholding Calculator (http://www.irs.gov/Individuals/IRS-Withholding-Calculator) to determine the right amount of tax is being withheld from weekly paychecks. From there, he or she can evaluate personal retirement savings options and employer’s plans as well – both will be necessary to retire effectively. Signing up for automatic deposits into retirement accounts and personal savings allows money to grow without the temptation of spending it first.

Insurance is crucial. Renter’s insurance is important not only to cover personal belongings that are lost, stolen or damaged, but most policies cover living expenses in an emergency and offer liability and medical coverage if someone gets hurt at one’s apartment. Auto insurance is the law in many states, and even though disability coverage may be available at work, it is important to determine whether additional individual coverage should be purchased. Finally, the Affordable Care Act has made health coverage a must for young adults. New graduates may stay on a parent’s plan until the age of 26 even if they have the option for health coverage at work. After age 26, health insurance can be bought privately or through federal and state exchanges.

Young adults should get into the habit of tracking their credit reports from the beginning. By law, everyone has the right to receive all three of their credit reports for free (https://www.annualcreditreport.com) each year, and it is important to stagger requests from the three credit bureaus—Experian, Equifax and TransUnion—to better check for inaccuracies and potential identity theft.

Finally, for those still having trouble making ends meet, moving home for a limited time period could be an option. New grads should negotiate an affordable rent on a fixed timetable and use those savings to create investment accounts that can pay for major goals like a home, a wedding or graduate school. If you’re working with a financial advisor already, ask them to weigh in with additional ideas.

Bottom line: The first year out of college, young adults encounter a range of financial challenges that will shape their money behavior for a lifetime. Embracing budgeting, saving and investing is crucial even with the smallest of amount of resources.

 

By Jason Alderman

 

This article is intended to provide general information and should not be considered legal, tax or financial advice. It’s always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.

Getting Married

marriedMarriage is the coming together of two lives and two separate financial histories and situations. And while your financial history may continue to influence your finances now, you’ll also be contending with a lifetime of new money-related experiences and decisions together. The key to success is preparing yourself and your spouse to handle the unexpected, while also learning to communicate with each other about financial matters.

Talking About Finances Financial problems are a factor contributing to many divorces. So how do you keep marital finances from putting a strain on your relationship? First, get to know each other’s financial histories, strengths, goals and challenges. Discuss your experiences with money, saving and credit. Ask about your partner’s financial history and what he or she expects when it comes to marital finances and financial planning.

Financial Planning Before you tie the knot, it can be useful to meet with a CFS Financial Advisor at NASA Federal Credit Union Investment. He or she can help you develop financial goals as a couple and create a shared budget. This is also an excellent way to ensure you are in agreement about important financial topics. Set an appointment to meet with one today.

Planning an Affordable Wedding With the average American wedding costing $30,000, the event runs the risk of saddling couples with relationship-crippling debt for years to come. Here are a few tips for planning a memorable yet affordable wedding:

  • Develop a budget, prioritizing the parts of the wedding that are most important to you and your spouse-to-be; then cut back on expenses in other areas.
  • Limit the guest list to close friends and family.
  • Hold your ceremony and reception in one location – it will cut travel time for vendors you pay by the hour.
  • When shopping for wedding attire, be sure to check outlet stores.
  • If there is a photographer you love but his or her prices are not in your budget, ask them if they have an associate who may be able to photograph your wedding for less.
  • Substitute less expensive seasonal and local flowers for more expensive options, or use more greenery.
  • Order a small one or two-tiered cake for display; then supplement with a larger sheet cake served from the kitchen.
  • Consider a weekend honeymoon nearby and then have a more elaborate trip for your first anniversary.

Copyright © VISA

Renting an Apartment

renting

While it doesn’t offer any investment potential, renting an apartment is the wisest financial choice for many people. Some may be saving for a down payment on a home, others may be unable to afford buying a home. For families or individuals who move often or for those not interested in the maintenance and repair of a home, renting can offer freedom to relocate and some relief from the costs of home ownership. No matter why an individual is renting, it’s a great idea to know about the financial and legal aspects.

Leases A lease is a binding contract that lays out the conditions and responsibilities of a rental agreement, both for the owner and the renter. It stipulates the monthly rental price, payment due date, the length of the lease and what happens if one of you breaks the lease. A lease generally also outlines whether the renter or landlord will pay the utilities, whether pets are allowed, and any other restrictions and requirements the landlord wants to include.

Read your lease agreement very carefully before you sign it. You will be held accountable for knowing everything included in the lease. Also, keep a copy of the lease for your records. It may come in handy if you have a question about what you are or are not allowed to do.

Cosigning If the landlord is not convinced that you will be able to make your payments, he or she may require you to get a cosigner. This is someone who will share financial responsibility for the lease. If for some reason you are unable to make the payments, the cosigner will then be responsible for making the payments.

Breaking a Lease You should avoid breaking a lease by moving out before the end of the agreed term if at all possible. Each lease agreement has its own penalties for breaking the terms—some only require the payment of a penalty but others require the renter to continue paying rent until the apartment is re-rented. For this reason, it’s critical to check your lease and make sure you can handle the financial ramifications before you break your lease.

Copyright © VISA

Jump-Start Your Savings

Retirement_Savings_Plan1You want to save money, but how do you get started? There are always bills to cover, debt to pay, and time is tight. Though these are all real obstacles, they are ones that can and should be overcome. The current personal savings rate in America is in the four percent range—far short of the ten percent most money management professionals recommend to achieve financial security.

Saving money doesn’t happen without taking action. To get you into the swing of things, first recognize the importance of setting aside some cash each month or paycheck. After all, how many times have you wished there was some forgotten account you could tap into to pay for a new set of tires or to do something fun? Without savings, you have to do without—or worse, put it on the credit card. Thankfully, there are many painless and surefire ways to begin a cash-stashing routine.

  • Develop a detailed budget to determine how much you are capable of saving each month. Begin with whatever you can afford, even if it’s only a few dollars.
  • Set up an automatic transfer from your checking to your savings accounts, or use payroll deductions right from your paycheck. What you don’t see you don’t miss.
  • Save all or a portion of each raise you receive.
  • Deposit bonuses, income tax refunds, and monetary gifts from birthdays, holidays, or other special occasions into savings.
  • Put yourself on a short-term austerity program. Commit to buying only what you absolutely need and put the difference into savings.
  • Save all of your loose change. A quarter here and a dime there add up fast.
  • Once you’ve paid off your car or other installment obligation, put the same amount in savings.
  • Save even if you have debt. You’ll have funds available for emergencies, kick the habit of borrowing, and establish a positive routine.

Once you have a savings plan in place, monitor it regularly. Watching your nest egg grow is thrilling. Take pride in what you have achieved. And don’t panic or give up if you experience a setback—read just your budget and try to make it up next month or in future installments.

 

Copyright ©2005 Balance