When, Why and How Do Social Security Benefits Become Subject to Income Tax?

Social Security was established in 1935, due to so many elderly people going hungry during the Great Depression.  President Roosevelt felt people were losing hope.  The Welfare Department was established and Social Security began.  In the past, FICA tax paid into the Social Security system on a portion of income was never subject to income tax.

With that historical background, now let’s take a closer look at Social Security today and how it works 75 years later. I have researched over 50 of my clients at all ages by examining their Social Security benefits statement and this is what I’ve found:  The average portion that you will have paid into FICA tax during your working life will be close to $43,000.  Using the monthly income that the government promises to pay you for your lifetime, I have found on average that within two years you will have received all $43,000 back into your pocket.

Now what if you made a lot more money, thus had to pay more in FICA tax?  Your benefit will be higher, of course.  But you will still
have received back all that you paid within about two years.   Now does your Social Security benefit stop after you receive back everything you put into the system? Of course not, and if you, me, or anyone else lives to today’s average life expectancy of 84 for men and 87 for women, you will receive over $400,000 in Social Security benefits!  This could be considered the Social Security deal-of-a-lifetime:  Pay in $43,000 over 30 years and get back about $400,000 over 20 years.  This is the best pension deal anyone has ever had! 

But, and it’s a big but, Congress never planned on this happening when it instigated the Social Security system.  In the 30’s, 40’s and even 50’s, most people retired at age 65 and died five to 10 years later. But that started to change in the 1960s and today has exploded into this huge payout.

How can the government afford this?  The answer of course is it can’t!!  When Congress voted to cut benefits in the early 1980’s to deal with the problem of a huge payout it could not afford, citizens pushed back hard and the effort to cut Social Security was abandoned. Then someone suggested the government tax Social Security benefits to help make up the drag on the system, and thus Social Security income is now subject to tax. All retirees get their same Social Security income and since so few people actually check their tax returns, no one seemed to be pushing back on this new tax law. But with that change, retired people instantly lost 20 percent of their income without even realizing it. 

With that historical perspective, let’s now look at what that means for you today using the Social Security tax rules as of 2015 using the base amount showing on your tax return as “Modified Adjusted Gross Income”:

Single: $25,000 – $34,000, then 50% of Social Security is subject to income tax.  If income is greater than $34,000, then 85% of your benefits become subject to income tax.

Married Filing Jointly:  $32,000 – $44,000, then 50% of Social Security income is subject to income tax.  If income is greater than $44,000 then 85% of your Social Security benefits become subject to income tax.

Here is the bad part of this formula.  You have to use one-half of your Social Security benefits to establish your base income for this formula.  Example:  A person receiving $1,800 a month from Social Security multiplied by 12 months = $21,600.  Half of this, $10,800, must be included as income, which could force Social Security benefits to be taxed. A person can only earn up to $25,000 from all sources or benefits will be taxed.  Retirement income from IRA or 401(k) accounts can easily exceed this amount,  so when someone is so proud they saved a lot of money in their tax-deferred 401(k) plan, they just assured themselves of getting a haircut on their Social Security benefits.

Congress has deceived us, in my opinion.  Hindsight says they should have just told us they will reduce benefits according to the length of life.  If they would have done this in 1950, or 1960, or 1970, there would not be such a problem today.  Watch out for changes, because the government can NOT keep paying out this much money to all the Baby Boomers retiring at the rate of 10,000 each and every day. 

A potential solution for you is to convert any tax qualified savings accounts like IRAs, or 401(k)s, to a Roth IRA, which means you have to pay income tax when you do the conversion, but once converted, this money will never be taxed again.  So it is better to convert early in your life so that the growth does not compound your income taxes and force your Social Security benefits to be subject to income tax.  This effort will take planning, organization, knowing the rules and controlling your spending to have enough money to pay taxes today and not allow investments to grow tax-deferred and crush Social Security benefits at a time when you really need them the most. If you need more help, contact me:  peter@moneymastery.com.

As Older Employees Keep Working There’s Less Room for Younger Workers…

Healthcare costs are much higher because older workers are not retiring.  They stay on and keep their health insurance and take up a place of employment that would normally go to a younger person.  This is why younger folks are having a harder time finding employment (and paying for healthcare).

As older folks keep on keeping on, it will take 15 more years before we see more room at the top for workers who are moving up the ranks. Younger people are finding it hard to compete with tenure of an older employee.  Since older employees have not saved enough to pay for health costs and retire, they keep working and do jobs that many younger folks could be enjoying.

If you are older and have lots of experience, and even own the company you are working for, you are in control.  If you are younger and trying to break into the job market, it is harder to compete when you don’t yet have experience that some jobs require.  So it will come down to a younger person having to work harder than ever to get a good-paying job and acquire experience.  This is only one of the many strange phenomenon of the Baby Boomer generation having not prepared adequately for retirement. 

For more information about how to get prepared now, even if you have put it off, contact me:  peter@moneymastery.com.

The U.S. Budget vs. a Family Budget

Following are some numbers showing how the U.S. government spends money. These are big numbers, so it’s pretty hard to get any kind of perspective on what they really mean to you personally:  

U.S. Government Spending

  • U.S. Tax revenue: $2,170,000,000,000
  • Federal budget: $3,820,000,000,000
  • New debt: $ 1,650,000,000,000
  • National debt: $14,271,000,000,000
  • Recent [April] budget cut: $ 38,500,000,000

The Gainesville Tea Party has taken these very large numbers and given all of us a very simple way to wrap our heads around these complex figures by simply lopping off 8 zeros (i.e. divide by 100 million) to produce a “pretend” U.S. household budget correlated to the U.S. government’s budget:

Sample U.S. Household Spending (Correlated to Actual U.S. Government Figures):

  • Annual family income: $21,700
  • Money the family spent: $38,200
  • New debt on the credit card: $16,500
  • Outstanding balance on the credit card: $142,710
  • Budget cuts: $385 (You can see once you take off all those zeroes, that in comparison to the U.S. budget cut, this doesn’t amount to much of a cut.)

If you or I tried to pull off the kind of financial insanity you can see the U.S. government is attempting, we would be forced into bankruptcy!  My experience shows 90 percent of all Americans over-spend their income.  This is why so very few people have enough money saved for retirement.  Keeping  our nation’s spending in mind, as shown above, check how you are doing.  Place your numbers alongside the sample U.S. household numbers above and see if you’re acting just as irresponsibly as the federal government. Make changes as needed.

For help in making those change go to www.moneymastery.com or send me an email:  peter@moneymastery.com.

Cost of Medical Care After Age 65 Will Bury the Nation… and Probably You As Well

National statistics report that healthcare costs for retired persons average $250,000 from age 65 through the remainder of life.  How can a retired person (or anyone for that matter) afford this expense?  Statistics show that 91 percent of those retired are totally dependent upon Social Security benefits for their monthly income.  How can any retired person take their Social Security income and carve out an extra $250,000 to pay for health care?  This is an impossible task!  If anything is done to curtail Social Security benefits it will totally destroy the senior class.  Medicare is soon running out of money and Medicaid is broke.  I predict healthcare costs will be the largest hammer to come down on our financial world in the next five years. 

As you read this article, take inventory and ask how you will pay for healthcare costs in retirement?  If you do not have an answer, then you will probably be in this same group of people in the U.S. who are currently incurring $250,000 in medical/nursing home expenses that eat up all their retirement and life savings because they were not prepared.  If you are not saving adequate money for retirement, then healthcare costs will eat up what little you have saved and destroy you right along with our nation. 

I suggest 91 percent of the population needs to cut all expenses and not buy new homes, new gadgets, new cars, or go on expensive vacations until they  have saved, saved, saved!  Times are troubled and only promise to get worse for those who are in debt and have not established passive income they cannot outlive. If you are counting on Social Security and a risky 401(k) plan, you have no chance of survival.

Gloom and doom you say? It is what it is.  The real magnitude of the situation just hasn’t hit the fan in your own living room yet, so you don’t see it but it’s coming.  Plan on making changes now, while you still can.  My word of caution is take action today! For more ideas on how to do this, contact me for a no cost consultation: peter@moneymastery.com.

Don’t Ignore What Economists Are Predicting for the Economy

Economists with the best prediction track records have recently spoken out about what the future economy holds.  Here are quotes from these economists from last year for you to review and decide what you might do better or differently with your personal finances.  Take notes and put them somewhere you can recall them in the near future and see for yourself how accurate their predictions are:

David Stockman: “It’s one of the scariest moments in our history…No central bank has ever printed this much money this long, kept interest rates at zero, and fueled so much speculation…they’ve [feds] painted themselves in a corner, they’re playing it day by day, and they’re going to make a HUGE mistake!”

Harry Dent: “The only way to correct this is to let this bubble burst…the next crash is going to be worse than the last one.” And, “They brought in the foxes — like Goldman Sachs — to look over the hen house!”

Stockman: “All the cheap money has stayed in the canyons of Wall Street where the speculators can access it day after day… that’s called arbitrage.”

Dent: “Nobody is going to protect you, and nobody is going to stop this bubble from bursting because every single bubble in history has burst. And this is one of the biggest.”

Economy and Market Daily Opines: “Harry Dent’s concern is that the government’s unprecedented intervention through Quantitative Easing and other measures is creating the worst case scenario. Considering that Dent is known worldwide for his uncanny boom and bust calls over the last 30 years, one should pay careful attention to his new warnings that the stock market will collapse by 70 percent, real estate will plunge by 40 percent, and that unemployment will spike up to 15 percent (24.7 percent U6).”

To summarize, these economists agree with one another.  You decide if you agree with them, then make decisions accordingly.  But as time goes by each of us need to reflect and see how well we have done with this information.  Remember you are the captain of your own financial ship.

What Is a Consumer Credit Freeze?

Most states have passed a law allowing their citizens to “freeze” their credit with the three main credit bureaus:  Experian, TransUnion, and Equifax.  A credit freeze simply means that any new credit accounts without will not be approved and your credit file cannot be accessed by anyone without your approval.  Therefore, even if thieves have all your personal identifying information, they still won’t be allowed to get credit in your name.  More information can be found here:  5 Signs You Should Freeze Your Credit

It is a good idea to protect yourself from identity thieves, though it adds some inconvenience to your life.  For example, freezing your credit account may slow down the process of obtaining credit you may need and want.  Your state law rules here, but in my state you can thaw a credit freeze in 15 minutes.

There are requirements to be met to be able to freeze your credit account, but could be worth the effort and cost.  In my state I have to give various proof of identity and pay a $10 fee to each reporting agency.  But in this day of digital access to almost everything, freezing your credit could make sense… something to consider. To learn more about debt and credit management go to www.moneymastery.com.

What Will You Do about Money If You Live to Be 100?

Experts think that any of us living today, who reaches age 65, healthy and vibrant, will easily make it to age 100.  Whoa! That will change things financially, to say the least.  In the “old days,” between 1960 and 1980, people who reached retirement age lived just four to eight years past retirement to about 69 for men, and 72 for women. It wasn’t too big of a stretch to have between five and 10 years of retirement income saved . But consider working 35 years, then retiring for 35 years instead of just 5 to 10.  I read an article in 1983 that said by the year 2000, many people would be retired as long as they worked. At the time I balked at that idea — NO WAY! I thought. But the fact is, those numbers are a reality now and that longer retirement period is presenting some very challenging problems we all need to think about:

  1. How will you afford to live 35 years into retirement? 
  2. Will you need to work more years than you had originally planned, until age 75, for instance? What if you can’t because of poor health?
  3. Will you have to reduce your living costs drastically to make ends meet?
  4. What about inflation? If the inflation rate keeps averaging 5 percent screen-shot-2016-09-16-at-2-31-17-pmper year as it has been doing, living on a fixed income for 35 years is not going to work very well.
  5. People may be living longer, but especially in the United States, where the standard American diet is so poor, you won’t be living to
    a ripe old age in good health. What if you’re one in four people who will require long-term care? This is expensive at between $2,500 and $6,000 per month.
  6. Social Security will be bankrupt in 2034, according to the Social Security Administration’s annual report, so what do you do if you can’t count on even that income in retirement?
  7. If you are one of the many retired persons who is divorced, what will you do to live on just one retirement income instead of two?

The old way of looking at retirement planning may not work for you anymore. Trying to save using a basic 401(k) is passe. It’s time to get creative and look at real estate, life insurance, annuities, and leasable resources as other options for creating a predictable retirement you can’t outlive. I suggest you read the book MONEY, What Financial Experts Will Never Tell You Full of case stories and practical, holistic approaches to financial planning and retirement that are easy to apply, this book is a BookCovermust-read. Get it in time for Christmas and give it to your kids as well. They will for sure be living longer than you, in most cases, and will have to be ready for a long retirement period. Why not prepare them for that now?  Get going, as time will keep marching forward. Will you be pleasantly surprised when you reach retirement age, or will you be horrified and shocked at what you have done to yourself financially by not taking things seriously today?

Without Fiduciary Responsibility Refinancing Makes No Sense

Remember how many people loaded up their credits cards and then refinanced to pay them off?  Then in 2008, the mortgage lending bubble burst and home values dropped, banks went broke, and refinancing came to an end.  How did this really hurt our nation?

  • It trained consumers to over spend.
  • This over-spending carried over into government practices.
  • Over-spending continues today, eight years later, at a rate that has put us into trillions of dollars of debt.

Can you imagine what might happen if United States were a private corporation and ran its business like the Congress has been doing?  It wouldn’t last two minutes, that’s what! You could never run a corporation without a balanced budget, without a profit, and without firing employees who perform poorly.  Because the government has no balanced budget, never makes a profit, and doesn’t fire poor performers, national debt just continues to grow and grow. 

The bottom line is, as a nation, we have refinanced and refinanced again and again, but the problem is we don’t have a “house” to sell and pay off the obligation.  You and I are the “house” or the asset that is behind all these national debts. 

What Impact Are the Baby Boomers Going to Have on You?

The oldest Boomer was born in 1946, just after World War II and is age 70 today.  The youngest Boomer was born in 1964 and is age 52 today.  There are 78,000,000 Boomers that make up 29 percent of the U.S. population.  Those are the statistics, so what do they mean to you?

I have three older brothers. They were bigger, stronger and faster than me in every way.  I looked up to them and tried to match what they did:  swimming, tennis, basketball, etc.  I did not realize for many years that they stretched me into being better than I would have ever been.  The same can be true for you, too, if you will watch and learn from the Baby Boomer generation; you will learn both good and bad from their example. The way they have handled retirement savings, for instance, is not looking good.  The average Boomer reaching age 65 today has less than $60,000 in total assets, according to the U. S. Census of 2010.  This should be a sobering statistic to you, if you are younger than the Boomers, and a wake up call to do something different with your retirement than they have.

Another way you can learn from the “older” generation is what to do and not do with healthcare. Out-of-pocket costs for anyone reaching age 65, until death, are predicted to be $200,000 per person or $364,000 per couple. How can anyone with a paltry $60,000 in total assets pay for these costs? The answer is they can’t and that’s where it’s getting really messy for the Baby Boomers. Let me be clear about this figure as it hovers around the quarter-of-a-million-dollar range! Good grief! This is a shocking statistic that you need to take seriously, now, while you still have a chance. Now is the time to look into getting long-term care insurance or setting up a health savings account or exploring other options. I urge you to contact me for options:  peter@moneymatery.com.

And here’s another thing to think about in terms of how Baby Boomers will affect the housing market, potentially to your benefit. As the first wave of Boomers begin to die in the next few years, more and more houses will be coming on the market with fewer people to purchase them, causing prices to go down. Author Harry Dent has said about the aging of America that when when people die, they certainly don’t buy anything ever again.  Or said succinctly, dyers are not buyers.  Get prepared now to take advantage of options that will come available to those who have the financial capital to act on those options due to the coming changes in the economy due to the changing demographics of the Boomer generation.

The Massive Debt Tsunami Is Coming!

We all know that the FDIC is broke, right?  When Obama bailed out banks with TARP (Troubled Asset Relief Program) money six years ago, the reason was because the FDIC did not have any money.  Banks are supposed to pay insurance money into a fund so when a bank goes broke, this reserve pays depositors who would otherwise lose their savings.  But you may also remember Obama increased FDIC insurance from $100,000 per each account to $250,000 just to calm fears of total bank failures. It’s a nice thought, but since the FDIC is broke, it doesn’t matter too much.

Now turn your attention to the Pensions Benefits Guarantee Corporation or PBGC insurance plan.  Have you ever heard of this?  Through this program, in a like manner to the FDIC, all pension plan administrators are to pay insurance into a reserve for when pension plans go broke.  If you have a pension, this should be a comforting guarantee.

But here’s the problem: Director Thomas Reeder said that 10,000,000 workers with pensions are expected to run out of money in the next 10 to 20 years.  He said they have $2.2 billion available against a required pay out of $61 billion.  If a pension plan goes broke, plan participants will get something, but certainly not what they are supposed to get.  Here is how some numbers would work if you have a pension plan and the program goes broke.  Say your employer has a formula of 60 percent of your highest three years of earnings to be paid for  your lifetime.  Your income level averaged $80,000, so therefore you should receive $48,000 per year for life.  But if the pension plan fails, then the guarantee is reduced to just $8,580 a year as per Director Reeder’s numbers.

Social Security benefits are also in trouble and even the Social Security Administration says the fund will be out of money in 10 to 15 years.

Workers that participate in a 401(k) are also going to get much less than they bargained for since the average amount of money squirreled away by all workers is less than $3,000. Plus, think of all the risks 401(k) savers take with the market… If it takes a serious dive and you’ve actually accumulated a descent retirement fund of say $350,000 or more, there is no way you are going to recoup your loses in the time you have to do so.

And what about savings? Average savings per worker is less than 1 percent of their income.  The 2010 U.S. Census shows that all people reaching age 65 have less than $60,000 in total assets, including equity in their home.

Finally, let’s review the grim number associated with our nation’s debt at $20 trillion!!!!  

Are all these problems going to come together at the same time and swamp us in a huge financial tsunami? The odds don’t look good for us as a general population. But what can you do personally to protect yourself?

First, know the facts and learn the rules about the programs you put your money in. I have reviewed some of the grim facts here in this post.

Second, quickly change your spending, borrowing, and savings habits. And that means now. If you are still over-spending each month and  have consumer debt hanging over your head, you are more likely to be a victim of a terrible financial storm.   For help in creating a spending plan that will get you in immediate control of your spending, go here. For help creating a debt elimination plan that can have you out of ALL debt, including your mortgage in under 10 years, go here. If you want to talk about all the other, better options for creating a predictable retirement that do not rely on the FDIC, PBGC, Social Security, 401(k), or any other paltry savings programs, contact me for a no-cost conversation. I will be happy to outline some great ways you can get in complete control of your finances and create a future that will not be affected by the national debt tsunami that is about to sweep over us:  peter@moneymastery.com.