Retirement

Retirement Tax Triangle for Better Retirement Planning

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tax triangle save money in retirement

Financial advisors make their bread and butter from retirement planning. Unless you’re wealthy (or young), chances are that most of your money is in your retirement savings and home equity. That makes your retirement accounts the main interest of most financial advisors, so it’s in their best interest to make it sound complicated. Unfortunately, they are right. There are a bunch of little tricks to good retirement planning. Fortunately, most of them are easy to straighten out, like the tax triangle. Retirement Taxes Welcome to Retirement. Oh, while you’re here, we need to tax those 401(k) withdrawals. All too many new retirees find themselves surprised that withdrawals from their 401k accounts are fully taxable. It’s an easy mistake to make. After all, when you contributed money to your 401k it was tax-free (technically, pre-tax, but same difference). And, while all of that money sat in your 401k earning interest and dividends, it was tax-free. So, why wouldn’t it keep being tax-free? Unfortunately, that’s the deal you make with the IRS. A 401k plan is actually a tax-deferred account. As the name implies, the IRS allows you to defer, or wait, to pay the taxes. It is a huge advantage and …

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Big Social Security Raise Coming

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social security card cola increase

I did not see that coming. Well, I knew that there was enough inflation washing around in the US economy that retirees would see an increase in there Social Security payments for 2022. I did not know it would be this big. Social Security COLA Increase Is a Big One If you’re new to collecting Social Security, or if you are just new to following along, Social Security offers a fixed monthly payment to US retirees based upon a combination of how many years they worked, what their salary was while working, and at what age they started taking Social Security benefits. Once this number is set, it is never recalculated. However, each year, all Social Security recipients get a Cost of Living Adjustment or COLA that ensures the benefit’s value stays steady with inflation, a mistake made with the minimum wage that they did not want to repeat. Check out my SoFi review The COLA is calculated by the Social Security Administration based upon inflation statistics for the prior year. In the last few years, the COLA increases have been moderate, less than 2% in most cases. This year, the calculation occurs as higher food and energy prices have …

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Financial Independence Made Simple

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Financial independence is both easier and harder to achieve than most people think. Financial independence is simple if you follow the standard, time-tested formula of long-term saving and investing. But no one wants to do that. They want financial independence faster and easier, and that is much harder to achieve than most people think. What Is Financial Independence? The definition of financial independence is when work becomes optional, and you do not depend on anyone else for any income or help with expenses. In other words, when your finances are completely under your control. If you want to keep working, go ahead. If you want to earn money on the side, do you. When you are financially independent you make the choices without regard to your finances. Sound impossible? It is actually quite simple. Easy Financial Independence Achieving financial independence is easy and simple… in exactly the same way as losing weight is easy and simple. Just eat less calories than you burn over a long enough period of time. Financial independence is no different. Just spend less money than you earn over a long enough period of time. You have heard this song a thousand times, and it is …

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Real World Retirement Planning

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If you’ve read much in the personal finance world, or even just the occasional news story from the business section of your local paper, you are probably well aware of the non-stop stream of headlines about how people are not prepared to retire. Chances are you have visions of old people shut up in their homes clustered around a single candle for light and warmth. But, is this reality, or just great financial copy? A recent Marketwatch article reports on a survey where almost 80 percent of retirees found it easier than they thought to adjust their lifestyle and spending for retirement. This matches more closely with my experience as a financial advisor than the alarmist headlines do. Some real world retirement planning is all you really need. Retirement Crisis for All? As is so often the case, the reality of finances is very individual. As a result, generalizations are often inaccurate for large swaths of people, even while being correct for many others. When I was  a Certified Financial Planner, the reality is that I had a lot more clients who were planning for retirement than those who were actually retired. I never did a financial plan for someone …

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Social Security Increase For 2021

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social security cola

Every year Social Security payments are adjusted for inflation. That means that in most years, there is an increase in the monthly benefit paid to people collecting Social Security. This year, retirees can expect a small increase. Social Security COLA for 2021 The Cost-of-Living Adjustment, or COLA, is calculated using an inflation index called the consumer price index, or CPI. The adjustment for the following year is set in October so that there is enough time to get everything processed. (It probably doesn’t take that long anymore, but the law says October, so that’s the way it goes.) Of course, in order to calculate the CPI, you have to have the whole month of data, so the best they can do in October is use the September number, which came out showing negative inflation. Social Security is never cut by COLA, so instead, it will stay the same for the following year. The increase from 2020 to 2021 was will be 1.3 percent. Income Cutoff for Paying Social Security 2021 The same index is used to determine how much income a current wage earner must pay for Social Security tax, sometimes called FICA on paystubs. Since the COLA adjustment for benefits …

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How To Start Retirement Savings

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retirement planning how much

One of the things that comes up in financial planning is that getting all of the information and facts can be difficult. This, all too often, leads to financial paralysis where you don’t end up doing anything at all, because you don’t understand all the details. Ironically, a lot of the information that ends up being “too much,” is for edge cases that don’t affect the average American saving for retirement. How To Start Saving For Retirement Now Retirement savings, investing, and planning is one area where complicated topics can needlessly paralyze people from taking action. Occasionally, financial companies themselves accidentally cause this confusion. Not long ago, I was talking with someone about retirement savings. The issue, for this particular person was the commercial talking about “Your Number.” If you remember this commercial, the point was that you should know how much money you will need when you retire. The goal, was to get you to schedule an appointment with one of their financial advisors or brokers to find your number. Since the person I was talking to didn’t know his number, he was stuck on what to do for retirement. The ironic part is that you don’t need to …

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Difference Between a Rollover and a Transfer

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ira transfer 401k rollover

When it comes to rollovers or transfers between 401k accounts and IRA accounts, one word makes a lot of difference. So, what exactly is the difference between a rollover and a transfer? A 401k rollover requires that 20 percent of the amount being rolled over be withheld for taxes, even though the IRS still requires the account owner to deposit 100 percent of the amount within 60 days to avoid taxes and penalties. This means that the account owner has to come up with that 20% on his own, and be sure to deposit it with the 80% proceeds he actually receives. A 401k transfer requires no withholding and moves the funds tax-free. As a result, a 401k transfer is better than a 401k rollover in most cases. Likewise, an IRA rollover gives the account owner 60 days to deposit any rolled over funds into a new IRA account. IRS rules limit each taxpayer to only one rollover per year. An IRA transfer moves the money directly to a new qualified retirement plan account with no delays and with no one per year limits. While many of these rollovers are handled electronically, some are done by a check made out …

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Contribute a PERCENTAGE to Your 401k

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Sometimes, it’s easy to let the small (but BIG) stuff get lost among all of the other information and knowledge out there. I’m just as guilty as anyone else, and that’s why I’m ashamed that there are already hundreds of other articles on my personal finance advice blog before I got around to writing this one. It comes from a friend who was “running some things by me” who showed me that his 401k contribution is $750. “Why isn’t a percentage instead of fixed amount,” I said. “What difference does it make,” he said. Oh boy. Have you seen my Credit Karma reviews?  Set a Percentage to Save Into Your 401k You’ve already heard it a million times before. There are fancy names for it, like “paying yourself first,” or whatever you like. But, in order to save, to really save you need to get money out of your hand, before it ever gets into your hands. It’s just human nature. We spend what we make. That’s why, no matter how old you are, and no matter how many times you’ve said it before, it still seems like just another hundred, or thousand, dollars a month is all you would need …

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401k Fiduciary Rule

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Politics sometimes makes it hard to get straight information about important topics relating to your finances. In this case, a court has struck down an Obama era rule that essentially applied the fiduciary standard to certain 401k advisors. According to the Republicans, this is a giant victory for freedom, and business, and enterprise. According to Democrats, this is a giant blow to fairness, and an attack on all hard-working Americans. As is so often the case when politicians get involved, the reality lies somewhere in between. What Is Fiduciary Standard? There is a HUGE amount of case law and statutes about what exactly makes up fiduciary standards, but for our purposes, the easiest way to understand is to compare to the other existing financial standard, suitability. I spend several years as a financial advisor. During that time, I was under the suitability standard. This meant that investments I recommended had to be suitable for my clients. In other words, I wasn’t supposed to be recommending highly-volatile, high-risk, futures contracts to my widowed, orphaned, school teacher, clients. Practically speaking, this standard had a lot less to do with what I wanted to recommend, and a lot more to do with what my company …

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Basic 401k Recipe – How To 401k

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When I was a financial advisor, it always surprised me how often people who didn’t know the first thing about money, investing, or 401(k) plans ended up being so successful at saving for retirement. For them, when they got their first “real” job all those years ago, they signed up for the 401k — because someone told them to — put in 6% of their salary — because that’s how you get the full match — and just chose a basic stock index fund as their investment choice — because that’s all you really need to do right now. Then, 30 years later, after having contributed 6% into a basic stock index fund every paycheck, during every recession, during every boom, during every bust, they ended up with a pile of money thanks to dollar cost averaging and compound interest — all without ever knowing anything about it. In contrast, I also met many people who knew “everything” about money. They quizzed me on minutia like where a company becomes a mid-cap stock versus a small-cap stock, or what month the Federal Reserve raised interest rates, but ended up with very little money in their 401k plans. As it turns …

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