How Much Do You Know About Social Security Retirement Benefits?

Quiz: How Much Do You Know About Social Security Retirement Benefits?

Social Security is an important source of retirement income for millions of Americans, but how much do you know about this program? Test your knowledge, and learn more about your retirement benefits, by answering the following questions.

Questions

1. Do you have to be retired to collect Social Security retirement benefits?

a. Yes

b. No

2. How much is the average monthly Social Security benefit for a retired worker?

a. $1,360

b. $1,493

c. $1,585

d. $1,723

3. For each year you wait past your full retirement age to collect Social Security, how much will your retirement benefit increase?

a. 5%

b. 6%

c. 7%

d. 8%

4. How far in advance should you apply for Social Security retirement benefits?

a. One month before you want your benefits to start.

b. Two months before you want your benefits to start.

c. Three months before you want your benefits to start.

5. Is it possible for your retirement benefit to increase once you start receiving Social Security?

a. Yes

b. No

Answers

1. b. You don't need to stop working in order to claim Social Security retirement benefits. However, if you plan to continue working and you have not yet reached full retirement age (66 to 67, depending on your year of birth), your Social Security retirement benefit may be reduced if you earn more than a certain annual amount. In 2017, $1 in benefits will be deducted for every $2 you earn above $16,920. In the calendar year in which you reach your full retirement age, a higher limit applies. In 2017, $1 in benefits will be deducted for every $3 you earn above $44,880. Once you reach full retirement age, your earnings will not affect your Social Security benefit.

2. a. Your benefit will depend on your earnings history and other factors, but according to the Social Security Administration, the average estimated monthly Social Security benefit for a retired worker (as of January 2017) is $1,360.¹

3. d. Starting at full retirement age, you will earn delayed retirement credits that will increase your benefit by 8% per year up to age 70. For example, if your full retirement age is 66, you can earn credits for a maximum of four years. At age 70, your benefit will then be 32% higher than it would have been at full retirement age.

4. c. According to the Social Security Administration, you should ideally apply three months before you want your benefits to start. You can generally apply online.

5. a. There are several reasons why your benefit might increase after you begin receiving it. First, you'll generally receive annual cost-of-living adjustments (COLAs). Second, your benefit is recalculated every year to account for new earnings, so it might increase if you continue working. Your benefit might also be adjusted if you qualify for a higher spousal benefit once your spouse files for Social Security.

For more information, visit the Social Security Administration website, ssa.gov.

How can you save for retirement even if you don't have a 401(k) plan?

How can you save for retirement even if you don't have a 401(k) plan?

A company’s 401(k) plan is a great savings tool. An employer’s 401(k) plan that offers a match can jumpstart your savings. Having a savings plan at work makes it easier to stay committed to saving money on a regular basis. Hopefully, your employer has done the due diligence necessary and has chosen an optimal mix of investments at a reasonable fee structure.

If you do not have a 401(k) plan at work or you are self-employed, you can still save money for your retirement. I recommend a 15% savings goal. You can start with incremental goals. If you are saving nothing, I recommend saving 5%. If you are already saving 5%, I recommend that you increase it to 10%. If you are saving 10% that is great and perhaps you can increase it to 15%. Reviewing cash flow and budgeting helps identify where the funds are that can possibly be redirected to savings.

Once you decide on the monetary amount you want to save on a regular basis, the next decision is where to put the money. If you do not have a 401(k) at work and are self-employed, you have a range of retirement plan options to choose from. You can consider the SEP IRA, the Profit Sharing Plan, the Money Purchase Plan, the Simple IRA, the Defined Benefit Plan or the 401(k). All have their own pros and cons to consider. You can check out the IRS Publication 560 for more information on these plans.

If you do not have a 401(k) plan at work and are not self-employed, you can consider the following options:

·       Fund the IRA of your choice; Traditional IRA or Nondeductible IRA. If you are not covered by a retirement plan, you can fund a Traditional IRA up to $5,500 per year or $6,500 if you are over age 50. If you are covered by a retirement plan and your income is below the income guidelines, you can still contribute to the Traditional IRA. For the 2017 tax year, below are the adjusted gross income (AGI) limits to take a Traditional IRA deduction if you are covered by an employer's retirement plan. If your AGI is less than the lower end of the range, you are entitled to a full deduction of your Traditional IRA contributions. If your AGI is above the higher limit, you cannot deduct any Traditional IRA contributions. Finally, if your AGI falls within the range, you are allowed a partial deduction. If your income is over these amounts and you are covered by an employer's retirement plan, you can still contribute to a Nondeductible IRA instead.

Tax Filing Status	2016 Tax Year	2017 Tax Year
Single or Head of Household	$61,000-$71,000	$62,000-$72,000
Married Filing Jointly	$98,000-$118,000	$99,000-$119,000
Married Filing Separately	$0-$10,000	$0-$10,000

·     Fund a Roth IRA. Not everyone is allowed to directly contribute to a Roth IRA. In order to make a contribution, your AGI must be below a certain threshold that depends on your filing status.

 

Tax Filing Status	2016 Tax Year	2017 Tax Year
Single	$117,000-$132,000	$118,000-$133,000
Married Filing Jointly	$184,000-$194,000	$186,000-$196,000
Married Filing Separately	$0-$10,000	$0-$10,000

·       Consider using a Variable Annuity. Variable Annuities offer similar benefits to a Nondeductible IRA but usually limit the investment choices offered. Also, some Variable Annuities have very high expense and surrender charges so be sure to take that under consideration.

• If you have a home with a 30 year mortgage, consider converting it to a 15 year mortgage. Not only will you pay off your loan faster but you will also qualify for a lower interest rate. Typically, a 15 year mortgage is 15% to 20% more than a 30 year mortgage. This is not because it is a bad deal. Instead it is because you are paying off more principal each month. It is truly amazing to see how much interest you will save overtime by paying the loan off in 15 years instead of 30 years. If you can't afford to go for a 15 year mortgage then consider paying one extra payment per year. On a 30 year mortgage, this can save you six to seven years of payments. If you can't afford to do that, consider rounding up your payment by an extra $100 a month. Paying down extra principal is another form of saving. By paying off the loan faster, you are paying substantially less interest.

• Consider funding a brokerage account made up of stock index funds and municipal bond funds. This is a very tax efficient way to invest and you have liquidity on the money. You can sell the investments at any time if you need the money. 

If you have additional questions, please feel free to call my office at 201-843-0044 or check out our website at www.wattersfinancial.com for additional information concerning Financial Planning and Wealth Management topics.

Timothy Watters, CFP®

Saving money is always a challenge. Find Out How to do it

Saving money is always a challenge. The first step to setting up a savings program is to find out how you are currently spending your money. To start, I would encourage you to use Quicken or mint.com which will help you get a better handle on where your money is going. Once you know what you are spending your money on, you are in a better position to redirect some of that money towards savings.

A great exercise I use is to have couples look at each item as essential or discretionary. Once you decide which items are discretionary, I recommend that each person separately look at the discretionary items and rank them in importance from 1 to 3. Then, I recommend that they go to a public place like Starbucks or a restaurant and look at each other's list (everything stays more civil if you meet in a public place). The ground rules are that if an item is ranked 1 in importance for one person but a 3 in importance for the other partner, it is off-limits. However, if there is an item that is a 2 or 3 for either person, you can definitely consider redirecting that money towards savings.

Another recommendation is to open multiple online savings accounts for different purposes. Looking at your last year credit card bills will give you a great idea of what short term spending items are recurring yearly. For example, consider setting up a slush fund for vacations, holiday spending, etc. An automatic monthly savings plan that you can fund regularly can help you be more disciplined in your savings activity. Paying for items or occasions in advance will help you avoid building up credit card debt and less likely to sabotage your long-term savings plans.

Another recommendation is to switch to a 15 year mortgage instead of a 30 year mortgage. I recommend this with clients who have already had a mortgage for a few years. Often by then, they have a lower amount of principal on their loan and it may not be a substantial difference to pay. This is a great move for clients to make when interest rates have come down since they first took out the mortgage.

I also advise you to round up your mortgage payment to the next round number. If you can afford to, I encourage you to pay one extra payment per year on a 30 year mortgage. It is surprising how quickly you can make a difference if you pay one extra payment per year on a 30 year mortgage. Paying an extra principal each year can reduce the time it takes to pay off the mortgage considerably.

If you would like to discuss this further, please feel free to call my office at 201-843-0044. Also, I recommend you check out our website at:

www.wattersfinancial.com for further information concerning financial planning and wealth management topics.

Timothy Watters, CFP

Should you rollover a 401(K) plan into an IRA and should you rollover old 401(K) s into your new employer’s 401(k) plan?

Should you rollover a 401(K) plan into an IRA and should you rollover old 401(K) s into your new employer’s 401(k) plan?

Many people have 401(k) plan accounts from previous employers and they are not sure whether they should roll these funds over to their new employer’s 401(k) plan or to rollover these funds to an IRA account. When trying to decide which option to choose, I recommend looking at the quality of the investments that are held within your new employer’s 401(k) plan and the fees associated with the plan.

Generally, if the employee works for a very large company, they will probably have a good selection of investments available. However, if the employee has left a big company and is now working for a small company, they may be better off leaving their 401(k) plan assets within the former employer’s 401(K) plan.  

Small companies often charge their employees for record-keeping expenses in addition to mutual fund management fees. Small company plans may also not qualify for institutional pricing on the mutual funds held in the plan. Also, on some plans, the employees may pay sales charges on purchases as well.

Assuming that the current plan has good investment choices and reasonable fees, it is often easier to have one custodian holding all of the former retirement assets from previous employers. It can make asset allocation easier as well. However, some people do not want to roll the funds together because they are worried about the viability of the custodians after the 2008 credit crisis and may want to keep the assets separated for that reason. This is a personal decision.

In addition, the employee may not have enough money in the new plan to qualify for the maximum loan amount. By consolidating the previous 401(k) balances into the plan, they may be able to take advantage of the maximum loan amount of 50% of the account value (up to $50,000).

Employees must use caution when a broker recommends that they roll over their 401(k) assets into an IRA. Their incentive may only be to free up the assets to invest. Again, if the employee is with a large employer plan, it probably has institutional pricing and the funds inside the plan have probably been vetted by an investment committee. Moving the money to the IRA may result in higher fees and less desirable investments that may not necessarily be in the employee’s best interest.

The bulk of my practice is working with clients on either an hourly fee basis or through advisory fees. While I still maintain an insurance license, I rarely use it any longer after 30 years of being in this business.

If you have additional questions, please feel free to call my office at 201-843-0044. Also, check out our website at:

www.wattersfinancial.com

Timothy Watters, CFP

Beware Cybercrime

Over the last few years, we have seen a dramatic rise in fraudulent email requests to take funds out of our client’s accounts.

This type of fraud used to be easy to pick out. However, the thieves have grown more sophisticated over the last few years.  We have taken several steps to protect our clients:

1.   We always call clients when we receive an email request for funds. A few months back, our firm received an email request from a client requesting over $28,000 to be sent to her sister. Once we called the client, we learned she has no sister!

2.   We do not send out funds to third parties. We wire funds directly into our client’s checking account.

3.   In addition, we have photos of all of our clients on file. This way, if someone shows up saying they are our client and the staff person has never met the client, they have an easy way to prove identity. One client had someone who impersonated them at a bank branch take out a large withdrawal. You never can be too careful.

4.   We purchased Cybercrime Insurance to protect clients from hacking into our computers and to protect against fraudulent theft of assets as well.

It is critically important to be careful with passwords.  It is a wise thing to update and your email passwords periodically and to make sure that all of your passwords are robust. It's also important to make sure that your computer has a firewall and you use virus scan software and you are up to date on all of the patches from your operating system as well.

Even with those precautions, you can still fall victim to identity theft. Be careful to not open suspicious emails from someone who would not normally email you. Also, do not click on links in emails unless you are sure of the source.

Myths in Financial Planning

There are many myths in Financial Planning.

My personal favorite is the myth that the Last Will and Testament overrides your beneficiary assignments. 

Often a client will go to the effort of meeting with an attorney and drawing up a perfectly adequate Last Will and Testament only to have it undermined completely by the beneficiary assignments in their retirement accounts, annuities and life insurance policies. 

This can be a real problem if there is a special needs beneficiary in the family. Beneficiary assignments should be discussed (and amended if necessary) with your attorney. 

My second favorite myth is that there is no need to plan for long-term care because it will all just work out fine. I have been approached many times by families in desperation after they realize that a loved one is going to spend down all of their assets. There is not much they can do about it at that point in time. Whether the client decides that Long Term Care Insurance is part of the solution or not, they should have a concrete plan of action. They should have a family meeting where these issues are discussed. The decision to purchase Long-Term Care Insurance is a family decision based on the client’s financial assets and health and their viewpoint. I often create a Retirement Scenario Report looking at how long the assets will last with or without Long-Term Care Insurance to help clients decide if they can afford to self-insure or they need the coverage. The important thing is that people need to think it through and make an informed decision.

Finally, the third myth is that you can continue to save very little AND still have enough to live comfortably in retirement. This is one of the things YOU have direct control over. My goal for all of my clients is to save 15% each year.

If you have additional questions, please feel free to call my cell phone at 201-650-0753. Also, check out our website at:

www.wattersfinancial.com

Timothy Watters, CFP

Should a Millennial Rent or Buy?

               What to Consider when Buying a Home.
For millennials, the decision of whether to buy has never been harder. Many millennials are in a financially weak position because of the aftermath of the Credit Crisis and student loan debt.
In the last 30 years, I have seen many young couples grapple with this decision. Having children forces them to think about education. If they live in the city, they may want to consider staying in the city and finding a good private preschool and elementary school. Unless they make a substantial income, private school may be too expensive. If they move out to the suburbs, they can buy a home, pay property taxes and send their child/children to public school. Property taxes are deductible. Private school tuition is not deductible. One of the negatives of choosing a private school education is that parents are often not able to afford to contribute to college funding as well.
Here are some guidelines that I recommend couples think about when deciding whether to buy a home:

·      It's important especially now to make sure that you can afford both the down payment on the home as well as keeping an emergency fund of 3 to 6 months’ worth of bills.

·      It is important to understand the PITI rule. Now banks will not allow you to spend more than 28% of your gross income on principal, interest, taxes and insurance.

·      Credit ratings are an important factor to consider also. According to JP Morgan Investment Management, banks require a credit rating of 743 or higher to get a home loan.

·      It is important to have a long time horizon when buying your first home. The home has to appreciate 10% just to break even overtime. You need to pay the realtor 4.5% to 6% to sell the home. You also have transaction costs to buy the home and transaction costs to get out of the home as well as moving costs.

These are a few suggestions. If you are considering buying a home and have questions, please call my office at 201-843-0044 and we can discuss it.