Volume 15, Issue 12
How Social Security Affects Your Retirement
When contemplating retirement, you may be counting on Social Security benefits to provide you with a basic level of income. However, the age at which you choose to retire is an important part of the equation. There are also other issues to consider when making your choice.
Consider the following questions: 1) How would an early retirement, for example, at age 62, affect your Social Security benefits? 2) How will those benefits be taxed? and 3) Is it in your best interest to continue working to earn extra income when your Social Security benefits could be reduced based on your earnings?
What’s the Maximum?
Social Security provides only a base level of income. The maximum benefit for a person who retires in 2009 at full retirement age is $2,323 per month. In 2008, the maximum benefit was $2,185 per month. It is important to note that the benefit for a non-working spouse is 50% of that amount.
Should You Delay Retirement?
If you delay retirement past your full retirement age, your monthly benefit will increase, based on the age at which you elect to take retirement benefits. But, upon attainment of age 70, the benefit increase no longer applies, even if you continue to delay payment.
Taking benefits at age 62, which is considered early retirement, is appealing to many people. However, if you decide to take early retirement benefits from Social Security, your monthly benefit amount will be permanently reduced by 20–30%, based on your full retirement age.
Some people continue working and earning additional money to supplement basic Social Security income. This is where you need to be careful. If you earn more than the maximum amount allowed, you may forfeit some of your benefits. If you are under full retirement age, receive Social Security benefits, and earn additional income, your benefits will be reduced by $1 for each $2 you earn over $14,160 in 2009 and 2010. During the year in which you attain full retirement age, your benefits will be reduced by $1 for every $3 earned over a certain amount ($37,680 in 2009 and 2010). Upon attainment of full retirement age, there is no earnings limit, and Social Security benefits will not be reduced.
Full Retirement Age Is Changing
For a long time, full retirement age was 65. Due to longer life expectancies, that age is increasing gradually until it reaches age 67. This change began in the year 2000 and affects people born in 1938 and later. Age 62 remains the earliest you may begin to receive Social Security retirement benefits.
For Your Information
The Social Security Administration (SSA) provides a free service that allows you to check the accuracy of your Social Security records. To learn more, call Social Security at 800-772-1213 or visit www.ssa.gov to request a Social Security Statement (Form SSA-7004). Once you complete the request, you’ll receive an annual breakdown of salary credited to you since 1950, as well as an estimate of benefits you will receive upon retirement.
Guardianship and the Elderly
Suppose an elderly family member becomes incapacitated and has made no arrangements for such a situation. Advance directives are legal instructions that express a person’s wishes regarding financial and health care decisions in the event that he or she becomes unable to make them. If incapacity occurs and there are no advance directives, is guardianship a viable option?
Guardianship for an adult is far different from guardianship of a minor child. For minor children, guardianship involves parenting because minor children require adult supervision until they reach a certain age. Moreover, minors have not yet earned societal rights, such as the right to vote or the right to drive. Consequently, minor children do not give up any rights by virtue of guardianship.
An adult, on the other hand, who is accustomed to making his or her own decisions, typically loses the right to vote, hold a driver’s license, marry, and draft a will (laws may vary by state) when placed under guardianship. The guardian, appointed by the court, becomes a decision-maker for the incapacitated person. The guardian has the power to make some, or all, financial and health care decisions for that person. Guardianship for an adult is considered a serious intervention.
Guardianship for an adult cannot be enforced until after a clear need becomes evident. At a minimum, most states require a court hearing and examination by a physician and/or psychologist to determine incompetence. The person for whom guardianship has been petitioned (i.e., the ward) must be informed of his or her rights and notified that a court hearing has been scheduled. Proposed wards generally have the right to retain an attorney and to object to the petition for guardianship, even if incapacity prevents them from attending the hearing.
It’s important to realize that confusion and eccentricity do not necessarily indicate incapacity. For example, an elderly parent may appear to be spending money frivolously, but that alone may not indicate an inability to manage his or her affairs. Consider what would happen if the court appointed a guardian for someone in a coma who later comes out of the comatose state. For these and other reasons, guardianship for an adult is generally considered a last resort in the absence of advance directives.
Advance directives can help a person plan for a variety of situations. A durable power of attorney grants authority to another person to make legal and financial decisions on a person’s behalf in the event of mental incapacity. The powers granted can be broad or limited in scope. A durable power of attorney can provide assistance with personal finances, insurance policies, government benefits, estate plans, retirement plans, and business interests.
A living will allows a person to state his or her preferences prior to incompetency regarding the giving or withholding of life-sustaining medical treatment. In most states, a person must have a “terminal condition,” be in a “persistent vegetative state,” or be “permanently unconscious” before life-support can be withdrawn. The definition of these terms and the medical conditions covered may vary from one state to another.
A health care proxy allows a person to appoint an agent to make health care decisions on his or her behalf in the event of incapacity. These medical decisions are not limited to those involving artificial life-support.
Time Is of the Essence
Advance directives by durable power of attorney, living will, or health care proxy are generally inexpensive and easy to implement. They are essential estate planning tools for all individuals, regardless of age. In the absence of such documents, court intervention to appoint a guardian may be necessary. This could involve a great deal of time, expense, and stress at precisely the moment when timeliness and ease of action are of the greatest importance.
Where Does All the Money Go?
Do you ever wonder where all your money goes? Usually, it’s not that mysterious. You can figure it out with a little discipline on your part—along with the help of a budget. Many people spend their money in small increments without realizing how it all adds up. As you begin to track your income and expenses, you can design a budget to help you better manage your personal finances.
Make It a Family Affair
Creating and maintaining a budget are often more successful if the process is a family affair. Be sure to involve all adult family members in the decision making, and since children also affect and are affected by the budget, include them, too. When children see that the family’s income is not limitless and that finances are important, they may better understand why they can’t always get everything they want.
To design a budget that meets the needs of your family, consider the following steps:
1) Track Income and Spending. To start, tally all your sources of income and spending for a few weeks or months. An easy way to do this is to keep a receipt for all expenditures over $1.00. You may also refer to credit card statements, receipts, and check stubs.
2) Categorize Expenses. Next, categorize your expenditures. The two basic types are 1) fixed—those that are not optional, such as mortgage or rent, insurance, and utilities; and 2) discretionary—those that are optional, such as clothes, movies, sporting events, and dining out.
3) Set Goals and Prioritize. When you begin to see how much money is coming in and how much is going out, it is time to set goals for your financial future and prioritize those goals. Do you want to buy a house or a new car? Are you saving for your child’s college education or your retirement? Are you trying to minimize your debt? Once you establish your priorities, you can begin working toward your goals, according to their importance to you.
4) Prepare the Budget. Now that you have a handle on your current income and expenses and have established some priorities, you are ready to prepare a budget. Remember to keep it simple. The less complicated your budget is, the easier it will be to maintain. For instance, to estimate expenses for tax bills or insurance premiums, simply calculate the annual expense and divide by 12. The budgeting process may allow you to see precisely where you need to cut expenses. Don’t get discouraged if it takes several attempts before you finalize your budget. It may take some time to align your expenses with your income and your financial goals.
5) Stick to It. Get in the habit of reviewing your budget regularly. Include family members in the review process and remind everyone that the budget can only be effective if everyone sticks to it.
6) Conduct an Annual Review. Be sure to review your budget at the end of each year. By totaling what you spent and comparing it to your projected budget, you may see areas to focus on for the coming year.
Once you have prepared a budget, there are still some important things to remember. First, set aside emergency savings in case of an unforeseen problem, such as a job loss or an unexpected major expense. As a rule, an emergency savings fund should cover three to six months’ worth of living expenses. Savings may be set aside on a weekly or monthly basis toward this goal. Second, closely monitor your credit card use. Due to the ease of using credit cards, many consumers end up buying things they don’t really need, which cost more in the end when finance charges and interest are added.
If you incorporate a budget into your family’s financial routine, you’ll no longer need to wonder where all the money goes.
New Year’s Financial Resolutions
For many people, the New Year is a time for personal reflection, a time to consider commitments and resolutions for the coming year. This year, why not resolve to make your finances a priority? With proper planning and appropriate guidance, you can begin to build financial stability and prepare for the uncertainties of tomorrow.
Consider the following steps:
1. Get Organized. Gather all your important financial documents—life insurance policies, homeowners insurance, wills, trusts, and other pertinent financial records—and organize them so you can access them quickly and easily.
2. Schedule a Legal Consultation. Arrange a time to meet with your attorney to review or write your will and establish any necessary trusts. Prior to your meeting, discuss with your spouse or other loved ones how to handle property dispositions and guardian appointments.
3. Keep Debt in Check. Pay off high interest debt first, especially if the interest is not tax deductible. Do your best to avoid the minimum payment trap. By making only the minimum monthly payment, the interest that accumulates over time can make even “bargain” purchases costly in the long run.
4. Review Insurance Coverage. Review your life insurance policies to ensure that your beneficiary designations are appropriate to your current situation and that all arrangements are up-to-date. Also, consider repaying any loans you may have against your insurance policies. This will help to reestablish an emergency fund for the future.
5. Apply for Scholarships. If your children plan to attend college next year and require financial aid, remember that financial aid forms are due early in the year. The earlier you apply, the better your chances are for obtaining aid.
6. Prepare a Tax Strategy. Begin to gather your tax information and arrange a time to meet with your accountant, if necessary. It is important to file your income taxes on time and to be aware of any tax changes that may affect your return.
7. Write It All Down. Once you’ve met with your financial, insurance, and tax professionals, write down a few realistic goals for the coming year. Make the commitment now to plan your finances accordingly. This is your first step to building a solid financial future.
The New Year offers us a fresh beginning. This year, resolve to make your finances a priority. With proper planning and appropriate guidance, you can begin to work toward financial independence and prepare for life’s uncertainties.