The Season of Giving

The Season of Giving

As the holidays near, you probably find that you’re being approached for donations by many organizations . And I encourage charity donations. But have you ever gotten that call where “just $10 or $20” will be used to support one of these important causes? Money will go to support victims of natural disasters, children with cancer or other serious diseases, veterans, and first responders (police and firefighters), and mistreated animals, to name a few. The caller describes situations that tug at your heart. And they want the donation right then – no time to research. You can ask questions, of course, but can you trust the answers? I recently heard a report on American Public Radio’s Marketplace show (available as a podcast) about phone solicitations and was reminded of a call from a friendly, deep-voiced gentleman who wanted money for a police charity (I don’t remember the name of the charity). During the call, I asked questions about where the money went and how it was used. I really wanted to help, but something told me to be skeptical. I asked him to send me written information so I could make a decision. I never received the information in the mail that he’d promised. Turns out, many of these calls are from telemarketers who are working on behalf of the charities. By the time the telemarketer takes their cut, and the charity pays administrative and management costs, there’s little left for the actual cause. The state of Iowa has been investigating charities that use phone solicitation, and have found that they call donors on behalf of multiple charities. Reporting from...

GAO Report on 401(k) Rollover Focuses on Process, not Price

I’ve seen lots of headlines in the last couple of weeks about a new GAO report, “Labor and IRS Could Improve the Rollover Process for Participants”.  Media outlets and industry groups have latched on to different findings in the report, and resulting headlines vary from the humdrum (“GAO Advises Easing Rollovers Between 401(k) Plans”) to the conspiratorial (“Firms Mislead Workers on 401(k) Rollovers: GAO”). Bottom line, what seems to concern the GAO is that so much 401(k) money is flowing into IRAs. From reading the report and its summary, I sense a bias from the authors that qualified money is better off in the 401(k) environment than in the IRA environment. I’m not sure where this bias is coming from. After all, wasn’t it just a couple of years ago that the Department of Labor issued regulations to require disclosure of 401(k) fees because “the cumulative effect of the [401(k) plan] fees and expenses on your retirement savings can be substantial.[i]”? I don’t think the GAO made a very clear argument about why it’s important to keep 401(k) money in 401(k) plans rather than move it to IRAs. Don’t get me wrong, IRAs and 401(k)s are not completely interchangeable. The relative benefit of the 401(k) plan varies depending on the individual’s circumstances. There’s some insinuation that custodians are making more money off of IRAs than 401(k)s, which is probably true in some cases. And of course, a custodian would much rather keep the money “in house” in an IRA than have it move to a new employer’s 401(k). But that doesn’t necessarily mean the employee is best served by a 401(k)...

The “Best-Cast Retirement Strategist” Part 1

Are you close to retirement? Or does retirement seem so far away, you can’t even envision it? Whatever your time frame, you probably do want to retire some day. A 2011 study from the Metlife Mature Market Institute contains a lot of interesting information about how retirees and pre-retirees create a financially successful retirement. We always hear about the challenges of achieving a secure retirement, but this survey asked respondents who felt that they were successful in their work towards a “best-case” retirement strategy how they did it. The survey found a common set of approaches to producing the best possible outcome. Not surprisingly, there’s some planning involved. According to the survey, a best-case strategist: Stops, sits down, and focuses on the future…and talks about it Has a sense of self-reliance Thinks about the future – all the way to the end Anticipates…or, expects the unexpected Designates a budget column, today, for a future self Sets and lives by personal financial rules Engages in the “What ifs?” Puts pencil to paper, or cursor to screen; Does the math – All of it Gathers information Seeks advice Gets the house in order – literally Starts as soon as possible Over several blog posts, I’ll discuss these actions and what you can do to incorporate them into your life, no matter where you are in your journey towards retirement. Stops, sits down, and focuses on the future… and talks about it I’ve started with this attribute because I’d like to offer this series as a conversation starter for you as you consider your own retirement readiness. I know we’re all busy,...
About that Social Security tax reduction…

About that Social Security tax reduction…

Several people have asked me if the reduction in Social Security taxes in 2011 will impact their actual benefit amount. In short, the answer is “no”.  At least, not directly. What’s actually happening is that for the first time ever funds in the government’s GENERAL account are being used to pay into the Social Security trust fund.  And we all know that there are no excess funds in the GENERAL account, so in essence we’re borrowing to pay to add to the Social Security trust fund to the tune of 2% of earned income (up to the maximum for each person contributing) in 2011.  So, the funding level is the same as it would have been without the tax cut, but the funds come from borrowing from the GENERAL fund rather than having you pay in the full 6.2% of salary that you’d normally pay. This is for the year 2011 only. As long as benefits remain at current levels, there will be no impact on your benefits due to the 2% tax “reduction” in 2011.  But as we all know, the GENERAL fund gets its revenue from… oh, yes, taxes.  At some point, taxes will need to be raised to pay for this 2011 reduction. How does this impact your planning? Not at all, immediately.  However, we have been assuming for the past year that taxes will increase to the year 2000 levels as soon as the current tax cuts expire.  We have also assumed that Social Security levels will increase at levels less than the rate of inflation to reflect that there may be future reductions in Social Security payments. ...
The Federal Government giveth, Illinois taketh away….

The Federal Government giveth, Illinois taketh away….

This posting is the good news/bad news of the 2011 tax year, particularly for Illinois residents. The good news?  As part of the tax compromise passed during the lame duck session, Congress included a 2% reduction in the rate of Social Security tax collected from individuals.  Normally, 6.2% of your pay up to a maximum level of $106,800 goes to Social Security Retirement funding.  In 2011, this rate is reduced to 4.2%.  You should already see this reduction in your paycheck.  If your earned income is $80,000, you’ll “save” $1,600 in taxes this year. But, if you live in Illinois, you’ll also see the bad news – a 2% increase in State Income tax. In essence, the two offset, up to the Social Security maximum, for the regular income that you earn from a paycheck.  (Okay, I’m ignoring things like IL state exemptions and deductions, but that’s fine for our purposes here. I’m also ignoring that there is an increase on Illinois non-wage income tax that is not offset by a reduction in Social Security taxes.  But let’s move on…).  If you didn’t get a raise at the end of the year and paid Social Security taxes as part of your final paycheck, your net pay will be the same after the first of the year as it was before the end of the year. Unfortunately, in 2012, Social Security taxes go back to the old level, and Illinois state income taxes stay at the new, higher level. What should you do for planning purposes? Start adjusting now to next year’s tax increase, but put the money into savings this year.  Assume you need to pay an additional 2% of your income in total taxes. Take that...