According to the SSA, they’re working on making an electronic version of the benefit statement available, but no estimated date has been announced.

In the meantime, the SSA’s Retirement Benefits Calculator is available online now, and shows your retirement benefit estimates at age 62, at your full retirement age, and at age 70.  Amounts shown in the calculator are based on your prior and anticipated future work earnings amounts. Using the calculator, you can also build scenarios where you estimate your benefit based on different future earnings amounts and “stop work” ages – something you couldn’t do with the old paper statements!

To use the Retirement Benefit calculator, click here to link to the SSA Retirement Benefit calculator.  Review the information on the page about who can use the Retirement Benefit Estimator; look at the right for the big red button that says “Estimate Your Retirement Benefits” (big red button on the right) and click on it.  Next you’ll be directed through a privacy statement and then you’ll need to enter personal identifying information.  Enter last year’s income on the next screen, and you’ll get the familiar benefits at age 62, 70, and your full retirement age.  Once you’ve seen your basic benefits, you can move on to create alternative scenarios.

However, you can’t verify online that the SSA has captured your correct earnings credits.  Until an alternative earnings record is available, make sure you save your final annual pay stub or, if self-employed, your tax return showing your self employment tax amounts until you’re able to once again verify these amounts.

It’s hard to avoid talk about federal spending these days, and much of Jamey’s presentation revolved around the retirement implications of the upcoming federal budget discussions.  Jamey referenced a survey by Matthew Greenwald & Associates on behalf of the National Institute on Retirement Security.  That survey found that “nearly 80% of Americans believe leaders in Washington do not understand how hard it is to prepare for retirement in this economy. Some 83% say government should make it easier for employers to offer pensions, and 81% believe that Washington leaders need to give a higher priority to ensuring more Americans can have a secure retirement.”

On the other hand, Jamey noted that with the current budget status, there are “no sacred cows”.  On the table are the mortgage interest deduction, reductions in the tax incentives to save for retirement and life insurance and annuity cash value accumulations, and of course Social Security and Medicare.  With respect to many of these tax benefits, he noted that many of the disussions focus on ”upper income” Americans, with the possibility of phaseouts, additional taxes, and/or means testing.  

He described the upcoming debt ceiling vote as “ugly and painful”, but believes that in the end the debt ceiling will be raised without a default in U.S. debt. 

And so, the question is, what should you do in this climate of citizens wishing for additional government support of retirement programs, against the desire to balance an unsustainable budget deficit?  Well, I’d point back to the tax agreement reached at the end of 2010.  Remember that?  The discussion went down to the wire, the outcome was a bit surprising to some, and there were some total surprises included (such as the unanticipated and material changes to the estate tax law).  With respect to planning, it would be prudent to assume that some combination of fewer benefits and higher taxes is likely in the near to medium term.  Tax diversity - owning a combination of tax deferred and taxable assets – continues to make sense with talk of tax simplification.   However, it’s too soon to adjust current strategies without concrete guidance; as we know, individuals are affected differently by changes depending on their specific situations. 

Overall, the message is, hold on for a bumpy ride, stay informed about proposals and provide feedback to your elected representatives, and be prepared to make adjustments when the environment changes.

It all started when our son, Max, asked for a prairie dog, about a year ago.  One of the “deals” was that he had to research what it would take to get and keep a prairie dog as a pet.  Once that was done, the spring shipment of prairie dogs at our local pet store had already been purchased, and I thought we might have a one-year reprieve from the challenges of owning a wild animal.  We put our names at the top of the list for the next shipment of baby prairie dogs, which are arriving this spring, and Prairie Dogs were out of my mind.

However, in October, the very friendly pet store called and said they had a customer who was going to have to sell her one and a half year old prairie dog.  I asked Max if a “used” prairie dog was OK, and he said “yes”.  We went to check out Peanut, and Max was immediately smitten.  A couple of weeks later, Peanut’s cage was at the foot of Max’s bed.

One of Peanut’s less endearing qualities is his penchant to chew – just about anything.  We believe he’s usually looking for something to eat, given his chunky figure.  He’s gnawed drywall, carpet, sheets, blankets, and got particularly excited about a stuffed animal that appears to be full of some kind of small seed rather than plastic filler. 

Which gave me the idea to “hire” Peanut as the new Shredder for GFFP.

At first, I was skeptical.  How were we going to get Peanut interested in chewing a bunch of paper into shreds tiny enough to ensure privacy of our clients?  How would we keep the paper clean enough to be recycled?  But we tried several approaches, and finally, we’ve perfected “Shreds By Peanut” to the extent that we’re comfortable having Peanut do all of our shredding on-site, with no one else having access to the confidential data!

Here’s an example of how “Shreds by Peanut” works:

1) Paper is put into a special cardboard box in a secure room.

Before

2) Pumpkin seeds are scattered around the paper, to attract Peanut into the box

3) Peanut starts looking for more pumpkin seeds in the paper

Shredder at work

4) Paper is shredded, and viola, turned into unrecognizable paper-fetti!

Shreds by Peanut!

5) We review all shredded paper to ensure that no confidential information is visible

6) Paper is recycled, and Peanut goes back to bed

We think many businesses will start using Shreds By Peanut once they see how simple and natural the process is. 

Happy April Fool’s Day!

Pros: 

1.  They’re on “autopilot”.  You don’t have to worry about rebalancing or adjusting your allocation; that’s all done for you.  For younger participants, equity exposure can be 85% or even more of the total invested fund.  As the target date gets closer, the fund allocation automatically adjusts and may add more retirement-appropriate investments such as inflation-protected bonds, and may focus more on short-term bonds rather than longer-term bonds.  In general Target Date funds tend to get increasingly bond-allocated over time, presumably to provide more stability.

The automatic nature of the Target Date fund is to me one of its most attractive features.  It can be particularly well suited to young, starting investors who are saving most of their money into a tax deferred option and simply want a strategy that’s appropriate to their time horizon.

2.  You may only need to pick one fund.  Target Date funds generally come in “five year increments”: for example, a Target Date fund from Fidelity will have the name “Fidelity Freedom 20XY Fund”, where XY is divisible by 5.  If you plan to retire in 2021, you would most likely pick the Fidelity Freedom 2020 fund, which Fidelity says is ”designed for investors expecting to retire around the year 2020″.  

If you’re comfortable that you’re getting broad exposure – international equities, short and intermediate term bonds, and various capitalization levels for corporate equities – you may just need one target date retirement fund in your 401(k). 

But Target Date funds aren’t for every situation.  Here are some cons:

1.  They’re on “autopilot”.  Hmmm… I thought this was a “pro”!  Well, it is, and it isn’t.  Consider if you wanted to go to California and your plane was on autopilot to New York… In other words, you need to ensure that your target date fund will take you where you want to go!  For example, some Target Date funds include such investments as High Yield bonds allocated to the assumed “safe” Bond part of the allocation.  Bonds may have longer maturity dates than you might find desirable.  When you buy the Target Date fund, you’re buying the allocation each company selects. Make sure you’re aware of what’s in each fund and know that the investments are appropriate to your situation.

One approach to test the asset allocation in your Target Date fund is to come up with your own investment strategy, and then see how close the Target Date comes to selecting your desired asset classes and the proportion of those assets.  For help developing an asset allocation strategy, see Richard Ferri’s book, “All About Asset Allocation“, or other asset allocation resources.

2.  They can be pricey.  As with most mutual funds, you need to check for fees.  Vanguard’s Target Retirement funds have annual fees of .18%, whereas the Oppenheimer version may have annual fees of up to 2.2% when sales fees are included.  One of the problems with these funds inside of employer plans is that employees generally only have one fund company’s target date funds to select, so they may have to decide if they want to trade off convenience for fees.

3. They don’t allow flexibility when taking withdrawals.  One of the values of diversification is that withdrawals can be taken from asset classes that are currently overvalued.  However, withdrawals from a target date fund come pro-rata from each of the represented asset classes.  I see the one-fund approach as having reduced applicability as you reach retirement age and the need to withdraw from your retirement assets.

4. They don’t allow for tax management.  You’d generally like to hold equities in your taxable accounts and bonds in your tax-deferred accounts (at least, as federal taxes in the United States stand as of this writing).  Holding a single fund eliminates your potential to tax-manage your accounts in this way.  As noted above, this is OK if all of your assets are in tax-deferred accounts; but not if you have a significant amount of taxable savings.

Those are just a few of the pros and cons of target date funds. As noted, these funds do have a specific place in the world of saving for retirement, but may not be the best approach for everyone.

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.  And for younger (under age 50) clients, we assume that benefits are reduced significantly from today’s levels.  And so, for many reasons (not just this year’s 2% Social Security tax reduction), we’re cautious about the future impact of government income and spending on your retirement planning.

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 2% and put it in your IRA, your 401(k), or your taxable account, whichever makes sense for you; ask your advisor if you’re not sure.  Then, next year when taxes go up, you can see if you need to reduce your 2011 savings rate to help pay for the taxes.  Quite possibly, you’ll adjust to the lower spending again in 2012. 

If you can’t swing the 2% all at once, start at 1%. If you get a raise this year, increase your savings rate by another 1% once your raise goes into effect.

Practice now for that tax increase that’s coming next year!  You’ll know that you’re able to adjust your spending, and you’ll end up with more money in your savings account.  Make the best of this upcoming increase by using the advance notice to prepare.

And if you don’t have Illinois taxable income, start saving that 2% now, it’ll be gone in 2012!