Social Security Benefits.....

Social security benefits will rise up by a mere 1.5% in 2014 and in real dollars this translates to only $19 monthly.  Of all the expenses that seniors shoulder on a fixed income that $19 hardly begins to cover the disparity between needs and available funds. 

For those still in the planning and building stage of their retirement nest egg Congress’ recent inability to find common ground so that they can find resolutions to a growing list of issues is disheartening at best.  The assumed 70% of current benefits will certainly fall short of one’s needs.  To ensure there is enough funds to cover everyone receiving benefits suggested solutions range from a change in the retirement age to an increase in payroll contribution amounts.   At this stage there are plenty of suggestions being debated with no plausible chance of Congress implementing any of the suggestions any time soon.

While your social security benefits on their own are not enough to live on there are ways to increase actual amounts of your benefits by delaying the age at which you start receiving benefits.  Most people want to continue working as long as possible, especially those limited wealth. 

Options are to start claiming at age 62 but the penalty is a reduction of monthly benefits by about 25% less of what you would have received at your regular retirement age of 66 – 67 (age is determined by your year of birth).  Delaying until age 70 does, however, come with bonus of an additional amount which can be up to 8% being added to your benefits. 

There are no benefits to delaying Medicare – so at 65 remember to sign up.

For many years people spoke of the “three legged stool” as an ideal method of saving for retirement.  With current economic conditions we need to take a different approach.  Participation in your employer retirement sponsored plan is a must if offered even though very few employers offer pension any more.  Defined contribution plans are more popular now but these have a significantly lower benefit.  That along with an increase of your regular savings is also necessary.  You can also use your home – either by downsizing or selling it to avail more money for retirement.  Others opt for reverse mortgage as a way to raise fund during retirement.

Social Security Calculator

“Mental Accounting”

I am currently taking a course on “Behavioral Economics” and one of the topics we covered last week really left its mark on me.  I know the older generation (Generation X and prior) are a little more familiar with “Mental Accounting” than Generation Y and/or the Millennials.  

  

The topic left me wondering how everyone else out there is coping in today’s world insofar as making payments is concerned.  I would hazard a guess and say the Millennials are paperless and the Baby boomers still need the ritual of sitting down and writing out checks by hand and balancing their checkbooks while at it.  Generation X, however, we are all over the place for some of us have gone paperless and others are holding on to paper as if their very life depends on it.  They often say “if it worked for my parents it will surely continue to work for me”.  What is the driving force behind your choices – are you simply “old school” and refuse to change just on principle?

Do you belong to the school of thought that divides all your money into “jars”?  Each jar has a specific use and once the jar was empty so too is your ability to make any purchases for that assigned need.  This group does the mental accounting and will be more risk averse by default.

If we do not physically have to part with our money, by not counting what we need to pay out we tend to spend more easily – with less caution.  Counting money out makes one mentally aware of what you are parting with – swiping your credit/debit card does not have the same effect.  If the money in your purse or wallet runs out then you simply stop buying but very few people either keep tabs on the credit limit or acknowledge that they are actually borrowing money with each transaction.

Debit cards on the other hand offer you the ease of swipe without the borrowing but there is a price for the convenience.  Does anyone keep track of these costs?   In the end it all does adds up!

What camp are you in and why? 

Why do I need insurance?

Most us of find it painful to pay insurance premium because what you are purchasing is not tangible.  With the house or car we are constantly seeing and using the item so it makes it easy to relate to the making payments.

Insurance is all about risk management – transferring risk to a company that charges a fee for taking on the risk on your behalf.  It is about protection rather than accumulation.  There are many types of insurances and each is used to protect you or your property different ways.  Some are mandatory and while others it is left to the individual to seek and acquire the protection by transferring to company.  As such it is important to review your own vulnerabilities to see what you need to protect.  If however it is a matter of limited cash available to pay the necessary premiums then one needs to look having just the important coverage.

1.  Health insurance is the most important.  This is a hard one for people who visualize themselves as being healthy but unfortunately it is not all about being healthy today.  It is about not knowing what tomorrow holds and ensuring your ability to pay for your medical bills should something unexpected happen.  It is about not being faced with a huge hospital bill that can cause financial ruin.  Currently there is a lot of talk about the Affordable Health/Obama Care.  Since there is a lot of information concerning this I will trying discuss this in a separate post. Nothing political but only the maneuvering around the options of the exchanges and comparison with what your employers might be offering or not offering.

2.  Home owner’s insurance is mandatory for those that have a mortgage. And the requirement is pushed by the lenders.  Since this protects your most prized possession it is important even after you have paid off your mortgage to ensure you keep your asset protected (yes it is possible and many people do actually get to pay off their mortgages - you just have to commit and strategize accordingly to achieve this.  I covered buying what you need vs. what you want in an earlier blog and plays well into buying the house you can afford).

For those that rent it is also important to protect your property and sometimes these items can be quite costly to replace.  As such renter's insurance will go a long way towards the peace of mind that you can recover in case of thief or unforeseen disaster.

3.  Automobile Insurance is mandatory and usually at a basic level depending in our state requirements.  It always blows my mind how many people out there still go without auto insurance and the risks they consciously put on their financial well-being.  Most of us buy a car more out of necessity than pleasure.  We use it for transportation to and from work.  If you are involved in an accident and your car needs work to get it back on the road, you need to know that expense is catered for.  As well as you getting a rental while yours is in the shop.  Some types of auto insurance cover medical bills related to accidents as well legal costs should any arise.

4.  Life insurance has many uses.  For those that are married and have young children life insurance can be used to provide financial protection for your family should you die prematurely.  It can also meet funeral costs and cover some medical bills should there be need.  Term life is ideal for the early stages of family life and it is of course cheaper than permanent life insurance.  Permanent life insurance needs and uses can be spread throughout the cycles of life from income for your family to estate planning.  A thorough review of your needs and affordable premiums is of course extremely important.

The Ramifications of Voters' Short-Attention-Span

Latest polls have cockroaches more popular than Congress. My only problem with this is that the same people who voted them in are the same ones preferring cockroaches.

People are complaining of working without pay or not working at all.  

Isn't there a greater good in what Congress is trying to achieve?  Or do some feel that Congress has lost the plot altogether?

Or are we as individuals not willing to make necessary sacrifices?

Doesn't a good economy go on hand in hand with that higher standard of living we are all seeking?

What are your thoughts?  

So do we blame Congress or the short attention span of the voters? In a few weeks the polls will reflect them thinking something else is worse than cockroaches.

If in the end how we vote has such as such unfavorable ramifications on our daily lives and; our ability to feed and shelter our families why then do we approach elections as though its just another day and we do not invest more in elections.

Paying taxes - do's and don'ts on withholding

With the year coming to a close it is time to start reviewing one's finances.  Most middle income people will quickly say "that is something the wealthy people do, it is not for me".  Quite the contrary financial planning is necessary at all levels of income/wealth.  Whether you are looking at it from a wealth preservation point of view or from a wealth building point of view, planning is a necessity. 

If you are an employee and only have your Form W2 to report at tax time then the review of your Form W4 on record with your employer is necessary.  For those having more than one job it goes without saying it needs to be an across-the-board review.  Form W4 - Employee's Withholding Allowance Certificate is used to instruct our employers on how to handle our tax withholding on wages earned.

We all do not like paying taxes, as they say there is no avoiding death and taxes.  Some say "I do not want to pay Uncle Sam until I really have to", and then proceed to pay as little as possible during the year.  Needless to say most of these people end up paying interest and penalties for late payment of taxes due.  Ensuring how you that use your money efficiently toward fulfilling your financial goals is of paramount importance.  Paying avoidable interest and penalties is inefficient use of your hard earned money.

Below is a link to a calculator found Internal Revenue Service (IRS) website.  This will help you figure out how many exemptions you can claim.  If you are single then zero exemptions would be more advisable.  Just because the form does not limit your exemptions it does not mean you should pick as many as possible.  Whatever exemptions you select on W4 you need to remember you will need to match these same exemptions on your Individual Income Tax return at the time of filing.

http://www.irs.gov/Individuals/IRS-Withholding-Calculator

Form W4

Reviewing your expenses

Deciding what is a necessity on your list of expenses and what is  luxury requires one to be very honest with oneself.  There are the "needs" and then there are mere "wants".  Our needs are very basic: shelter, food and clothing.

Shelter

The size of the shelter can quickly move from being a "need" to being a "want".  How much house do you really need?  What will suffice to meet your basic shelter needs? Before the "Great Recession" many people bought more house than they could afford.  Some were able to refinance; others were able to take advantage of government programs to avoid foreclosure; and others could not avoid losing the homes.  It is always advisable to review mortgage or rent at every life changing event. For those renting always remember your rent should never be more 25% of your gross income.  Buying a home is a huge step - while beneficial it must be done after careful consideration and preparation.  The rate you qualify for your mortgage is equally as important as knowing if your home will meet you and your family's needs over a long period of time. 

http://www.bankrate.com/apps/mortgage-app/

Clothing

Same concept applies to clothing - yes you do not need to compete with Carrie Bradshaw of "Sex and the City" for Manolos.  Or for those of us who are little older - completing with Imelda Marcos.  There are ways to dress well without breaking the bank. One can definitely do with less clothing than what the average person has in their wardrobe. You do not need to take advantage of every sale or offer of a discount that is out there.  Do not go "window shopping" or if you do it as a past-time then do not have purse/wallet with you. Try and limited you spending on clothes to 4-8% of your income.  Again planning is important to curb excessive spending.

Food

Aim to spend between 15 - 25% on groceries.  Having a grocery list before you leave home will help to buy only what you need.  Try planning your meals ahead of time so that your grocery list contains things that you really need.  Another thing that I always find works for me is to shop for food on a full stomach.  

Since meat is expensive increasing fruits and vegetables is helpful in reducing the amount of money you spend on food monthly.  Using vacuum packaging before freezing or refrigeration will go a long way toward reducing spoilage thereby saving you money in the long run.  

Many of us like to eat out but most do not have a budget for this.  If you use your credit cards to pay, then try looking back three months to see how much you are spending.  Alternatively you can begin now and for the next two months monitor your spending on what you spend when you eat out.  

Budgeting - 101

To live within your means it is important that you create a realistic budget. A serious look at what your earnings are, as well as a review of your expenses.  You will need to initially categorize expenses into groups.

The expense group can be broken down into:

i) essentials (mortgage/rent, utilities, food, transportation/car note)

ii) non-essentials (entertainment)

Once you have done this it will be easier to see how flexible you can be.  It will allow  you to view more clearly which items you have the flexibility reduce.  The benefits of this reduction you can then use fund an emergency fund; increase your savings or make plans for a new financial goal.  

Sometimes it is not possible to cut expenses and in such cases a look at increase the income might be necessary.  Make sure you do not put yourself in a situation where your life becomes miserable.

It is always beneficial to have an idea of what your debt-to-income ratio is as it affects your credit score.

A debt ration of 36% of your monthly income is ideal.  You should consider a debt-to-income ration of 40% as being too high.

It is of utmost importance that you commit to debit repayments that you can comfortably pay without stressing you out.  Only count income that you are actually receiving on a regular basis - if you are still interviewing for a job that income should not be included.

Below is a link to a calculator found on Bankrate.com

http://www.bankrate.com/calculators/mortgages/ratio-debt-calculator.aspx

Edited 10/13/2013

How do you view your retirement assets and rainy day fund?

Many of us live for the moment - putting nothing away for retirement and worse still not having an emergency fund to help you weather the storm during those not so good days of the cycle of life.  

As a result of the "Great Recession" instead of adjusting one's standard of living to meet current level of income many of the "underemployed" and "unemployed" have been draining their 401(k) s and IRAs - all in an effort to maintain lifestyles at levels that are not sustainable.  Generally people find it difficult to face their predicament but denial is not a workable alternative either. 

For the "underemployed" it is understandable to either reduce the amount being deferred (put away) for retirement or alternatively you can freeze the contributions for a short while. The best way to avoid dipping into your retirement assets is to ensure you have an emergency fund to cover your expenses while you are not gainfully employed.

Ideally one needs between three and six months of living expenses set aside to fully fund your “emergency fund”.  That is not to say once you reach three or six months you stop - no it would be more conservative in today's world to work around six to nine months. Many have experienced longer and longer gaps between jobs and sometimes you might realize that you need to re-invent yourself to meet the requirements of the current job market.

Edited 10/11/2013