3 New Retirement Rules You Need to Know

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Dear Rich Lifer,

Spend less than you earn. Never take a loan to invest. Don’t borrow more than you can repay.

If you stick to these simple money rules, you won’t ever be a slave to debt.

In retirement planning, there are rules of thumb that can help guide you away from financial ruin as well.

For instance, the 4% rule is great to avoid running out of money. But, a lot of basic retirement rules like these need a refresh.

If I’m being candid, there are too many Americans planning their financial futures with outdated advice and rules that no longer hold true today.

That’s why I thought it’d be a good idea today to share with you three new rules of retirement. These are new ways of looking at old problems that I think everyone should know.

Rule #1 – Forget About Your “Retirement Number.”

Only 39% of Americans have tried to figure out how much money they need to retire, according to FINRA.

I’m willing to bet the other 61% of Americans will do just as fine as the first group. Here’s why…

Too often we fixate on a single number — usually the amount of money we think we need saved to retire comfortably.

If you’re hoping to finance at least part of your retirement with savings, this is the wrong approach to take.

For most people, if you ask them what money means to them, they say things like “freedom,” “security,” and “having options.” Notice they didn’t say luxury cars and boats, beach villas, or expensive jewelry?

That’s because the number that matters most to you probably isn’t the number in your bank account. It’s the number of years of freedom those digits in your bank account buy.

If you frame retirement through this lens then your perception of wealth changes too.

For example, if someone is worth $1 million and lives a lifestyle that’s costing them $200,000 a year, this person likely only has five years of freedom and security to their name.

On the other hand, someone with a net worth of $200,000 who lives on $10,000 a year, plus Social Security, has 20 years of freedom banked. (Assuming their nest egg is invested and keeps pace with inflation and taxes.)

By our new definition, the second person is wealthier. You can think of wealth like a ratio: the money you have versus the money you need to live life on your terms for as long as you please.

Looking at wealth in time versus dollars is a powerful way of thinking about retirement.

Rule # 2 – Saving Beats Earning More.

If wealth is about time, and money buys freedom, then there are two ways you can become wealthier: make more money or spend the money you have more wisely.

Which one do you think is easier?

Going back to our example of someone with a net worth of $200,000. If that person were to spend $20,000 annually above Social Security payments, they’d have 10 years of financial wealth.

But if they could find simple ways to cut their annual expenses in half (a little over $800 per month), they’d double their financial wealth to 20 years.

Compare that scenario to someone who decides they want to keep their $20K-a-year lifestyle. Instead of cutting spending by $10,000 a year, they find ways to make an extra $10K each year.

The problem is you won’t get all that money after taxes. Even if you were willing to work an extra 10 years to maintain your current spending levels, you might bring home a total of $80,000 after taxes.

So, your net worth after 10 years would be $280,000. With a $20K-a-year spending rate, you have about 14 years of wealth.

What’s the better deal: Spend $10,000 less per year, and you immediately gain 10 years of wealth, or spend a decade making an extra $10,000 to gain about four years?

Surprisingly, living frugally actually has a better payback than taking on a side hustle.

But what about happiness?

If you think spending less will make you unhappy, it’s very unlikely. Research shows that we quickly get used to living on less, just as we quickly get used to living on more.

Plus, people tend to get more happiness out of experiences rather than buying stuff.

Most of the best memories you have probably cost very little. Taking your children and grandchildren out for ice cream, going on hikes, cooking dinner together.

Cutting costs is not rocket science either. I’ve shared several tips on how to save money by cutting cable, downsizing, selling your old junk…you name it.

I recommend starting by cutting one thing out of your budget for one or two months and see what that does to your happiness.

Rule # 3 – Delay Taking Social Security.

I touched on this on Monday, but it’s important enough that it bears repeating. There are a number of reasons why people choose to take Social Security as soon as they can rather than wait.

Sometimes it’s outside of their control, other times it’s because they don’t want to dip into their retirement savings.

If you’re taking benefits ASAP to protect your nest egg, you’re making a huge mistake. A better choice is to spend your savings today so you can delay taking Social Security.

When you follow this rule, you’re basically buying one of the best annuities around: one that’s guaranteed by the government, keeps pace with inflation and has a survivor benefit.

Plus, each month you wait to take Social Security, it gets better. Delaying payments from age 66 to 70 can raise your monthly benefit 32 percent, even before cost-of-living increases kick in.

While there are a lot of factors you need to consider, as a general rule of thumb, delaying Social Security is a solid strategy for most.

If you’re single, and in good health, wait.

If you’re the higher earner in a married couple, wait until 70 unless you and your spouse are in poor health.

If you’re the lower earner in a married couple, filing early is okay too, especially if one of you is in poor health.

Always run the numbers first to see what’s best given your circumstances.

These rules are meant to be guidelines not the gospel. Adopt the ones that fit your situation and discard the ones that don’t.

To a richer life,

Nilus Mattive

Nilus Mattive

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3 Moves You Need to Make BEFORE the Holiday Rush

This post 3 Moves You Need to Make BEFORE the Holiday Rush appeared first on Daily Reckoning.

Dear Rich Lifer,

We’re entering the busiest time of the holiday season, and I’m sure you have a lot going on.

But the reality is that, with the end of the year rapidly approaching, now is also the time to consider some last-minute moves that can substantially change your finances as well.

So before time runs out, I want to give you three of the best ones …

Tax Loss Harvesting

Although plenty of stocks have made big gains in 2019, others haven’t fared as well.

So if you have some open losses in your portfolio, you might consider selling them before year’s end so you can deduct the losses on Tax Day, 2020.

It works like this:

First

If you also booked gains this year, you’ll be able to offset them on a dollar-for-dollar basis with no limit.

Second

If you recorded more losses than gains — or no gains at all — you can use your losses to offset some ordinary income. The maximum amount is $3,000 ($1,500 if married filing separately) … but you can carry additional losses forward for future tax years.

Doing this before year-end is a no brainer if you have losing positions that you don’t think will ever come back.

You will not only get a tax break, but you can then take the proceeds from the sale and reinvest them in better long-term choices.

Of course, even if you have underwater positions that you would like to continue holding for the long-term, you STILL might consider selling them at a loss for the tax advantage.

Why? Because as long as you wait more than 30 calendar days before buying back those same positions, the loss will count on your tax form.

The IRS applies what is known as a “wash rule.”

What Qualifies as a Wash?

Basically, they will not recognize a loss if you’ve bought replacement stock within 30 calendar days before or after you sell your losing position.

However, if you wait 31 days, you’re fine and the loss counts.

Aren’t tax laws great?

The real risk is that the stock could rebound over those 30 days and you’d miss out. But I would consider taking the chance, it all depending on the position.

You might also consider another tactic during this season of giving …

Charitable Donations

If you happened to spot some unused items while you were digging out your holiday decorations, now is a great time to take them to your local charity.

And the same thing is true if there’s a particular cause you’d like to fund.

Reason: As long as you itemize, your charitable donations will also be deductible come April 15th.

Here’s some of the fine print straight from the IRS:

“To be deductible, charitable contributions must be made to qualified organizations. Payments to individuals are never deductible.

“If your contribution entitles you to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.

“For a contribution of cash, check, or other monetary gift (regardless of amount), you must maintain as a record of the contribution a bank record or a written communication from the qualified organization containing the name of the organization, the date of the contribution, and the amount of the contribution.

“In addition to deducting your cash contributions, you generally can deduct the fair market value of any other property you donate to qualified organizations.”

If you want even more details, go here. But suffice it to say that this is one of those rare tax items that helps you do well by doing good.

Last but not least, one last time…

Look at Your Retirement Accounts

Some accounts — such as IRAs — give you all the way until April 15th, 2020 to sock away money for 2019. But others must be established and/or funded by December 31st.

For example, if you have access to an employer’s 401(k) plan, your contributions have to be in before New Year’s Day.

So if you’ve been slacking, there should still be time for you to get something in there for this calendar year.

Doing so will provide you with more money for the future … the possibility of matched contributions from your employer … PLUS a nice tax break on your 2019 taxes.

Self-employed? Then DEFINITELY consider opening a Solo 401(k).

I’ve written about them before, but I never get tired of saying it: Opening one could allow you to sock away as much as $56,000 just in 2019 … or even $61,000 if you’re over 50!

But again, you have only until December 31st to establish a Solo 401(k) and elect to contribute any money that is to count as your “employee” part of the overall contribution (though the money itself can go in by April 15th).

One Last Thing

This is also the time to consider implementing any changes to existing accounts — for example, converting a traditional IRA to a Roth.

As with all the other moves I described today, personal circumstances will dictate a lot of what makes sense for you personally… and you may be best served by talking to a tax professional to get more information on all the ins and outs.

But my overall point is that — despite the holiday madness — this is also the best time of the year to make important decisions that will affect you well into 2020 and beyond.

To a richer life,

Nilus Mattive

Nilus Mattive

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What I Told My Dad About Social Security

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Dear Rich Lifer,

It’s been a few weeks since the Paradigm Shift Summit went down in New York, and I’ve already covered a few of the many ideas and concepts I shared at that awesome event.

But there’s one I haven’t yet touched on… and it started with a question from one of the audience members.

The Set Up

I had just finished outlining how several of my favorite Social Security strategies were no longer available because lawmakers had shut them down.

Indeed, I have strong reason to believe that these various “loopholes” were closed precisely because I (and a handful of other people) popularized them in articles and letters that went out to hundreds of thousands of retirees.

My own parents got in before it was too late and I estimate they’ll grab an extra $100,000 or two out of the system because they were able to act.

Based on the feedback I’ve received over the years, plenty of other readers benefited from that information as well.

Of course, that’s no consolation to anyone considering their options these days.

Which brings me to the audience member’s question…

The Shot

“Are there still any good Social Security tricks available now?”

The answer is yes.

And one of them is completely obvious though roughly 96% of Americans do not take advantage of it.

That trick is delaying benefits until age 70.

Why would I possibly recommend this? Especially since I spend a lot of time criticizing the Social Security program?

It’s simple: While I continue to believe that our national retirement system is riddled with problems, I am also a pragmatist.

This is why, in addition to recommending other tactics that are no longer available, I advised my own father to delay taking his Social Security benefits until age 70 if possible. (Which he did.)

See, I consider Social Security to be the best fixed immediate annuity currently available.

The Smoking Gun

Remember, annuities are basically life insurance policies in reverse.

In their simplest form, you pay money upfront and then start collecting monthly fixed payments for as long as you live.

Die early, and you “lose.” Live for a long time, and you may make more than you paid up front.

The same basic principle is at work when it comes to delaying your Social Security benefits.

If anything, Social Security differs from the typical private fixed annuity because it is based on a MUCH LESS AGGRESSIVE actuarial table.

And while I always get a lot of feedback on the issue of future inflation and the overall “time value” of the money you receive from Social Security, don’t forget that Social Security does contain an inflation adjustment — as flawed as that adjustment may be.

This is something that many private annuities DON’T have.

The Fallout

So here’s an example of how delaying your Social Security benefits might work in the real world:

Scenario #1. You are able to collect $12,000 a year from Social Security at age 65.

Scenario #2. You wait an extra year and start collecting $12,680.

Just for delaying 12 months, you will now earn an extra $680 annually for the rest of your life. And your “cost” for doing so was $12,000.

To arrive at your annual interest rate, or “return on investment,” you simply divide the $680 annual payment by the initial $12,000 you “spent.”

What you’ll come up with is an annual rate of 7.1%!

To be clear, I am merely saying that by forgoing $12,000 for that one year of benefits, you are now going to receive an extra $680 a year for every additional year you live.

Now I know there are a lot of “ifs” involved. So, yes, it’s a gamble. Just about every investment decision or insurance contract is.

And obviously, if you need the money to live on then just start taking your benefits as soon as you can.

But from a mathematical standpoint, it might make sense to delay collecting — especially given the fact that interest rates remain far lower than historical norms.

If you have “longevity genes” in your family, the idea only becomes more compelling.

And that’s just based on the simple analysis.

The Resolution

There are additional reasons to favor Social Security over a regular annuity.

First, if you worked during that extra year of delaying, it’s quite possible you would have FURTHER increased your future payments because your earnings record would have also gone up.

Second, these “annuity” payments currently get favorable tax treatment in many cases, and it’s entirely possible you would get further tax benefits by delaying that extra year.

Third, Social Security’s built-in survivor benefit might also make delaying for the additional income all the more attractive to couples.

That last point is especially critical because I also told my mother to begin collecting her benefits at an earlier point than my father.

In doing so, she started getting immediate income … but also retained the ability to step up to my father’s higher benefit if she ends up widowed at any point.

So if you’ve been thinking about purchasing an annuity and you haven’t yet filed for Social Security, take a little time to work out all the pros and cons of various strategies before you make a final decision.

To a richer life,

Nilus Mattive

Nilus Mattive

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President(?!) O’Rourke Will Take Your Guns

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Dear Rich Lifer

Last week, I explained why Elizabeth Warren’s plan for Social Security – while philosophically flawed – at least made more sense than Andrew Yang’s “freedom dividend” plan.

But let me tell you, Beto O’Rourke’s plan to forcibly buy back all the AR-15 and AK-47 rifles in the United States takes the cake as the most outrageous proposal we’ve heard from a Democratic candidate.

It doesn’t matter whether you’re pro-gun, anti-gun, or somewhere in between.

I’m highlighting this as another example of the way politicians will say anything to win the hearts and minds of various groups of Americans without any regard to facts or laws. (And yes, the same applies to Trump and most other elected officials as well.)

There are several huge problems with O’Rourke’s promise.

Let’s start with this whole idea of defining certain weapons as “assault rifles,” particularly the AR-15 currently sold to civilians in the United States.

What is an Assault Rifle Technically?

An Assault Rifle, like an AR-15 is a semi-automatic rifle, which means it fires one round for every time you pull the trigger.

So contrary to what a lot of people think, you can’t just hold the trigger down and have it keep shooting round after round like the fully automatic version U.S. soldiers use.

Meanwhile, it fires Remington .223 or 5.56 NATO ammunition, which is a far less powerful round than many others in common usage … including most common types used for deer hunting.

Really, the idea of an “assault rifle” is completely made up and mostly relates to appearance – black or olive drab green plastic parts – and relatively superficial features like folding stocks or mounting rails.

Many modern rifles – with plain-looking wooden stocks – fire the exact same types of ammunition, just as quickly, and in the same quantities as AR-15s. Indeed, they are functionally equivalent.

But let’s put that nerdy stuff aside.

There are much bigger legal and logistical hurdles to consider.

District of Columbia v. Heller

The President of the United States simply doesn’t have the authority to perform such an action without Congressional approval.

Getting that is a fairly big task in and of itself.

And even with Congressional approval, it’s very likely that such an action would be found unconstitutional based on past Supreme Court rulings such as District of Columbia v. Heller.

That case, dating back to 2008, determined that the Second Amendment grants individual U.S. citizens the right to keep and bear arms for lawful purposes – including self-defense inside their homes – without having to belong to any official militia.

The specific case was about D.C.’s handgun ban but the Heller ruling affirmed the idea that people have the right to own guns “in common use at the time.” With millions of AR-15s already in use by civilians, it’s hard to see how a wholesale and involuntary buyback of those guns would be deemed constitutional based on the Heller ruling.

Speaking of which, even if all the legal issues were put aside, how exactly would the government make such a thing happen anyway?

The Logistics are a Nightmare

There are somewhere between five and 20 million AR-15s alone in the U.S. though nobody really knows the exact number.

How come we don’t know? Because the Firearm Owners Protection Act of 1986 prohibits any type of federal gun registry linking specific guns with specific owners.

In other words, many AR-15s are not in any centralized computer database, and have changed hands without any official record of those transactions even in any individual state databases.

It doesn’t matter what you think about this personally. It’s a fact.

Neither O’Rourke nor anyone else in the government can ever know how many existing AR-15s need to be confiscated or the names of the people who own them.

By the way, how much would the government pay for each of those weapons as it bought them back? The typical AR-15 is currently worth $1,000 or more.

One also wonders how O’Rourke would handle noncompliance … because I’m pretty sure you would have a lot of AR-15 owners who are unwilling to hand over their guns.

As you can see, the list of potential issues with O’Rourke’s promise are absolutely massive and, in my mind, completely insurmountable.

So whether you support the idea or absolutely abhor it – you might as well forget about it. It’s simply not going to happen.

Indeed, it’s Americans who are somewhere in the middle of the gun debate that should be most concerned …

Because in his attempt to grab headlines, O’Rourke has only polarized people further, making it far more difficult for our country to have any type of reasonable dialog at all.

That’s the real lesson in all of this, and it’s an important one as we keep moving toward 2020 …

Whether they’re from long-shot candidates like O’Rourke or a sitting President, attention-seeking promises should always be countered with on-the-ground facts. Quickly.

And as someone with a soapbox, a level head, and a penchant for research, I’m happy to take on that responsibility whenever I see a good opportunity.

After all… bad information is one of the biggest blockades to living a rich life.

To a richer life,

Nilus Mattive

Nilus Mattive

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How to Avoid Shipwrecking Your Retirement

This post How to Avoid Shipwrecking Your Retirement appeared first on Daily Reckoning.

Nilus MattiveDear Rich Lifer,

You’ve worked incredibly hard in order to save up to retire. The road to retirement can be a difficult one that requires both social and financial sacrifices in order to save enough for a comfortable retirement. This is why it’s crucial  to avoid as many financial  mistakes that  could compromise the security of your retirement plan as you can.

Not to fear! I’ll highlight some of the common mistakes people make with their retirement funds so that you can avoid these slip ups.

 

  1. Not Having a Plan

 

According to the Retirement Confidence Survey from the Employee Benefits Research Institute, 48% of workers haven’t calculated how much money they need to save for retirement. If you don’t have a plan, you are setting yourself up for failure. In fact, Fortune magazine published a study which showed that people with written plans end up with an average of five times the amount of money at retirement as compared to those with no written plansThere is no “one size fits all” when it comes to a financial plan, but experts suggest you aim to have enough saved up to in your retirement account and income from other sources to equal 80% of your income at the time you retire..

 

  1. Taking Social Security Too Early

 

Although you can start collecting Social Security Payments at age 62, your monthly checks are reduced if you start collecting benefits so soon. This could mean your benefits are reduced by almost 30%! To claim your full benefits you must sign up for Social Security at your full retirement age, which varies based on date of birth. So, for a worker eligible for a $1,000 monthly Social Security benefit at his full retirement age, claiming at age 62 reduces their monthly payment to $750 if his birth year is 1954 and if they were  born in 1957 it brings the amount down to $725.

Of course, there can be reasons to start collecting social security early, such as health concerns or an issue with your work status, but if you have the choice, make sure you think long and hard about when the right time is to start your collection.

 

  1. Cashing Out Before You Retire

 

It’s very tempting to dip into a sizable retirement fund, but as much as you tell yourself you will pay yourself back, once that money is gone it is usually gone for good. It is also important to remember that you have to pay income tax on any money you withdraw from an IRA. You also can face a 10% early withdrawal penalty if you withdraw money before the age 59 ½. If you absolutely must take out funds from your 401(k), there is a loophole you can use to take money out with no penalty. You can take penalty-free 401(k) withdrawals beginning at age 55, if you leave the job associated with that 401(k) account at age 55 or later.

 

  1. Spending Too Much Too Soon

 

When most people retire they are still living active and healthy lives. This will most likely result in wanting to spend money on activities such as trips, vacation homes, or boats. However, always make sure you are keeping track of your spending. If you live into your 90s you will still need resources in order to take care of yourself for your whole life.

 

  1. Playing the Stock Market

 

This one may seem a bit counterintuitive, but hear me out. Most people automate their 401(k) savings and investments while they are actively working so they can focus on other things. However, once retired some retirees think they are smart enough to take on Wall Street and take control of their own financial fate. My advice here may seem harsh, but unless you have experience with the market, or have someone who does know what they are doing, most likely you are not smart enough to beat Wall Street at it’s own game. Ultimately it may be  a much better idea to stick to a low-cost diversified ETF or mutual fund. Either way, if you decide to play the stock market, make sure it is with funds you are comfortable losing. Never invest money you can’t afford to lose.

 

  1. Failing to Account for Inflation

 

Right now the government states that inflation is barely 2%; however, there is no way to tell if, or when, higher inflation will occur. Inflation is often an issue for retirees because pensions may not be adjusted for inflation. Further, many jobs fail to offer a traditional pension plan. In fact, Only 17 percent of private industry employees were offered a traditional pension plan in 2018, according to Bureau of Labor Statistics data.

Social Security payments are adjusted for inflation annually; for example, recipients will get 2.8 percent bigger checks in 2019. However, this often only accounts for the increase in Medicare costs. So make sure you should keep a portion of your savings invested in assets that increase with inflation, such as real estate, stocks or rental properties.

  1. Failing to Prepare for Medical Expenses

 

Many retirees have Medicare which covers most medical bills, alongside supplemental insurance. However, many forget that you must also be prepared to pay for deductibles, uncovered procedures and copays. These costs can add up over time. In addition, some health expenses, such as dental, eyeglasses, or hearing aids, are not covered by Medicare. Putting aside funds for health expenses that are likely to occur later in life will save you a lot of headache down the road for unexpected medical expenses..

Also remember, most people become  eligible for Medicare during the months around their 65th birthday. If you don’t sign up for Medicare during this initial enrollment period, you could be charged a late enrollment penalty for as long as you have Medicare.

 

  1. Not Spending Enough

 

This may seem odd, but it is possible to be too cautious when it comes to spending your retirement savings. Of course it’s great to leave your kids an inheritance, but there is no reason to scrimp and save if you have enough money in the bank. Don’t put yourself through  Unnecessary financial hardships that could be easily avoided by being realistic about your spending plan.

I hope that these tips will be helpful to you as you move forward with your retirement plan! I know it can seem like a daunting task, but with the right research, and planning, you can retire comfortably, and live out your golden years the way you always pictured them.

To a richer life,

Nilus Mattive

Nilus Mattive

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The Democratic Debate Dilemma

This post The Democratic Debate Dilemma appeared first on Daily Reckoning.

Right before last week’s Democratic debate, Elizabeth Warren revealed her plan to greatly expand Social Security.

And then, during opening remarks, Andrew Yang said he wanted to pay 10 Americans “freedom dividends” worth $1,000 a month as a way of demonstrating his larger plan to do the same thing for everyone in the country.

Now, both of these proposals are attempts to create larger social safety nets.

Both are also attempts to buy votes.

And both, in my opinion, miss the mark.

Let’s start with Elizabeth Warren.

The Headline Promise

Warren wants to pay all current and future Social Security recipients an extra $200 a month.

Promising seniors, the group of Americans who always vote come rain or shine, an extra $2,400 a year in Social Security benefits is a pretty good way to garner their support.

In addition, her plan:

  • Changes the measure of inflation used for Social Security adjustments to make it more tailored to what seniors experience
  • Provides Social Security credits to non-earning caregivers
  • Allows disabled widows and widowers to claim survivor benefits earlier
  • Creates special minimum benefit rules that would guarantee checks worth 125% of the federal poverty line
  • Finally, it allows public sector employees to avoid negative adjustments for various pension benefits

Warren would pay for all of these changes with two new taxes:

  1. A 14.8% combined payroll tax on all wages above $250,000
  1. A 14.8% net investment income tax for individual filers making $250,000+ and joint filers making $400,000+. (This is in addition to an existing 2.9% net investment income tax.)

For the vast majority of Americans, this tradeoff sounds pretty good – higher Social Security checks, a better safety net for some, and all the costs being paid by the highest 2% of earners.

Personally, the individual line items sound like a mixed bag to me.

But there are really two big objections to be considered here:

A Philosophical Shift

Social Security was never intended to be an overtly progressive program. So this proposal would represent a marked philosophical shift.

When Social Security was first instituted, it covered about half of the population. Many teachers, nurses, librarians, and other workers were excluded from coverage.

Today, Social Security covers virtually everyone and the average American is living to age 76. Other features like disability insurance have also been added to the equation as well.

To accommodate this widening gap of money coming in and money going out, the initial payroll tax rate of 2 percent — which was and still is split between employer and employee — has already risen to a combined 12.4 percent.

But the idea was always providing a basic retirement benefit for all Americans … funded by their own contributions over time … with well-defined parameters on the top end (both maximum benefits and maximum contributions).

Warren’s plan is substantially different in spirit.

It places a lot more financial burden on a lot less people at the top of the income scale.

Whether you agree with her assessment that those people should bear the cost is up to you. That brings us to the second objection.

The Math Is Against Her.

It’s quite likely that Warren’s math wouldn’t pencil out in reality.

According to an analysis by Mark Zandi of Moody’s Analytics, Warren’s proposal would pay for itself and extend Social Security’s solvency out another 19 years.

Of course, one of the big assumptions is that wealthier Americans will take zero action to avoid the new taxes that Warren is proposing.

Newsflash: They will take actions to avoid the new taxes that Warren is proposing.

I have no idea to what extent or how, obviously.

But it’s foolish to think that America’s richest citizens won’t reconfigure their businesses … shift income sources … go through various legal restructurings … or use many other tactics to minimize the impact of these new policies.

Therefore, we can’t take any analysis at face value.

What About Yang’s Plan?

For someone who touts his ability at math, Yang’s proposal looks pretty ridiculous once you dig a little deeper.

I really like Yang. He’s funny. He’s intelligent. He also seems fairly reasonable.

I also thought his “freedom dividend” idea was somewhat palatable – or at least more palatable than Warren’s Social Security plan – until I read the fine print.

Okay, so one of Yang’s biggest ideas is a universal basic income program for all Americans.

Here’s the explanation from his website:

“Andrew would implement the Freedom Dividend, a universal basic income of $1,000 a month, $12,000 a year, for every American adult over the age of 18. This is independent of one’s work status or any other factor. This would enable all Americans to pay their bills, educate themselves, start businesses, be more creative, stay healthy, relocate for work, spend time with their children, take care of loved ones, and have a real stake in the future.

“Other than regular increases to keep up the cost of living, any change to the Freedom Dividend would require a constitutional amendment.

“It will be illegal to lend or borrow against one’s Dividend.”

How would we pay for this?

This is the answer from Yang’s website:

“Andrew proposes funding the Freedom Dividend by consolidating some welfare programs and implementing a Value Added Tax of 10 percent. Current welfare and social program beneficiaries would be given a choice between their current benefits or $1,000 cash unconditionally – most would prefer cash with no restriction.

“A Value Added Tax (VAT) is a tax on the production of goods or services a business produces. It is a fair tax and it makes it much harder for large corporations, who are experts at hiding profits and income, to avoid paying their fair share. A VAT is nothing new. 160 out of 193 countries in the world already have a Value Added Tax or something similar, including all of Europe which has an average VAT of 20 percent.

“The means to pay for the basic income will come from four sources:

“1. Current spending: We currently spend between $500 and $600 billion a year on welfare programs, food stamps, disability and the like. This reduces the cost of the Freedom Dividend because people already receiving benefits would have a choice between keeping their current benefits and the $1,000, and would not receive both.

“Additionally, we currently spend over 1 trillion dollars on health care, incarceration, homelessness services and the like. We would save $100 – 200+ billion as people would be able to take better care of themselves and avoid the emergency room, jail, and the street and would generally be more functional. The Freedom Dividend would pay for itself by helping people avoid our institutions, which is when our costs shoot up. Some studies have shown that $1 to a poor parent will result in as much as $7 in cost-savings and economic growth.

“2. A VAT: Our economy is now incredibly vast at $19 trillion, up $4 trillion in the last 10 years alone. A VAT at half the European level would generate $800 billion in new revenue A VAT will become more and more important as technology improves because you cannot collect income tax from robots or software.

“3. New revenue: Putting money into the hands of American consumers would grow the economy. The Roosevelt Institute projected that the economy will grow by approximately $2.5 trillion and create 4.6 million new jobs. This would generate approximately $800 – 900 billion in new revenue from economic growth.

“4. Taxes on top earners and pollution: By removing the Social Security cap, implementing a financial transactions tax, and ending the favorable tax treatment for capital gains/carried interest, we can decrease financial speculation while also funding the Freedom Dividend. We can add to that a carbon fee that will be partially dedicated to funding the Freedom Dividend, making up the remaining balance required to cover the cost of this program.”

So, a little wordy but, here’s the thing.

I’m the last person who wants to support another tax. But I could have at least argued that a VAT affects people who spend money rather than people who earn money.

Moreover, if the proceeds were going to be redistributed to all Americans on an equal basis and regardless of their income or net worth, then “freedom dividends” are certainly a lot more fair than Warren’s proposal.

The real problem is that, based on Yang’s numbers, a 10% VAT would only produce $3,200 a year for every American adult. Which leaves about $8,800 unaccounted for.

I repeat: We would all pay an extra 10% on most of the purchases we make, and yet that would only cover a bit more than one-quarter of the income Yang wants to give back to us.

That’s why he’s also going to completely remove the cap on payroll taxes – a far worse blow to higher-earning Americans (particularly those earning between $140,000 and $250,000) than what Warren proposes.

There’s also another tax on financial transactions …

He would end a tax break on capital gains and carried interest …

Another tax – okay, a carbon fee – on some undefined people or entities …

Plus, all this nebulous stuff that essentially amounts to back-of-the-envelope guesswork. Streamlining existing welfare programs? Sure…

But the other claims of economic growth and institutional avoidance can’t be proven out until we’re years into the experiment.

So, math… Sure.

Heck, the very way Yang counts the things it will take to produce $12,000 a year for every adult American is a lot more than four sources.

At the end of the day, I don’t really like either of the two proposals we covered today.

But as much as I wanted to support Yang’s more than Warren’s, at least hers somewhat adds up.

To a richer life,

Nilus Mattive

Nilus Mattive

The post The Democratic Debate Dilemma appeared first on Daily Reckoning.

Could Retiring Later Make You Live Longer?

This post Could Retiring Later Make You Live Longer? appeared first on Daily Reckoning.

If you ask most people when they’d like to retire, they’ll tell you ‘yesterday.’

However, there’s an interesting argument to be made for delaying retirement just one more year.

According to the Employee Benefit Research Institute, the number of workers reporting that they expect to work past age 65 rose from 16 percent in 1991 to 48 percent last year.

It seems like more workers are getting the message that in order to boost their retirement security they need to work longer.

But boosting your retirement nest egg is not the only benefit to delaying retirement. In fact, I’ve got six reasons why putting off retirement just one more year is not such a bad idea.

Reason 1: You’ll Live Longer

It’s counterintuitive to think that working a stressful 9-5 job will increase your chances of living longer but that’s the truth.

The Center for Retirement Research found that delaying retirement reduced the five-year mortality rate for men in their early 60s by 32%.

Another study of half a million retired self-employed workers in France found that dementia was significantly less common among those who retired later than those who retired earlier.

Researchers hypothesize that the reason why early retirement has such negative effects on the brain is due to a decrease in mentally challenging tasks.

Reason 2: You’ll Save More

The longer you work, the more time you have to save for retirement. And, as you get older, the opportunity to set aside even more money increases.

Here’s how: If you’re under 50, your contribution limit to a 401(k) is $19,000 and $6,000 for an IRA this year. But, once you’re older than 50, you can add an extra $6,000 and $1,000 to your 401(k) and IRA contribution limits, respectively.

On top of that, the money you have saved and invested gets a chance to grow one more year without you touching it.

For example, if you have $500,000 in a retirement account today by delaying just one year, that $500,000 could grow to $535,000, assuming a 7% annual rate of return. And that’s not including any additional contributions you make to your retirement accounts during that time.

What can you do with an extra $35,000? That leads us to my next reason…

Reason 3: You’ll Have a Better Quality of Life

The reason why your quality of life will improve if you work just one more year is due to the fact that your retirement will be one year shorter.

If you estimate your yearly expenses in retirement to be $35,000, then delaying just one year lowers your required savings by that same amount. Couple that with an extra $35,000 from compound growth and you now have an extra $70,000 to spend how you please.

Reason 4: You’ll Have Bigger Social Security Checks

If you delay retirement, you boost your Social Security benefits in two ways.

First, it’s likely that you’re at the peak of your earning potential so because your Social Security check is based on the average monthly income during your 35 highest-earning years, delaying retirement could make up for the early years in your career where you earned less.

Second, depending on your age, you might be able to delay your Social Security benefits, which further increases your checks. Everyone can begin claiming as early as age 62, but you give up a significant amount versus if you waited until your full retirement age. How much exactly?

You’ll earn 124% more with a full retirement age of 67 and 132% for a full retirement age of 66. Plus, the longer you wait to claim benefits, the less of a burden you place on your personal savings later on.

Reason 5: You’ll Have Better Health Care

One more reason to delay retirement is company benefits, especially health insurance. Depending on the size of your company, your employer’s health insurance plan could be cheaper than Medicare and provide better coverage.

Here’s what you need to know: At 65, you qualify for Medicare Part A, which covers inpatient hospital services. Because Part A is free, there’s no reason why you shouldn’t enroll. At that point, you can also enroll in Medicare Part B (for doctor visits), Medicare supplemental coverage and Part D (for prescription drugs).

If your company has less than 20 employees, you need to sign up for Medicare as your primary insurance, even if your employer offers its own coverage. Failing to do so could mean you’re not covered at all. Talk to your Human Resources department to find out what’s best for you.

Reason 6: You’ll Make a Difference

A commonly cited reason for staying in the workforce is meaningful work. If there’s a project you’re working on that you enjoy, it might be fulfilling to stick around and see it through to the end. Capping off your career with a big project could be the perfect way to cruise into retirement.

Lastly, working one more year is not always going to be your call. Sometimes your boss has a different timeline for when he sees you retiring. Take what I said today with a grain of salt and decide what’s best for you and your family when the time comes to make the call .

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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6 HUGE Social Security Mistakes

This post 6 HUGE Social Security Mistakes appeared first on Daily Reckoning.

One of the biggest Social Security mistakes I see people make is claim their benefits too early.

According to the Center for Retirement Research at Boston College, 60% of seniors are applying for social security benefits before full retirement age.

If you turned 62 last year, your full retirement age will be 66 years and six months. Full retirement age will continue to increase in two-month increments each year until it reaches 67.

Even though you’re eligible to start claiming benefits at 62, it’s ill-advised. Monthly payments are reduced by 25-30% if you claim at 62, depending on your birth year.

In theory, claiming Social Security benefits should be straightforward — after working several decades, fill out an application and get a monthly benefit check for the rest of your life.

But, you and I know it’s not that easy. There are strategies to consider if you want to maximize your benefits, and there are several mistakes that could cost you thousands of dollars over the course of your retirement if you’re not careful.

Here are just a few mistakes I see people make that could easily be avoided.

Mistake #1 – Claiming Benefits Too Early

I already explained why this is not advised for most retirees. But if you already chose to claim benefits early and now are second-guessing your decision, there are some recourse steps you can take.

Specifically, you are allowed to withdraw your Social Security application and re-claim benefits at a later date, but two conditions apply.

First, you must withdraw your application within the first 12 months of receiving benefits. And second, you have to pay back every cent of benefits you’ve already received. Which can be a lot of money if you weren’t planning on withdrawing.

This is why you should be certain. There are some perfectly good reasons for claiming benefits before your full retirement age, but it’s important to weigh all your options before you make moves.

Mistake #2 – Not Understanding the “Earnings Test”

If you’re still working and haven’t yet reached full retirement age, your benefits can be withheld based on your earnings.

Here are the two “earnings test” rules for 2019:

  1. If you will reach full retirement age after 2019, $1 of your benefits will be withheld for every $2 you earn in excess of $17,640.
  2. If you will reach full retirement age during 2019, $1 of your benefits will be withheld for every $3 you earn in excess of $45,920. This is prorated monthly, and only the months before your birthday month are counted.

To be clear, benefits withheld under the earnings test aren’t necessarily lost. They can be returned in the form of increased benefits once you reach full retirement age.

People who think they can be fully employed and collect their Social Security benefits are often caught off guard when the Social Security office tells them they made too much money and have to repay some of the benefits.

Once you reach full retirement age, you can earn as much as you’d like with no reduction in benefits.

Mistake #3 – Assuming Social Security Is All the Retirement Income You Need

23% of married couples age 65 and older and 43% of unmarried seniors rely on Social Security for 90% or more of their income. Not only is this unsustainable, it’s not how Social Security was designed. The original intent was that Social Security would account for about half of your retirement income.

In reality, the average American can expect Social Security to replace about 40% of their income. The rest needs to come from other sources, like pensions and retirement savings.

Typically you’ll need 70% to 80% of your pre-retirement income to maintain your quality of life after retiring.

Mistake #4 – Not Checking Your Social Security Earnings Record

Do you check your Social Security statement each year? If not, now is a good time to create an account at www.ssa.gov and check it out.

Your Social Security statement has lots of valuable information, including your estimated retirement benefits, disability benefit eligibility, Medicare eligibility and benefits for your potential survivors.

But maybe the most important reason to check your statement every year is to ensure it’s correct. Recently, the SSA said there was about $71 billion in Social Security-taxed wages that couldn’t be matched to any earnings records, and only half of this was eventually resolved.

Because your future benefits are based on your earnings record, it’s important to make sure you keep tabs on this number.

Mistake #5 – Remarrying without Understanding the Consequences

If you’re collecting an ex-spousal Social Security benefit and you remarry, that benefit goes away. And if you remarry someone who is 10 or 20 years younger than you, you might not qualify for spousal Social Security benefits for awhile.

So make sure you understand how remarrying will impact your benefits. Also consider, if your ex-spouse passes away, you will step up to their full benefit amount — not the most pleasant thing to think about but important to consider.

Mistake #6 – Assuming Social Security is Tax Free

A surprising number of people I’ve talked to don’t realize they may have to pay income tax on their Social Security benefits. It depends on how much retirement income you have. But you don’t have to be considered “high income” to be taxed.

If your combined income is greater than $25,000 for single filers or $32,000 for married couples filing jointly, as much as 50% of your benefits could be taxable. If your combined income is greater than $34,000 (single) or $44,000 (joint), as much as 85% of your benefits could be subject to federal income tax.

It really depends on how significant a source Social Security will be for your retirement income. If you have a pension and significant 401(k) income, likely a portion of your Social Security benefits will be taxed.

If Social Security is your prime source of retirement income, you’re unlikely to be taxed. Consider this when estimating how much income you’ll need in retirement.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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The 7 Biggest Regrets for Retirees

This post The 7 Biggest Regrets for Retirees appeared first on Daily Reckoning.

More than half of retirees have retirement regrets.

And, as you can imagine the regrets range from “I wish I started saving earlier” to “I wish I traveled more when my health was good.”

But, the number one biggest regret most retirees have is claiming Social Security too early. As many as 57% of recent retirees chose to claim Social Security before their full retirement age, locking themselves into a lifetime of 25%-30% smaller Social Security payments.

The National Bureau of Economic Research also found that early Social Security claims are linked to increased likelihood of living in poverty in one’s old age.

Reasons vary for why someone might decide to claim Social Security early –  I get that stuff happens that’s outside your control –  but knowing what you know now, I hope you wait at least until you’re closer to age 70 before you start claiming benefits. The difference in payout even from age 68 to 70 is often as much as $1,000 per month.

What other retirement regrets should you watch out for? Here’s my list of the other 6 biggest regrets retirees have and how to sidestep them all:

1. “I Wish I Saved More”

Until you’re retired, it’s hard to estimate exactly how much money you’ll need. There will always be unexpected emergencies and events out of your control that eat into savings.

My rule of thumb is I’d rather have an excess than just enough to get by. So, I aggressively save so I won’t have to worry about not having enough when I retire. It used to be that retiring with $1 million in the bank was enough to fund a comfortable retirement, these days most people will tell you that’s not enough.

Inflation and rising healthcare costs alone drive up how much you need to save. Some estimates suggest retirees need at least $220,000 to cover medical expenses if they retire at age 65. Start saving now and if you’re late to the game, look for ways to maximize your investments based on your expected retirement date.

2. “I Wish I Quit Sooner”

This might come as a surprise, but a lot of retirees who leave the workforce later, regret it. Of course there are circumstances where it’s out of necessity, but if you don’t have to work until you’re 70, don’t do it.

According to the Schwartz Center for Economic Policy Analysis, older workers are often overlooked for promotions and on-the-job training, and begin to experience a decline in pay between the ages of 55 and 59 regardless of their education level.

Working longer is not always better. It’s also not a great retirement plan since anything can happen and you might not be able to work regardless of whether or not you want to.

3. “I Wish We Downsized Earlier”

Another big regret is downsizing. Most retirees wait until they’re in their 70s before they start getting rid of stuff and moving to a smaller home. However, a lot of retirees report that they wish they’d started when they were 50. And, they wish they hadn’t accumulated so much junk in the first place.

The sooner you can start downsizing and decluttering, the better. Adding a few thousand dollars to your monthly income might not seem like a lot, but it could free up the budget for travel and other hobbies that you’d want to take advantage earlier in retirement.

A word of caution: Another top regret was not having done enough thorough research before moving. So if you have plans of moving somewhere with a more favorable climate and with lower state taxes, make sure you do your research. Visit where you want to live several times before you take the plunge.

4. “I Wish I Traveled Sooner”

Traveling seems to be on most people’s retirement bucket list. However, most people get the timing wrong. Waiting until “the time is right” is not a good idea. The truth is your retirement goals can’t wait.

There are two times in retirement: when you are healthy and when you are not. Plan to travel in the first five years of retirement, then if you’re healthy enough to travel after that, consider yourself lucky.

5. “I Wish I Learned How To Relax”

When you’ve spent the last 40+ years working hard, climbing the career ladder, and operating in fast-paced environments, it can be hard to actually slow down. That’s why a lot of retirees feel like they have to fill their calendars so they don’t go crazy.

The problem is you’re not actually retiring. You’re simply swapping out work for other activities that require your commitment on a weekly basis.

Instead of constantly trying to fill your calendar with things to do, learn how to be comfortable enjoying the fruits of your labor. Sleep in, spend full days reading, go for long walks.

Retirement is meant to be relaxing and care free. You don’t have to become a couch potato, but also don’t feel like you have to keep yourself busy all the time.

6. “I Wish I Looked Into My Estate Sooner”

Estate planning is one of those tasks everyone procrastinates on. “It can wait until tomorrow.” The reality is you never know if tomorrow will come. So don’t leave the burden of not having your affairs in order by pushing your estate planning off to another day.

Creating a good estate plan is a gift to your beneficiaries because you’ll remove the headache of settling your estate faster and easier for them. Bottom line: get it done early.

And the last regret a lot of retirees have is not telling their family and friends that they love them.

Don’t wait until you’re on your deathbed or giving a eulogy to tell someone you love them. Tell them while they are still alive.

Your relationships become that much more important in retirement, make sure you cherish them.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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How to Retire Rich Without Social Security

This post How to Retire Rich Without Social Security appeared first on Daily Reckoning.

It’s no secret that our country’s Social Security program is running out of money.

The Social Security system is paying out in benefits more than it’s collecting in tax revenue and as a result they’re dipping into the Social Security trust fund to make up the difference.

If Congress takes no action to fix the problem, starting in 2034 retirees are going to see a 23% cut in social security payments.

Today, the average retiree receives about $1,300 per month from SS. If this massive cut happens, your SS cheque will drop to about $1,000. This will lead to an economic crisis worse than the 1930s depression.

Anyone in their twenties, thirties, heck, even forties might be thinking: “Gee, I feel bad for Dad or Grandpa, but you know it’s not my problem.”

Well the reality is it is your problem. Because Congress will find the money…and you know where they’ll find it? Tax increases on American workers.

What can you do?

The key is to start saving. You have to assume you’re not going to get much help from our government, you’re not going to get much help from your employer, and your financial future is all up to you. And that means you need to save more and save a lot.

The issue is we’re really not good at preparing for retirement. The vast majority of Americans are reaching retirement with around $150,000 saved in their 401(k) plans…for the whole rest of their life. That’s clearly not enough.

Here are some strategies that will allow you to retire rich without having to rely on social security:

Max Out Your 401(k) Match

You can’t rely on your employer to bail out your retirement but if they’re offering to help, then at least make the most of it.

In 2019, the IRS allows those up to age 50 to contribute $19,000 to a 401(k) plan or a similarly structured 403(b) or 457 plan. If you’re older than 50, you can contribute up to $25,000 in 2019.

Most workplaces offer employees the choice of using a traditional plan, which offers an immediate tax deduction or a Roth account, which eliminates a deduction on contributions in exchange for tax-free withdrawals in retirement.

The biggest perk to a 401(k) plan is a lot of employers will match a portion of your contributions. This can be set up in different ways, like a dollar-for-dollar match or a percentage match of contributions up to a certain amount. Take advantage of your employer’s match program, it’s an easy way to boost savings.

Build Your Own Pension Through Tax-Free Savings

Start saving early at the highest percentage you can even if you’ve been putting this off. But don’t let your savings get eaten up by taxes. Minimize what you owe the government by using IRAs, health savings accounts and your employer’s 401(k).

IRAs offer traditional and Roth options, so you can choose to receive tax savings now or in the future.

But contribution limits for IRAs are significantly lower than for 401(k) plans – $6,000 for workers up to age 50 and $7,000 for those 50 and older in 2019.

If you’re eligible for a high-deductible health insurance plan with single coverage, you can contribute $3,500 to an HSA in 2019. With family coverage, you’re looking at contributions up to $7,000.

When you contribute money to these accounts, your money is tax deductible, grows tax-free and can be used tax-free for qualified medical expenses. At age 65, withdrawals can be made from an HSA for any reason and only regular income taxes will apply.

Invest, Invest, Invest

You can’t just save money for retirement and expect it to grow. You need to invest properly. And I don’t mean just putting all your savings into the S&P 500 and hoping for the best.

Index funds that track the market are great, but shouldn’t be your only strategy. If you’re still several years away from retirement, you may want to put your savings in more aggressive growth funds to maximize potential returns.

And if you’re nearing retirement, you might take the opposite approach and diversify your savings into less risky investments. It all depends on your circumstances but leaving your money sit in a savings account earning half a percent is no good.

Find Other Guaranteed Sources of Income

Social Security gives you a steady monthly income, regardless of how the market performs. But an annuity can do the same.

If you’re looking for peace of mind, a variable annuity might be right for you. Payments are fixed though, so if you happen to die prematurely, any extra principal is pocketed by the insurer. But, annuities can be another source of guaranteed income to look into.

Claim What’s Yours, Early

There’s no telling what could happen to Social Security. While the full retirement age is 66, you can begin claiming benefits as young as 62. If you do claim early, you lock in a permanent 30% reduction in benefits.

But with the future of SS in question, it might not be such a bad move to claim as much as possible before the program runs out.

Still, I think it’s unlikely that Congress will let SS collapse by 2035. So it’s best to wait and maximize your SS benefits. If you’re married, you might be able to hedge your bets by having one person claim benefits early and let the other wait.

SS was never meant to replace 100% of your pay at retirement. It was designed to prevent people from going into poverty like in the great depression.

However even though it’s likely not going to disappear, save like it doesn’t exist and you’ll thank me later.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post How to Retire Rich Without Social Security appeared first on Daily Reckoning.