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Social Security 101: Surviving Insolvency

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Social Security 101: Surviving Insolvency

It has emerged from the battle of left and right wing parties that social security is under threat.

Speculated by many, the program may be unsustainable by the year 2034, which is 19 years from now.

How bad is the current state of social security?

William Baldwin, contributor from Forbes said:

“Social Security is doomed; it has more money going out in benefits than from what’s coming in with payroll taxes. The US Treasury is trying to cover costs by collecting income tax, printing money, and borrowing.”

Currently, $714 billion is going out in benefits and overheads, with payroll taxes only bringing in $646 billion.

This short of inflow is the predicted cash flow, taking the budget into account from 2010.

social security cash flow

Cash flow graph analysis:

This data shows the clear nosedive in funds, as it meets negative figures by 2015.

Social Security has been in the red for a year, and it’s bound to get messy for those who survive on benefits.

A trust fund was initially set up, leaving aside a $2.7 billion, but it has recently been discovered that the fund doesn’t exist.

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The consequence of social security going bust

A Social Security bust means a risk to the social security payouts, and everybody’s payouts will stop – as well as vital public services facing closure.

The short-term

Benefits won’t be axed immediately, but the insolvency does mean major overhauls will be made to the Social Security Administration – particularly in the areas of benefit eligibility and payroll taxes.

Many people have resorted to drawing benefits out early, with some as young as 62.

This is because the majority are afraid of Congress making cuts, or stopping payouts.

What happened to Social Security’s trust fund?

Unlike a standard trust fund where savings are used to finance capital assets (services, businesses, etc.), the Fed instead made investments into their bonds.

If we take an example:

A fish stall holder puts away $30 a week in savings, but when his fishermen stop catching fish, he then starts using emergency funds and replaces the value with a bit of paper which says IOU – retirement.

If you are using savings to patch up the profit loss, then it’s never good news in the long term.

Eventually, this way of thinking would ultimately blitz his business, especially if the money put aside is no longer there to help.

How about the income side of social security?

Theoretically, the bond interest and a portion of income tax collections should be creating the payouts.

The following is a graph showing the growing gap between outgoings and revenues:

P1.2-1

Also note:

There have been attempts to boost tax returns.

One example of this is the quantity of tax disclosure has gone up to 85%, from only used to being 50% in the good old days.

The population boom danger

The population boom certainly doesn’t help matters, especially with all the baby boomers now planning retirement.

The mass retirement is probably a foreseen issue as for the massive births during the baby boom years.

Let’s have a look at the population growth in the USA from 1961 – 1985:

P1.3

Graph Analysis

  • Not only is social security experiencing lower income, but also the after effects of the big baby boomer spike now all coming through to retirement.
  • There just doesn’t seem to be any hope, unless the agency undergoes drastic measures to change their methods of business, looking at the figures.
  • Future outlook:
  • If they do not do anything soon, then its predicted only 75% will receive their promised benefits and the trust will be thoroughly exhausted.
  • Ideas on ways that Congress could rebalance outflow and income:

The following would seem like a shrewd move by the government, however given the rate at which the population is growing they become absolutely imperative:

  • Make cuts to cost of living adjustment by limiting damage to those on higher income or a legislator could play around with the formula.
  • Raise payroll tax; a bigger contribution would potentially give a two-point boost on closing up revenue s
  • Put up the retirement age; now being 66, if it went up to 69 then this would cut benefits by 10%.
  • As Chris Christie proposition, if you reduce social security payments to retirement incomes above $80,000 (and completely stopping if over the $200,000 bracket), then less money would be wasted on those who don’t need it.
  • Raise income tax from 85% to 100% on the maximum fraction benefits.

 

Is Congress likely to take action?

The first five bullet points are most likely to be put into movement in a diluted combination, while overall it is unlikely that the rich will be the target.

What can you do?

Find out how much your social security benefits are worth.

There’s even an online calculator available, which will apply all the formulas you need.

It can calculate the following:

  • Your benefit streams of income.
  • Any discounted time off you take.
  • Your health and mortality.

What you should not do:

It would be a big mistake now to start claiming early, even those doing it now, could be making a big mistake by messing up their financial future.

What you can do:

Instead, focus on your career, as the benefit formula only counts 35 of your highest earning years – go 45 years and then quit at 62 (early retirement).

You do have the risk of payroll taxes going up, so that’s why it’s a good idea to start planning for early retirement.

You should consider going Roth IRA:

  • IRA stands for Individual Retirement Arrangement
  • This IRA is a type of retirement plan, subject to US law, which offers a tax deduction to savings under certain conditions.
  • It is significantly different to other plans, as the tax break comes from withdrawal rather than on the amount saved.
  • The advantages of a Roth IRA:
  • You can withdraw money which is a penalty and tax-free after five years but is subject to qualifying terms and conditions.
  • If you make the maximum $10,000 from earnings, then withdrawals can also qualify if the Roth IRA owner is using the savings to purchase the primary residence (also by the Roth IRA owner’s immediate family, descendants, and ancestors – if they haven’t brought a home in 24 months).
  • You can still make contributions to a Roth IRA, even if the holder has any other plans in place – like the 401(k) plan (do note that other retirement plans may not be tax deductible).
  • In the event of death for the retirement plan holder, then his/her spouse will inherit the Roth IRA trust, and will merge if they own a separate account.
  • They have higher limits to contribution (in comparison to standard IRAs); this is because the post-tax contribution is a larger equivalent to a bigger pre-tax contribution from any other IRA plans – the tax deduction will give you higher returns from your savings.
  • The majority of employer funds tend to be more similar to the standard IRA plans, rather than Roth. Ultimately, you’ll diversify tax risk and gain higher returns for your pension pot.
  • Large estates can also have taxes reduced.
  • However, there are some disadvantages to a Roth IRA:
  • You can’t use the funds as collateral towards any loans, financial leverage or any cash management tools used for investment.
  • Qualifying for a Roth will be determined by your income limit, whereas the standard IRAs do not have any income limits.
  • While withdrawals are subsidized in this unique plan, contributions to Roth are not subject to tax deductions – so is only beneficial for after retirement.
  • It doesn’t reduce the taxpayer’s adjusted gross income (AGI), in comparison to other retirement plans where AGI can be reduced (this can benefit for minimizing taxable income) – other perks that are missed are a disqualification for deductions and tax credits. Other lost subsidies include reducing student loans, child tax credit, and earned income credit.
  • The contribution set at the current taxpayer’s income tax rate – it’s the norm for the majority in retirement to see their income fall, which also downgrades the retiree’s tax bracket. The reduction of the bracket can certainly put some risk into your retirement investment (this may also be likely if Congress lower income tax rates before the retirement age). So the more traditional plan would otherwise benefit from providing immediate tax breaks.
  • If a taxpayer pays state income taxes, while also paying into a Roth IRA, then they’ll have to pay the state income tax towards the contributions in the same year. But if the taxpayer retires on a lower income tax rate (or on no income taxes), then the opportunity is lost to avoid paying state income taxes – an advantage offered by the traditional IRA pension plans.

Conclusion

There are always pros and cons for doing something, so whether you go the Roth IRA route or not will depend on your personal circumstance. However, forming a private pension plan and being less reliant on the state may be thanked by your future self – especially with social security facing much uncertainty.

There are many methods for taking control of your financial future, for example, downloading an online calculator like My Money Platform.

Not only can they accurately work out your retirement age and how much you can earn, but also increase saving contributions by scrutinizing your budget.

Taking control of your finances now will offer you a much brighter retirement, where you can enjoy life and spend more time with family and friends.

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Andrew Yang Wants You to Make Money Off Your Data by Making it Your Personal Property

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Andrew Yang, 2020 Democratic presidential candidate, plans to regulate the tech industry by prioritizing in giving people the right to own their personal data (“data as a property right”), thus allowing them to make money by sharing it with companies. Currently, companies entirely own users’ data – users do not have much control over it.

Yang said, “our data is now worth more than oil” and gave emphasis to the great amount of data people create and how companies make money over it. “By implementing measures to increase transparency in the data collection and monetization process, individuals can begin to reclaim ownership of what’s theirs,” he said.

He also cited a report saying that the collection and use of Americans’ personal data has become a $198 billion industry. Yang believes that people should have more control over their data, such as being able to see how their data is being used and having the freedom to opt out if they choose.

Yang added that we need politicians “who understand technology and a modern way to regulate it,” as reported by Engadget. “In order to regulate technology effectively, our government needs to understand it. It’s embarrassing to see the ignorance some members of Congress display when talking about technology, and anyone who watched Congress question Mark Zuckerberg is well aware of this,” said Yang.

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What Bitcoin’s Split Means for You

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The Bitcoin Spilt and What it Can Mean Short Term

Functionally speaking, the attraction to Bitcoin is that it’s virtually created and is limitless; 1s and 0s make up the crypto-currency and thus it has no end…that is unless buyers evaporate…

Bitcoin Cash launched this week is to be run side by side with Bitcoin. The good news is that if you had one Bitcoin before the split, you now have two. The bad news is that Bitcoin proper is worth about $2,700 a unit and Bitcoin Cash is around $600 but only if you sell now. So hold on…

It’s only been a day so the fact that traditional Bitcoin users are choosing to hold on makes sense. The spilt made you an extra $600, on paper at least. In the worst case scenario, Bitcoin Cash could be D.O.A and you still lost nothing, provided you don’t sell off the traditional Bitcoin at a loss.

Main Reason for the Split

https://thecapitalist.com/bitcoin-split/

 

Like Bitcoin, the Cash creators are hoping for the same critical mass. It was invented by supporters worried about the congestion in the main network with payments and higher processing fees. The Cash concept removes that and could allow overall maximized exposure for Bitcoin, in addition to easier use.

Technically speaking, it would be trivial to change that one megabyte limit to a higher value. But proposals to do so have faced opposition from traditionalists who argue the limit is actually an important feature of Bitcoin‘s design that protects the network’s democratic character. To participate in the network’s peer-to-peer process for clearing transactions, a computer needs a copy of every transaction ever made on the Bitcoin network, which adds up to gigabytes of data per month. Even still, there’s more collateral backing Bitcoin than most national currencies; in that consumers pay to own it.

They could have started over with an empty block chain; the crypto currency version of a clean slate. But if they’d done this the new software would likely have languished in obscurity. Instead, they chose to branch off from the existing Bitcoin block chain. Bitcoin Cash has the same transaction history prior to August 1, 2017, which means that anyone who owned ordinary Bitcoins before the switch owns an equal number of Bitcoin Cash units, secured by the same cryptographic keys, after the switch.

Basically, if you believe in owning Bitcoins at $2,700, stay. You probably have made your money. Bitcoin Cash, at $600 could be a great investment (and boon after the split) in that the technology could make the growth leap forward years ahead because of the Bitcoin brand.

At the end of the day, these guys are service providers. IF Bitcoin proper suffers at all, Bitcoin Cash could evaporate just like that! If you were not a beneficiary of the split, wait before you buy outright.

Check out what Bloomberg Technology had to say about the split

As crypto-currencies go, it’s already third behind Bitcoin proper and Ethereum. But don’t get hasty as Bitcoin Cash is roughly 24 hours old. Pessimism and optimism are in the eye of the beholder and one should always mind their wallet when the beholder is out to sell “the next big thing.”

 

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Your Guide to Retirement: FAQs About Bonds

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Your Guide to Retirement- FAQs About Bonds

Bonds are an important part of your retirement portfolio, and the closer you get to retirement, the more of them you should have. 

Nevertheless, beginning investors often have a number of questions about bonds. 

Here’s what you need to know.

If I Invest in a Bond, How Much Money Can I Make Off It?

That depends on the issuer and the bond’s maturity—that is, the length of time it lasts and pays you interest until the principal is returned to you.  Generally speaking, longer terms pay higher interest rates.

As far as issuers go, the less stable ones will generally offer a higher interest rate to you. 

This is to attract you as an investor, since you know there is a higher chance that this particular issuer will fail to make its bond payments. 

For the absolute safest bet, go with Treasury bills, which the United States government issues.

What Do the Returns Look Like Compared With Stock Returns?

p6.1

As you can see, stocks are the clear winner return-wise.

Why Then, are Bonds Considered Better for Retirement?

  • Bonds provide you with a stability that stocks cannot, so having at least some bonds in your portfolio cushions you against major stock losses.
  • Bonds provide regular income in the form of interest payments
  • Bonds are incredibly secure. U.S. Treasuries are second only to cash in liquidity and safety.
  • There are bonds which are non-taxable. While their yields tend to be lower, the lack of tax may cancel out this difference for individuals in higher tax brackets.

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How About the Risks?

Inflation poses a serious risk to bond holders. 

The cost of goods and services goes up over time—the payout from your bonds do not. 

Long-term bonds run a serious risk of not keeping up with inflation.

With all but the most stable bonds—U.S. treasuries—there is a risk that the issuer will default on its payments. 

This risk is particularly magnified with junk bonds, issued by borrowers with such a poor credit rating that it will be unsurprising if they fail to make payments to you at all.

Should you choose to sell your bond before its term is out, you should be aware that bond prices are subject to market pressures and rise and fall just as stock prices do.

p6.2

The above is a sample from Barclays Indices on the web, which gives information related to the latest movements in bond indices.

The price of bonds tends to have an inverse relationship to interest rates—when one goes up, the other goes down, and vice versa. 

If your bond has a very long term, and you wish to sell it early, there is a good chance it will not cost what it did when you bought it, which may or may not be a good thing for you.

I’ve heard of TIPS—What Are They?

  • TIPS stands for Treasury Inflation-Protected Securities
  • TIPS’ rate of interest is not as high as other Treasury bonds
  • However, the face value of TIPS is changed to keep up with the consumer price index.
  • Thus, inflation no longer poses a risk, as the face value and interest of your TIPS go up to match.

What Should I Put in my Retirement Portfolio?

You should diversify with bonds the same way you would diversify with stocks

A good spread would be amongst high-grade corporate bonds (avoid junk bonds) and Treasury bonds. 

If you are in a high tax bracket, you may also want to look into municipal bonds, as their interest is tax-free.

How Do I Buy Bonds?

You can choose to buy almost any kind of bond through a broker, same as stock, though the transaction costs may be a whole lot higher.

For TIPS or U.S. Treasuries, it’s better and cheaper to buy from the Feds, as no broker is necessary for this transaction. 

The federal government offers these at auction fairly regularly.

If you would like to look into the details, a good place to start is the TreasuryDirect Website, which among other things contains auction schedules like the example below:

p6.3

If you are a small investor, look into mutual funds for diversification purposes. 

Getting good diversification through individual bonds tends to cost $25,000 to $50,000, whereas bond funds will open you up to owning stakes in dozens of bonds for far less.

Which Should I Buy—Short-Term or Long-Term Bonds?

For a higher interest rate, go with longer-term bonds as opposed to shorter. 

An example is, the difference between 30-year Treasury bonds and five-year Treasury notes—the former pays at least a percentage point more in interest. 

The reason for this discrepancy is that the longer the life of the bond the greater the chance of erosion by inflation or interest rates.

For the majority of long-term investors, bonds that last from one to ten years are in a good sweet spot, as they have decent yields but less volatility than their longer or shorter-lived peers.

How Heavy Should My Portfolio Be In Bonds?

This depends on where you are in your life and career. 

As a younger, working individual, you should put more emphasis towards stocks for their higher returns. 

However, the older you get and the closer you are to retirement, the more you should move towards bonds for their stability and guaranteed income.

How Will My Bonds Be Taxed?

Some bonds generate taxable income. 

Corporate bonds, for instance, will always make taxable interest payments. 

Treasuries, however, only garner federal taxes while being exempt from local and state taxes.

Municipal funds are also free of federal taxes, and may be free of local and state taxes when bought in-state. 

Retirement accounts may also offer tax savings.

Conclusion

Bonds are an important tool to have in your retirement arsenal. 

They provide guaranteed income, and while they may not give as high a return as stocks, they are more stable. 

U.S. Treasuries are considered some of the safest investments that there are.

So, however far away from retirement you may be, it is a good idea to become more educated about bonds. 

The more you learn now, the more you will know what you are working with later.

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