Katie Brockman


Social Security beneficiaries could be in for a big surprise if this proposal passes.

As the number of coronavirus cases continues to soar, it’s becoming clear the first wave of the pandemic is still with us. The number of new daily infections across the U.S. surged past 66,000 in July, more than double the roughly 30,000 new cases per day the country experienced back in April.

For millions of Americans, a second stimulus check is needed now more than ever. Approximately four in 10 U.S. adults say another stimulus payment is necessary just to pay the bills, according to a poll from Money and Morning Consult, and 68% of retirees say a check would be either necessary or at least helpful in covering basic living expenses.

Congress is still negotiating the next coronavirus stimulus bill, but there are several proposals for what should be included. And there’s one proposal, in particular, that could be dangerous for Social Security recipients.

Tax cuts could be on the way

President Trump has announced that he would like to see payroll taxes reduced as part of the next coronavirus stimulus package, going so far as to say he won’t pass any relief bill that doesn’t include payroll tax cuts.

The president first suggested a payroll tax holiday, which would suspend payroll taxes through the end of the year. However, he has also indicated that he’d like to make tax cuts permanent, eliminating both employee and employer payroll taxes altogether.

The theory behind the tax cuts is that it will reduce workers’ financial hardship because they’ll be able to keep more of their paychecks. Not only does this measure not help unemployed Americans, but it could also harm current and future retirees collecting Social Security benefits.

Payroll tax cuts could have a disastrous effect on retirees

If payroll taxes are cut — either temporarily or permanently — it could threaten the future of Social Security benefits.

The Social Security Administration (SSA) relies almost exclusively on payroll taxes to fund benefits. However, the SSA has been experiencing a cash shortage for years, and the money coming in from payroll taxes isn’t enough on its own to continue paying out benefits in full.

To cover the deficit, the SSA has been tapping its two trust funds. Those funds are expected to last until 2034, according to the SSA Board of Trustees’ latest estimates, and once that money is gone, payroll taxes alone will only be enough to cover around 76% of projected benefits — meaning benefits could be slashed by roughly 25%.

If taxes are cut temporarily, that’s less money the SSA has right now to pay out in benefits. That means it will need to take more than expected from its trust funds, and those funds could be depleted before 2034. In other words, Social Security beneficiaries could see their monthly checks reduced sooner than anticipated.

Permanent tax cuts would be even more dangerous, because not only would the trust funds run dry sooner, but there would also be less money to pay out in benefits once the funds are depleted. If nothing changes, benefits could be cut by nearly 25%. A reduction in taxes could mean benefits will need to be cut by more than 25%, and if payroll taxes are eliminated entirely, benefits could potentially disappear.

Preparing for Social Security’s uncertain future

It can be tough to prepare for the future when nobody knows what will happen. There’s a good chance Congress could solve Social Security’s cash problems before 2034, but there’s also a chance retirees could see their benefits evaporate in the relatively near future.

One of the best ways to prepare is to ensure you won’t be too dependent on Social Security in retirement. Save as much as you can in your retirement fund so you’ll have a healthy nest egg to rely on in case Social Security benefits are reduced in the future. It’s also a good idea to build a strong emergency fund as you head into your senior years. Unexpected expenses will inevitably pop up, and an emergency fund can help you avoid withdrawing more than you should from your retirement account.

Finally, you may want to consider delaying claiming Social Security benefits. The longer you wait to claim (up to age 70), the more you’ll receive per month. If benefits are reduced down the road, starting out with bigger checks can make those cuts a little less painful.

Social Security is already on shaky ground, and payroll tax cuts would only exacerbate its current problems. While hopefully the SSA won’t have to resort to benefit cuts, it’s wise to be prepared for anything just in case.

Author: Katie Brockman

Source: Fool: 1 Reason the Next COVID-19 Stimulus Bill Could Hurt Social Security

You could be in for a nasty tax surprise.

Millions of Americans have been hit hard financially due to the coronavirus pandemic. Approximately 36.5 million U.S. adults have filed for unemployment benefits over the past two months, according to the Department of Labor, and if the virus isn’t contained soon, that number could continue to skyrocket.

Even with the help of unemployment benefits, however, many people are still struggling. To provide relief, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provided millions of Americans with stimulus checks and also allowed unemployed workers to collect an additional $600 per week in unemployment benefits.

While stimulus checks are tax-free and won’t count toward your income, unemployment benefits are a different story. If you’re receiving benefits now, there’s a good chance you could be hit with a hefty tax bill later.

How your unemployment benefits are taxed

Unemployment benefits have always been subject to federal taxes (and potentially state and local taxes, depending on where you live), but the additional $600 per week could result in a bigger tax bill.

The CARES Act was passed in late March, and it extends the $600 per week benefit boost through the end of July. That means if you collect this extra money each week for the four months it’s available, it will amount to nearly $10,000 in additional unemployment benefits. That’s a good chunk of change that can provide serious financial relief, but if you’re not prepared to pay taxes on that extra benefit money, your tax bill could take you by surprise.

Exactly how much you’ll pay in taxes on your benefits will depend on where you live. Some states, including Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, don’t have state income taxes, so you may get a tax break on your unemployment benefits. Other states, such as California and New Jersey, generally tax income but make an exception for unemployment benefits. To figure out whether you’ll owe state taxes on your benefits, check your state’s tax laws.

When it comes to how you want to pay these taxes, you have a few options. You can have the money withheld from each check, you could pay your taxes quarterly, or you can pay your entire tax bill when you file your tax return. There are advantages and disadvantages to each option, so consider each one carefully before you decide.

The best time to pay your taxes

If you’re worried about owing a lot of money in taxes, you can opt to have your taxes withheld from each check. That way, you won’t be slapped with a massive tax bill if you wait until you file your tax return to pay what you owe.

However, the downside to this approach is you won’t have as much spending money right now. If you’re trying to stretch every penny, it might be a better idea to hold off on paying taxes until your financial situation improves. You may need to make a bigger tax payment later, but you’ll also have more money to pay your bills right now.

The middle ground between these two options, then, is to pay your taxes quarterly. This approach is a bit more complicated, because you’ll need to estimate how much you’ll owe in taxes each quarter — which may prove difficult if you don’t know how long you’ll be collecting unemployment benefits. If you believe you’ll be able to find a new job relatively soon, you may choose to simply wait until you file your tax return to pay your unemployment taxes. But if you think you’ll be collecting unemployment benefits for the foreseeable future, paying estimated taxes can help you avoid a big tax bill while keeping more money in your pocket for day-to-day expenses.

The coronavirus pandemic has cost millions of Americans their jobs, and unemployment benefits are a lifeline for those struggling to make ends meet. Just be sure you’re prepared for the tax bill that will follow, so you’re not caught off guard by this expense.

Author: Katie Brockman

Source: Kitco: Collecting Unemployment Benefits Due to COVID-19? Prepare for a Hefty Tax Bill

The coronavirus pandemic has essentially brought the economy to a standstill, causing thousands of businesses to close their doors and resulting in millions of layoffs. The organizations that are fortunate enough to stay open have also faced challenges, many of them experiencing cash flow problems as more Americans are asked to stay home.

As a result of these budget strains, some organizations have opted to slash employee benefits, including 401(k) plans. While some companies have simply suspended employer-matching contributions, others have decided to terminate their plans altogether to save money. Here’s what to do if that happens to you.


COVID-19’s impact on 401(k) plans

The good news is that relatively few organizations are ditching their 401(k) plans entirely. Only around 1.3% of companies said they plan to terminate their 401(k) plan due to COVID-19, according to a recent survey from the Plan Sponsor Council of America. Approximately 16% are temporarily suspending matching contributions, and nearly 77% said they’re not planning on making any changes at all to their plans.

However, the not-so-good news is that workers may not be in the clear just yet. Small businesses, in particular, are at a higher risk of facing financial problems as a result of the coronavirus pandemic, so they may be more likely to have to make changes to their 401(k) plans if money gets tight.

Approximately 42% of small businesses might be at risk of eliminating their 401(k) plans due to COVID-19, according to a report from the American Society of Pension Professionals and Actuaries. That’s around 216,000 retirement plans that are at risk of termination, the report revealed.

If your 401(k) plan is terminated, or you’re concerned it might be in the future, you can still save for retirement. You have other options, and you shouldn’t need to put your retirement plans on hold if you lose your 401(k).

Saving for retirement without a 401(k)

You don’t need a 401(k) plan to save for retirement, and if you lose your plan through your employer, you have a couple of options: Roll your money into a traditional IRA or Roth IRA, or withdraw your cash.

The option to avoid is withdrawing money from your 401(k). When you withdraw your savings from your 401(k) before age 59-1/2, you’re typically faced with a 10% penalty and income taxes on the amount you withdraw. Under the CARES Act, the 10% penalty is temporarily waived, but you’ll still need to pay income taxes on your distribution, although you do have three years to pay these taxes, thanks to the new regulations. If you have a significant amount of cash in your 401(k), though, that can be a hefty tax bill.

In addition, by withdrawing your cash now, you’re taking away your money’s growth potential. Your retirement investments need as much time as possible to compound, and if you stick them in a checking or savings account, you’re essentially pressing pause on your retirement strategy.

To avoid withdrawing your savings, you can either roll your money over into a traditional IRA or a Roth IRA. Both are strong options, and they differ in one key aspect: Taxes. With a traditional IRA, you’ll get a tax deduction when you make the initial contribution, but you’ll have to pay income taxes on your withdrawals. With a Roth IRA, you’ll pay taxes now, but your distributions will be tax-free.

You can’t go wrong with either option, but right now might be a particularly good time to opt for a Roth IRA. You will need to pay income taxes on the amount you roll into your Roth account, but because the stock market has taken a tumble over the past few months, you probably don’t have as much in your 401(k) right now as you did a few months ago. That means if you convert to a Roth now, your tax bill will be smaller — and your retirement withdrawals will be tax-free. If you opt for a traditional IRA, you won’t pay any taxes right now, but you may face a higher tax bill in retirement when you start making withdrawals.

COVID-19 has turned the world upside down and affected nearly every aspect of our lives, and it’s also having an impact on 401(k) plans. However, even if your 401(k) is eliminated, you don’t have to let it derail your retirement. By rolling your money over into a new account, you can ensure your plans stay on track.

Author: Katie Brockman

Source: Fool: Employers Could Terminate Your 401(k) Plan Due to COVID-19. What to Do if It Happens.

If you’re doing these three things, there’s a good chance you’re financially on track for retirement.

Retiring rich is a dream many people share, but few are able to achieve. Close to half of baby boomers (45%) have no savings at all, according to a report from the Insured Retirement Institute, and of those who do, more than one-quarter have less than $100,000 squirreled away.

But if you’ve been working hard to prepare for the future, you may be one of the few who is able to retire with a healthy fund that will last. While everyone’s definition of “rich” differs, these three signs indicate you’re on track to enjoy retirement without worrying about running out of money.

1. You’ve been saving consistently for years

Because you’ll likely need to save bundles of cash for retirement, it takes decades of consistent work to build a healthy nest egg. The average worker estimates retirement will cost around $1.7 million, according to a survey from Charles Schwab, and around 1 in 10 survey respondents believe they’ll need at least $3 million to retire comfortably.

These numbers may be intimidating, but the earlier you begin saving, the easier it will be to achieve lofty goals. Say you want to save $1.5 million by age 67. If you started saving at 25, you’d need to save around $550 per month, assuming you’re earning a modest 7% annual rate of return. But wait until 40 to begin saving, and you’ll have to sock away roughly $1,700 per month to reach that goal, all other factors remaining the same.

Even if you’re off to a late start and don’t have 40 to 50 years to save for retirement, it’s never too late to begin. By starting now, you’ll give yourself the best chance to build a strong retirement fund.

2. You’ve set saving goals and have a plan to reach them

Without a goal, it’s tough to tell whether your savings are on track or not. Even if you do have a goal in mind, you need an action plan that will help you achieve it.

To set your savings goal, figure out how much you should aim to save by retirement age. A retirement calculator is helpful here, but make your inputs as accurate as possible — don’t just guess at how much you expect to spend each year or what age you plan to retire. While you can’t be 100% accurate, try to come up with as precise an estimate as possible.

Once you have a savings goal, consider how to reach it. Thinking about how many hundreds of thousands (or even millions) of dollars you need to save by retirement can be overwhelming, so try breaking it down into smaller goals.

Most retirement calculators will tell you how much you should save each month to reach your target, so start there. You may want to break it down even further into weekly or even daily goals. Saving a few dollars per day is much more manageable than saving an enormous amount by retirement age, and these smaller goals can help keep you on track.

3. You’ve considered how much (or how little) to rely on Social Security

Social Security benefits are an important factor in your retirement plan, but many retirees depend too heavily on them. For the average worker, monthly checks are designed to replace only about 40% of pre-retirement income. But around half of unmarried beneficiaries and close to one-quarter of married couples rely on their benefits for around 90% of their income in retirement.

Be honest with yourself about how much of your income will come from Social Security and how much you’ll need to save on your own. You can check your estimated benefit amount online by creating a my Social Security account. You can then see your future benefit amount based on your real earnings, which can give you an idea of how much you can expect to receive. This number is assuming you’ll start claiming benefits at your full retirement age. If you choose to file before then, your monthly checks will be reduced.

Once you have an idea of what you’ll be receiving in benefits, you can adjust your savings goals accordingly.

Saving for retirement isn’t easy, and retiring rich can be even more challenging. But putting in the extra work now to ensure you won’t struggle in retirement is worth it.

Author: Katie Brockman

Source: Fool: 3 Signs You’re Likely to Retire Rich

These sneaky mistakes can be difficult to spot, but they can do serious long-term damage.

One of the toughest aspects of retirement planning is that nobody has all the right answers. There’s not necessarily a correct answer as to exactly how much the average person should save, or what age is best to retire because it will depend greatly on your unique situation.

Even though there’s no single “right” way to save, there are a few wrong ways to prepare for the future.

Some retirement planning mistakes may seem harmless at first glance but can actually cause a significant amount of long-term damage. The good news, though, is that the sooner you catch these blunders, the easier they are to correct.

1. Forgetting about how taxes will affect your retirement income

If you’re investing in a tax-deferred retirement account — like a 401(k) or traditional IRA — you won’t pay taxes when you make the initial contributions, but you will owe income taxes when you start making withdrawals in retirement. And if you haven’t accounted for these taxes in your retirement plan, that could throw off your whole financial future.

Not accounting for taxes could lead you to withdraw more than you should from your retirement fund each year, which may result in running out of money sooner than you anticipated. And if you expect to spend more money annually in retirement than you do now, you may push yourself into a higher tax bracket and owe Uncle Sam an even bigger chunk of your savings.

In addition, you may have to pay taxes on your Social Security benefits too. Depending on where you live, you might owe taxes on your benefits at the state level. Additionally, you may also have to pay federal taxes on your monthly checks if your income reaches a certain level.

For unmarried individuals, you’ll pay taxes on up to 85% of your benefits if you’re earning more than $34,000 per year in combined income — which is half your annual benefit amount plus any other retirement income you have. Married couples can expect to pay taxes on up to 85% of their benefits if their combined income is more than $44,000 per year.

Between income taxes on your retirement account withdrawals and potential state and federal taxes on Social Security benefits, that’s a lot of retirement income you won’t be able to spend. And if you’re not prepared for those costs, you could be in for an expensive surprise.

2. Not considering how much you’re paying in retirement account fees
Whether you like it or not, you’re paying fees when you invest savings in your 401(k) or IRA. However, not understanding what you’re paying in fees can be incredibly costly, because paying even a fraction of a percentage more than you should amounts to tens of thousands of dollars over a lifetime.

The average 401(k) plan charges fees of around 1% of total assets under management, according to a study from the Center for American Progress. So if you have $100,000 in your retirement fund, 1% in fees amounts to $1,000 per year.

Over a lifetime, the average worker paying annual fees of 1% will end up paying more than $138,000 in fees alone, according to the study. But if that same worker were paying slightly higher annual fees of 1.3%, that number increases to more than $166,000 in fees over a lifetime.

To figure out what you’re paying in fees, dig through your plan’s statements to look for the expense ratio — which is the percentage of your funds devoted to fees. If you can’t find that number, talk to your plan administrator.

If you find that you’re paying higher-than-average fees, consider switching to a less expensive retirement account. But if you’re investing in a 401(k) that offers employer matching contributions, you should continue saving enough to earn the full match. Free money outweighs high fees, so it’s a good idea to allocate at least a little money there. After you’ve maxed out the match, you can consider investing the rest of your cash in an IRA with lower fees.

3. Choosing the wrong financial advisor

Not everyone needs a financial advisor, and some people can save a lot of money by handling their finances themselves. But if you don’t want to manage your money, or you have a complicated financial situation, it may be beneficial to work with a professional.

However, choosing the wrong person for the job can be costly. Not all advisors are created equal, and some of them receive commissions by selling certain products or investments — even if they know those investments aren’t in their clients’ best interests. That type of conflicted advice costs Americans $17 billion in lost potential earnings every year, according to a 2015 report released by the White House.

So how can you tell whether your advisor has your best interests at heart? First, look at their qualifications. The term “advisor” is broad and doesn’t necessarily mean a person is qualified since nearly any finance professional can call themselves an advisor.

Instead, look for those who are certified financial planners. CFPs are required to pass rigorous tests and are held to high standards of quality to maintain their CFP status, so they’re typically more qualified than the average advisor.

Second, ask any potential advisors how they’re paid. Commission-based advisors earn money based on what they sell to their clients, while fee-based advisors charge a flat hourly rate or take a percentage of the assets they’re managing for you. Commission-based advisors are generally less expensive, and some of them may be superbly qualified. But it’s important to ask lots of questions to make sure you can trust them to give you unbiased financial advice.

Ask questions and prepare well

Everyone prepares for retirement in slightly different ways, and that’s not a bad thing. But as you’re saving for the future, be sure to look out for these hidden obstacles that can potentially cost you thousands of dollars.

The better understanding you have about where all your money is going, the more prepared you’ll be going into retirement.

Author: Katie Brockman

Source: Fool: 3 Retirement Planning Blunders That May Cost You a Fortune

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