The Future of Social Security

The Future of Social Security

In 1935, Social Security (the Old-Age, Survivors and Disability Insurance program) was introduced through the Social Security Act. Since then, retirees have used this as a reliable source of income to supplement retirement savings. The retirement age in which full social security benefits are payable is currently between the ages of 65 and 67, depending on your year of birth, while those who have reached age 62 are eligible for partial benefits. While the program has changed significantly since it was introduced, its goal has always been to provide a more stable income outlook for those that are retired or affected by disability.

Baby Boomers

The generation of Americans born from 1946 to 1964 has historically been called Baby Boomers. This generation will have a tremendous impact on the economy, strategy for investments and the future of social security. Beginning on Jan. 1, 2011, and every day for the next 19 years, it is projected that 10,000 baby boomers will reach the age of 65. In addition to the sheer number of baby boomers, the increase in life expectancy over the past few decades has caused the projected benefit obligations of the social security system to substantially increase.


Revenue and Expenses

While Social Security is not a business, the same concepts apply. For the system to continue operating functionally, it must generate a sufficient amount of income to cover the benefits that are paid out. In 2010 and 2011, Social Security expenditures exceeded non-interest income for the first time since 1983. This is expected to continue for at least the next 75 years under current circumstances. Thus, to continue the ability to fully pay all scheduled benefits, congress will have to either increase the revenues generated by social security taxes, decrease projected expenses or both. To generate income for Social Security funding, Congress enacted the FICA tax. Until recently, the income has been greater than payments, generating a surplus. This surplus has then been held in a trust fund, earning interest income. Any future funding shortfalls will be drawn from this trust fund.

Each year, the Trustees of the Social Security trust fund report on the financial status of the program. In 2012, the actuarial deficits were made worse because of updated economic data and assumptions. The Trustees determined that legislative modifications will be necessary in order to avoid disruptive consequences for beneficiaries and taxpayers. The primary goal of the report was to warn lawmakers not only about the extent of the issue of long-term projected shortfalls, but also that changes should not be delayed. Any additional delay will only make the problem worse and will reduce options available to lawmakers. One of the biggest issues with the program is that growth in program expenses is forecast to be substantially larger than GDP growth due to the aging population of baby boomers. Additionally, social security will be strained by the increasing life expectancy of its participants and growing health care costs in excess of GDP, and Social Security costs as a percentage of GDP are projected to increase from 4.2 percent in 2007 to 6.4 percent in 2035. With projected future shortfalls, the trust fund is projected to run out in 2033 (three years earlier than in 2011). While this is alarming, FICA tax is still projected to cover roughly 75 percent of schedule benefits after the fund is depleted.


Changes to Social Security that would help solve future funding shortfalls (increasing income, decreasing expenses or both) are difficult, but necessary. Further complicating this issue is political matters. Neither political party would like to be seen as responsible for raising FICA taxes or extending the retirement age. However, changes to the system are necessary in order to extend the availability of fully funded benefits and therefore appear inevitable. While no material discussions are ongoing regarding changes to the system, the simplest change to help combat future shortfalls would likely be an increase in retirement age. The main reason for this is that changes have not been made to the Social Security retirement age since the early 1980s. Life expectancies have continually increased, rising above 78 years in 2011. Additional possible changes could include raising the FICA tax to higher levels, raising/eliminating the income limit for FICA taxes, introducing means testing and many more.

Effect on Financial Planning

The effect of the uncertain future of Social Security on financial and retirement planning is tremendous and should be taken into account by everyone, regardless of age. Based on the projections outlined by the Social Security Board of Trustees, there is a marked difference in the effect this uncertainty will have on different generations. For those already in retirement, while it is possible that benefits could be changed to reduce expenditures, it is highly unlikely that changes would be made for anyone already retired. With benefits still projected to be fully provided through 2033, any potential benefit shortfalls are relatively unlikely to affect individuals that are already retired. With a high likelihood that Social Security will be changed to solve funding shortfall problems, it is reasonable to rely on this income source for the rest of your life. 

Individuals near retirement have less certainty about the future of social security, as the projected future shortfall in the Social Security trust fund in 2033 will likely be within your planning time frame. The high likelihood that some Social Security regulations will change in the near future will make it extremely likely that this projection will change for the better. If you are near retirement, most of your investment decisions related to retirement have already been made. As a result, future changes in social security may have little impact on your retirement plan. However, it may be beneficial to analyze the potential scenario (however unlikely) that no changes are made and only 75 percent of projected income is realized from this source after 2033.

For people who are far from retirement, any future changes to the structure of social security will alter the projections for the viability of future payouts. This uncertainty means that a contingency plan to cover cash flow shortfalls should be in place, just in case Social Security benefits are reduced. It is important to remember that even if no changes are made and the Social Security trust fund is entirely depleted, 75 percent of benefits are still projected to be paid from ongoing taxes. Projecting cash flow under the assumption that only 75 percent of benefits are paid would be helpful to determine whether your savings will be enough, even in this scenario. An increased focus on saving personal funds would decrease the risk of not having enough resources to achieve retirement goals.

Take the first step toward achieving your goals.

Learn More: Long Term Care

Read about what Long Term Care really means and the projected costs that you may face when you get older.

Building Your Nest Egg: 401(k) Explained

Building Your Nest Egg: 401(k) Explained

When most of us think about retiring, it is easy to picture ourselves having a comfortable cash cushion to sit on, but we often experience uncertainty when trying to figure out how to inflate that cushion. Sorting through and understanding retirement options can be a confusing and daunting task. If you are planning for retirement and a 401(k) is available to you, it may be a beneficial option for you to explore. To help you better understand what a 401(k) can do for you, review the following essentials.

What is a 401(k)?

A 401(k) is a tax-deferred retirement plan that is commonly offered by employers as an added benefit to their employees. The name of the retirement plan, 401(k), derives from its section of the Internal Revenue Code, and has become one of the most commonly used employer-sponsored retirement programs.

Putting the Money In

There are multiple ways that a 401(k) can be funded:

Employee contributions

Employee select a tax – deferred dollar amount or percentage of their salary to be placed into their retirement fund.





Non-elective contributions

Employers contribute a specific dollar amount or percentage of the employee’s salary to the employee’s account.




Matching contributions

Employers contribute to the employee’s retirement fund based on a specific formula framed around how much the employee elects to contribute. For example, a common company-match program is 50 cents for every dollar contributed by the employee, up to 6 percent of the total salary deferment.

401(k) plans can be funded by any combination of these three options, though it should be noted that employee contributions of any kind are not required.

Here are additional basics to understand regarding the funding of your 401(k):

Vesting – Many companies establish a vesting schedule that allows employees to gain entitlement to employer contributions as their tenure with the company lengthens. Employees are always 100 hundred percent vested in their own contributions however, as those funds originally belonged to them to begin with.

Contribution limits -Employees are in control of how much they contribute to their 401(k), so long as they stay within the annual contribution limits that are set by the IRS. In 2018, employees under the age of 50 may contribute up to $18,500.

Catch-up contributions – Employees over the age of 50 have the ability to make additional contributions up to a specific limit. In 2018, employees over the age of 50 may contribute up to an additional $6,000.

Investing Your Funds

Once a 401(k) plan has been established, employees may choose where to invest their funds from a list of investment options. Employees may opt for allocation of different percentages to different investments, devote all of their funds to one investment or choose to decline on investing their funds altogether. Investing funds from one’s 401(k) is not risk-free, but it does offer the possibility of portfolio growth.

Taking the Money Out

Funds in your 401(k) account may be available to you should you wish to access them before you retire. However, if you desire to make a withdrawal from your 401(k) prior to retirement and are not in a state of financial hardship, you may be subject to a 10 percent tax penalty in addition to the regular income tax that is due at the time of withdrawal. Because of the negative impact an additional 10 percent would have on your funds, it is widely recommended to avoid withdrawing from your 401(k) unless you believe it is absolutely necessary. It should be noted, however, that there are certain exceptions to the additional 10 percent tax penalty.

It may be possible to use money from your 401(k) before retirement without the 10 percent tax penalty if you need it for sudden disability costs, avoiding eviction or foreclosure, buying your first house, or the expenses of higher education. However, withdrawing from that fund means withdrawing from your future financial stability because you are extracting potential portfolio growth. One way to be sure that the funds you take out are eventually refunded back into your retirement plan is to take out a loan from your 401(k), if this feature is an option in your employer’s 401(k) plan.

Taking a loan from your 401(k) is a lot like most other loans; you have a set amount of time to pay it back, you will be penalized if you don’t pay it back on time (the additional 10 percent tax penalty that comes from making an early withdrawal), and you will owe interest on the loan that is similar to the market rate of other loans. Whether or not a 401(k) loan or another type of loan is a better option varies by each individual scenario, as there are pros and cons to each type of loan. For example, a benefit of borrowing from your 401(k) rather than a different loan is that the interest you pay goes to you, so the interest you pay actually helps fund your future financial stability rather than becoming money that you will never see again. On the other hand, borrowing from your 401(k) plan could significantly reduce the potential growth of your portfolio, as the funds that would normally be invested are no longer in the account.

What is a Roth 401(k)?

The primary difference between the traditional 401(k) discussed above and the Roth 401(k) is that the taxation on the plans is reversed. In other words, funds that are contributed to a traditional 401(k) are not taxed at the time of contribution, but the funds are taxed at the time of withdrawal. Contributions to a Roth 401(k), on the other hand, are taxed with each contribution, but not at the time they are withdrawn. Because each contribution to a Roth 401(k) is already taxed, Roth 401(k) plans are not subject to required minimum distributions (RMDs) like traditional 401(k) plans are. RMDs are annual withdrawals that a tax-deferred plan participant must make once they reach age 70 1⁄2.

If a company offers both a traditional 401(k) and a Roth 401(k), an employee may choose to use either or both of them. Companies that offer both Roth and traditional contributions allow employees to elect what percent of each type of contribution is funded to their retirement plan.

Take the first step toward achieving your goals.

Learn More: Building Your Nest Egg: Traditional IRA vs. Roth IRA

Read about the differences between the IRA and Roth IRA saving programs.

Building Your Nest Egg: Retirement Income Strategies

Building Your Nest Egg: Retirement Income Strategies

 You spend most of your adult life saving for retirement, but have you ever thought about what you’ll do once it’s time to actually tap into those savings? Retirement income has traditionally relied on a combination of Social Security, pensions and personal savings, such as 401(k) accounts, IRAs or other investment vehicles. Now that many workers believe social security and pensions will no longer be available in retirement, strategies for creating income must change as well.

Sources of Income

Social Security: According to a 2012 report by the Social Security Administration, the most used form of retirement income in 2010 was social security, with 86 percent of people over 65 receiving payments. This same study found that 65 percent of retirees depend on social security for over half of their income. If you believe social security will still be around when you retire, you can see that it could play a large role in your income plan. And if you don’t believe you can rely on it, you have a large percentage of income to make up for when you retire.

Pension plans: Like social security, pensions area form of retirement income that many workers are no longer depending on. Pensions and other defined benefit plans are waning in popularity among employers, and many companies have already phased them out. You may have a better chance at pension income if you work for the military or government, but for many future retirees, a pension will not be part of their retirement income plan either.

Savings: The final piece of your income plan is your personal savings and investments, perhaps the only piece many future retirees will depend on. Investment accounts, real estate, bonds, CDs, dividends, high-interest savings accounts and anything else that appreciates can provide income in your golden years.


Your income strategy may combine two or three of the aforementioned income sources, or you may be relying solely on your personal savings. To develop an effective strategy, you’ll need to estimate how long you’ll be in retirement (what year you’ll retire and your life expectancy), the value of your savings (how much you’ve saved, how much you can save before you retire and how much it is expected to appreciate) and how much you need to live on.

Safe withdrawal rate: The 4 percent rule was established as a one-size-fits-all safe withdrawal rate. To follow this rule, retirees take 4 percent of their entire portfolio’s value in the first year of retirement to use as living expenses. This amount is then what they’d use annually throughout their retirement, adjusting only for inflation. Four percent is considered a safe withdrawal rate because it is not likely to deplete your savings before the end of your life. Many factors render this rule ineffective: excessive inflation, lifestyle changes, unexpected expenses, long lifespan and more. Additionally, 4 percent might not be enough for you to live on, or it might force you to live more frugally than necessary. Nevertheless, it is a good rule of thumb to keep in mind. Another strategy is to tie your withdrawals to your portfolio’s value, increasing when the market is up, and decreasing when it is down. This works well in theory, but only if you can afford to live on a smaller distribution in a bear market.

Annuities: For guaranteed, regular income throughout your retirement, consider purchasing an annuity, which you can think of as a cross between an investment account and an insurance plan. You purchase an annuity through an insurance company (which may also be an investment company in the case of variable annuities) who then professionally invests your money and uses the growth to provide you with a fixed or variable income stream. You can choose between different types of annuities to find one that fits your needs best, including the following:

• Fixed annuity: The most conservative type of annuity, these pay the same amount of money regardless of how the market performs. You won’t have to worry about a down market, but you also won’t reap the benefit of an upswing.

• Variable annuity: On the contrary, a variable annuity varies its payout with market trends. Your income correlates with market fluctuations, which is riskier but also has the capacity for better returns.

• Equity-indexed annuity: An attempt to combine features of fixed and variable annuities, the equity-indexed annuity guarantees a minimum return, but fluctuates with an equity index to provide higher payments in a good market. Returns won’t be as high as actual market returns, but they can be better than a fixed annuity. Here, you have the possibility of high returns without the risk of losing everything.

Other strategies: You can additionally live on income from part-time retirement jobs, rental income on owned real estate, royalties from past work, laddered CDs, stock dividends and more.


There is always the risk of unexpected expenses (especially health care costs) and not saving enough for retirement. But even if you do everything you can to mitigate these risks, you cannot have an entirely risk-free retirement. One of the biggest risks facing retirees today and in the future is increasing life expectancy. Many retirees save for a 30-year retirement and end up outliving their savings. Another risk is market volatility. You could lose more of your retirement savings than you can afford to if the market takes a downturn. Keeping safe, low-risk investments might seem like a good idea, but this actually puts you at risk of losing money to inflation. Inflation is another risk that is a real issue for those on a fixed income.

Income in retirement is never a sure thing. With possible social security decreases, the elimination of pension plans, a volatile economy and increasing health care costs, there is no way to guarantee a certain amount of income in retirement. The best way to approach the retirement income quandary is to create a realistic strategy that accounts for as much risk as possible while ensuring a comfortable lifestyle throughout your retirement.

Take the first step toward achieving your goals.

Learn More: Building Your Nest Egg: Qualified Retirement Accounts Chart

Read about which accounts are classified as retirement accounts and how you can get them started.

Building Your Nest Egg: Qualified Retirement Accounts Chart

Building Your Nest Egg: Qualified Retirement Accounts Chart

To make planning for retirement more appealing, the government developed qualified retirement accounts. 

These accounts (or plans) offer hefty benefits to employers and individuals who make an effort to map out a successful financial future.

Qualified Plans

The term “qualified” is often used to describe retirement accounts, but can cause confusion if not properly defined. Qualified accounts must meet the strict standards set by section 401(a) of the Internal Revenue Code and portions of the Employee Retirement Income Security Act (ERISA). Account management and distributions are monitored and firmly regulated. With the exception of IRAs, all qualified retirement accounts are offered through an employing business.

The hallmark of a qualified retirement account is its ability to defer or deduct certain taxes. Contributions made by an individual (or his or her employer) to a qualifying account are typically tax deductible. Contribution growth through investment is allowed to continue tax-deferred until the money is distributed during retirement. Distributions are taxed as normal income. (The exceptions to this rule are Roth accounts, which require individuals to pay income tax on contributions but have tax-exempt distributions.)

Individuals should not assume that non-qualified accounts are automatically worse than official “qualified accounts.” Qualified accounts are often only available through an employer and do not always accommodate for how some people would like to plan for retirement. Many forms of stock options and purchased annuity plans are quite popular despite not having any tax advantages.

Understanding the Chart

The chart of qualified retirement accounts listed below is a not meant to be complex or exhaustive. It reviews some of the most common accounts in use. Because the benefits of an account (particularly pensions) vary between individuals or employers, only the basic restrictions and tax attributes are covered here. Four categories help summarize each account as follows:

Qualification to Make Contributions Contains the restrictions or rules that affect an individual’s ability to participate in a plan. IRS and ERISA guidelines for creating or operating a plan (for employers and account custodians) are complex, lengthy and not meant to be addressed by this participant-focused chart.

Annual Contribution Limits Because of their beneficial tax status, the IRS must impose limits on contributions to qualified retirement accounts. These limitations are meant to prevent abuse of the system but are set high enough to accommodate a reasonable retirement for the majority of individuals.

Deductibility of Contributions Determines whether employer or participant can deduct contributions to the retirement plan from taxable income. If a plan features deductible contributions, it will be taxed during its retirement distributions.

Taxation of Distributions The kind of tax levied on the owner once retirement distributions have begun. Account distributions are usually taxed as regular income.

The following table is a partial list of retirement accounts that may be available to you:

Note: This chart will NOT display properly on a mobile device. You will need to use a computer or tablet to view the chart. 

Traditional IRA

Spousal IRA

Nondeductible IRA

Roth IRA

Qualifications to Make Contributions

Individual must have earned income and under age 701⁄2 at end of year.

Individual must be under age 701⁄2 at end of year. Contributions based on other spouse’s earned income.

Individual or spouse must have earned income and under age 701⁄2 at end of year.

Individual or spouse must have earned income. May be any age, including over 701⁄2.

Annual Contribution Limits

2018 – $5,500 Indexed for inflation, in $500 increments. Lesser of the above limits or owner’s taxable compensation. Annual total contribution limit between Roth IRA and Traditional IRA is $5,500 (2018). Additional catch-up contributions available for individuals age 50 and over.

2018 – $5,500 Indexed for inflation, in $500 increments. Lesser of the above limits, or total compensation, less your spouse’s IRA contribution and less any contributions for the year to a Roth IRA. Additional catch-up contributions available for individuals age 50 and over.

2018 – $5,500 Indexed for inflation, in $500 increments. Lesser of the above limits or owner’s taxable compensation. Annual total contribution limit between Roth IRA and Traditional IRA is $5,500 (2018). Additional catch-up contributions available for individuals age 50 and over.

2018 – $5,500 Indexed for inflation, in $500 increments. Lesser of the above limits, or total compensation, less your spouse’s IRA contribution and less any contributions for the year to a Roth IRA. Additional catch-up contributions available for individuals age 50 and over. Phase-out for contributions apply as follows:
Single, HOH: $120,000 – $135,000 MFJ: $189,000 – $199,000
MFS: $0 – $10,000

Deductibility of Contributions

Above-the-line deduction. If active participant in employer retirement plan, phase-out rules apply; phase-out reduction of deduction begins and ends: Single, HOH: $63,000 – $73,000

MFJ: $101,000 – $121,000
MFS: $0 – $10,000 Not covered under employer plan but filing joint return with a spouse who is covered under an employer’s plan. Phase-out begins and ends: MFJ: $189,000 – $199,000

Above-the-line deduction. Phase-outs apply if the couple’s AGI is between $189,000 and $199,000; and filing a joint return with a spouse who is covered under an employer’s plan.

Not deductible.

Not deductible.

Taxation of Distributions

All distributions are taxable.

All distributions are taxable.

Basis distribution non-taxable. Earnings portion is taxable.

Qualified distributions are non-taxable, including earnings.

The following table is a partial list of retirement accounts that may be available to you:


403(b) TSA

SEP – Employee

SEP-Self Employed

Qualification to Make Contributions

Cannot exclude employees who:

• Are 21 years old.

• Have completed one year of eligibility service (1,000 hours).

• Service eligibility may be 2 years where plan provides for 100% vesting at start of participation.

Employee of a tax-exempt religious, charitable or educational organization is eligible. Part-time employees who were hired to and do work less than 20 hours per week may be excluded from the plan.

Cannot exclude employees who:

• Are 21 years old.

• Are employed in 3 of last 5 plan years.

• Earn at least $550 in current year.

Anyone with self-employment income.

Annual Contribution Limits

Employee Elections or designated Roth contributions: 2018 – $18,500 Indexed for inflation in $500 increments. Total contributions to the plan cannot exceed 100% of compensation (limited to $275,000, adjusted to inflation) or $55,000, adjusted for inflation. Additional catch-up contributions available for individuals age 50 and over for either elective or designated Roth contributions.

Employee Elections or designated Roth contributions: 2018 – $18,500 Thereafter, indexed for inflation in $500 increments. Total contributions to the plan cannot exceed 100% of compensation (limited to $275,000, adjusted to inflation) or $55,000, adjusted for inflation. Additional catch-up contributions available for individuals age 50 and over for either elective or designated Roth contributions.

Employee can contribute up to $5,500 (2018) as an individual IRA contribution to the SEP account in addition to the employer’s SEP contribution. Employer may contribute 25% of first $275,000 of compensation up to a maximum of $55,000. Compensation limit of $275,000 adjusted for inflation in $5,000 increments Annual addition limit of $55,000 indexed for inflation in $1,000 increments.

20% of first $275,000 of trade or business income.

Deductibility of Contributions

Contributions made pre-tax. Designated Roth Employee contributions are made after-tax.

Contributions made pre-tax. Designated Roth Employee contributions are made after-tax.

Employer’s contributions are excluded from income. Contributions independent of employer deducted same as regular IRA; deduction may be reduced because covered by employer plan.

Limited to 20% of adjusted net self-employment earnings.

Taxation of Distributions

Distributions are taxable unless the distribution is from a designated Roth account.

Distributions are taxable unless the distribution is from a designated Roth account.

All distributions are taxable.

All distributions are taxable.

The following table is a partial list of retirement accounts that may be available to you:


Defined Benefit

Profit Sharing

Money Purchase

Qualification to Make Contributions

Employers with 100 or fewer employees and self-employed, who received $5,000 in compensation in the preceding year. Once qualified, can exclude employees who earned less than $5,000 in any two preceding years or expected to receive less than $5,000 in current year.

Cannot exclude employees who:

• Are 21 years old.

• Have completed one year of eligibility service (1,000 hours).

• Service eligibility may be 2 years where plan provides for 100% vesting at start of participation.

Cannot exclude employees who:

• Are 21 years old.

• Have completed one year of eligibility service (1,000 hours).

• Service eligibility may be 2 years where plan provides for 100% vesting at start of participation.

Cannot exclude employees who:

• Are 21 years old.

• Have completed one year of eligibility service (1,000 hours).

• Service eligibility may be 2 years where plan provides for 100% vesting at start of participation.

Annual Contribution Limits

Employee: 2018 – $12,500 Indexed for inflation in $500 increments. Employer: Required to make either a matching contribution of up to 3% of employee wages or a nonelective contribution of 2% of annual compensation for each eligible employee with proper notification. Additional catch-up contributions available for individuals age 50 and over.

Lesser of $220,000 (indexed for inflation) or 100% of average compensation during three highest consecutive earning years. Thereafter, indexed for inflation in $5,000 increments.

Contribution Limit per employee: 100% of compensation up to $55,000 (adjusted for inflation in $1,000 increments) Compensation limit: $275,000 (adjusted for inflation in $5,000 increments)

Contribution Limit per employee: 100% of compensation up to $55,000 (adjusted for inflation in $1,000 increments) Compensation limit: $275,000 (adjusted for inflation in $5,000 increments)

Deductibility of Contributions

Contributions are pre-tax.

Employee may be permitted to make nondeductible contributions.

Employee may be permitted to make nondeductible contributions.

Employee may be permitted to make nondeductible contributions.

Taxation of Distributions

All distributions are taxable.

All distributions, except Nondeductible contributions, are taxable.

All distributions, except Nondeductible contributions, are taxable.

All distributions, except Nondeductible contributions, are taxable.

Take the first step toward achieving your goals.

Learn More: A New Look at Annuities

Did you know you can design your own paycheck for life, without loads, fees, or commissions charged to you? While some annuities come with heavy charges, others can be tailored to fit your needs with a guaranteed return and no loss of principal. It's time to take a new look at annuities.



Life is full of unanswerable questions, like knowing exactly how much you’ll need to live comfortably during your retirement years. Though difficult to determine, the following article highlights some useful strategies and tools to help you get a step closer to a dollar amount you can feel confident about.

Retirement Age

The first step is determining your desired retirement age, keeping the following in mind: Medicare is available to you when you reach age 65, but you are eligible for early Social Security benefits at age 62. Those who retire at age 62 will receive Social Security benefits at a 30 percent reduction from the full amount that they would receive if they waited until their “full retirement age,” which ranges from age 65-67, depending on birth date. In general, the longer you wait to retire, the larger your Social Security benefits will be, up until age 70. If you have the desire, ability and health to work until age 70, your social security benefits will be significantly larger than if you chose retirement at age 62. Similarly, your company’s retirement plan may have specific early, normal and deferred retirement ages to be aware of.

You might have a specific age in mind, and plans for what you’d like to do when you do retire. That’s great, as long as you’ll have sufficient funds to live the life you envision. For those with a desire to travel, start their own business or spend more time on their favorite hobbies, they may want to retire earlier. Others may want to delay their retirement as long as possible because they enjoy their work. Similarly, some choose semi-retirement, taking a step back from their careers to help out on a part-time basis. Keep in mind, your goals and health may change as you get closer to retirement, so it’s important to adjust your planning accordingly.

Lifestyle Goals and Familial Responsibilities

Whether you plan to shave strokes off of your golf game, rack up the mileage on your personal odometer by traveling, or simply maintain your current lifestyle, your plan will alter the amount of money you will need. Similarly, it may be beneficial to take your family’s financial situation into account. By the time you retire, chances are your dependents will be off on their own, supporting themselves financially. However, it is not uncommon for retirees to want to help their children with mortgages on their homes or grandchildren with their college tuition. In other unfortunate situations, retirees may be in a position to continue to financially support disabled dependents. Each individual’s goals and obligations may vary, but taking them into account when planning for retirement is crucial.

Life Expectancy

Like planning for retirement, life expectancy is never certain. Life expectancy rates are only an estimate based on averages, but useful when planning for retirement. While it is positive news that life expectancy rates continue to rise, this may have a negative effect on your retirement funds – living up to or even past life expectancy may mean outliving your retirement funds. In addition, life expectancy rates continue to rise, so the average life expectancy age may be even higher by the time you retire than it is today. Take increasing life expectancy rates and personal and family health history into account when planning for retirement.

The Replacement Ratio Method

For those who wish to maintain their current standard of living, the replacement ratio method is often a useful strategy when drawing up your retirement blueprint. In general, this method suggests taking between 60 and 80 percent of the average of the assumed salary of the three years prior to retirement. The replacement ratio method is typically supported by the assumption of common changes in your financial routine and situation. For example, the fact that you will no longer be working also means that many employment-related expenses – such as the costs of commuting, parking, proper clothing and even food for work – will decrease when you retire. In addition, retirement brings important changes to your taxes, such as the halt in Social Security taxes, plus typical increases in medical expenses, and also typical decreases in debt, vehicle and homeownership expenses.


The Expense Method

The expense method focuses primarily on the typical increases and decreases of common expenses. For example, expenses that tend to increase or remain the same in retirement are utility bills, medical expenses, recreational activities, and house and vehicle maintenance. On the other hand, expenses that tend to decrease in retirement are mortgage payments, income and property taxes, transportation costs, debt repayments and household furnishings. The use of the expense method varies by an individual’s financial situation, goals and obligations. The expense method will require you to spend some time considering the many potential changes to your expense patterns upon retirement – but when it comes to feeling confident about your future financial security, every second is worth it.

Take the first step toward achieving your goals.

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A New Way to Look at Annuities

A New Way to Look at Annuities

Retirement is about trust. When we choose to give up our careers, we all trust that the money we’ve put away is enough to get us through the rest of our lives. We have faith that our investments will continue to do well.

Seeing the need for guaranteed income, insurance companies have devised an investment strategy to remove some of the risk to retirees. Annuity plans are investment contracts that promise a certain level of income for purchasers. When used as part of a retirement plan, annuities become something retirees can trust for an uncertain future.

How does it Work?

Insurance companies have created many types of annuity contracts, all designed to provide regular income for their owners. Though each type has its own complex details, the concept behind them is very simple. An investor hands over a large sum of money to an insurer. The insurer then professionally invests it and makes regular payments back to the investor over a given period of time. The additional money gained through the investment is used to benefit both the investor and the insurer.

Annuities have become popular with many diversified retirement portfolios because they are able to promise income. Even if a retiree’s investments drop and he or she loses all other assets, an annuity will always be there to provide some form of payment. Despite this guarantee, the rigidity of an annuity’s payment cycle makes it less than the ideal vehicle for the entirety of a retirement fund.

Different Types

There are two major factors used in determining the type of annuity available to a person: funding and return on investment. During the accumulation phase, annuities can be funded with the intention of either immediate or later use. Annuities used immediately are typically funded with a large lump sum payment. An annuity that will be used later is usually funded through smaller regular payments, much like an IRA or 401(k).

The other factor, return on investment, is much trickier to judge when choosing an annuity. Agreements on income are usually made by selecting one of three major types of investment return systems: fixed, variable and equity-indexed.

  1. Fixed annuity – These are annuities that earn a fixed rate of interest. No matter how good or bad the market is, the insurer will always pay out at the rate it has guaranteed.

  2. Variable annuity – The hallmark of variable annuities is the account value is largely swayed by the success of the investment option. The contract owner takes on the risk of market performance.

  3. Equity-indexed annuity (EIA) – A hybrid of fixed and variable annuities, EIAs, also known as fixed-index annuity, provide a minimum interest rate along with minimum payout guarantees. The insurer promises that this set growth will occur but also credits additional interest if the EIA index outperforms the minimum.

Your selection of one of the above types of annuities may influence the type of payouts available to you during the second phase of the annuity, which is the distribution phase. During the distribution phase, the owner typically has two choices for receiving distributions from the contract. One choice is to withdraw earnings and principal from an annuity contract in either a lump sum, or over a period of time through regular or irregular payments. A second choice is to annuitize the contract. Annuitizing a contract will generate a guaranteed income stream from the annuity as defined under the terms of the annuity contract. The contract might provide payments to be made on a periodic basis in either a fixed amount or a variable amount. Most annuity contracts provide that payments can be made over a lifetime, a specific term of years or a combination of both. The amount the contract owner will receive for each payment depends upon how much money is in the annuity, and the annuitant’s age and gender when the contract is annuitized.

Customizations and Exchanges

Though the major characteristics of annuities are described above, insurers have created a competitive market with dozens of specialized features that can be added to any given annuity plan. These features allow for investors to get exactly what they want but can also raise the cost of an annuity. Investors shopping for annuity plans must be careful to judge what they need and what is unnecessary.

In Section 1035 of the Internal Revenue Code, the IRS allows for an investor to exchange their annuity for a new one without incurring any income taxes. Though the option exists to let investors back out of a bad annuity plan, it should only be exercised in situations when a different annuity is obviously better. An exchange may not incur a tax penalty, but it could still be subject to fees and adjustments from the insurer.

Annuities and Investment Plans

Because of their rigidity, annuities are best used as a support to other retirement plans. Annuities can provide for skeleton costs, while a managed IRA fund can provide the flexible cash needed to travel or handle sudden expenses. Even if the market plummets or an accident drains other funds, depending upon the annuity selected, it can continue to provide a fixed or variable income stream.

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Long Term Care

Long Term Care

What is long-term care? Long-term care goes beyond medical care and nursing care to include all the assistance you could need if you ever have a chronic illness or disability that leaves you unable to care for yourself for an extended period of time. You can receive long-term care in a nursing home, assisted-living facility, or in your own home. Though older people use the most long-term care services, a young or middle-aged person who has been in an accident or suffered a debilitating illness can also need long-term care.

Are you likely to need long-term care? About 70% of people over age 65 will require some type of long-term care services during their lifetime. More than 40% will need care in a nursing home. Since there is a good chance that you might need long-term care services at some point, it is important to explore your options and plan ahead.

What does long-term care cost? Long-term care can be very expensive and the real amount you will spend depends on the level of services you need and the length of time you need care. In 2016, the average costs for one year in a nursing home were $82,125 for a semi-private room and $92,378 for a private room.

Who pays the bills? For the most part, the people who need the care pay the bills. Individuals and their families pay about one-third of all nursing home costs out-of-pocket. Generally, long-term care isn’t covered by the health insurance you may have either on your own or through your employer. What about the government? Generally, neither Medicare nor Medicaid cover long-term care. People over 65 and some younger people with disabilities have health coverage through the federal Medicare program. Medicare pays only about 12 percent for short-term skilled nursing home care following hospitalization. Medicare also pays for some skilled at-home care, but only for short-term unstable medical conditions and not for the ongoing assistance that many elderly, ill, or injured people need. Medicaid – the federal program that provides health care coverage to lower-income Americans – pays almost half of all nursing home costs. Medicaid pays benefits either immediately, for people meeting federal poverty guidelines, or after nursing home residents exhaust their savings and become eligible. Turning to Medicaid once meant impoverishing the spouse who remained at home as well as the spouse confined to a nursing home. However, the law permits the at-home spouse to retain specified levels of assets and income.

What are the types of long-term care policies? Several types of policies are available. Most are known as “indemnity” or “expense incurred” policies. An indemnity or “per diem” policy pays up to a fixed benefit amount regardless of what you spend. With an expense-incurred policy, you choose the benefit amount when you buy the policy and you are reimbursed for actual expenses for services received up to a fixed dollar amount per day, week, or month. Today, many companies also offer “integrated policies” or policies with “pooled benefits.” This type of policy provides a total dollar amount that may be used for different types of long-term care services. There is usually a daily, weekly, or monthly dollar limit for your covered long-term care expenses.

What do long-term care insurance policies cover? Long-term care services are provided when a person cannot perform certain “activities of daily living” (ADLs), or is cognitively impaired because of dementia or Alzheimer’s disease. Most commonly the ADLs used to determine the need for services include bathing, dressing, transferring (getting from a bed to a chair), toileting, eating, and continence.

What is not covered? All policies contain limits and exclusions to keep premiums reasonable and affordable. These are likely to differ from policy to policy. Before you buy, be sure you understand exactly what is and is not covered under a particular policy.

*Note: Insurance policies are legal contracts. Read and compare the policies you are considering before you buy, and make sure you understand all of the provisions. Marketing or sales literature is no substitute for the actual policy. Read the policy itself before you buy.

Sources: A Guide to Long-Term Care Insurance Revised edition, America’s Health Insurance Plans. Genworth 2016 Cost of Care Survey, conducted by CareScout®, April 2016. Department of Health and Human Resources, National Clearinghouse for Long Term Care Information, for additional information see

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Learn More: Long Term Care: What it Could Cost

Read more about the real cost of Long Term Care.

How to Prep for College Financially: Other Funding Sources.

How to Prep for College Financially: Other Funding Sources.

Though rising costs of higher education don’t appear to be letting up any time soon, there are many options available that can make it more affordable – or even free.

Free Money

There are countless opportunities for scholarships and grants that will help pay for your higher education. It is often worth the time and energy to apply for grants and scholarships before loans since they are “free money,” and do not have to be paid back.


In most cases, grants are distributed by the government and other nonprofit organizations. Eligibility and amount is usually awarded according to their assessment of an applicant’s financial need. There are several well-known federal grants available to students:

Federal Pell Grant – Recipients and amounts of Pell Grants are determined by the applicant’s level of financial need, the cost of attendance and status as a full- or part-time student. Applicants are automatically considered for Pell Grants when they submit their Free Application for Federal Student Aid (FAFSA). For the 2016-2017 school year, the maximum Pell Grant award is $5,920. Pell Grants are distributed primarily to students who show the greatest financial need. For example, according to a 2011 study conducted by Fastweb LLC., 95 percent of Pell Grant recipients in the 2007-2008 academic year were at or below 250 percent of the poverty line (adjusted gross income of $53,000 for a household of four). Today, 250 percent of the poverty line for a household of four is $60,750.

Federal Supplemental Educational Opportunity Grant (FSEOG) – Eligibility and amounts for these grants are determined primarily by level of financial need. However, other factors in determining eligibility and grant amount include: the amount of other aid you receive, the amount of funds available at your school and how early you apply for the grant. Students are considered for an FSEOG after filling out a FAFSA, and may receive a grant between $100 and $4,000 per year.

Teacher Education Assistance for College and Higher Education (TEACH) Grant – The TEACH Grant is less common than other federal grants because it is specifically for students who intend to become teachers, and eligibility requirements are strict. Unlike other federal grants, students must meet a list of requirements in addition to demonstrating financial need to be eligible. Students must sign a “TEACH Grant Agreement to Serve,” in which they vow to teach in a high-need field at a school that serves low-income families for at least four years within the first eight years after graduating. Students must also complete TEACH Grant counseling each year, enroll in TEACH grant-eligible programs and maintain a specific academic performance. Those who meet the requirements and are eligible may receive up to $4,000 each year.


One distinction between grants and scholarships is that scholarships are typically awarded by merit, and grants are most often awarded by financial need. Scholarships are similar to grants in that they generally offer money that does not need to be repaid. Many scholarships are awarded for athletic or academic success. Others are given to members of a specific group or as prizes for contests, such as an essay competition. There are thousands of scholarship opportunities available to students, and many different places to find them. Potential resources include employers, high school guidance counselors and the Internet.

When searching for scholarships online, be careful to avoid websites that request money for results – the only thing you should be spending when searching and applying for scholarships is time. Both and are useful scholarships resources. The College Board offers a free scholarship finder tool that allows the user to enter requested information that exposes relevant scholarship opportunities. Access this useful tool at

Federal Student Loans

If you need additional funds to pay for college, the government has several student loans in place to help out. Federal loans typically have much lower interest rates and more flexible repayment options than private loans.

Direct Subsidized Loans – Depending on level of financial need and year in school, undergraduates may borrow $3,500 or more, depending on the year of school they are in. Once the loan is made, an upfront 1 percent loan fee is added to the total. Interest does not accrue until the student graduates or withdraws from college, and loan repayment begins six months after that.

Direct Unsubsidized Loans – Undergraduates may borrow a base amount of $5,500 or more, depending on year in school and level of financial need. If the amount you receive for your subsidized or unsubsidized loan – the type of loan you receive is determined by the U.S. Department of Education – does not exceed the anticipated cost of attendance that is determined by your school’s financial aid office, you may be eligible for an additional $2,000 per year in direct unsubsidized loans. Repayment begins six months after leaving school.

Direct PLUS Loans – PLUS loans are available to graduate students, professional degree students and parents of dependent undergraduate students, should they need additional funds. PLUS loans have a loan origination fee, and a fixed interest rate that begins immediately after disbursement of the loan and varies depending on the year disbursements occur. The loan amount is determined by subtracting your other financial aid from the expected cost of college as determined by your school’s financial aid office.

Federal Perkins Loans – Of all the federal loans available, Perkins loans are the most cost-efficient. Perkins loans don’t begin to accrue interest until the end of the six-month grace period. Once the grace period concludes, Perkins loans begin charging interest, fixed at only 5 percent. However, Perkins funds are limited, and only students who have the greatest financial need qualify for the loan.

To apply for federal grants and student loans, you must submit the Free Application for Federal Student Aid (FAFSA) form available at

Repayment Options for Federal Loans

Federal student loans offer repayment options that are more flexible than private loans. Unless requested otherwise, borrowers are placed on a standard, 10-year repayment plan that usually requires monthly payments of at least $50, depending on the total amount owed. Standard repayment is usually the cheapest long-term option because the loan balance is paid down faster. However, if you need a repayment plan with smaller monthly dues, a graduated repayment plan is also a 10- year plan in which the monthly amount due starts out low and increases every two years. Or the extended repayment plan, for example, allows borrowers to make payments for up to 25 years at lower monthly costs. Finally, you might be eligible for an income-based repayment (IBR) plan or income-contingent repayment (ICR) plan. While IBRs and ICRs do have minor differences, they are identical in that monthly dues are determined according to your adjusted gross income and household size. These plans typically take about 15-25 years to pay off.

Private Loans

Private student loans are comparable to most other loans. They are funded by banks and non-federal organizations, such as Sallie Mae, and the amount, eligibility, interest rates and other fees are often determined by your credit history. Interest rates for private student loans are almost always higher than federal student loans, but usually lower than credit cards.

Though private student loans are available to you, it is generally recommended that you consider private loans only after you’ve exhausted all of the other options listed above.

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How to Prep for College Financially: The Total Cost

How to Prep for College Financially: The Total Cost.

Pursuing a higher education is an expensive investment. Each year, millions of students spend thousands to further qualify themselves for their dream career. Tuition and room and board are likely the first expenses that come to mind when considering the costs of higher education, but there are a variety of expenses that are often overlooked when planning. To help you plan for the “hidden cost of college,” here are some expenses that most students – and parents – can expect.

Spending Before Attending

Though tuition and housing expenses are expected, don’t overlook expenses that begin well before college. This includes:

Standardized testing. Most colleges require applicants to submit their standardized ACT or SAT test results. While many are able to achieve satisfactory results on their first try, others require multiple attempts. This can add up, as a single test can cost from $25 to $75.

• Application fees. Depending on the school, it costs from $25 to $100 to submit an application. Application fees can add up fast for those who are considering multiple schools. Start by researching the schools that interest you, and narrow the list to limit the number of applications you submit.

• Campus visits. Once you have your options narrowed to a select few, you may want to visit the campus to get a first-hand feel. Just keep in mind that food, lodging, gasoline and parking add up, especially the farther you travel.

• The move. If you plan to live away from home, you can anticipate moving expenses. You may need to acquire certain furnishings or household items, or anticipate travel expenses if you are going to a school far from home. Don’t neglect to factor those into your planning.

Direct Costs

Once you’ve been accepted, you can begin planning for certain expenses as soon as you commit. It may be beneficial to begin your planning with the direct costs: the expenses paid directly to the college.

Tuition. Tuition is the amount of money that is charged by the institution for instruction. Many colleges charge a certain amount per credit and/or a flat rate per semester within a minimum and maximum credit limit. For example, an institution may charge $400 for each credit taken, and also offer a flat rate of $6,000 for semesters of 12 to 18 credits. If you planned on being on the lower end of credits in this example (12-14), paying by the credit would save you money. If you planned on being on the higher end of the credit limit in this example (16-18 credits), you would save money by paying the flat rate.

Fees. Fees are other mandatory charges that many institutions impose for certain situations. For example, it’s not uncommon to pay additional fees for science, art and music classes because extra resources may be necessary.

Room and board. Most colleges offer lodging and food plans. If you plan to live on campus, contact the university to discuss room and board charges to estimate these costs.

Indirect Costs

There are many other costs associated with college that are often overlooked. That can be dangerous, as The College Board estimates that the average student spends $4,000 per year on indirect costs. Here are some indirect expenses that many college students can expect:

Textbooks and school supplies. Don’t underestimate the cost of books and supplies. Though the prices of some textbooks can be shocking, they are often required for academic success. Remember, the costs of textbooks are still cheaper than the costs of failing a class.

Additional food. Though you may pay for food plans through your board fees, from time to time you’ll need to spend money out of your pocket for other food. Whether you like to keep food in your dorm or eat out on weekends, additional food is an indirect cost that you should prepare for.

Transportation. Driving a vehicle to campus may not seem expensive, but the costs of gasoline and parking can add up if making the trip multiple times per week. Opting to ride a bicycle or the city bus can save you money in the long run.

Laundry. Though most colleges have laundry facilities onsite, it usually costs extra. Though each use may not seem like much, it can add up quickly, so add it to your budget.

Printing and ink. Whether you use campus’ printers or bring your own, printing is an expense that is often overlooked, yet sometimes necessary for academic success. Chances are, you will have projects and papers that require printing, so you should plan for the cost accordingly.

Entertainment. Many students like to reward themselves with some fun for a job well done, so it is important to plan for these expenses, too.

The “Sticker Price”

Each college is required to have a forecast available to students that estimates the total cost of attendance. The total cost of attendance – often called the sticker price – includes estimates for tuition and fees, room and board, books and supplies, and transportation. Requesting this information from the institution is helpful in your planning. It is important to remember, however, that the total cost of attendance is an estimate, and not a set figure for you to plan on.

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How to Prep for College Financially: The Tax Advantages.

How to Prep for College Financially: The Tax Advantages.

Looking to take some of the sting out of the cost of higher education? Review the following information to ensure you are taking full advantage of all the education tax benefits available to you at tax time.

Education Deductions

Tax deductions are intended to reduce the amount of tax owed to the government by decreasing the amount of your taxable income. If you, your spouse or a dependent are enrolled in college, there are two potential deductions to keep in mind.

Tuition and fees deduction

This deduction may decrease the amount of your taxable income by up to $4,000 per student, per year. Though most are eligible for this deduction, there are general requirements to meet. If you pay the qualified education expenses – tuition and fees, room and board, books and supplies, etc. – of higher education for an eligible student (yourself, spouse or dependents), then you may claim the deduction if none of the following apply:

• You or anyone else claims an education credit for the same student with the same expenses (discussed later)

• Your filing status is married filing separately

• Someone else claims an exemption for you as a dependent on his or her tax return

• Your modified adjusted gross income (MAGI) is more than $80,000, or $160,000 if you are  filing a joint return

• You were a nonresident alien for part of the year but did not elect to be treated as a resident alien for tax purposes


Student loan interest deduction

Unlike most other loans, there is a special deduction allowed for interest paid on a student loan. If your MAGI is less than $75,000 (or $150,000 if married filing jointly), you can reduce your amount of taxable income by up to $2,500, depending on the amount of interest you paid on the loans throughout the year. The student loan interest deduction can be applied to any official student loan, not just federally backed loans. In fact, paid interest for credit cards that are exclusively used to pay for education expenses are also eligible for this deduction.


Receiving Credit for Taking Credits

Tax credits are another way to reduce income tax, which includes the Lifetime Learning credit and American Opportunity credit. Those eligible for the Lifetime Learning credit may claim up to $2,000 per tax year, while those eligible for the American Opportunity Credit may claim up to $2,500. If you, your spouse or any dependents that you claim on your tax return is or was a student, it is likely you are eligible for either credit if none of the following apply:

• You or anyone else claims a different education credit or the tuition and fees deduction for the same student in the same year

• Your filing status is married filing separately

• Someone else claims you on his or her tax return

• You were a nonresident alien for part of the year and did not elect to be treated as a resident alien for tax purposes


Credit Check

Though the Lifetime Learning credit and American Opportunity credit are identical in terms of qualifications and disqualifications, there are important distinctions between them.

(All deductions, credits, and MAGI limit values are for the 2018 tax year.)

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