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Is Social Security 'Going Broke'?

Is Social Security 'Going Broke'?

Nov 2020

Social Security’s financial cliff is coming closer into view. Experts project that the fund that pays for government retirement benefits through FICA taxes will be depleted within the next 15 years.

The Trust Fund was set up to hold excess amounts of FICA taxes from when the Baby Boom generation dominated the workforce. But now that Boomers are retiring, the number of workers per Social Security beneficiary is dropping from 5.1 workers per beneficiary in 1960 to a projected 2.1 workers per beneficiary in 2040.

Taxes coming in are now less than benefits going out, and the shortage comes out of the Trust Fund. Once the Fund runs out, benefits would be paid through taxes from a decreasing pool of workers. Without any changes to the system, it’s likely that either taxes will rise or benefits will shrink sometime around 2035.

Possible Solutions

There are policy proposals that could potentially address these issues. The last major reform of Social Security was in 1983 during the Reagan administration. At that time, the retirement age was raised, taxes were imposed on up to half of a recipient’s Social Security payments and many people lost benefits they were receiving through Social Security Disability.

Many of the same proposed solutions are reappearing this time around: Increase the age that workers receive full retirement benefits, cut benefits and index lifetime benefits to account for longer lifespans (therefore reducing monthly payments). One recent proposal could fix the shortfalls while making room for some benefit increases: Currently, workers pay the FICA tax only on the first $132,900 of wages. Once they hit that threshold, they’d no longer pay FICA tax that year. Raising the threshold to wages over $400,000 could wipe out the projected deficits.

Even if the Trust Fund runs out, it’s highly unlikely Social Security would go away — although unpleasant changes might be necessary. But don’t panic: There are several non-legislative ways that this crisis might be avoided or mitigated. As Yogi Berra said, “It’s tough to make predictions, especially about the future.

Immigration is a complex and fraught issue in the current political environment with wide-reaching consequences — including an impact on Social Security. Many undocumented immigrants pay into the Social Security system but don’t receive benefits. In 2010, the government estimated it received a net surplus of $12 billion from undocumented immigrants. Legal immigrants can qualify for Social Security once they meet certain qualifications, including earning enough work credits. An influx of such workers could increase the pool of those paying into the system, boosting the ratio of workers to beneficiaries.

Workers staying in the workforce longer could similarly extend the length of time until the trust fund’s depletion. This could happen under a variety of circumstances. For example, the growing utilization of telework may allow some older workers to remain in the workforce longer and continue to contribute into the system. On a less-positive note, the inability of many workers to afford retirement could create the same net effect.

Plan, But Don’t Panic

Don’t wait for someone else to solve the Social Security dilemma. Create an online account and get your Social Security benefits estimate. Then make an appointment to speak with your financial adviser about how much you should realistically expect Social Security to contribute to your retirement and plan accordingly.

#socialsecurity #retirement #usa

Sources

https://www.ssa.gov/policy/docs/ssb/v66n4/v66n4p37.html

https://www.cnbc.com/2019/12/08/this-is-what-experts-really-want-to-see-happen-to-fix-social-security.html

https://www.ssa.gov/oact/NOTES/pdf_notes/note151.pdf

8 Things About 401(k)s Every Baby Boomer Should Know

8 Things About 401(k)s Every Baby Boomer Should Know

Nov 2020

For those considered baby boomers, retirement has now become reality with 10,000 people retiring daily. Unfortunately, research shows that 54 percent of older Americans do not have enough savings to fund their retirement.

If you’re on the pre-retirement end of this age group, it’s never too late to start setting money aside. Here are eight facts about 401(k)s that could help you prepare for your golden years.

Retirement Is Expensive: Although it can vary from one person to the next, the current total cost of retirement is estimated at $738,400.

Social Security Won’t Be Enough: It depends on your income, but even someone earning $100,000 annually will only get $2,670.37 per month. This calculator can help you determine your projected earnings.

The Money Stays with You: The best thing about a 401(k) is that the money travels with you from one job to the next.

It’s Never Too Late: Even those who are over 50 can begin to set money aside in a 401(k). In addition to saving money, you should also look for ways to boost your income during your final working years.

You Can Catch Up: The new tax plan may change this, but those over 50 can make catch-up contributions to make up for lost time.

The Money Won’t Wait Forever: Halfway through your 70th year, you’ll be required to begin withdrawing money from your 401(k).

There Are Penalties for Early Withdrawal: Before retirement age, the money will need to stay in place unless you can roll it over to another type of account.

You Have Investment Options: You may not realize that you can choose where your money goes within your 401(k).

Good fiduciary risk management is about preparing for the future and simultaneously protecting your current finances. If you haven’t begun saving for retirement through a 401(k), it isn’t too late. Check with your employer on available options, talk to an advisor, and take advantage of any opportunities you can find to save.

Tags: social security, retirement

NFPR-2019-85 ACR#324835 09/19

When Does Collecting Social Security Early Make Sense?

When Does Collecting Social Security Early Make Sense?

Nov 2020

Full retirement age (FRA) for Social Security benefits is currently between 66 and 67, depending on when you were born. Benefits are determined based on your 35 highest years of earning on record with the Social Security Administration, but will be higher or lower depending on when you file. If you file at FRA, you’ll get your full monthly benefit.

For each year you delay past FRA, however, your benefit will be increased by 8% until the age of 70. The earliest you can currently file is age 62. For each month ahead of FRA you file, benefits are decreased by a certain percentage. If, for example, you elect to begin receiving benefits at 62 when your FRA is 67, your monthly payment will be approximately 30% lower. But despite this fact, 62 is the most common age to claim Social Security benefits — often because, unfortunately, people are just not in a position to wait.

Determining the timing of Social Security benefits is an important decision that can have lasting consequences. You want to make a choice that’s in your long-term best interest. In many cases, it’s advisable to wait to receive the larger benefit, but everyone’s circumstances are different so it’s a good idea to have a discussion with a qualified financial advisor when determining what’s best for you. But here are some factors in favor of electing to receive benefits early.

You’re currently in or anticipate poor health. If you have a progressive health condition or a family history that makes early health complications more likely, then you may want to consider taking benefits early — while you’re still well enough to take advantage of your retirement years.

You’re unable to continue working and need the money. Job loss and/or disability can sometimes make it unfeasible to wait until full retirement age. If your employer-provided or private disability insurance along with other resources can’t cover your basic needs, then you may have no other option but to collect early.

Your spouse can take benefits later. This approach might let you access some Social Security income immediately, while allowing your spouse’s benefits to continue to grow. You should probably run the numbers with a professional financial advisor, however, to make sure this strategy makes sense in your specific situation.

You have qualified dependents on your tax return. If this is the case, your dependents might qualify for benefits when you take your own. Again, this is another instance where it makes sense to have an expert help determine if this is in your best interest.

You can afford to. If you dislike your job and don’t need the additional funds provided by waiting until your full retirement age or beyond, then you may want to embark on this exciting time of life as early as possible.

Social Security is a central component to most retirees’ financial plan. It’s important to make a thoughtful and well-researched decision regarding how best to use this resource to finance your retirement.

Sources:

https://www.msn.com/en-us/money/realestate/why-do-so-many-people-claim-social-security-at-62/ar-BBTbXg1

2. https://www.investopedia.com/articles/financial-advisors/012216/filing-early-social-securitywhen-it-makes-sense.asp

tags: social security, retirement

Securities are offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services are offered through NFP Retirement, Inc., a subsidiary of NFP Corp. (NFP). Kestra IS is not affiliated with NFP Retirement Inc. or NFP.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.

Managing Investment Risks

Managing Investment Risks

Nov 2020

In my opinion, it is impossible to predict future stock market returns. Investment models can produce hypothetical returns but they can’t account for future events. So, in my opinion, investors who manage their investments based on market performance or what they perceive as opportunities for better returns have very little control over the outcome.

On the other hand, there may be market risk, interest rate risk, inflation risk and taxation risk. If your investment portfolio is not vulnerable to market risk it may be vulnerable to interest rate or inflation risk. In my opinion, over the long term, taxes may impede returns and portfolio performance. If it were possible to control the risks to your portfolio, then you could try to improve the long-term performance of your investments.

Understanding all Risks

Some investors understand the concept of risk and reward. The risk of loss associated with the stock market is called “market risk”.

In my opinion, the investors who were rattled from the steep declines in the market during the 2008 crash, and more recently in the August 2011 plunge, may have decided they have little tolerance left for market risk, and some of them may have moved their money to “less risky” investments. The problem for these investors is they have now left their portfolio vulnerable to other adverse risks. Effectively managing all of your risks entails allocating your investments along a mix of assets that can act as counter-weights to the various types of risk. * Inflation Risk There is going to be inflation. When there hasn’t been inflation, there could have been deflation or stagflation, which some would consider to more dangerous conditions for investments. When investors shift their assets to low yielding or fixed yield investments to avoid market risk, they may be exposing them to inflation risk.

Interest Rate Risk

We also know that interest rates may rise; and they could fall. Unlike changes in the direction of the stock market, changes in interest rates could come with some forewarning. For instance, when the economy slows down as it has these last few years, the Federal Reserve may lower interest rates to try to stimulate economic activity. Conversely, when the economy begins to overheat, the Feds may increase rates to try to contain inflation. Generally, when interest rates rise, the prices of debt securities decrease, and in a declining interest rate environment their prices will increase.

People who stash their money in fixed yield vehicles could also be vulnerable to interest rate changes.

Taxation Risk

At one time or another, the IRS will collect its share of your investment earnings. But, as imposing as the tax code is, it may allow investors to use means to minimize taxes. Deferring taxes, which can be done using qualified retirement plans and annuities, enables your earnings to compound unimpeded by taxes so they can accumulate more quickly; however, there is usually a tax consequence when you eventually access those funds. Understanding investment taxation, such as capital gains, loss carry forward, investment income, etc., may affect the longterm growth of your assets.

In my opinion, an effective way to manage and potentially minimize investment risks is through the broad diversification of assets under a long-term investment strategy. Investors should consider their long-term objectives and overall tolerance for risk when selecting investments.

* Diversification does not necessarily produce results.

Tags: risk management, investment risks

Securities may be offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services may be offered through NFP Retirement, Inc. Kestra IS is not affiliated with NFP Retirement Inc., a subsidiary of NFP.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.

NFP retirement, Kestra IS and Kestra AS do not provide tax or legal advice. For informational purposes only. Please consult with your tax or legal advisor regarding your personal situation.

NFPR-2019-88 ACR#324839 09/19

Understanding Investment Risk

Understanding Investment Risk

Nov 2020

All investors – be they conservative, moderate or aggressive – need to understand that the level of returns they expect to generate is directly related to the amount of risk they are willing to assume – the higher the return, the higher the amount of risk one needs to take. It probably doesn’t dawn on most people that, regardless of where you put your money, you assume some element of risk. For instance, if you focus solely on keeping your money safe from the possibility of loss, you risk not accumulating enough money to meet your goal. In this case, trying to avoid “market risk” increases your exposure to other types of risk, such as “inflation risk” or “longevity risk.”

Essentially, you need risk in order to generate the level of returns you will need to achieve financial independence. However, risks can be managed far more effectively than investment performance. You can’t predict the direction of the financial markets, or which mutual fund will outperform the others; however, you can manage risk and even have it work for you through proper asset allocation and portfolio diversification. While there is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio, by including a mix of assets and securities that act as counterweights to one another, a risk aware portfolio can potentially help returns wherever they might occur while reducing overall portfolio volatility.

Understanding the different types of risks and how they can individually and collectively impact your long-term investment performance is crucial to constructing a well-conceived portfolio that seeks to maximize your returns while reducing your overall risk.

Different Types of Investment Risk

Market Risk: The risk that most people associate with investing is market risk, the possibility of losing money due to the price fluctuations of the markets. Because it is difficult to know which way prices will move, investors can lose money if the market moves against them. However, losses are only realized if the investment is actually sold.

Inflation Risk: Many risk adverse investors and savers prefer the safety of savings accounts, CDs and government bonds. The risk they face is that the growth of their secured savings doesn’t keep pace with the rate of inflation which will, in effect, reduce the value of their money in the future.

Interest Rate Risk: The prices of interest-bearing securities, such as government and corporate bonds fluctuate in response to the movement of interest rates. As interest rates rise, the prices of these securities will decline. So, it is still possible to lose money. If the bonds are held to maturity, which can be as long as 20 or 30 years, the investor receives the full-face value of the bond.

Taxation Risk: With the possible exception of some tax-exempt bonds, all investments will trigger a tax consequence, either as a result of income earned or capital gains realized from the sale of an investment. Over a long period of time, taxes can adversely impact the return on investment. Additionally, tax laws do change, so if an investment was based on its tax treatment, it could change at some point in the future.

Liquidity Risk: Investors who are concerned with having immediate access to their money need to be aware of liquidity risk. The safest of investments, such as CDs, have some liquidity risk because if it is redeemed too early the investor could lose a part of his principal to early redemption fees. And, even though stocks and bonds can generally be liquidated at any time, investors may be reluctant to do so if they are in a loss position.

When investing, all possible risks should be evaluated against your overall tolerance for risk. The most effective way to manage risk is to invest with your specific goals in mind. Also, having a long-term investment horizon may allow your investments to work through the inevitable down and up cycles of any market.

Tags: risk management, risk, investments


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