Social Security and Retirement Income: a Primer

Social Security Retirement Income: a Primer

Presented by Jared Daniel of Wealth Guardian Group

What role does Social Security play in your retirement income strategy?

As you near retirement, it's likely you'll have many questions about Social Security. How much will your retirement benefit be? When should you apply? Will earnings from a part-time job affect your benefit? Social Security has always been a major source of income for many retirees, but with fewer companies offering traditional pensions, Social Security is playing an even more important role in retirement income planning. Not only can Social Security help protect you against risks that retirees often face, including longevity risk (the risk of outliving your retirement income) and inflation risk (the risk that your income won't keep up with the rising cost of living), but it also offers built-in benefits for your family members and survivors.

When planning your retirement income strategy, you should be aware of three advantages that Social Security offers:

A steady stream of lifetime income

Social Security provides a steady source of retirement income that you can't outlive. Although you may not be able to rely on Social Security as the sole source of your retirement income, your benefit can serve as the foundation of your retirement income plan.

Annual inflation adjustments

Your Social Security benefit provides some protection against inflation risk. Your benefit is subject to automatic annual cost-of-living adjustments (COLAs) that will increase the amount you receive by a certain percentage each year to help offset the effects of inflation.

Benefits for eligible family members and survivors

After you retire, certain members of your family may also be eligible for benefits based on your Social Security record, which may increase your household income. They may receive continuing income from survivor's benefits upon your death as well. Eligible family members may include your spouse, your minor children, and your dependent parents. The amount they receive will depend on your earnings and other factors.

How much will you receive?

Your Social Security retirement benefit is based on the number of years you've been working and the amount you've earned. When you become entitled to retirement benefits, the Social Security Administration (SSA) calculates your primary insurance amount (PIA), upon which your retirement benefit will be based, using a formula that takes into account your 35 highest earnings years.

Your age at the time you begin receiving Social Security also affects your retirement benefit. If you were born in 1943 or later your full retirement age is 66 to 67, depending on your year of birth. Electing to receive benefits before your full retirement age (you can receive benefits as early as age 62) will result in a lower benefit than if you had waited until full retirement age to begin receiving Social Security. If you delay receiving benefits past your full retirement age, you can receive delayed retirement credits that will increase your benefit by a certain percentage for every month you wait, up until age 70.

Receiving benefits at full retirement age

At full retirement age, you will be eligible for full Social Security benefits (100 percent of your PIA), provided that you have worked in a job covered by Social Security and meet other eligibility requirements. Your full retirement age depends upon the year in which you were born.

If you were born in:	Your full retirement age is:
1943-1954	66
1955	66 and 2 months
1956	66 and 4 months
1957	66 and 6 months
1958	66 and 8 months
1959	66 and 10 months
1960 and later	67

Tip:     If you were born on January 1st of any year, the full retirement age for the previous year applies.

Receiving benefits earlier than full retirement age

The minimum age at which you can retire and receive Social Security retirement benefits is currently 62. At age 62, you will be eligible for reduced retirement benefits based on a percentage of your PIA, provided that you are fully insured. Your retirement benefit will be reduced by 5/9ths of 1 percent (or 0.55556 percent) for every month between your retirement date and normal retirement age, up to 36 months, then by 5/12ths of 1 percent thereafter. This reduction is permanent; when you reach full retirement age, you will not be eligible for a benefit increase. However, it may still make sense to receive benefits early, because you may receive benefits over a longer period of time.

Example(s):   Mimi decides to begin collecting her Social Security benefit at age 62, five years before her full retirement age of 67. As a result, she will receive 30 percent less per month than if she had waited until her full retirement age. However, she will receive 60 more benefit checks than if she had waited until full retirement age.

Receiving benefits later than full retirement age

You will permanently increase your retirement benefit for each month that you delay receiving Social Security retirement benefits past your full retirement age. Your benefit will increase by a predetermined percentage for each month you delay retirement up to the maximum age of 70. The following chart shows the relationship between the year you were born and the delayed retirement credit you will be eligible to receive if you decide to work past normal retirement age.

Year you were born	Monthly percentage	Yearly percentage
1937-1938	13/24 of 1 percent	6.5 percent
1939-1940	7/12 of 1 percent	7 percent
1941-1942	5/8 of 1 percent	7.5 percent
1943 or later	2/3 of 1 percent	8 percent

Example(s):   Robert, who was born in 1950, will receive a $1,000 monthly retirement benefit at age 66. He decides to delay collecting Social Security until age 70, four years after his full retirement age of 66. At age 70, his retirement benefit will be $1,320, which is 32 percent higher than it would be if he had collected benefits at his full retirement age.

Tip:     You can estimate your benefits under current law by using the benefit calculators available on the Social Security website. You can also sign up to view your online Social Security Statement there. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor's, and disability benefits, along with other information about Social Security that may help you  plan for retirement. If you haven't registered for an online account and are not yet receiving benefits, you'll receive a statement in the mail every five years, from age 25 to age 60, and then annually thereafter.

When should you begin receiving Social Security benefits?

Should you begin receiving Social Security benefits early, or should you opt to wait until full retirement age or even longer? Obviously, if you need the money right away, your decision is clear cut. But otherwise, there's no ''right" time to begin receiving Social Security benefits; it depends on your personal circumstances, and there are many variables. Here are some questions that can help you make your decision.

Are you planning to work?

It may be advantageous to work as long as possible if you want to increase your Social Security retirement benefit because your PIA will be recalculated annually if you have had any new earnings that might result in a higher benefit.

However, although you can work and still receive Social Security, if you're under full retirement age, wages you earn as an employee (or net earnings from self-employment income) may reduce your retirement benefit. If you're under full retirement age for the entire year, $1 in benefits will be withheld for every $2 you earn over the annual earnings limit ($15,720 in 2015). A higher earnings limit applies in the year you reach full retirement age, and the calculation is different, too--$1 in benefits will be withheld for every $3 you earn over $41,880 (in 2015).

If your earnings will be high enough to affect your Social Security benefit, you may want to consider waiting until full retirement age to begin receiving benefits, because once you reach full retirement age, you can earn as much as you want, and your benefit won't be affected.

Tip:     The benefit reduction is based on your annual earnings and is not permanent; your monthly benefit is reduced starting in January of the year following the year you had excess earnings and will be reduced until the excess earnings are used up. Additionally, if your monthly benefit is reduced in the short term due to your earnings, you'll receive a higher monthly benefit later. That's because the SSA recalculates your benefit when you reach full retirement age, and omits the months in which your benefit was reduced.

Will Social Security be around when you need it?

You've probably heard media reports about the worrisome financial condition of Social Security, but how heavily should you weigh this information when deciding when to begin receiving benefits? While it's very likely that some changes will be made to Social Security (e.g., payroll taxes may increase or benefits may be reduced by a certain percentage), there's no need to base your decision on this information alone. Although no one knows for certain what will happen, if you're within a few years of retirement, it's probable that you'll receive the benefits you've been expecting all along. If you're still a long way from retirement, it may be wise to consider various scenarios when planning for Social Security income, but keep in mind that there's been no proposal to eliminate Social Security.

How long will retirement last?

Retirees must make sure that they have enough income to last for a lifetime. But how many years will that be? You can never know for sure, but you can make an educated guess by using calculators or tables to calculate your life expectancy, then factoring in that information when deciding when to take your Social Security benefits. You'll also want to consider your current health and your family health history when deciding when to take your Social Security benefits. For example, if you have a serious health condition, you may decide to take benefits earlier. On the other hand, if you can reasonably expect to live well into your 80s or 90s, you may decide to delay receiving Social Security benefits so that you can increase your retirement benefit, and boost the odds that you'll have enough income for the years ahead.

Calculating your "break-even" age can help you compare the long-term financial consequences of starting benefits at one age versus another. Your break-even age is the age at which the total accumulated value of your retirement benefits taken at one age equals the value of your benefits taken at a second age. Although many factors can affect this number, you'll generally reach your break-even age about 12 years from your full retirement age if taxes and inflation aren't accounted for. For example, if you begin receiving benefits at age 62, and  your full retirement age is 66, you will generally reach your break-even age at 78. This calculation may vary by one to three years, depending on what factors are used.

However, unless you're able to invest your benefits rather than use them for living expenses, your break-even age is probably not the most important part of the equation. For many people, what really counts is how much they'll receive each month, rather than how much they'll accumulate over many years.

How will your spouse be affected?

If you're married, you and your spouse should consider how Social Security will affect your joint retirement plan. Are you both eligible for benefits? How much will you each receive? What are your combined life expectancies and break-even ages? These variables can affect the decisions you make regarding your Social Security benefits.

For example, the age at which you begin receiving benefits may significantly affect the amount of lifetime income your spouse or surviving spouse may receive. If your spouse has never worked outside the home or in a job covered by Social Security, or has worked but doesn't qualify for a retirement benefit higher than yours based on his or her own work record, he or she may be able to receive a spousal retirement benefit based on your work record. At full retirement age, your spouse may be entitled to receive 50 percent of your full retirement benefit amount, and will generally be eligible for a survivor's benefit equal to 100 percent of your benefit upon your death. If you're the primary wage earner, it may make sense for you to delay receiving benefits, because the larger your benefit, the larger benefit your spouse may receive, both before and after your death. If your spouse's life expectancy is much longer than yours, this can be an especially important consideration.

However, your spouse can't file for spousal benefits based on your earnings record until you reach full retirement age and file for benefits. One alternative you might consider is to "file and suspend." You apply for Social Security benefits, then request to have your benefit payments suspended. Your spouse can then file for spousal benefits, and you can accrue delayed retirement credits (up until age 70).

What is the impact on your overall retirement income plan?

Any decisions you make regarding Social Security income should take into account other potential sources of retirement income, and your overall retirement income plan. For example, you may need to determine whether it's wise to take early Social Security benefits so that you can delay withdrawing funds from tax-advantaged investments (e.g., 401(k) plans, 403(b) plans, or traditional IRAs), allowing them to continue to accumulate tax deferred. If you're eligible for pension benefits, you'll need to consider how Social Security impacts that income. For example, pension benefits from a job not covered by Social Security may be reduced (offset) by any Social Security income you receive.

Another major consideration is your tax situation. If the only income you had during the year was Social Security income, then your benefit generally won't be taxable. However, other income you receive during the same year (generally earned income or substantial investment income) may trigger taxation of part of your Social Security benefit. It's important to look at how other sources of income are taxed and how your overall tax liability might be affected when considering when to take your Social Security benefits.

Caution:         The rules surrounding taxation of Social Security benefits are complex. The IRS has a worksheet you can use to determine whether or not your Social Security benefits are taxable. You can find this worksheet and more information about the taxation of Social Security benefits in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

How do you apply for Social Security benefits?

According to the SSA, you should apply for Social Security benefits approximately three months before your retirement date. No matter when you apply for Social Security, you'll be eligible for Medicare at age 65, so make sure you contact the SSA three months before you turn 65 even if you plan to retire later. To apply for Social Security benefits, you can fill out an application on the SSA website, or call or visit your local Social Security office. You can also call the SSA at (800) 772-1213 to discuss your options or to get more information about the application process.

Jared Daniel may be reached at www.WealthGuardianGroup.com or our Facebook page.

IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.  The information in these materials may change at any time and without notice.

Will You Outlive Your Money?

Will You Outlive Your Money?

Presented by Jared Daniel of Wealth Guardian Group

Will you outlive your money?

Before you retire, take the time to figure out just how much money you'll need for retirement. One of the biggest concerns for retirees is whether their retirement savings will last the rest of their lives-- will they run out of money? Social Security is not the guaranteed source of retirement income it once was, and people generally don't want to depend on public assistance or their children during their retirement years. Whether you might run out of money hinges upon several factors; how much money you've saved, how long you need your savings to last, and how quickly you spend your money, to name a few. You'll be better off if you can tackle these issues before retirement by maximizing your retirement nest egg. But, if you are entering retirement and you still have concerns about making your savings last, there are several steps you can take even at this late date. The following are tips and ideas to help make sure you don't outlive your money.

Tips to help make your savings last longer

You may be able to stretch your retirement savings by adjusting your spending habits. You might be able to get by with only minor changes to your spending habits, but if your retirement savings are far below your projected needs, drastic changes may be necessary. Saving even a little money can really add up if you do it consistently and earn a reasonable rate of return.

Make major changes to your spending patterns

If you have major concerns about running out of money, you may need to change your spending patterns drastically in order to make your savings last. The following are some suggested changes you may choose to implement:

·         Consolidate any outstanding loans to reduce your interest rate or monthly payment. Consider using home equity financing for this purpose.

·         If your home mortgage is paid in full, weigh the pros and cons of a reverse mortgage to increase your cash flow.

·         Reduce your housing expenses by moving to a less expensive home or apartment.

·         If you are still paying off your home mortgage, consider refinancing your mortgage if interest rates have dropped since you took the loan.

·         Sell your second car, especially if it is only used occasionally.

·         Shop around for less expensive insurance. You'd be amazed how much you can save in a year (and even more over a period of years) by switching to insurance policies that have lower premiums, but that still provide the coverage you need. Life and health insurance are the two areas where you probably stand to save the most, since premiums can go up dramatically with age and declining health. Consult your insurance professional.

·         Have your child enroll in or transfer to a less expensive college (a state university as opposed to a private one, for example). This can be a particularly good idea if the cheaper college has a strong reputation and can provide a quality education. You could save significantly over the course of just two or three years.

Make minor changes to your spending patterns

Minor changes can also make a difference. You'd be surprised how quickly your savings add up when you implement a written budget and make several small changes to your spending patterns. If you have only minor concerns about making your retirement savings last, small changes to your spending habits may be enough to correct this problem. The following are several ideas you might consider when adjusting your spending patterns:

·         Buy only the auto and homeowners insurance you really need. For example, consider canceling collision insurance on an older vehicle and self-insure instead. This may not save you a bundle, but every little bit helps. Of course, if you do have an accident, the amount you saved on your premium could be wiped out very quickly.

·         Shop for the best interest rate whenever you need a loan.

·         Switch to a lower interest credit card. Transfer your balances from higher interest cards and then cancel the old accounts.

·         Eat dinner at home, and carry "brown-bag" lunches instead of eating out.

·         Consider buying a well-maintained used car instead of a new car.

·         Subscribe to the magazines and newspapers you read instead of paying full price at the newsstand.

·         Where possible, cut down on utility costs and other household expenses.

·         Get books and movies from your local library instead of buying or renting them.

·         Plan your expenditures and avoid impulse buying.

Manage IRA distributions carefully

If you're trying to stretch your savings, you'll want to withdraw money from your IRA as slowly as possible. Not only will this conserve the principal balance, but it will also give your IRA funds the opportunity to continue growing tax deferred during your retirement years. However, bear in mind that you must start taking required minimum distributions (RMDs) from traditional IRAs (but not Roth IRAs) after age 70½.

Use caution when spending down your investment principal

Don't assume you'll be able to live on the earnings from your investment portfolio and your retirement account for the rest of your life. At some point, you will probably have to start drawing on the principal. You'll want to be careful not to spend too much too soon. This can be a great temptation particularly early in your retirement, because the tendency is to travel extensively and buy the things you couldn't afford during your working years. A good guideline is to make sure you don't spend more than 5 percent of your principal during the first five years of retirement. If you whittle away your principal too quickly, you won't be able to earn enough on the remaining principal to carry you through the later years.

Portfolio review

Your investment portfolio will likely be one of your major sources of retirement income. As such, it is important to make sure that your level of risk, your choice of investment vehicles, and your asset allocation are appropriate considering your long-term objectives. While you don't want to lose your investment principal, you also don't want to lose out to inflation. A review of your investment portfolio is essential in determining whether your money will last.

Continue to invest for growth

Traditional wisdom holds that retirees should value the safety of their principal above all else. For this reason, some people totally shift their investment portfolio to fixed-income investments, such as bonds and money market accounts, as they approach retirement. The problem with this approach is that it completely ignores the effects of inflation. You will actually lose money if the return on your investments does not keep up with inflation. The allocation of your portfolio should generally become progressively more conservative as you grow older, but it is wise to consider maintaining at least a portion of your portfolio in growth investments. Many financial professionals recommend that you follow this simple rule of thumb: The percentage of stocks or stock mutual funds in your portfolio should equal approximately 100 percent minus your age. So, for example, at age 60 your portfolio should contain 40 percent stocks and stock funds (100% - 60% = 40%). Obviously, you should adjust this rule according to your risk tolerance and other personal factors.

Basic rules of investment still apply during retirement

Although you will undoubtedly make changes to your investment portfolio as you reach retirement age, you should still bear in mind the basic rules of investing. Diversification and asset allocation remain important as you make the transition from accumulation to utilization.

Laddering investments

Laddering investments is a method of controlling your investments to avoid having them all mature at the same time. The principle of laddering is simple: Stagger the maturity dates of the associated deposits or investments so that they mature in different time periods. You can apply laddering to any type of deposit, loan, or security having a specified maturity date, such as bonds.

Laddering can reduce interest rate risk

Interest rates rise and fall in response to many factors. Consequently, they are largely unpredictable. Whether you apply laddering to a cash reserve or use it in portfolio investing, minimizing interest rate risk is one of its most important benefits. Laddering investments minimizes interest rate risk because you will be investing at various times and under various interest rates. Thus, you are unlikely to be consistently locked into lower-than-market interest rates.

A single large deposit or investment that matures during an interest rate slump will leave you with two undesirable choices regarding reinvestment. You can hold the money in a low-interest savings account until rates improve or roll it over at the now low rate. However, a later rebound of interest rates can catch you locked into the prior low rate for an extended period. Breaking your investment into smaller pieces and laddering maturity dates allows you to avoid this situation.

How do you do it?

When you first begin your laddering strategy, you will need to acquire several term deposits (e.g., certificates of deposit) or securities with specified maturity dates. Initially, your individual investments should have terms of varying lengths, and you should intend to hold them until maturity. This will set up your staggered maturity dates. For example, you might purchase three separate certificates of deposit--one with a three-month term, one with a six-month term, and one with a nine-month term. When you reinvest as your CDs mature, your new investments should each be of the same length to perpetuate the staggering, or laddering, of maturity dates. Keep your laddering strategy intact by promptly redepositing each maturing investment for a new term.

Long-term care insurance

A catastrophic injury or debilitating disease that requires you to enter a nursing home can destroy your best-laid financial plans. You will need to decide whether to take out a long-term care insurance policy that may cover nursing home care, home health care, adult day care, respite care, and residential care. If you decide to purchase such a policy, you'll need to choose the best time to do so. Typically, unless you have a chronic condition that makes you more likely to require long-term care, there is generally no reason to begin thinking about this issue before age 50. Usually, there is no reason to purchase such a policy before age 60.

Won't Medicare pay for any long-term care expenses you might incur?

Contrary to popular belief, Medicare will not pay for most long-term care expenses, and neither will any health insurance you may have through your employer. Medicare benefits are only available if you enter a nursing home within 30 days after a hospital stay of three days or more. Even then, Medicare typically will only provide full coverage for 20 days of skilled nursing home care in Medicare-approved facilities. After 20 days, Medicare will cover part of the cost of care. You will pay $157.50 per day in 2015, and Medicare will cover the rest through day 100. No further coverage is available after 100 days.

What about Medicaid?

Medicaid is sponsored jointly by federal and state governments. Each state's Medicaid program is required to provide certain minimum medical benefits to qualified persons, including inpatient hospital services, nursing home care, and physicians' services. States also have the option of providing additional services. All states require proof of financial need. However, each state has different rules regarding benefits and eligibility, so it is essential that you understand your state's Medicaid program before you decide that Medicaid will provide adequate long-term care coverage.

How much does long-term care insurance cost?

Unfortunately, long-term care insurance can be quite expensive. If you begin coverage when you are younger, premiums will be more reasonable, but you will likely be paying for the insurance for a much longer period of time. The cost of LTCI will vary depending on your age, the benefits, and the insurer you choose.

Jared Daniel may be reached at www.WealthGuardianGroup.com or our Facebook page.

IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.  The information in these materials may change at any time and without notice.

Teaching Your Child About Money

Teaching Your Child about Money

Presented by Jared Daniel of Wealth Guardian Group

Ask your five-year old where money comes from, and the answer you'll probably get is "From a machine!" Even though children don't always understand where money really comes from, they realize at a young age that they can use it to buy the things they want. So as soon as your child becomes interested in money, start teaching him or her how to handle it wisely. The simple lessons you teach today will give your child a solid foundation for making a lifetime of financial decisions.

Lesson 1: Learning to handle an allowance

An allowance is often a child's first brush with financial independence. With allowance money in hand, your child can begin saving and budgeting for the things he or she wants.

It's up to you to decide how much to give your child based on your values and family budget, but a rule of thumb used by many parents is to give a child 50 cents or 1 dollar for every year of age. To come up with the right amount, you might also want to consider what your child will need to pay for out of his or her allowance, and how much of it will go into savings.

Some parents ask their child to earn an allowance by doing chores around the house, while others give their child an allowance with no strings attached. If you're not sure which approach is better, you might want to compromise. Pay your child a small allowance, and then give him or her the chance to earn extra money by doing chores that fall outside of his or her normal household responsibilities.

If you decide to give your child an allowance, here are some things to keep in mind:

·         Set some parameters. Sit down and talk to your child about the types of purchases you expect him or her to make, and how much of the allowance should go towards savings.

·         Stick to a regular schedule. Give your child the same amount of money on the same day each week.

·         Consider giving an allowance "raise" to reward your child for handling his or her allowance well.

Lesson 2: Opening a bank account

Taking your child to your local bank or credit union to open an account (or opening an account online) is a simple way to introduce the concept of saving money. Your child will learn how savings accounts work, and will soon enjoy making deposits.

Many banks and credit unions have programs that provide activities and incentives designed to help children learn financial basics. Here are some other ways you can help your child develop good savings habits:

·         Help your child understand how interest compounds by showing him or her how much "free money" has been earned on deposits.

·         Offer to match whatever your child saves towards a long-term goal.

·         Let your child take a few dollars out of the account occasionally. Young children who see money going into the account but never coming out may quickly lose interest in saving.

Lesson 3: Setting and saving for financial goals

When your children get money from relatives, you want them to save it for college, but they'd rather spend it now. Let's face it: children don't always see the value of putting money away for the future. So how can you get your child excited about setting and saving for financial goals? Here are a few ideas:

·         Let your child set his or her own goals (within reason). This will give your child some incentive to save.

·         Encourage your child to divide his or her money up. For instance, your child might want to save some of it towards a long-term goal, share some of it with a charity, and spend some of it right away.

·         Write down each goal, and the amount that must be saved each day, week, or month to reach it. This will help your child learn the difference between short-term and long-term goals.

·         Tape a picture of an item your child wants to a goal chart, bank, or jar. This helps a young child make the connection between setting a goal and saving for it.

Finally, don't expect a young child to set long-term goals. Young children may lose interest in goals that take longer than a week or two to reach. And if your child fails to reach a goal, chalk it up to experience. Over time, your child will learn to become a more disciplined saver.

Lesson 4: Becoming a smart consumer

Commercials. Peer pressure. The mall. Children are constantly tempted to spend money but aren't born with the ability to spend it wisely. Your child needs guidance from you to make good buying decisions. Here are a few things you can do to help your child become a smart consumer:

·          

·         Set aside one day a month to take your child shopping. This will encourage your child to save up for something he or she really wants rather than buying something on impulse.

·         Just say no. You can teach your child to think carefully about purchases by explaining that you will not buy him or her something every time you go shopping. Instead, suggest that your child try items out in the store, then put them on a birthday or holiday wish list.

·         Show your child how to compare items based on price and quality. For instance, when you go grocery shopping, teach him or her to find the prices on the items or on the shelves, and explain why you're choosing to buy one brand rather than another.

·         Let your child make mistakes. If the toy your child insists on buying breaks, or turns out to be less fun than it looked on the commercials, eventually your child will learn to make good choices even when you're not there to give advice.

Jared Daniel may be reached at www.WealthGuardianGroup.com or our Facebook page.

IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.  The information in these materials may change at any time and without notice.

Saving for College and Retirement

Saving for College and Retirement

Presented by Jared Daniel of Wealth Guardian Group

What is it?

These days it's not uncommon for parents to postpone starting a family until both spouses are settled in their marriage and careers, often well into their 30s and 40s. Though this financial security can be an advantage, it can also present a dilemma--the need to save for college and retirement at the same time.

The prevailing wisdom has parents saving for both goals at the same time. The reason is that older parents can't afford to put off saving for retirement until the college years are over, because to do so means missing out on years of tax-deferred growth. Moreover, because generous corporate pensions (and lifetime job security) are now the exception rather than the rule, employees must take greater responsibility for funding their own retirements.

First, determine your monetary needs

The first step is to determine your projected monetary needs, both for retirement and college. This analysis will reveal whether you are on a savings course to meet both goals, or whether some modifications will be necessary.

You've come up short: what are your options?

You've run the numbers on both your anticipated retirement and college expenses, and you've come up short. The numbers say you won't be able to afford to educate your children and retire with the lifestyle you expected based on your current earnings. Now what? It's time to sit down and make some tough decisions about your expectations and, ultimately, how to compromise.

The following options can help you in that effort. Some parents may need to combine more than one strategy to meet their goals.

Defer retirement

Staying in the workforce longer is one way of meeting your retirement and education goals. The longer you wait to dip into your retirement funds, the longer the money will last.

Reduce standard of living now or in retirement

You may be able to adjust your spending habits now in order to have more money later. Consider making a written budget to track your monthly income and expenses. If your monetary needs have fallen far short of the mark, you will need to make a bigger spending adjustment than you would with a lesser shortfall. The following are some suggested changes:

·         Move to a less-expensive home or apartment

·         Sell your second car and carpool whenever possible

·         Reduce your entertainment budget (e.g., bring your lunch to work, eat out once a month instead of every week, rent movies instead of going to the cinema)

·         Get books and magazines from the library instead of the bookstore

·         Cancel any club memberships (e.g., golf club, health club)

·         Set a limit on birthday and holiday gifts for family members

·         Forgo expensive vacations

·         Shop for clothes in the off-season, when they're likely to be on sale

·         Buy used furniture and used big-ticket items

·         Limit your child's extracurricular activities, like music lessons or hockey camp

If you're unable or unwilling to lower your standard of living now, perhaps you can lower it in retirement. This may mean revising your expectations about a luxurious, vacation-filled retirement. The key is to recognize the difference between the things you want and the things you need. The following are a few suggestions to help reduce your standard of living in retirement:

·         Reduce your housing expectations

·         Cut back on travel plans

·         Own a less-expensive automobile

·         Lower household expenses

Note: There's a difference between reducing your standard of living in retirement and drastically reducing your standard of living in retirement. Most professionals discourage the use of retirement funds for your child's education if paying college bills will leave you high and dry in your retirement years.

Work part-time during retirement

About 25 percent of retirees work part-time. You may find that the extra income enables you to enjoy the kind of retirement you had anticipated.

Increase earnings (i.e., spouse returns to work)

Increasing earnings may be another way to meet both your education and retirement goals. The usual scenario is that a stay-at-home spouse returns to the workforce. This has the benefit of increasing the family's earnings so there's more money available to save for education and/or retirement. However, there are drawbacks. The additional income may push the family into a higher tax bracket, and incidental expenses like day care and commuting costs may eat into your overall take-home pay.

In addition to a spouse returning to work, one spouse may decide to increase his or her hours at work, take another job with better compensation, or moonlight at a second job. Factors to consider here include the expectation of increased job pressure, less availability for child rearing and household management, the amount of extra income, the opportunity for advancement, and job security. Another way to create extra income is for a spouse to turn a hobby into a business.

Be more aggressive in investments

Your analysis has shown that your current savings (and the accompanying investment vehicles) will leave you short of your education and retirement goals. One option is to try to earn a greater rate of return on your savings. This may mean choosing more aggressive investments (e.g., growth stocks) over more conservative investments (e.g., bonds, certificates of deposit, savings accounts). This strategy works best the more years you have until retirement.

Caution:         The more aggressive the investment, the greater the risk of loss of your principal. This strategy isn't for people who shudder at the slightest downturn in the stock market. If you'll have trouble sleeping at night, you probably shouldn't take on greater risk in your investment portfolio.

Reduce education goal

One of the realities parents may have to face is that they can't afford to fund 100 percent (or 75 percent, or 50 percent, as the case may be) of their child's college education. This is often an emotional issue. Parents naturally want the best for their children. For many parents, this translates into sending them to (and paying for) college (especially in cases where one or both parents didn't have such an opportunity).

You may have dreamed that your child would go to a prestigious Ivy League school. Well, with a year's cost at such a school hovering at the $40,000 mark, maybe you need to lower your expectations. That small liberal arts college or the big state school may challenge your child just as much and at a far lower cost. Remember, there are loans available for college, but none for retirement.

Children pay more and/or assume more responsibility for loans

With college costs continuing to increase at a rate faster than most family incomes, and with perhaps more than one child in the family picture, chances are that more responsibility will fall on your child to help fund college costs. This money can come from part-time jobs or gifts, though the majority of your child's contribution is likely to come from student loans.

Though student loans can be a financial burden in the early years, when graduates are just starting out in their careers, many loan providers offer flexible repayment options in anticipation of this common situation. In addition, if your child meets certain income limits, he or she can deduct the interest paid on qualified student loans.

When children take out student loans, parents can always decide to help financially rather than mortgaging their house before college. Students who take out student loans to pay for college may have a more vested interest in their education than students who receive help from their parents.

Other ways to lower cost of college

In addition to reducing your education goal and having your child pay a portion of college costs, there are other ways to lower the cost of college. For example, your child can choose a college with an accelerated program that allows students to graduate in three years instead of four. Likewise, your child may choose to attend a community college for two years and then transfer to a four-year private institution. The diploma will reflect the four-year college, but your pocketbook won't.

How do you decide what strategy is best for you?

This decision must be made on a case-by-case basis. What works for one family may not work for another family. In some cases, more than one strategy will be necessary to deal with the demands of educating children and retiring successfully. Factors influencing your decision may include the following:

·         The amount of your financial need

·         Your current income and assets and any expectation of significant future income (e.g., a bonus at work, exercise of stock options, an inheritance)

·         The number of years you have until retirement

·         Your willingness to reduce your standard of living (now or in the future) for the sake of your children

·         The number of children in your family who plan on attending college

·         The academic, athletic, or other notable skills of your child that may raise the possibility of a college scholarship

Can retirement accounts be used to save for college?

Yes. But should you? Probably not. Many financial advisors recommend against dipping into your retirement account to pay college expenses as a preferred strategy. But if you must, there are some tax breaks available.

It's now possible to withdraw money from either a traditional IRA or Roth IRA before age 59½ to pay college expenses without incurring the 10 percent early withdrawal penalty that normally applies to such withdrawals. However, any distributions of earnings and deductible contributions from a traditional IRA and any nonqualified distributions of earnings from a Roth IRA may be included in your income for the year, which may push you into a higher tax bracket.

Tip:     This college exception to the 10 percent early withdrawal penalty is a good reason to funnel your child's income from a part-time job into an IRA.

Unfortunately, there's no similar college exception for employer-sponsored retirement plans, such as a 401(k) plan. So, if you're under age 59½, you'll pay a 10 percent early withdrawal penalty on any withdrawals. As with an IRA, any withdrawals are added into your income for the year, which may push you into a higher tax bracket. Nevertheless, saving in a 401(k) plan can be an attractive option for some parents because the company may match employee contributions and because most employer plans allow you to borrow against your contributions (and possibly earnings) before age 59½ without penalty.

Tip:     Some parents who have built a college fund within their 401(k) accounts, but who are not yet 59½ when the kids are in college, take out what's called a bridge loan (such as a home equity loan) to pay their child's college bills. A bridge loan is a source of funds that tides you over until it's more economical to tap your retirement account. Although you pay interest on a bridge loan, it may still cost less than what your 401(k) funds can earn. Then, when you turn 59½, you can start tapping your 401(k) plan to pay off the bridge loan with no early withdrawal penalty.

A benefit of using retirement accounts to save for college is that the federal government doesn't consider the value of your retirement accounts in awarding financial aid (the federal formula also excludes annuities, cash value life insurance, and home equity from consideration). However, most private colleges do consider the value of your retirement accounts in deciding which students are the most deserving of campus-based aid.

Jared Daniel may be reached at www.WealthGuardianGroup.com or our Facebook page.

IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.  The information in these materials may change at any time and without notice.