RETIREMENT INSIGHTS

News and information for current and future retirees.

10 Social Security Myths That Refuse to Die

The program is going broke, the retirement age is 65, and other common misconceptions.

Given Social Security’s importance, concerns about its current and future state are understandable and widespread. Some of those worries, and the many changes to the program in its 85-year history, have given rise to misconceptions about how it is funded and how it works. Here are the facts behind 10 of the most stubborn Social Security myths.

Myth #1: Social Security is going broke

The facts: As long as workers and employers pay payroll taxes, Social Security will not run out of money. It’s a pay-as-you-go system: Revenue coming in from FICA (Federal Insurance Contributions Act) and SECA (Self-Employed Contributions Act) taxes largely cover the benefits going out.

Social Security does face funding challenges. For decades it collected more than it paid out, building a surplus of $2.9 trillion by the end of 2019. But the system is starting to pay out more than it takes in, largely because the retiree population is growing faster than the working population, and living longer. Without changes in how Social Security is financed, the surplus is projected to run out in 2035.

Even then, Social Security won’t be broke. It will still collect tax revenue and pay benefits. But it will only have enough to pay 79 percent of scheduled benefits, according to the latest estimate. To avoid that outcome, Congress would need to take steps to shore up Social Security’s finances, as it did in 1983, the last time the program nearly depleted its reserves. The steps then included raising the full retirement age (see Myth #2), increasing the payroll tax rate and introducing an income tax on benefits (see Myth #8).

Myth #2: The Social Security retirement age is 65

The facts: Full retirement age, or FRA — the age when a worker qualifies to file for 100 percent of the benefit calculated from lifetime earnings history — is currently 66 and 2 months. Those born in 1955 reach the milestone this year (or the first two months of next year). Over the next five years it will increase by two months at a time, settling at 67 for those born in 1960 and after.

The 65 threshold is a longtime Social Security truth that became a myth. When Social Security was created in 1935, 65 was set as the age of eligibility. In later decades the minimum eligibility age was lowered to 62, when people could claim a reduced benefit, but 65 remained the standard for full retirement.

That changed with the 1983 overhaul, which raised the retirement age to reduce Social Security’s costs. The increase is being phased in over time; 2002 was the last year in which people turning 65 could claim their full benefit.

Myth #3: The annual COLA is guaranteed

The facts: Since 1975, Social Security law has mandated that benefit amounts be adjusted annually to keep pace with inflation. But there is no requirement that this cost-of-living adjustment (COLA) produce a yearly increase.

The COLA is tied to a federal index of prices for select consumer goods and services called the CPI-W. Benefits are adjusted annually based on changes in the CPI-W from the third quarter of one year to the third quarter of the next. In 2020, the index showed a 1.3 percent increase in prices, so 2021 benefits grew by that amount.

But if the index doesn’t show a statistically measurable rise in prices — if there’s effectively no inflation — then there’s no adjustment to benefits. This has happened three times since the current formula was adopted, in 2010, 2011 and 2016. Whether or not it produces a benefit increase, this process is automatic; it does not involve the president or Congress. They would have to take separate action to change the COLA.

Myth #4: Members of Congress don’t pay into Social Security

The facts: A common complaint about Social Security is that members of Congress don’t bother fixing the program because it doesn’t cover them. Actually, it does. Members of Congress came under the Social Security umbrella in 1984, along with the rest of the federal workforce, as part of the sweeping changes to the program enacted the previous year.

Before that, senators and representatives did not pay into Social Security and were instead fully covered by a pension plan called the Civil Service Retirement System (CSRS). Those in office on Jan. 1, 1984, were allowed to remain in CSRS, but only in conjunction with Social Security. (If you’re curious, two senators and five House members remain from those days.)

READ MORE @AARP.ORG

Why Your Taxes In Retirement Will Likely Be Lower Than You Expect

One of the most common mistakes people make is overestimating their tax rate in retirement.

Not All Your Retirement Income Is Taxable

When you’re working, the bulk of your income is from your job and is fully taxable (after deductions and exemptions) at ordinary income tax rates. When you’re retired, this is only true for pension income, withdrawals from taxable retirement accounts, and any rental, business, and wage income you have. Social Security is taxed at ordinary income rates, but only part of it is taxable. Withdrawals from Roth accounts are tax-free if you’ve had the account for at least 5 years and are over age 59 1/2. Accessing the principal from savings and investments is tax-free and long term capital gains are taxed at lower rates or can even reduce other taxes if you’re selling at a loss.

Your Income Will Probably Be Lower

Experts typically estimate that you need about 70-80% of your pre-retirement income in retirement, but you may need even less depending on your situation. How much of your income goes to saving for retirement and paying into Social Security? Do you have a mortgage and other debts that will be paid off? Do you have kids that will no longer be financially dependent on you? Are you thinking of downsizing or moving to a lower cost area?

When you add all this up, you may find that you need less than 80%. If your income is lowered enough, you may retire in a lower tax bracket. But even if you retire in the same tax bracket, your effective tax rate may be lower. Here’s why….

Our Effective Rate Is What Matters In Retirement

First, what do we even mean by “tax rate?” When you’re contributing to a retirement account, you probably want to look at your marginal tax rate. That’s the tax rate you pay on an additional dollar of income. The reason is because the next dollar that you contribute to your retirement account would normally be taxed at the marginal tax rate.

Let’s say I’m a single person with a taxable income of $50k a year. That puts me in the 22% marginal tax bracket for 2021. But according to this calculator , my effective tax rate would be 13.5% of my taxable income since only my taxable income over $40,525, or $9,475, would be taxed at that 22% rate. The rest would be taxed at 12% or less. However, if I contribute $7k to my 401(k) pre-tax, all of that $7k would normally be taxed at the 22% rate.

Now what happens when I take money out of my 401(k) in retirement? First some of my income won’t be taxed at all because of deductions and exemptions. In fact, my standard deduction would be $1,700 higher if I were age 65 or older this year.

You May Retire in a Lower Taxed State

Many states are very tax-friendly for retirees, while some popular retirement destinations like Texas, Florida, and Nevada don’t even tax income at all. You can use this site if you’re curious how much you can save by retiring in a lower tax state. When you do the math, you’ll see that warm weather isn’t the only thing some  states have going for them.

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Planning for Retirement? Don't Forget Caregiving Costs

Budgeting for care during sickness and health is a good first step.

What do your retirement goals look like? Extended travel, more quality time with your children and grandchildren, picking up hobbies or personal pursuits, owning a beach cottage or mountain cabin? Before you start putting money aside for that RV, be sure to contemplate caregiving as a part of your post-retirement years.

It turns out that approximately 80 percent of older adults have at least one chronic disease and 77 percent have at least two. At some point in the progression of these illnesses, these people will need caregiving assistance. On top of this, many older adults are caregiving for a spouse or adult child with an illness, disability or special needs. So, the majority of us will both need care and provide care in our 60s and beyond.

If you need a caregiver

Whether you already have a diagnosis or disability, or you’re as healthy as a horse, incorporate caregiving-supportive tools into your longevity planning. Run the numbers through retirement and benefits calculators and work with advisers to guide you on the different options available. This may include:

Saving and budgeting

Calculate the amount of money you expect to need in retirement, in times of good and poor health — and budget for both. Save or earmark certain assets specifically for caregiving needs. At some point, you may wish to simplify your finances to meet this goal. The older you are, the more likely you’ll rely on both paid and unpaid caregivers for assistance. Downsizing your living space at a certain age may open up assets to bring in paid help, such as aides or housekeepers. Or you may consider some home modifications that will let you live at home independently with less reliance on caregivers and without moving into an assisted living or nursing facility. If you already have a diagnosis, research the costs of your treatment and potential future needs to determine how expensive your care will be in the long term.

Purchasing insurance or annuities

These policies can be significant financial contributors if you are facing extraordinary medical needs. But options like this may not be available to you after diagnosis of a chronic disease. Don’t wait for the ship to sail if you can comfortably afford premiums for insurance or annuities that will offset the costs of long-term care or disability.

Public benefits planning

Will you be able to privately pay for long-term care or will you require public benefits, such as Medicaid or veterans’ assistance? It is possible to have some assets and income and still qualify for benefits. Tools like personal services contracts will allow you to pay your loved one who is taking care of you. Other techniques like reallocating income or assets, paying off certain debts and purchasing allowable Medicaid spend-down items, or setting up trusts can help maintain the maximum amount of assets for your spouse and provide extra support to you in your retirement years.

If you will be the caregiver

One in 5 caregivers experience significant short- and long-term financial strain. I am one of those caregivers. Out-of-pocket expenses wiped out my savings. I lost my income when my job let me go at the end of family medical leave. Suddenly, my family could not pay our mortgage or other fixed monthly bills, like student loans. We weren’t making ends meet in the day to day and certainly weren’t saving for the future. Years later, we are still nowhere near where we want to be for our projected retirement goals.

Younger caregivers are more likely to feel more financial impacts, like reducing savings, taking on debt, and having trouble with expenses. But caregivers in their 50s and 60s are most likely to deplete their savings, right on the cusp of their own retirement.

So, whether you become a caregiver at age 35 or 65, you have to account for your personal financial strength when you undertake the job. Mitigating the impacts and pitfalls that caregivers face will help you maintain future security.

Understanding your expected contributions

Knowing what your care recipient will expect — or need — from you is the first step. Figuring things out during a medical crisis can result in hasty decisions. Although people can be uncomfortable talking about money, it’s a necessary conversation. If you work together, you may find ways to minimize your personal outlay.

Securing your future financial strength

If you have been saving toward your own retirement, it’s important to preserve those assets.

I can’t stress this enough: Learn which bills you are — and are not — responsible for. For example, you are not responsible to pay another person’s medical debts. Be sure you have the proper legal documents in place so you can help your care recipient without assuming any of their financial obligations.

Think twice before tapping your own retirement accounts to cover expenses. Your retirement accounts are protected assets, and taking money from them early or unnecessarily can come with tax consequences, penalties and a reduction of your future well-being.

READ MORE @AARP.ORG

9 Underrated National Parks You Should Visit in 2021

These parks may not have the same international reputation as Yellowstone or the Grand Canyon, but that doesn’t make them any less spectacular.

 

1. New River Gorge National Park

West Virginia

Just last year, “the New River Gorge, formerly a national river, was upgraded to a national park and preserve,” reports Sarah Buder, making this West Virginia park the newest in the United States.

Encompassing more than 70,000 acres of land, this rugged Appalachian canyon has something for everyone: rock climbing routes on sandstone cliffs for climbers of all levels, whitewater rafting along 53 miles of whitewater that include Class IV and V rapids, and hundreds of miles of hiking and mountain biking trails.

2. Congaree National Park

South Carolina

Congaree National Park in South Carolina is best known for its large collection of old-growth, bottomland hardwood trees, although more than 80 tree species can be found here. “This biodiversity, along with a rich cultural heritage, in 1983 earned Congaree UNESCO biosphere reserve status,” writes Brooke Vaughan.

Come here to hike among the trees or take a guided tour down Cedar Creek canoe trail. But be warned: The park sits on a floodplain fed by the Congaree and Wateree Rivers and it can be swampy (in other words, full of mosquitoes) in warmer months. Spring and fall are the best times to visit.

3. Dry Tortugas National Park

Florida

Located 70-miles offshore from Key West in the Gulf of Mexico, Dry Tortugas National Park is often passed over in favor of Florida’s more well-known and easy-to-reach Everglades National Park. Although a neighbor of the Everglades, Dry Tortugas is entirely different. This park consists mostly of open water, with coral reefs and seven small islands, putting marine life at the center of its attractions. 

Sadly, climate change threatens the ecosystem at Dry Tortugas but, for now at least, visitors can explore its unique beauty by snorkeling, diving, or kayaking—as well as the history of Fort Jefferson, built in the 1800s on Garden Key. For the few who choose to spend the night and camp, the remoteness of the islands also offers incredible stargazing and afternoons of crowd-free swims once the day-trippers have returned to shore.

4. Voyageurs National Park

Minnesota

With just 263,091 visitors in 2020, Voyageurs National Park along the Canadian border in Minnesota doesn’t always get the attention it deserves, despite being a wonderland for water lovers. More than 40 percent of the park is water, a series of interconnected waterways as well as the Rainy, Kabetogama, Namakan, and Sand Point Lakes. There is evidence that for over 10,000 years, humans have centered life in this area around the waterways: using them for fishing, foraging, and as transportation corridors—activities that continue to be a main draw for visitors to this day. 

5. Big Bend National Park

Texas

Located in the southwest corner of Texas, Big Bend National Park is “underrated because of the location . . . it’s definitely one of the harder parks to get to,” says Norman Aynbinder, president and CEO of Excursionist, a luxury tour operator that has a variety of unique, expert-led options for exploring the U.S. national parks. But “unlike some parks that are more limited in the season, you can visit [Big Bend] year-round.”

It’s worth the effort—Big Bend is one of the most biodiverse parks in the United States, home to over 450 species of birds, 75 species of mammals, 22 species of lizards, as well as three distinct landscapes centered around the Chisos Mountains, Chihuahuan Desert, and the Rio Grande. Vast, rugged, and varied, the park offers plenty of ways to explore—whether it’s a hike to the park’s historic hot springs, a multiday canoe trip down the Rio Grande, or bird-watching along the 5.2-mile Window Trail.

READ MORE @AFAR.COM

On the Bright Side

Some large employers suspended matching contributions to retirement plans last year, but this was only temporary for many of them. Studying 260 such companies, consulting firm Towers Watson reports that 75% have already restored employer matches, with 74% matching at the same level they did before the arrival of the pandemic.*

Source: MarketWatch, December , 2020

Did you know?

Looking for the tallest mountain on earth? Try Hawaii.

Mt. Everest, at the border of Nepal and Tibet, is generally ranked as the world’s highest peak, towering more than 29,000′ above sea level. Hawaii’s Mauna Kea volcano, however, is in one sense even grander. While Mauna Kea rises 13,796′ from the shoreline, it actually measures 32,808′ from its base on the floor of the Pacific Ocean.*

Source: FarandWide.com, December 15, 2020

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