Will Social Security Retire Before I Do?

Will Social Security Retire Before I Do?

People have traditionally seen Social Security benefits as the foundation of their retirement planning programs. The Social Security contributions deducted from your paycheck have, in effect, served as a government-enforced retirement savings plan.
However, the Social Security system is under increasing strain. Better health care and longer life spans have resulted in an increasing number of people drawing Social Security benefits. And as the baby boom generation (those born between 1946 and 1964) approaches retirement, even greater demands will be placed on the system.
In 1945, there were 41.9 active workers to support each person receiving Social Security benefits. In 2000, there were only 3.4 workers supporting each Social Security pensioner. And it is projected that by 2030, there will be only 2.2 active workers to support each Social Security pensioner.¹
You should consider that as your income gets higher, Social Security replaces a proportionally smaller percentage of retirement benefits. It used to be that you could receive full benefits only after you reached age 65. But in 2003, the age to qualify for full benefits began to increase on a graduated scale. By 2027, the age to qualify for full Social Security benefits will have increased to age 67, where it is scheduled to remain.

That means in the future, you will probably have to wait longer to qualify for full Social Security benefits to start replacing a smaller percentage of your pre-retirement income.

Your long-term retirement planning program should recognize Social Security benefits as playing a more limited role when calculating required retirement income. Indeed, some financial professionals suggest ignoring Social Security altogether when developing a retirement income plan.
Source: ¹ Social Security Administration
Note:  The Social Security Administration will now assist you in calculating your projected retirement benefits. You can call 1-800-772-1213 and ask for Form SSA-7004, the “Personal Earnings and Benefit Estimate Statement,” or you can access the form on the Internet at www.ssa.gov. Complete the form, return it to the Social Security Administration, and you will receive an estimate of your benefits.

This material was written and prepared by Emerald.
© 2010 Emerald

Having trouble understanding Estate Tax??

What Is the Estate Tax?

 

 

The estate tax is a tax on property that transfers to others upon your death. Estate taxes are due on the total value of your estate — your home, stocks, bonds, life insurance, and other assets of value. Everything you own, whatever the form of ownership, regardless of whether the assets have been through probate, is subject to estate taxes. 

 

Also referred to as the “death tax,” the estate tax was first enacted in this country with the Stamp Act of 1797 to help pay for naval rearmament. After several repeals and reinstatements, the Revenue Act of 1917 put the current estate tax into place. Despite its long history, this tax remains controversial. 

 

By working in much the same way as marginal income tax brackets, estate taxes claim a graduated percentage of the total value of your estate. For estates of greater value, the percentage amount due in taxes is generally higher.  

 

The IRS calculates the estate tax due on your gross taxable estate by adding the value of your assets and then subtracting any applicable exemptions. 

 

The most common exception to the federal estate tax is the unlimited marital deduction. The government exempts all transfers of wealth between a husband and wife from federal estate and gift taxes, regardless of the size of the estate. Of course, the surviving spouse must be a U.S. citizen to qualify for this exemption. When the surviving spouse dies, the estate will be subject to estate taxes and, unless the appropriate preparations have been made, only the surviving spouse’s applicable credit can be used. Other exemptions include mortgage and other debt, administration expenses of the estate, and losses during estate administration.  

 

The Economic Growth and Tax Relief Reconciliation Act of 2001 made sweeping changes to the federal estate tax. It established a schedule that loweredthe top estate tax rate and raised the applicable credit amount gradually over several years. In 2010, the federal estate tax is scheduled to be repealed. However, because of the tax law’s sunset provision, the federal estate tax will return in 2011 at its previous maximum level unless Congress votes to permanently repeal the tax. (See the table for applicable credit amounts and top estate tax rates.)

 

 

Year	Applicable Credit	Top Estate Tax Rate
2006	$2 million	46%
2007	$2 million	45%
2008	$2 million	45%
2009	$3.5 million	45%
2010	Tax repealed	0%
2011	$1 million	55%

                                                    

 

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.

 

 

This material was written and prepared by Emerald.
© 2010 Emerald

Double your Money! The ultimate "Rule of 72"!

How Long Will It Take to Double My Money?

Before making any investment decision, one of the key elements you face is working out the real rate of return on your investment.

Compound interest is critical to investment growth. Whether your financial portfolio consists solely of a deposit account at your local bank or a series of highly leveraged investments, your rate of return is dramatically improved by the compounding factor.

With simple interest, interest is paid just on the principal. With compound interest, the return that you receive on your initial investment is automatically reinvested. In other words, you receive interest on the interest.

But just how quickly does your money grow? The easiest way to work that out is by using what's known as the “Rule of 72.”1 Quite simply, the “Rule of 72” enables you to determine how long it will take for the money you've invested on a compound interest basis to double. You divide 72 by the interest rate to get the answer.

For example, if you invest $10,000 at 10 percent compound interest, then the “Rule of 72” states that in 7.2 years you will have $20,000. You divide 72 by 10 percent to get the time it takes for your money to double. The “Rule of 72” is a rule of thumb that gives approximate results. It is most accurate for hypothetical rates between 5 and 20 percent.

While compound interest is a great ally to an investor, inflation is one of the greatest enemies. The “Rule of 72” can also highlight the damage that inflation can do to your money.

Let’s say you decide not to invest your $10,000 but hide it under your mattress instead. Assuming an inflation rate of 4.5 percent, in 16 years your $10,000 will have lost half of its value.

The real rate of return is the key to how quickly the value of your investment will grow. If you are receiving 10 percent interest on an investment but inflation is running at 4 percent, then your real rate of return is 6 percent. In such a scenario, it will take your money 12 years to double in value.

The “Rule of 72” is a quick and easy way to determine the value of compound interest over time. By taking the real rate of return into consideration (nominal interest less inflation), you can see how soon a particular investment will double the value of your money.


The Rule of 72 is a mathematical concept, and the hypothetical return illustrated is not representative of a specific investment. Also note that the principal and yield of securities will fluctuate with changes in market conditions so that the shares, when sold, may be worth more or less than their original cost.The Rule of 72 does not include adjustments for income or taxation. It assumes that interest is compounded annually. Actual results will vary.
This material was written and prepared by Emerald.
© 2010 Emerald Publications

Textbook September as Economy Passes Test

Dear Valued Clients and Blog Readers,

The first few days of September revealed much of what the economy did with its summer vacation. The economic data for the summer months through the end of August provided a report card that argues not for a return to recession, but instead for the return of slower—but stable—growth that often comes one year after the start of a recovery. The U.S. economy created 235,000 private jobs this summer (June through August), bringing the total to 763,000 jobs created through August of this year. As the time came to go back to school, it was also time for more people to go back to work.

Students of market history know that September is a tough month for investors. In more than half of the years since 1950, the month of September has resulted in losses for the S&P 500 Index. This has taken place despite gains, on average, in the first few trading days of the month when the key economic data was released. In fact, when the first three trading days of September resulted in gains for the stock market, those gains were followed by losses over the rest of the month 60% of the time.*

The stock market remains close to where it began the year. We continue to believe a late-year rally for stocks will fulfill our long-held outlook for modest single-digit gains on the year for the S&P 500. However, over the next month or two, the risk that this soft spot lingers and weighs on the markets is significant—especially given the historically weak market performance in September and October. Looking closer to the end of the year, the months of November and December have historically provided some of the best returns of the year*, on average, and this year’s seasonal bounce may be helped by clarity around the legislative environment with the outcome of the mid-term elections on November 2. This may lead to more of a political balance in Washington and slow the pace of legislative change due to the “gridlock” the market has historically favored. The market’s reaction to mid-term elections, as the uncertainty begins to fade, has almost always been positive, with fourth quarter gains averaging 8% in mid-term election years since 1950.

With it shaping up to be a textbook September, investors should brace for the price volatility that has defined this year to continue. We believe losses will be recouped by a late-year rally. However, in the meantime, we give high marks to yield-producing investments which offer investors a return while waiting out the price volatility in the stock market. As always, we encourage you to contact me if you have any questions.

Best regards,

Janet L. Barr, ChFC, CLU


IMPORTANT DISCLOSURES
This research material has been prepared by LPL Financial.
*Source: Bloomberg, LPL Financial
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stock investing may involve risk including loss of principal.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
LPL Financial, Member FINRA/SIPC

2011 Tax changes at a glance!

Federal income tax brackets

Right now, there are six income tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. For 2010, these brackets apply to married couples filing joint federal income tax returns in the following manner.

2010 Income Tax Brackets--Married Filing Jointly

Taxable Income

Marginal Tax Rate

Not over $16,750

10%

Over $16,750 to $68,000

15%

Over $68,000 to $137,300

25%

Over $137,300 to $209,250

28%

Over $209,250 to $373,650

33%

Over $373,650

35%

As it stands now, there will be no 10% bracket for 2011, and the remaining bracket rates will return to their original 2001 levels: 15%, 28%, 31%, 36%, and 39.6%.


Long-term capital gains tax rates



For 2010, if you sell shares of stock that you've held for more than a year, any gain is a long-term capital gain, generally taxed at a maximum rate of 15%. If you're in the 10% or 15% marginal income tax bracket, however, you'll pay no federal tax on the long-term gain (a 0% tax rate applies). That means if you're a married couple filing a joint federal income tax return, and your taxable income is $68,000 or less, you pay no federal tax on the gain.

However, these rates expire at the end of 2010. Beginning in 2011, a 20% rate will generally apply to long-term capital gains. Individuals in the 15% tax bracket (remember, there won't be a 10% bracket in 2011) will pay the tax at a rate of 10%. Special rules (and slightly lower rates) will apply for qualifying property held for five years or more. Finally, while qualifying dividends are taxed in 2010 using the same capital gains tax rates described above (i.e., 15% and 0%), in 2011 they'll be taxed as ordinary income subject to the increased 2011 tax brackets.


The estate tax

There is currently no estate tax for 2010, and special rules are in place that govern the way basis is calculated for property passing upon death. The estate tax reappears in 2011, however, with a $1 million exclusion amount (meaning that up to $1 million of assets will be exempt from estate tax) and a top tax rate of 55%. To put that in context, for 2009, the top estate tax rate was 45%, and estates received an exclusion of $3.5 million.

Year

2009

2010

2011

Estate tax exclusion

$3.5 million

N/A

$1 million

Top estate tax rate

45%

No tax

55%


Other important changes

Other changes for 2011 include:

Phaseout of itemized deductions and exemption amounts--Itemized deductions and personal exemption amounts will once again be phased out for higher-income individuals
The "marriage penalty" returns--Changes made to correct the federal income tax "marriage penalty" expire at the end of 2010, resulting in a reduced standard deduction amount and lower tax bracket thresholds (i.e., higher rates will apply at lower income levels) for married couples filing jointly in 2011
Tax credits get cut--The child tax credit will be reduced and both the Hope education tax credit and the earned income tax credit become less generous (the Making Work Pay tax credit also disappears)
Section 179 small business expensing--The increased IRC Section 179 expense limit ends (Section 179 allows small businesses to elect to expense the cost of qualifying property rather than recover the cost through depreciation deductions); the amount that a small business may expense will drop from $250,000 in 2010 to $25,000 in 2011

The Domino Effect??

http://www.collaborativefinancialsolutions.com/files/LPL/Research/RES%202354%200610.pdf


Many investors and market pundits prescribe to the Domino Theory, which states that one bad event tips over another issue that eventually causes everything to fall just like dominos.

The thought is that the already fallen dominos, such as unemployment, home losses, Greece, and others, have created a wave that will spread through the global economy.
While the Domino Theory certainly makes sense in the realm of little black stones with white dots on them positioned in an orderly pattern, it is based on assumptions that frankly do not hold water in the complex world of global markets.
While there has been much focus on the negative effects of the crisis in Greece and other European nations, the markets have not factored in that positive events have also sprouted as a result of these issues.

Consumers have lower mortgage rates, lower gas prices, and employment has posted job growth to the tune of 1.1 million net new jobs (not including census workers) in six of the last seven months.

Global central banks in economic powerhouse countries like the U.S., China, and Brazil once again have a reprieve from inflation concerns.

Valuations are now set at attractive levels, and fundamentals of the market continue to trend towards the transition to sustainable growth.

But do not expect a straight up rally from here — volatility will likely remain very elevated.

Leaving your job? Put an IRA to work!

After leaving a job, workers generally have three options when it comes to the money they have saved in their former employer’s retirement plans. They can keep the money in the plan, roll the money directly to an individual retirement account, or cash out and take a lump-sum distribution.

The way in which you handle your retirement plan assets when leaving a company is an important decision that could affect your retirement savings considerably. One of these choices may result in current taxes and penalties. One may end up limiting flexibility and your investment options. Rolling your money directly to an IRA may enable you to avoid the hassle and cost of the other two options while you continue saving for retirement.
Cashing Out

Taking a lump-sum distribution not only subjects the withdrawal to income taxes plus a 10% federal income tax penalty for someone younger than 59½ (with certain exceptions), but companies will withhold 20% for taxes. Despite these disincentives, 46% of workers who left their jobs in 2008 decided to cash out and pay the taxes and penalties.1
Staying Put

Although leaving money in your former employer’s plan may avoid current taxes and penalties, it may not be the ideal saving situation for you. Not all plans allow former employees to remain, so you might get the boot. If your plan allows your funds to stay, you may be subject to certain restrictions and will continue to be limited by the investment options offered by that plan.
Rolling Over

By transferring funds directly to a traditional IRA, you can preserve tax deferral and avoid penalties. Beyond that, IRAs offer benefits that aren’t available with many employer-sponsored plans.

IRAs tend to have more flexible rules than workplace plans. This can affect everything from customizing your investment selections to naming your beneficiaries. IRAs generally have fewer restrictions when it comes to inherited plans, which could make it easier for your heirs to stretch the account into possibly decades of tax-deferred growth potential. Finally, the range of investment options with an IRA vastly outnumbers that of most employer-sponsored plans.

Distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income. Distributions taken prior to age 59½ may be subject to a 10% federal income tax penalty, except in cases of the owner’s death, disability, or a qualified first-time home purchase ($10,000 lifetime maximum).

1) Hewitt Associates, 2009

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.
Santa Barbara Financial Consultant, Janet L. Barr