Freebie Website: SocialSecurity.tools

January 25, 2017 by Andrew Leave a Comment

Earlier this week, I came across a nifty resource at socialsecurity.tools. The website, made by an individual not the government, helps provide a clearer picture of what one’s Social Security benefits will be at different ages and different working year earnings. This is particularly helpful for planning a retirement that is before the normal age of 65 or when you expect your earnings to significantly change up or down in the coming years. As it stands, the official SSA.gov website only gives very generic estimates about your SS benefits and it only does so after you have earned the prerequisite 40 working credits, something that is difficult for anyone in their 20s to accomplish (because you can only earn a maximum of 4 per year).

Seeing as this tool was created by a stranger on the internet and deals with personal finances, it is prudent to check the security and safety of the site before entering numbers. The about page has this to say about Security.

Security

This site does not store any data entered by users. All calculations are made client-side in the browser’s JavaScript and are never transmitted over the internet.

While unnecessary for security, this can be confirmed by loading the site in your browser, and then disconnecting your computer before entering any additional data.

Yes, it is safe to use. Furthermore, it is really interests you, the author of the tool has made the source code public on GitHub.

You will need a free SSA.gov account in order to use the tool. SSA.gov keeps a record of your earnings that you will copy and paste into the tool. Once you have done that, you’ll see a screen that looks similar to this (I used one of the demos for all the screenshots below, they are not my numbers).

Additional information is available as you scroll down the page. You may recognize the PIA vs AIE ‘bend-point’ graph from one of my previous blog posts. With this tool, you can see where exactly you’ll be on that graph.

Finally, farther down, you can get an idea of how your benefit will change depending on when you start taking it. Currently, age 62 is the soonest that you can begin taking benefits. It also carries a -30% penalty. You must start taking benefits by age 70, and waiting that extra time caries a 24% increase in yearly benefit payout.

I would encourage you to check out this tool, doubly so if you are in your twenties or thirties. One of the greatest misconceptions about retirement planning is that it is something that you do when you are in your fifties or sixties. Retirement planning is best done early in your career so you have time for compounding interest to work!

More “benefits” of FI/RE

April 25, 2016 by Shae Leave a Comment

My employer announced changes to the paid time off (PTO) policy today. Though it’s being touted as “better” and “more in line with industry standard,” like most benefits changes it’s meant to help the employer not the employee.

The current system is set up such that for XX number of years of service you get XX days of personal vacation (renewed in June), XX days of personal sick leave (renewed on your anniversary), and 3 days of personal time (renewed every January). The rules for how you can use each vary. The new system will do away with that and combine everything into one bucket with some special rules for long term federally protected leaves and one-off events like jury duty and funerals. Instead of once a year allotments, employees will get a fraction of their PTO days every pay period. Less tenured employees who don’t use a lot of sick time, like myself, will see an bump up in usable PTO days. Pretty nice huh?

The extra days up front will be a boost in the short term but after you do the math anyone staying long term will lose out compared to today’s plan especially with the new accrual caps and timings.

It is always good to have a back up plan as employee benefits packages can change suddenly and without warning. Just a few years ago there was a radical change to the post-retirement healthcare subsidies that left many retirees and soon-to-be retirees confused as to what exactly was going to happen to their healthcare and how they could afford it. In the past you could put in 35+ years of service and retire with a guaranteed pension. That doesn’t happen much anymore. Employers have to change to stay solvent. I wouldn’t be surprised if our own pension and 401k plans were to change over the next decade given the aging workforce.

By taking responsibility for your own finances and not relying on anyone else to provide for you (whether that be your employer or the government’s Social Security) you cushion yourself from the sudden benefits changes that may devastate someone else. Our goal to be financially independent by 40 makes the new PTO policies an non-issue for us. We’ll happily take the extra days off that we would have had to wait years for. By the time that the new policy would become a negative we’ll hopefully be in a spot where we are a) completely retired b) cut back to part-time or c) selfishly employed somewhere else (in no particular order of preference).

EBRI 2016

March 22, 2016 by Andrew Leave a Comment

The Employee Benefit Research Institute, or EBRI for short, just released their 2016 survey results of 1000 workers and 500 retirees. The annual survey has been ongoing for a couple of decades now, so it provides a good indicator of where Americans are in regards to retirement confidence and thought process.

You can view the full survey brief here: https://www.ebri.org

My own conclusions after skimming through the charts and figures is that Americans are still on course for a rude retirement awakening.

21% of workers in 2016 are confident that they will be able to retire comfortably and 19% are not at all confident with the rest in-between, but 67% of current workers expect to continue working in retirement.

Compare the blue line (current workers) with the red line (current retirees). Either we are going to get used to seeing older people in the workforce, or a lot of people are going to be in for a rude surprise when they cannot find employment as they get older.

Looking at the Savings and Investments by age doesn’t exactly inspire confidence. The Baby Boomer generation is woefully underprepared for retirement with 1/3 of respondents claiming less than $25k in savings. That would probably cover 1-2 years of living expenses. Gen X and Y (Millenials) aren’t doing much better.

Married men seem to be the most motivated to save for retirement. Unmarried women don’t seem to have the same kick in the pants.

A whopping 23% have raided their retirement accounts for present day needs/wants.

I think the biggest threat to retirement in America is people simply burying their heads in the sand. They know that it is a problem, but it is easier to kick the can down the road instead of dealing with it right now. The problem is that developing a solid retirement takes time! Kicking the can down the road isn’t the answer!

What can be done to help avert a retirement crisis? Enroll in your employers 401k plan and/or setup an IRA. Workers enrolled in a plan had significantly more saved than workers not enrolled. Paying yourself first works!

Should You Work Longer to Increase Social Security Payout?

December 17, 2015 by Andrew 1 Comment

I read an interesting blog post about a month ago that talked about the effect of early retirement on social security. The writer concluded that retiring early on a high income was essentially the same as working longer at a lower income. In essence, the total amount of income is more important than time in the system.

The reasoning behind this is how social security payments are calculated. The SSA, Social Security Administration, uses a formula to calculate ones benefit. That formula works off the PIA or primary insurance amount. The PIA formula uses a sliding scale and the average indexed monthly earnings (AIME).

Confused? Good. Then we were in the same boat the first time I read through this as well.

An example and charts will help explain the whole mess.

AIME

For starters we have the AIME, average indexed monthly earnings. Simply put, this number is how much you have earned in a 35 year period divided by 420 (35 years * 12 months). If you made a million dollars ($1,000,000) over the course of 35 years your AIME would be $2381 (they get rounded to the nearest whole dollar).

If you work more than 35 years, the lowest working year incomes are tossed out. If you work less than 35 years (early retirement) then the empty years are filled with zeros and that drags your AIME down.

Finally, in order to qualify for SS, you have to earn 40 work credits. You can earn up to 4 credits per year. To simplify, you have to earn money for at least 10 years to qualify for your own SS benefits (non-spousal).

You can look up your current work credits and earnings income on ssa.gov.

Now that we have an idea of what AIME is and what your AIME number could be, let’s see how the PIA formula plays out.

PIA

PIA works on a sliding scale. The first $856 of your AIME pays out at 90%. The amount of AIME between $856 and $5157 pays out at 32%. Anything above $5157 is paid out at a measly 15%. Graphically, it would look something like this:

Let’s consider two hypothetical men Mr. Management and Mr. Pleb. Management has done quite well for himself and his AIME is $6000 ($2.5 million earned over 35 years). Pleb has an AIME of $3000, half that of his middle management boss.

Using the PIA formula we can figure out the social security benefit for each man.

Mr. Management would get:

($856 * 0.9) = $770. This is before the first bend point

Plus

($4301 * 0.32) = $1373. This is between the two bend points

Plus

($843 * 0.15) = $126. This is after the final bend point

His total benefit would be $770 + $1373 + $126 = $2269/mo

You can see how the sliding scale makes the first $850 yield so much more than the last $840 dollars (770 vs 126). Social Security was designed to be a progressive system and is inverse of our progressive income tax system (the rich pay more and get less).

How about Mr. Pleb?

($856 * 0.9) + ($2144 * 0.32) = $1456/mo.

Mr Pleb made half as much as his boss, but will get more than half in social security.

How is this Useful?

Now that we know how the system works, we can game the system. It should be obvious that reaching the first bend point is critical to maximizing ones benefit. It should also be apparent that exceeding the second bend point is rather pointless in terms of benefit returns.

To fill up the first bend point, you’ll need to earn $359,520 over the course of 35 years (~$10k/year). It doesn’t matter if you earn 10k a year for 35 years or 360k in one year and nothing in other 34 years. Your SS benefit will be the same.

Social Security lacks returns once you cross over $2,165,940 of earned income (~$62k/year).

To game the system, try to earn as closely to 2.1 million as possible. Once you’ve made that, you can stop asking yourself if working longer is worth it for a bigger SS check. If you don’t make it to that amount, don’t sweat it. The really important bucket to fill is that first 90% payout.

Personal Finance 401

May 17, 2015 by Andrew Leave a Comment

School is almost out for the summer, but you should always be learning new things in life. Today we’ll cover an advanced personal finance topic. It may sound like goobly gook, but the payoff is worth it! So break out the notebook and pay attention.

Roth Conversion Ladders

What if I told you that you could retire earlier or with substantially more money and you didn’t need to earn more or spend less. Does that sound too good to be true? Well, it is true thanks to a little strategy called roth conversion ladder.

What is it?

During your working years that you are saving up for retirement you have three options as to how you can save your money.

The first option is to use a traditional 401k or IRA (individual retirement account). With this type of savings account, your contribution gets to grow tax free. Then when you reach retirement age (59.5) any withdrawals that you make are taxed.

The second option is to use a Roth 401k or IRA. Your contributions are taxed going in and then at retirement age you can withdrawal the principle and interest tax free.

The third option is to invest in a taxable account. Generally the contributions to a taxable account are post tax and any gains (withdrawals) are also taxed. It is kind of the worst of both worlds. The one bonus is that you do not have to wait until retirement age to access the funds.

To sum it up, you can either pay the tax man when you retire, when you earn, or both.

A Roth conversion ladder is a strategy where you use a traditional IRA as your primary savings vehicle and then over time you convert the balance over to a Roth IRA. In doing so, you get the best of both worlds. Your initial contribution is tax free and can grow for many years and your eventual withdrawal is also tax free. The tax man can be removed from the equation and the best part is that it is perfectly legal!

How does it work?

To start the process, upon retiring any traditional 401k funds will need to be rolled over to an IRA. This is pretty straightforward and according to Vanguard, it involves 3 simple steps that should take you less than 30 minutes.

Now the real fun begins. The IRS allows you to transfer IRA funds to a Roth IRA as long as the transferred money is considered income and taxed as such. Also transferred money is not accessible for a period of five years. Uncle Sam gets his cut during the transfer and is happy. You are also happy because you realize that being a newly retired individual your taxable income is basically whatever you transfer between accounts. You also know that income tax doesn’t kick in until you cross a certain threshold (exemptions + standard or itemized deduction). For example, since we are married and have one dependent we could convert up to $24,600 a year without paying a single penny in taxes.

$12,600 (standard deduction) + $12,000 (three times personal exemption of 4,000)

Obviously when Frugal Boy strikes out on his own, we will lose a dependent, but we would still be able to convert $20,600 a year tax free.

Roth Conversion Ladders are awesome because you get to grow money relatively tax free.

Perhaps the easiest way to understand the strategy is to see an example. Thankfully, Root of Good, has already packaged together some easy to read tables that show how it works.

[credit] http://rootofgood.com/roth-ira-conversion-ladder-early-retirement/

Root of Good also explains some intricacies nicely, such as how to handle inflation during the five year waiting period, how to best cover the five year gap, and their own personal conversion plan.

Why Bother?

If this sounds like a lot of work or is overly confusing you may be asking yourself why should I bother. JL Collins, an early retirement advocate, crunched the numbers and determined that by using this strategy to minimize taxes, the test case individual could retire two years earlier than just sticking to the conventional script. You don’t have to earn more or spend less, just plan ahead and you can retire sooner!

When should I consider it?

Roth conversion ladders are best suited to those planning on an early retirement. The conversion takes time (the more time you have, the less taxes you’ll have to pay).

In Summary

If you are just starting out and the prospect of early retirement is appealing to you then you should utilize a traditional 401k and/or IRA. Having some money in a taxable account will help you cover the first five years of converting, but your primary goal should be to stuff as much money as possible into the tax advantaged retirement account. Later on in life, you can figure out the specifics of how you are going to access that money in a tax minimal way.

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