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The Advisory Firm Newsletter:  March 2013

THIS MONTH IN PERSONAL FINANCE: Higher Education, Social Security and Roth 401k's

 

This month we will cover a variety of topics, hopefully a little something for everyone.......

Things that make you go hmmmm.....

If you choose personal finance as your career path you have to be optimistic by nature, however it is also an occupation where you tend to worry more about macro indicators more than most folks.

Case in point is the issue with College Education costs. Sometimes a chart is worth a 1000 words so courtesy of dshort.com, here we have a graphical representation of the inflation in costs of various services. One service in particular stands out for price increases:

 

And just to piggyback the above we now have a chart from last year (courtesy of dshort.com/ Mike Shedlock) showing loans in delinquency, one category in particular reinforces the problem above:

Is there anything positive that we can takeaway from the above trends? Actually yes, supply and demand / market forces will eventually correct this imbalance. If students are unable to find jobs to allow them to service their debt, enrollment will begin to fall until colleges bring down their costs. It may take sometime for the higher education bubble to pop, but eventually they will have to correct their pricing like any business, or lose out to competitors.

 

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Some Facts about Social Security:

  • To be eligible for social security you must have earned 40 credits from a SS covered job. (1 credit per quarter for 10 years)
  • Your benefit is called your Primary Insurance Amount or PIA
  • Your PIA is calculated based on your highest 35 years of income indexed for inflation.
  • If your full retirement age (FRA) is 66 and you elect to take early benefits at 62 it will be approximately 75% of your full benefits.
  • Your spouse is eligible for the higher of their own PIA or half of your PIA at full retirement age.
  • Benefits are supposed to be adjusted for inflation via the CPI (consumer price index), in 2012 they were adjusted 3.6% the previous 2 years there was no adjustment.
  • Widows/Widowers can claim survivor benefits as early as age 60, although there will be a reduction for claiming benefits earlier than full retirement age.
  • In 2013 the maximum monthly benefit is $2533.
  • By postponing your benefit after full retirement age it will increase 8% annually up to age 70.
  • If you claim early benefits (age 62) the maximum earnings you can make is $15,120 annually up through age 65 or your benefits will be penalized $1 for every $2 you earn over the limit.
  • Once you are over age 66 you can collect benefits and continue working with no penalties.
  • Everything above does not count if you worked a partial year prior to retiring and filing for benefits. It only effects working after you file for benefits.
Roth 401k:

More employers are offering Roth 401k option to complement their existing traditional 401k, so which do you choose?

The Roth 401k works identical to a Roth IRA in that you don't get a tax deduction for contributions but all future growth is tax free. However, there are a couple of very big differences in the two, because the Roth 401 operates exactly like a traditional 401k it means you can put up to the annual IRS limit into the plan, for 2013 that is $17,500 (vs. $5500 for Roth IRA). It also means that there is no income cap on contributions.

With a Roth IRA you are unable to participate if your household AGI exceeds $178,000 joint or $112,000 single (beginning of phase out for participation). With a Roth 401k this income cap does not apply.

So which to choose Roth 401k or Traditional 401k? Everyone is unique in their needs but a rule of thumb would be if you have enough free cashflow each month so that your not hurting with the excess taxes withheld from your paycheck, then go for the Roth 401k. In the long run you will thank yourself.

One note: more companies are also allowing a Roth 401k conversion from a traditional 401k. Just like converting a traditional IRA to a Roth IRA, it is beneficial if you have time to allow the money to compound AND you have excess saving on the side to cover the tax bill when it comes due. Any conversion is booked as ordinary income, so plan in advance as it may bump you into a higher tax bracket when you convert.

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I hope you enjoyed this months newsletter. If you have any questions about planning or investing feel free to drop me an email:

James A. Daniel, CFP

 

Disclaimer: this information is for general purposes and should not be considered tax advice. Talk with your accountant and/or advisor before implementing!

© 2011 The Advisory Firm. All Rights Reserved.


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The Advisory Firm, LLC provides fee-only financial planning services for clients throughout metro Atlanta and North Georgia including the communities
of Alpharetta, Canton, Cumming, Dawsonville, Duluth, Dunwoody, Marietta, Midtown, Roswell, and Woodstock.

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation
for financial services. Consult with your financial professional if you have any questions. The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.