Your Biggest Financial Decision

What’s the biggest financial decision you’ll ever make? Going to college? Buying a house? Maybe, but it may also be true that the biggest financial decision is the decision about when to claim Social Security. And that is a decision where you’ll hear people give opposite advice – some will recommend claiming early, and others encourage you to wait.

Because it’s a big decision, it’s worth exploring your options carefully using readily available online tools. Tool #1 is well-known, but read on to tool #2, as well, because it offers a bonus.

Tool #1: Set up your account at www.socialsecurity.gov and check out your options. Notice how your monthly Social Security income changes depending on your age at claim. You’ll notice that it’s not just what year, but also what month, that matters. For example, if you turn 67 in November, but really don’t have any plans until summer, working an extra 5 or 6 months will give you a higher monthly income.

Tool #2: Check out the Social Security Estimator from the Consumer Financial Protection Bureau (CFPB).  Although this tool is not personalized to your individual history of work and earnings, it does something the Social Security tool does not. It shows the cumulative impact of your decision about when to claim. 

Here’s how the CFPB tool works: You enter your birthdate, and type in how much has been your highest annual earned income in your career. Based on that, it estimates what your social security retirement benefit would be at your full retirement age, and at other ages between 62 and 70. When you select an age, it shows what your monthly income will be, AND (in the left margin) it shows the total amount you will receive from Social Security if you live to the average life expectancy of 85.

graphic depiction of output described.
Combined graphic showing calculator results at ages 62 and 70

I ran an example for a person born in 1960 whose highest earning level was $50,000/year. If they claimed at age 62 and lived till age 85, they would receive a monthly benefit of $1,112 and would have received a total of $305,800 from Social Security during their life. By contrast, if they claimed at age 70 and lived to age 85, their monthly benefit would be $1,958 and their total by age 85 would be $352,440. Note: all these figures would actually be higher, because of adjustments for inflation.

There is no “right” age to claim Social Security; your choice depends on your situation – your needs, other sources of income, health situation, and more. But using available tools, including the CFPB calculator which enables you to easily see the total impact of your decision at age 85, will help you make a well-informed decision. Find more retirement planning information our retirement resource page.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Roth vs. Traditional – Understand your Options

If stepping up your retirement planning is part of your new year’s resolution, one key is to understand the pros and cons of traditional tax-deferred accounts in comparison with Roth accounts.  Individual Retirement Accounts (IRAs) come in both “flavors,” and many employer accounts have both options as well.

The differences between Traditional and Roth affect your retirement in two main ways:

  1. How much money you’ll be able to spend in retirement after taxes; and
  2. Flexibility of withdrawals in retirement (this is affected in a couple of different ways).

Whether you are saving for retirement or are already retired and need to decide when to withdraw from which account, understanding the differences matters.  To better understand how those differences play out and how you might put them to work for you, ISU Extension and Outreach has a new on-line mini-lesson (20 min).  It’s part of our collection of retirement resources, which includes mini-lessons on five other topics and sixteen printable publications.

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Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Year-End Statements = Opportunity

In the last ten days I have received year-end statements from all three of my retirement accounts.  The arrival of these financial statements presents great reminder to do a retirement check-up.  Now is the time to do a calculation to see whether your retirement investments are on track to give you a comfortable retirement.

There are many retirement calculators on-line; most investment firms have them.  They’re not all the same; different calculators present information in different ways, using different assumptions and perhaps emphasizing different aspects of the situation.

Calculators often have built-in assumptions about things like inflation, life expectancy, or investment return.  With that in mind:

  • Try to identify the key assumptions built into each calculator.
  • Use a variety of on-line calculators, rather than sticking with just one. Looking at the different responses you are given by different tools will make you familiar with a wider range of possibilities.

Most on-line calculators are commercial; they are posted by companies that have products or services to sell. Keep that sales motive in mind as you review the information you receive.  Occasionally, a tool will subtly steer consumers toward a particular type of product.  By being aware, you can avoid making decisions based on biased information.

Fortunately, there are free non-commercial retirement calculators available on-line as well. Here are two provided by non-commercial organizations:

  • Ballpark E$timateThis tool is, as its name suggests, a ballpark estimate.  It doesn’t go into great detail.  It is especially appropriate for people who are a long way from retirement, don’t have detailed retirement goals, but just want to be sure they’re on track.
  • Department of Labor Retirement Calculator This tool provides detailed on-line worksheets for examining retirement expenses as well as your income.  It is particularly useful for those who are fairly close to retirement and ready for more detailed planning.

If you work with a financial adviser, he or she plays a key role in your retirement planning; even then, however, it is wise to take an active role in the planning.  Your adviser will be the first one to tell you that you must be the one to make the final decisions.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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myRA- Another way to Contribute

125183558Changes – good changes – are coming in how individuals can make contributions to the new myRA accounts.  Our May post shared some details of how to enroll and who was eligible. At that time, the only way to participate was to have your employer withhold contributions from your paycheck. Beginning this fall, you can submit to the US Treasury your bank routing and account numbers for auto-withdrawals.  The new option  should make it possible for self-employed individuals to participate in this new Roth option.

When you file your tax return at the beginning of 2016 you will also be able to direct all or part of your  federal tax refund to your account. In the refund section of your tax return simply mark the “Savings” box, provide your myRA account and routing numbers, and designate how much of your refund you want to put towards your savings. If your income falls within the range that qualifies for the Retirement Savings Tax Credit, you’ll realize additional tax savings.

Joyce

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Social Security Retirement Estimator

When you think about great on-line tools, Social Security may not be the first source that comes to mind — but they really do have great tools.   Here’s one that is useful to all adults as they plan for retirement (and I don’t mean when you turn 60!  By your early 30’s, it’s generally time). I encourage you to check out the Retirement Estimator.

The Retirement Estimator is an easy way to get an instant, personalized estimate of your future Social Security benefits. Just key in some basic information and the Estimator will use information on your Social Security record, along with what you input, to give you a benefit estimate on the spot. You even can experiment with different scenarios, such as changing your future earnings and retirement date. Check it out at www.socialsecurity.gov/estimator

(It’s also available in Spanish at www.segurosocial.gov/calculador)

It’s easy and safe, and it’s an important step in making sure you’ll be ready when retirement rolls around!

– Barb

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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