5 Changes coming to Social Security in 2015

In October 2014, the Social Security Administration announced several changes that it planned for the year 2015. Some of them were routine ones; others were a change of policy. Here are five of the most significant changes that you can expect to see to Social Security rules in the year 2015.

Bigger checks are coming

The Social Security Administration automatically tracks the Consumer Price Index for Urban Wage Earners and Clerical Workers to make sure that its benefit payments keep up with inflation. Social Security adjustments were non-existent in some years (2010 and 2011) and as high as 14% in others (1980, for instance). In the year 2015, Social Security recipients will see a 1.7% cost-of-living boost to their checks. While the average benefit to retired workers was $1,306 in 2014, it will rise to $1,328 in the new year. The average retired couple will make $2,176 a month (a rise of $36).

A higher maximum benefit level is planned

In 2014, the maximum Social Security benefit possible for any worker was $2,642. This limit has been raised by $21 for next year. In 2015, the maximum benefit possible for any worker will be $2,663.

A higher tax cap is planned

In most cases, workers contribute 6.2% of their paychecks to Social Security until their payments reach a set tax cap. Up until 2014, the maximum taxable earnings for the purpose of Social Security contributions was $117,000. This will rise by $1,500 in 2015. This change will have the effect of raising contributions for 10 million workers. Those who earn more than $180,500 will not pay Social Security taxes on the excess. They wil also not see these earnings factored into their Social Security benefits.

Bigger earnings limits are expected

Social Security recipients under the age of 66 may earn as much as $1,306 each month in the 2015. Over this amount, the SSA will withhold 50% of all benefits due. Beneficiaries who turn 66 in the year 2015 will have 33% of benefits received beyond $41,880. Past the age of 66, though, there is no limit to what can be learned.

The SSA is sending out paper statements

The SSA used to send out paper statements to all recipients each year. In 2011, though, the Administration suspended these mailings to conserve its resources. Beginning 2015, these mailings will start again. If you are over the age of 25 and haven’t signed up for an online Social Security account, the SSA will now send out paper statements once every five years until you turn 60. These paper statements will record your earnings history, information about taxes paid, the benefits you can expect to receive and so on. Typically, you will receive these paper statements about three months ahead of your birthday on the years that they are due. Past the age of 60, the SSA will send out yearly paper statements.

Downsizing Dilemma – Should You Pay Cash for Your New Property or Invest the Proceeds Instead?

Many people follow a familiar pattern when it comes to real estate. When they are young, they save as fast as possible, scraping together the money for a down payment on starter home. As they begin to earn more money, they sell the starter home and move into a succession of ever larger houses until they reach the home of their dreams.

That pattern often reverses itself as individuals near retirement. The idea of having a huge home, and an equally huge mortgage payment, is not as appealing in the absence of a steady paycheck. Getting ready for retirement often means paying off the mortgage as quickly as possible, making extra payments in an attempt to become debt free.

Getting Ready for Retirement

Those retirement preparations may also involve selling the dream house and moving into a more modest property. Sometimes that means moving to a new town, where the cost of living is lower, or heading to a resort community where leisure activities are plentiful. No matter what the situation, downsizing from a large and expensive home to a more affordable dwelling comes with its own set of challenges.

One of the most significant dilemmas is what to do with the proceeds of the home sale. If the house is completely paid for and the new property is a modest one, you could walk away with hundreds of thousands of dollars in your pocket. How you handle that windfall will have a profound impact on your retirement living, your estate and the rest of your life.

House Rich and Cash Poor

For many people a house is the single largest asset they own. There is nothing wrong with that, but it can also mean being house rich and cash poor. Having the majority of your net worth tied up in real estate can sometimes be problematic. If you need money from a stock portfolio, you can sell a few shares. If your home is your only major asset, you cannot sell a room to raise cash.

Selling your expensive property and buying a cheaper one gives you a chance to fix the house rich/cash poor situation. If your cash and investment portfolio is lacking, taking the proceeds of the home sale and boosting your savings makes a lot of sense. If you have never invested before, it might even make sense to take out a mortgage on the new property and put the proceeds from the home sale into a well-diversified portfolio.

The expected return also plays a role in the decision to pay cash vs. invest the home sale proceeds. While the stock market is subject to wild swings in value, over the long run it has returned more than 8% a year. That would argue for the investment approach, since mortgage rates are currently much lower than that. There is risk, of course, and stock market investing should be confined to money you will not need for at least 10 years.

If you already have an impressive portfolio of stocks and bonds, paying cash for the new property can make more sense. Not having a mortgage can give you real peace of mind in retirement, and having a paid-for house can balance out your portfolio.

It should also be noted that some people simply do not want to be in debt. The idea of carrying a mortgage in retirement can be scary, no matter how low the interest rate. If that describes you, it makes sense to pay cash for your new property and sleep more soundly at night.

In the end, there is no one right answer to the downsizing dilemma. Some people are quite comfortable carrying a mortgage and investing the proceeds of the home sale, while others would rather own the roof over their head. No matter which approach you ultimately choose, weighing the options and evaluating your overall portfolio are essential.

Is Market Volatility Inevitable?

Many people avoid investing in the stock market, and it is easy to understand why. The past decade has seen an almost unprecedented level of market volatility, including the most vicious bear market since the Great Depression. The recession we experienced in 2008 and 2009 led to a sharp market decline, and many investors panicked out a the bottom.

The market has turned around since then, rocketing up more than 200% since its bear market lows. Even so, the stock market has remained an extremely volatile place, which sharp corrections and severe day-to-day gyrations.

It is important for stock market investors to realize that these kinds of ups and downs are par for the course. Market volatility is an inevitable part of investing, and panicking out when the market suffers a decline is a sure way to lose money. The people who sold at the depths of the last bear market turned their paper losses into real ones, while investors who held on through the pain saw their accounts grow substantially.

Statistically speaking, the stock market experiences a correction roughly once a year. In stock market terms a correction is defined as a drop of 10% or more. If your portfolio is worth $100,000, that means a drop of at least $10,000. With that kind of volatility, it is no wonder so many investors stay up and night worrying about their money.

The problem with that short-term thinking is that it overlooks the impressive long-term record the stock market has accumulated. Over the long term, the stock market has returned more than 8% per year, better than almost every other investment. That does not mean investors will see a steady 8% a year rise in the value of their accounts, of course. That is where the inherent volatility of the market comes into play. In just the past decade, stocks were down in excess of 30% one year and up more than 40% during another time period. Since it is impossible to predict which way the market will go in the short term, the only thing investors can do is stay the course.

Investors can also take steps to reduce the volatility of their own accounts. Mixing in less volatile holdings like government bonds and certificates of deposit can reduce the overall volatility of the portfolio substantially and make it easier to get a good night’s sleep.

Stock market investors can also reduce their own volatility by choosing their holdings carefully. Mutual funds and stocks are rated based on their beta coefficient — a measure of volatility. A beta of one represents average market volatility. A higher beta coefficient means more volatility, while a lower number means the investment should be less prone to price changes than the overall market.

There is nothing you can do to eliminate the volatility of the market, but you can control it to some extent. Over the long run the stock market has been a superior investment, and investors who avoided panic and stayed the course were amply rewarded for their courage.

Men and Women Look at Investing from Different Perspective. How Do You Blend the Plans to Make Both Happy?

Like many other things in life, men and women look at investing differently, but that’s not to say they can’t learn from each other. Men and women are positioned differently in the world of finances as this industry is mostly male-dominated, thus it is not surprising that they make their financial decisions in different ways. Nevertheless, they can work together and make both sides happy with the products and the ways of investing by learning what the other person wants and embracing their differences.

On average, women are less likely to invest at all and when they do they take fewer risks. Men, on the other hand, often make more money than women and by simple mathematics have more money to invest. In addition, the financial world is mostly male-oriented so men are more familiar with various investment options than women. Many financial advisors suggest to both sides not to take any action before making sure they understand what they’re getting into and to also try and keep their investment costs low. Women relate well to this point of view as they are generally more cautious in the world of finances and take longer to research a product they are considering investing in. Similarly, men claim they are well informed and knowledgeable when it comes to investment options, while in reality the level of knowledge does not vary as much as it would be expected between the sexes. Women are eager to learn about finances, ask more questions before making a decision, and they are usually long-term oriented. Men, on the other hand, mostly focus on their short-term plans, so it can sometimes be challenging to bring the two sides to agree on the joint course of action when it comes to investing.

One of the ways to blend the plans to make both sides happy is joint investments. By investing together, the man can take more risks as the woman gets more familiar with the stock market and in turn becomes inclined to invest more often or invest larger amounts. On the other hand, when the market is volatile, the male side can learn from the female side that a lower risk tolerance can save the family from a financial downfall. Creating a financial plan that makes both sides happy is key to having a pleasant investment experience. As is the case with any issue in a relationship, compromise always goes a long way. The idea is not to make a financial plan that works for one side but not the other. Neither person should be forced to commit to something they are not comfortable with. It is crucial to always keep in mind the main objective, which is for both sides to be satisfied with their choices.

It is not surprising that men and women approach investing differently, with the female side being more cautious, and the male side taking more risks and focusing on short-term plans. Notwithstanding, men and women should be able to work out their differences and make sound financial decisions together with both sides being happy if they learn to compromise and embrace the other person’s point of view.

Planning for the Expected

Many financial advisors lead clients planning for retirement to believe that once they stop working, they will be able to get by on no more than 80% of the money they need while they work. The 80% figure seems believable to many: they reckon that they will need less money when they will no longer have children living at home and no longer spend on work clothes or a daily commute. These careful calculations, though, invariably fail.

New retirees tend to be healthy, energetic and filled with a desire for great new experiences. Fresh with excitement from their new-found freedom, they find an appetite for foreign travel, golfing, boating, social work and other costly pastimes.

The fact that life tends to throw up expensive problems can be a concern, as well. While these situations don’t happen to everyone, they are common enough to require planning for. These predictable surprises can completely ruin your retirement planning if you don’t have enough money set aside for them.

An adult child in need of help

Thousands of parents each year find that their children have a harder time making it in life then they thought. With recessions, technology transitions and outsourcing eating away at traditional sources of livelihood, it can be harder for young people to find a footing in life now than ever before. Young adults often have no way out other than to ask their parents for help. Requests for bailouts are so common these days parents need to make room for them in their retirement plans — even if they feel that their children are doing very well.

Taking care of a sick parent

Many retirees are taken by surprise when they find that a parent who has been independent for years is one day unable to manage on their own. A stroke, a fall or Alzheimer’s may make independence out of the question. Parents may need extra help for their healthcare expenses or at least for household help.

Helping a grandchild with special needs

It can take a great deal of money to give a grandchild born with disabilities a fair shot in life. In some cases, the child will need to be provided for with an endowment that can support him through life. While people tend to not believe that they could ever have a disabled child in the family, there can be serious financial consequences if the unexpected does happen. It’s important to make room for the possibility.

Moving costs

Moving to a part of the country with better climate is an important part of many retirement plans. While many people do plan for the costs involved in buying a home elsewhere, though,they tend to forget to factor in moving and renovation expenses. These needs can amount to tens of thousands, and can burn a major role in any retirement budget.

It’s important to plan for the same level of spending

People rarely seen their expenses fall in retirement. From medical care to new interests and lifestyle expenses, they tend to need a great deal of money in retirement. Many people are taken by surprise when they find new expenses turn up to take the place of old ones. These rarely turn up out of the blue, though. They are common ones that most retirees face. It’s time that every retirement plan made room for them.

Should You Convert your IRA to a Roth IRA?

Traditional IRAs are paid out of pretax earnings, and require the payment of taxes on each withdrawal. When you convert your IRA to a Roth IRA, though, you only pay on your contributions and not on you withdrawals (in most cases). Such conversions, then, offer huge tax savings. Yet, aiming to save with a Roth conversion doesn’t make sense for everyone. Whether you should choose to convert or not depends on the specific circumstances of your retirement plans.

Converting to a Roth IRA can be a sensible idea in some cases

If you have major money in an IRA: The more money you have in an IRA, the more important it is to convert to a Roth. If you don’t, you will be forced by the IRS to pay RMAs at age 70.
If you often need to make late contributions: If you tend to put off making retirement contributions for very long each year, a Roth will allow you to get those savings by contributing at any time up to the last minute on tax day.
If you plan to leave money to your heirs: If you plan to give the money in your retirement savings to you grandchildren after your death, you get an after-tax benefit that’s twice what it would be with a traditional IRA.

You expect to stay in the same tax bracket: There is no minimum income level to be eligible for a Roth IRA. Whatever your income level may be, though, a Roth is a good idea if you expect to either stay in your current tax bracket or move to a higher one.

A Roth conversion may make little sense for others

If you depend on your investment for an income: When you convert your IRA to a Roth IRA, you need to pay brokerage fees upfront. It can take a few years for the tax savings that come with Roth IRAs to add up to a large enough sum to offset these fees. To anyone looking at retirement approaching in 10 years or less, there isn’t likely to be enough time to justify fees.

If you will spend your retirement in a lower tax bracket: When you contribute to a Roth IRA, you pay your current tax rate. If you plan to retire on a smaller income and a lower tax bracket, though, you could save a great deal simply by converting after you retire. You will pay lower taxes then.

If you cannot pay the tax upfront: If you need to convert a $250,000 IRA to a Roth IRA, you need to pay as much as $60,000 in tax upfront. In many cases, the money required can only come from breaking into an emergency fund or savings set aside for a child’s education. Roth conversions often look good on paper but fail to work out when real-world considerations are taken into account.

Understanding Hedge Funds

Financial products and concepts are poorly understood by the general public. The fear of numbers is common, and finance professionals sometimes profit from fostering confusion. The financial system has also become complicated in itself, as banks and other financial institutions employ the most ingenious brains they can recruit to dream up new and better ways of securing profit. The result has been an increasing detachment of finance from the real world of making and selling things, as financial structures that can only be explained by way of other financial structures are imagined and created.

What is a hedge fund?

The term “hedge fund” seems familiar, but mysterious at the same time, and is sometimes used as shorthand for everything that is perceived to be wrong with the financial sector. It is seen to embody complexity, disconnection from real life and exclusive devotion to profit.

Unlike some financial concepts, the basic idea of hedge funds is fairly simple, and the name itself is a major clue to its meaning. The expression “to hedge one’s bets” is in common use to mean “not to put all one’s eggs in one basket”. If you hedge your bets, you adopt a primary strategy that involves risk, along with another course of action that protects you to some extent against that risk, like an insurance policy.

How do hedge funds work?

A hedge fund is designed to hedge its bets in the financial sector with side bets as insurance. Hedge funds are not just about making profit, but about protecting profit by minimizing the risk of loss. The various strategies used by hedge funds to make and protect profits, whether the market goes up or down, in essence involve placing bets that will pay out when a particular market falls.

Short trading and arbitrage

Among the most notorious methods of profiting from a falling market is by ‘short trading’. Short trading means paying for the use of an asset you don’t own, selling it when you believe that the market may go down, then buying it at a lower price when that happens. The practice has a bad name because if a lot of stock is sold by people using the strategy, the price is likely to fall for that very reason. Falling stock can have consequences for people’s jobs in the real world.

When short selling is done instantaneously, buying low and selling high in different markets simultaneously, it’s called ‘arbitrage’. It’s possible to use this strategy when an asset is trading at a different price in two different markets at the same time. It’s harder to do successfully in today’s markets because instant communication has reduced the gaps in knowledge between markets.


Trading in futures markets is another strategy that is employed to secure profit. Again, it can have real consequences in the world outside finance. The idea of buying futures is in theory to make the future more predictable, to reduce volatility by buying the right to purchase a real commodity at a future time at a pre-determined price. In order to reduce the risk of paying more than the market price at that future point, the hedge fund might employ a strategy to balance things out. It could, for example, do a ‘short’ trade on futures in the commodity at the same time as buying it.

Distressed securities

Investing in distressed securities is another way of making an assured profit in a falling market. When assets owned by a company that’s failing are worth more than shares in the company, then acquiring the shares is a way of buying the stock at a reduced price, in order to profit if the company becomes insolvent and the assets are sold. Asset stripping is another phrase for such investments.

All the strategies briefly outlined above, and plenty more, are deployed by hedge funds in the service of maximizing profit and minimizing risk. Hedge funds tend to outperform other investment funds and are increasingly used by institutional investors. The trouble with complex speculation for profit, divorced from anything except the financial sector, is that decisions made that way can have results in the real world which are unintended and harmful. That’s why markets are all, to some extent, regulated.

What Does The Economy Have To Do with Your Retirement?

It’s tempting to shy away from any discussion of financial matters, and that applies even more to the world economy. A lot of people are put off by math as a subject at school because of poor teaching. They can develop a fear of math based on poor explanations from teachers and being shamed for making mistakes. The fear of figures, once learned at school, can last a lifetime.

Why we should understand figures

It’s not surprising then that a lot of people lack confidence in dealing with numbers. That’s a shame in today’s world when economic upheavals threaten the security of ordinary people. Public funding is being cut everywhere, leaving people with more need for self-reliance. Life is harder if you can’t handle a personal budget or understand the economy, at least as far as it affects you.

American society stresses individualism over family values when compared to many other cultures, and that may be one reason why it’s the exception rather than the rule for older people to move in with adult children. In hard economic times, middle-aged people are more likely to be helping their own children reach independence, rather than offering to support elderly family members.

So what other impacts have recent events in the world economy had on citizens’ retirement plans, aside from making life more of a struggle alal round and throwing people onto their own resources?

Printing money

One measure taken by several Western governments has been the strategy of ‘quantitative easing’, otherwise known as printing money. If an individual did this, they would earn themselves a jail term for fraud. When a government does it on an enormous scale, it’s regarded as a wise step aimed at avoiding financial disaster.

Quantitative easing creates money out of nothing, so that the money you earn or save becomes worth less. The new money has basically been given to the banks to use, rather than to individual citizens, so wealth has been transferred from people to banks.

If savings decrease in value, then the traditional answer for an older person is to invest in high interest accounts. Senior citizens, who may be relying on savings to eke out a small pension, don’t generally like the sort of high risk, high return investment that would stand a good chance of making a profit to beat inflation.

How to beat inflation

Unfortunately, the economic crisis has led banks to manage their increased funds in a very conservative way, and interest rates for savers have been extremely low for seven years or so.

With a justified fear of risky investments, and with savings being steadily eroded by inflation, senior citizens ignore economic factors at their peril. The safest answer in many economies is to invest any savings in bricks and mortar, provided that the property in question is in an area where demand is high.

The attractiveness of this option has led house prices to overheat in some places like London, where there is also an absolute shortage. It has also created a class of amateur landlords who are not necessarily able to provide the best service to tenants. But it’s certainly a strategy to consider, either as an individual or by pooling resources with friends or family.

Return on Investment Capital

As an investor, you want to find a profitable home for your savings. So, what’s the best way to assess a company’s profitability?

Although a ‘gut feeling’ about companies probably plays a part in decisions for many amateur investors, it’s essential to have more objective measures to help you compare companies with one another. You may feel drawn to a particular company for personal or political reasons, but, even so, should know the likely profit from your investment, so that you can either go in or stay out with your eyes open.

Some tools for comparing companies’ profitability are in common use. The three main ones are known as ROE (return on equity), ROA (return on assets) and ROIC (return on investment capital).

‘Return on equity’ refers to a calculation that compares the company’s ‘net annual income after tax’ with its ‘equity’, or the total value of its assets less the value of its debts. That means that long-term borrowings are disregarded. The ROE measure makes it look as though the whole profit has been generated by the equity, ignoring the part played by borrowed money in financing the company. So the company may look more profitable than it really is if it has been highly ‘leveraged’, in other words, if it has borrowed heavily against its assets.

The ‘return on assets’ metric counts borrowed money in the calculation, but has the drawback that it doesn’t differentiate between assets like land or machinery, which are used to generate profits, and assets like stock-in-trade, which will not be held long-term. A company may be holding a high amount of stock-in-trade for valid reasons, such as to take advantage of fluctuations in wholesale prices, but the ROA calculation may make it look relatively unprofitable. Nonetheless, ROA is a helpful way of comparing different companies operating in the same sector.

The concept behind ‘return on investment capital’ arguably has fewer drawbacks than the other two measures. It defines ‘investment capital’ as ‘operating net working capital plus operating fixed assets’. Operating fixed assets are only those assets that are used to generate income in the long term, like land or equipment. Therefore, it leaves out of the calculation the value of short-term assets like stock-in-trade or excess cash. It includes the figure for long-term liabilities. Therefore, money that has been borrowed for use in the business is factored in.

The ROIC measure can be used to compare businesses that have differing amounts of long-term debts, and also across different industries and sectors.

Unfortunately, the ROIC isn’t something that appears ready-made in a company’s ‘official’ accounts. It’s necessary to work the figure out from the available raw data. That’s not necessarily an easy task for the layman to be confident about. It isn’t rocket science though, and if an amateur investor wants to understand his or her investment choices, then it’s worth getting to grips with the concept. It’s also important that private investors understand the terms that are used by professional advisers so that they don’t fall victim to mystification.

Social Security Survivor Benefits

Most people think of Social Security as a Federal scheme that provides basic pensions for workers. It does more than that, though. One extra benefit provided is the assistance it gives to surviving spouses and other dependents of deceased workers who have paid into the scheme through their wages. Dependent children or parents of the deceased can claim survivor benefit in some circumstances, but the calculation of benefit for surviving spouses is the most involved.

There are two kinds of survivor benefit available to surviving spouses of deceased Social Security participants, the first being simply a single payment of $255. The second kind of benefit, the ongoing income benefit, is less straightforward.

The income benefit is only payable from the date it’s claimed, so any unclaimed benefit will be altogether lost. There is no back-dating provision. However, that doesn’t necessarily mean that the survivor should claim as soon as possible.

The Amount You Receive Goes Up Between Ages 62 & 67

As for retirement pension, the amount of benefit you get each month varies according to the age you are when you first claim the benefit, and that differential continues for as long as you live. In the case of the retirement pension, the earliest age at which you can claim is 62, and the percentage of the full amount you receive goes up until you reach full retirement age, which is 65 to 67, depending on your date of birth.

For survivor benefit, the earliest age at which you can claim is two years earlier, at the age of 60. At that age, the survivor will receive the amount that the deceased spouse would have been entitled to in pension payments, less a deduction of 28.5%. That is a sizable deduction over a remaining lifetime which is likely to be another 25 years or so. The deduction reduces over the years in the same way as the deduction from full pension payments, until full pension age is reached.

If the deceased spouse was actually receiving a Social Security pension at the date he or she died, then the maximum available to the surviving spouse is the amount which the deceased spouse was getting. So, if the deceased person claimed his or her pension early, at the age of 62, then the surviving spouse’s entitlement will never reach the amount they could have had if the deceased had delayed claiming until the full pension age or later.

The Survivors Claim Can Come At A Younger Age

If an early claim for pension is made, the pensioner then dies and the surviving spouse also claims at the earliest age, 60, then the benefit will be subject to two separate deductions, one for the original claim at age 62, then for the survivor’s claim at age 60.

It should be noted that a divorced spouse can also receive survivor benefit, provided the marriage was longer than 10 years, unless they remarry before the age of 60, and remain married.

Surviving spouses who are disabled can claim from the age of 50 rather than 60, and a surviving spouse with young children can claim at any age.