One of the biggest concerns facing many Americans right now is retirement.

Looking at the damage done to retirement investment accounts, thanks to the financial crisis and the current bear market, some are looking for ways to encourage new options for retirees. Even for those with longer time frames until retirement, there is still fear. Even if retirement investment accounts recover and grow between now and retirement in 15 - 20 years, some are concerned that the next crash could pull the rug out from under them just as they retire.

Another problem revolves around the longer life expectencies that retirees are expected to have. Few people now will have enough in their retirement funds to last the 20 to 30 years that people will soon be expected to live after retiring.

Enter an ambitious new bill aimed at shoring up retirement.

In the House, the Retirement Security Needs Lifetime Pay Act (H.R. 2748) is being proposed. This bill would allow a tax break for those who take their retirement investment accounts and used them to buy a lifetime annuity. CNN Money offers a look at two of the main tax breaks offered in the bill:

1. You will be allowed to exclude 50% of annual annuity payouts from a non-qualified plan (one you invested after-tax dollars in) from taxable income. The annual maximum exclusion would be $10,000.
2. You will be allowed to exclude 25% of annual annuity payouts from a qualified plan (401(k), IRA and other tax-deferred accounts) from taxable income.

Additionally, there will also be incentives to purchase what is known as longevity insurance. This is actually another kind of annuity. You wait until you are much older — usually in your eighties — to start taking payments. As a result, the payouts are normally higher. And they would start about the time your retirement investment accounts may be running somewhat lower.

Whether or not this is the answer to the problem of investment-based retirement accounts remains to be seen. But it is clear that there are some definite concerns about the ability of Americans to have enough money throughout retirement. An annuity might be helpful. However, the downside to an annuity is that you trust the management of it someone else. I think I will need to consider the matter further (and see whether this bill makes it through and the tax breaks materialize) before deciding an annuity is right for me. So far, though, I am fairly content with my Roth IRA, which is funded largely with index funds.

Image source: Darren Hester via Flickr

I read an interesting article by Thomas Kostigen in MarketWatch this week. It mentioned that the Nordic countries (Denmark, Finland, the Netherlands, Sweden and Norway) all had the happiest people in the world. The U.S., according to the survey cited, didn’t even crack the top 10 (but we are #11).

Kostigen speculates that part of the reason Northern Europeans are so happy is that people in these countries don’t have to worry about paying for social services and health care directly, because the government takes care of it with their tax money. After all, if you aren’t fretting about how you will pay for your doctor visit or how much your insurance premiums are going up, or what you are going to do when you retire, or how you will get through maternity leave, you feel a little more secure in your financial situation and you feel happier. (We did beat out France, Great Britain, China and Japan.)

Sure, he points out, the Danes (#1 for happiest) pay close 2/3 of their income in taxes. But they don’t have to buy anything beyond food, housing and consumer goods. They’ve already paid for social services; it’s like an automatic deduction from the paycheck. Here is what Kostigen points out about paying taxes:

Simply, you pay for what you get. Taxes in the U.S. have taken on a pejorative association because, well, we are never really quite sure of what we get in return for paying them, other than the world’s biggest military.

Interestingly, the Nordic countries have lower incidences of corruption and catering to special interests. Perhaps that is where we Americans get our fear of paying high taxes for the government to take care of things. In the Nordic countries, the system has been practically built in as part of development in modern times. And they expect the government to use the money to actually benefit the people. In the U.S., we expect politicians to squander tax money on useless things; we expect it because we have seen it every day, for decades.

On top of that, even though we don’t pay as much in taxes, our individual incomes aren’t as high. Even though those living in Denmark pay more in taxes, per capita the people in the country still earn more on an individual basis (ranking 5th) than we do in the U.S.:

With the highest gross domestic product in the world, we are the richest country. On a per capita basis, though, we don’t even make the top 10. The U.S. ranks 15th in this category, according to the International Monetary Fund.

Obviously, there are problems with taking some of these Nordic countries for a model. They have far fewer people to worry about, and these countries do not have plurality in the same degree that we have here. We have too many voices to adequately come to an agreement as to what should be paid for by society. They are smaller countries, with smaller costs. To institute the all of the same programs in the U.S. would most likely be unweildy and impractical.

But we could do a little bit better, especially in terms of health care — and more and more Americans are beginning to want universal health care. There are ways to provide us with universal health care that wouldn’t break the bank (Mitt Romney figured out how to do it in Massachusetts). We could do better in terms of taking care of our own people. We are the richest country in the world after all. And even though we spend more money per person on health care, we still rank #37 in the world. We don’t even rank #1 (as our leaders would like us to believe). We pour billions upon billions into supporting the military efforts of other countries, but we can’t take care of our own children?

I figured out once that my yearly tax increase for universal health care would be something like $3,500. I’m paying $5,040 in premiums each year right now. While a dramatic increase to my taxes might probably wouldn’t make me happier, a small increase to my income taxes would save me $1,500 a year on health insurance — and that would increase my happiness level. (And think what it could do for the economy — we could all spend the savings as part of economic stimulus.)

No, we don’t need to pay 2/3 of our incomes in taxes to be a little happier and more relaxed. However, we might be a little happier as a nation if our politicians were more interested in what we the people wanted to have happen with our tax dollars. As my husband says: “I wouldn’t mind paying 40% of my income for taxes — if I knew it was going for good things and not being wasted on corporate subsidies, foreign militaries and pork barrel projects.”

What do you think? Would you be willing to pay more taxes if we had better services? Or do you think our government is so wasteful and incompetent that it would just lead to more problems?

image source: Malene Thyssen via Wikimedia Commons

If you’ve been looking at your retirement investment account, you are probably aware that things aren’t going so well. But eventually, your IRA or 401k will recover and you will be back in business. But things aren’t quite so positive for those who have reached the point where they are required to withdraw money. These are known as required minimum distributions (RMDs), and if you are at least 70 1/2, you have to take a minimum amount out of your retirement plan each year.

However, 2009 is an exception, thanks to the recession. The IRS has ruled that a suspension is in order; you do not have to take your RMDs this year.

Taking RMDs

If you do not take the minimum amount of money out each year after you turn 70 1/2,  the IRS can penalize you 50% of the amount you should have taken out. For most people, in times where recessions and stock market crashes aren’t depleting earnings, taking RMDs is no big deal. But right now it’s difficult. With retirement investment accounts losing value, it can be devastating to take that money out of the account — thereby solidifying losses. That’s why it is a blessing to many to have the rule about minimum distributions suspended for 2009. The idea is to give retirees a chance to let their retirement accounts recover. (Of course, some retirees may have no choice but to take distributions anyway, since they might need the money.)

Jeff Rose, at Good Financial Cents, points out that if you have already taken your distribution, it is possible to roll it back into your retirement plan or IRA. He suggests that you contact your plan administrator to find out your eligibility for RMD suspension and rollover if you have taken your distribution.

image source: Darren Hester via Flickr

With the school year coming to a close, many people have next year on their minds — and for some of us financial geeks that tends to lead to speculation about the distant future. I’ve been thinking about my son and his college options. More specifically, I’ve been thinking about how we’re (my son will help) going to pay for it all.

529 investment plans

529 plans are tax-advantaged investment accounts meant to be used for education expenses. Many people use these to help fund their children’s educations. The accounts grow as the investments in them gain in value. Of course, the risk is that the accounts lose value when the investments inside of them don’t do very well. Many parents are probably finding this out right now. And it has many more parents thinking about age-based 529 plans. Savingforcollege.com offers this on age-based 529 plans:

Age-based plans are popular, with 75 percent of 529 plans offering such options, according to Wilshire Associates. Such plans allocate plan assets more aggressively for younger 529 account beneficiaries and then switch to more conservative investments as the beneficiary gets closer to college age.

It works much like age-based retirement plans. It’s probably too late for those with children who are close to college or already in college, and who might have lost quite a bit in the recent crash (although if you have a couple of years you might recover). However, for someone like me — with a 6-year-old — now is a good time to invest. With stocks on sale, I could load up the 529 with cheap investments likely to grow pretty well over the next decade — at which point the allocation would shift to something more conservative. The closer my son gets to college, the more the shift will be to capital preservation for what he has gained.

Of course, I’m not sure I like the idea of a plan that automatically shifts things for me. I think I might like to be a little more involved. But, even so, it’s definitely food for thought. The closer a child gets to college attendance, the safer his or her portfolio needs to be.

What do you think of age-based 529 plans?

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Many people are looking for a silver lining to this recession. I have been looking as well. And I’ve found one: the sales. There are sales everywhere, on a number of items that are normally rather expensive. Some of the items that you can get a discount right now include:

• Car. This is a major one for me, since we just bought a car. Many dealers are offering amazing opportunities, and cars are cheaper than they have been for years. My parents considering moving their timetable for a new car up a year, since cars are unlikely to be this inexpensive once the economy begins to recover in earnest.
• Travel. We decided this year that we’re getting our yard in. This means that we are not going on our customary trek to New York to see my husband’s family. Just for fun, though, we looked at prices. We could go for half of last year’s price. It’s now extremely tempting to go since we can almost afford it — even with the yard. If you want to go on a family trip, now is a good time to consider it.
• Computer. I bought a new computer for my home office last year. But I do want a laptop. Nothing too fancy. And computers are very inexpensive right now. I will probably get myself a laptop soon, since I can get more bang for my buck right now.
• Furniture. Furniture is very inexpensive right now. We’ve been looking to get a larger table — one that can accommodate guests when they come. The 7-piece set we’re considering is much less than it was last year when we first started toying with the idea.

We’re also trying to see if we can refinance our home and open a second IRA (this one for my husband), since mortgage rates are low and stocks are on sale. It’s a good time to prepare for the future and reduce costs.

Are you doing any recession spending now that many things are on sale?

image source: scrutiny hooligans

With tax season recently over, I’m not terribly surprised that I’ve got a few questions in my email inbox that essentially ask this question:

What should I do with my tax refund?

This is, obviously, a question that you can really only answer for yourself. (Personally, I prefer to have a $0 tax refund) But many people like to have ideas of what they might do with the money to make themselves more financially secure. So, here are some suggestions for using your tax refund money to improve your personal finance situation:

1. Emergency fund. If you don’t have an emergency fund, now is a good time to start it. And what better way to start your emergency fund than with what many people consider a “windfall”? Many financial gurus have settled on $1,000 as a good emergency fund start. You can keep adding to it, of course. And if you don’t have $1,000 right now, start what you have and work up to it. Your tax refund can probably get you well on your way to a $1,000 emergency fund.
2. High-interest debt. If you already have an emergency fund of $1,000, you should consider paying off your high interest debt. This means credit cards. Mathematically, it makes sense to pay off the debt with the highest interest rate first. Emotionally, you might feel better if you pay off as many of the smaller credit card debts as you can. In any case, using your tax refund to put a serious dent in your credit card debt can be a good idea.
3. Invest. If you have paid off your high interest debt, and if you have a good handle on your emergency fund, you might invest your tax refund. Put it to work for you. If you aren’t maxing out your retirement account contributions, put it in your IRA or 401k. If your tax advantaged accounts are maxed out, consider a college savings plan or IRA for your kids. Or invest in an index fund.
4. Spend it. Finally, if you have all your other bases covered, you might consider spending your tax refund. There are a number of things you can buy now, before the economy picks up, that represent great deals. Buy some furniture, a computer, increase your down payment amount for a car or pay an extra point on your mortgage. Or just do something fun with it.

We got a tax refund this year, due to our mortgage interest. We’re actually spending it. We’ve got to put in a yard.

What are you doing with your tax refund?

image source: sxc.hu

I loved the TurboTax commercials this year featuring the dead guys that are on our money. Now that Tax Day is past, and tax season is over for another year, I’d like to share one last commercial.

Happy Friday!

It may seem counter-intuitive to say that you want a $0 tax return. But that is my goal. What a tax refund indicates is that you have paid more in taxes than you needed to. It means that you have given the government an interest-free loan. Tax refund money is money that you could have been investing. Or at the very least putting in a high yielding savings account. Tax refund money is capital that could have been used to earn a return. Instead, you are just getting back what was already yours — with no additional benefit.

I know that some folks like to use a tax refund as a sort of savings plan. It pays off debt and may added to the savings account after the fact. This actually does one a disservice. It promotes poor financial planning habits and prevents you from maximizing your income. While I suppose it’s better than having no savings plan, it doesn’t encourage a mind set that leads to truly yielding wealth.

• If you use your tax refund to pay off debt, it means that you have been paying high interest for a good portion of the year. Meanwhile, the money that was already yours was earning nothing for you in government coffers. You’re better off paying your credit card balances every month and avoiding a build-up of debt.
• If you want an automatic savings plan, have your money directly withdrawn from your checking account every month. Make sure you set up your personal finance software so that you don’t think that you have that savings plan money to spend.

You can adjust your withholdings to more accurately reflect what you owe in taxes. If you work for someone else, this is usually a matter of visiting the HR department and filling out a new W-4 form. If you pay estimated taxes quarterly, you get a new estimate every year.

I ended up with a tax refund this year

This year, unfortunately, I actually got a tax refund. We bought a home in late 2007, so 2008 was the first year that we had a whole year’s worth of mortgage interest for a deduction. However, the hope is that with my latest estimated quarterly taxes I will be back to paying a little extra in taxes.

The last few years, I’ve owed money. As my home writing business has grown, my estimated tax calculations have not been adequate. However, I have normally accounted for that and made sure that I set aside a little extra to cover the difference. It’s not much of a difference, but I just accept that I’ll be off by somewhere between $200 and $800 each year. And that’s not a bad thing; it means my business income is growing.

What about you? Do you like a tax return of $0?

image source: arborlaw.biz

This is a guest post from Matthew R. Bader, 1st Lt USAF. Be sure to share your thoughts and perhaps express your gratitude for his service to our country in the comments.

I think that I am rich. How can this be you ask? I am in the military, I am only 26 years old, I haven’t started my own business, I don’t work on Wall St, and I am definitely not featured on the cover of Forbes. I consider myself rich because I do not ascribe to the conventional definition of what being rich is. I have become rich while serving only a short time in the military through the combination of one very simple action and a unique mentality surrounding money and wealth. What is this very simple action? Well if I had to put it as simply as possible I would define being rich as “keeping more than you spend.” Wow. Very anticlimactic I know. But if you think about it, when you keep more than you spend you are, in essence, rich. It then becomes a matter of how rich you are and how long it will take to reach your financial goals.

The statement “time is money” represents one of the greatest truths. We really only have one currency and that currency is our time on this earth. If you took all the money you had and cut off all sources of income, how long could you maintain your current lifestyle? Is it 1 year, 2 years, 30 years? When you view money as a personal stockpile of time it changes how you think about it. Your values are reflected in how you spend your time. There are many people who are consumed by making more and more money, only to spend what they make on ‘things’. I like nice things as much as the next guy, but I think the real joy in accumulating wealth is building up that personal stockpile of time to do the things you truly want to do. Like spending more time with family, seeing different parts of the world, giving back something to this earth that stands the test of time, and improving as a person. Can you begin to see the difference between my definition and the conventional definition of being rich?

Tax Time: Identity Thieves on the Prowl

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