Q&A: Millionaires and social security

Dear Liz: I have a friend who is a multimillionaire. He told me what he collects in Social Security, and it was much less than what I receive even though my income while I was working was small. He said because of his status, Social Security pays him much less. Is that true? I thought your benefits are based on what your income was.

Answer: They are. The Social Security system was designed to replace a larger percentage of income for lower-paid workers, based on the idea that these workers had less opportunity to save for their future. The higher your income, the lower the percentage of your pay the system is designed to replace.

But people who earned high salaries during their working lifetime will reap bigger checks than those who didn’t, all other factors being equal.

Assuming your friend is telling the truth about his benefit, there are several explanations for why he’s getting less. One is that he was a business owner who controlled his own pay and deliberately kept down the amount of his salary that was subject to payroll taxes. (People think they’re saving money by doing this, until it’s time to claim Social Security and they realize what it has cost them.)

Another possibility is that he has income from another source, such as a public pension, that would reduce his check because of the government’s windfall elimination provisions.

Other possibilities: Perhaps he started his benefits early, while you delayed yours to let them grow. Or maybe he was one of those diligent, frugal people who built wealth on a smaller income. Or it could be he was talking about his after-tax benefit, since Social Security benefits are taxable once your income exceeds certain amounts.

Those are just some possibilities, but he definitely isn’t receiving a smaller check than you just because he’s rich.

Q&A: Buyer’s remorse?

Dear Liz: I am a single mom who has been renting a condo for seven years. My landlord decided to increase my rent and for two weeks I didn’t know by how much. In the meantime, I looked for a house so I would have a Plan B. I found a totally renovated foreclosure. By the time I found out what my new rental amount would be (just $46 a month more), my son and I had decided to get the house. I used my entire life’s savings of $25,000 as my down payment. Now I owe $62,000. Do you think I made the right decision to buy the house, or should I have stayed in the condo and continued renting? I am torn.

Answer: Of course you are. That’s a very common emotion after taking such a big step.

Tying up all your money in a single purchase or investment is never ideal, but what’s done is done. Focus now on rebuilding your savings (including your retirement savings) and keeping your house in good shape so that you don’t face expensive repairs down the road.

You’re unlikely to get any tax benefit from this home, given your enviably small mortgage, but you will build equity over time as you pay down the loan. You’ll quickly discover the many challenges and rewards of owning a home, which most people prefer to renting.

Friday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: The student loan deadlines you need to know. Also in the news: What to do if you haven’t saved for your kid’s college, a retirement check list for baby boomers, and how getting in shape could help your wallet.

3 Student Loan Deadlines Everyone Needs to Know
Missing these deadlines could become costly.

Eight Tips for Parents Who Have Saved Nothing for College
Hope is not completely lost.

Here’s What Needs to be on Every Boomers’ Retirement Check List
The important things you need to watch.

How to Spring Clean Your Budget: Start With Your Health
Get your body and your wallet in shape.

Does Taking Early Social Security Hurt Your Spouse?
Taking social security early could have a big impact on your spouse.

Is it time for you to get unstuck?

Getting UnstuckBob Sullivan’s excellent book, “The Plateau Effect,” is finally out in paperback with a new, snazzier title: “Getting Unstuck: Break Free of the Plateau Effect.”

Co-written with technology entrepreneur Hugh Thompson, “Getting Unstuck” covers what to do when hard work stops working. Whether it’s advancing in your career, trying to lose weight or building relationships, a plateau can leave you stranded putting in more effort while achieving less.

The book has already garnered a lot of attention. The Miami Heat used it last year on their way to a second NBA championship. It was featured on the cover of O! Magazine and in the Wall Street Journal.

But a lot more people need to discover and read this book. Understanding how the plateau effect works can help you stop wasting time and effort, and start getting better results.

 

Thursday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Saving money on your summer travel plans. Also in the news: Disappearing inheritances, creative college financing, and the hidden costs of moving.

6 ways to score deals on summer travel
Planning ahead could save you money.

Why You May Not Get An Inheritance (And What To Do About It)
You know that saying about counting chickens before they hatch?

Outside-the-Box Financial Strategies to Pay for College
Thinking outside the loan box.

The Hidden Costs of Moving
You’re going to need boxes, packing tape and a whole lot of cash.

Helping Gen Y Declare Their Financial Independence
Escaping the debt-ridden 20’s.

Wednesday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Distinguishing between good and bad debt. Also in the news: How to fly for free, reducing your post-retirement cost of living, and protecting yourself from buying a lemon of a home.

When Your Student Loan Debt Shouldn’t Be Your First Priority
Learning the differences between good and bad debt.

How Our Family of 3 Will Fly Free for the Next 2 Years
It’s all about the points.

5 Ways to Reduce Your Post-Retirement Cost of Living
While reducing your stress at the same time.

Protect Yourself from Buying a Lemon of a Home
Don’t buy a money pit.

5 reasons to try a 2-week spending freeze
Give your savings a jump start.

Tuesday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Are you being charged too much for your 401(k)? Also in the news: Teaching your kids about money, using your tax refund to pay down debt, and tips that will make next year’s tax filing a breeze.

Is Your Small-Company 401(k) Charging Too Much?
How much are you paying in fees?

3 Everyday Events That Can Teach Your Kids About Money
It’s never too early.

Use tax refund to reduce your debt
While not as fun as a new TV, it pays off in the long run.

Tips to Make Your Taxes Way Easier Next Year
Anything to make taxes less stressful.

13 Times Being Cheap Could Cost You More
The high price of trying to save money.

Can you submit too many college applications?

Zemanta Related Posts ThumbnailI only applied to one college, and I opted for early decision. There’s no way I’ll let my daughter do the same thing.

Recognizing how much the world has changed is key to getting our kids launched right. These days, a half dozen applications may not be enough, as I write in this week’s Reuters column, “How many college applications is too many?” College consultants say there’s a rising level of unpredictability to admissions, which means you may want more than two safety schools, two matches and two reaches.

One issue I didn’t get into for lack of space was the public vs. private school aspect. Private school students typically have access to counselors who are essentially dedicated to getting them into good colleges. These counselors usually stay up to date not only on colleges’ statistics but also on their changing needs (that is, what they’ll be recruiting for next year). Private schools often subscribe to services like Naviance, which help students see exactly where they stand relative to the stats (GPA, class rank, test scores) of a college’s existing student body. With intel like that, private school students (and families who hire private consultants who offer the same services) can get a pretty good idea at where they have a good shot at getting in and where they don’t.

Public school students, by contrast, may be assigned a counselor who has 400 other kids in her caseload plus duties that have nothing to do with college admissions. Families may be on their own in trying to figure out where to apply.

The good news is that most colleges still accept most applicants–the Ivies and other highly selective colleges are a small fraction of the total number of higher learning institutions in the U.S. Also, there are sites such as Lynn O’Shaughnessy’s The College Solution and CollegeData.com to help sort through the options.

Still, if you’re not getting help in winnowing down your application list, it can make sense to err on the side of applying to too many colleges rather than too few.

Monday’s need-to-know money news

homebuyerToday’s top story: How long you should work to max out your social security benefits. Also in the news: What your student loans are really costing you, 9 common financial myths, and paying close attention to closing costs.

Social Security Benefits: How Long Should You Work to Max Them Out?
Determining your magic number.

Are Your Student Loans Costing You More Than You Think?
Find out what you’re really paying.

9 Common Money Myths
How many do you believe?

Watch Out for These Closing Costs When Buying a Home
Don’t pay more than you have to.

Quiz: Are you smart enough to buy a home?
Do you have what it takes to become a homeowner?

Q&A: Social Security and spousal benefits

Dear Liz: I just got laid off and will be collecting unemployment. In January, I will be eligible for Social Security at my full retirement age of 66. Can I collect 50% of my spouse’s benefits (he is 76) instead of collecting on my record and continue to let my Social Security benefits grow until age 70?

Answer: Yes. As long as you wait until your own full retirement age to apply for spousal benefits, you retain the option of switching to your own benefit later. If you apply for spousal benefits early, you are locked into the smaller payment and can’t switch.