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Myths and Facts about Social Security

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Myth: Social Security will provide most of the income you need in retirement.

Fact: It’s likely that Social Security will provide a smaller portion of retirement income than you expect.

There’s no doubt about it–Social Security is an important source of retirement income for most Americans. According to the Social Security Administration, more than nine out of ten individuals age 65 and older receive Social Security benefits.  But it may be unwise to rely too heavily on Social Security, because to keep the system solvent, some changes will have to be made to it. The younger and wealthier you are, the more likely these changes will affect you. But whether retirement is years away or just around the corner, keep in mind that Social Security was never meant to be the sole source of income for retirees. As President Dwight D. Eisenhower said, “The system is not intended as a substitute for private savings, pension plans, and insurance protection. It is, rather, intended as the foundation upon which these other forms of protection can be soundly built.”  No matter what the future holds for Social Security, focus on saving as much for retirement as possible.  You can do so by contributing to tax-deferred vehicles such as IRAs, 401(k)s, and other employer-sponsored plans, and by investing in stocks, bonds, and mutual funds. When combined with your future Social Security benefits, your retirement savings and pension benefits can help ensure that you’ll have enough income to see you through retirement.

Myth: Social Security is only a retirement program.

Fact: Social Security also offers disability and survivor’s benefits.

With all the focus on retirement benefits, it’s easy to overlook the fact that Social Security also offers protection against long-term disability. And when you receive retirement or disability benefits, your family members may be eligible to receive benefits, too.  Another valuable source of support for your family is Social Security survivor’s insurance. If you were to die, certain members of your family, including your spouse, children, and dependent parents, may be eligible for monthly survivor’s benefits that can help replace lost income. For specific information about the benefits you and your family members may receive, visit the SSA’s website at www.socialsecurity.gov, or call 800-772-1213 if you have questions.

Myth: If you earn money after you retire, you’ll lose your Social Security benefit.

Fact: Money you earn after you retire will only affect your Social Security benefit if you’re under full retirement age.

Once you reach full retirement age, you can earn as much as you want without affecting your Social Security retirement benefit. But if you’re under full retirement age, any income that you earn may affect the amount of benefit you receive:

• If you’re under full retirement age, $1 in benefits will be withheld for every $2 you earn above a certain annual limit. For 2014, that limit is $15,480.

• In the year you reach full retirement age, $1 in benefits will be withheld for every $3 you earn above a certain annual limit until the month you reach full retirement age. If you reach full retirement age in 2014, that limit is $41,400.

Even if your monthly benefit is reduced in the short term due to your earnings, you’ll receive a higher monthly benefit later. That’s because the SSA recalculates your benefit when you reach full retirement age, and omits the months in which your benefit was reduced.

Myth: Social Security benefits are not taxable.

Fact: You may have to pay taxes on your Social Security benefits if you have other income.

If the only income you had during the year was Social Security income, then your benefit generally isn’t taxable. But if you earned income during the year (either from a job or from self-employment) or had substantial investment income, then you might have to pay federal income tax on a portion of your benefit.  Up to 85% of your benefit may be taxable, depending on your tax filing status (e.g., single, married filing jointly) and the total amount of income you have. For more information on this subject, see IRS Publication 915,Social Security and Equivalent Railroad Retirement Benefits.

What Is Your Full Retirement Age?

If you were born in: Your full retirement age is:

1943-1954                  66

1955                           66 and 2 months

1956                           66 and 4 months

1957                           66 and 6 months

1958                           66 and 8 months

1959                           66 and 10 months

1960 and later            67

Note:  If you were born on January 1 of any year, refer to the previous year to determine your full retirement age.

The information contained in this material is being provided for general education purposes and with the understanding that it is not intended to be used or interpreted as specific legal, tax or investment advice. It does not address or account for your individual investor circumstances. Investment decisions should always be made based on your specific financial needs and objectives, goals, time horizon and risk tolerance.

The information contained in this communication, including attachments, may be provided to support the marketing of a particular product or service. You cannot rely on this to avoid tax penalties that may be imposed under the Internal Revenue Code. Consult your tax advisor or attorney regarding tax issues specific to your circumstances.

Neither Ameriprise Financial Services, Inc. nor any of its employees or representatives are authorized to give legal or tax advice. You are encouraged to seek the guidance of your own personal legal or tax counsel. Ameriprise Financial Services, Inc. Member FINRA and SIPC.

The information in this document is provided by a third party and has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial Services, Inc. While the publisher has been diligent in attempting to provide accurate information, the accuracy of the information cannot be guaranteed. Laws and regulations change frequently, and are subject to differing legal interpretations. Accordingly, neither the publisher nor any of its licensees or their distributees shall be liable for any loss or damage caused, or alleged to have been caused, by the use or reliance upon this service.

Retirement Income Shortfalls

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If you’re lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you’ll come up short? Don’t panic–there are probably steps that you can take to bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions:

  • Try to cut current expenses so you’ll have more money to save for retirement
  • Shift your assets to investments that have the potential to substantially outpace inflation (but keep in mind that investments that offer higher potential returns may involve greater risk of loss)
  • Lower your expectations for retirement so you won’t need as much money (no beach house on the Riviera, for example)
  • Work part-time during retirement for extra income
  • Consider delaying your retirement for a few years (or longer)

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3 new realities of retirement

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3 new realities of retirement

Think about your parents’ retirement for a minute. Their lives most likely look a whole lot different than their parents’. Your grandfather probably stopped working the very day he turned 65. He and your grandmother might have hit the links or the beach while they collected pension checks that they supplemented with high-yielding investments.

But, today’s retirees are living longer, working longer, reinventing themselves and staying active — all while trying to figure out how to pay for this great new chapter in their lives. They usually can’t rely on pensions, high interest on savings or health care benefits from former employers.

Call it revolving retirement. The term, coined by Strategic Business Insights’ Consumer Financial Decisions group, describes retirees who re-enter the workforce in one way or another either to fulfill an emotional need or make ends meet. They may find they’re bored with retirement or want to start a new career. With all this change comes confusion and sometimes some misguided assumptions.

“Frankly, a lot of myths about retirement are floating around out there,” says Thomas Rowley, director of retirement business strategy at Invesco Consulting. To help set things straight, we asked top demographic and financial experts to help bust some of those myths and offer advice on how best to prepare for a fast-changing future.

$300,000

That’s how much a 65-year-old male will need to cover health care costs for the rest of his life.

Source: Employee Benefits Research Institute, 2012.

MYTH: Luckily, I won’t need to worry about health insurance. Medicare will kick in when I’m 65.

REALITY: Most experts agree Medicare will be around in its present form for some time to come. But, people often misunderstand the limitations of Medicare. It doesn’t cover everything, especially long-term care. Consider the fact that a 65-year-old male will need more than $300,000 to cover health care costs for the rest of his life, according to 2012 research from the Employee Benefit Research Institute.

You need a solid health care costs strategy in place to deal with several factors. For instance, have you purchased long-term care insurance, or do you think you have saved enough for those potential expenses? If your company offers a health savings account, is this a viable option for you that you could roll over into retirement? (Earnings on savings for eligible health care expenses grow tax-free.) Do you intend to retire before you will be eligible for Medicare (at age 65)? If so, how do you plan to pay for health insurance coverage? Ask your advisor about strategies that can help cover health care costs in retirement.

MYTH: My taxes will be lower in retirement.

REALITY: Conventional wisdom has long held that your tax bracket, along with your income, will decline in retirement. But, that may no longer be the case. Taxes may continue to rise as the government struggles with the ongoing debt crisis over the next 10 to 15 years, says Russell Price, Ameriprise Financial senior economist. How you withdraw your retirement savings and how much you plan to spend each year will also affect your taxes. You want to make sure you have a good mix of taxable, tax-deferred and tax-free investments.

MYTH: My traditional asset allocation will definitely give me enough income.

REALITY: With persistent low interest rates over the past several years, some retirees are finding their savings aren’t generating the income they had hoped for. Proper diversification among a wide range of asset classes is key. With the right mix, you may be in a better position to handle market volatility, generate more yield to boost income and protect your portfolio from downturns in any one specific asset class. Your advisor can help you choose the asset allocation and diversification strategy that’s right for you. (Please see the following piece on alternative investments.)

Talk to your advisor about the best strategies to help you save for a long and fulfilling retirement.

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*Ameriprise helped pioneer the financial planning process more than 30 years ago. We have more financial planning clients and more CERTIFIED FINANCIAL PLANNER™ professionals than any other company in the U.S. based on data filed at adviserinfo.sec.gov and documented by the Certified Financial Planner Board of Standards, Inc. as of Dec. 31, 2012.

Thomas Rowley, Invesco Consulting and Strategic Business Insights are not affiliated with Ameriprise Financial.

Asset allocation and diversification do not assure a profit or protect against loss in declining markets.

Alternative investments involve substantial risks and are more volatile than traditional investments, making them more suitable for investors with an above average tolerance for risk.

Investment products, including shares of mutual funds, are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

Ameriprise Financial and its representatives do not provide tax advice. Consult with your attorney or tax advisor regarding specific tax issues.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.

© 2013 Ameriprise Financial, Inc. All rights reserved. P1 – 8/13

Identify your sources of retirement income

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Once you have an idea of your retirement income needs, your next step is to assess how prepared you are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. To get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov) and order a copy of your statement. Additional sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

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Estimate your life expectancy

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The age at which you retire isn’t the only factor that determines how long you’ll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you’ll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you’ll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There’s no way to predict how long you’ll actually live, but with life expectancies on the rise, it’s probably best to assume you’ll live longer than you expect.

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Decide when you'll retire

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To determine your total retirement needs, you can’t just estimate how much annual income you need. You also have to estimate how long you’ll be retired. Why? The longer your retirement, the more years of income you’ll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it’s great to have the flexibility to choose when you’ll retire, it’s important to remember that retiring at 50 will end up costing you a lot more than retiring at 65.

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Don't forget that the cost of living will go up over time.

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The average annual rate of inflation over the past 20 years has been approximately 3 percent. (Source: Consumer price index (CPI-U) data published annually by the U.S. Department of Labor, 2009.) And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children’s education early in retirement. Other expenses, such as health care and insurance, may increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it’s always best to be conservative). Finally, have a financial professional help you with your estimates to make sure they’re as accurate and realistic as possible.

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Project your retirement expenses

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Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That’s why estimating those expenses is a big piece of the retirement planning puzzle. But you may have a hard time identifying all of your expenses and projecting how much you’ll be spending in each area, especially if retirement is still far off. To help you get started, here are some common retirement expenses:

  • Food and clothing
  • Housing: Rent or mortgage payments, property taxes, homeowners insurance, property upkeep and repairs
  • Utilities: Gas, electric, water, telephone, cable TV
  • Transportation: Car payments, auto insurance, gas, maintenance and repairs, public transportation
  • Insurance: Medical, dental, life, disability, long-term care
  • Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs
  • Taxes: Federal and state income tax, capital gains tax
  • Debts: Personal loans, business loans, credit card payments
  • Education: Children’s or grandchildren’s college expenses
  • Gifts: Charitable and personal
  • Savings and investments: Contributions to IRAs, annuities, and other investment accounts
  • Recreation: Travel, dining out, hobbies, leisure activities
  • Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living
  • Miscellaneous: Personal grooming, pets, club memberships

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Use your current income as a starting point

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It’s common to discuss desired annual retirement income as a percentage of your current income. Depending on who you’re talking to, that percentage could be anywhere from 60 to 90 percent, or even more.

The appeal of this approach lies in its simplicity, and the fact that there’s a fairly common-sense analysis underlying it: Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect the fact that there will be certain expenses you’ll no longer be liable for (e.g., payroll taxes) will, theoretically, allow you to sustain your current lifestyle.

The problem with this approach is that it doesn’t account for your specific situation. If you intend to travel extensively in retirement, for example, you might easily need 100 percent (or more) of your current income to get by. It’s fine to use a percentage of your current income as a benchmark, but it’s worth going through all of your current expenses in detail, and really thinking about how those expenses will change over time as you transition into retirement.

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ESTIMATING YOUR RETIREMENT INCOME NEEDS

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You know how important it is to plan for your retirement, but where do you begin? One of your first steps should be to estimate how much income you’ll need to fund your retirement.

That’s not as easy as it sounds, because retirement planning is not an exact science. Your specific needs depend on your goals and many other factors.