Tape #307 - Rural Retirement Issues

 

On rural retirement issues, I'd like to introduce Trenna Grabowsky.  Thank you Doreen.  And good morning everyone.  I was tempted, and as you'll probably as you get to know me, that I'm not always that serious and Doreen said, when I just asked her if there was a break, and she said no the time is yours you can do whatever you want.  Well I do some teaching for the Ferguson Agromangement Institute in the winter time down in Tulsa and theres one fellow there that I teach with, and instead of giving his folks and his classes a break, to use the restroom, get some coffee or whatever, he takes them outside the hotel and has them run around the hotel, and than brings them back.  And he considers that a break.  You can probably tell by the shape I'm in were not going to do that.  And we will not have a scheduled break.  But please feel free to get up and leave the room any time you like, we'd kinda like for you to come back after your business is taken care of, but please feel free we'd like to have this as informal as possible.  And I mentioned to Doreen not to bother with the sixteen page resume that I sent, I'm kidding.  They tell me a resume should be one page but actually what I did, they had asked for a narrative and I just hooked the narrative on the very back of your handout so this is me on the back.  Basically, I'm from Southern Illinois and I'm a past president of American AgriWomen.  American AgriWomen is a farm women's organization that has been around since 1974.  We're very proud of her.  My name is Trenna.  The double n makes the e short.  But I have responded to Trenna, Treena, Terry and even Tommy for the past fifty-two years. So anything that starts with a "t" and there's not too many Grabowsky  Let me introduce my assist is my daughter Liz, and Liz is a senior, at the University of Illinois majoring in Technical Systems Management which she tells me is in the College of Agriculture.  And I'm never quite sure what Technical Systems Management is, I think that's one of those kinds of degrees, you can do just about anything, but seriously she will be going into Agriculture probably in the industrial area.  And she's going to help me out this morning with the transparencies.  I'm a certified public accountant, and in addition to my public accounting practice and being involved in the farm operation, and so on and so forth I do a little bit of writing.  I write the farm tax saver for farm progress publications.  Anyone here from Australia. No one from Australia?  Farm progress publications, which allot of your probably get as Pray Farmer, Colorado Farmer and Stockman, Texas Farmer and Stockman, Missouri Ruralist, there are twenty-some magazine all together.  All there's more they just added the East coast.  But anyway just recently they were published recently by the Rural Press, so now farm progress publications is now owned by an Australian firm.  I was going to mention that.  I do articles for them as well as the farm tax saver. I had some questions, Doreen said, be sure to do your questions in the end.  And I said well, I was going to do them in the beginning, the first one is "how are of you are from the United States?  I was a little bit worried about exactly how to approach this with rural retirement issues, because I know nothing about the rural retirement system in Uganda, or India or anything like that.  But now for the folks who are not from the United States, what country?  Anyone one other than US and Canada.  I don't know about the retirement system in Whales either.  There is allot to say?  How many of you are self-employed? Self-employed or you work in your family's corporation...  How many of you consider themselves part of the baby boom generation? I'm an old baby boomer.  They tell me that baby boom starts in 1946.  Well ladies, I was born in 1945 and I want to be considered young so I call myself a baby boomer.  How many of you are prepared for retirement? And one of the classic answers, is it depends.  It depends, depends on what transpires within the next ten, fifteen, twenty years as to how prepared we really are.  Well, if your ready for retirement and if you made the plans at every stage in your life.  Than your probably among the minority.  Most folks are not ready for retirement.  Actually most folks look at retirement kinda close to the way  they look at making their wills, and doing their estate planning.  It's kinda the Scarlet O'Hara syndrome.  I'll think about it tomorrow.  You know, we don't like to contemplate our own demise so we put it off.  Americans and people all over the world are living, longer and longer, from the time that you retire you can anticipate having twenty-five, thirty or more years of some sort of viable life left.  I mean, something to do allot with.  You know, nothing something in the chair and do nothing with. Have you ever heard portrait of Whistler's Mother,  she did that portrait when she was thirties when that was done?  That's what I heard.  I'm fifty-two or three, I loose track, I haven't had a birthday this year yet, so I think I'm fifty-two.  But I sure don't want to just sit in a chair and do nothing.  I want to get and be doing things.  But you know what it takes to be doing things.  Money.  Yes.  So, if your self-employed your probably way at the bottom of the list, in terms of whether or not you've probably done anything about preparing for your retirement.  Look at the people who go to work for somebody else.  They got a 401K plan.  The employer contributes to it, do you want to sign up and contribute to the 401K, oh, well yeah, I won't miss that little extra off my check, yeah sure we'll do that. And it's growing and it's growing. There's deferred compensation, there's all sorts of benefits for those who are employed. Unless your employed by someone who doesn't offer benefits.  The majority of people in this country who are employed and work for major companies, have some great benefits.  And their going to have something in additional to society security available through their retirement.  But look at the self-employed folks, when do we make the retirement decision, when do we make the decision as to whether we're going to contribute to some sort of retirement plan for ourselves, and how much it's going to be. When we file our income tax, right?  Now, what worse time can there be, assuming that you've maybe made a profit and your going to owe a little tax.  What worse time can there possibly be to decide yeah there's a little bit of money left over and we're going to put it into retirement.  And of course you've heard, pay yourself first, what goes into your  retirement, what goes into savings, etc...it's not what's left, your supposed to pay yourself off the top. That's a little bit difficult to do, if the gas man will not fill that tank unless you pay him for what he brought two months ago.  In that case, if it's a choice between paying the gas man so that you'll have the fuel to combine the wheat crop, versus planning for your retirement, hey that's no brainer if your a farmer, because we're going to pay our suppliers, and we pay ourselves last.  And that's just the mentality that we have developed over the years, and it's part of what makes farmers the way that we are really.  Is that we don't want to take anyone.  During the sad, sad years of the 80s, I unfortunately was one of the few accountants who was willing to work with the fellows and gals who had gone bankrupt.  And I did allot of bankruptcies, allot of workouts.  And one really common thread that ran through those, there was the shame of bankruptcy, but it wasn't as much the shame of what other folks are going to say, as the shame I have myself.  Because I will not be able to pay the supplier and those people are going to write off my debt.  I saw that over and over again.  I saw farmers that I had respected for all my life, sitting across the desk from me in tears because they had to make that ultimate step.  So farmers want to pay the other folks first.  Put yourself at the top of the list too, put yourself up there, and think about your own retirement. And think about those thirty some odd years.  And we know, as ladies, we're probably going to out live our husbands, and so we do need to be ready.  The handout that you have, it's divided into three parts,  we talk first about retirement vehicles that are available to us in the United States, than we talk about some retirement tools that can be used, and finally we end up with Social Security, we're going to spend a little while maybe debunking some of the mess that exists with Social Security.  And than at the very end we'll talk about some issues, and some that are some pretty thorny issues having to deal with Social Security.  And of course, as we go along, you all paid your money to come, you made the effort to come, and wasn't for me to stand up here and be sure that I go through everything on this paper, and be sure for my satisfaction that I get to say everything I want to say.  That's not the idea, this is your session.  So as we're going along if there's something that you don't understand, and I know that agricultural ladies are not shy, so if there's something that you disagree with, please, please let's talk about it than, you don't have to hold your questions to the end, you don't have to hold your comments to the end.  OK, Look first at Individual Retirement Accounts or Individual Retirement Arrangements, and the IRA can actually stand for either.  It's actually in the law it's individual retirement arrangement, they've come  to be called individual retirement accounts, because most of them are bank accounts.  It's really a personal savings plan and it allows you as a self-employed individual or as someone who works for compensation within certain guidelines, to be able to put aside a certain about of money every year up to $2,000 and to have that money earn interest on a tax deferred basis.  You don't pay the income tax on those earnings until you begin to draw the IRA out.  Now in most cases, the IRA is deductible, that's the way it started out.  If you had at least $2,000 worth of earnings, you could put $2,000 into an IRA account and deduct that as an adjustment on your Federal income tax.  And doing so, than basically you had no tax bases in the money and you were getting $2,000 off your tax in your current rate, which we assume would be higher than the rate your going to be in when your retire.  That's the theory behind the IRA, and that's the way it started out.  Now we have five or six different kinds of IRAs.  This is not going to be as visible as I thought it would be.  And I was thinking, we could probably get some copies made.  And if you can't read it and you want to move up to the front, there are some chairs up here in the front pews.  If anyone would care to move up here.  The traditional IRAs, the one over on the far end, once you have put money into an IRA it is there, and cannot be withdrawn until you are fifty nine and a half years old, without penalty.  If you want to put it into the account, and it will be earning on its tax-deferred way, you need the money, you draw it out, there is a 10% penalty for having drawn that out, in addition to the fact that it's taxable on your federal income tax in the year that you draw it out.  So, there is a penalty for drawing it out early, and that sometimes works against folks who would like to be able to put it aside for a certain amount of time, but want it available to them.  Now there are some exceptions, and we won't go into the real technical exceptions, there is small exception for  medical expenses, there's a small exception for first time homebuyers, and there's and exception if you draw the money out equally over the rest of your entire life.  Those are probably more technical than what we want to get into right now.  You must begin drawing money out that traditional IRA by the time your seventy and a half.  And if you do not begin drawing it out, there is a penalty there too.  Based on the amount that you were supposed to draw out.  So, you can begin drawing anytime between the age of fifty-nine and a half and seventy and a half but you must begin tapping the account by the age of seventy and a half.  The question is why do you have to draw it out.  You know, I don't know the theory behind their having made that as a rule, other than, just with the idea that the Federal Government does want it's income tax on the money.   Now with having said that, I could come right back and say, well what difference does that make because an IRA and in fact several of these retirement plans are something that is very unique, when it comes to being inherited and passing through an estate.  And that is because and I don't know how it is in Canada, but in the US when assets pass through your estate they get a stepped up basis, so if I have a farmland that I paid $100 an acre for and I die at the time that its worth a $1,000 an acre, and Liz gets it, her basis for tax is $1,000 an acre.  If she sells it the next day for $1,000 an acre, she will have no income tax on it.  That's not how it works with an IRA account, an IRA account has no basis, so the IRA account, even though it goes through an individuals estate, or goes to a beneficiary is going to be taxed, income tax wise to the beneficiary as well as being taxed for the estate taxes.  So, the fact that the government wants its money doesn't hold a whole lot of water.  But actually the Federal Income laws in this country don't make a whole lot of sense, not a whole lot of consistency there and so, I really can't rationalize that, but that's I'm sorry that's just the way it is.  Spousal IRAs.  We've had spousal IRAs since the almost since the beginning of IRAs, and the idea behind the spousal IRA was that if you have an individual who has chosen to be a "I hate this term" non-working spouse, that the working spouse can contribute a certain amount of additional money for an IRA for that individual.  It used to be relatively small amount, now it can be the full the $2,000.  So, it's possible to have a spouse who is a non-wager, non-compensated earning spouse, and still have an IRA for both spouses.  There is such thing as a non-deductible IRA, the non-deductible IRA is, obviously it's not deductible.  But it will still earn on a tax-deferred basis.  So if for a reason, which I'll explain in just a second, that the IRA is not deductible, so you don't get the benefit of deducting it on your tax return, you may still want to put the money in, because it will earn on a tax-deferred basis, you will not pay income tax on the earnings until you begin to draw it out.  Now why would you possibly have non-deductible IRAs, well for one thing there is a provision in the law that refers to one of the spouses being an active participant in employer sponsored plan.  That's the kind of terminology the tax law uses.  But if you or your spouse when active participant in an employer sponsored plan than your income used to have to be below a certain level in order to be able to have a deductible IRA.  If your income was above that level, you could have an IRA but it was not deductible.  They've changed it this year now, having an employer sponsored plan is no longer a social disease.  Which means if one spouse is a participant in an employer sponsored plan, that does not taint the other spouse and say that the other spouse than can not have a deductible IRA.  The new kid on the block and this is the one that has the retirement professional very excited.  Is the Roth IRA.  You probably could not have looked at a newspaper, picked up a magazine that had anything to do with finance in it,  without having heard about the Roth IRA this year.  The Roth IRA is kind of neat.  Although it's not deductible when you put the money in, not on a tax deferred basis, but on a tax-free basis.  So you don't get to deduct it, but over the years, that $2,000 earns, and earns, and earns, and when you begin to draw it out, there's no tax.  No tax on the earnings at all.  This is kind of a nod, toward the argument that in the United States we don't encourage savings, in fact, we discourage savings, by taxing savings income.  And so this is a nod in the direction of trying to encourage savings.  And you put the money and your planning for your own retirement than it's just possible that if you cross all the t's and dot all the i's than you don't have to have all the forms signed.

Oh boy, there are professionals out there just waiting for you.  Because that is a big deal right now, should I transfer my current traditional IRA into a Roth IRA.  And there is a window that of opportunity during 1998 to do that.  When you transfer a traditional IRA into a Roth IRA, your going from a vehicle that would have been taxed when you draw it out to a vehicle that will not be taxed when you draw it out.  Somewhere in there somebody has to pay the tax.  So under the rules that will be in affect after 1998, when you withdraw money from a traditional IRA and put it into Roth, all of the amount becomes taxable in that year.  No penalty, but it becomes taxable in that year.  And of course after that, no tax.  The special provision they've made that if you roll to a Roth, during 1998, you can spread the tax liability over the next four years.  But only if you roll to the Roth in 1998.  And in terms, of is it allot of trouble?  No.  And whoever has your current IRA would be more than happy to convert you to a Roth and there are probably lots of other folks out there who would like for you to take your current IRA and make it into a Roth and they would benefit from the commission.  So, in terms of trouble and difficulty, it is not difficult, however, the thing that you need to look at, and there are also income ramifications because your income must be no more than $100,000 in 1998.  Without the addition from the IRA, in order to be able to roll the Roth.  So that too for some people can be a consideration, so your income should be below $100,00 and you also look at what its going to do to you tax wise.

 

Are you an accountant?  Actually, my husband and I graduated from high school in 1963 together.  We were not high school sweethearts, we were high school best friends.  But the fellows that he hung around with had a saying.  When anyone said something that was particularly clever or showed some really good thinking, they always said, hey your thinking like a farmer.  So, I applaud you, unfortunately, exactly what you say was true in originally how the way the bill was written, however, they figured it out, and now you can not do that, well over funds must be there, well over funds must be there five years before you can take them out without penalty now.  But good point, and it would have worked if they would not thought, hey this could be a problem and its fixed now.

 

The last one up there is called the Education IRA.  And actually the education IRA, I don't know why they even call that thing, other than that was what they called it when they put it into the law, so of course that's why they call it an IRA, it's not an IRA.  It doesn't have anything to do with retirement.  The only thing that makes it an anything like an IRA is that the earnings are deferred and if their used for education, the beneficiary doesn't have to pay income taxes on it.  The way the education IRA works, it's not really part of your retirement at all.  But you may put up to $500 per year into and educational IRA for someone else who is under the age of eighteen, that beneficiary will be able to use that money for qualifying higher education expenses, up until the time that  individual turns thirty.  The money has to be taken out of the account by then, otherwise it becomes immediately taxable with a 10% penalty.  But if the individual takes the money out of the account it's not deductible when you put it in, but it will earn on a tax-free basis if the money is used for education.  This is a good vehicle for parents, or aunts, or uncles to maybe do a little bit of funding for a grandchild or whatever.  Initially, I thought that this thing was better than it really is.  Because the way it came out first, we thought hey, anybody that wants to can put up to $500 per beneficiary in, so when each child is born, if each set of grandparents contributes $500 and anybody else who wants to, can contribute.  We'll have a pretty good stack going on here.  We won't have to worry about the kids education at all.  Unfortunately that's not the way it's written.  It's one $500 per amount per beneficiary per year.  So, it's not a real big, big thing, but still it's a neat little break, and this is part of the new tax law for 1997.  And it was an extremely, extremely education-friendly tax bill and this is part of what made it education-friendly. 

 

Question:  Can anyone else put in $500 other than grandmother or grandfather in that year?  Not for that same year. Only one contribution per year.

 

Question:  (Audio not clear.)

 

Answer: You are too old to start an IRA at age seventy and half, unless it is a Roth IRA.  And while I forgot to mention, where you have to start to withdraw from the traditional IRA by seventy and a half, you do not have to start withdrawing from the Roth IRA.

 

One of the realities of rural retirement if you not making the money while your working it's not going to be there when you retire.

 

Question:  The question is the IRA amount that you can contribute is $2,000 per year is that a reasonable when it was originally established close to twenty years ago, is that a reasonable amount for retirement?  I would say not, it may have been more reasonable when it was originally established close to been twenty years, but how did they come up with the $2,000, I would venture to say that it was a compromise of some sort.  Because everything almost every that we do in terms of tax legislation is a compromise of some sort and a trade off.  And the idea behind the IRA and some of the other retirement vehicles that you see up here was to put the self-employed individual access to some type of retirement plan, on a somewhat level playing field, with folks that have retirement plan through an employer.

 

The question was there are other things that you can contribute to, and you may not be able to deduct those as you put them in, and the $2,000, in the traditional IRA as a deduction. And that is true.

 

And actually that brings us into the other things, the other plans that might be out there that could be used for retirement: And one of them is the SEP.  And the SEP is available with self-employment income, it includes freelance fees, earnings from childcare, even a hobby, earnings as a general partner in a partnership and these contributions are treated basically the same as IRAs. And in fact, once there in the account they take on the nature of IRAs.   But it's called a Simplified Employee Plan.  Now don't let the employee in there throw you. You, as a self-employed person are your own employer and employee, the down-side of the SEP because you can put more into a SEP, than you can put into a SEP than you can put into an IRA, the down-side is that you must also cover certain of your employees, you can chose to put up to 15% of your net self-employment earnings in any one year,  the thing is if you should choose to put 15% of your earning in, and you have an employee to whom you pay $10,000 that year, than you must also contribute $1,500, fifteen percent of that employees wages to a SEP for him or her.  So the downside to this particular vehicle is that yes you can contribute for yourself and yes it can be deductible, but you must also contribute for your employee.  And by the way through a convoluted calculation that applies the fifteen percent after you have taken out the deductible proportion of the social security the fifteen percent actually for  self-employed person is widdled down to the equivalent of 13.045 percent.  So it's just slightly over thirteen percent that it really comes out for you. But you must contribute for the employee as well.  And so that's one of the things that keeps folks from using the SEP, although its good, and the fact is that you put more into a SEP than into an IRA, because you can put 15% of your earnings up to a max of $24,000 and that $24,000 indexed for inflation as well.

 

The simple over there is new, it came not from the 97 act but from the 96 act, but its generating some additional excitement and I really like the idea of the simple, especially in husband and wife situations, the simple is employers with 100 or fewer employers, eligible employees must have received up to $5,000 in compensation in the last two years, so that leave out allot of your part-time, occasional labor.  Employees can choose, employees now remember you, your your own employee,  can choose to put anywhere up to 100% of their compensation into this simple plan up to $6,000 per year.  So, theoretically if your a traditional husband and wife operation, and if the employee is the wife, and I'm sorry to be sexiest, but that's the way it is more than likely being the other way, but I do have a client where it's the other way around.  But if the employee is the wife, than theoretically if she's being paid $6,000, she can put 100% of her earnings into this plan.  And the husband too, could elect to put net self-employment earnings into the plan. Now what do you have to put in and what do you have to do for employees, the employee can put in whatever they want up to 100% up to $6,000 of their earning, you have to match that up to 3% of their salary. Which sounds allot better than the SEP which you had to match up to 15% or whatever you put in.  So you yourself as the employer, you can put in $6,000, and if you have an employee that your paying $10,000 per year you only have to put in 3%  which would be $300 which is allot easier to take than having to put in 15%.  So there are allot of creative ways that you can utilize the simple.  When you go in for your taxes and you go in for your tax planning.  You might want to spent some time talking about the simple with your accountant or even with your banker.  And find out a little more about it, because I do believe that the simple is where it's at for allot of folks and allot of small businesses. 

 

On employees, do you have to take out social security?  If they are employees, yes, there are two very, very narrow exceptions, if the total amount that you pay out to all employees is less than $2,500 during the year, than you do not have to do social security on anyone that you did not pay more than $150.  So some folks say, OK, if I paid out less than $2,500, but if it's less than $2,500 total than anyone for whom you paid less than $150, you do not have to take it out on.  Otherwise, yes, you are supposed to take it out, unless it is contract labor, if it is contract labor and your sending them a 1099, and that meets the qualifications of contract labor, than you don't have to take social security out, otherwise, you have to take it out and match it. 

 

And what is your percentage in Canada?  It appears from the discussion that in Canada you have a matching dollar for dollar just like we do here in the Social Security.  There's the schedule in Canada, and the schedule in Canada sounds very much like what we have here in Social Security.  We're going to go more into that later on.

 

The final thing that I wanted to mention on the pension plans is the KEO plan which is sometimes referred to as an HR10.   And allot of farmers had these and they were really popular about fifteen-twenty years ago, and the insurance agents really hit the dirt roads, and sold these those to allot of farmers.  And so allot of folks do still have these.  I'm not going to go real deeply into these, their not something you can set up yourself, you get it from a broker or from an insurance company.  The amount that you can contribute may be more.  If it is a defined benefit plan, than it can really get complicated, but with a defined benefit program, under a KEO plan, its possible, if your someone finds themselves and fifty-two or fifty-five and you haven't done anything about your retirement than that may be a vehicle that you can use to get some money, to get some relatively big bucks, assuming that your earning something to put in there to get something into retirement. So that may be a vehicle for you. The KEO plans can also be what they call money purchase, profit-sharing or it could be a combination.  And with the money purchase you can put in up to 25% of income.  But now understand that the 25% of income is for employees, and since you are your own employee and employer, you have to take of the social security, the one-half of it, and by the time you get down to it, your deduction is 20% rather than 25%.

 

Wanted to look at just pools that you might be interested in for planning for retirement.  Once you set your financial goals where you want to be this is the monthly investment that would be required to reach that goal.  So if for instance, look at the 8% annual return and it's earning at 8%.  In thirty years, you would have $150,000.  And that's the theory behind sustained savings.  That's the reason why, from the time my kids were able to do something that they could earn income, they had IRAs and we started putting money into their IRAs.  And when you put it in when you thirteen years old, it's got a long time to earn.  And so that's one of theories of the sustained earnings.  Just look at the difference between the 8% and the 1%.  In thirty years, $227,900 at just a hundred dollars a month, at just $100 a month, which is only $1,200 per year. It could grow and grow nicely.  And I'm not saying that everyone can afford $1,000 a month at 12% in thirty years is worth $3,500,000.  I could live comfortably throughout my retirement on that.  I do believe.

 

Question:  What amount of money will people need in order to retire reasonably comfortably.  Statistics say that when you retire, your expense do slow down, but you normally would use they say, 60% to 80% of your pre-retirement income.  Now I don't know I think that's

 

 

Tape #307, side two

 

Or it's also eligible to be added into the mix, you know on the front of the return if anybody does there own return, where you can deduct this last year, was 40% of your health insurance premiums and this '98, it's going to be 45% of your health insurance premiums, you can add into that the nursing home insurance premiums as well.  You know that the income tax system in this country is not designed solely to generate money, it's a social policy. A way of setting social policy as well. What kind of social policies do we have in this country.  Well, we think that it's important for everyone to have their own home, don't we.  And that's shown by the fact, that if you mortgage your home you can deduct the interest on your schedule A.  Do we think having children is a good thing? Yeah.  Do we want to encourage people who have young children to spend some money on those children, to earn but to also to get out into the market place but also to have some money left for those children.  Yeah we do, the earned income credit is a perfect example of that.  So there is social policy all through the internal revenue code.  And I could stand up here for three or four hours and talk about the difference aspects of social policy, and I would imagine most of you in this room are either producing farmers or you live in a rural area, and at least have some affinity toward farmers, OK.  If this were at total urban group, and if I asked what group is favored most by the tax code, I'm sorry but the answer would probably be farmers.  Now I'm not saying that farmers are favored by the tax code, there are some benefits we as farmers have but there certainly are some things in the tax code that work against us as well. Understand that it's all a matter of perspective, and my tax benefit, may well be what you would term a tax loop hole.  Some people consider the 197 deduction, if I talk about the expending deduction you all know what I'm talking about there, right.  That your allowed to deduct up to $18,000 off of equipment initially the first year, now we consider that real good tax policy, but there are those that consider that a loop hole.

 

So, it all depends on where you stand.  Eighty percent may well be low to get back to the question.  And part of it depends on what quality of life you want to have, what do you want to be able to do.  And as people retire not at an earlier chronological age but certainly at an early body stage.  We're taking better care of ourselves, we healthier, and therefore we're going to be around for that retirement longer, and that's going to take more money too.

I've got another chart that shows you, and this ones depressing, how long your money will last.  When will your principal balance equal 0.  Well you can see, if your earnings are earning at seven percent, and your pulling at seven percent out per year. Your balance is going to stay there, it's going to remain the same.  If your pulling out eight percent every year.  Eight percent of the balance of your account every year and it's earning at six percent, than you have about 23 years of money there in your account and than it will all be gone. Just get into the Interned, use a search engine and type in retirement in and you'd be amazed at all the help you'll get. All sorts of charts and all kinds of things that you can go to.  And if you get some of these naughty things than just don't visit those. 

 

But this shows you if you want to pull ten percent out per year and it's going to earn at nine percent than you've got twenty six years.  If it's only earning at ten percent and you want to pull fifteen percent out every year than it's not going to be long enough. 

 

OK this chart is called figuring future portrait.  And I'm only put this up here and I'm thinking I probably should have copied this and put it in your packets.  But it shows you how to apply present value to the assets that you have.  We'll probably skip this one. 

 

This is will the projected pensions and assets provide for future retirement.  This is a quick method.  Basically here let me read you what it says, number one you list the present annual gross income before taxes, less the annual amount currently invested for retirement needs, than you list the annual gross income as projected at retirement, you know how much income are you going to have, than you list the annual retirement income that you need, and here they say seventy percent if your retiring at 65, seventy-five if your retiring at 62, and eighty if your retiring before age 62.  You list down your savings, your investments and all, list the estimated annual retirement income that you expect to be generated by those savings, than you list the expected annual pensions that your going to be receiving, than list your estimated annual social security, add all those together, take the value from step three which was the percentage, and subtract and you come up with the projected pensions and assets that you have available for your retirement now.  I don't know this does take some presumptions there.  If anyone wants copies of this, I'll see if I can maybe get some copies made. It is copyrighted, and its not mine, but I did have the name at the bottom. 

 

OK lets take that one down.

 

Question:  Was on interest rates in the states?  We have a banker here, if your talking pass book savings, it's incredibly low, probably two and a half percent.  Being able to draw the money out any day.  If you lock it up in a CD.  Five and a quarter rates were offered recently.

 

The rates in Canada are at .25 percent or a quarter of a percent.

 

The comment is to shop around because different banks will be offering different things and there are innovative things available now like the step up.  That allows you the one time step up in the interest rates.

 

The comment is that if you live right on the border, and might want to invest since the interest rates are higher in the United States than in Canada.  That folks that live right on the border might be bringing there money over and getting several points more in interest.

 

One point I wanted to make on the amount of money that you need for retirement in something that surprises folks when they do their tax returns.  Do you pay income tax on social security benefits, what do you think?  Do you?  Right.  It depends on your income.  Allot of folks think that the social security benefits are not taxed and to some extent that it true.  But if you significant other income, significant, it doesn't have to be that significant, but if you have other income than the social security can be drawn into the calculation as well.  And actually up to 85% of your social security benefits can be taxed.  For people who are married, filing separately the social security is automatically 85% brought into the tax. And we're seeing that happening more and more, and you say why would anybody be married filing separately.  Late in life marriages.  Where two older people who have raised one family each. For a variety of reasons decide not to commingle their assets, and part of this not to commingling their assets, is that they desire not to file a joint return.  And there are several places within the internal revenue code, where a married couple who chooses to file separately is penalized and one of those is in the social security. Social security than goes into the calculation

 

to determine whether it is taxed from dollar one.  So, that's something to keep in mind too.  If your looking ahead and your looking at the possibility of social security.

 

Question:  What do we mean by social security?

 

It was never designed to carry the full load of retirement benefits for folks, but many people are left now with only social security to draw on. And unfortunately many widows are left with only social security to draw on.  Social security there are actually two parts to social security.  Social security is part of FICA,  Federal Insurance Contributions Act included within OASDI, Old Age Survivors and Disability Insurance, and the hospital insurance so those two components together make up the FICA.  We pay either as employers or self-employed individuals the rates, the current social security rate for individuals who are self-employed or for people who are employers, where the employer pays half and the employee pays half are 15.3 percent.  And if your self-employed you pay the whole 15.3 percent yourself.  If you work for someone than half of it is deducted from your check and the other half is matched by the employer.  Now that 15.3 percent is broken down between the OASDI and the Medicare and the Medicare is 2.9 and the OASDI is 12.4.  It's the program that we have in this country.  And it's of course, what Medicare grew out of it as well.  It was never intended to replace private pensions.  This is the problem with the baby boomers, because there may well be enough money there for the baby boomers, there may not be enough for the baby boomers children.  And that's something that Congress is looking at now and has been looking at.  You have knowledgeable folks on one side who say don't be so doom and gloom it's all there, it's just invested. Well actually it's invested but we loaned it to ourselves.  I have a feeling if I had invested all my daughters college money by loaning it to myself, she would not be real happy with me right now.  So there are some issues within the social security that really do need to be addressed.  And that's another reason that we need to be looking at taking care of our own retirement.  Because nobody else is going to do it for us.  And of course, as an older baby boomer, I' m probably in better shape than younger baby boomers. 

 

Do you think your going to be able to draw social security at age 65?  Nope.  Afraid not.  This is the schedule based on your year of birth.  If you were born before 1938 you may begin at 65 or take reduced benefits at age 62.  But if you were born in 1938 and after, here's your chart, this one's for you.  I was born in 1945, I will be able to retire and collect full benefits at age 66.  For folks who were born 10 years later, in 1955, they must 66 year and two months in order to retire and get full benefits.  So this is designed to conserve part of the funds in the social security fund by putting off the social security age and also than by keeping these folks in the work market longing contributing to social security.  Oh, and by the way,  just because your drawing social security doesn't mean you don't pay into social security as well.  You do pay into it.  Any time you have earned income you pay into social security.

 

The social security is really a very basic formula.  It's based on each workers lifetime earning, and than you come up with a benefit amount that you applies in each situation. The years of earnings are indexed and you come up with a life time indexed earnings.  Now let me go back down the arrows to the thirty-five years, I was in a class several months ago, and this lady was real concerned cause she her hand and she said, I understand that they only look at the last ten years that you made money, and that's what you social security is based on.  So if that's the case, I want to be sure if I earned more before than I don't want to earn less now.  That's one of the myths.  That's not true.  The calculations is based on your highest thirty-five years of earnings.  But what do mean up here by than by this life time indexed earnings.  OK here's how it goes.  All of the workers earnings go into the calculations here, and than they are indexed based on when the amount of money that was earned.  If instance, if you earned $3,600 in 1951, in the formula equates to about $30,000 in indexed earnings.  So see what they're saying everything was lower back than, so having earned $3,600 that would be the equivalent of earning $30,000 now.  So when we do this calculation we're going to use the $30,000.  Than that's all added together.  You can come up than with a life time indexed earnings, that can be whatever it is for thirty-five years times what you earned during all that time when the index applied.  And than, you divide by 420 which is the number of months in thirty-five years, and than that gives you that AIME, which stands for the average indexed monthly earnings.  Than you go through this conversion deal down here, which I have never totally understood, therefore I can not explain it to you.  But it goes through this little calculation right here, and you end up with something called a primary insurance amount.  Now the real easy way to get this, is to call social security's toll-free number tell them that you would like to check on what your benefit will be that you can draw, and they will send you the form to complete and they will send you the listing with all of your earnings, with the indexed amounts, and will come down to what the primary insurance amount is. So that's the easy way to do it without having to go through all of this. They did start last year, automatically sending out those things to various folks based on age, and the plan was that by the year 2000 everyone would be receiving this information automatically every year.  I don't think that's going to happen.  I'm real concerned with the Y2K problem. And how it's going to fit into all this thing.  And you all know what the Y2K problem is, that the computers may not be ready to accept the year 2000.  And it's a buzz all over Washington, it's a buzz all over the country.  So how the social security's computers are going to be able to deal with the problem, I hope they are ready. 

 

Question: What about the not years?

 

Answer:  Yes, actually allot people say that they got cheated because of this not year thing.  But actually what happened is they changed the way that they calculated the benefits and it turned out not being at all fair to the not year babies, so when recalculating the benefits, they mad a slight error, but they didn't go back and correct the error, but they didn't go back and correct the error, they went ahead and gave the benefits to the not year babies, based on what they had calculated, which than makes it appear to be not fair to the people who had come after the not year babies. But actually it's no the people who came after the not year babies aren't getting what they were supposed to get, it's that the not year babies got more.  It was kinda like winning a little lottery or something. Basically that is what happened.  I hear people say well so and so didn't pay as much as I did and he's getting more benefits, how does that work, and the point is there are some people that are getting more than according to the formula they should have.

 

This primary insurance amount, you come up with the primary insurance amount.  If your a worker retiring at age 65 your benefit is 100% of the primary insurance amount, if your a worker retiring at 62 it's 80%, if your a spouse retiring at 65 it's 50%, because we know that spouses get half of what the other spouse is received.  A spouse retiring at 62 is 37.5%.  A divorced spouse is 50% at age 65,  50% of the PIA, and at 62 its 37.5%.  Interesting thing, divorced spouse what happens if after 30 years of marriage he leaves me do I still get to draw on his social security, what happens if nine years of marriage he leaves do I still get to draw on his social security, no.  You only get to draw on a spouses social security if you were married for ten years.  So ten years is the magic number as far as being able to draw under a spouses social security.  Child benefit are listed as well. Divorced spouses benefits caring for eligible children 50%, child benefit if the parents living 50%, if the parents deceased 75%,  widows benefits at age 65 are 100% of the primary insurance amount, but a widow can begin drawing at age 60 rather than 62 but than she only gets 71% of the insurance amount. 

 

Question:  Why is the spouse so much less?

 

Answer:  Your looking at the wife drawing on what the husband paid in, as the spouse or your looking at the husband drawing on what the wife paid in, if you both have accounts than there's a real good possibility that rather than a spouse drawing on the wives account or the husbands account the spouse will draw on his or her own account.  And so it's possible within a family unit to have two people drawing 100% of the primary insurance amount.  But she will be drawing 100% of her primary insurance amount and he will be drawing 100% of his primary insurance amount.

 

 

Question:  If husband dies, does she get widows benefits?

 

Answer:  Only if that would be more than what she was drawing on her own account.  And this to be, and I don't mean to make fun of the social security administration. Because they are right on top of checking out what's the best for folks and letting them know. Several years ago my mother received a call from the social security administration.  My father passed away when I was sixteen.  My mother worked at minimum wage jobs until she retired, worked as a clerk in a jewelry store, nice surroundings but you don't get paid anymore than minimum wage.  When she retired, she was drawing on what my dad had paid in, which had been a long time ago.  We have looked at your benefits and we have checked your own account, and now feel that if we switch you from drawing as a widow off of your husbands account over to drawing off of your own account, your benefits will be more.  And they switched her, so you can ask them to do the calculations, but it's my understanding that they are routinely doing these calculations.  So it's whatever will give you the most is what you draw.

 

Answer 2:  I think it's 75 percent among the three children. It's more than 75 percent if you have more than three.  Because as well there is also a total family amount as well.

 

And for young folks this sort of brings us to strategies which is the very last page of the social security issues for discussion.  I have people who want to minimize the amount that they're paying into social security.  Well, Mr. twenty-six year old, because it is absolutely one of the cheapest form of disability or life insurance that you can get, and I would always encourage young people to pay in especially if there are children at home the survivors benefits for getting those children are raised to eighteen.  I mean their not anything get rich off of, but their going to help.  There going to help tremendously.  So, I don't like to see people try to get their income to a point where there's not paying any social security.  The first item you see there on the issues for discussion are issues and commodities, is anybody familiar with wages and commodities.  Wages and commodities the IRS doesn't like.  There is a provision in the internal revenue code it's 31-21-AAA for anybody whose interested, and it says that wages for agricultural work paid in a medium other than cash are exempt from society security.  So that if a farmer pays a farm laborer not in dollars, but in bushels of soy beans, than that amount is not subject to social security tax, and that is true, it has to be done right, it can't be done after the fact, the employer must have what they call dominion control over the commodities.  It's very complex, the IRS doesn't like it. And they like to audit the issue.  So if your interested in it, you might want to talk to your accountant about it, it can be some instances be appropriate to use, in other instances its probably inappropriate to use.  But it can not be done on a retrospective basis, you have to go into it knowing exactly what your doing.  Where I see this working well, with a husband and wife, and the wife is working as an employee, and the wife will probably never going to be drawing on her own account. Now this takes some trust, thinking that they marriage is going to last too. You know you have to consider that sort of thing as well.  But, if the wife is paid on commodities, than you don't waste money paying social security on her when she's never going to be drawing on her own account anyway, she's going to be drawing from her husband's account.  So that's one way, where it can kinda work.  Several years ago wages paid by one spouse to another were exempt from social security.  That's no longer that case.  But this is still one way that wages can be made exempt. 

 

The second strategy we have there is about paying wages to spouses, now before you get too excited about paying wages to spouses, the lady right here, you brought up, what if the equal what if their 50/50,  this brings in a whole interesting ball game as well and we've only got about six minutes to go.  Part of it has to do with philosophy, is the farming operation a partnership, who is the farmer, who files the schedule f, I've had ladies say, well we're a partnership, because we file a joint return.  Well that's fine, when you sign that return, on the front of the return, your saying that everything on that return is correct.  If that schedule f in that return shows only your husband as the farmer, and if that schedule f works down to where the net income from the schedule f, you know it flows over to an SE form,  and than the social security is calculated, that can only be one number, unless your flowing to two forms, which you could do, if it's only flowing to one SE form and it's in your husband's name, than your saying, and your saying when you sign that return, my husband is the farmer.  And that's fine if that's the way you want it to be and that is the way you want it to be if you  want to take advantage that allow you to pay wages to a spouse, but if what you want to accomplish is a partnership, and the guy's of this sole proprietorship, you file two schedule f's. You split it right down the middle.  The one schedule f flows to an SE in the husbands name and social security number and the other flows schedule f flows to an SE (which stands for self-employment form) in the wife's name and social security number.  You can have it either way, I'm not saying one way is more preferable to the other.  Don't think that you are, everytime you sign that joint return, that you are saying ok this is partnership income because I am signing the return and we're filing together.  If the schedule f, whoever's name the schedule f is in. That's who the farmer is.  So keep that in mind.  There are some estate tax ramifications as well.  So it's not something to switch lightly.  But it's something that I will close by saying, I know a few years ago there was an uproar with some farm ladies and we worked on the farm all these years and there's no disability, we can't draw social security, disability benefits.  That's true, if there was nothing paid in for you there, so even though you've worked side by side, I think remember the picture of the loving and loyal spouse holding the lantern, well you've been a loving and loyal spouse holding the lantern, but you ain't gonna get paid for it.  So, whatever you say the situation exists, and whatever you've signed the situation exists, that's what the situation is.