“Personal Finance: How to handle Social Security windfall - Sacramento Bee” plus 1 more

Personal Finance: How to handle Social Security windfall - Sacramento Bee

Posted: 16 Jan 2011 09:51 AM PST

Here's a happy fact: For most Americans, paychecks are getting a tad bigger this year.

How much bigger? Starting this month, the typical employee making $50,000 a year will take home an extra $83 a month, or roughly $1,000 a year.

The bump in take-home pay, enacted in late December as part of Congress' tax-cut extension bill, drops Social Security contributions – for this year only – from 6.2 percent to 4.2 percent on wages up to $106,800.

The so-called "tax holiday" is designed to put a little stimulus in the pockets of recession-weary workers and give the economy another nudge out of the doldrums.

For some, the full amount spread over 26 bi-weekly paychecks will hardly be noticeable. In fact, a handful of people interviewed this week didn't even know the extra money was coming their way.

Whether most Americans save it or spend it, the extra cash will be welcome.

"It's not a whole lot of money, so I'll probably spend it on incidentals: gas, food, things like that," said data entry contractor Andrew Carroll, 25, who said he'd be getting less than the average U.S. worker's $996 a year.

Others say they'll sock the extra away. "I'll probably act as though I'd never seen it and put it into my savings every month," said Matthew Parsons, a 35-year-old state Department of Education consultant. "I'm pretty fiscally tight with my finances."

While it's tempting to want to spend it freely, financial advisers recommend thinking twice.

"It depends on your individual circumstances. There are many people who need the money to pay bills," said CPA Greg Burke, a partner with John Waddell & Co. CPAs in Sacramento. "If you have credit card debt, that's where I'd put it. The interest you're paying – 20-plus percent – is probably higher than what you'll pay for borrowing anywhere else."

Workers don't have to make any changes to their withholding themselves; the Social Security tax cut is handled automatically by employers and payroll companies. (The amount that employers contribute for their employees' Social Security doesn't change: it's still at the same rate of 6.2 percent.)

Employers must start implementing the lower Social Security tax rate on paychecks no later than Jan. 31, according to the IRS. If any overwithholding of Social Security contributions occurs in January, employers have until March 31 to make adjustments.

Although the paycheck adjustment is handled automatically, the IRS recommends that everyone review their federal withholding once a year. You may need to adjust for certain life changes, such as getting married, having a child, getting divorced, buying a home. If your withholding needs to be changed, submit a new W-4 to your employer. For details, see box.

Dropping the amount that employees contribute this year to Social Security will not harm the fund's long-term well-being or impact anyone's future benefits, say federal officials. (The $112 billion shortfall is to be covered by the federal government's general fund.)

But some financial planners doubt that.

"Nothing's free," said Eleanor Blayney, consumer advocate for the national Certified Financial Planner Board of Standards Inc.

In the long run, she and other financial planners believe the one-year cut will contribute to Social Security's chronic underfunding and likely result in either delaying the age at which you can begin collecting Social Security or lessening the monthly benefit.

For that reason, Blayney urges consumers to plow this year's extra money into a savings or retirement account to bulk up for the future.

"We all need to be more self-reliant about our retirement. If you haven't maxed out your 401(k) contribution, use that extra $40 a paycheck. Or consider a Roth or regular IRA."

Or set up an automatic transfer of that extra 2 percent into a money market, savings or brokerage account.

While the extra may not make "a huge difference paycheck to paycheck, it could make a difference for you on an annual basis," she said.

Paul Golden, spokesman for the Denver-based National Endowment for Financial Education (NEFE), suggests some additional ideas for the extra money:

• Avoid a holiday shopping hangover by opening a separate savings fund today for the 2011 holidays.

• Deal with any critical maintenance/repairs to your home or vehicle, such as fixing a leaky roof or buying new tires.

• Build up an emergency fund for unexpected car repairs, medical bills, etc.

"Start with a realistic goal so you get a sense of achievement. Even if it's as little as $500, it has a psychological benefit," said Golden.

Once you achieve that goal, work on setting aside the recommended savings for three to six months of living expenses, a cushion in case of job loss or medical surprises.

• And finally, treat yourself. If you've got your other savings goals covered, reward yourself – but responsibly, suggests Golden. Use the extra money toward a small vacation or even a flat-screen TV, but not a new car payment that could keep you in debt.

Not everyone gets a break with this new two percentage point payroll tax cut. That's because last year's "Making Work Pay" tax credit, which gave working individuals a $400 credit on incomes up to $75,000, expired Dec. 31.

"There's a crossover point where losing the Making Work Pay credit costs more than getting the 2 percent tax cut," said Blayney.

Generally, those making below $20,000 a year will take a hit.

Regardless of where you land, Burke reminds that the paycheck bump is only temporary, set to expire at the end of December.

"Don't depend on it as income. Don't anticipate it'll become permanent. It's one-time savings," he said. "Treat the money as extra: Either save it, put it away for your kids' college or pay down your credit card debt."

Have a personal finance question? Call The Bee's Claudia Buck at (916) 321-1968.

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Personal Finance: In 2010, most made a bundle - Philadelphia Daily News

Posted: 15 Jan 2011 11:57 PM PST

Posted on Sun, Jan. 16, 2011

Open that envelope . . . the one from your 401(k), IRA, college fund, or anything else from your broker. It's bound to contain some delightful news if you did just about anything other than play it safe with cash or CDs last year.

In 2010, it was almost impossible to make a mistake if you plopped money into a stock mutual fund at the beginning of the year and left it there, or if you didn't get scared during the 16 percent plunge in the stock market in the summer and kept adding money. Bond mutual funds also treated investors kindly for the year, although they have been on a nasty streak that's been destroying some gains during the last couple of months.

Despite the fear the last three years, and fretting that the economy would fall back into a recession last summer, investors did extremely well in the stock market, beating historical averages.

If you simply put money into an index fund that mimics the stock market, or the large stocks known as the Standard & Poor's 500 index, your money grew about 14.3 percent, according to Lipper Inc., a firm that tracks mutual fund performance. That is better than the 9.8 percent historical average in large-company stocks tracked by Morningstar Inc.'s Ibbotson Associates Inc. since 1925.

Small companies rocked

If you took a chance in a small-cap stock mutual fund, the average fund would have returned 25.7 percent for the year, as investors followed the typical behavior after an awful recession. Smaller companies tend to be the leaders, as investors start feeling more optimistic about the economy. And small stocks last year far outperformed their average annual gain since 1925, which has been 11.9 percent.

Around the world, small companies were the place to be in 2010. Yet, if you hedged your bets and put money into an international fund that sampled a blend of large and small stocks from all over the world, you would not have made as much money as if you had bet on the United States alone. The average international fund, a blend of stocks from throughout the world, climbed about 10.4 percent over the year, according to Lipper.

Europe, of course, with its worries about debt problems in Greece, Portugal, Spain, Belgium, and Italy, was the world's laggard. Still, the average fund invested only in European stocks climbed about 7 percent.

On the other extreme, China, with an economy growing at 10 percent a year, prompted nervousness as investors wondered whether the government would try to slow down growth somewhat to avoid a bursting bubble. Still, China funds provided a 12.5 percent return.

Time heals the wounds

The year demonstrated clearly that time heals the stock market and the economy, even after the harshest devastation since the Great Depression. Although the economy and, especially, employment still have a distance to go, the full stock market, or what's known as the Wilshire 5000, has climbed about 98 percent and added $8 trillion to people's wealth since the scariest moments of March 2009.

That growth should go a long way to easing the pain of 56 percent losses during the cruel bear market. But getting back to even after such devastating losses takes time, as investors will see if they compare their 401(k) now to where it was in 2007. The Wilshire 5000 still ended 2010 down 14.3 percent from the Oct. 9, 2007, peak. In other words, despite the stock market's returning $8 trillion to investors over the last couple of years, people still have not regained about $3 trillion of their original losses.

If you were scared and decided to stick with gold in 2010, you would have made about 30 percent in the SPDR Gold Trust exchange-traded fund.

Meanwhile, investors who continued to cling to U.S. Treasury bond funds were picking up on warnings of their own. In the last month, investors have lost about 3 percent in the average U.S. bond fund. In a recovery, interest rates are expected to rise, and that means bonds lose value.

Gail MarksJarvis is a personal finance columnist for the Chicago Tribune. E-mail her at gmarksjarvis@tribune.com.

Personal Finance

Sunday, January 16, 2011