Godlmighty! Yesterday I realized that Fidelity never sent my April 403(b) drawdown. So now on Monday I have to try AGAIN to get those people off the dime.
What torture! I just hate bureaucratic runarounds. I hate them even more when the bureaucracy is private instead of governmental. At least with the government the employees are usually trying to accommodate you.
I have talked to CSR after CSR after CSR—every time you call, you get a different person, and you never can get through to Person 1 who told you X or Person 2 who told you Y. I have asked and been assured now three times by three different people that the drawdown required by the State of Arizona would be made correctly and would be direct-deposited in my checking account. The result is that since last December I’ve gotten two checks sent in the mail. And this month I’ve received nothing.
It just makes me so angry. We originally had the option to invest with Vanguard in its 403(b) plan. As soon as that became possible, I moved most of my 403(b) funds over there, because all my nondeferred savings were at Vanguard, whose fees are low, whose profits are handsome, and whose customer service is excellent. That lasted all of a year—I guess Vanguard must have been too competent to work with Arizona State University.
If I weren’t afraid the state woulddeny me the rest of my RASL, I’d roll the money over into my big IRA now. In fact, my financial advisor and I hatched a plan to have them roll a portion of the drawdown over to the IRA, but I hadn’t gotten around to doing battle with the bureaucrats about that, mostly because I wanted to see how I would get by in the summer before cutting the drawdown from $500 to $100.
Presumably, though, that wouldn’t have happened, either. The only way I’m going to get the money where it belongs is going to be to roll the entire amount over. And I’m really afraid that’s going to get me in trouble, since the woman who administers the RASL program insists that to be eligible you have to be drawing what she calls a “pension”—i.e., a monthly drawdown from the state’s 403(b) plan.
I’ve concocted a new plan, though. To wit: leave enough cash in the 403(b) fund to cover the time between now and the date the last RASL check is issued, but roll the rest of it over. There are only 22 months remaining, and so the most I’d have to leave in there—assuming I continue the drawdown I’m currently making, which I’d actually like to cut—is $11,000.
Whatever I decide to do, though, next week I’m going to have to bang my head against the bureaucratic wall again. I’m royally sick of that!
In response to my rumination about the strategy for surviving in Year 1 of Bumhood, when Social Security imposes an earnings limitation that amounts to real poverty, readers have speculated that structuring my business as a sole proprietorship rather than as an S-corporation would allow me to deduct Medicare, Medigap, and long-term care premiums dollar-for-dollar against business income, rather than having to jump the 7.5% hurdle set up for people who itemize. Frugal Scholar made the interesting discovery that “employees of an S corp can take the self-employment health insurance deduction.”
It’s an interesting concept; I just sent off an e-mail to Tax Lawyer inquiring about it.
Somehow, though, I doubt Uncle Sam will let me run Medicare premiums through a corporation. Social Security automatically withholds Medicare Part B from your Social Security check—you don’t get a choice about it. It might be possible to work some sort of scam with the Medigap premiums, but even there…questionable.
The point of incorporating CE Desk as an S-corp, in my case, is to allow me to stay in business during this endless first year of penury, during which the government penalizes me if I earn more than $14,160 because I’m under age 66. I earn about $240 more than that teaching six sections of freshman comp. Without a way to shelter my editing and blogging income, I would have to close both of those enterprises down. As we know, when you quit working at a freelance enterprise, your clients go away permanently, so that when you want to revive your little business, you have to start over from scratch. I’m getting too darned old to start over from scratch! Plus FaM is starting to earn a small but steady income…I don’t want to get rid of that, either.
Channeling the income from the S-corp means that if I earn, let’s say, $5,000, through freelance enterprises, the money belongs to the corporation, not to me. I am an employee of the corporation. My “job” is to direct the corporation. The corporation has to pay me an amount deemed “reasonable” by the IRS. It’s not paying me for my day-to-day editing and writing work; it pays me to be a corporate director. So, on a $5,000 income it pays me a little over $500. That is salaried income.
The S-corp does not shelter the salary you pay yourself from self-employment tax. What it does is convert some (but not all) of your freelance income into a “dividend,” on which none of the social welfare taxes are due. From my pittance, it has to withhold FICA and Medicare, and it has to pay FUTAand the employer’s share of FICA on the amount it pays me. The rest of the money—the part that remains after my “salary” is paid—can either remain in the corporation to be used to cover operating expenses (or just to sit there) or can be disbursed to the corporation’s owner(s) as “dividends.”
Because Social Security views dividends as return on investment, not as salaried income, this part of my freelance revenues doesn’t count toward the $14,160 earnings limit.
While it is true that you don’t pay self-employment tax on the dividend part of your drawdown from the corporation, it also is true that you don’t get credit toward Social Security for that part of your annual earnings. Thus if you did this for a very long time—say, starting fresh out of law school or medical school—you would greatly reduce the amount of your Social Security entitlement when the time comes to retire. If you engaged this strategy, you would have to be certain that you were going to earn and save a great deal of money during your career…otherwise, in your old age you’d end up just as penurious as an aging college English lecturer.
According to Elderlaw, qualified long-term care insurance premiums and Medigap premiums are regarded as medical expenses and are deductible if they exceed 7.5% of your gross income:
Premiums for “qualified” long-term care policies will be treated as a medical expense and will be deductible to the extent that they, along with other unreimbursed medical expenses (including “Medigap” insurance premiums), exceed 7.5 percent of the insured’s adjusted gross income. If you are self-employed, the rules are a little different. You can take the amount of the premium as a deduction as long as you made a net profit–your medical expenses do not have to exceed 7.5 percent of your income.
Medigap will cost me about $1,200 in 2010; long-term care is about $960, for a total of $2,160. Medicare Part B will cost me $1,326 this year.
According to IRS Publication 502, Part B premiums are also treated as medical expenses:
Medicare B is a supplemental medical insurance. Premiums you pay for Medicare B are a medical expense. If you applied for it at age 65 or after you became disabled, you can include in medical expenses the monthly premiums you paid.
Thus the total amount, before I buy any eyeglasses, contact lenses, or prescriptions, that will qualify as medical expenses will be $1,326 + $1,200 + $960 = $2286. And I’m not even adding Medicare Part D into that. The total, with Part D, probably will come to around $2,400.
If I stand down off one class this fall, my total earned income will be $1257(12) + $2,400(5) + $500 + $500(12) = $33,584. That’s Social Security + teaching + freelance income + drawdown from 403(b). Multiply that by 7.5% and you get $2,518. So…one pair of Costco glasses puts me over the 7.5% qualifying threshold—that’s before I visit a doctor, before I buy a prescription drug, before I buy a couple boxes of contact lenses, before I pay for a shingles shot. And the 7.5% is on adjusted gross income, which you can be sure will be less than $33,584.
I don’t earn enough from freelancing to live on (far, far from it!), and so there’s no question of my working the business so that I write off medical costs and everything else against my taxes. If a miracle happened and FaM’s traffic went up about tenfold, I’d have to reconsider that. But unless the government can be persuaded to regard my teaching income as “self-employed” (which Tax Lawyer says it will not do), in my case the S-corporation is probably better than a sole proprietorship, because it allows me to keep the pittance I do earn through freelance editing and blogging from biting into my Social Security earnings.
Next year, when I’m 66 and can work until I drop without being punished for the privilege, will be another matter. But I’ll cross that bridge when I come to it.
Baker at Man vs. Debt hit the gong at several blog carnivals this week with his rumination on the various excuses not to give money to charities. While the article is well written and I respect the passion with which his readers respond, the enthusiasm for giving away hard-earned wages escapes me.
I rarely donate cash to any charities or churches. There’s a reason for that: charitable giving warped my father’s psychology, influencing his entire life for the not-necessarily-better, and it permanently alienated his two older brothers from each other. Effectively, it destroyed his mother and his family. Because of his experiences, he would never allow my mother to teach me religion or to drag me to church, and he would not permit her or himself to donate to anything.
At the turn of the twentieth century, my grandmother inherited a substantial sum from her father, who had accumulated a small fortune in freighting buffalo hides out of Oklahoma to market in Texas. By the time my father came on the scene, rather late in her life, she was pretty well set: she owned two houses and a commercial property in Fort Worth, and she had money in the bank.
My father was a change-of-life baby: the youngest of his two brothers was 18 years older than he. At the time he was born, his father ran off, abandoning the middle-aged wife to care for the new baby herself. Her two other sons were, by this point, out of the house and launched on their own lives. One became a ranch hand, running cattle in west Texas; the other went to work at a Fort Worth dairy. Both men had their own families, with all the concerns that entails.
Over the next decade or so, my grandmother became engaged with an alternative Christian church that since then has evolved into the mainstream. Neither brother paid much attention to what was going on, although my father realized something was awry by the time he was about ten years old. She was quietly giving money to this church: large amounts of money. The church was gratefully accepting it and offering exactly nothing in return.
The two older brothers learned about this only after it was way too late. They found out when the county seized their mother’s home for unpaid taxes. She couldn’t pay her property taxes, because she had no money. She was flat broke, having given every penny of her fortune to the church.
Did this make her a better person? No. Did it contribute to her personal happiness? Obviously not. Did it make her holy in the eyes of God? Maybe. God didn’t do much to keep a roof over her head, though. Nor did He prevent creditors and the government from taking away what little she had left. She lost both houses and the gas station, and everything she had ever had was gone. There was no help for her from any direction. She died in desperate penury, without a word from the worthies of the church that had taken all her money.
My cattleman uncle blamed his brother, my other uncle, for this state of affairs. He felt that his brother should have been keeping an eye on their mother, since he was the one who stayed in Fort Worth. The two men fought, and after that they never spoke to each other again.
My father was a little boy, but he was old enough to understand that his home was gone, his mother was reduced to poverty, and a substantial inheritance that should have supported her and all three of her sons had evaporated into the coffers of a church. He determined that he would earn back the entire amount that she had lost.
And he did. By the time he reached his goal, forty years later, the dollar amount wasn’t very much, and because he wasn’t an educated man, he didn’t understand that to match the buying power of what she lost, he would have had to save over seven times as much. But that didn’t matter: in his mind he’d regained her losses. As soon as he reached his goal, he retired, imagining he would be set for life.
To do it, he
• dropped out of school in the 11th grade; • lied about his age to join the navy; • worked like an animal all his life; • spent ten grim years of his life, my mother’s life, and my life in a godforsaken outpost in the Arabian desert; • pinched every penny that came his way; • based his marriage and his entire life on the accumulation of savings; • lived a miser’s life right up until the time he died.
To say he was a frugal man is to understate. Saving money became an obsession, and he focused all of our lives on it. Because he didn’t really understand money well, he made some serious mistakes, topmost among them investing all he had in insurance securities, which during the 1950s were returning at a rate of 30 percent. He didn’t realize a) that investments should be diversified, and b) no investment that was earning that much could possibly last long. When the bottom fell out of the insurance securities market, he lost almost everything—just as he stood at the verge of making his goal.
He did eventually earn the lost savings back, but this fiasco added another ten years of hard labor to his financial plan, and it pinched his personality even more than it was already pinched. Overall, he fared pretty well, considering that he had no education and only the opportunities he managed to wrest from life by main force. He kept us in the middle class, and he left about a hundred thousand dollars to his wife, my son, and me.
But his character was changed by his mother’s charity: warped and crabbed. And he was effectively left alone as a teenager, his two brothers spun off like asteroids in deep space. What remained of his family fell apart, and he spent his entire life trying to put what he thought was his birthright back together.
And that’s why I don’t give to churches.
To my mind, charity begins at home. If I give any money away, it’s to my son, who has returned the favor by growing into a decent man. By keeping myself off the public dole, I save the taxpayer a great deal of money. And let us bear in mind that what I do to keep myself off the dole—mostly teaching—is itself a form of charity: I educate young people for a small fraction of what anyone with comparable skills doing a comparable amount of work with comparable management responsibility would earn in business. She who gives away her time, energy, and skill for the public good donates something worth a great deal more than cash.
. . . to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.
When the job ends on December 31, I’m planning to consolidate all my checking and savings accounts into just three: a checking account, an emergency savings account, and the self-escrow account to pay annual property tax and insurance bills. Right now I use one checking account as a “pool” from which incoming cash is disbursed to a half-dozen “cookie-jar” accounts dedicated to various expense and savings needs. Yesterday, thinking ahead to what the simplified system will look like, I added up all the money that has accumulated in the cookie jars and then estimated the last few pittances due next month. And I was astonished to discover how much cash has quietly accrued, painlessly, without my trying very hard to save.
Hang onto your hats, folks: over $26,500 is sitting there in the credit union!
That’s about $16,500 more than I thought. What accounts for this startling windfall?
Well, near as I can tell, the combination of a small extra income stream plus certain frugal habits builds saving into your lifestyle in ways that you hardly notice. For example:
• Use a budget to help you live within your means.
How it works: By establishing limits to how much you spend, you rarely spend more than you earn, and you occasionally spend less. Every time you come in under budget, the money you didn’t spend tends to accumulate in your checking account.
• Automate your savings.
How it works: Ask your bank or credit union to divert part of each paycheck to savings. What’s left in your checking account is the amount you view as your net income, and you don’t even think about the savings set-aside. It’s already done by the time you start to budget.
Also, take advantage of any 401(k), 403(b), or other retirement schemes your employer offers. These allow you to save—automatically—with pre-tax dollars, and if your employer matches contributions, you get double the savings at half the hassle.
• Pay yourself first—and last.
How it works: Got money left over at the end of a pay period? Transfer it into a savings account. It doesn’t hurt to have two savings accounts: one to hold automatic savings “payments” from your paychecks for the long term, and one to hold leftovers, which can be used to reward yourself with indulgences and vacations.
• Live within your former means.
How it works: When you get a raise, leave your spending level where it was. Add the new income to the amount your bank or credit union automatically transfers from each paycheck into savings.
During the first six months of 2009, GDU’s ill-advised furlough scheme cut my income by $240 per paycheck. In that period, I learned to live on a lot less pay. In July, when the university started paying us our full salaries again, I continued to live on the “furlough” budget and put the extra income into savings.
• Drop your spending level a small amount at a time.
How it works: Reduce discretionary spending in small, tolerable steps. This allows you to get used to a smaller budget, and a smaller spending budget leaves more from your income to put into savings.
The layoff message has been scrawled across the wall for a long time. At my office, we’ve known since summer of 2008 that sooner or later the university was likely to can us, and as we’ve seen, that suspicion was confirmed in June. This has given me time to reduce my habitual monthly expenditures from about $1,500 a month to $1,200 and then to $1,000. Or less! The past couple of months I’ve managed to keep the spending in the vicinity of $800. Because I’m still earning until the end of December, all that unspent income has gone into savings.
• Snowball and snowflake savings as you would snowball a loan.
How it works: The “snowballing” principal suggests that you can accrue funds to pay down debt by focusing on a single account and then when that’s paid, add the amount you were paying against that debt to the amount you’re paying against the next debt, speeding payoffs incrementally. “Snowflaking” entails applying every windfall and every bit of “found” money, no matter how tiny, to paying down debt. Well, you can apply that to saving, too:
When you’ve paid off a debt, the amount of the payments can go into savings, rather than being diverted to restaurants and indulgences. Same with unexpected bits and pieces of money—gifts, extracurricular jobs, overtime, bonuses: stash the money in a savings account before you can diddle it away.
Every little bit helps. It’s amazing how fast these dribs and drabs add up. When I paid off the second mortgage on my house, I had the credit union put the $169/month into savings instead of leaving it in my checking account. Same with another $200/month payment I managed to escape. Lo! That’s $369 a month, $4,428 a year of “free” money.
• Divert all income from a second income stream to savings.
How it works: A key way to protect yourself from layoffs, pay down debt, and build savings is to build a second income stream. If you don’t need that income to live on, for heaven’s sake keep it!
I have three side income streams: teaching, blogging, and freelance editing. None of them earns much, in the large scheme of things. Taken together, I probably haven’t netted ten grand in 2009. But everything I earn from these ventures has gone straight into savings. Over time, as we can see, it certainly has added up.
It has added up: so painlessly that I hadn’t even realized how much, really, was stashed in the half-dozen credit union accounts I’ve been using. I have to admit that I had no intention of keeping that much money in low-interest checking and savings accounts.
I’d figured to start unemployretirement with a base “cushion” of $10,000, which I expect will tide me over the first year when Social Security rules will allow me to earn no more than $14,160. Ten grand plus $15,000 of Social Security plus $14,160 of teaching income should just net enough to cover my expenses. So, next month, when I’m certain of how much is in there after my last paychecks, vacation pay, and whatnot, I’ll transfer about $16,000 of those surprise savings from the credit union into my investment accounts.
If, as my financial managers expect, the economy continues to grow in 2010, that should go a long way toward reviving my retirement fund!
A meeting with the investment adviser yielded a little decent news on the pending unemployment (i.e., forced retirement) front. He figured out that $10,000 of the $25,000 sitting in the whole life insurance policy my ex- bought back in the early 1980s is not subject to taxes.
So, he proposes that I withdraw that in January 2010 and use it to pay my share of the mortgage on the investment house. This should keep taxes low and, because it’s not earned income, will not work against me in the Social Security earnings limit department. With the mortgage covered and the likelihood that the community college teaching gigs will max out the earnings limit, I may not have to take a drawdown from investments at all next year.
This, he thinks, will allow my much-battered investments to recover from the depredations of the Bush economy.
If, as planned, I add the net amount of the vacation pay GDU will owe me to the living expenses fund, I should end up with about the same monthly income that I have right now. It will delay having to raid my retirement funds for as long as a year, and meanwhile, it’ll give me a chance to apply for full-time work. The community college district has had a hiring freeze going for quite some time; that one job has opened up means the ice-pack may be melting. Between now and next fall, several more opportunities may arise.
O’course, the fly in that ointment is Medicare. Even with the inflated health-care premiums presented to us in this month’s open enrollment, the cost of cobbling together coverage comparable to my present health-care coverage will be about 10 times what I’m paying now. That’s going to be a big hit, and because of the earnings limitation, I won’t be allowed to use freelance income or take on a summer course to take up the slack.
So…2010 is gonna be a little pinched, but it should be survivable. As for 2011: it’ll just have to take care of itself.
In a history article for a client journal, one of our authors mentioned Measuring Worth, a nifty tool that allows you to compare a variety of money-related values over periods stretching back to 1774. Among other things, it will calculate the relative worth of the dollar. Enter a specific sum and a year, and then ask what it would have been worth in a later year. The engine disgorges the equivalent according to six different indicators: the consumer price index (CPI), the gross domestic product (GDP) deflator, the consumer bundle, the unskilled wage rate, the GDP per capita, and the GDP.
The first two are ways of measuring average prices. The third (consumer bundle) shows the average value of a household’s annual expenditures; the unskilled wage rate provides a way to compare wages over time. The GDP per capita is another way to compare income over time, and the GDP itself, the market value of all goods a country produces in a year, shows “how much money in the comparable year would be the same percent of all output.”
More on this feature in a minute.
First, though, let’s look at a feature of special interest to personal finance enthusiasts: Measuring Worth also has a tool that shows how much savings would have grown over time. Enter a value and a date, and then ask how much that value would be worth at another date (up to this year), and it will tell you the return on a short-term investment, a long-term investment, and a stock market investment.
So…let’s say your child is 19 years old now, and you’d like to send her to college. When she was born, in 1990, your parents gave you $1,000 to invest toward her education. If you’d put the money in an excruciatingly safe short-term asset, today it would be worth $2,060. Invested in a long-term asset with a term of 20 years, it would have yielded $4,973. And had you put it in a Dow Jones Average portfolio, you would have $4,196, a middling performance.
Well, what if your own parents gave you $1,000—say, when you were born—and now you’re about to retire? If you were 65 today, the gift would have come in 1944 (and it would have been a lot of moola in those days!). Assuming you kept that investment separate and didn’t add more cash other than reinvesting proceeds, how far would it go today toward supporting you in your old age?
Whoa! Over a really long term, the stock market beats the other two investment modes, hands-down.
I wonder how our college girl would’ve been doing before the Bushies screwed up the economy. How much would her stock portfolio have been worth a couple of years ago, when she was 17?
Ah hah! $4,918. In the stock market, her savings would have fallen off $722 over the the year between 2007 and 2008. In a long-term investment instrument, it would’ve been worth $4,549 in 2007, $424 less than the most recent value. It appears that given competent national leadership that recognized the importance of regulating financial markets and was capable of an intelligent response to 9/11, she might have been better off in stocks and bonds.
Entertaining, isn’t it?
Now for the money story:
At the time my father was born, in 1909, his mother had about $100,000. She’d inherited this small fortune from her father, who had made it freighting buffalo hides out of Oklahoma into Texas. Also at about the time my father arrived, her husband ran off. He eventually was found dead by the side of a rural Texas highway. This left her alone with an infant, a change-of-life baby. My father had two elder brothers, the youngest of whom was 18 years older than he was. By the time he was born, both men were out of the house with families of their own.
She became involved with a Christian church on the fringes of mainline Protestantism, and she also became interested in spiritualism. She donated copious amounts to both causes. By the time my father was about ten years old, these worthies had sheared her of every penny that she had. She was left destitute.
Her home was taken away for taxes. She also lost a commercial property and another house she owned. The two older brothers, who knew nothing of this until they returned home and found her on the street, fell out over the fiasco. Tom, the eldest, was a ranch foreman who, of course, lived out in the sticks. He felt his middle brother, Ed, who lived in Fort Worth where their mother lived, should have been keeping an eye on her finances. The brothers were permanently alienated as a result of the bad feelings that arose in the wake of their mother’s impoverishment.
My father also was permanently affected. He developed a lifelong hatred of organized religion (his skepticism—shall we say—is the reason that to this day I will not donate to a church), and he also conceived a passion about money. He decided that, as his life’s goal, he would earn back the hundred thousand dollars.
And he did.
You understand, he was not a sophisticated man. He dropped out of high school in his junior year, lied about his age, and joined the Navy. He went to sea all his adult life, ultimately became a master mariner, and retired at the age of 53, when he achieved his goal of accruing $100,000 in savings. Details like the relative value of money were largely beyond his ken. Though he understood that a hundred grand didn’t make him a wealthy man in 1962, he had no way of anticipating the double-digit inflation of the 1970s. By the time that was over, the nest egg that would have kept him comfortable wasn’t worth enough to support him through his old age in a fashion other than basic poverty.
Luckily, he was a very frugal man by nature, and so it didn’t much matter: his lifestyle wouldn’t have changed, one way or the other.
I have always wondered what that $100,000 of 1909 would be worth in today’s dollars. Let’s enter it and the date of my father’s birth into the Measuring Worth relative value calculator. Current data, we’re told, are available only up to 2008. According to the various measures, today the dollar value of her inheritance would be…
• CPI: $2,441,007.10 • GDP Deflator: $1,777,507.10 • Value of consumer bundle: $5,009,823.18 • Unskilled wage: $10,307,228.92 • Nominal GDP per capita: $13,314,632.87 • Relative share of GDP: $44,808,290.00
In terms of purchasing power, my grandmother’s hundred grand would have been worth $2,441,077.10 in 2008. LOL! Think of the McMansion I could’ve bought with that as a down payment!
What if she had put her inheritance in the stock market, instead of diddling it away on her religious delusions? Invested in a nice, balanced portfolio, by the end of 2008 it would have been worth $16,595,085.85.
Well. Any way you look at it, if she been a little smarter about money and a little less inclined to woo-woo, today I wouldn’t be worrying about how I’m going to get by in retirement!
My father hugely underestimated the amount he would need to live comfortably into his mid-80s. Of course, without his mother’s crystal ball he couldn’t have anticipated the inflation that ate up his savings…but I think, given the way the government is spending money in the wake of the crash of the Bush economy, we can expect a similar inflationary period in the near future.
How much would I need in savings to have the equivalent of the $100,000 he had managed to earn back by 1962?
• CPI: $711,510.24 • GDP Deflator: $569,106.07 • Value of consumer bundle: $879,310.34 • Unskilled wage: $809,366.13 • Nominal GDP per capita: $1,510,749.04 • Relative share of GDP: $2,465,665.02 • Purchasing power: $711,510.24
Hm. If the least of these—$569,106.07—is what I’ll need to survive in moderate comfort (or not!), then I’m in deep trouble. Eighteen months ago, my savings were close to that. But today they sure aren’t, thank you very much, George and friends!
Welp, too late now. There’s not a thing I can do about it, so there’s no point in fretting. Tra la!
