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cola's can never duplicate any of our cost of living . they are only based on a price change index representing the 1500 mini economies in this country .
many of the goods and services do not apply to us as well as location is a big factor . this is the second year in a row 1/2 of all the housing in nyc and the 5 boroughs had no rent increases voted in . that is a big difference from other areas .
your personal usage of these goods and services and how many times you personally do something or buy something changes things .
a personal cost of living index is very different .
that takes in to consideration how many times you buy an item , the price change, as well as the quality of the item . you can buy a better quality item and it can last twice as long although the price increase on higher quality items tend to be more .
medical expenses have been running 5.50% down from 7% today . no cpi figure will match that expense so that is a big variable right off the bat .
this is why thinking that things like inflation proof bonds are going to keep you even with inflation you are dreaming .
cola's can never duplicate any of our cost of living . they are only based on a price change index representing the 1500 mini economies in this country .
many of the goods and services do not apply to us as well as location is a big factor . this is the second year in a row 1/2 of all the housing in nyc and the 5 boroughs had no rent increases voted in . that is a big difference from other areas .
your personal usage of these goods and services and how many times you personally do something or buy something changes things .
a personal cost of living index is very different .
that takes in to consideration how many times you buy an item , the price change, as well as the quality of the item . you can buy a better quality item and it can last twice as long although the price increase on higher quality items tend to be more .
medical expenses have been running 5.50% down from 7% today . no cpi figure will match that expense so that is a big variable right off the bat .
this is why thinking that things like inflation proof bonds are going to keep you even with inflation you are dreaming .
Sure, this is the concern I was alluding to. It also puts a big fat question mark on all of those safe withdrawal studies, which treat CPI as a good measure of expense inflation for living breathing homo sapiens.
very few seniors need inflation adjusting yearly because as we age we naturally do less and spend less .
what we are no longer doing or buying tends to offset the increases in what we do .
in fact i am in to my 3rd year of retirement spending and have yet to inflation adjust once .
as kitce's found :
EXECUTIVE SUMMARY
Most retirement research assumes that retirees spending from a portfolio will seek to maintain a “real” inflation-adjusted standard of living throughout their retirement, just as they implicitly would have if their portfolio had been paid out as a steady pension with an annual cost-of-living adjustment. However, despite the simplicity of this assumption, retirement research has increasingly shown that retirees actually experience a decline in real spending through their retirement, as the early “go-go” years transition to less active “slow-go” years and then finally wind down in a series of “no-go” years with little discretionary spending.
In a new study contributing to the literature on this subject, David Blanchett of Morningstar has issued a new study entitled “Estimating the True Cost of Retirement” that finds in reality, real retiree spending decreases slowly in the early years, more rapidly in the middle years, and then less slowly in the final years, in a path that looks less like a slow and steady decline and more like a “retirement spending smile” instead. Implicit in these results is an acknowledge that, despite the common fears, even the uptick of health care expenses in a retiree’s later years are not enough to offset all the other spending decreases that tend to occur as retirees transition into the “no-go” years and other discretionary expenses fall significantly.
The implications of this research are not only that financial planners should be more cognizant to assume some level of real spending decreases throughout retirement (Blanchett’s research suggests this may be especially true for more affluent retirees who tend to have more discretionary spending that winds down over time), but also that the traditional research may be somewhat overestimating the amount of funds needed to retire in the first place, as a lower average spending level across all the retirement years means it simply may not take quite as much to retire as is typically assumed or modeled in a typical financial plan!
The conventional method for evaluating safe withdrawal rates assumes that retirees maintain a stable standard of living through retirement in real (inflation-adjusted) dollars. While there’s nothing unsound about this assumption – at least so long as it reflects a particular retiree’s goals – it is worth considering how accurate this assumption is relative to actually observed retirement spending behavior of the “typical” retiree.
Because, as it turns out from a growing base of research, constant real spending is not particularly realistic for most retirees. Instead, various studies are finding that real spending actually declines throughout retirement, by as much as 1% to 2% per year. And compounded throughout retirement, this discrepancy between standard industry assumptions and actual retiree behavior may be underestimating the safe withdrawal rate.
In this guest post, Derek Tharp – our new Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – analyzes safe withdrawal rates assuming decreasing spending in retirement, finding that the discrepancy between standard industry assumptions and actual retiree behavior may be underestimating the safe withdrawal rate by 0.32% to 0.75% – turning the so-called “4% rule” into something closer to a “4.5% rule” (with subsequently reduced real spending) instead.
While some may argue that “overstating” spending assumptions is good for the sake of being conservative in making retirement projections (certainly it is worse to run out of money that it is to have some extra!), assuming constant real spending is not the only (nor necessarily the best!) way to incorporate a margin of safety. Further, an appropriate safety margin will vary by retiree, depending on their risk tolerance and spending flexibility. If advisors truly wish to give advice that is customized to an individual’s goals and values (as most say they do!), then the safety margins utilized should reflect an individual retiree’s situation, too.
Obviously, the best way to capture an individual’s unique circumstances is simply to create a customized financial plan — which isn’t a radical idea for most advisors — but it is still important to understand what is actually customizable within a plan and what remaining assumptions may be biasing the results. And for advisors who prefer to apply and adapt the safe withdrawal rate to individual retiree circumstances, it’s still crucial to build on the right baseline assumptions – recognizing that the 4% rule may be predicated on retirement spending that simply doesn’t reflect reality!
I just ran through the Social Security benefits worksheet on page 30 of the 1040 instructions. I had it wrong. Line 2 says you take 50% of your Social Security 1099 form for the calculation. That's the first time I'd gone through it in that level of detail.
There's still an example where you'd have to pay tax on nothing but Social Security income. If you're married and you both receive the maximum possible defer-to-age-70 benefit, you're over $88K and hit the tax torpedo. I doubt there are many tax returns that look like that but it's certainly possible.
That $25K/$34K single; $32K/$44K married exemption isn't indexed to inflation. I'm 59. By the time I'm 70 and collecting, I'll certainly be hitting the tax torpedo on just my Social Security income. My statement says my Social Security income will be $44,136 if I defer to age 70. 11 years of COLA adjustments will certainly push it over $50K.
In this case, does it make sense to start collecting before age 70? In order to avoid the tax torpedo.
The catch here, which is alluded to in your second followup, is that someone with little discretionary money in their retirement budget starts out in "no-go" mode. If one is only covering the essentials like housing, food, utilities, health care... they may be at some risk by using the standard advice.
This isn't opinion. It's fact and anyone can look up the Federal income tax treatment for Social Security income.
It's really unfortunate that tax law put in place under Ronald Reagan to start taxing high income people wasn't indexed to inflation. $25K was pretty high income at the time.
*Note:
Your adjusted gross income
+ Nontaxable interest
+ ½ of your Social Security benefits
= Your "combined income"
In our case starting next year, which will be our first full year on retirement, we will be making about 58K from SS married filing jointly, with a paltry $355/month pension. Our Federal taxes will amount to about $114. That may just be the SS portion. I may have more to pay on the pension part. Or that may include it. Either way it won't be that much.
In our case starting next year, which will be our first full year on retirement, we will be making about 58K from SS married filing jointly, with a paltry $355/month pension. Our Federal taxes will amount to about $114. That may just be the SS portion. I may have more to pay on the pension part. Or that may include it. Either way it won't be that much.
This thread is "Social Security as sole source of income" but yeah.
My first post in this thread, it is pretty obvious that I didn't understand how it all worked. I'd read written descriptions from the SSA and other sources and they are not really clear. It wasn't until I actually downloaded the 1040 instructions and ran though the worksheet that I understood how it really works.
Some people must pay taxes on their Social Security benefits. If you get Social Security, you should receive a Form SSA-1099, Social Security Benefit Statement, by early February. The form shows the amount of benefits you received in 2012.
Here are five tips from the IRS to help you determine if your benefits are taxable:
The amount of your income and your filing status affect whether you must pay taxes on your Social Security.
If Social Security was your only income in 2012, your benefits are probably not taxable. You also may not need to file a federal income tax return.
If you received income from other sources, then you may have to pay taxes on your benefits.
You can follow these two quick steps to see if your benefits are taxable:
Add one-half of the Social Security benefits you received to all your other income, including tax-exempt interest. Tax-exempt interest includes interest from state and municipal bonds.
Next, compare this total to the ‘base amount’ for your filing status. If the total is more than your base amount, then some of your benefits may be taxable.
The three 2012 base amounts are:
$25,000 for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year;
$32,000 for married couples filing jointly; and
$0 for married persons filing separately who lived together at any time during the year.
If you use IRS e-file to prepare and file your tax return, the tax software will figure your taxable benefits for you. If you file a paper return, you can use the Interactive Tax Assistant tool on the IRS website to check if your benefits are taxable. The ITA is a resource that can help answer tax law questions. There also is a worksheet in the instructions for Form 1040 or 1040A that you can use to figure your taxable benefits.
For more information on the taxability of Social Security benefits, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. You can get a copy of this booklet on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Thank you everyone for the replies, of course no tax means no refund either LOL.
You mean the interest free loan you gave the Gvmnt ?
true.
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