How To Allocate Your Savings

Three Glass Jars On Wooden Shelf For Savings
I recently wrote a post about saving money and why you need to have an emergency fund saved up before you start saving for retirement. (See: How Much of My Income Should I be Saving? ( Well, a friend of mine recently asked me what I thought should be the next step in saving and this is what I told him.

I’m not a financial planner or money guru of any kind. If you have access to a professional in that field I recommend you hire one because I think everybody could use a plan tailored to their needs. But if you don’t have access to a personal planner, this is my opinion of how I think you should prioritize your savings.

First: Have at least three months worth of expenses saved up in a regular bank account. I like to see 6 months to a year’s worth in the bank, but the three months is crucial before you start putting money anywhere else.

Second: If your employer matches your 401(k) contribution- then put your money there up to the match. An employer match is a 100% return on your investment. You can’t get that anywhere in the marketplace. If you find a bank account that pays one half of one percent interest that’s considered good these days. A 100% match? That’s totally awesome! Do not miss out on that opportunity.

Third: If you have money left to save after contributing up to the match, then I would put money into a Roth IRA if you qualify. Generally you need to earn less than $129,000 a year if you’re single and $191,000 a year if you’re married. The reason I like the Roth IRA over the 401(k) or traditional IRA is that you get to take the money out tax free in retirement. It’s also a good source of funds for college, housing, or other emergencies if you should need it. There is no tax benefit now for putting money into the Roth, all the benefit comes when you take the money out. I cannot overstate how valuable that “tax-free” part of the retirement equation is.

Fourth: My next choice for savings would be back to your employer sponsored 401(k). This gives you a tax reduction benefit now.

Fifth: College savings. People with new babies always ask me about college savings programs. They will have no money in their own savings or retirement but they want to open a 529 plan. So why is college savings so far down on the list? Here’s the main reason: you can get a loan to go to college. You cannot get a loan to retire. We’re talking about priorites: savings, Roth IRA, 401(k), then college. (Remember, a Roth IRA can be used for college if needed.)

Have you gotten this far and you still have money left to save? That’s great! That also implies that you’ve got enough money to hire a professional financial planner. There are cool things you can do with annuities, life insurance, and other investments that are way beyond the scope of anything I can tell you about. Find someone that you can really talk to.

What are your plans for the future? Where do you want to be when you retire? When will you retire? How will you get there? These are all things that need to be tailored just to you and can’t be answered in some blog post.

How Can Social Security Be Out of Money If We Only Take Out What We Put In?

Photo by Scott at

I hear this question all the time.  We all put our own money into Social Security so how can it run out of money?


First, let me point out that Social Security is not out of money.  It’s estimated that it could run out of money by 2035 if changes are not made, but it is not out of money yet.  But, how could it run out of money if it only pays out what we pay in?  The problem is–and I hate to call this a problem, but we’re living too long.  (Like I said, hate to call that a problem.)


Let me use a real example of a real person.  I’ll call him Sam.  Over the years, Sam has paid $120,698 into Social Security.  His employers have paid $131,693.  So all together, $252,391 has been paid in.


According to Social Security, Sam will receive $2,611 a month in benefits.  At that rate,  Sam basically uses up all his money in just over 8 years.    ($252,391 divided by $2,611  =  96.66 months.  96 months divided by 12 months = 8 years)  So assuming that Sam retires at age 66, if he lives to age 75 then he’s used up all the money put in for him in the first place.


But you don’t quit getting social security when it runs out.  Social security payments go on until you die.


But what about interest?  Isn’t the money invested, shouldn’t it go farther?

Well yes, I did over simplify things.  The Social Security trust funds are invested in “special issue” securities of the US Treasury.  For 2012, the annual effective interest rate of return was 4.091%.  (But that’s because of some special circumstances, the actual rate right now is closer to 1.48%.)


There is no social security withholding on wages over $113,700.  Why can’t the wealthy just contribute more to social security?

I hear that all the time too–why not just have the higher income people keep contributing and eliminate the cap–but here’s a catch–if you are supposed to take out what you put in–then those higher wage earners are going to want to take out what they put in too.  Given that people are living longer than their benefits are holding out–do you really want people taking even higher benefits?  That would actually make the situation worse than it already is.


Let’s go back to Sam for our example.  If Sam lives to age 80, that’s 4 extra years of social security.  At his current rate of $31,332 a year, that’s an extra $125,328 more than what he originally paid in.    In reality, Sam earns well above the social security base wage.  Let’s say his contributions to social security are unlimited.   Based upon Sam’s “unlimited” contributions, when I run the numbers, I get Sam’s monthly payment to be close to $7,500 a month ($90,000 a year.)  Now if Sam lives an extra 4 years,   that’s $360,000 more than what he paid in.   So having the wealthy pay in more to social security actually costs more than keeping it capped like it is now.


So how do we “fix” social security? I wish I knew the answer to that one, but I don’t.

Why Social Security Wants You to Retire at 62

Social Security and early retirement

If you are going to life past that age of 83, then Social Security comes out ahead if you take your retirement benefits early.


Social Security would rather have you retire at age 62 than at your full retirement age.  That sounds a little backwards, but it’s all about money.  (Of course!)


When Social Security started back in 1935, the average person died before ever claiming any benefits.  Now, people are living longer than ever and Social Security payments continue through the end of your lifetime and even beyond for widow(er) benefits.


So, if the Social Security Administration is paying out so much money, why would they want you to retire early?   Let’s do the math.  (Don’t worry, I’ll keep it simple.)


Frank has worked all his life and he’s tired.  He doesn’t have to, but he’s thinking about retiring at 62 so he can spend more time with his wife, Delores.  If Frank retires at his full retirement age of 66, his monthly Social Security benefit would be $2,000 a month.  If he retires at age 62, he’ll get $1,500 a month.


So the first round of math is going to be–how much does Frank get before he ever turns 66?  He’s got 4 years of benefits, 12 months in a year, at $1500.  So he gets $72,000.


$1500 per month x 12 months =  $18,000 per year


$18,000 per year times 4 years = $72,000 per four years


So at first blush, it makes a whole lot of sense for Frank to take the money and run.


If Frank waits until he’s 66 to start claiming Social Security benefits, how long would it take for him to make up the $72,000 that he’s lost by waiting?  He’d catch up at age 77.   So if Frank’s family has a history of dying young–it might not make sense for him to wait until he’s 66 to retire.  You can do that math with different numbers, but generally it will take 12 years to catch up to your benefits.


But what if Frank comes from a family with an average life expectancy of 90 years?  What then?


Remember, by retiring early, Frank loses 25% of his payment every month.  In this case, that amounts to $6,000 a year ($500 a month x 12 months). So if Frank catches up at age 77, then he’s got 13 more years with $6,000 a year extra, now Frank is ahead by $78,000.


According to Social Security Statistics, the average person today lives to be 83 years old.  Going by the numbers, Social Security saves money on people claiming their benefits at age 62.


This is a very simplified example.  Frank has many things to think about–his wife’s benefits, what if he waits until age 70, how long does he expect to live?  What other benefits might he be entitled to?  Social Security won’t tell you all of your options.  If you call them to file for benefits, they take your application and you’re done.


At Roberg Tax Solutions, we’ll sit down with you and chart out your benefits so that you know all of your options.   At the end of the day, the decision is yours, but you deserve to know what all your options are before you have to make that decision.

IRAs for Dummies



Okay first and foremost, you’re not a dummy!  But I wanted to make a simple post with simple explanations about IRAs.  This isn’t the be all end all of IRA stuff.  But hopefully it will give you a little clue about them.

A traditional IRA lets you put money away for retirement and you can get a tax deduction for the money that you put into the IRA.  For example:  if you’re in the 25% tax bracket and you put $1,000 into an IRA then you will save $250 in taxes for the year you put the money in.  (The tricky part is that there are limits as to how much is deductible if you or your spouse have a retirement plan at work.  There are also complications if you’re using the married filing separately status.  I’m not covering that here.  If this sounds like you, give me a call and I can help you figure it out.)
A Roth IRA lets you put money away for retirement but you don’t get a tax deduction for the money you put in.  $1,000 into a Roth IRA gives you no tax savings.  (There are income limits for contributing to a Roth, the phase out starts at $167,000.  If you’re under that income level, you’re fine.)
Generally, the most you can contribute to an IRA in a year is $5,500.  If you’re married, you can contribute $5,500 for you and $5,500 for your spouse, even if your spouse doesn’t work.  You can’t put more money into an IRA than you earned (so if you only made $3,000 that’s going to be your maximum contribution.)   If  you’re over 50 years old, you can contribute up to $6,500 to your IRA.
Remember, the $5,500 is a maximum.  It’s fine to contribute less.  Most accounts are going to want at least a $1,000 to open, but you don’t have to have $5,500 to put into an IRA. Its not an all or nothing kind of investment.
When you take money out of your traditional IRA, the money you take out is taxable.  So, once again if you’re in the 25% tax bracket and you take $1,000 out of your IRA then you’ll pay $250 in taxes.  The concept is kind of like:  take a tax deduction now/pay taxes later.  Here’s where it’s tricky…if you take the $1,000 out before you are 59 1/2, not only will you pay the $250 in taxes, but you’ll also pay a 10% penalty making the total tax you pay $350.  There are exceptions to the penalty if you use the money to buy a house or pay tuition.  You will pay the tax no matter what, but sometimes you can escape the penalty.
With the traditional IRA you are playing a gambling game.  You’re betting that your taxes are higher now and will be lower when you retire.  That’s a good bet for many people.  So the traditional IRA is a good thing.
When you take money out of your Roth IRA, the money you take out is not taxable.  So, if you take out $1,000 from your Roth and you’re in the 25% tax bracket, you will pay zero tax on that $1,000.  If you take the $1,000 out before you turn 59 1/2, you may pay a 10% penalty on the earnings but not on the whole $1000.  Roth IRA means tax-free income later.
I really like the Roth IRA for a couple of reasons:
  1. 1.  It’s especially good for young people.  The Roth is a great savings tool that can be used for buying a home and paying college tuition.  If you invest in a Roth when you’re in the 15% tax bracket but wind up taking the money out when you’re in the 25% tax bracket:  zowie!  You win!  It’s like a little tax bonus.
  2. 2.  Even if you’re more mature and already in the 25%  tax bracket or higher, I still like the Roth.  When you’re retired and receiving social security payments, your social security isn’t taxable until you cross a certain income threshhold.  Once you cross that line, your social security becomes taxable and it’s like you’re paying double taxes.  For example:  let’s say your pension and social security put you right at the line where if you make any more money your social security would be taxable.  Once you cross that line you’ll pay tax on your social security income.  If you take money out of your traditional IRA, let’s use the $1,000 example again, and you’re in the 15% tax bracket, you won’t pay 15%–you’ll pay even more because now your social security will be taxed too.  It’s not exactly double, it’s more like one and  a half times more.  (Kind of a funky equation.)  Bottom line:  once you start receiving social security payments, extra income is actually taxed at an even higher rate than your real tax rate because they start taxing your social security.    Ouch!  Ask any senior citizen who’s been hit with this.  It hurts.
  3. Now  if your retirement income is so far over the threshold that you don’t need to worry about additional tax (because you’ve maxed out your taxable social security), or if it’s nowhere near the threshhold, then it’s not really an issue for you.  But for many seniors, extra taxable income can be a big problem for them.  The Roth IRA can be a real lifesaver when you’re older.
If it’s not completely obvious yet, I’m a big Roth fan.  That said, if you need a tax deduction now, then traditional IRA is the way to go.  For example:  one  year, I needed to lower my personal income by $310 to claim a $2000 tax credit.  That’s a no brainer, of course I spent $310 on a traditional IRA to save $2,000.  I put the rest of my retirement money into a Roth.  You can do stuff like that when and if you need to.
There’s so much to know about IRAs and it can be really confusing.  This little post is just the tip of the iceberg.  For detailed information about IRAs, the IRS has a book called Publication 590.  Here’s a link to it:  Pub 590
Okay, I confess, that publication looks a little intimidating.  It’s 110 pages long.  But if you look at page one, the chapters and sections are set up based upon the questions people ask.  Look for your question and it will tell you the right page to find your answer.  It’s not so scary when you know that in advance.