Your credit score comes from your credit report, so it’s important to understand that in order to improve your credit score you must first improve your credit history. Think of it this way. Remember when you were in school or college? You received individual scores or grades on assignments and then received a final grade at the end of the year. All of your assignments throughout the course of that semester or year are like items on your credit report. Some received good scores, and some may have been bad scores. But all of those assignments come together to give you a final grade, which is how your credit score is calculated. Remember sleeping through that freshman math midterm that brought your entire grade down by 25%? That’s like missing a payment on your credit card or other loan.

Checking Your Credit Report

There are two good reasons to check your credit report. For one, you simply want to make sure the lenders on your account are reporting information correctly. Mistakes can and do happen. Maybe you’ve sent in all of your auto loan payments in on time but for some reason they are reporting a late or missing payment. That’s a big mistake and could cost you qualification on a future loan, or get you higher interest rates elsewhere. A simple mistake like that could really hurt.

The other reason to check your credit report is to spot identity theft. Identity theft can be a silent crime until it’s too late. A criminal may have obtained your information and opened up a credit card in your name and you’d never know unless you spotted it on your credit report. So checking your report at least once a year is a good way to make sure nothing fishy is showing up. The sooner you can catch a problem, the better.

You can get your credit reports for free each year. Just head on over to annualcreditreport.com and use their secure site to verify your information. When you receive your report it may be a little overwhelming at first, but the site will guide you through the data and you’ll see what’s most important. If errors do arise, be sure to contact the creditor right away.

Checking Your Credit Score

Since you need a good credit report for a good credit score, once you’ve verified your credit history is in-check you may also want to get your credit score. Knowing what is on your credit report is nice, but without having an estimated score it’s really hard to know where you fall on the scale of good and bad credit.

A FICO credit score ranges from 300 to 850, where the higher the number, the better. And the higher the score, the more likely you will be approved for a loan and ensured the lowest rates. When you know your score you’ll have a pretty good idea of where you fit in the spectrum. For example, scores greater than 720 are considered excellent, and would put you in the best position to obtain the best rates and terms. On the other hand, scores less than 620 are considered poor, and that means you may have trouble getting a loan or may have to pay a few percentage points higher interest. Everything in-between is pretty much average and lending requirements will reflect that. Not sure what your score is? Get your credit score today.

With the previously mentioned investment vehicles, it appears that there is no risk involved–your money won’t go down in value and in most cases it’s insured or backed by the government. But what you don’t realize is you are subjecting yourself to hidden risks that aren’t as apparent. While you may not lose your principal investment, you’re still losing money. That’s because in times when people are most afraid of taking risk, it’s almost always in a low interest rate environment. That means even though you may be earning interest, you’re still losing in two ways: for starters, these investments won’t outpace inflation, and second, after paying taxes on any gains (not counting Roth IRAs) you’re losing even more. So, after factoring inflation and possible taxes on that money you will often end up still realizing a loss of at least a few percentage points each and every year even though it looks like your account value is increasing.

I know what you’re thinking: “but it’s better than risking it in the stock market where you could lose half your money in just a single year!” You’re absolutely right. If avoiding a big loss is your primary objective, then putting your money into cash, CDs, and government bonds is one way to do that. Unfortunately, that goes to the extreme other end of the spectrum and you begin doing more harm than good. There are ways to still maintain the security you’re looking for without actually losing money to inflation and eventual taxes. Conservative investments are popular these days when the common belief is that you can’t make money in the stock market. True conservative investing will provide a solid balance between safety and returns. I’m here to show you how.

Avoiding Stock Market Risk

If you’re thinking about conservative investments, chances are you’re trying to minimize or eliminate the inherent risk in the stock market. I don’t have to remind you, but just turn on the news or go to your favorite financial website and you’re bombarded with information regarding how the stock market is doing. Especially in recent years, it isn’t uncommon to see the entire market shift more than three percent in either direction in a single day. Clearly, this can create some sleepless nights if all you’re trying to do is keep your money moving in the right direction.

To show you what I mean, here is what it looked like if you had $25,000 invested in the S&P 500 (using Vanguard’s S&P 500 index fund) over the past ten years:

You can see how wild the ride has been. There are a ton of short-term peaks and valleys, and obviously, some much larger ones that stretch for years. In the end you will also notice that stocks ended pretty flat over a ten year period. Some people call this the lost decade of investing. This is pretty much the polar opposite of what a conservative investor has in mind. So that brings us back to the original reason for choosing to be a conservative investor. You are basically trying to smooth out all of the randomness in the market as visualized by this chart and create a steady upward sloping line which means you’re making money.

Using Conservative Investments

After determining that you want to stick to something conservative, where do you turn? As I pointed out earlier, banks and government bonds are obviously a safe alternative that can eliminate the risk to your principal, but you may also remember that this means you still ultimately lose money after taking into account inflation and potential taxes on the gains. There is some good news. Most fund companies provide already diversified portfolios for almost any risk tolerance, conservative included, so you can literally put your money into a single fund and take immediate advantage.

Here is what the past ten years looked like if you put the same $25,000 into Vanguard’s Wellesley Income fund:

Clearly, this chart looks incredibly different than the S&P 500 chart above. That’s because of how the money is invested. To give you an idea, it is comprised of roughly 57% bonds, 32% stocks, 5% cash, and a smattering of other investments. What a change to be made by holding mostly bonds and only a third in stocks. Suddenly most of the peaks and valleys are gone and it’s a far more steady line of growth. Granted, there was still a pretty significant drop in 2008 thanks to the financial crisis, so even this “conservative” allocation wasn’t quite enough to prevent some short-term damage. But in the end, this fund managed to average over 6 percent per year over this time period, and it still far outperformed the stock market as a whole. That’s not bad.

Let’s take things one step further. Clearly, all you staunch conservative investors out there are pointing to that drop during 2008 and saying that is unacceptable when you’re trying to protect your money. I agree, and I think we can still do better without resorting to earning less than 2 percent in government bonds or the bank. So, I’ve put together a custom conservative portfolio that is made up of three equal parts: a money market/cash fund, a long-term treasury fund, and a short-term investment grade bond fund. How did it do? I’ll let the chart do the talking:

Look at that. You can’t even spot the financial crisis of 2008-2009 in this chart. Even the last conservative allocation lost money during that period, but this portfolio kept on chugging. And notice there are no significant peaks and valleys, and for all intents and purposes, it’s a smooth line continuing to increase in value. Here’s the really good news: even though we got far more conservative, we were still able to achieve an average annual return of nearly 5 percent. Given what we’ve been through over the past decade, it is refreshing to see that there is still money to be made without taking on much risk. Most people just write-off the fact that safe investments will mean little or no return. But when you think outside the box instead of putting your head into the sand, there is still money to be made during even the rockiest markets.

Here is one last look. What if you did have your money parked in a cash-equivalent investment? Well, it isn’t very exciting:

Knowing Your Investment Goals

All of the above information is good, but it doesn’t mean anything without also looking at your goals for that money. For instance, if the money you are investing conservatively will be needed in just a few short years for a specific purpose (wedding, vacation, home or vehicle purchase, etc.) then the the absolute no-risk option of cash, savings, CDs, and such may be the best bet. But what if you are talking about longer term uses for that money? Whether it’s retirement, saving for college, or just trying to earn more money from non-emergency fund cash, as you can see from the examples above that there are conservative investment styles that can give you significantly better returns while introducing very little risk.

Let’s take a look at all of the previous investment choices and overlay them on a single chart:

As a reminder, each investment began with $25,000 and was held for the past ten years. The lines represented above are:

• Black: Cash/Money Market – Average annual return of 2% and cumulative return of 22.3%
• Gray: S&P 500 – Average annual return of 2.59% and cumulative return of 29%
• Green: A third each in money market, government bonds, and investment grade bonds –  Average annual return of 4.75% and cumulative return of 59%
• Blue: A Vanguard conservative allocation fund – Average annual return of 6.2% and cumulative return of 82%

Assuming you are looking for a conservative investment to span ten years or more, which of those lines above would you be comfortable with? When compared side-by-side, the green line doesn’t differ much from the money parked in cash in terms of the risk of losing money, but look at how much better it performs over time. In fact, you would have earned more than twice as much money and had little to no risk of losing your principal. Finally, in all of these examples we’ve simply been looking at a lump-sum investment held for a decade. Obviously, most people continue to add to their investments slowly over time. This dollar-cost-averaging takes even more risk out of your investment. In addition, you’ll also want to be sure to rebalance your portfolio regularly, which helps as well.

What Kind of Conservative Investor Are You?

We’ve covered a lot of information here, but the big question comes back to you. Just what kind of conservative investor are you? As you can see, you don’t have to essentially hide your money under the mattress to keep your money safe. In the end, keeping all of your money in cash or savings has you actually losing money in the long run. Of course, this strategy is still good for certain circumstances such as emergency savings or money that will be needed in a short amount of time. But if you’re just someone looking to save money for the future, whether it be retirement or otherwise, there’s just no sense in letting your money sit around earning nothing when you can find a conservative investment strategy that can provide you with reasonable returns with very little added risk. Even if the economy and stock market has you feeling down, step back and take a look at what you really want your money to do for you.

These stories may be fairly common, but it doesn’t mean life insurance is a bad product or that you should shy away from determining how much life insurance you need. If you understand the different types of coverage and calculate how much you really need you’ll be able to get the protection you desire without feeling ripped off for buying too much or getting into the wrong policy.

Do I Even Need Life Insurance?

Before going on to find out how much life insurance you need you must first determine if you even need it. If you ask someone who sells insurance for a living they will tell you everyone needs life insurance regardless of what their situation is in life. This just isn’t true. There are plenty of people and situations where life insurance simply doesn’t make sense. So, how do you know if you’re someone who needs life insurance or not? Here are a few general rules to follow:

You probably need life insurance if:

• You are married.
• You have children.
• You have a desire to leave a beneficiary something upon your death.

You probably don’t need life insurance if:

• You are single.
• You are older and your children are no longer dependent.
• You are married but only your spouse earns an income.

Now keep in mind that these are generalities and not black and white questions. There are situations where there may be a combination of factors going on that warrant coverage even if the general consensus says otherwise. To put it simply, ask yourself this: If I were to die, would that place a financial burden on someone else? If you answered yes to that question that’s a pretty good indication that you need some sort of life insurance.

The Different Types of Life Insurance

Once you’ve determined that you could use some life insurance you’ll then want to consider the different types of life insurance options. To keep things simple, life insurance is generally broken down into two forms: term and cash value. Term life is just what you’d suspect. It’s an insurance policy that is only effective for a specific term and when that term is up the coverage ends. Policies that have a cash value come in a few different forms, but their goal is the same. They provide a death benefit just like term life but they don’t expire after a certain number of years (as long as you stay current on premiums) and a portion of your policy premiums build up cash value over time.

To get a better understanding of the different types of policies let’s look at some of the details of each:

Term Life -  This is the cheapest way to obtain life insurance. You select the length of coverage, typically 5, 10, 20, or 30 years, and make premium payments as long as the term is in effect. The premiums typically remain the same for the life of the term and when the term is up you stop making payments and the death benefit goes away. Term life is cheap because the policy only lasts a set number of years and doesn’t have any sort of cash value or investment option. Term policies are best for those who need coverage for just part of their life such as while they are married and in their prime earning years or while there’s a dependent child in the house.

Whole Life - Unlike term life insurance whole life is meant to provide a death benefit for someone’s entire life as long as the premiums are paid. Because these policies are effective in most cases until someone dies the premiums are much higher since the insurance company will almost certainly have to pay out a death benefit at some point. Whole life also has a cash component that will take part of each premium payment and set it aside in a separate account earning a set interest rate. Because of the significantly higher premiums and low rates of return on the cash portion whole life is almost never recommended for young people simply looking to protect their family. Like term life, generally the premiums remain the same for the life of the contract.

Universal Life – Similar to whole life in terms of having a cash component and still unlike term life, universal policies provide a little more flexibility over whole life. With universal life you can usually increase or decrease the death benefit at some point in the future and you may have a few different investment options for the cash value component of the policy.

Variable Universal Life – Here’s where things get a bit complicated. Similar to the other cash value policies you pay a higher premium than term life and some of that goes into an separate investment account. But instead of generally earning a regular interest rate you have the ability to invest that money into a all sorts of things such as mutual funds, putting your money at risk. These investments also increase the total fees paid which hurt your returns but help pad the insurance salesman’s wallet. These are the policies that have really given insurance a bad name in recent years and since very few people have a situation in where this type of policy can help you should probably think twice if someone mentions a VUL to you.

Calculating How Much Life Insurance You Need

So, you’ve determined that you do need life insurance and have identified the type of policy that’s right for you, but how do you come up with the magic number for how much coverage to have? It’s not as hard as it sounds so let’s walk through the process.

First, take stock of any life insurance policies you already have. Maybe your parents took out a small whole life policy on you when you were just a child or maybe you already have some coverage through your employer. While you’ll want to take any existing policies into account, don’t hold them with as much weight because like with your employer’s insurance it may disappear if you change jobs, or the little policy your parents took out on you might be too expensive to keep paying premiums on for the provided death benefit so you may opt to cancel or cash it out.

Next, look at your other assets that would be given to your beneficiaries upon your death. If you have a 401(k), IRAs, property, or other assets that have your spouse or kids listed as beneficiaries they will receive the bulk of those proceeds upon your death just like they would from an insurance policy so these funds may offset some of the coverage you think you need and can help you keep premiums down.

Using Income Rules of Thumb

Now it’s time to look at how long you need coverage. We’re going to assume you’re looking at term life which is the most common so you probably want to have coverage while you have dependent children, so you’re usually looking at a 20-30 year term. For sake of calculations we’ll go with 20 years. If you need coverage for 20 years you’ll want to start with the worst-case scenario if you were to die in that first year. How much money would your spouse and/or dependents be missing out on if that were to happen? If you make $50,000/year the easiest way to figure that would be to take $50,000 x 20 years, or $1,000,000. That means if you were to die within the first year of the policy your beneficiaries would receive enough money to directly replace your lost income for the next 20 years.

That’s a good rule of thumb, but it’s not always as simple as that. For example, your income probably wouldn’t remain static for the next 20 years and you’d probably receive pay increases over time. On top of that you want to factor in inflation. Remember, $50,000 in year 1 is going to be worth a lot more than $50,000 in year 20. So, maybe you take your replacement income and come up with an average inflated number to use for your calculation. If you make $50,000 today and expect your pay to increase with inflation you might expect your income to be upwards of $90,000 by then. Without getting too complicated you could then use these two numbers and split the difference for an average income over that time and maybe use $75,000. So with $75,000 x 20 you get $1.5 million.

Remember what we talked about above with looking at existing policies and assets? Well, if you have say a $50,000 policy through your employer and $200,000 tucked away in retirement accounts and other assets you could reduce your life insurance death benefit accordingly and save on premiums. So instead of $1.5 million you may only want to get $1.25 million in coverage. There is no right or wrong way to figure this in, but keep that in mind so you can balance your true death benefit needs and keep premiums as low as possible.

Using a Bare Bones Approach

The income rule of thumb above is great for maximizing your death benefit to ensure your beneficiaries don’t miss a beat, but covering two people to match their income for the length of the term may put the insurance premiums out of reach for many. That’s ok. What a lot of people do instead is take a look at their financial situation and determine what the bare minimum of coverage should be so that if something were to happen your spouse or children aren’t faced with a financial hardship. For most families this means keeping up with the mortgage and car payments, paying off other debts, and putting some food on the table.

So, that means you can determine how much coverage you need so that you can alleviate those concerns for your loved ones. Assuming the worst-case again where you die in the first year of the policy you should add up all of your current debts. Say you owe $150,000 on your current mortgage, owe $15,000 on a few cars, and have $5,000 in credit card debt. If you were to die your spouse and children would be left to live on just one income and still need to keep up with all of the above debt payments. But you can add up those debs to get a bare bones number: $150,000 + $15,000 + $5,000 = $170,000. To be safe, you may want to tack on another $10,000 that would be used to cover funeral expenses. So, here we’re at a $180,000 death benefit.

To understand how this may be all you need, consider what happens if you were to die in the first year. That $180,000 would be enough to pay off the house, the cars, wipe out the credit card debt, and pay your final expenses. With all of those things eliminated your spouse doesn’t have a mortgage, car payments, credit card bills, or any of that to worry about. As long as they are working there’s a good chance their single income will be more than enough to live off of.

Making Sure You Can Afford Life Insurance

You’ve seen the two extremes in the examples above. You can go all out and give your beneficiaries complete replacement income or you can get just enough coverage to eliminate your existing debt so they don’t have to worry about trying to make the payments when you’re gone. It goes to show you that there’s no right or wrong answer when it comes to determining how much life insurance you need. Your priorities, financial situation, and use of the death benefit will determine how much you should have. For some it might be a lot, but others may only need a little. So, don’t get caught up on numbers people throw out there as must-haves when it comes to insurance. It’s up to you to decide that.

But whatever you decide it’s important to make sure it fits within your budget. If your premiums cut into how much you’re able to put into an emergency fund, save for retirement, or pay down your debt, you’re buying too much insurance. Those items should take priority and insurance should be something that you can comfortably add on to your monthly expenses without negatively impacting the other areas of your budget.

To give you an idea, term insurance is much more affordable than you may think. For example, my wife and were shopping for policies and for non-smoking 30 year olds we were looking at $500,000 20-year term life policies around $240/year or $20/month. 20 bucks a month, that’s it! When you look at how much you might spend on things like cell phones, internet access, your daily Starbucks and so on, it really puts things into perspective. It really wouldn’t cost much to make sure our family is taken care of if something happened one of us.

But insurance premiums vary greatly, so the only way to know how much it will cost is to get a quote. If you’re curious as to how much life insurance will cost you, get a free quote today.

The days of being a clueless consumer walking into a dealership and letting the car salesmen explain all of the features of the new models are over. Today, you have the internet on your side. You can learn anything you’d ever want to about any car on the market before stepping foot into a dealership. You can research crash ratings, fuel efficiency, insurance rates, and even build a car with all of your desired options right from the web. With this knowledge comes power and you’re less likely to be scammed by a car salesman. But all of this information is useless if you don’t use it.

If you just walk into the dealership, pick out a car, and do the financing on the spot, you could be walking away having paid hundreds, even thousands, of dollars more, directly or indirectly, than you should have. That’s the old way to buy a car, and even though some people still do this, if you’re reading this you’re already one step ahead.

Here are the top six things you should know to be ready to buy a car at the best total price. Remember, it isn’t just the dollar amount on the sticker that matters since there are dozens of ways to save on car expenses over the life of ownership.

1. Are You Upside Down On Your Current Car Loan?

Welcome to the world of the 60-month (or longer) loan. Newsflash: vehicles are rapidly depreciating assets and the longer you finance them, the longer you’ll be upside down and pay excessive interest. While being upside down on a $15,000 vehicle is not as bad as being upside down on a $150,000 house, it’s still a stupid financial mistake. What makes it so stupid is that cars have a known depreciation rate so you can easily calculate whether or not you’ll be upside down on your loan, how long it will take to pay it off, and what you’ll pay in interest over the life of the loan. You can’t do this with real estate, at least not in this market. Because real estate values can go up and down at different rates over time it’s understandable that some people can be caught upside down. There’s no excuse when it comes to your car loan.

There was a time when car loans were a standard 36 months. Gradually the term became longer to enable more people to qualify for loans they couldn’t really afford, by lowering the monthly payment. The longer the term, the more you’ll pay in interest, so a lower payment is really not your friend. Does this sound familiar? It should, because the mortgage industry did the same thing. The 30-year fixed rate mortgage with 20% down used to be the standard. Over time they introduced zero-down loans, adjustable rates, balloons, ARMs, and even interest-only loans to allow more people to buy something they really couldn’t afford. It’s no different when it comes to buying a vehicle these days.

If you try to sell your car before the loan term is over, you may find that the car is worth less than you owe on it. To buy a new car, you’d have to pay off the balance on the original loan or roll it into the new loan, which creates an even more expensive car. Buying a car that depreciates quickly is another thing that can cause you to be upside down on your loan. If you buy a model that depreciates roughly 20% each year you’re going to lose money on it faster than a car that depreciates maybe just 7-10% a year. Don’t get into a cycle of constantly financing an upside down vehicle and letting your car make you poor.

2. Have You Researched the Trade-In Value of Your Current Car?

Keep the trade-in of your old car and the purchase of your new car as separate transactions. Get the trade-in offer before discussing the price of the new car, or finalize the price of the new car before discussing the trade-in. Some dealerships will offer you a good trade-in but will just raise the price of the car you’re buying, or if they already give you a good deal on a new car they might come in with a low-ball number on your trade. You need to know the trade-in value of your current car so that you have a rough idea of what to expect the dealer to offer for it. If the number is much lower than expected you know you may be getting taken for a ride.

One of the easiest ways to research the trade-in value of your car is to look it up at Kelley Blue Book. Here you can enter your location, vehicle make and model, mileage, condition, and features. It will then give you various prices for private party value and trade-in value. The trade-in value is obviously going to be less than what you’d get selling it privately because the dealership has to make money on it when they resell, so keep that in mind. If the difference is significant, you may want to consider trying to sell it privately first.

3. Have You Researched Interest Rates on Car Loans?

Don’t evaluate the deal based on the monthly payment. This is one of the biggest mistakes most car buyers make. Do you think it’s just coincidence that most car commercials advertise new cars by just stating how low your monthly payment can be? The interest rate is where most of the cost lies if you don’t put a significant chunk down. Know how much you’ll pay over the life of the loan by using a vehicle loan calculator to model some different loan amounts and rates.

One thing you can do before even shopping for a car is to check with your local bank or credit union about auto loans. See what they currently offer and whether or not you qualify. If you go into the dealer already pre-approved for a loan with your bank you know exactly what your interest rate is and how much you’ll be paying. If you wait for the dealer to try and find financing for you you’ll almost always get approved for something, but by the time you get to the financing stage you’re so emotionally sold on buying the new car that you don’t even care about the interest rate and just want to finalize the deal. This could literally cost you thousands of dollars.

4. Have You Considered the Benefits of Buying a Used Car?

There’s nothing like the feeling of buying a new car, but consider the cost. Cars depreciate sharply in the first two years — some models as much as 25-30%. The car you paid $25,000 just two short years ago may be worth only $17,000 now. If you’re someone who keeps cars for 7-10 years or doesn’t bother buying a new car until long after the first one has been paid off this isn’t as much of a concern. You’ll get your money’s worth. But if you don’t think you’ll keep the car 10 years you need to consider the potential savings by buying used. You can buy a car that’s literally only a year old and with only 15,000 miles on it and save 15-20% over new in many cases. The car may have had a previous owner, but it’s still nearly new and carries all of the original warranty. If you think about it, the money you save by buying a slightly used car will probably cover the insurance premiums on that car for as long as you own it.

5. Do You Know the True Cost of Ownership of the Car?

Don’t find out too late that you can afford to buy the car, but you can’t afford to own it, due to operating expenses, insurance, gas mileage, annual excise taxes, and other costs of ownership. You’re not ready to buy a new car until you’ve researched and considered this information. Just like when you buy a house, there’s much more to it than the monthly mortgage payment. This is how so many people get into financial trouble because they are told they can afford the monthly payments, but really can’t afford everything else associated with it.

New car buyers often don’t consider the higher costs of repairs and maintenance for certain models, tires that cost twice as much as those on other cars, higher gas costs, and higher insurance (depending on make, model, and even color). This is especially true once you begin looking at SUVs and luxury models. Insurance rates can be nearly double that of a smaller or less expensive vehicle.

One of the most important considerations is the repair record of the make and model. Does it have a history of problems with the transmissions? Brakes? Electrical systems? What does it cost for routine repairs and maintenance? You can find all this information at Edmunds.com. It doesn’t do any good to find a great deal on a car only to find out you’ll be spending $1,000 a year fixing common problems with that particular model once the warranty is up. This is a great site that can really help you save money and avoid being taken advantage of.

6. Have You Evaluated Any Dealer or Manufacturer Offers Like Rebates or Financing Specials?

A $2,000 rebate on your new car may sound good, but are you sure it beats the low-interest-rate deal the dealer may offer as an alternative? Don’t be fooled by the lure of cash upfront as it isn’t always the best choice over the long run. Evaluate the incentives and offers before you start seriously shopping. Check all of the manufacturer websites, ask your local dealers about incentives, and be armed with your options ahead of time. This will help you make sure you get any incentives you’re entitled to while also objectively comparing the true savings between offers.

The Bottom Line

Do your homework. Don’t roll the balance of an upside down loan into a new loan just because you’re tired of your old car and you’re just ready for something new. Don’t just walk into a dealer without having done your research and expect to be given the best possible deal. Don’t buy a new Lexus just because you can finally afford it if you get a 6-year loan. Vehicles are wealth destroyers, not wealth creators. While it may feel good to impress your friends or commute in style, foolishly wasting money on a vehicle is a sure way to retire broke.

Social Security is a sore topic for many people. The system is flawed, it’s in significant financial trouble, and the younger generations aren’t expecting to see a penny from it when they retire. While it’s true that Social Security has its problems, it still pays out benefits to tens of millions of Americans each year and will continue to pay out benefits for years to come. How the system and benefits may change in the future is anyone’s guess, but as it stands now it’s still a key source of retirement income for many.

There’s some bad news for younger generations, which include many in Generation X. Unfortunately, younger workers have a great deal to worry about. Even though their parents’ and grandparents’ benefits are safe, theirs are not. Any worker born after 1974 will reach full retirement age after the trust fund is exhausted. Unless Congress acts soon, younger workers can look forward to paying full Social Security taxes throughout their careers but only receiving 78 percent or less of the benefits that have been promised to them. In addition, they will have to repay the Social Security trust fund, an expense that will total almost $6 trillion by the time the trust fund is exhausted in 2041.

More Than Just Retirement

When most people think of Social Security it simply means a monthly retirement check. While that may make up the bulk of the benefits, Social Security covers much more. Social Security as a whole consists of:

• Old-Age Benefits
• Survivor’s Benefits
• Disability Benefits
• Medicare

The old-age benefits are what most people consider retirement benefits. This is the monthly check a retiree receives once they are age 62 or older. As important as this is, you also need to consider the survivor benefits, disability benefits, and Medicare. Even though Medicare is technically part of the Social Security program, that’s such a big topic it deserves its own post. So for now we’re going to focus on the other three benefits.

Normal Retirement Age (NRA)

The normal retirement age is the age at which full retirement benefits are available. The NRA doesn’t remain constant and those born between 1937 and 1960 will have different normal retirement ages. For those of us born after 1960 it’s pretty easy to remember that our NRA is a flat 67. Keep in mind that although this information currently applies, there could be changes made that affect you in the future as the government looks for ways to solve the Social Security funding problems. But for now, here is the current Social Security NRA breakdown with some examples of how much benefits are reduced by taking an early retirement at age 62.

			At Age 62
Year of Birth	Full (normal) Retirement Age	Months between age 62 and full retirement age	A $1000 retirement benefit would be reduced to	Benefit is reduced by	A $500 spouse's benefit would be reduced to	The spouse's benefit is reduced by
1937 or earlier	65	36	$800	20.00%	$375	25.00%
1938	65 and 2 months	38	$791	20.83%	$370	25.83%
1939	65 and 4 months	40	$783	21.67%	$366	26.67%
1940	65 and 6 months	42	$775	22.50%	$362	27.50%
1941	65 and 8 months	44	$766	23.33%	$358	28.33%
1942	65 and 10 months	46	$758	24.17%	$354	29.17%
1943-1954	66	48	$750	25.00%	$350	30.00%
1955	66 and 2 months	50	$741	25.83%	$345	30.83%
1956	66 and 4 months	52	$733	26.67%	$341	31.67%
1957	66 and 6 months	54	$725	27.50%	$337	32.50%
1958	66 and 8 months	56	$716	28.33%	$333	33.33%
1959	66 and 10 months	58	$708	29.17%	$329	34.17%
1960 and later	67	60	$700	30.00%	$325	35.00%

Early Retirement

Those who are eligible for a Social Security old-age benefit can begin receiving them at age 62, but with a reduction from what would otherwise be received at NRA. The current formula for figuring the benefit reduction is five-ninths of 1% per month for each of the first 36 months prior to normal retirement age, plus five-twelfths of 1% for each month in excess of 36 months. This reduced level of payments continues for the life of an early retiree. Benefits do not increase to 100% when the retiree reaches NRA.

Could that calculation be any more confusing? Odd fractions of a single percent for a certain number of months. It sounds like a math question that would be on the SAT. Don’t worry about calculating it yourself. If you really want to know you can use the Social Security Administration’s online benefit calculator.

Late Retirement

Someone who does not want to start receiving benefits at their Social Security NRA but continues working can earn delayed retirement credits, which can eventually increase the worker’s benefit by up to 8% per year. Keep in mind the worker’s spouse will not see any increase in their benefits as a result. The decision to delay receiving benefits can be complicated and one must take into account many different factors such as the amount of the benefit, other sources of income, and life expectancy.

Spousal Benefits

In addition to receiving benefits as a Social Security recipient the spouse of a recipient is also entitled to 50% of their primary insurance amount (PIA), subject to a family maximum, as long as the spouse is of normal retirement age. If the spouse is entitled to a larger Social Security benefit of their own, they will receive that benefit and no additional spousal benefit will be paid. Also, the family maximum does not reduce the benefit if both spouses receive their own Social Security benefits. Instead, the family maximum applies when one or more dependents receive benefits based upon the earnings record of one worker.

Earnings Limitation

The Senior Citizens’ Freedom to Work Act of 2000 eliminated the retirement earnings test for people who have attained Social Security’s normal retirement age. Excess earned income by Social Security beneficiaries who are under Social Security’s NRA results in a partial or full loss of benefits, depending on the age of the person, the amount of their benefit, and the amount of earned income.  For the sake of this test earned income generally includes wages and salary. Investment income is not included in this definition.

For people attaining NRA after 2010, the annual exempt amount in 2010 is $14,160. For people attaining NRA in 2010, the annual exempt amount is $37,680. This higher exempt amount applies only to earnings made in months prior to the month of NRA attainment. $1 in benefits is withheld for every $2 of earnings in excess of the lower exempt amount. $1 in benefits is withheld for every $3 of earnings in excess of the higher exempt amount. Earnings in or after the month you reach NRA do not count toward the retirement test.

Taxation of Benefits

As if it wasn’t bad enough that Social Security benefits are rather small, many people are surprised to find that some or all of their Social Security benefits may be taxed. Whether or not your benefits are taxed are a result of two things:

• The total amount of Social Security benefits received, and
• The amount of the recipient’s other income

The higher the amount of Social Security benefits received during the tax year and the higher the income from other sources (even including tax-exempt income), the more likely it is that your benefits will have to include a portion of Social Security benefits as taxable income. The portion is defined by a set of calculations that, in essence, determines how much of the taxpayer’s income is in excess of certain thresholds. Because tax-exempt income is one factor in this calculation it may have an ironic effect of pushing some of the benefits over the thresholds to a point where they are subject to taxation.

If a taxpayer’s modified adjusted gross income (MAGI) for the tax year plus one-half of Social Security benefits received (let’s call this provisional income) during the tax year exceed the base amount, then according to the general rule the lesser of the following two amounts must be included in gross income:

1. one-half of the Social Security benefits received during the year, or
2. one-half of the amount by which the provisional income exceeds the base amount

The base amount is determined by the recipient’s filing status. Notwithstanding the preceding general rule, if a taxpayer’s provisional income exceeds certain levels, more than one-half of their Social Security benefits must be included in gross income.

Are you confused yet? Don’t worry, it is kind of complicated. This is a situation where it certainly makes sense to get professional tax advice. But if you have plenty of time before collecting Social Security, don’t fret about it. Just realize that there are tax considerations when you reach that point.

Indexing for Inflation

Social Security benefits are indexed annually to the cost of living. This is one bright spot the current system. The idea is that your Social Security benefits will increase alongside everything else. The bad news is that not all things increase in price at the same rate. Your benefits may generally increase according to some things, but it may fall well short of covering for the price increases in other areas. So, it’s good that benefits will generally increase over time, but don’t be fooled in thinking that the increases will easily cover everything as you age through retirement.

What You Need to Know

Fortunately (or unfortunately, depending on how you look at it), Social Security is largely out of our hands. During your working years you simply have to work and pay into the system. Little can be done in terms of increasing your benefit other than make more money so that you pay more into the system or work longer. Where the real decisions come into play are those years leading up to retirement. You’re then faced with choices such as deciding if you want to receive your benefits early, wait until NRA, or keep working longer and building up a larger benefit. In addition, you then need to begin thinking about your other income and how taxes will affect your benefits.

Whether or not Social Security will be around for the younger generation is debatable, but the best thing you can do is to plan for retirement as if it won’t be. This means putting money into your 401(k), opening an IRA, and saving what you can for retirement so that you will have something to live off of in the event Social Security is nowhere to be found. In reality, there will probably always be some sort of benefit to protect our retired individuals, but the amount you receive will almost certainly not provide you with the retirement that you want.