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The www.FedPrimeRate.com Personal Finance Blog and Magazine

Monday, August 23, 2010

Social Security and Prudent Financial Planning: Friends or Foes?

August 14, 2010 marked the 75th anniversary of Social Security, and since then national political debate has been heavily focused on the future of the program. Democrats wish to paint themselves as the sole champions for the working and middle class by opposing Social Security reform and reviling Republicans who even suggest that seniors don’t deserve the greatest income benefit possible. Republicans are digging their heels into the facts and figures surrounding the fiscal folly of a government-controlled ponzi scheme doomed to fail. Paul Krugman’s inflammatory column in the New York Times calling conservative concern for the future of Social Security “nonsense” has fueled even more heated debate in the blogosphere and on social networking websites.

Everybody is concerned about Social Security these days.

Debthelp.tv reported in 2009 how an SSA press release revealed that “program costs will exceed tax revenues in 2016” and “the combined assets of the Old-Age and Survivors, and Disability Insurance (OASDI) Trust Funds will be exhausted in 2037”. The current debate ensues over what these numbers really mean and whether or not Americans should consider Social Security to be stable and dependable or at a crisis status.

Unfortunately, very few economists and financial analysts are making mention of the fact that a heavy dependence on Social Security benefits is not prudent financial planning, regardless of the stability of the program.

The National Academy of Social Insurance released a brief in May 2007 confirming that American retirees are not receiving proportionate income replacement when they depend on Social Security for their livelihood. According to NASI, retirees need to replace 70-80% of their income in order to maintain their quality of life, but Social Security benefits only replace about 40%. Furthermore, most American retirees depend on Social Security benefits for at least 66% of their retirement income, with SS benefits accounting for 80% among seniors in the lowest wage earning bracket. Any retirement fund that replaces less than half of the pre-retirement income should be supplemental, not a primary income source!

Yet, Washington is consumed with taking sides on the issue of reform instead of educating the public on how to do more toward securing their retirement through sound investing, savings, debt reduction, and entrepreneurship or other income supplement. Financial literacy is the real issue here, and too many Americans are so busy arguing about and depending on Social Security benefits that they miss the truth about how well these benefits can actually sustain retirees.

In a related article on Social Security I propose the following:

“It is not the government’s responsibility to take care of me in my old age...That’s my job. All of the wisdom we learned from our predecessors has been thrown out the window – we don’t have to live modestly and below our means so that we can save for a rainy day. We no longer have to be prudent for ourselves because we no longer believe that the dynamics of life can swing the pendulum to the unfavorable side of financial stability. Americans think that employers, politicians, and institutions of various sorts exist to take care of them, not to serve a specific purpose within a limited scope.”

Whose responsibility is it to plan for your financial future, and how heavily should anyone rely on government to secure their income replacement? No matter how you crunch the numbers, replacing income is hard work, and it would be wise not leave such a crucial function to the wits of elected officials who will retire well whether you do or not.

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Friday, April 16, 2010

Life Insurance: Do You Really Know What You Need? Term vs. Whole

Life Insurance: Do You Really Know What You Need? Term vs. WholeSome people are plain grumpy. Teaching a night course on Personal Finance at a local college painted my memory full of stupidity from one specific student. My other students were great and as a class we learned a great deal. Even Ms. Grumpy would eventually come around.

It just so happened I was much younger than Ms. Grumpy and this was my first adult teaching experience. I kept my cool and told the class from day one, "We all have something to learn, and if you can save yourself money from this, I have done my job." The big break came in about week 5, when we were on the topic of life insurance. I started class off with a short little introductory lecture on Term Life Insurance vs. Whole Life Insurance.

Each time in your life requires different life insurance strategies; and knowing these strategies will save you money on the policy you purchase.

  1. Term and Whole Life Insurance both cover expenses in case of death.

  2. Whole Life Insurance costs more because it is also a way for you to invest your money.

  3. Term Life Insurance is for a set period of years and with the lower premiums, you can invest your money your way.

Whole life insurance makes insurance companies money, that is why many insurance salesman push Whole Life Insurance. Term life insurance is cheaper and does provide for your dependents in the case of your death.

There were a lot of glossed over faces looking at me, when Ms. Grumpy said,"I have a lot of money, I am divorced, my kids are out of the house, I have Whole Life Insurance, and I know how to invest myself." "So I should get Term Life Insurance." I replied, "If you weigh the price and length of the polices and if you have enough discipline to invest the remaining money, then, yes."

I could tell she was mad, but luckily this time it wasn't at me, but her Insurance company who had been selling here Whole Life Insurance for the last 4 years, when she could have the same protection under a Term Life Insurance Policy. It was a great moment, Ms. Grumpy in her own way had learned something from the new teacher.

Saving money in our budgets adds up in many different ways. Depending on you life situation, re-evaluating your Life Insurance needs could be one way to free up some extra cash for investing or paying down debt, while still giving you the protection for yourself or your family.

I wish the story of Ms. Grumpy would have a happy financial ending, but when we got to the investing unit, finding out she had all her eggs in Corporate Bonds because they paid a 8% interest rate, would not let that happen. She said here is where all my money is and it is safe. That will be for our next story. Life Insurance is a necessary evil. Finding the right coverage can save you money and allow you to invest the way you see fit. Keep in mind, Insurance Companies make a lot of money, but as a consumer you decide how much of yours they will get.

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