As we mentioned before, social security benefits are income-tax funded programs that offer retirement benefits to retired individuals or beneficiaries. These include disability insurance, survivor’s benefits, and Medicare coverage.
However, what most people don’t realize is that your SS benefits can be in jeopardy if you aren’t able to afford to live on your savings once you retire. In fact, according to The Hartford Institute for Savings, one of the largest financial institutions working towards educating adults about money, more than half of all retirees run into trouble because they lack adequate savings.
This is particularly concerning since early withdrawals can hurt your long term finances and health. And while it’s never nice to have to take action due to poor budgeting, there are ways to mitigate risk by altering how much money you withdraw from your account.
Passive income is an excellent way to increase your safety net. It may even reduce stress levels, give you additional motivation to save, and help you stay within budgeted limits. So, let’s talk about some passive income strategies and how they could affect you when it comes to social security.
Social security is a powerful tool
Most people agree that social security is a valuable source of income for retirees. After all, it was designed to aid in daily living costs during the golden years. Beyond this, though, many believe it to be a significant asset for those who plan ahead.
Recent discussions about “passive” or “no-income” income have some people thinking that you can not achieve financial success without having an active job. This myth is perpetuated by media, popular culture, and some small groups with strong beliefs in capitalism.
The idea of having richly rewarding lives comes down to one thing: investing in things that will make your life more satisfying.
By this definition, anyone can be wealthy if they are willing to put in effort into educating themselves, improving their skills, and spending time doing things they enjoy.
A person who chooses to work for companies that pay well instead of getting paid per hour worked is considered passive because they are choosing what task to do next and how much money to ask for for their current job.
But this assumption that social security retirement benefits depend only on earned income ignores two important factors: investment returns and savings.
In this article, we will discuss why having extra savings can increase your guaranteed monthly income even when investments perform poorly (or even lose money).
As we mentioned earlier, social security is funded by contributions from both employees and their employers as well as taxes paid throughout your life. But how much it pays out is influenced heavily by how much money you have in the system!
If someone has very little savings in the system, they will get less retirement benefits than people with more savings. This can be because the government uses past savings to estimate future payouts or because those with lower savings receive fewer benefits per dollar saved.
This isn’t necessarily a bad thing though- having low savings right now is probably better than running out of money later. It just means that employee and employer contributions don’t go as far.
However, if you have lots of savings then you risk “saving up” for retirement only to find yourself with even less spending money once you do retire!
One way to mitigate this problem is to consider ways to achieve what’s called a balanced budget during your working years. This means not spending more than you make and keeping an eye on waste (excessive coffee drinks, for example).
Another option is to focus on investing in things like stocks and bonds rather than putting your hard-earned money into individual investments. Investing is always a good idea, but thinking about it in terms of funding social security can help ensure everyone gets enough benefits.
As we mentioned before, you can only earn so much money with spending it all! If you currently have no savings, that is changing soon. Fortunately, there are many ways to make passive income which do not require you to spend any of your resources.
The best way to understand how this affects social security is to compare two different strategies in our nation’s top pension fund. The Government Pension Offset (GPO) compares keeping all your current investments and transferring them to an IRA to reduce your taxable income to zero.
This would effectively prevent you from withdrawing funds for social security benefits since you wouldn’t be taxed on it. On the other hand, investing in stocks through an IRA allows you to slowly draw down your investment as you desire without affecting your retirement paychecks too much.
Both of these strategies work well because they lower your tax burden gradually while also giving you access to invested capital later on.
Recent discussions about how to finance retirement have focused mostly on two main concepts: Traditional pensions and IRA’s, along with the popularized term “retirement accounts.” These are all types of personal savings vehicles that people can use to save for their future self.
A traditional pension is an employer-sponsored plan in which you pay monthly premiums (usually through your paycheck) to receive a fixed income upon retirement.
In order to receive this benefit, however, you must work for the company long enough to accrue benefits under the system. This could be difficult if you are not willing to put in the necessary time at work, or if you are able to do so but then need the money for other things.
IRA’S ARE MORE MODERATELY FUNDED
Individual Retirement Accounts (IRAs) come with several advantages over traditional pensions. The most significant difference is that IRA’s are less guaranteed than pensions.
This means that if an investor runs out of money before he/she retires, they will lose what they have saved rather than being given a stipend like a pension would be. However, there are some limitations to investing into IRAs that may make it more cost effective.
The first is the tax status of the account.
As we mentioned before, you do not have to have your own domain name or website in order to earn money online. That is definitely one way to make money fast, but it will require more investment than just clicking a few buttons.
Another way to make money quickly without owning a site or channel is by offering and selling other people’s products through the Amazon FBA (Fulfillment By Owner) program.
By using this service, you get all of the benefits of being an entrepreneur with less risk since you are not investing in equipment or marketing materials. These days, there are lots of ways to start making extra income via the internet that don’t cost a lot of money.
According to the Internal Revenue Service (IRS), “Passive income” is defined as follows:
"Distributions of money or property that are not actively managed, nor do they require substantial time or effort to produce."
By this definition, most forms of passive income fail the test of being considered "income". For example, if you have a large sum of cash in your savings account, that's going to be categorized by the IRS as active income because you're putting into it with your own efforts. Likewise, if you earn extra money doing something you already do for pay- such as writing a book- that too will be classified as active income since you're spending your time doing it to make more money.
However, if you are able to get outside help to create content for an online course you're selling, then that would not be seen as active income by the IRS. Because you are not investing your time in creating the material yourself, but instead hiring someone else to do it for you, it does not fit the regulation defining passive income as non-taxable income.
As we mentioned before, you can’t directly deduct all of your passive income in your tax return. You have to report some of it as taxable income. And depending on how much money you make from active or passive sources, you may be able to reduce your overall taxes even more by taking advantage of special tax deductions and credits.
For example, if you are in the 25% income tax bracket, then earning $10,000 per month (or less than $12,500 per month for those in the lower income brackets) would get you just under that threshold for the highest marginal rate.
But if you were to earn only $1,250 per month (less than $2,625 per month for those in the higher income brackets), you still would owe significant amounts in federal income tax because you made over the threshold for the highest marginal rate.
By adding lots of low-cost, dividend paying stocks into your investment portfolio, you increase your net worth which means you could potentially qualify for additional tax breaks. For example, you might be able to apply the mortgage interest deduction so instead of subtracting $18,300 from your annual income, you now only need to deduct $6,100.
And since many high dividend payers offer excellent customer service, you can keep up with their business via social media and stay informed on what they are offering and how to use their products.
As mentioned earlier, social security benefits are income-tax free. However, when it comes time to calculate your personal savings, they can be considered taxable income.
The average person will spend about one year of their life paying taxes at the individual level. This is why most people consider themselves “wealthy” even though they're living paycheck to paycheck.
But here's the thing — being wealthy isn't the same as being rich.
Wealthy means different things to different people. For some, investing in financial assets like stocks or real estate could make them wealthier. To others, spending money on experiences or educational opportunities could increase their wealth.
In fact, there's a term for individuals who accumulate large amounts of wealth quickly: millionaire descendants. People with this title come from very well-off families and inherit all of that wealth.
However, just because someone has a ton of cash doesn’t mean they enjoy what he/she has. In fact, many millionaires don’t seem particularly happy. They may feel stressed out, overworked, and overwhelmed by everything they have to do.
It can also hurt relationships if friends aren’t aware of how much money you have. Plus, it can create an image problem if your neighbors think you’re rolling in dough.