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| Tax Refunds Aren't Found Money: Evaluating Your Income Tax Withholding Rate | |
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Have you ever put on a coat you haven't worn for a while, reached into the pocket and found a dollar bill that you'd forgotten about? There's something exciting about finding lost money. It feels like a sign things are going your way. You're likely to feel a bit more carefree with re-discovered money in your pocket, and you're likely to be carefree as you spend it as well.
A lot of people react the same way when they file their income tax return and discover they'll get a refund. And there are a lot of people out there getting refunds. According to the Internal Revenue Service, as of March 17, 2006, more than 56 million Americans had filed 2005 income tax returns that qualified them for a tax refund. The amount of refunds continues to go up each year, with the average refund now nearly $2,500 - an increase of about $100 over last year.
More money going back into taxpayer pockets is a great thing, but it also means the money you get through the refund has been sitting for some time in Uncle Sam's pocket rather than yours. Would you hand a friend $2,500 dollars and ask them to give it back to you in a year without interest? Aren't there better things to be done with money - paying down that lingering credit card debt or investing it for a loved one's education or your own retirement?
Receiving a large income tax refund means the government has been holding on to a significant portion of your money for up to a year. If instead of the government holding the money, you had the money to save or invest, that money could have been working for you, earning interest or paying down your debts. The goal is to reach tax time receiving only a small refund or owing just a little in taxes.
To have more control over your money, you want to make sure you're not having too much or too little money withheld from your paycheck for taxes. If you received a large income tax refund this year, it may pay to take some time to evaluate whether you've selected the optimum withholding rate.
How do you evaluate your withholding rate? If you've hired a financial planner or accountant to help with your finances, ask them for guidance. You can also make the evaluation yourself using an online withholding calculator available on the Internal Revenue Service Web site. To find the withholding calculator, visit www.irs.gov and enter the term "withholding calculator" in the search box.
To use the withholding calculator, you will need a recent pay statement and a copy of last year's tax return, as well as information about any deductions or credits you anticipate being able to take with next year's taxes. Follow the instructions, and in only a few minutes, the calculator should confirm whether your withholding is on the right track or if there are adjustments to be made. If there are changes to make, check with your employer to see about adjusting your Form W-4 - Employee's Withholding Allowance Certificate.
Planning ahead for next year's taxes may reduce the amount of "found money" you receive in the form of a refund. You might miss the feeling of surprise at seeing a large refund when you complete next year's tax return, but you can feel confident year round that you've taken another step toward controlling your finances.
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| New Retirement Models to Replace the Impossible | |
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"The difficult we do immediately. It is difficult to turn on the TV, open a newspaper or surf the Web without encountering stern warnings that most of us will run out of money early into (if not before) the decades of retirement we envision.
These warnings are based on plenty of facts. What seems apparent is that (a) Americans are not saving enough to support their vision of retirement and (b) despite all the warnings, things are getting worse.
So what does this mean we need to do? Basically we need to stop expecting the impossible and set the bar lower. We need to create new retirement models that are not as expensive as the ones most people currently contemplate. Offering people retirement ideas that cost less might actually encourage savings. Many people say they give up planning for retirement because the amounts they are told they need seem unattainable. If we are going to push people to do something very difficult, we should at least try to minimize the difficulty.
How can we reduce the cost of retirement? There are many approaches, but they tend to rely on either shortening the period of full retirement or reducing its per-day cost (or both).
A recent article in the Washingtonian discussed a retirement model-senior co-housing-that reduces the cost of an average retirement day. In senior co-housing communities, the seniors assume many functions other retirement communities pay staff to do, such as office staffing, lawn care, the use of younger seniors to help older ones, and so on. Besides reducing overhead costs, these projects foster a sense of community and keep seniors active, both of which improve the seniors' health and reduce their health care costs, further reducing the overall per-day cost of retirement.
Senior co-housing relies on a simple concept shared by other retirement-policy initiatives: it allows seniors to gradually diminish their working hours rather than dropping suddenly from full time to zero. It is much less expensive for society to support someone working part-time than someone not working at all, and surveys suggest that most people actually prefer a gradual shift into full retirement. These shifts can be accomplished by reducing hours at the same job, by taking on less-demanding jobs, or by becoming temporary, seasonal, or piece workers.
Another issue that senior employment raises is how to compensate an individual (senior or otherwise) who is able to work but whose capacity (or rate of work) is less than other employees. Jobs that involve piece work are easiest to adjust-employees are simply paid per unit of production. A Midwestern cosmetics company takes this approach with senior workers who can show up when they like and who get paid per piece of work. This company's model has proven extremely popular with some very senior seniors (people in their 80s) who find the job gives them meaning and spending money. This model has also proven to be good business for the employer.
There are many other examples of ways to extend a person's working years and allow for a gradual, rather than a sudden, ending to them. And there are other creative ways to reduce the per-day cost of retirement as well. The point is not that individuals should give up on personal financial planning-for most people, financial planning is one of the most important things they can do to improve their quality of life. The point is that we cannot rely solely on individuals' personal finance habits to address our looming retirement shortfalls.
Sometimes aiming for the impossible is helpful and inspiring. Sometimes, however, it results in greater failure to achieve the possible. When grocery money in retirement is the goal, we should all prefer the possible.
- Sarah Ball Teslik, CEO, CFP Board
Do you work for an employer who has come up with creative ways to assist workers who are approaching retirement? Have you come up with a plan to reduce the length or cost of your own retirement? Send your stories and insights to mail@CFPBoard.org. |
| Profile: The Money Camp | |
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You've heard of summer camps full of crafts, campfires and horseback riding. You've heard of summer camps to help turn troubled kids around and boot camps for weight loss. Now there are camps designed to help children and adults improve their financial literacy.
The Money Camp, a non-profit organization founded by Elisabeth Donati in 2002, is one of these new programs providing camping experiences to people who want to learn more about handling money. Both kids and adults can attend The Money Camp's programs to learn practical money management skills and participate in activities that will change their beliefs and attitudes about money in a positive way.
Donati found many adults to be embarrassed and ashamed at their lack of financial knowledge. At The Money Camp, people discover they are not alone in these feelings. With 75% of Americans living month to month, paycheck to paycheck, not only are most adults struggling each day with their personal finances, but their own lack of knowledge results in their being unable to pass good money skills to their kids. Kids don't realize they're not getting the information they need because they don't know they need it until they become adults.
The Money Camp's mission is to empower kids to grow up and choose financial independence. It's a place where kids learn the "ins and outs" of personal money management as well as some critical life skills. The Money Camp explores how things such as our beliefs and attitudes about money and wealth influence our choices and behaviors and help dictate our future wealth potential.
A visit to The Money Camp's Web site, www.themoneycamp.com, with its chirping birds, bright flowers, fluffy white clouds, and butterflies lazily crossing the landscape, makes it clear that the program's educational goals are presented in a way that's fun as well as informative. Campers will enjoy their experiences with The Money Camp and return home with activities that allow them to put the principles they learned into practice every day.
Elisabeth Donati, Executive Director of The Money Camp, will speak about The Money Camp's programs and successes at CFP Board's 2006 Annual Meeting on Friday, August 4, 2006, at the Los Angeles Convention Center.
Read more about CFP Board's Annual Meeting and register online at: www.CFP.net/learn/annualmeeting.asp.
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| About This eNewsletter | |
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