Recently a reader asked:

I would like to know the breaking points for annual income that affects the percentage of social security that is taxable. example…low income only 15% is taxable.

Social Security is normally not taxable unless you earn over a certain amount. This lower amount is called the base amount and depends on your filing status. Single and Head of Household filers have a base of $25,000. Married Filing Jointly has a base of $32,000. If your provisional income (all worldwide income, including tax-exempt income, plus half of Social Security benefits) is lower than the base, you are not taxed on your benefits.

The next tier is at $34,000 for Single and HoH and $44,000 for MFJ. If you earn between the base and the next tier’s limit, then your 50% of your benefits are taxed.

If you earn more than the second tier, then 85% of your Social Security benefits are taxed.

With the recent high profile bank “failures,” they’re really just liquidity crises that forced the FDIC and Fed to intervene, you might be wondering if your investments are safe. In a nutshell, your investments are protected by the Securities Investor Protection Corporation (SIPC) up to $500,000. The coverage is such that you get what you would’ve lost, not money. So if you had shares of stock, you’d get the same number of shares in that same company or mutual fund.

What Is Protected?

Cash and securities are covered with some exceptions. Commodity futures contracts and currency, that is foreign currency, aren’t covered. Investment contracts, like limited partnerships, and fixed annuities that aren’t registered with the SEC under the Securities Act of 1933 are not covered. If you’re just in stocks and mutual funds, you’ll be OK.

What Happens In Failure?

What will happen is what often happens when banks fail, your assets are simply transferred to another brokerage or dealer and it has no effect to you. In the worst case, the brokerage you’re working with has bad records and you have to file a claim to retrieve your assets.

Sometimes brokerages will buy additional insurance to supplement SIPC. For example, TradeKing has up to $25M of protection in addition to the SIPC coverage: “Through its clearing firm, TradeKing provides an additional $25 million of coverage per client (including $900,000 for claims of cash) through a third-party insurance company with an aggregate clearing firm limit of $100 million to pay amounts in addition to those returned in a SIPC liquidation. This brings the total protection per client to $25.5 million with a limitation of $1 million on claims for cash balances for each client (as defined by SIPC rules). This coverage does not include transactions or trading losses or declines in the value of securities.”

I have a nasty habit of checking stuff all the time. Whether it’s the traffic stats on my blog or the performance of my retirement investments, I feel a compelling need to “check in” on things all the time. How often is all the time? I once checked how many times I checked stock prices while I was work and it was 14 times. Fourteen! Whenever I had a little break, I just typed in tickers into Google to check and I did it fourteen freaking times.

I didn’t need to check that often.

In fact, there’s a reason why financial markets have worked for so long without the internet. Remember when you could only get stock prices the next day in the morning paper? It’s because you only needed to know about stock prices once a day - the next morning over coffee.

There’s really no point to checking your retirement accounts everyday, especially if you’re like me and many years away from retirement. What happens today, tomorrow, or even anytime this year, should have no effect on my decisions if my retirement is twenty years away or thirty or forty. In 1987, the stock market lost 22% of its value in one day; but we’re still here and still humming along.

So, don’t check every day, just check it once and a while. I’ve trained myself to check my investment holdings only once a day, in the morning, and my retirement accounts once a month. I still check my traffic stats all the time though.

Every quarter, I receive disclosure forms from my employer’s 401(k) plans. They discuss my current account balance, my gains and my losses, the fees I’m paying, and a broad look across all the funds available to me. It’s a good quarterly snapshot and one that I felt was adequate. I had online access to my account, so I could review my holdings whenever I wanted to, but for the less technology savvy the once a quarter look was probably adequate.

Looks like the Department of Labor said it wasn’t enough. The Department of Labor recently recommended improved 401(k) disclosure regulations that would require 401(k) plan administrators to provide more information about funds starting in January 1, 2009. This includes 1-, 5- and 10- annualized performance tables for every fund along with their benchmark. It would include annual expense ratio figures and other cost figures. It’s information that my plan administrator always provided so it’s surprising it would have to be mandated. Actually, it’s sad that it had to be mandated.

This simply means that there are workers out there who didn’t have access to this information. While you probably could’ve dug deeper for it, all funds will give you expense ratio figures, making it easier helps everyone.

There are some things missing from the regulations but it’s not a horrible start.

The High Cost of Poor Disclosure [Yahoo! Finance]

When it comes to asset allocation, it’s important to get the right mix of equities (stocks) and bonds but those aren’t the only two asset classes you should be aware of. The general rule of thumb, that your percentage of retirement held in stocks should be 120 minus your age and the rest in bonds, is a good start but falls short in giving you a good allocation mix because it ignores so many asset classes.

When you look at target retirement funds, you’ll see that some offer exposure to international equities and bonds, some offer a little mix of cash, and others don’t necessarily follow the 120 minus age rule in the first place.

What are some other asset classes? Consider putting a small percentage in investing in areas like real estate, or commodities, or precious metals, or even even artwork (OK, maybe not artwork). A small percentage in those areas could give you some much needed diversity given your risk profile.

Don’t just think stocks, bonds, and cash.

I’m not a big fan of 401(k) debit or credit cards because I’m not a fan of raiding your retirement accounts to pay for non-retirement expenses. I think that the retirement bucket should essentially be a lockbox (*gasp* the dreaded lockbox phrase) that you don’t touch unless you’re actually retiring.

However, the cat’s been let out of the bag with 401(k) debit cards and they do improve 401(k) loans as a whole. Before debit cards, you would have to take out a lump sum loan rather than borrow only as much as you needed. With debit cards, you draw down the funds as you need it and it reduces the interest you do pay. While I don’t like the idea of borrowing from your 401(k), at least this minimizes the damage.

Senator Charles E. Schumer of New York, recently in the news a lot for his letter that the Office of Thrift Supervision said caused IndyMac’s collapse, and Senator Herb Kohl of Wisconsin introduced new legislation that would outlaw credit or debit cards associated with 401(k)’s and retirement plans.

I you’re a young investor, with decades before you’ll need the assets in your retirement portfolio, this bear market should make you happy. While it’s difficult to swallow the losses your retirement account has made, think of it as a 20% discount on what you’ll be buying over the next few years rather than a 20% loss of the assets in your retirement account.

Since the high in the market last October, my retirement accounts have lost thousands if not tens of thousands. It’s hurt. But, I’m only 27, nearly 28, and with another forty years of retirement saving left in me it’s actually a positive that the market has gone down. As much money as I may have in my retirement assets now, I doubt I’ve even contributed 10% of what I will eventually contribute towards retirement. The 20% discount young investors are now getting, which will benefit the 90% of retirement savings we have yet to do, outweighs the 20% loss we’ve experienced on the 10% we have contributed.

It wasn’t until today that I full appreciated what all those investment magazines and books had said. A broad market decline is good for young investors, bad for poorly diversified older investors nearing retirement, and now I actually believe it.

How will this change my behavior? It won’t. I still make my regularly scheduled contributions, though rebalancing will be a little more active the next time we look at it.

Presidential hopeful John McCain agrees with many expert’s opinions that the Social Security program is in trouble. In fact, he called it “a disgrace,” but that doesn’t stop him from cashing the checks the SSA sends him. In 2007, he received $1,930 a month in benefits and has received benefits for the last six years.

The fact that McCain’s wife earned $6 million and has a net worth of about $100 million is a sign that something is very wrong. The SSA is supposed to limit benefits if you earn above a certain amount but I suppose the McCains have some accounting guru working that all out for them.

The Social Security Administration recently released a report on an investigation into the practice of banks garnishing Social Security and disability payments for third party creditors, a practice that is illegal. It was discovered that approximately $171.4 million was garnished from accounts receiving direct deposits of SS benefits and other direct deposits and an additional $6.3 million was garnished from accounts that contained only Social Security payments. In addition to the garnishments, they found that in some cases the banks would freeze accounts and charge penalty fees after the freezes. Those fees totaled just over $1 million between September 2006 and September 2007!

Unfortunately, consumers can do little except wait for relief from lawmakers. Some states already have laws in place that protect SS recipient accounts. In New York, the governor is expected to sign a bill that would protect the first $2,500 of a depositor’s money from being frozen if they are getting SS direct deposits, a law that is similar to those in place in California and Connecticut.

Banks Continue to Prey on Social Security Recipients [Yahoo! Finance]

In our current economic climate, it’s easy to take a call from an unknown broker offering some hot stock tip. They’ll sometimes say “check out company XYZ, they’re about to be acquired or announce some hot news that will make the stock triple!” Of course, you could always buy the stock on your own but the broker says that by going through him, he’ll bring you some of these hot offers every single week or month. It’s a tempting offer right? I mean my stock portfolio’s been down, the broader market’s been down 20% since the high last year, so everyone’s looking for an edge.

Don’t. Answer. The. Phone.

Here’s why those offers are likely not legit:
If they were legit, why doesn’t the broker invest in it? If the broker could triple their investment ever few weeks, $1000 becomes $3000 and then $9000 and before you know it the guy should be a billionaire right? If they can make more money selling you stock than in the investment itself, it can’t be on the straight and narrow.

No one can see the future. I don’t think this needs any more explaining.

Insider trading is illegal. Let’s say this broker does have its hands in all sorts of business and is privy to insider information. Insider trading is illegal, especially if they tell you they know something will happen because of a “hot tip.” Any money you make as a result of insider trading is forfeit and you could go to jail.

Don’t let greed cloud your judgment!