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Teachers: Here’s How to Ace Retirement Without Social Security

When it comes to saving for retirement, many teachers can’t use the standard lesson plan.

What’s different for them? Social Security coverage, or the lack thereof. About 40% of public school teachers aren’t covered by the Social Security system, according to the National Association of State Retirement Administrators.

That goes back to the initial draft of the Social Security Act in 1935, which left state employees out in the cold. Most states have since opted into Social Security for their public-sector employees, but 15 states haven’t. In those states, teachers and other state and local government workers are exempt from paying Social Security taxes and instead typically rely on a state-run pension plan.

+ Click to expand to see a list of the 15 states States where teachers are ineligible for Social Security AlaskaLouisiana CaliforniaMaine ColoradoMassachusetts ConnecticutMissouri Georgia (some areas)Nevada IllinoisOhio Kentucky (some areas)Rhode Island (some areas) Texas Why teachers aren’t covered by Social Security

The short answer: In part, it’s because they don’t pay into the Social Security system. But in some cases, even if they’ve paid in at some point in their career, Social Security benefits — including retirement, disability and survivors benefits — could be reduced if they also have a state pension.

The retirement and disability benefit reduction is due to a rule called the Windfall Elimination Provision, which is designed to block state and local public employees from collecting a pension alongside Social Security benefits. It does that by reducing Social Security retirement benefits. A separate rule, called the Government Pension Offset, can also cut into Social Security survivors benefits.

The Windfall Elimination Provision

You might wonder how Social Security can be reduced if you weren’t covered by the program in the first place. The answer is that it can’t. The Windfall Elimination Provision doesn’t directly affect you if you’ve never paid into the Social Security system; you simply won’t receive benefits.

But if you have contributed to the system — most likely because you paid Social Security taxes in a different job — and you now work for a state or local government in a role that doesn’t participate in Social Security, the Windfall Elimination Provision could reduce any Social Security retirement or disability benefit for which you’re eligible based on that past work.

Your Social Security statements likely won’t reflect that reduction, which is based on a special calculation. The maximum monthly reduction in 2017 is $442.50, limited to one-half of your monthly pension benefit. You will be subject to a smaller cut if you have 21 or more years of “substantial earnings” from a job in which you paid Social Security taxes. If you have 30 or more years of substantial earnings, your benefits won’t be reduced by the Windfall Elimination Provision.

How teachers can save for retirement

Teacher retirement options vary by state, but you’re generally offered either a pension or a defined contribution plan like a 403(b) or 457(b), or both.

Pensions have plenty of perks, most notably a guaranteed benefit in retirement that lasts as long as you live. But they’re also not without downsides. Many are underfunded or in debt, and they typically don’t travel well, requiring you to participate in the plan for a certain number of years before you’re vested (“vested” means promised the full pension benefit you’ve accumulated).

If you leave teaching or move to a different state before you meet the vesting requirement, you may forfeit any employer contributions. Contributions you’ve made — and often at least a portion of interest earned — are yours to keep. Generally, the longer you work, the larger your pension benefit.

All of this means it’s wise to supplement your pension. You can do that in a couple of ways:

1. A defined contribution plan

You may be eligible for a 403(b) or 457(b) plan alongside your pension. Both are similar to the private-sector 401(k) plan, in that they allow you to put aside money for retirement pretax. The annual contribution limit for 2017 is $18,000, with additional catch-up contributions in some cases. If you have both a 403(b) and a 457(b), those limits are separate. You may also earn employer matching contributions.

The money you contribute generally grows tax-deferred and will be taxed as income when you take distributions in retirement. Both plans may also offer a Roth individual retirement account option, which allows you to put away after-tax dollars and take retirement distributions tax-free.

One word of warning: 403(b) plans can be rife with fee pitfalls for participants, sometimes even more so than other employer-sponsored retirement plans. An analysis by human resources consultant Aon Hewitt found that those costs could add up to a cumulative leak of $10 billion annually. No matter where you invest, be sure to understand your fee costs by asking to see investment prospectuses or annuity contracts.

2. A Roth or traditional IRA

These are accounts you would open and fund on your own at an online broker. You can contribute up to $5,500 in 2017, with an extra $1,000 if you’re 50 or older.

With a traditional IRA, you make tax-deductible contributions, then pay taxes on distributions in retirement. With a Roth IRA, your contributions don’t get you an upfront tax break, but distributions in retirement are tax-free. Depending on your income, you may be able to combine IRA contributions with a 403(b) or 457(b), increasing how much you put away for retirement each year. Review the IRA contribution limits to find out, then learn how and where to open an IRA.

» IRA vs. 403(b) vs. 457(b): Get all the details in our retirement plan comparison

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.

Mortgage Rates Thursday, July 20: Rates Lower as Fed Looms

Mortgage rates for 30-year fixed-rate loans and 5/1 ARMs both fell by one basis point today, while 15-year fixed loans remained unchanged, according to a NerdWallet survey of daily mortgage rates published by national lenders Thursday morning.

Both fixed-rate products and 5/1 ARMs haven’t been this low in several weeks.

The Federal Reserve meets again next week, and going by the futures market, the general consensus is that the target range for the federal funds rate will be left as is, especially after Fed Chair Janet Yellen’s remarks last week that low inflation levels merited further observation.

MORTGAGE RATES TODAY, Thursday, JULY 20:

(Change from 7/19)30-year fixed: 4.07% APR (-0.01)15-year fixed: 3.47% APR (NC)5/1 ARM: 3.87% APR (-0.01)

Get personalized mortgage rates

NerdWallet daily mortgage rates are an average of the published annual percentage rate with the lowest points for each loan term offered by a sampling of major national lenders. APR quotes reflect an interest rate plus points, fees and other expenses, providing the most accurate view of the costs a borrower might pay.

Emily Starbuck Crone is a staff writer at NerdWallet, a personal finance website. Email: emily.crone@nerdwallet.com. 

Why Credit Cards Are Serving Big Restaurant Rewards

Finding a credit card that offered big rewards at restaurants used to feel like ordering vegetarian at a barbecue joint: There weren’t many options, and they often weren’t appetizing. But with consumers spending more on dining than ever before, that’s quickly changing.

In recent years, Chase, Citi, Capital One and PNC have all launched cards with an effective rewards rate of at least 3% on dining, a step above the 2% that was once the maximum dining reward on many cards. These are similar to the rewards on gas, groceries and travel that cardholders have enjoyed for years. And for many users, they’re just plain practical.

“Everyone has to eat. You end up with a lot of people who say, ‘Look, I may not go to New York every week, but I certainly go to restaurants every week,’” says Robert Hammer, CEO of R.K. Hammer, a bank card advisory firm.

Spending on dining out is rising

When deciding what credit card rewards to offer, issuers try to determine which perks will entice people to apply for a card — and then use it regularly. So they pay close attention to how potential customers are spending money.

“We’ve heard directly from [our customers] how important mealtime is,” Mark Mattern, vice president of U.S. cards at Capital One, said in an email. That’s how the issuer came up with the Capital One® Premier Dining Rewards Credit Card, introduced in March 2017, which offers unlimited 3% cash back on dining and 2% on groceries. “We know that these are categories that people are spending more in and are passionate about,” he added.

Consumer spending trends reflect that. In 2015, sales at restaurants and bars overtook spending at grocery stores for the first time ever, according to a Bloomberg report citing Commerce Department data. Consumer spending on food services has also been steadily increasing, reaching an all-time high in 2016, according to the most recent data available from the federal Bureau of Economic Analysis. To credit card issuers, these trends present a business opportunity.

“Chase, Capital One, [Bank of America] — they don’t push things that don’t make money. It just doesn’t happen,” Hammer says.

The young and the wealthy are eating out

Issuers don’t offer bonus rewards on dining simply because they want a piece of dining purchases; they also want to appeal to a specific type of consumer. The two groups currently most sought-after by financial institutions — high-income consumers and young adults — happen to be prolific diners.

Among households with incomes in the top 20% nationwide, 49% of food spending went to food away from home, which includes spending at restaurants and fast food joints and on takeout, according to 2015 data from the Bureau of Labor Statistics. That amounts to $6,040 per year, more than 4.5 times what those with incomes in the bottom 20% spent in that category.

Millennials tend to dine out more frequently than other age groups. A December 2016 Gallup poll found that 72% of 18- to 34-year-olds had eaten dinner at a restaurant once in the previous week, the highest rate of any age group surveyed.

These two groups mean big business to credit card companies. High-income shoppers, of course, have more money to spend. That can generate revenue for issuers in the form of transaction fees and interest charges.

Millennials, meanwhile, bring growth potential, a point underscored in Chase’s most recent annual report. “[Millennials’] wealth is expected to grow at the fastest rate of all generations over the next 15 years,” writes Gordon Smith, CEO of consumer and community banking at Chase. The majority of new cardholders with the Chase Sapphire Reserve℠, which features rich dining rewards among several other benefits, were millennials, according to the report.

Would you like rewards with that?

Credit cards with supersized dining rewards benefit issuers, certainly. But if you use yours responsibly and pay the balance in full every month, they can especially benefit you. If you’re deciding which credit card to use for restaurant excursions, and all of your options offer 3% back on dining, look for these features:

  • No annual fee: It generally doesn’t make sense to pay an annual fee just for dining rewards. Many cards these days offer 3% back on dining — and other perks — and don’t charge an annual fee.
  • Unlimited earnings: If you spend big bucks on dining, choose a card without a spending cap. The Capital One® Premier Dining Rewards Credit Card, launched in 2017, and the AARP® Credit Card from Chase, relaunched with dining rewards in 2013, are both good options.
  • Other rewards and benefits: Dining rewards might be your main objective, but many of these cards offer other perks. Choose one with the benefits that best fit your spending habits. If you’re a commuter, find a card that supplements your dining cash back with gas rewards. If you also frequent the supermarket, get your dining rewards with a side of grocery bonuses.

Getting more cash back, points or miles on dining purchases is great, but it doesn’t have to be the only useful benefit your card offers.

Claire Tsosie is a staff writer at NerdWallet, a personal finance website. Email: claire@nerdwallet.com. Twitter: @ideclaire7.

Credit Gardening 101

MoneyTipsYou may be a whiz at vegetable gardening or flower gardening, but how are you at credit gardening? That may sound like you are buying plants on credit, but in this case, good credit is the product of your gardening. Instead of harvesting fresh vegetables or springtime flowers, your harvest will be an improved credit score. Your objective is to remove items that drag down your credit score — the "weeds" in your credit report — while taking care not to introduce any new items that can drop your score. For example, opening new lines of credit will typically pull down your score through hard inquiries for credit that require significant review of your income and debts. Just as with other types of gardening, credit gardening requires planning. Your credit score is most important right before making a large purchase such as an auto or a home, and by keeping your credit score at its peak, you can save hundreds or even thousands of dollars via a lower interest rate offer. Before beginning your credit gardening, make sure that your garden has no hidden errors that are unnecessarily damaging your credit score. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips. The service will allow you to check reports from all three major credit bureaus (Equifax, Experian, and TransUnion); that's important because any error could be unique to one agency. Be sure to dispute any errors in the report to clear your credit garden for planting. If you believe there is a mistake on your credit report, you can resolve it with a single click using our credit correction service. If you already have a variety of credit accounts such as credit cards and installment loans like a mortgage, your credit "seeds" have already been planted and your goal is to manage those accounts wisely until the next large purchase. However, if you are starting out with little credit or attempting to rebuild poor credit, you will need to plant some credit seeds by opening a few, controllable accounts. Secured cards backed by a cash deposit are an excellent form of seed credit, assuming that the card issuer reports activity to the credit bureaus. Gas station cards are also useful because they are frequently used but do not generally build up large balances. During the tending phase of your credit garden, you must be careful to manage your accounts wisely. Use all of your cards for small purchases each month to keep the accounts active and your overall credit utilization low. Make sure that you pay off all purchases on time and in full each month. This provides food for your credit garden by showing responsible use of credit. Meanwhile, the passage of time will eventually remove the negative events pulling your credit score down — weeding the credit garden automatically. Even though you may be tempted by promotional credit card offers or major deals on purchases during the tending phase, keep your goal of a higher credit score in mind. If you are not credit gardening toward a specific large purchase, it may help to set a time-related goal such as opening no new accounts for one year. This clears the path for future large purchases. After careful tending, it is time to harvest your new higher credit score in whatever way you see fit. Whether your goal is a great deal on a mortgage or auto loan, or simply to bask in the glow of a great credit score, it is time to enjoy the fruit of your efforts. If you want to see your credit report and credit score within minutes for free, try Credit Manager by MoneyTips. Photo ©iStockphoto.com/Saracin Originally Posted at: https://www.moneytips.com/credit-gardening-101How To Boost Your Credit Score Fast5 Credit Tips For New College GradsHow can I increase my credit score?

Avoid Paying Mortgage Insurance Despite Low Down Payment

MoneyTipsIf you are stretching your funds to purchase a home with a minimal down payment, you are probably familiar with private mortgage insurance (PMI). It is generally required in any home purchase in which the down payment is less than 20%. PMI is insurance for the lender, not for you — it covers the lender for the increased default risk that you present. Typically, lenders arrange PMI through a third-party insurer. The premium is calculated based on a percentage of your loan amount and incorporated into your monthly payment. The PMI lasts until you no longer pose a heightened risk of default, usually near the 20-22% equity range. If you have a hard time accepting this approach, consider a variation of PMI offered through lenders. In this lender-based alternative, known as LPMI, the lender pays the PMI and passes that cost on to you through a higher interest rate on your loan and/or an upfront fee. LPMI often results in a lower initial monthly payment, which could make the difference in being able to afford your dream home. The main disadvantage of LPMI is that it cannot be cancelled. In essence, LPMI spreads out your mortgage insurance over the life of the loan. Typically, you are trading a lower initial monthly payment front-loaded with PMI for a higher monthly payment in later years. Depending on the interest rate, you may be paying a lot more over the long run — which is why most borrowers who expect to stay in their home for a considerable time opt for traditional borrower-paid PMI. LPMI does provide a tax advantage. Since LPMI is tied into the interest rate of your loan, it is also tax deductible because it is considered to be part of your tax-deductible mortgage payment. Traditional PMI is considered separate and not deductible as of this writing. The keys are the combination of interest rate, the size of the loan, and the time you expect to stay in the home. If the interest rate is low enough or you can lower the rate with some upfront fees, it may not matter that the LPMI lasts for the life of the loan. LPMI also makes more sense if you do not intend to stay in the home for a long enough time to reach the 20% equity point that would allow you to cancel traditional borrower-paid PMI. To find out if LPMI is a better option for you, work with your loan officer to do a direct comparison of your costs, both monthly and over the life of the loan. Regardless of the style of mortgage insurance that you choose, there are two ways to keep your premium as low as possible. Casey Fleming, Author of The Loan Guide and Mortgage Advisor at C2 Financial Corporation, explains: "Mortgage premiums today are very highly credit score driven, so the higher your credit score, the lower your premium will be with all other things being equal...[they are] also very dependent on your loan-to-value ratio and it's done in steps." Essentially, the higher your credit score and the lower your loan-to-value ratio is (i.e. more down payment), the lower your premiums will be. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips. Of course, if you can afford to make a 20% down payment or more, PMI is not an issue. You may want to consider waiting until you can place 20% down to make your purchase, but in that case you risk missing today's relatively low interest rates — unless you can compensate with future improvements in your credit score. If you decide not to wait, work with your chosen lenders, and remember to consider PMI options as you shop around. Armed with a cost-benefit analysis, you will be able to make the best mortgage insurance choice to fit your needs. MoneyTips is happy to help you get free refinance quotes from top lenders. Photo ©iStockphoto.com/Bliznetsov Originally Posted at: https://www.moneytips.com/avoid-paying-mortgage-insurance-despite-low-down-paymentPrivate Mortgage Insurance 101MIP vs. PMIMortgage Insurance – What Is It?

Saving on the Costs of Children

MoneyTipsChildren are treasures – but they are expensive ones. The latest USDA report on the costs of raising children to the age of 17 puts the price at almost $234,000 apiece accounting for inflation. As Sunday, July 23, is Parents' Day in the US, this is a good time to consider your total family income over that same period of time and how you can use that income most efficiently. Housing – Housing is the largest contributor to the costs of raising a child, and therefore is the place where you can make the most impact. You may think that you immediately have to upgrade your home when your family grows, but that is not necessarily the case. Upgrading just so your children can all have their own bedrooms, or just because you think that you should upgrade, is not a suitable reason. With an existing mortgage, focus on saving for future expenses and building your equity. If you are renting and planning to buy, wait until you have saved up a sufficient down payment and find an excellent deal on a home that fits your needs. Look for a rent-to-own arrangement if you want to buy a home ultimately but simply cannot afford it at the moment. In short, do not buy a house bigger than you need just because you want one. Your children’s needs take precedence, and the money you save on housing can be applied to future expenses such as higher education. MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders. Child Care – Child care and education costs are tied for the second–largest cost component of child-raising. If you cannot afford traditional daycare and do not have a willing and able relative nearby, consider creative yet safe options. Examples include babysitting co-ops where the load is shared (or similar nanny-sharing concepts), and flexible work schedules that allow one parent to be home at all times. Do not assume that you do not qualify for assistance programs. Check with Benefits.gov, as well as your state and local Department of Children’s/Social Services, to see what programs are available. Education – Start saving for higher education early by putting away any small amount you can in a 529 savings program. The earlier you start, the more time your funds have to accumulate and relieve the pressure for scholarships or student loans to cover education costs. Food – Any parents of teenage boys are painfully aware of food costs. During their growth spurts, they are bottomless pits. However, you can encourage healthy eating habits and still keep food costs down even during that stage. Buying in bulk is an excellent method of keeping costs in check. Stores like Sam’s and Costco supply large quantities of necessities at a discount, and you are likely to have little waste at this point. Coupons can also save significant money on grocery bills. If you do not have time to clip and save, consider the newer coupon apps that allow you to search and download specific coupons to your smartphone (or computer printer, if you prefer). Check out our Coupons 101 article for more tips and details on the coupon apps available. If you have the space, growing your own food can be a great cost-saver, as well as providing chores for your children and helping to establish a work ethic. Besides, food just tastes better when you grow it yourself. Clothing – Your kids do not have to have the most stylish and trendy clothing, despite what they may tell you. Make sure your kids have adequate clothing, but there is no need to go overboard with designer clothes and overpriced athlete-endorsed sneakers. A funky used clothing store may satisfy your teenager’s tastes and your budget. Do not let child-raising costs frighten you. Children are worth every penny in the end, and then some… although there will be many days when you question that concept. Photo ©iStockphoto.com/fotostorm Originally Posted at: https://www.moneytips.com/saving-on-costs-of-childrenThe Costs Of Raising Boys Vs. Girls (Infographic)Costs of Being a DadCost of Raising a Child

Men More Likely Than Women To Ask For Financial Advice

MoneyTipsWe all have heard the cliché that men never ask for directions. That may or may not be true on the road, but a new survey refutes the stereotype with respect to finances. A recent survey by Country Financial finds that in a wide range of basic financial topics, men are more likely to ask for help than women are. Overall, 19.5% of survey respondents had never sought financial advice at all – but 23.6% of all female respondents reported never seeking financial advice as compared to 15.2% of men. Out of the financial categories listed in the survey, the one topic women sought advice on the most was retirement planning (37%). Given that women on average live about five years longer than men and earn less money (approximately 83 cents for every dollar that men earn), retirement planning should be even more important to women – but men still had a higher overall rate of asking for retirement advice (45.2%). The discrepancy in asking for advice holds across other categories such as taxes (42.1% for men, 33.9% for women), insurance (39.0% to 26.9%), estate planning (25.4% to 12.9%), debt management (20.4% to 15.8%) and non-retirement investments (30.1% to 24.1%). Why would men seek advice more often than women would? Perhaps women simply don't need as much advice. Women tend to be better at relationships, and according to Leisa Peterson, Certified Financial Planner and Life Coach at WealthClinic, people should consider that "their relationship with money is actually really similar to their relationship with other people." A Vanguard study from 2016 partially backs up this premise, finding that working women were saving between 7% and 16% more than men depending on their income levels. It's possible that women prefer to do their own research with available sources and take time to reach their own conclusions, while men just want to get to the answer as quickly as possible. Regardless of your gender, there's no harm in asking for financial advice from a qualified source. Financial Educator and Author Tiffany "The Budgetnista" Aliche explains: "The number one piece of advice I can give someone with financial problems is 'Ask for help'...Just like you wouldn't set your own leg if you broke it, don't fix your own money by yourself if you have not been educated in how to do so." Where should you go for education and advice? Internet resources are abundant, as are financial planners. However, there are alternatives. For those struggling to make ends meet, "I would always recommend a non-profit credit counseling agency," advises April Lewis-Parks, Director of Education and Public Relations at Consolidated Credit. "They will give you a range of options. Everybody's situation is different." It makes sense to do initial research on your desired topic using Internet resources. Not only can you find advice on any financial topic for free, you can also do research on any financial planner or non-profit counseling agency that you plan to use. With a greater baseline understanding of the topic, you can more easily understand the counselor's advice – and also get a feel for advice that seems questionable enough to seek a confirming opinion. Maybe you fit into this data profile and maybe you are an exception – but in either case, it's simply common sense to fill in gaps in your financial education by asking for advice from a trusted source. Don't be afraid to ask for help on retirement planning, investments, or any other important financial topic. As for directions to the nearest gas station, ask someone or use your phone! Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle. Photo ©iStockphoto.com/Juanmonino Originally Posted at: https://www.moneytips.com/men-more-likely-than-women-to-ask-for-financial-advice/731Women and RetirementFinancial Decisions: Men Vs. WomenAverage Social Security Payments Are Lower For Women Than For Men

Does Your Spending Personality Match Your Credit Cards?

It’s easy to get caught up in credit card incentives, such as cash back, travel perks and sign-up bonuses. But if your credit cards don’t match your spending personality, you might not get the rewards you expect, or you might end up paying too much in fees.

One in five consumers carries a card that “has fees or rewards not aligned with their actual purchase habits,” according to J.D. Power’s 2016 U.S. Credit Card Satisfaction study.

And circumstances change. Even a credit card that was once compatible with your spending habits might no longer be the best fit. Identify your spending personality to determine whether the cards in your wallet are offering you the most value right now.

The jetsetter

If you travel in style often and want big rewards for your spending, a premium credit card will go further than a regular travel card. Some premium cards offer credits for airlines, hotels or airport security screening programs, as well as airport lounge access. They come with a large annual fee, but you likely spend enough to earn it back in the form of perks and a generous sign-up bonus.

The explorer

Travel is your hobby, but you’re not loyal to airline brands; you’re loyal to the best deals. General travel credit cards offer flexibility in reward redemption. Some charge annual fees, but you can often make up the cost in rewards, and the best cards don’t charge foreign transaction fees. However, travel rewards might lose value if you redeem them for anything other than travel.

The cash-back connoisseur

You like knowing the exact value of your rewards in cash, and you use plastic at every opportunity to earn more. Tiered and bonus-category cash-back credit cards offer higher rates on certain purchases and 1% on everything else. You could get more value by pairing one of these with a flat-rate cash-back card that pays 2% for all purchases. Minimalists should consider a single flat-rate cash-back card.

The balance carrier

Your paychecks aren’t always steady, so sometimes you lean on a credit card, and it’s not always possible for you to pay the balance in full every month. Still, you make sure you never miss a payment. Cash-back credit cards are tempting, but their high interest charges will outweigh your rewards. A low-interest credit card is more likely to save you money over time.

The self-starter

If you have bad credit or no credit, you probably have limited credit card options. Secured credit cards offer an opportunity for credit building. They require a security deposit that you get back after closing the account or upgrading to a regular, unsecured card. The credit limit is often relatively low, equal to the security deposit.

The survivor

You’re struggling to pay off debt, but if you have good or excellent credit, a balance transfer credit card can provide a way out. It allows you to transfer a balance from an existing credit card to take advantage of a lower interest rate. A card with a low balance transfer fee and a 0% annual percentage rate period can give you time to catch up on payments.

The optimizer

You’ll go to great lengths to get a good deal, including managing multiple credit card bills. Mixing and matching cards can be worth it as long as you save money. Just watch out for annual fees or interest.

If your credit card is no longer a match, it might be time to move on. But unless it charges an annual fee, don’t rush to close the account, because that could impact the length of your credit history — and your credit score.

Keep current cards active with the occasional, small purchase and use a new credit card to swipe your way toward your goals.

Melissa Lambarena is a staff writer at NerdWallet, a personal finance website. Email: mlambarena@nerdwallet.com. Twitter: @LissaLambarena.

Today's Headlines: Where's The Wage Growth?

MoneyTips So Much for Economic Theory How does one accurately predict the future when long-held standards change? Economists must grapple with this challenge when trying to predict relationships between jobs, wages, and inflation. Standard economic theory dictates that as unemployment drops — and fewer workers are available to fill positions — wages should rise as employers compete for the services of remaining workers. Inflation should rise as a result. However, our post-recession economy defies that pattern. Are we in a new economic paradigm, where traditional economic rules may be set to join traditional political rules in America's collective trashcan? Perhaps – or there may simply be other factors we have not been considering. Jobs Strong, Wages Weak Aside from occasional monthly anomalies, job growth has been relatively strong. According to the Bureau of Labor Statistics (BLS), America's unemployment rate was at 4.4% in June, well below the 5% generally considered full employment. Unemployment has been at 5% or below since September 2015, and May's value of 4.3% was the lowest since May 2001. The U-6 unemployment rate, which includes "marginally attached workers and those working part time for economic reasons," is also at pre-recession levels. BLS reported that 222,000 jobs were added in June, and the April and May estimates were increased by 47,000 total jobs. The unemployment rate ticked up slightly because opportunity is bringing more workers back to the job market. While job growth is substantial, wages are stubbornly refusing to follow the playbook. Average earnings in June increased to $26.25 per hour, a 2.5% increase over the previous year. That's a fairly typical 12-month wage increase since the beginning of 2015 – an improvement over the general 2% annual increase between 2010 and 2015, but not by much. The average inflation rate since 2009 is well below 2%, a value consistent with low wages. In an economy that is approximately 70% driven by consumer spending, sustained economic growth requires that workers have sufficient discretionary income. Is our slow recent wage growth just an artifact of a long recovery from a deep recession, or are there more fundamental forces at work? That is subject to debate among economists and policymakers. Maybe It's Productivity Despite the rosy unemployment numbers, the labor pool still contains slack – as millions of "discouraged workers" have exited the labor force in recent years. Economy watchers such as Sean Stannard-Stockton, CFA of Ensemble Capital, view these people as a hidden segment of the unemployed. Economists in this camp contend that the recovery still needs to absorb more workers before traditional economic rules kick in. Other suggestions include that of Cathy Barrera, Chief Economic Adviser at ZipRecruiter, who believes that the larger pool of young workers with limited or no experience allows employers to select these lower-wage workers and train them in lieu of raising wages for others. Government policy also plays a role. The Federal Reserve's policy on interest rates has fostered slow and steady growth in order to prevent inflation from rising – yet inflation has been running at or below the Fed's 2% target for years. To dig deeper, it helps to look at the labor market from a productivity viewpoint. A report from the Economic Policy Institute (EPI) notes that from 1948 to 1973, changes in productivity and hourly compensation were well correlated. That relationship split in 1973 with the cumulative changes in productivity far outpacing compensation, a trend that continues today. EPI suggests lack of compensation equality as a major factor. Increased automation also plays a role, as far fewer people are required in many industries as compared to 1973. EPI's main point is that much of the income created by increases in productivity is not making it back to the average worker – it's either going to capital improvements or to compensation at the highest levels. An analysis by Neil Irwin of the New York Times echoes this point, although Irwin detects a slight change over the last few years. Irwin notes that while wage growth seems weak, workers are actually taking home a greater slice of the income gains given equally weak gains in productivity over the last few years. Irwin suggests this may reflect minimum wage increases and Obama-era government efforts to benefit front-line workers. In essence, we've seen a very slight shift in the productivity and compensation patterns. The issue must be addressed by both increasing growth and finding ways to get a larger share of that growth into worker's pockets to perpetuate the cycle. While labors' slice of the pie is increasing, it hasn't increased by much in historical terms – and the overall pie isn't growing fast enough to feed all the new workers coming to the table. The Takeaway While it appears traditional economic relationships between unemployment rates and wages don't apply at present, you are more likely concerned about the effects on your own employment situation. Regardless of the macroeconomic situation, you can improve your chances of maximizing income by making yourself as valuable as possible in your existing job and planning for your next one – whether it's with a same employer or a different one. If one of the underlying problems is a mismatch between your skills and available jobs, lay out a plan to improve those skills over the coming months (or years, if required). Which job are you targeting? Do you need more specific training? Is a new college degree required? It won't be easy to execute this plan, but few worthwhile things in life come easily. If you are content where you are, that's great – not many workers have their dream job. Just don't forget to ask for a raise occasionally, and make sure that the quality and quantity of your work merits one. Also make certain that you are preparing sufficiently for the next phase of your life. Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle. Photo ©iStockphoto.com/TheaDesign Originally Posted at: https://www.moneytips.com/todays-headlines-wheres-the-wage-growth/224Costs Rising, Income FallingToday's Headlines: Frustrating GDP NumbersWages For Top Earners Growing

Caring for Your Parents as They Age

MoneyTipsSunday, July 23, is Parents' Day, which was established when President Clinton signed a Congressional Resolution into law in 1994 to recognize, uplift, and support the role of parents in raising children. At some point when those children are grown, however, it often becomes their responsibility to care for their aging parents. It is an uncomfortable discussion, but an important one – what sort of financial obligations will you have in caring for an elderly parent, and consequently, how does that change your retirement plans? You cannot answer the second question without fully addressing the first. It is important to have an honest discussion with your parents about their wishes – and financial capabilities -- for their senior years. What sort of care are they comfortable with? Do they want to pass assets on to heirs or liquidate them for their own needs? If they do not have basic paperwork set up such as wills, power-of-attorney, and a healthcare proxy, try to convince them to address this immediately. Next comes the most awkward part – the financial discussion. Ask your parents for permission to go over their net worth, debts and monthly payments, insurance (health, life, homeowners and auto) and income with them. This is important for two reasons: combined with their wishes, this tells you how much financial support you may need to provide, and their income will determine eligibility for tax credits and dependent status. Make sure you have covered all sources. It is easy to forget about safe-deposit boxes, life insurance policies, or similar items. Also, consider their Medicare/Social Security situation to make sure they are taking full advantage of their benefits, and whether supplemental health or long-term care insurance makes sense for them. Make estimates conservative (high on debt/expenses and low on income). If you run into complex estate issues or investment considerations, you may want to consult with a financial planner and/or an elder law specialist. It is also worth visiting www.Govbenefits.gov and similar websites to check for assistance programs for which your parents may qualify. At the end of this awkward conversation (or two), hopefully you will have a good idea of what financial burden you will have. As for the effect on your investments and retirement accounts, consider the following: Budget – Assuming you are adding a new running debt to your budget to care for your parents, can you absorb this without affecting your investments and retirement plans? Try to cut back on expenses before dipping into assets (see below). When your parents pass, keep the expenses low and direct some of those funds toward "catch-up" contributions to your existing IRA's, or consider starting a Roth IRA if you do not have one yet. Assets and Liquidity – If most of your assets are in retirement programs, eldercare bills could put you in a cash crunch. You may have to reduce retirement contributions for a bit and send them into more liquid, lower-return investments. You can borrow against a 401(k) program in some cases, and withdraw IRA contributions for an effective 60-day interest-free loan, but these are short-term solutions. Try to avoid cashing in a 401(k) or an IRA and incurring early withdrawal penalties – especially an employer-matching 401(k). Tax Considerations –There are three primary tax benefits of caring for an elderly parent – claiming them as a dependent (if you can), itemized medical deductions and the Child and Dependent Care tax Credit. See our article "Tax Benefits of Caring for an Aging Relative" for details. Make sure no resources are being left on the table (unclaimed benefits or programs), do what you can through reducing other expenses, and leave any effect on your retirement plans as the last resort – first minimizing contributions if you can, borrow if you must, but never cash in. You owe your parents the best retirement that you can afford, but don't shortchange your own retirement in the process. Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle. Photo ©iStockphoto.com/yacobchukOriginally Posted at: https://www.moneytips.com/caring-for-your-parents-as-they-ageHow Supplemental Insurance can Help You7 Top Retirement Roadblocks80 is the New 60
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