I’m spending a year dead for tax reasons.
~ Douglas Adams
Most of us have heard about FICA but perhaps we just aren’t sure what it is. So before I get to telling you all about what FICA is I want to tell you a bit about the purpose of this post. Like I wrote the other day about how much money the average American saves, this is meant to help you start thinking about how to save and invest for your future so that you don’t have to end up relying on your historic contributions you would’ve made to FICA.
So here is the 411 on what is FICA. FICA stands for the Federal Insurance Contributions Act and it is a tax that both employers and employees pay. It is a payroll tax.
FICA is an American tax that is used to fund Social Security and Medicare services. Depending on the amount of your salary determines how much you pay. So the more you make the more you pay up to a point. As such, your contributions into FICA will determine to a degree how much Social Security you will be entitled to when you retire.
In 2008, 2009 and 2010 both the employer’s and employee’s contribution to the Social Security portion of the FICA tax was 6.2%. In 2011 it was reduced to 4.2%. The Medicare portion of the tax in 2008, 2009, 2010 and 2011 was 1.45%.
So all told the FICA tax is 15.3% of wages. However, there is no cap on the wages to which the Medicare portion must be paid, but there is a cap on the Social Security portion of the FICA tax depending on your salary.
If you earn more than $106,800 in 2011 then you no longer paid the Social Security portion of the FICA tax on any amounts above $106,800.
I’m not a Chicken Little who thinks the sky is falling like many others who want to fear monger us into believing that there will be no Social Security benefits for those of us who are 40 or younger. I believe there will be, but it might require a later retirement age of perhaps around 70 or so.
Regardless, relying on the government to take care of you is foolish and an unwise strategy to plan for your future.
The best way is to live simply and frugally while still enjoying the very best that life has to offer. Choose your hobbies and your outlays carefully. You can enjoy life to its very depths but you can’t have everything you want.
I mentioned earlier how I enjoy working out, but I am working out at home currently to save money for my future so that I can enjoy other things that I find more important at the moment. I wrote about working out at home if you’re curious about the possibilities of getting into shape with at home workouts.
So the first thing you need to do is start saving your money and investing it wisely. This is the easiest step. Another great step is to look at ways of earning more income.
But today I just want to touch on ways that you can save for your future while limiting your risk.
Please understand that I am not a financial planner, I am only telling you how I invest, and how I feel comfortable investing. You will need to speak to a financial planner and determine the best investment strategy for you. In any event, investing in the stock market is risky and you can lose all of your money.
I invest in companies that I understand and that pay dividends. I also look for companies the have paid increasing dividends for longer than 25 years.
These companies who have managed to pay out increasing dividends for 25 years or longer are called the Dividend Aristocrats. They are all members of the S&P 500 and as such are larger companies.
I like investing in these companies because I feel that they are safer than most others. I reckon that a company that has been able to pay out INCREASING dividends every year for over 25 years has been through some tough economic times and as such they are well managed, at least that is what I would argue.
Nevertheless, as you well know, past performance is no indication of future performance, and this is why I like to choose a dozen or so of the Dividend Aristocrats to invest in.
And the ones I choose are companies that I understand at least at a general level. For example, there are currently 51 constituents of the Dividend Aristocrats as I write this. One of those companies is Coca Cola. I understand Coca Cola and it is a company that although I don’t currently own is one I am looking to own as I understand it.
The reason I don’t own KO yet is because the price is not where I want it to be for me to buy it. I usually like to buy good companies at around their 5 to 10 year lows. For KO that would be around $40 to $45. I might not get the chance to own KO but that’s how I look at these things if you’re interested.
Anyway, that is just an idea for you to take and think about and perhaps talk with your broker or financial planner about if you like it.
I know a lot of folks have done well investing in dividend paying stocks but it does carry its own risk. But always, you can’t do poorly if you earn more money and save more of your money. That is the way to financial freedom. Go for it!