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Adjusting for Trail Conditions


I recently returned from a trip to North Carolina. The reason for the trip was simple. We wanted to spend a few days with some friends who do not live near us, and we wanted to enjoy the beautiful countryside without the interruption of all of the news and noise that populates our life.

Our main physical activity was our daily hikes in the mountains. On day 2 we woke to a soaked earth and wet leaves. During the night, the wind and the rain combined to create a slick surface. In addition the trail we were taking featured exposed roots, rocks, and a steep drop off to one side, causing us to make adjustments to how we hike this trail.

We made sure to wear clothes that would keep us dry. We wore shoes that gave us the best grip, and slowed our pace to avoid slipping or falling. Events happen and you have to adjust .

Prior to leaving on this trip, there had been a lot of news regarding social security. In my mind, these stories should create a lot of discussion. I do not think the majority of people are aware of the news.

First came the news that $1.29 million dollars in overpayments and fraud have been paid out through the social security disability program. These overpayments and fraud part of the reason that $150 billion was transferred from the social security fund to pay retirement benefits to the social security fund the pays disability benefits.

The next piece of news was the changing of the amount of taxable income that is subject to social security taxation. Previously an employee and employer were each taxed 6.2% of wages for social security on the first $118,500 of wages. The new amount of wages subject to social security taxation is $127,200. This is an increase of 7.3% and is an event that will necessitate adjustments to me made.

Let us take the example of a small business owner who employees 6 people. The business owner earns a salary of $175,000. The business employs two people that earn $130,000, two people who earn $50,000 and two people that earn $35,000.

In this example the business owner will have to pay an extra $2157.60 in social security taxes for himself and his two employees that earn $130,000. Each of the employees who earn $130,000 will have additional deductions of $1078.80 deducted from their gross pay. The lower wage earners will not see their take home pay altered, however it will be more difficult for the owner to provide a raise or bonus when combining the increase in social security taxes with other increases, such as health care, that are also squeezing cash flow. To the owner of this business, and the two employees that make $130,000, adjustments must be made.

Many business owners’ purpose of growing a business is to sell the business sometime in the future. One way businesses are valued is by cash flow. Different business sell by a certain multiple of cash flow. If a business generates $100,000 of cash flow per year, and that type of business sells at 5 times cash flow, it would be worth $500,000.

In our example, assuming the business sells at 5 times cash flow, this business just lost $10,785 in value. To the owner of this business, adjustments must be made.  

I have not heard any news on adjustments the Social Security Administration is making on reducing fraud or overpayments.

So here is my take away from this blog. If you earn more than $118,000 of income per year, your budget just got hit by a storm, and may become a more slippery trail. If you do not fall into that category, but the person who writes your paycheck does, you are likewise effected, since it will become more of a challenge for your employer to generate the cash flow necessary to justify bonuses and raises.

On the positive side, if you are a recipient of social security, the ability to keep making payments without cuts was just improved. When you work with your financial advisor, become educated about how much of your social security will be available for retirement spending. Do not plan of having it all available.

As the landscape has just shifted it is more important to have a plan, or to update your current plan. If we can help you in the endeavor, please give me a call at Forest Hills Financial.

Bart Steindler

Vice President / COO

Forest Hills Financial



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Guest Wednesday, 20 March 2019