2023 IRMAA Update – Will You Have a Surcharge for Medicare Part B and D?

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A major part of retirement planning is ensuring that you have the healthcare insurance necessary to go to the doctor for checkups, treatment, or injuries. Medicare is one way to secure healthcare in your retirement, but you may be spending more on surcharges in 2023 than you expect due to the Income-Related Monthly Adjustment Amount known as IRMAA.

We’re going to cover the 2023 IRMAA update and what it means for you if you have Medicare Part B and/or D.

Don’t know what IRMAA is or what surcharges you may face? Read through our guide on IRMAA Medicare Surcharges.

At its core, IRMAA is a surcharge that you’ll pay for your Medicare if you make over a certain amount of money each year. Updates to IRMAA will affect you because in most cases it means you’ll need to pay more for your Medicare.

Will You Avoid IRMAA Surcharges?

We’ve had quite a few clients who didn’t know about these surcharges and were surprised when they had to pay more for their Medicare. The baseline is based on the modified adjusted gross income (MAGI) of an individual or couple.

Based on the figures below, you will not have a surcharge if you meet the following income requirements:

  • Single person: $97,000/annually or less
  • Married filing jointly: $194,000/annually or less

If your modified adjusted gross income falls under these amounts, your monthly premiums will be $164.90.

Anyone who is still working will need to plan accordingly, because IRMAA is based on what you were earning two years ago. For example, if you are a single person and made $100,000 in modified adjusted gross income in 2021, you would be over the threshold in 2023, based on these earnings.

What to Do If You Made More Than $97,000/$194,000 in 2021?

If you exceed these figures when single or married and filing jointly, the IRS will recognize some nuances or life-changing events that can help offset the surcharge. If you or your spouse experienced the following, you would be considered for a life-changing event:

  • Retirement
  • Marriage
  • Divorce
  • Widowing
  • Layoff
  • Loss of pension
  • Loss of income-producing property

Retirement is one of the life-changing events that the Social Security Administration (SSA) will allow. If you can receive this exception, you will avoid the surcharge. We recommend looking into the life-changing events listed and understanding if you can avoid paying surcharges.

However, the rules are very specific, and the event must fall under one of the exceptions above.

With this in mind, if you believe that you have had a life-changing event and can show your income is under what it was two years ago, you can file form SSA-44. The form is relatively simple and allows you to explain:

  • Why your income is less
  • What the significant change is and why it happened

Again, if you have one of the exceptions above, we highly recommend filling out the form because it will allow you to avoid or reduce surcharges.

What to Expect if Your Modified Adjusted Gross Income Exceeds the Baseline

If you do not have exceptions and will need to pay additional surcharges on your Medicare premiums, you can expect the following monthly surcharges in 2023:

MAGI for single filerMAGI for joint filerPart B SurchargePart D Surcharge
$97,000 – $123,000$194,000 – $246,000$65.90$12.20
$123,000.01 – $153,000$246,000.01 – $306,000$164.80$31.50
$153,000.01 – $183,000$306,000.01 – $366,000$263.70$50.70
$183,000.01 – $499,999$366,000.01 – $749,999$362.60$70
$500,000 or more$750,000 or more$395.60$76.40

Note: Remember, all these surcharges are in addition to the standard monthly premium of $164.90.

If you’re still working or you have events coming up that will add to your income, it’s important to plan the transactions with IRMAA in mind. For example, if you plan on selling an asset that would put you above these thresholds, it may be worthwhile to sell three years before qualifying for Medicare to avoid these additional charges.

Form SSA-44 and the exceptions it provides is almost a one-time deal with some exceptions.

We have had some folks try to apply and a nice representative at the SSA helps them out. However, the form and its exceptions do not help you if you had a one-time investment gain or were trying to follow a specific strategy for your retirement plan.

Tax strategy meetings are an important part of retirement planning because your income determines whether you will pay Medicare surcharges. We have clients who want to do Roth conversions for a variety of reasons, but Roth conversions will add to your MAGI. An increase in income means it’s important to consider both the additional tax you may owe on the Roth conversion and whether the conversion will infringe on the IRMAA thresholds, requiring you to pay a surcharge you might not have had otherwise.

To avoid these surcharges when converting to Roth, convert your accounts before you qualify for Medicare, or put specific strategies in place such as planning carefully around the thresholds.

You’re not stuck with high surcharges forever. Your premiums are recalculated from your tax return each year, so you may have to pay surcharges in 2023, but if your income in 2022 falls, the surcharges for 2024 will be based on the lower 2022 amount.

Do you have any questions about these figures, or do you need some guidance on your IRMAA surcharges?

Click here to schedule a call with us.

July 31, 2023 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for July 31, 2023

CLICK HERE TO WATCH THE UPDATE

This Week’s Podcast – Andrew Opdyke – 2023 Mid-Year Economic Update for Retirement

In this Episode of the Secure Your Retirement Podcast, Radon and Murs speak with Andrew Opdyke about a 2023 mid-year economic update and the future. Andrew is a Certified Financial Advisor and Economist at First Trust Advisor.

Listen in to learn the expected and unexpected turn of events in the economy today and why inflation might not allow for rate cuts this year.

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

This Week’s Blog – Andrew Opdyke – 2023 Mid-Year Economic Update for Retirement

Andrew Opdyke, an economist for First Trust, was back on our most recent podcast. For those who don’t know, Andrew comes on our show about once a quarter to update us and our community on recent economic events.

This time, he provides us with a great mid-year economic update that will help you when retirement planning.

CLICK HERE TO READ THE BLOG

Andrew Opdyke – 2023 Mid-Year Economic Update

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Andrew Opdyke, an economist for First Trust, was back on our most recent podcast. For those who don’t know, Andrew comes on our show about once a quarter to update us and our community on recent economic events.

This time, he provides us with a great mid-year economic update that will help you when retirement planning.

We’re going to:

  1. Summarize the first two quarters of the year
  2. Summarize what Andrew expects over the final two quarters of the year

If you want to listen to the podcast, you can find it right on our site here. Otherwise, we’ll cover the most important parts for you below.

What Happened in the Last Quarter and What are Andrew’s Thoughts?

We’re a little more than halfway through the year, and the first half of the year was more comfortable than the last quarter of 2022. Even the markets have been far less volatile, which is a good thing for investors. 

At the end of the first quarter of the year, we saw the Silicon Valley Bank collapse and a few domino pieces fell along the way.

Today, the Fed agrees that they have more work to do. We’re at the halfway mark of the year, and we’re seeing:

  • Inflation trend lower at 3% year-over-year, although Andrew believes this to be a little misleading
  • Energy prices are slowing down a bit
  • Taking out food and energy, we’re seeing inflation fall from 5.9% to 5%, which is hitting consumers quite a bit

Inflation has remained stubbornly sticky, and the Fed is expected to raise rates at the end of July and maybe another before the end of 2023. The question remains:

  • Will we see a recession?
  • Will employers begin laying people off?

We’re seeing manufacturing come down a bit, but construction activity is at record-high levels. Employment, at the time of this article, is still progressing and remains strong. Consumers are still spending.

Has everything transpired as expected?

For the most part, the economy is doing well and even the markets are stabilizing. There was sort of a concentrated performance in the tech industry at the beginning of the year.

Andrew believes that the market may get a little bumpier going into the end of the year.

Rates Hikes or Cuts: What Will We See?

Rate hikes and cuts are always top news stories and something we hear a lot about from our clients. Andrew believes that at the end of July, the Fed is likely to raise rates again. He expects an additional rate hike before the end of the year.

At the mid-point of August, he expects that the CPI will dictate the future choices from the Fed.

CPI was from activity almost a year ago. We’ll see some bumps in the newest CPI due to the Ukraine/Russian war.

The Fed has changed pace often this year because the ability to guide and navigate this ever-changing environment is evolving. What the Fed doesn’t want to do is repeat the mistakes made in the 70s and stop inflationary measures too fast.

Andrew anticipates the rates will have one or two hikes before the end of 2023 and sometime in 2024, rate hikes may follow. As inflation begins to trickle in the right direction, the Fed will begin to lower rates.

Most countries are seeing similar trends as the United States, but we are seeing:

  • Germany has rising inflation
  • United Kingdom’s inflation remains flat

Energy price rises in the US can put some pressure on the UK economy. At this time, we’re not seeing a Central Bank that we can say, “Hey, they’re doing everything right.” Every Central Bank is working through these ups and downs.

Recession Risk at the Mid-point of 2023

Recession is something we’ve been talking about for a while now, and with everyone spending like normal, it’s almost a self-fulfilling prophecy at this point. Andrew estimates that there is an 80% chance that we’ll see a recession.

When will this recession happen?

No one knows. We may see a recession in 2023 or 2024. We’re seeing facilities being built today without orders in the pipeline in the coming year. What does this mean? Businesses are sort of holding back a recession, but something needs to happen before orders run out for the momentum to remain.

Reading through banking reports, it looks like consumer savings may fall back to pre-COVID levels by the end of 2023. Less money in the bank may lead to consumers spending less, which also raises the risk of a recession.

If we hit a point where consumer spending falls and rates are high, it will likely push us into a recession.

Can we avoid a recession? Possibly. However, it’s a very delicate time. We’re even seeing the markets perform very well this year.

2023 Mid-year Economic Update: Stock Markets

No one would have guessed that going into 2023, the market would be where it is today. Technology and AI helped lift the market at the start of the year, but Andrew is seeing the market broaden a bit.

We’re seeing 3% – 4% of market growth happening from outside of the tech sector.

Most people started the year with expectations that the market would go down, but it hasn’t really happened. Instead, we’re seeing people paying not based on earnings but higher multiples from these companies. We’re seeing the top 10 tech companies trading at 30 times their earnings. The top 11 – 50 companies are trading at 16 – 18 times their earnings.

A sustainable bull market will require some of these non-tech companies to have strong earnings and returns.

Based on GDP and employee output, we’re not seeing the rise in productivity that tech companies expected with AI. Many of these technologies take time to evolve and be adopted by users, which could cause some of these tech stocks to come back down.

Foreign Economies

China reports not seeing the bounce back that they expected of 5% growth, which is low for the country. Apple and Tesla moving to India is changing the economic landscape. With the country likely to have the world’s largest population soon, it’s very likely that India will begin to grow rapidly.

Top-down leadership works well in short bursts, but communist countries have been, traditionally, difficult to maintain long-term.

For example, the tech sector has been the backbone of the US for the past 20 years, but China has had a lot of difficulties in this arena. China is known to replicate ideas and innovations, which means they continued to fall behind on tech that others had already released.

Finally, when companies in China started to innovate, the communist government started to put the clamps on them because it didn’t look good for the government when these companies were acting independently.

We saw this with tech investments and Alibaba. Investors have been scared away from China due to this clamping down.

We’re also unsure of where China’s economy stands because the country has been known to provide inaccurate information. Andrew expects that over the next 10 – 30 years, China will struggle to grow.

Geopolitically, the world may look very different in the next 5 – 10 years.

Forward-looking Questions: Concerns for the Second Half of 2023

As we move into the end of the year, there are some major concerns, especially with a lot of the big company’s price-to-earnings (P/E) ratios. If confidence wanes, we can see some pullback while P/E goes back to normal levels.

Commercial and office real estate loans are coming up.

We are seeing a lot of foreclosure talks that can hit local and regional banks. Large banks are less susceptible to these potential risks of foreclosure.

Russia and Ukraine will remain a major question mark. China’s threat to Taiwan will remain critical to the market, especially if things intensify, such as an increase in training in the area.

Andrew believes the biggest headwinds are:

  • P/E for many companies is too high
  • Money is coming out of the system

In 2020/2021, we saw the government inject a lot of money into the system. PPP loans, COVID checks, treasuries trying to hold money – all of this can have an impact on the economy and cause growth to slow heading into December.

Forward-looking Questions: Positives for the Second Half of 2023

Manufacturing investment will help the country, especially bringing back semiconductor manufacturing. Investments like this will roll out for years to come and will boost the economy.

We’re seeing a lot of things today that can help us see a boom in the future. 

Andrew is optimistic that we’re a lot closer today to a recovery than just a few months ago. It’s very unlikely that we’ll need massive rate hikes of 500 – 550 basis points again. We just need to get over the last hurdle, and then we can see growth.

Improvements in education, clean water, manufacturing and so on will drive us forward 18 months from now.

Once we get through the tough stuff, we’ll have a very bright future.

S&P 500 Forecast

Andrew thinks that we’re likely to see a pullback in the market because the markets got ahead of themselves. Evaluations and P/E are too high, but this can change with some major unforeseen growth factors, such as AI reaching its expected potential much faster than expected.

People will need to reevaluate to see if they’re overpaying for something that is underperforming with the tech stocks that are trading well after what they should be, in many cases.

Do you want to talk to us about any of these key points in the mid-year economic update?

Schedule a 15-minute consultation with us today.

July 24, 2023 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for July 24, 2023

CLICK HERE TO WATCH THE UPDATE

This Week’s Podcast – Should You Consider a Franchise as a Part of Your Retirement Plan?

Learn why franchising is a proven profitability pathway compared to starting a business, plus the financials around franchising cost and revenue. You will also learn how to run a franchise successfully, even with a corporate background and zero business experience.

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

This Week’s Blog – Should You Consider a Franchise as a Part of Your Retirement Plan?

Jon Ostenso was a special guest on our most recent podcast, and he had a wealth of information to discuss on owning a non-food franchise. If you’re considering a franchise in retirement as part of your overall income plan, this is one blog that you’ll want to take your time to read.

CLICK HERE TO READ THE BLOG

Should You Consider a Franchise as a Part of Your Retirement Plan?

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Jon Ostenso was a special guest on our most recent podcast, and he had a wealth of information to discuss on owning a non-food franchise. If you’re considering a franchise in retirement as part of your overall income plan, this is one blog that you’ll want to take your time to read.

Don’t have time to read this blog?

You can also listen to the podcast by searching for it on our site: here.

Who is Jon Ostenso?

Jon is the owner of FranBridge Consulting and is a top 1% franchise broker, author, investor, and speaker. He is a multi-brand franchisee and has worked to help others find the same success he has achieved.

You can view Jon’s website and email below:

Speaking to Jon Ostenso

Jon’s latest book, Non-food Franchising, came to fruition in a way that many of us can relate to in life. Like many of us, he spent years in the corporate world and had a great run. However, he had the itch to build his own empire and started with the opportunity to enter a leadership role and support franchisees with ShelfGenie.

He saw many people entering franchises that weren’t food-related and finding ways to thrive.

Fast-forward and Jon has invested in a lot of franchises and recently became the owner of another franchise. Through the help of good managers, he’s able to run his businesses that do not include fast food.

Note: Jon is not against fast food, but he believes that there are easier industries to enter and make money from than fast food.

Thought Process on Franchising vs Starting a Business

Starting a new business takes time and patience. No one knows your brand or what you offer. When you start a franchise, you’re starting with a reputation and potential client base that can help you thrive.

You can:

  • Execute a proven playbook
  • Work with a franchisor who will coach you 
  • Network with other franchisees
  • Access suppliers and service providers that are otherwise difficult to gain access to

It’s possible to be part-time, full-time, or even an absentee owner when you own a franchise.

Examples of Non-food Franchising and Who Is Buying Them

Franchising demand is skyrocketing, and Jon has benefitted from it. In the first half of this year, he’s been able to double his business. The overwhelming interest exists because:

  • People want to make a change and have a hand in things
  • Money has been sitting and people want to make it grow

However, the businesses that are doing well in the franchise space aren’t exotic by any means. Instead, Jon is seeing major interest and success with:

  • Gutter businesses
  • Oil change companies
  • Laundromats
  • Health and wellness
  • Home services

Franchises that are resilient are a great option. People will continue to invest in their homes, pets, health, and things like oil changes even in a recession.

Things like in-home care, testosterone treatments, and non-trendy businesses are some of the best franchises to enter, according to Jon.

We described our audience to him and how we go about retirement planning.

When we asked him who buys franchises, he stated:

  • 33% of clients are existing business owners
  • 66% of clients are not business owners 

People have so many transferable skill sets that allow them to buy and run a franchise with great success. Around two-thirds of franchisees that Jon works with are hands-off owners and simply collect money, thanks to the strong managers that are in place.

You can still operate the franchise if you like, but you can also be the money behind it and take a more hands-off approach to the whole thing.

100% Hands-off

Most franchises fall into a semi-hands-off approach. You’ll need to hire the right people, but they’ll do the rest for you. There are a few franchises that are 100% hands off and the franchisor will even hire the managers for you.

About four or five companies will run the business for you.

What do you do?

  • Jump on call once or twice a month
  • Make decisions

If you’re interested in owning a franchise in retirement, there are options available that allow you to invest and have the franchisor do most of the heavy lifting.

Financials Around Franchising

Franchising does cost money, so we asked Jon to explain:

  • Funding. You can use a special program called ROBS to roll money from your 401(k) or IRA into the business without a tax penalty. You can also pay yourself straight from the business. 
  • Expenses. Most franchises fall between $150,000 – $350,000 in costs. Many clients put $50,000 – $75,000 into the business and then take out an SBA loan for the remainder.
  • Returns. Of course, the return will vary. The franchisor will provide you with documents on the general returns that you can expect. Jon did six gutter businesses last year, costing $200,000-$220,000. These businesses often hit $1 million in revenue in the first year with margins from 15% to 27%.

Almost 90% to 95% of clients start a fresh franchise, but you can find some gems that are for sale. Buying resale does have some inherent risks to consider, too.

Franchises allow you to build toward an exit. You can sell the franchise in the future with a large payoff. One study found that franchises sold for 1.5 times a traditional business, so you can benefit from the income coming in and then sell the asset for a major payoff at the end.

Jon mentions that there are a lot of passive opportunities and other options that allow you to grow and own many franchises – if that is something that you want to consider.

What Starting a Franchise Looks Like

Jon helps people become franchisees, and he recommends that the first step you take is to visit his website: FranBridge Consulting. He will send our readers and listeners Non-food Franchises for free.

You’ll gain access to:

  • Jon and his team
  • 600+ franchises he works with
  • 100% free assistance

Franchisors pay Jon for helping them land qualified franchisees, so you gain access to his help for free. 

With that in mind, he will begin by:

  • Getting to know you
  • Asking you to fill out a form

He’ll come back with a list of 10 – 12 franchises that he believes are a good fit for you. After you receive the list, you’ll be asked to narrow down the options to 3 or 4, and then Jon will make the introduction for you.

Many of Jon’s clients enter franchise opportunities that they never knew existed. Franchises can be a great option if you want to create an income stream in retirement and enjoy a mostly hands-off approach.

Want to talk to us about creating income streams or learn more about franchising?

Click here to schedule a call with us.

July 17, 2023 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for July 17, 2023

CLICK HERE TO WATCH THE UPDATE

This Week’s Podcast – Annuities or CDs – What You Should Consider

In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the similarities and differences between annuities and CDs and the best one for retirement planning. In as much as CDs and fixed index annuities are similar, CDs are best suited for short-term investments, while annuities are best suited for long-term investments.

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

This Week’s Blog – Annuities or CDs – What You Should Consider

“Annuities or CDs?” is a question many folks are asking because interest rates on CDs are the best they’ve been in a long time. In this article, we’ll cover both annuities and CDs to help you better understand which option is right for your current retirement planning strategy.

CLICK HERE TO READ THE BLOG

Annuities or CDs – What You Should Consider

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“Annuities or CDs?” is a question many folks are asking because interest rates on CDs are the best they’ve been in a long time. In this article, we’ll cover both annuities and CDs to help you better understand which option is right for your current retirement planning strategy.

Wait. CDs? They’re No Good, Right?

We haven’t talked about CDs for a long time. Interest rates weren’t that attractive in past years. Most people were lucky to receive 1% to 2% returns. Clients who want to reduce market risk can, at the time of posting this article, go out and get a 1-year CD at 5.5%, or a 5-year CD at 4.5%.

With returns like this, we have a lot of people questioning why they would put their money into an annuity – especially a fixed annuity.

First, we need to consider putting the funds into the right place for your retirement focused plan. You have a lot of options when investing, including the following three main categories:

1. Growth

You can put your money into growth assets, such as equities, because they have the highest return potential. These assets would include things like ETFs, stocks, and mutual funds.

These funds need to remain in the market for some time and have the risk of volatility. Markets go up and down all the time, and your funds will follow this trend, too. You do have the potential to lose money with equities, but we do have controls in place to limit these potential losses.

2. Safety

If you want to have a good rate of return without the risk of losing money on it, you’re now in the following territory:

  • CDs
  • Treasury Bonds
  • Fixed Annuities

These investment vehicles protect you from market losses, so you don’t need to worry about that, but you may earn less with a fixed option.

3. Cash

Easy money access. If you need liquidity, this is the avenue that you’ll want to choose because it gives you access to the money without penalties when you need it. However, you will not receive a high rate of return.

 Keeping this in mind, we’re going to expand on the second category, “safety”, because that’s where the discussion of CDs vs. annuities really exists.

Interest Rate Risks of CDs and Annuities

CDs and annuities are the “hot topic” right now. Interest rates have gone up due to inflationary measures and banks are now able to offer better rates on CDs than they have in a long time. The Fed’s goal is to tame inflation, and when it does go down, interest rates will also come down.

If you buy a CD today at 5% and allow it to reach maturity, you can choose to:

  • Take the money and put it back in a CD
  • Take the money out and put it into other investments

CD renewals will allow you to buy the CD again at current market rates. It’s very likely that rates will come down and you may have a CD rate of 3.5% or 4% at renewal – or lower. Two years from now, CDs may be 2% or 1.5%.

These lower interest rates are your “reinvestment risk”.

We like the idea of putting a portion of our client’s money into the six-month or one-year CDs, if they know they’ll use these funds in the next year and will need to access them. In the meantime, they will receive a nice return on their investment.

Fixed Indexed Annuities and Their Potential 

Fixed Indexed Annuities (FIAs) are driven by interest rates, so just like CDs, the interest rates have gone up in the last year. The key difference between a CD and an FIA is the length of the contract you receive. For an annuity, the term is longer, such as 10 years.

You may receive a 4.5% – 5.5% interest rate on CDs for 1 year or more. Over the past 10 years, FIAs with no riders or fees have had returns of 4% – 6%. Compared to CDs, this range for annuities was much higher.

In today’s market, because of higher interest rates you can receive an FIA that averages 5% to 10% over a 10-year period. However, you may have some years with 0% returns.

How does that work?

Annuities are linked to an index. For example, S&P 500:

  • S&P 500 rises 10%, so you earn 10%
  • Next year, the S&P 500 drops over 10%. Since you are protected from market losses in an FIA, you do not lose any money in that year.

Fortunately, FIAs often have many index options that allow you to diversify your potential and gain more opportunity.

We believe FIAs are really a bond alternative, as they are both conservative and protect against risk. Bonds in 2020 – 2022 hurt portfolios more than they helped.

Clients often look to bonds to make 3% – 5%, but FIAs offer:

  • Greater return opportunities
  • Principal Protection (protection from market losses)

Of course, if you have money that you want to park for a year and then use the money, put it into a CD and make your 5% return. However, for long-term investments and the potential to make more money, it often makes better sense to go with an annuity.

Annuities are longer-term, but the reward is more consistent. CDs are shorter-term and, while they have their place today, will see rates go back down as inflation falls and interest rates follow.

Do you want to read more about how to secure your retirement?Click here to view our latest books covering this topic, or schedule a call with us.

July 3, 2023 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

This Week’s Podcast – You Have Enough to Retire, but How Do You Create an Income.

Listen in to learn the importance of starting a withdrawal strategy in the first few years of retirement to avoid a sequence of return risks. You will also learn about all the things you should be thinking about if you want to retire early or at any age to keep your life fun and exciting in retirement.

What’s the importance of having a financial professional to help you with the withdrawal strategy to avoid the stress of the deaccumulation phase? Learn here…

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

This Week’s Blog – You Have Enough to Retire, but How Do You Create an Income.

In this scenario, the couple wants to retire at 55 – one year from now. They want to know the best way to take their distributions. The couple plans not to touch the qualified money until they hit age 59.5.

They go on to say that they understand the 4% rule, but they don’t…

CLICK HERE TO READ THE BLOG

You Have Enough to Retire, but How Do You Create an Income?

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An article came across our desk from MarketWatch about a couple in their 50s who want to retire early. They have $4.5 million in savings and don’t know what to do to withdraw the money in retirement. 

Breaking down the couple’s assets, they have:

  • $2.3 million in taxable accounts
  • $2.2 million in retirement assets

The couple has the assets to retire, but this article resonates strongly with us at Peace of Mind Wealth Management. How do you build a plan that will last 20 – 30 years and take care of your family?

The article’s response was pretty standard: seek professional advice instead of trying to do it yourself because everyone and their circumstances are different.

With that setup, let’s dive into the meat of the topic and explain how we recommend you create an income stream.

What the Couple Lets Us Know About Their Situation and Ideas

First, the couple wants to retire at 55 – one year from now. They want to know the best way to take their distributions. The couple plans not to touch the qualified money until they hit age 59.5.

They go on to say that they understand the 4% rule, but they don’t know whether to take money monthly, quarterly, or annually. The couple planned to take money off the table after the 2021 peak, but waited until 2022 for tax purposes, and that backfired.

They also want to know how often they should withdraw money from their accounts.

From our perspective, we love the idea of a retirement focused financial plan. As you grow up you are told to save. Save as much as you can, and dump the money into 401(k), IRA, life insurance, brokerage accounts, emergency funds, and so much more.

Suddenly, you’ll exit the accumulation phase of life and need to enter the distribution phase.

The money you’ve built up needs to last the rest of your lifetime. This is where the anxiety phase seems to kick in:

  • Did I save enough?
  • Did I plan enough?
  • Do I have enough money to last the rest of my life?

We see clients that have less than $4.5 million for retirement and some with substantially more.

How Do You Start Withdrawing?

Based on the article, we know that the individual who wrote into MarketWatch understands the 4% rule. This rule is simple: if you withdraw 4% of your assets annually, you should maintain your assets throughout retirement.

Let’s say that you have $1 million in an account and take $40,000 out of the account annually. In a “predictable” market, this means you’ll replenish the money you take out each year.

We saw in 2022 that the market fell 20% – 30%, depending on the index. In 2020, the market fell over 30% in just a few weeks.

Markets are not predictable. Every few years, we do see volatility and corrections.

While the 4% rule is slightly off and is more like 3.3%, meaning for every $1 million you have in retirement accounts, you can confidently take out $33,000. Rates of returns have gone down, and inflation has gone up.

The times when 7% – 10% gains were almost certain in the markets are, in our opinion, not in our future. You’ll have years of gains in this range or higher, but on average, the market fluctuates too much for it to be predictable.

Based on this information, you should speak to a financial professional and look at all the pieces of retirement and how they fit together.

The person who responded to the question mentioned something else that was important: sequence of returns risk.

What is Sequence of Returns Risk?

If you start your retirement in a down scenario, your return risk goes up. For example, if you wanted to retire in January 2022 and wanted to withdraw $5,000 a month for retirement, it was a bad time.

The markets went on a steady 12-month decline with no recovery phases in the middle.

A person may have had $1 million at the start of the year, but when the year experiences a downturn like 2022, the $5,000 you take out is turning into a higher percentage of your portfolio.

The portfolio stress becomes higher when you withdraw on a down asset.

If the first early years were down 10% or 20%, you could get into a very tricky situation where you might receive 7% returns a year now. However, those initial down years really hurt your chances of the account lasting through retirement.

For us, it makes more sense to consider where you’re withdrawing the money and think about withdrawing money from accounts with less risk.

You may even need to adjust the number of withdrawals you have during down years.

Gap Between the 55 and 59.5 and Funding Retirement

Since the person is retiring before 59.5, they do risk being penalized if they touch their retirement accounts before the age of 59.5. The person writing in understood this fact, but they will need to fund retirement for 4.5 years in some other way.

You can tap into your non-retirement accounts, and there are strategies to tap into a 401(k) at age 55.

The other thing to identify if you’re retiring early is:

  • How much do you need to spend every month? These are “needs”, including food, utilities, mortgage and so on.
  • How much do you want to spend every month? “Wants” include things like vacations, visiting grandkids and so on.

We also need to think about pensions and any income that may be coming in that is not tied to your retirement account. Since the person is 55, we’re not considering Social Security. Early retirement age means thinking about heightened health insurance costs of around 10 years until the person reaches age 65.

When retiring at 55, the person also has opportunities to understand where to withdraw money from to make their money last.

Between the age of 55 and 75, when the person needs to take required minimum distributions, they have 20 years where they can do some pretty cool stuff. For example, they can:

  • Convert pretax to tax-free accounts
  • Reduce taxes through conversions

If the person has all their money in a traditional 401(k), they can start converting these assets through Roth conversions over these years. The ability to grow assets tax-free is a beautiful concept.

We recommend the person spend time understanding where money is coming in, where money is going out, and when various milestones in retirement will be hit.

A person can begin taking Social Security early, at retirement age or at age 70. The additional income may help pad their income needs later in retirement.

Medicare also needs to be considered and is a massive topic because of IRMAA, or surcharges for making too much money in retirement. You may take out more money from one account, but you’ll be penalized in some way:

  • Tax bracket change
  • Taxable Social Security
  • Medicare surcharges

When it comes to a withdrawal strategy, we follow a bucket approach that follows a “why” scenario for spending by breaking your money into:

  • Cash
  • Safety
  • Growth

Bank money and emergency funds are cash. This money is easy to access and will not impact retirement. Safety buckets speak to the idea of the safety of return risks. If we have a safety bucket with low risk and make a return, it brings predictability to our plan.

Finally, the growth bucket is the long-term bucket that is in the stock market and will go through ups and downs. If we can avoid tapping into this bucket, it will be allowed to grow long-term and can circumvent volatility because you don’t need to take money out of the account during down periods.

You can tap into the growth bucket when you need it for things like a vacation. It is a liquid bucket but allowing it to grow over time makes sense for our clients.

We aim to create a withdrawal strategy that minimizes risks and allows you to live comfortably through retirement. Everyone’s retirement plays out differently because your needs are unique and will change over time.

Working with someone who lives and breathes retirement strategies can help you create a withdrawal plan that minimizes risks and tax burdens, and considers volatility in ways that “general” rules, like the 4% rule, do not.

Do you have questions about retirement and want to speak to a professional?

Click here to schedule a 15-minute call with us today to discuss your retirement concerns.

June 26, 2023 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for June 26, 2023

CLICK HERE TO WATCH THE UPDATE

This Week’s Podcast – What To Consider If Your Spouse Has Passed Away After Retirement.

Listen in to learn the importance of knowing how much you’re spending, where that money comes from, and what changes will happen after a spouse’s death. You will also learn the importance of getting an attorney to help you through the probate process if your deceased spouse didn’t have a will executor.

We explain how to approach cash flow, estate settlement, insurance, tax, and investment and assets issues…

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

This Week’s Blog – What To Consider If Your Spouse Has Passed Away.

Losing a spouse – or any loved one – is not something that people want to think about. However, we know from experience that our clients are not in the headspace to know exactly what to do if their spouse passes away.

Getting things in order today is going to be much easier than “figuring it out” in a worst-case scenario.

We’ve created a checklist….

CLICK HERE TO READ THE BLOG

What To Consider If Your Spouse Has Passed Away

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Losing a spouse – or any loved one – is not something that people want to think about. However, we know from experience that our clients are not in the headspace to know exactly what to do if their spouse passes away.

Getting things in order today is going to be much easier than “figuring it out” in a worst-case scenario.

We’ve created a checklist that we can send to you to go through that will make some decisions a little easier if your loved one passes away.

Do you want the checklist? Give our office a call at: (919) 787-8866.

Note: We do want to mention that we took the approach of a spouse passing on, but these are very similar steps that you would take with other loved ones, such as a parent.

We’re going to go through quite a bit of topics, but we’re going to start with: cash flow.

Things to Consider If Your Spouse Has Passed Away

Cash Flow

Cash flow really makes you look at where income is coming from and what you need to do now that your spouse has passed away. For example, you need to think through income sources, such as:

  • Pension
  • Rental properties
  • Social Security
  • Investment income

There is a lot to consider on these items, including:

Social Security

Often, we see cash flow issues with Social Security. You won’t receive both your own and your spouse’s Social Security, but you will receive the higher of the two. You may also be entitled to Survivor’s Benefits, but you can experience a drop in income on this end.

Required Minimum Distribution

Was the deceased spouse at the age of 73 (the age to take a required minimum distribution)?

In this case, you’ll need to take the required minimum distribution on behalf of your spouse if they didn’t take it before their passing.

Pension

If a pension was involved, was there a survivorship on the pension? Often, when you have a pension, there are multiple options. A single option is on the person’s life, but your spouse may have a survivorship benefit, too.

Normally, if a survivor benefit is available, your spouse will take a lower pension with the agreement that their benefits will pass on to their surviving spouse upon their demise. Survivorship benefits may be:

  • 100% of the benefit
  • 75% or 50% of the benefit
  • For a predetermined number of years

Inquire about the pension and what your entitlements would be as a survivor.

Rental Income

If rental income exists, you need to know if there’s a manager involved and how to take control of these properties.

Investment Income

Investment income may have been taken out to add to your cash flow, and this is a source of income that we’ll be discussing in more detail below.

Expenses

What expenses do you have each month? Where is the money coming from to cover these costs? You may need to adjust these expenses because losing a loved one is a major life-changing event.

Estate Settlement Issues

Many estate settlement issues exist and need to be thought through. First, did your spouse die with a will? If so, was there a living executor appointed? The executor will need to contact the attorney who wrote the estate plan or hire another attorney if the person is no longer practicing or alive.

An attorney will help you go through probate and make sure everything is done correctly.

If the only thing that is going to go through probate is a home that you own jointly, you really don’t need to worry much about this. Joint ownership makes it easy to transfer full ownership of the house to you.

Anyone reading this will want to make their surviving spouse’s or family’s lives easier by:

If you set beneficiaries, you can avoid probate.

Anyone who doesn’t have an executor listed for their assets will need to have one appointed to them to divide them properly.

What if you have more assets than you typically need?

If your spouse leaves you sizable assets, you can disclaim some of these assets to a child or grandchild. Why? These individuals may be in a lower tax bracket, so they’ll be taxed far less on the assets than you will be.

Retirement accounts that have ownership changes

Certain accounts will need an ownership change, which is something that you’ll need get done. For example, if you’re taking over your spouse’s 401(k) account, you’ll need to have the ownership of the account changed to your name.

Do you exceed estate tax guidelines?

Right now, as an individual, if you have $12.5 million from the estate, you’ll need to pay estate taxes. This figure is revised up to $25.8 million for a couple.

Possible unknown assets

If your spouse had credit card points or miles, you could have them changed over. Safety deposit boxes often can’t be opened until you’ve followed all probate rules, and don’t forget to search estate agencies and unclaimed property sites.

Update your estate plan

Normally, an estate plan ends up giving most or some of the assets to your spouse. You’ll need to review your plan and make changes now that your spouse is no longer living.

Digital asset considerations

Your spouse may have had digital assets, perhaps they owned digital currency, and this can be transferred to you.

Insurance

Insurance is the next big category to consider because you need to know if your spouse had life insurance. This type of insurance is a tax-free transfer and is one of the nicest forms of assets to receive. You need to know if your spouse had life insurance, and the amount of life insurance your spouse carried.

If your spouse was still working, they may have life insurance through their employer. This benefit often goes away if your spouse has retired. 

Veterans may have death or burial benefits.

Was the death accidental or work-related?

Often, benefits may be received or lawsuits filed if the death occurred on the job or was accidental.

Is there a minor involved?

If your spouse has a minor child or dependent, Survivor Benefits may kick in earlier for the minor.

You should take an inventory of all insurances that your spouse may have had because they can provide substantial financial relief.

Tax-related Issues

Taxation never seems to go away, and can potentially impact you in the following ways after the loss of a spouse.

Home

On your primary home, you can have up to $500,000 in capital gains. If you sell a home for $1 million, only $500,000 is hit with capital gains. However, if you’re single, the capital gains exemption falls to $250,000.

If you want to sell your home, you’ll want to be sure that you follow the rules.

Joint-owned Properties

If you had a joint-owned rental property, you’d receive a step-up in basis for the portion that your spouse owned. We have a nice flowchart that outlines this.

Did your spouse pay taxes on all their income for the year?

If not, you’ll need to make sure that these debts are satisfied.

Did you file taxes as married filing jointly?

You can continue to file like this in the year of your spouse’s death.

Do you have any dependent children?

If so, you might be able to qualify for widower’s tax filing status for up to two years after your spouse’s death.

Investment and Asset Issues

You may come into issues with investments and assets that were in your spouse’s name. It’s important to know:

  • Where were these accounts or assets held?
  • Did your spouse have 401(k) or IRA accounts? If so, were there any beneficiaries attached to them?

Spouses have options, which often allow you to combine your spouse’s retirement accounts with your own. 

If your spouse owned a business, you need to learn about buy sell agreements or buyout agreements that exist. There may be other assets, such as annuities, which may be transferred to your name.

Working with an accountant to help you through all these tedious tasks is recommended.

Final Things to Think About

While the list above is not exhaustive, it does provide you with a good starting point for your checklist of things consider now to have a better idea of what to do after your spouse’s death. A few additional things that you’ll want to think about are your spouse’s:

  • Email accounts
  • Social media accounts
  • Driver’s licenses

You’ll also want to notify the credit bureau that your spouse has passed away.

You don’t want someone to steal your spouse’s identity. It also makes sense to change their passwords on accounts that you do keep open.If you have any questions about the topics above or want to receive our full checklist, feel free to reach out to us at (919) 787-8866 or schedule a call with us.

June 20, 2023 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for June 20, 2023

CLICK HERE TO WATCH THE UPDATE

This Week’s Podcast – Mid-Year Tax Planning – Why So Important in Retirement?

It’s important to look at the previous year’s tax situation because some things, like Roth conversions and qualified charitable distributions, need to be done before the end of the year in order to be reported on your tax returns.

Listen in to learn the importance of coming up with a good tax withholding strategy to avoid tax liabilities and bills during tax season. You will also learn about the tax benefits of donor-advised funds and qualified charitable distributions.

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

This Week’s Blog – Mid-Year Tax Planning – Why So Important?

Why are we talking about tax planning in the middle of the year? Mid-year tax planning allows you to get everything in order before the end of the year to lower your tax obligation as much as possible.

In June of 2023, we’re doing a lot of work to get ready for our tax planning and strategy meetings we’ll be having later this year. A lot of prep work goes into these meetings because it’s one of the most intense that we’ll have all year.

CLICK HERE TO READ THE BLOG

Mid-Year Tax Planning – Why is it So Important?

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Why are we talking about tax planning in the middle of the year? Mid-year tax planning allows you to get everything in order before the end of the year to lower your tax obligation as much as possible.

Note: We are not giving specific advice. We’re talking in general terms and advise you to discuss your own tax planning with a professional who can recommend the best method to reduce your tax burden.

In our most recent podcast (listen to it here), we have two members of our team with us, Nick Hymanson, CFP® and Taylor Wolverton. 

In June of 2023, we’re doing a lot of work to get ready for our tax planning and strategy meetings we’ll be having later this year. A lot of prep work goes into these meetings because it’s one of the most intense that we’ll have all year.

Why Do We Do Tax Planning and Tax Strategy Before the Beginning of the Year?

First, we want to review your tax situation from last year so we can understand potential moves we can make before the end of this year.

For example, Roth conversions or qualified charitable distributions (QCDs) need to be made before the end of the year to be reported on your tax return. Changes to your contributions or account conversions must be completed before December 31st of the year to be claimed on your taxes.

Mid-year tax planning helps us get everything in order to have a discussion with our clients on which strategies we can employ to lower your tax burden.

How Financial Planning Ties into Tax Planning

Financial, tax, and retirement planning are all linked together, or they should be if they’re done professionally. We have clients who first retire and live on cash in the bank, and then they start taking money from an IRA or a required minimum distribution.

In our process, at the beginning of the year, we have a financial planning meeting to update where their income is coming in this year, and we review what happened in 2022 (or the year prior).

From an income perspective, we want to understand where your income came from last year. We want to understand any unique changes that may have transpired this year and your income last year.

During the year, you may have income coming in from multiple sources, and it’s crucial that you have a good tax withholding strategy in place.

Proper tax withholding will allow you to avoid any unexpected tax surprises the following year. Having conversations throughout the year allows us to position our clients to pay less taxes by making smart financial decisions.

For example, if you want to sell a highly appreciated stock, we may recommend holding off until the beginning of the coming year because there are tax advantages.

We perform a full software analysis of our clients’ past year taxes to look for:

  • Filing status
  • Social Security number accuracy
  • Sources of income (interest, dividends, etc)
  • Withholdings 

We look through all these figures with our clients to help you better understand the tax obligations of each form of income. If you want to adjust your withholdings or make income changes, we’ll walk you through this process.

For example, you may not want a refund at the end of the year and want to withhold just enough taxes to be tax-neutral. You won’t pay or receive anything at the end of the year from the IRS.

With a mid-year tax plan, we have a better understanding of the steps that must be taken to reach your goals in the coming year.

Things to Do Before December 31st

Retirees must do a few things before the end of the year by law. Here’s what you need to know:

Donor-advised Funds

Sometimes we learn from a tax return or through a conversation with our clients that they give $10,000 to charity per year. Can you itemize? Sure, but the standard deduction is so high that it often doesn’t make sense to do this.

What’s the Standard Deduction

For your reference, the standard deduction in 2023 is:

  • Single: $13,850
  • Married filing jointly: $27,700 (65+ goes up by $1,500 per spouse)

Itemization won’t make sense if you have less than the standard deduction amount in contributions.

If you do a donor-advised fund, you can stack charitable contributions and use the multi-year contributions as a deduction this year.

Let’s assume that you put $40,000 into a donor-advised fund. You can still make $10,000 contributions to your favorite charity, but you can then take a $40,000 deduction this year to negate your tax burden. Itemizing is the best course of action if you have more deductions than the current standard deduction amount.

We may recommend this strategy if you expect a very high tax burden and want to lower your tax obligation.

Opening a Donor-advised Fund

We use Charles Schwab for our funds, but you can use a custodian of your choosing. A donor-advised fund looks just like any other account held at Charles Schwab, except for a few differences. Checks are written directly to a Schwab charitable account and funds are held directly in this charitable account. You can assign contributions to charities of your choice.

Funds remain in the account and can be withdrawn and moved to the charities in the future. Once you put money into the fund, you cannot reclaim it in the future. You can decide annually on who you want to distribute contributions to.

However, it is very important that Charles Schwab has information on the charity that you want to disperse the money to and that everything is in order for the distribution to be made problem-free.

Qualified Charitable Distribution

Qualified charitable distributions (QCDs) are another tactic that you can use if you’re over the age of 70-and-a-half. Age requirements and the time of your distribution are crucial and one of the reasons that people often work with a financial planner.

We can make sure that you’re making the QCD properly and get all the tax benefits that go along with it.

Note. If you have a required minimum distribution (RMD), you can set up the QCD to be taken directly from this. A key benefit is that if the RMD never hits your bank account, you don’t have to pay taxes on it.

Making Out Your QCD Check

In terms of Charles Schwab, we want to make sure that the QCD check is made out directly to the charity and not the account owner. If the check is written to the tax owner, it is considered taxable income.

We need a few things when writing out the QCD check:

  • Name of charity
  • Charity’s tax ID
  • Charity address
  • QCD amount

One important thing to note is that there’s an option to send the check directly to the charity or to the account owner, who can then hand-deliver the check to the charity.

The most important thing is to have the check written to the charity itself with the tax ID.

What You Need to Gather for a Tax Planning Strategy Meeting

Whether you work with us or someone else on a tax planning strategy meeting, you’ll need a few documents to get started:

  • Last year’s tax returns
  • Income for the coming year
  • Changes to income in this year
  • Change to cost of living on Social Security

We really need to know your sources of income and if any changes to this income have occurred in the last year. Cost of living adjustments are a big one and will impact your taxes, but all of this is information necessary for a tax planning strategy meeting.

IRMAA is another thing that we want to consider, and we have a great guide on the topic, which you can read here: IRMAA Medicare Surcharges.

Medicare looks back two years to determine your surcharges, which is something we can plan for with enough time and a strategy in place. We want to manage your Medicare surcharges so that you don’t need to pay more than necessary for your Medicare.

Tax strategy can help you better prepare for your taxes and make strategic moves that will save you a lot of money in the future.

We have a team of people working with us to handle all these moving parts and walk our clients through the process.

Want to learn more about retirement planning?

Click here to view our latest book titled: Secure Your Retirement.