September 3, 2024 Weekly Update

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 September 3, 2024

Navigating Your Social Security Retirement Benefits

Radon and Murs discuss the intricacies of Social Security retirement benefits and answer some of the most commonly asked questions. They break down key topics such as when and how to apply for Social Security benefits, understanding the taxation implications, and how to maximize your benefits.  

Navigating Your Social Security Retirement Benefits

When it comes to planning for retirement, few topics generate as much curiosity and concern as Social Security. After all, Social Security benefits can form a significant part of your income in retirement. Many people find the rules surrounding Social Security confusing and even intimidating. Questions like “When should I apply for Social Security benefits?” “How does Social Security work?” and “What happens if I make a mistake?” are common concerns.

Social Security Retirement Benefits

When it comes to planning for retirement, few topics generate as much curiosity and concern as Social Security. After all, Social Security benefits can form a significant part of your income in retirement. Many people find the rules surrounding Social Security confusing and even intimidating. Questions like “When should I apply for Social Security benefits?” “How does Social Security work?” and “What happens if I make a mistake?” are common concerns. In this guide, we will explore the ins and outs of Social Security retirement benefits to help you maximize your payout and avoid costly mistakes.

One of the most critical decisions you’ll make as you approach retirement is determining when to start drawing your Social Security benefits. Timing your application correctly can mean the difference between a comfortable retirement and having to make unnecessary sacrifices. This blog will walk you through everything you need to know—from the optimal time to apply for Social Security benefits to how your benefits might be taxed, reduced, or even withdrawn. Whether you’re considering early retirement or planning to wait until age 70, understanding these nuances will empower you to make the best decision for your future.

Common Questions About Social Security Retirement Benefits

When it comes to Social Security, there are several commonly asked questions that can affect your retirement strategy significantly. These include:

  • When and How to Apply for Social Security Benefits: Knowing the right time to apply for Social Security can maximize your benefits. The application window opens four months before your desired start date, which can be as early as age 62. However, the longer you wait—up to age 70—the higher your monthly benefit will be. It’s generally advisable to start the application process three to four months before your chosen start date, especially since the Social Security Administration (SSA) can experience backlogs. The smoothest way to apply is online at the SSA website, which offers various tools to help you calculate your benefits based on different starting ages. Alternatively, you can apply over the phone or in person at your local Social Security office, though these methods may take longer and could require waiting for an appointment.
  • Understanding Maximum Social Security Retirement Benefits: Your Social Security benefits are based on your highest 35 years of earnings, with a cap on how much you can earn each year that contributes to Social Security taxes. For example, in 2024, someone who has consistently earned at or above the maximum taxable amount (around $160,000-$170,000 annually) could receive up to $2,710 per month if they start benefits at age 62, $3,822 at full retirement age (67), or $4,873 if they delay benefits until age 70.

Full Retirement Age and Its Impact

Your full retirement age (FRA) is the age at which you are eligible to receive 100% of your Social Security benefits. FRA used to be 65, but it has gradually increased to 67 for those born in 1960 or later, reflecting longer life expectancies. Deciding when to apply for Social Security benefits can be influenced by your need for income, health, and whether you plan to continue working. It’s important to note that if you claim Social Security benefits before your FRA and continue to work, your benefits could be reduced if your earnings exceed certain limits. However, once you reach your FRA, you can earn any amount without affecting your Social Security benefits.

IRA Withdrawals and Their Impact on Social Security Benefits

One common concern is how withdrawals from IRAs or other retirement accounts might affect Social Security benefits. While earned income (such as wages or self-employment income) can reduce your Social Security payments if you start benefits before FRA, withdrawals from IRAs, pensions, annuities, or rental income do not count against your Social Security benefits. However, it’s essential to understand how these withdrawals might affect the taxation of your Social Security benefits. Depending on your overall income, including withdrawals from retirement accounts, up to 85% of your Social Security benefits could be subject to federal income tax.

Withdrawing Your Social Security Claim

What happens if you decide to start receiving Social Security benefits and then change your mind? Perhaps you took benefits early because you were out of work, but now you’ve found a new job, or maybe your financial advisor has recommended a different strategy. The SSA does allow you to withdraw your Social Security claim, but there are conditions. You must withdraw your claim within 12 months of your initial application, and you must repay all the benefits you and your family received. This can be a complex and time-consuming process, so it’s critical to be sure about your decision when you first apply.

Protecting Yourself Against Social Security Scams

Unfortunately, Social Security scams are on the rise. These scams can come in many forms, including phone calls, emails, and even text messages, where scammers impersonate SSA officials. They may threaten legal action, claim your Social Security number has been suspended, or demand immediate payment. Remember, the SSA will never threaten you or ask for personal information or payment over the phone or email. If you receive a suspicious call or message, it’s best to hang up and contact the SSA directly through their official channels. Never give out personal information unless you are sure you are dealing with the SSA.

Tax Considerations for Social Security Benefits

Many people are surprised to learn that Social Security benefits may be taxable, depending on their income level. The IRS considers “provisional income” when determining the taxation of Social Security benefits. Provisional income includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits. If you are single and your provisional income is between $25,000 and $34,000, up to 50% of your benefits may be taxable. For married couples filing jointly, this range is $32,000 to $44,000. If your income exceeds these amounts, up to 85% of your benefits could be subject to tax. It’s crucial to factor this into your retirement planning to avoid any unexpected tax bills.

Maximizing Your Social Security Benefits

To maximize your Social Security benefits, it’s vital to understand how your earnings history, age, and life expectancy impact your payments. Delaying benefits until age 70 will result in the highest monthly payout, but this strategy may not be suitable for everyone. Health considerations, the need for immediate income, and other personal circumstances must be weighed against the potential financial gains of delaying benefits. Additionally, coordinating benefits with a spouse can add another layer of strategy. For example, one spouse might claim early while the other delays, providing a balance between immediate income and future growth.

Preparing for Social Security in Your Financial Plan

Incorporating Social Security into your retirement plan is more than just knowing when to apply. It’s about understanding how it fits into your overall financial picture, including how it interacts with other income sources, impacts your tax situation, and supports your retirement goals. Consulting with a financial advisor can provide personalized guidance, especially when dealing with the complexities of Social Security and retirement planning. They can help you navigate decisions around the timing of benefits, tax implications, and potential withdrawal strategies.

Conclusion

The complexities of Social Security retirement benefits can be daunting, but with careful planning and a clear understanding of the rules, you can make informed decisions that best suit your needs. Remember, there are no one-size-fits-all answers. The best approach is to consider your personal financial situation, health, and retirement goals.

Have some questions about this blog? We offer a complimentary phone call that you can schedule with us on our website. If we can’t answer all your questions in just 15 minutes, we’ll guide you to the next steps to find the answers you need. Schedule your complimentary call with us to learn more about Social Security Retirement Benefits in Retirement.

July 15, 2024 Weekly Update

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 15, 2024

Social Security at 62 vs 67 in Retirement

Radon and Murs discuss whether to take Social Security at age 62 or wait until the full retirement age of 67. This is one of the most frequent and challenging questions they encounter from clients. They emphasize that the decision involves multiple factors and cannot be answered by simply searching online. Through a detailed example featuring their colleague Taylor, they explore the considerations that influence this significant choice.

 

Social Security at 62 vs 67 in Retirement

Retirement planning is a multifaceted and often complex process, especially when it comes to deciding the right age to start drawing Social Security benefits. This blog aims to dissect the pros and cons of taking Social Security at 62 versus waiting until 67, using insights from a detailed financial planning podcast discussion.

Social Security at 62 vs 67: A Comprehensive Guide

Retirement planning is a multifaceted and often complex process, especially when it comes to deciding the right age to start drawing Social Security benefits. This blog aims to dissect the pros and cons of taking Social Security at 62 versus waiting until 67, using insights from a detailed financial planning podcast discussion.

Introduction to the Decision

Retirement is a significant milestone, and deciding when to start drawing Social Security benefits is a critical part of that journey. Social security benefits can begin as early as age 62 or as late as age 70. The later the begin date, the higher the benefit amount. For that reason, the choice of when to begin benefits is a common dilemma faced by many. Each option has its own set of advantages and potential drawbacks, and the best choice depends on individual circumstances, financial goals, and life expectancy.

The Scenario

Let’s consider a scenario where a couple, Jim and Jane, are both 61 years old and planning to retire at 62. They each earn $150,000 per year, have prioritized saving for retirement, and as such, have managed to accumulate substantial assets in their retirement accounts. Their primary question is whether to start taking Social Security benefits at 62 or to live off their savings and wait until their full retirement age of 67.

Understanding Social Security Benefits

Social Security benefits are calculated based on your highest 35 years of earnings. The Social Security Administration (SSA) provides an online tool where individuals can view their estimated benefits at different retirement ages. For Jim and Jane, their estimated benefits at full retirement age (67) are $3,800 per month each.

Financial Considerations

  1. Income Needs and Expenses: Jim and Jane’s current monthly expenses are $8,000, which includes living expenses, travel, and leisure activities. Their home is paid off, simplifying their financial needs somewhat.
  2. Retirement Savings: Both have IRAs worth $750,000 each, making a total of $1.5 million in retirement savings. They are also contributing the maximum allowable amount to their 401(k) plans.
  3. Social Security at 62 vs 67: If they start taking Social Security at 62, their benefits will be reduced by approximately 30%, resulting in around $2,660 per month each.

Analysis of Different Scenarios

Taking Social Security at 62

  • Immediate Income: Starting benefits at 62 provides immediate income, reducing the need to draw down their retirement savings.
  • Reduced Benefits: The benefits are reduced by 30%, impacting the total amount received over their lifetimes.
  • Impact on Assets: By starting benefits early, Jim and Jane can preserve more of their retirement savings. However, the lower monthly benefits could result in less overall income if they live a long life.

Waiting Until 67

  • Higher Monthly Benefits: Waiting until 67 increases their benefits to $3,800 per month each, providing a more substantial income.
  • Drawdown of Assets: They will need to rely on their savings to cover expenses from 62 to 67. This could significantly deplete their retirement accounts.
  • Long-Term Impact: Higher benefits from 67 onward can provide more financial security in later years, but this assumes they live long enough to benefit from the increased payments.

Detailed Financial Projections

Using financial planning software, we can project the impact of each option on Jim and Jane’s retirement assets:

  1. Retiring at 62 and Taking Benefits at 62:
    • Initial drawdown from savings to supplement reduced Social Security benefits.
    • By age 90, their projected net worth is $3.1 million, assuming no major unforeseen expenses or market downturns.
  2. Retiring at 62 and Waiting Until 67:
    • Larger drawdown from savings to cover expenses until 67.
    • By age 90, their projected net worth is $2.9 million, slightly less than if they had taken benefits at 62.
  3. Waiting Until 70:
    • This option maximizes Social Security benefits but requires substantial drawdown from savings until benefits start.
    • By age 90, their projected net worth is $2.8 million, the lowest among the three options.

Holistic Approach to Decision Making

When deciding on the optimal age to start taking Social Security benefits, it is crucial to consider several factors:

  1. Life Expectancy: If there is a family history of longevity, it might make sense to delay benefits to maximize lifetime income.
  2. Current Health Status: Poor health might favor taking benefits earlier to ensure some benefits are received.
  3. Retirement Lifestyle: Desired lifestyle and spending patterns during retirement play a significant role in this decision.
  4. Tax Implications: Social Security benefits are taxable, and the timing of withdrawals can impact overall tax liability.
  5. Other Income Sources: Availability of other income sources, such as pensions or rental income, can influence the decision.

Conclusion

The choice between taking Social Security at 62 versus waiting until 67 is not a one-size-fits-all decision. For Jim and Jane, starting benefits at 62 appears to be slightly more advantageous in terms of preserving their retirement assets. However, this decision is highly individualistic and should be made based on a comprehensive analysis of personal financial situations, health, and retirement goals.

Financial planning tools and consultations with financial advisors can provide valuable insights and help make an informed decision. Ultimately, the goal is to ensure a comfortable and secure retirement, with Social Security benefits complementing overall financial plans effectively.

For personalized advice and detailed financial planning, consider consulting with a retirement planning expert. Understanding the nuances of Social Security and integrating it into a broader financial plan can significantly impact the quality and security of your retirement years.

By considering the various factors and projections discussed, you can make a more informed decision about when to start taking your Social Security benefits. This comprehensive analysis should help you weigh the pros and cons and choose the best path for your unique situation.

If you want to understand all this a little better, we offer a complimentary phone call that you can schedule with us on our website. If we can’t answer all your questions in just 15 minutes, we’ll guide you to the next steps to find the answers you need.

Schedule your complimentary call with us and to learn more about holistic wealth management.

March 25, 2024 Weekly Update

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 March 25, 2024

Navigating Tax Withholding – A Guide for Retirees

In this Episode of the Secure Your Retirement Podcast, Radon, Murs, and Taylor discuss navigating tax withholding for retirees. When you retire, you have various sources of income, and you can choose to either withhold the tax on them, make estimated tax payments throughout the year, or do a combination of both.

 

Navigating Tax Withholding – A Guide for Retirees

While you’re working and earning a salary, your employer handles tax withholdings. When you retire and transition to multiple sources of income, it’s worth reviewing your tax situation to be sure you’re withholding enough to avoid any surprise payments and/or penalties due at the time you file your return.

Navigating Tax Withholding – A Guide for Retirees

Taylor Wolverton joined us on our podcast this week, and for those who don’t know, she’s our go-to person for everything taxes. This week we’re discussing tax withholding, which can change considerably when you retire.

While you’re working and earning a salary, your employer handles tax withholdings. When you retire and transition to multiple sources of income, it’s worth reviewing your tax situation to be sure you’re withholding enough to avoid any surprise payments and/or penalties due at the time you file your return.

What is Withholding vs Estimated Tax Payment?

There are two main ways to pay taxes (you can do a combination of both) which include:

  1. Withholding from income sources
  2. Making estimated tax payments

For our first method, taxes can be withheld from pensions, social security, IRA distributions, etc. Once you have your withholdings set up properly, this option requires the least amount of effort to maintain.

Estimated tax payments are another option and are due quarterly. At the time your tax return is filed, it’s common for your CPA / tax preparer to help you estimate how much you’ll need to pay every quarter with vouchers listing the amount to pay and when you need to pay it. You can go to IRS.gov and your state government website to make your quarterly payments.

The payment due dates are not even quarters and are:

  1. April 15th (for tax due on income received January 1 – March 31)
  2. June 15th (for tax due on income received April 1 – May 31)
  3. September 15th (for tax due on income received June 1 – August 31)
  4. January 15th (for tax due on income received September 1 – December 31)

The IRS requires taxpayers to ‘pay as you go.’ For example, if you sell highly appreciated stock before the end of March, the IRS requires that you make an estimated tax payment for the tax due on that sale of stock by April 15th of the same year. If you sold the stock during the month of November, your estimated tax payment would be due by January 15th of the following year. The potential consequence of not making estimated tax payments on time is underpayment penalties from the IRS which will be determined and reported on your tax return once it has been filed.

What You Need to Think About: Social Security

Social Security is something we review with our clients annually. You might receive your benefits immediately and your spouse years from now, so there may be a transition period for some families to consider.

The default withholding amount on Social Security is 0%. If you don’t make an election to have federal taxes withheld from social security, you may need to pay quarterly taxes on the income. We have an entire episode on taxation of social security benefits (listen to the podcast or read the blog post) if you’re interested.

Most benefits will be taxable on the federal level, but each state varies on whether they will tax social security benefits or not. The state of North Carolina does not tax social security.

If you want to withhold taxes from your Social Security, you can Google “form W-4V” or go to the IRS site (here). It’s an easy form to fill out and will allow you to start withholding taxes, with options for:

  • 7%
  • 10%
  • 12%
  • 22%

Once you fill out the form and submit it to the social security administration office, taxes will automatically be withheld. If you want to stop withholding taxes, you’ll fill out the same form again but ask for the withholding to stop.

It is not possible to withhold state tax on social security.

What You Need to Think About: Pension Income

Not everyone will have a pension, but if you do and want to begin withholding taxes from your pension, you’ll need to fill out Form W-4P. You’ll often receive the form from where your pension is coming from, such as the government or a union, but you can also find it publicly available online.

Unfortunately, the form is not as straightforward as the social security withholding form, and it’s more of a guide to approximate withholding taxes.

We recommend using the IRS Tax Withholding Estimator, which will help you fill out the form.

What You Need to Think About: IRA Distributions

An IRA is an interesting form of income because you contribute to your IRA for so long, and then in retirement, may begin withdrawals to cover expenses, and/or be forced to withdraw through required minimum distributions (RMD).

Clients turning 73 begin RMDs for the first time and will owe federal and state tax on those distributions. The amount of the RMD, the associated tax liability, and appropriate rate for withholding is a conversation we often have with clients.

If you’re starting recurring monthly distributions from an annuity, the most common default federal tax withholding is 10%. You can fill out Form W-4R to withhold an amount other than 10% or not withhold taxes at all.

What You Need to Think About: Income Not Eligible for Withholding

Some forms of income are not eligible for withholding. Some of these sources of income include interest (from a money market account, CD, checking account, and/or savings accounts) dividends, capital gains, sale of property, rental income, self-employment income, royalties, alimony, etc.

For a one-off income event such as the sale of property or sale of highly appreciated stock, you may consider making a one-time estimated tax payment.

However, if you have income not subject to withholding that recurs more regularly such as self-employment or rental income, you want to consider paying quarterly taxes before each due date during the year.

To review your situation in-depth and determine whether any adjustments to withholdings are needed, you will need to review all sources of income, determine the annual dollar amounts expected to be received, and review all current tax withholdings.

Every client’s goal is different. You may want a refund every year, or you might prefer to make a payment at the time your tax return is filed.

Your financial professional can help you set this up properly to align with your goals.

If you’re unsure about taxes in retirement, just reached retirement, or want to adjust your withholdings so that you’re not hit with a surprise tax bill, feel free to give us a call and we’ll be more than happy to help you through this process.

Schedule a call to speak with Taylor Wolverton.

October 9, 2023 Weekly Update

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 October 9, 2023

This Week’s Podcast – Social Security Taxation – How it Works in Retirement

Learn the importance of understanding your sources of income, social security benefits, and how they’ll be taxed, and have a long-term perspective. You will also learn why some people with low income in other areas can have their social security untaxed.

 

This Week’s Blog – Social Security Taxation – How it Works

Social Security taxation is complex. You may need to pay taxes on your benefits, or you may not have to pay taxes. Ultimately, your combined income will determine if you pay taxes and will include the sum of….https://pomwealth.net/social-security-taxation-how-it-works/

Social Security Taxation – How it Works

Social Security taxation is complex. You may need to pay taxes on your benefits, or you may not have to pay taxes. Ultimately, your combined income will determine if you pay taxes and will include the sum of:

  • Adjusted gross income
  • Non-taxable interest
  • Half of your Social Security benefits

Often, clients of ours are taken aback because they paid into Social Security their entire lives, and then they find out that they may be taxed on their benefits. For many of our clients, the benefits that they receive are not enough to live the lifestyle they want in retirement, so they’ll need other sources of income, such as distributions from their IRA.

We brought Taylor Wolverton, a member of our team, to our podcast to discuss how your Social Security is taxed because there are a lot of moving parts to consider. Taylor is our lead tax strategist and an Enrolled Agent, so she’s hyper-focused on individual taxation.

P.S. We are going to go through a lot of numbers, so take your time and reread this post a few times. However, if you do have questions about your specific situation, feel free to schedule a free 15-minute call with us.

Breaking Down the Figures

We have three main factors in determining how much of your benefits are taxable, but what do these really encompass?

What is Adjusted Gross Income?

Adjusted gross income (AGI) includes:

  • Interest from savings accounts
  • Dividends
  • IRA or other distributions

Your AGI includes any type of income that you’ll be taxed on in a given year.

What is Non-taxable Interest?

Your non-taxable interest comes from things like municipal bonds. Now, you must combine all this income plus half of your Social Security benefits. It’s a lot to consider.

Example of Taxation on Social Security

Someone has other sources of income of $75,000. Bob and Jane each receive $3,000 per month from Social Security ($6,000 total). Based on this example, there is:

  • $75,000 AGI
  • $0 tax-exempt interest
  • 50% of Social Security benefits, or $36,000 annually

Other sources of income are now $75,000 + $36,000 or $111,000. Now, it gets a little more complicated because of your tax filing status and the various thresholds that this may include.

Married Filing Jointly

If your income is between $32,000 and $40,000, up to 50% of your benefits may be taxable. However, if the couple’s income is more than $44,000, up to 85% of benefits will be taxable.

In the example above, the couple has $72,000 in Social Security benefits, so $61,200 will be reported on the couple’s tax return and will be taxable.

Going over these figures again, based on these calculations, the couple would have:

  • $75,000 AGI
  • $61,200 (85% of $72,000) from Social Security

Total taxable income is $136,200.

Note: For people who have income less than $32,000, you might not pay any taxes at all on your Social Security. However, taxation is on a sliding scale. At the most, 85% of your benefits are taxable.

Thresholds for Single, Head of Household, Qualifying Widow(er), or Married Filing Separately (and you did not live with your spouse during the year) 

A single person will have a different threshold for Social Security. You’ll be taxed up to 50% if you have income of $25,000 – $34,000. You may be taxed up to 85% if you have income of more than $34,000.

You’ll want to keep in mind that taxes are a bit more complicated than the examples above. We used approximations for these figures, but you’ll also need to consider credits, deductions, and special financial situations, which can lower your tax bill, too.

Variations Based on States

All the taxation above this point is based on the federal level. Every state has different rules that you must consider when retirement planning because some may follow federal rules, while others may not tax Social Security.

In North Carolina, where our office is located, there is no tax on Social Security, and this can be advantageous when trying to secure your retirement. 

How Social Security Taxation Impacts Retirement Planning

When looking at Social Security taxation, it’s important to know:

  • Sources of income
  • Taxes

Often, one of the largest expenses people have is the taxes that they need to pay in retirement. You’re not saving money for retirement any longer – you’re living off what you saved.

You need to understand how Social Security benefits will impact your taxes this coming year.

It’s possible to withhold taxes in some areas to lower the pending tax burden, but this is something that you need to consider well ahead of time. You never want to have a surprise when filing a tax return because you didn’t realize that Social Security is taxed.

Example of the Impact Social Security Had On One Client

One client of ours has the goal of leaving a tax-free legacy behind when she retires. She turned on Social Security, but she didn’t realize that she would be taxed on her benefits. 

What did she do?

  • Turned off Social Security
  • Paid it back
  • Leveraged Roth conversions for a few years
  • Turned benefits back on

She wants to leave a tax-free legacy behind, so it was crucial to make the most out of tax-free Roth conversions.

While she did have to pay back the benefits she received, she does benefit from higher Social Security benefits when she does decide to take them in the future.

Working with an advisor allows you to take the long-term approach to your Social Security and maybe avoid 85% of your benefits being taxable. A long-term perspective, based on your goals, needs to be considered.

Our goal is to limit the amount of taxation over a lifetime rather than a short period of time.

You may find that paying more taxes this year allows you to lower your burden over your lifetime. If you pay a bit more in taxes today but save 10% every year, it’s often in your favor to take the tax hit immediately.

Where to Learn How Much of Your Benefits Were Taxable

Pull out your most recent tax return and find your 1040 form. Often, this is the first page of your return. You’ll want to go to line 6a. This will show you how much of your benefits were for that year. If you look to the right to 6b, you’ll see how much of your benefits were taxable.

IRS officials do like to update income tax brackets and change percentages around for inflation. You’ll need to consult with us or a tax professional to learn the current year’s guidelines for income ranges and maximum taxation percentages.

The IRS does have an online calculator (here) where you can plug in data and learn how much of your benefits are taxable.

Do you want to talk to us about your tax situation?Schedule a free 15-minute call today.