April 1, 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 April 1, 2024

Sequence of Returns – How It Could Affect Your Retirement Plan

In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the impact of the sequence of returns on your retirement plan. The sequence of returns is the risk associated with how your money makes or loses money, and it can significantly impact your retirement plan.  

Sequence of Returns – How It Could Affect Your Retirement Plan

Sequence of returns is how long your money will last in retirement. If you’ve been reading our blog or a Secure Your Retirement podcast listener for any length of time, you know that we have a unique approach to how we set up assets to avoid the negative consequences of sequence of returns.

Sequence of Returns – How It Could Affect Your Retirement Plan

Sequence of returns is how long your money will last in retirement. If you’ve been reading our blog or a Secure Your Retirement podcast listener for any length of time, you know that we have a unique approach to how we set up assets to avoid the negative consequences of sequence of returns.

How Do We Approach Your Money Setup?

Our approach to discussing your money set up often starts with three main bucket types:

  1. Cash Bucket (ex: cash in the bank, easy to get to and emergency money).
  2. Income and safety bucket (provides income in retirement and is not impacted by stock market risks)
  3. Growth bucket (equities, stocks, bonds, structured notes and similar).

These three buckets are used to help visualize and plan for your retirement financial goals.

What is Sequence of Returns?

Keeping the buckets in mind, let’s take a closer look at “sequence of returns” and how it impacts your retirement planning.

Sequence of returns is a risk that we consider when building our retirement strategies.

In a nutshell, it asks the question: over the years, how much money will you make and lose?

If you put your returns into a chart by year, this is a sequence of return. You may:

  • Earn 10%
  • Earn 5%
  • Lose 4%
  • Earn 3%

Your withdrawal strategy will depend on these returns.

If you’re invested and working, you have time to recover from down years. If you have 10 –15+ years until retirement, you can recover from these down years.

But if you’re closer to retirement or in it, you don’t have the same luxury of time and income to spur recovery.

For example, imagine begin retirement in a bull market, where growth is high and the market is going strong. Growth years before having issues in the market is ideal.

Then, imagine going into retirement in 2022 with a bear market, when major indexes were down 20% – 30%.

The 12-month decline of 2022 still requires you to draw on your assets. So, if you have a down year and take $50,000 out of the account, it makes it all that much harder for you to grow your money again.

Note:

  • If you lose money, it takes longer to make it back
  • Withdrawals will make recovery harder because you’re not putting money back into the account

Remember, you’re not saving for retirement any longer. You rely on returns for income.

Using our bucket strategy, we help safeguard clients from the sequence of returns.

How?

If you experience a major drop in your investments, the income bucket can cover your bills and you don’t have to touch the growth bucket. Not touching the growth bucket is ideal because it allows you to recover from losses faster.

Once the growth bucket is growing nicely again, you can take money out of it and replenish the income bucket. Let’s take a look at how this strategy could help in different markets.

Scenarios of Sequence of Returns

We’re going to outline two scenarios for you where you have $100,000 in a growth bucket and need to withdraw $5,000 per year from it.

In this case, you’re withdrawing 5% of your bucket per year.

We’ll be looking at these two scenarios over a 15 year period:

  1. Upmarket return
  2. Down market return

In both scenarios, when you add up all the returns earned on the $100,000 and divide by 15, the average rate of return is 4.5%. The withdrawal for both scenarios will be $5,000 a year. Both sides have the exact same growth percentages.

Keeping that in mind, let’s walk through both scenarios.

Upmarket Return

In this scenario, the $100,000 has an 8% return, and you’re withdrawing $5,000 per year, so at year 15 you’re left with $103,000. Again, it earns:

  • +11%
  • +18%
  • +14%
  • +12%
  • +9%
  • +11%

And like markets do, some down numbers start to pile up at this point. You’re frontloaded with positive years and then hit with some down years.

Down Market Return

A down market return doesn’t have this 8% – 18% growth like the person entering retirement did with the up market. You enter with five years of negative returns of:

  • -5%
  • -6%
  • -15%
  • -8%
  • -4%

During the first five years, the returns are down. You’re not making any returns, but then you hit a growth spurt and have returns of:

  • +5%
  • +7%
  • +9%
  • +11%
  • +9%

In the second-half of this retirement outlook, you have some great returns. Since both scenarios have an average growth of 4.5%, you might assume that the accounts would be similar in the end.

What were the results for the two scenarios of the growth bucket account?

  • Upmarket Return Account: Started with $100,000, withdrawing $5,000 annually. At year 15, the ending balance is $105,944.
  • Down Market Return Account: Started with $100,000, withdrawing $5,000 annually. At year 15, the ending balance is $35,889.

As you can imagine, the down market account leaves the person with significantly less money in their accounts.

The key difference? Stock markets have positives and negatives. Unfortunately, the stock market doesn’t care when you retire.

Had the three-bucket strategy been used, the down market scenario could have reduced losses by withdrawing from the income bucket rather than the growth bucket.

Buckets provide us with predictability rather than the stress and anxiety that comes with sequence of returns.

If you want to talk and discuss your retirement plan further, we’re here to answer your questions and help you find peace of mind in retirement.

Click here to schedule a complimentary call with us.

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.

September 5, 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 September 5, 2023

This Week’s Podcast – Integrated Wealth Management Experience in Retirement

Learn more about the elements of an integrated wealth management experience: a retirement financial plan, specific-to-the-client investment process, and tax planning. You will also learn how we’re involved in every step of the wealth management process, in-house or with a partner.

 

This Week’s Blog – Integrated Wealth Management

Integrated wealth management experiences are our way to help clients have the type of retirement planning assistance that is provided in a “family office.” If you don’t know what this term means or who it applies to, we’re going to cover that in great detail before explaining the concept of integrated wealth management to you.

Integrated Wealth Management Experience

Integrated wealth management experiences are our way to help clients have the type of retirement planning assistance that is provided in a “family office.” If you don’t know what this term means or who it applies to, we’re going to cover that in great detail before explaining the concept of integrated wealth management to you.

Note: Click here to listen to the podcast that this article was based on using Spotify, Apple Podcasts, Google Podcasts and Amazon Music. 

What is a “Family Office?”

A “family office” caters to what can be considered ultra-high net worth. You have enough assets that you require an entire team to help manage your assets. These offices will help you with:

  • Family businesses
  • Taking care of budgets
  • Paying bills
  • Managing cash flow, credit cards, real estate

Individuals in a family office have assets of $50+ million. Anyone who falls into this category can be their “own client,” meaning that the entire team works for you to manage your wealth. Extensive assistance is offered, including tax and estate planning, to the degree that 99% of people will never require. You’ll also work with attorneys and CPAs.

All these employees work for you, they’re registered with the SEC, and they assist with managing your “family.” If a person has this high of a net worth, they may need to have a chief financial officer (CFO) who will handle hiring or working with certain experts to meet their family’s needs.

Often, with a family office, they have a CPA working with them full-time.

The family office works solely for the family and will handle all their financial and wealth management needs. If a lawyer needs to be hired to work on estate plans, that’s all handled for you behind the scenes.

Integrated Wealth Management Experience

In our office, our average client doesn’t have $100 – $200 million or a billion dollars. We can’t create a family office for these individuals, but we wanted to create a system that offered the same experience as a family office for all our clients.

What we devised is known as our integrated wealth management experience.

What Does an Integrated Wealth Management Experience Look Like?

Instead of working with one individual, we work with many and take on the role similar to a “CFO.” We look at the person’s entire financial picture and beyond to help you secure your retirement. We partner with multiple professionals on a range of services, in addition to in-house wealth management.

For simplicity, we’ll break this down into a few of our in-house and partnered services.

In-House Wealth Management

In-house, we specialize in wealth management. We are financial advisors, and fiduciaries- which means we’re required to put your best interests first. The majority of our clients are people close to or retirement, and we’re big on the retirement-focused financial plan.

In a few words, the retirement-focused financial plan:

  • Analyzes where you are today
  • Outlines retirement goals
  • Identifies changes that need to be made to reach your goals

Reaching your financial goals will often mean investing in some sort of return. We may invest in the market, bonds, annuities, or a wide range of other financial vehicles. We invest for a return that is comfortable for the client and is based on individual risk tolerance.

Next, we offer tax planning. Some of the tax planning is in-house and some of it is done by working with outside experts. We have checks and balances in place to understand:

  • What your taxes look like today
  • What strategies we can implement before the end of the year to lower the tax burden
  • What to do to save you money next year

We can also handle the tax return for you, and we have partnered with CPAs to lead this process. CPAs will also provide a stamp of approval for all the tax planning strategies that we prepare to ensure that everything moves along smoothly.

Our team helps clients understand where their income is coming from and ensures that their retirement-focused financial plan is operating to reach their goals.

Estate Planning

Estate planning is a crucial part of retirement planning that folks really struggle to talk and think about. However, we incorporate this planning into the experience because it provides you with peace of mind that your estate matters are all handled in a legal manner.

Without an up-to-date estate plan, it can be difficult for you to leave assets in your desired way for heirs and beneficiaries. If you’ve had a major life change since you’ve created or looked at your estate plan, it is a good idea to have your estate plan professionally reviewed and updated. 

For our clients, we have a system in place for the state they live in to create a:

  1. Trust
  2. Will
  3. Power of Attorney
  4. Healthcare Power of Attorney
  5. HIPAA form

We believe this aspect of your retirement-focused financial plan is urgent, and strongly encourage our clients to review and update these documents on a regular basis.

Social Security

We work with a Social Security consultant, so our clients have an expert look at avoiding mistakes when filing for Social Security. Some clients have an easy process for Social Security, and we can help them apply for their benefits. However, other clients do not have as easy of a time.

Our consultant is on retainer and will help consider:

  • Complex decisions
  • Divorce
  • Optimizing for certain forms of income
  • Survivorship

She assists us when running the numbers for Social Security to help you make the best decision on when to take your benefits and how to reach your financial goals.

Insurances

Insurance includes many different options, but one of the major ones is health insurance. When you retire, you’re responsible for your own health insurance, which will be Medicare.

Medicare can be overwhelming when it comes to options, plans, and thresholds. We work with our clients and partners to help them find the best Medicare options for their health scenario and budget. We may be able to structure things to avoid IRMAA surcharges on Medicare, too.

Additionally, we help clients during open enrollment to find plans that may be more affordable or a better overall option for them. 

Long-term Care Planning

Speaking of healthcare planning, we also dive into long-term care planning. Hopefully, you’ll never need this level of care, but you just never know what the future will hold for you. We recently had a podcast on long-term care planning.

We’ll analyze your long-term care options and even help you secure the insurance you need to pay for a nursing home or assisted living facility.

Life Insurance

We’ll work through the question of life insurance and how to structure it for you and your family. 

These are just some of the insurance options that we can use to help build our clients retirement-focused financial plan. As we’ve outlined, we do our best to mimic the “family office” so that it works in your best interests.

What Getting Started with Our Integrated Wealth Management Experience Looks Like

If you call us to discuss your options, we already have:

  • Ongoing, up-to-date research to aid in building plan for your goals
  • Multiple estate planning methods in place
  • Many in-house Insurance and Wealth Management strategy options

We’re involved the entire time, working to have all your questions answered. We will do the research with the estate planner or Social Security expert to have your questions answered.

Since we work with the outside experts, you bypass the extra step to make sure your financial, tax, and estate planning professionals are all on the same page when it comes to your retirement-focused financial plan. We’re very much involved with every aspect of your plan to help you make sound financial decisions.

Want to learn more about our Integrated Wealth Management Experience? Schedule a free call with us today.

June 20, 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 June 20, 2023

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.

 

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.

Mid-Year Tax Planning – Why is it 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.

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.

May 22, 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 May 22, 2023

This Week’s Podcast – Important Age Milestones in Retirement

Listen in to learn about the different financial milestones that happen in the life of a child from birth all the way to retirement. You will also learn when to work on your catch up contributions, the social security eligibility age, when to withdraw all your retirement assets and much more.

 

This Week’s Blog – Important Age Milestones

Important age milestones seem to come in waves, especially once you secure your retirement.  A lot of rules around financial planning and tax issues impact people at different ages, which everyone should know about when retirement planning.

Important Age Milestones

Important age milestones seem to come in waves, especially once you secure your retirement.  A lot of rules around financial planning and tax issues impact people at different ages, which everyone should know about when retirement planning.

Important Age Milestones for Parents or Grandparents

Some of the most important age milestones may or may not apply to you, so keep this in mind.

Age 0: Birth of a Child

If you have younger kids or grandkids, you can set up a 529 account for the child. These accounts are college savings accounts for the child. You can also set up a UTMA or UGMA account, which are types of custodial accounts that you can set up for minors.

Age 13: Child and Dependent Care Credit

At age 13, a child is no longer eligible for the child and dependent care credit.

Age 17: No Longer Eligible for a Child Tax Credit

When a child reaches age 17, the tax credit helps you deduct as much as $2,000 per child from your taxes if they’re a dependent.

Age 18: Age of Majority

Children reach the age of majority at age 18 in most states. The government now sees the child as an adult and the accounts you set up for them, such as the UTMA or UGMA, are now transferred to the “new adult.”

You’ll revoke your power over these accounts and need to go through the transfer process.

Age 21: Age of Majority

In some states, the age of majority is 21, and this is when all the custodial transfers for these accounts must take place.

Age 24: Full-Time Student Loses Kiddie Tax

A full-time student is no longer eligible for a “kiddie tax” at 24.

Age 26: Child No Longer Eligible for a Parent’s Health Insurance Coverage

When the adult child reaches age 26, they’re no longer eligible for their parent’s health insurance under the Affordable Care Act. We hear about this one a lot. Parents help get their kids through college, the child stays on the parent’s health insurance and then they’re shocked to learn that they’re no longer eligible to be on their parent’s plan.

Important Age Milestones for Retirement Planning

Age 50: Retirement Contribution Catch-ups

As young as age 50, there’s an important milestone that occurs. You can make “catch-up” contributions for your 401(k), 403(b) and 457 plans. In 2023, if you’re under 50, you can contribute $22,500 each year.

If you’re 50 or older you can add an additional $7,500 to the account, for a total of $30,000 per calendar year.

IRAs also have a catch-up contribution that you should consider.

Age 50: Social Security Benefits for Disabled Widows and Widowers

If you are a disabled widow or widower, you can file for Social Security benefits.

Age 55: HSA Catch-up Contribution

If you have a health savings account (HSA), you have catch-up contributions of an additional $1,000 on top of regular limits of $3,850 for a single person and $7,750 for a family.

Age 59 1/2: Reach the Age of Retirement Asset Withdrawal Without Penalties

In most cases, if you take money out of your retirement account before the age of 59 ½, you’ll be penalized for doing so. The early withdrawal penalty is 10%. Now that you’re 59 ½, you still pay taxes on many of these accounts, but you aren’t penalized for the withdrawals.

You also have the option, in most cases, to rollover from a 401(k) to an IRA. When you do a rollover, you now have the option to invest in stocks and ETFs. An IRA frees up the option of investing your retirement money in a way that is not possible with an employer retirement account. 

You can work with an advisor to help you with the retirement planning at this point.

Age 62: Social Security Eligibility at a Reduced Rate

You’ve paid into Social Security your entire life, and now you can begin taking from this account at a reduced rate. We are having major discussions with our clients on what to do at this critical age. In 2023, you have a limit of $21,240 in income.

If you make more than this amount, for every two dollars you make, one dollar in your Social Security is reduced. We don’t recommend that anyone making more than the $21,240 figure above take Social Security because of this reduction rule.

Age 65: Medicare Eligibility

You can receive Medicare at the age of 65, but you can apply for it at age 64 and 9 months. Now is the time to review plans and learn costs.

If you have an HSA that you’ve been funding, you can use your HSA for non-medical withdrawals because you’re eligible for Medicare. Before this age, any funds in your HSA are designated for medical and healthcare purposes.

Age 66 – 67: Full Retirement Age for Social Security

If you’re working and still bringing in income, you may want to wait until full retirement age to take Social Security. The income limit we mentioned at age 62 is now removed, allowing you to take your benefits while earning as much money as you can.

You can still work, receive good money, and still get 100% of your Social Security Benefits.

The full retirement age has changed a lot in the past decade or so, and the age for full retirement depends on the year you were born. The current ages are:

  • Born between 1943 and 1954: 66
  • Born in 1955: 66 and 2 months
  • Born in 1956: 66 and 4 months
  • Born in 1957: 66 and 6 months
  • Born in 1958: 66 and 8 months
  • Born in 1959: 66 and 10 months
  • Born in 1960 and beyond: 67

We believe that this age may be adjusted again in the future.

Age 70: Maximum Social Security Benefit

Deferring your Social Security until age 70 allows you to receive your maximum Social Security benefits. Your benefits will no longer increase after this age, even if you continue contributing to the system.

For 99.9% of people, this is the age when you want to take your benefits if you haven’t already.

Age 70 1/2: Charitable Contributions from Your Retirement Accounts

At the age of 70 and a half, you can begin taking contributions from your retirement accounts, such as your IRA, and then give them to charity using a qualified charitable distribution. If you use this method of charitable contributions, the key is that the money never hits your bank account.

The money goes from the retirement account directly to the charity, allowing you to avoid any taxes on it while also maximizing the amount you give to charity.

Age 73: Required Minimum Distributions (RMDs)

Age 73 is when you start taking your RMDs. This used to happen at age 70 and a half, but now you can wait until age 73 to take RMDs. You must begin taking RMDs at age 73 if you were born before 1960.

If you were born in or after 1960, the required age is 75.

For us, when it comes to retirement planning, these are some of the things that we like to discuss. A lot of milestones change and are easy to miss. If you would like to have a review of important milestones for you, be sure to reach out to us.Click here to talk to us about important age milestones.

Social Security Questions Answered

Social Security is such a key part of retirement planning, but people have a lot of questions that they never ask about. If you’re relying on Social Security to secure your retirement, you must know the answers to some key questions.

Don’t know what questions to ask?

We have you covered. We’ll be discussing the most important questions you should be asking about Social Security.

Top Social Security Questions and Answers

How Do I Find Out How Much My Social Security Benefits Will Be?

Determining your Social Security benefits was, at one time, much easier. Many people probably remember the time when paper statements were sent to you in the mail explaining just how much your benefits would be if you retired now or in the future.

However, the Social Security Administration wants to save money and encourage people to use its website. As a result, you won’t receive these paper statements in the mail anymore.

Instead, you’ll want to go to:

We can run estimates to determine your benefits, but the only 100% accurate solution to find out about your Social Security benefits is to go straight to the Social Security Administration.

You can view how much you’ll have in benefits if you retire now or in the future. Additionally, you can apply for benefits right on the platform if you like. You should sign up about three months before you plan to take your benefits just to be on the safe side.

Bonus Question: What about spousal benefits and Social Security?

Individuals have two options for Social Security:

  1. Their own benefit
  2. Their spouse’s benefit

Why would you want to take your spousal benefits? Typically, one spouse works more than the other spouse or earns more than their spouse and can take higher benefits. Ultimately, most people want to maximize their benefits, so they’ll only take their benefit if it’s the higher of the two amounts.

Let’s see a few examples of this:

  • One spouse goes to work, and the other raises the kids. If you’re married for 10 or more years, your spouse can take your spousal benefits.
  • Both spouses are the same age (just to make this easy), and they’re 67 years old.
  • The working spouse has $3,000 a month in Social Security benefits.
  • The non-working spouse, who didn’t get to work and earn credits, may have a $1,000 benefit.
  • You can take your $1,000 benefits, or you can take half of your spouse’s benefit.
  • So, based on this, the non-working spouse will want to take spousal benefits because they’re $1,500 a month versus their own $1,000 a month.
  • In total, the couple would have $4,500 a month in Social Security benefits.

However, if the working spouse is 67 and the non-working spouse is 65, the math is a little different. If the spouse who didn’t go to work applies at 65, they’re applying early and will have the benefit cut down to $1,350 or a figure around this amount.

What is the Youngest That You Can Take Social Security?

Barring any disability or any other issues, you can retire at 62. However, the earlier that you take your benefit, the lower your benefits will be. Benefit increases will end at 70, so there’s no reason to wait longer to take your benefits.

If you take in around $20,000 or more a year, you are penalized for taking your benefits before full retirement.

If you don’t understand your benefits or want advice on the best way to maximize your benefits, schedule a call with us today.

How is Social Security Taxed?

Many people get upset that they have to pay taxes on their Social Security. For many of our clients, it’s a sore spot and a major topic of discussion. However, under current law, you may have to pay taxes on your benefits.

Married and Filing Jointly

Unless you have less than $32,000 in income, you’ll have to pay taxes on your benefits. 

$32,000 and $44,000 in Income

If your adjusted gross income falls into this range, you’ll pay taxes on up to 50% of your Social Security. For example, if your benefits are $3,000 a month, you’ll pay taxes on $1,500.

$44,001 and Higher

If you earn over $44,000 in adjusted gross income, you’ll pay taxes on 85% of your benefits. 

Single Filers

If you’re single, you’ll pay taxes on 50% of your benefits if you earn $25,000 or more. And if you earn over $34,000, 85% of your benefits are taxable.

Unfortunately, you’ll be taxed on Social Security in most cases. We recommend working with a financial planner to help you determine when to take your benefits and how to minimize your tax burden through strategic tax planning.

When Should I Take Social Security?

If you go to Google, you’ll find most people saying to take Social Security at 70. You’ll maximize your benefits by waiting, yet every family and situation is different. When we work through a person’s retirement plan, we evaluate:

  • Income
  • Assets
  • Health
  • Expected lifespan

When income is not coming from Social Security, it often comes from assets or retirement accounts. The impact on your retirement may not be much, but if you want to leave as many assets as possible to the next generation, your choice may be different than someone who doesn’t mind leaving a little less to your estate.

There are so many factors to consider aside from maximizing your Social Security by waiting until 70 to start taking it.

For example, if you have more than enough assets or you may only live to 75, taking Social Security earlier may be in your best interest. You need to consider your choice carefully to make the right financial decision for you and your family.

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Social Security Strategies

Some of the most common questions we receive are related to social security strategies. A lot of people rely on social security to help secure their retirement because it is a source of income that can help you pay for your day-to-day expenses.

But it’s still a confusing topic when beginning with retirement planning because you’ll find a lot of different opinions.

If you’re wondering when you should take your retirement, grab a cup of coffee and continue reading.

When Should You Retire and Take Social Security?

One of the first questions we receive from clients is when to take social security. A lot of people try waiting until they’re 70 to retire so that they can receive the maximum benefits social security has to offer.

The problem is that this advice is based purely on the financial aspects of retirement and not your current situation.

You have a lot to consider, especially if you have a spouse, such as:

  • Age disparity between spouses
  • Health
  • Ability to work
  • Sources of income

For a lot of people, over 50% of their income in retirement is going to be social security, so it may make more sense to retire at 70 to maximize those benefits. The problem is that it’s not always that simple.

If one spouse is a lot younger and is still working and plans to continue working, retiring early may be the best option.

What to Think About If You Take Social Security Before Full Retirement

If you’re planning on taking social security before your full retirement, there is quite a bit to think about. You should be thinking about the following:

Is someone still working? 

If the person is still working, there is a limit to how much they can earn while on social security. For example, in 2021, if you make more than $18,960 during the year, the amount over the limit will result in 50% of the overage being deducted from social security.

This can be confusing to understand, but what it’s essentially saying is that:

  • You earn $28,960 ($10,000 over the limit),
  • $5,000 (50% of the overage) will be withheld

When trying to plan for income, it can be difficult because the withheld amount may mean a three-month gap between benefits being paid.

Spouse earnings will not impact you in this situation.

Is there an issue with permanent reduction?

Your benefits will be reduced permanently once you opt into social security early. It’s important to realize that when you hit full retirement age or 70, your benefits will not go up. Your choice to take social security is final.

Taxes

If a spouse is working and you’re taking social security, it’s important to consider taxation. You must plan for taxes because they will be a financial burden that is difficult to overcome. 

Restricted Application and the Potential Benefit It Offers

If you were born before January 1, 1954, you are eligible to use a restricted application. This is a strategy that allows you to file for spousal benefits first and restrict the application to the spousal benefits only.

What this means is that the person isn’t choosing to use their own social security benefits at this time, so they can effectively wait until they are 70 to maximize their benefits.

If you plan to wait until age 70 and meet the birth requirements, this can really be a beneficial option for you. It’s important to note that your spouse will need to already be on social security or plan to retire before your restricted application is filed.

Let’s take a look at an example:

  • One spouse is on social security that is $2,000 a month.
  • You file a restricted application and receive 50% of your spouse’s benefits, or $1,000.

You can continue taking the $1,000 while your own social security will continue to grow. And you can also, in some cases, claim six months of retroactive benefits.

How Spousal Benefits Work

While spousal benefits are 50%, it’s based on the primary person’s insurance amount. Let’s assume that the person is earning $3,000 on social security, this doesn’t mean that the spousal benefit will be $1,500.

The insurance amount may be $2,400, and the spouse would then receive $1,200.

If the dependent spouse, or the one taking spousal benefits, will also factor into how much the person receives. Why? The dependent spouse’s filing age will be the deciding factor in whether they receive the $1,200 or not.

For example, if the dependent filed at 60, the $1,200 may be reduced by 30%.

Reductions can be as high as 35%.

It’s very challenging when trying to secure your retirement because the social security office will not help you. Why? They’re prohibited from providing advice to you. You will need to work with someone who can help you navigate social security.

Note: You need to be married for 10+ years to receive these benefits.

What Happens If the Higher Earning Spouse Passes Away?

When one spouse passes on, the remaining spouse will receive 100% of the highest benefit amount between both spouses. You won’t be able to receive your benefits and survivor benefits.

Instead, let’s assume, using the scenario above, that the one spouse passes away and leaves the dependent spouse behind.

In this scenario, the dependent spouse can claim the $3,000 in benefits. 

But as with everything related to social security, the age at which you start collecting benefits will matter, too.

You will also receive the delayed retirement credits from the deceased spouse.

Note: You can also collect 50% of an ex-spousal benefit if you were to divorce rather than the one spouse passing on. If you remarry, the benefits will stop. But if the person dies and you don’t remarry until 60 or older, you can still take survivor benefits.

When to File for Social Security If You Know What Age You Want to File

You know what age you want to start taking your social security benefits, but now you need to know when to actually file. Filing should be done 3 to 4 months before you want to receive your first benefit check.

The easiest way to do filings is to use the online portal to apply.

When filing online, be sure to reiterate your plan in the remarks section to ensure that errors do not occur. This is especially important when filing for a restricted application to avoid any processing errors on the side of the Social Security Administration.

There’s a lot to think about figuring out social security strategies for your situation. Sit down with someone and really discuss your options because you may be missing out on key benefits that you can claim.Have you heard our latest podcasts? If not, we encourage you to join our podcast today for access to more than 90+ financial and retirement-related talks.

When Is the Right Time to Take Social Security?

If you’re getting ready for retirement, one of the most important questions you’ll want answering is: when should I take Social Security?

This is the most frequently asked question by all of our pre-retiree clients. There’s lots of information out there that dives into when the right time to take Social Security is, and, usually, people already have an idea of when might suit them. However, what this information fails to take into account is your own personal situation.

In this post, we illustrate the long-term impact taking Social Security at different times can have on your assets. So, if you’re considering taking it early, at full retirement age (FRA), or waiting until you’re 70, it’s important to know the long-term effects it can have.

You can watch the video on this topic above. To listen to the podcast episode, hit play below, or read on for more…

When can you take Social Security?

The earliest age you can take Social Security from is 62. The latest is age 70. That’s an eight-year window where you can choose to start taking Social Security.

Each year that you wait, the amount of Social Security you’ll get increases. So, if you take it earlier, you’ll receive less, but if you wait until the upper age limit, you’ll get the maximum amount possible. This is why a lot of the information says you should wait and take your Social Security as late as you can. However, we don’t believe this is the best option for everyone.

Many people choose to take Social Security at full retirement age. The IRS and Social Security define when this is, and currently, it’s contingent on the year you were born, making you either 66 or 67 at full retirement age.

Now, if you reach full retirement age and decide not to take Social Security right away, that’s going to draw on your assets. Those who retire at 66, and wait to take Social Security when they’ll get the most bang for their buck, have to face 4 years of withdrawals on their assets first. In this case, you have to live for a long time to truly reap the benefits!

Our approach to taking Social Security is to evaluate what works best for your individual retirement plan. Perhaps waiting until you’re 70 doesn’t make sense for you. In which case, taking it earlier could preserve your assets in the long run.

On the other hand, if you take Social Security after age 62 but before full retirement age, you need to be aware of some limitations.

Social Security penalties

If you’re still working between age 62 and full retirement age and choose to take Social Security, there’s a limit to the amount you can earn, otherwise, you will face a penalty.

In 2021, the maximum that a person age 62 can make and still take Social Security penalty-free is $18,960 a year. If you earn less than this, your Social Security will not be penalized. But what if you earn more?

As an example, say you’re planning on consulting and making $35,000-$40,000 a year at age 62. The math quickly tells us it does not make sense for you to take Social Security yet. If your Social Security benefit is $10,000 a year and you earn $10,000 more than the $18,960 limit, you’ll be penalized 50% of your Social Security. That means you’ll lose $1 for every $2 you earn over that limit. Now, instead of receiving $10,000 a year in Social Security, you’ll only get $5,000.

So, if you’re earning above this limit, then it’s highly unlikely that taking Social Security makes financial sense for you. To avoid these penalties, be clear with your financial advisor about how much you’re expecting to make at age 62. If you want to work part-time, or in a low-paid position, it could still be possible to take Social Security penalty-free. But you need to be aware of the numbers.

But what if you’re not planning on working at age 62? If you’re hoping to retire at this age, is taking Social Security a good option for you?

When is the right time to take Social Security?

We’re going to use a fictional person to demonstrate the differences between taking Social Security at various ages. In three example scenarios, we have Mary. She is 60 and planning to retire at age 62. We’re going to use our system to work out when would be the best age for Mary to start taking Social Security.

Before we dive into this example, it’s important to note that Social Security typically rises every year with a cost-of-living adjustment. To keep this example as straightforward as possible, the Social Security amount will not include any increases.

At age 60, Mary has an IRA with $1.2 million in retirement savings, that’s making a rate of return of around 6%. With two more years of work ahead of her, and the interest rates’ growth, Mary can expect to have around $1.4 million at age 62. This is when she hopes to retire.

One thing that Mary needs to know going into retirement is how much money she’s spending each month. Let’s say her expenses are $5,000 a month, with an additional 3% inflation rate.

Scenario 1: Taking Social Security at full retirement age

So, what happens if Mary chooses not to start taking Social Security until full retirement age (67)? For the first five years of her retirement, she will need to draw $5,000 each month on her own assets to cover all of her expenses. When Mary reaches full retirement age, she will start receiving $3,500 of Social Security a month. This now reduces the draw on her assets down to $1,500 each month.

If we look forward to Mary’s assets at age 90, we have some significant changes. Due to inflation, her expenses have increased to $12,000 a month. But thanks to a good rate of return, Mary’s assets have grown to $1.6 million. This is a good outcome for Mary, she can comfortably maintain her lifestyle well into retirement and has more money leftover than she initially retired with.

Scenario 2: Taking Social Security at age 62

But what if Mary took her Social Security when she retires at age 62? We know that she would receive less in Social Security each month because she’s taking it early. So, in this scenario, Mary receives $2,450 instead of $3,500. This means that while she won’t receive as much Social Security each month, she won’t need to draw as much on her assets as she’ll have support throughout her retirement.

In this instance, at age 90, Mary has $1.75 million left over. That’s over $100,000 more than if she waits until full retirement age.

So, you can see that while it might be tempting to hold off taking Social Security early to get more each month, that might not be the best decision. In Mary’s case, it’s more beneficial to take the lower payments long-term.

Scenario 3: Taking Social Security at age 70

Finally, let’s take a look at what happens if Mary waits until age 70 to take Social Security. Because she’s waited until the upper limit, Mary will now receive $4,340 a month. This may instantly look more appealing than taking it early at the lower rate of $2,450, or even in comparison to full retirement age at $3,500.

However, Mary will now have to draw on her assets from age 62 until she’s 70 to cover her expenses. This is a long and sizeable draw. If we look forward to age 90, Mary now has around $1.5 million left over in her nest egg.

So, even though she’s receiving more money on a monthly basis, that initial period of withdrawal has had a big knock-on effect. Looking solely at Mary’s assets at age 90, Mary’s best option will be to take Social Security at the earliest possible age, 62.

What does this mean for you?

This example isn’t reflective of everyone’s situation. If Mary wanted to continue working, had other sources of income, or there was a spouse involved, it may change the outcome. So do not take this example as individualized advice.

What we want you to take away from this article is, if you’re researching when to take Social Security, it’s likely that you’ll get a mass answer that won’t translate to your own situation.

If you want to find out more about when you should take Social Security and how your retirement decisions affect this, reach out to us. We offer a completely free, no-obligation 15-minute phone consultation, where we can run through your numbers and give you an idea of when is right for you to take Social Security. Book your call now.