Objective information about retirement, financial planning and investments

 

Social Security and Working – What You Need to Know

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In today’s world of early or semi-retirement, many people wonder when they should begin taking their Social Security benefits. The combination of Social Security and working can complicate matters a bit. You can begin taking your benefit as early as age 62, but that is not always the best choice for many retirees. If you are working either at a job where you are employed or some sort of self-employment, you need to analyze the pros and cons based on your situation.

Full retirement age

 Your full retirement age or FRA is the age at which you become eligible for a full, unreduced retirement benefit. FRA is an important piece in understanding the potential implications of working on your Social Security benefit.

Your FRA depends on when you born:

  • If you were born from 1943 -1954 your full retirement age is 66
  • If you were born in 1955 your FRA is 66 and two months
  • If you were born in 1956 your FRA is 66 and four months
  • If you were born in 1957 your FRA is 66 and six months
  • If you were born in 1958 your FRA is 66 and eight months
  • If you were born in 1959 your FRA is 66 and ten months
  • If you were born in 1960 or later your FRA is 67

Source: Social Security

Social Security and working

If you are working, collecting a Social Security benefit and younger than your FRA your benefits will be reduced by $1 for every $2 that your earned income exceeds the annual limit which is $18,240 for 2020. Earned income is defined as income from employment or self-employment.

During the year in which you reach your full retirement age the annual limit is increased. For 2020 this increased limit is $48,600. The reduction is reduced to $1 for every $3 of earnings over the limit.

This chart shows the monthly reduction of benefits at three levels of earned income for 2020.

                                         Reduction of Benefits – 2020

Age $25,000 earned income $50,000 earned income $75,000 earned income
Younger than FRA $282 per month $1,323 per month reduction $2,365 per month reduction
Year in which you reach FRA No reduction $39 per month reduction $733 per month reduction
FRA or older No reduction No reduction No reduction

Source: Social Security

Temporary loss of benefits

The loss of benefits is temporary versus permanent. Any benefit reduction due to earnings above the threshold will be recovered once you reach your FRA on a gradual basis over a number of years.

However, your benefit will be permanently reduced by having taken it prior to your FRA. This means that any future cost-of-living adjustments will be calculated on a lower base amount as well.

One other point to keep in mind, continuing to work can add to your Social Security wage base, somewhat offsetting the permanent benefit reduction from taking Social Security early.

A one-time do-over 

Everyone is allowed a one-time do-over to withdraw their benefit within one year of the start date of receiving their initial benefit. This is allowed once during your lifetime.

One reason you might consider this is going back to work and earning more than you had initially anticipated. This is a way to avoid having your benefit permanently reduced. You would reapply later when you’ve reached your FRA, or your earned income is under the limits. Your benefit would increase due to your age and any cost-of-living increases that might occur during this time.

When you do take advantage of this one-time do-over, you must pay back any benefits received. This includes not only any Social Security benefits that you received, but also:

  • Any benefits paid based upon your earnings record such as spousal or dependent benefits.
  • Any money that may have been withheld from your benefits such as taxes or Medicare premiums.

Social Security and income taxes 

Regardless of your age or the source of your income, Social Security benefits can be taxed based upon your income level. This could certainly be impacted from income earned from employment or self-employment, but it also includes other sources of taxable income such as a pension or investment income.

The amount of the benefit that is subject to taxes is based upon your combined income, which is defined as: adjusted gross income + non-taxable interest income (typically from municipal bonds) + ½ of your Social Security benefit.

The tax levels are:

Tax filing status Combined income % of your benefit that will be taxed
Single $25,000 – $34,000 Up to 50%
Single Over $34,000 Up to 85%
Married filing jointly $32,000 – $44,000 Up to 50%
Married filing jointly Over $44,000 Up to 85%

Source: Social Security

The Bottom Line 

The decision when to take your Social Security benefit depends on many factors. If you are working or self-employed you will want to consider the impact that your earned income will have on your benefit.

You should also understand that your benefits can be subject to taxes at any age over certain levels of combined income, regardless of the source of that income.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring regarding the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo by Sharon McCutcheon on Unsplash

Retirement Plan Contribution Rates and Limits – 2020

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With the new year upon us, it’s a good time to be sure you understand the contribution rates and limits for various retirement plan options so you can contribute as much as possible. As you look at your financial planning for 2020, you will want to maximize your retirement contributions to meet your retirement savings goals. Here are the limits for some popular retirement savings vehicles.

401(k) 

The contribution limits for 2020 are:

  • $19,500
  • $26,000 for those who will be 50 or over at any point during the year, including a $6,500 catch-up contribution.

These same limits apply to those of you who have access to a 403(b) plan via your employer.

The limits are slightly different for 457(b) plans offered by some governmental entities and other non-profits. The basic contribution limits are the same as for the 401(k) and the 403(b). However, for participants who have not contributed the maximum amounts in prior years, there is a special catch-up contribution limit that increases to a maximum of $39,000 in 2020 for those within a few years of the plan’s retirement age. If this describes your situation check with the plan administrator to see if you are eligible.

Health Savings Accounts

Health savings accounts (HSA) are another option that is increasingly being used as a retirement savings vehicle and should be considered by those of you who are eligible via participation in a high-deductible medical insurance plan.

For 2020, high-deductible medical plan is one with deductibles of at least:

  • $1,400 for individuals
  • $2,800 for a family

The maximum HSA contribution rates are:

  • $3,550 for an individual
  • $7,100 for a family
  • There is a $1,000 additional catch-up contribution available for those age 55 or over

An HSA is a great way to save for retirement medical costs as the money deferred can be carried over from one year to the next. Once you retire, the money can be used for either qualified medical expenses or treated like an IRA. Contributions are made on a pre-tax basis, withdrawals for qualified medical expenses are tax-free.

While you can use the money to reimburse yourself for covered medical and dental costs at any point in time, the real power of an HSA is the ability to use the money as an additional retirement savings vehicle. The key is to cover any out-of-pocket medical costs from other sources while you are working.

IRA 

The total contribution limits for IRAs remain unchanged from 2019:

  • $6,000
  • An additional $1,000 catch-up contribution for those who will be 50 or over at any point during 2020.

These contribution limits are totals for contributions across both traditional and Roth IRAs, as well as for both pre-tax and after-tax contributions.

Here are some additional IRA limits/rules to be aware of in 2020:

Roth IRA contribution limits and phase-outs 

If your filing status is single:

  • The phase-out in the amount that can be contributed begins at an income level of $124,000.
  • The phase-out range extends to $139,000 no Roth IRA contributions can be made at income levels above this.

If your filing status is married filing jointly (or you are a qualified widow or widower):

  • The phase-out in the amount that can be contributed begins at an income level of $196,000.
  • The phase-out range extends to $206,000 no Roth IRA contributions can be made at income levels above this.

As an example of how the phaseout works, a single filer with income of $131,500 could contribute $3,000 to a Roth IRA or $3,500 if they are 50 or over. This person can still contribute the full $6,000 or $7,000 maximum to an IRA, the remainder would need to be made to a traditional IRA on a pre-tax or after-tax basis depending upon their situation.

Income in this case is based upon modified adjusted gross income (MAGI) which is a modified version of the adjusted gross income (AGI) figure found on your tax return.

Traditional IRA pre-tax contribution income limits 

For those of you who are covered by a workplace retirement plan (whether or not you contribute) such as a 401(k), there are income limits above which you can’t make a pre-tax contribution. For 2020 those income limits are:

If your filing status is single:

  • The phase-out in the amount that can be contributed on a pre-tax basis begins at an income level of $65,000.
  • The phase-out range extends to $75,000; no pre-tax IRA contributions can be made at income levels above this.

If your filing status is married filing jointly (or you are a qualified widow or widower):

  • The phase-out in the amount that can be contributed begins at an income level of $104,000.
  • The phase-out range extends to $124,000; no pre-tax IRA contributions can be made at income levels above this.

If you are not covered by a retirement plan at work, then there are no income limits restricting your ability to contribute to a traditional IRA on a pre-tax basis.

If you are not covered by a workplace retirement plan, but your spouse is, the phase-out limits for pre-tax contributions start at $196,000 and extend to $206,000.

For those whose income may limit or eliminate their ability to contribute on a pre-tax basis, you are still eligible to contribute to a traditional IRA on an after-tax basis. You can mix and match between traditional and Roth IRA contributions, as well as between pre and post-tax contributions within the $6,000/$7,000 maximums for total IRA contributions.

SIMPLE IRA

A SIMPLE IRA plan is a business retirement plan that offers less administrative and paperwork burdens for small business with 100 or fewer employees. Self-employed individuals can also use a SIMPLE IRA.

For 2020, the contribution limits have been raised to $13,500, with those who are 50 or over eligible to contribute an additional $3,000. In addition, there is a mandatory employer contribution of either a 3% match or a 2% non-elective contribution. 

Self-employed retirement plans 

Solo 401(k) plans 

Solo 401(k) plans are available to a business owner, their spouse who works in the business and to any partners in the business. Solo 401(k) plans cannot include any other employees and are not the right choice for businesses with employees.

The contribution limits for 2020 for solo 401(k) plans are:

  • The same $19,500/$26,000 employee contribution limits as a regular 401(k) plans.
  • The maximum combined employer and employee contributions for 2020 are $57,000 and $63,500 for those 50 and over. The employer profit sharing contribution is based on a maximum of 25% of compensation up to the total $57,000/$63,500 limits.

SEP-IRA 

Contributions to a SEP-IRA are made by the employer only. Employee deferrals are not permitted. While a SEP-IRA plan can include employees, as a practical matter these plans can get expensive if employees are included.

Contribution limits for 2020 are:

  • The lesser of 25% of compensation or $57,000. There are no catch-up contributions for those who are 50 or over.

Note there are other options for the self-employed including a small-business 401(k) and a defined benefit pension plan depending upon your situation, including your business’ size, cash flow and other factors. 

The Bottom Line

These popular retirement savings options are all solid vehicles to help you accumulate a retirement nest egg. This is the time to look at your situation, decide how much you can contribute, and which options fit your situation. Studies have shown that the biggest determinant of the size of your retirement nest egg is the amount that you’ve saved.

What are you waiting for? The best time to start saving for retirement (or to increase your retirement contributions) is today.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo courtesy of sasint

Stock Market Highs and Your Retirement

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After a rough year in 2018, the S&P 500 and the Dow sit in record territory. So far in 2019, stocks have staged a very nice recovery with the S&P 500 up about 29% year-to-date. These gains are in spite of the questions and issues surrounding the Trump administration, the threat of trade wars with a number of countries and uncertainty about what the Fed will do with interest rates.

Difference Between Stocks and Bonds

At some point we are bound to see a stock market correction of some magnitude, hopefully not on the order of the 2008-09 financial crisis. As someone saving for retirement what should you do now?

Review and rebalance 

During the last market decline there were many stories about how our 401(k) accounts had become “201(k)s.” The PBS Frontline special The Retirement Gamble put much of the blame on Wall Street and they are right to an extent, especially as it pertains to the overall market drop.

However, some of the folks who experienced losses well in excess of the market averages were victims of their own over-allocation to stocks. This might have been their own doing or the result of poor financial advice.

This is the time to review your portfolio allocation and rebalance if needed.  For example, your plan might call for a 60% allocation to stocks but with the gains that stocks have experienced you might now be at 70% or more.  This is great as long as the market continues to rise, but you are at increased risk should the market head down.  It may be time to consider paring equities back and to implement a strategy for doing this.

Financial Planning is vital

If you don’t have a financial plan in place, or if the last one you’ve done is old and outdated, this is a great time to review your situation and to get an up-to-date plan in place.. Do it yourself if you’re comfortable or hire a fee-only financial advisor to help you.

If you have a financial plan this is an ideal time to review it and see where you are relative to your goals. Has the market rally accelerated the amount you’ve accumulated for retirement relative to where you had thought you’d be at this point? If so, this is a good time to revisit your asset allocation and perhaps reduce your overall risk.

Learn from the past 

It is said that fear and greed are the two main drivers of the stock market. Some of the experts on shows like CNBC seem to feel that the market still has some upside. Maybe they’re right. However, don’t get carried away and let greed guide your investing decisions.

Manage your portfolio with an eye towards downside risk. This doesn’t mean the markets won’t keep going up or that you should sell everything and go to cash. What it does mean is that you need to use your good common sense and keep your portfolio allocated in a fashion that is consistent with your retirement goals, your time horizon and your risk tolerance.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit:  Phillip Taylor PT

 

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

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One of the best tax deductions for a small business owner is funding a retirement plan. Beyond any tax deduction you are saving for your own retirement.  As a fellow small businessperson, I know how hard you work.  You deserve a comfortable retirement. If you don’t plan for your own retirement who will? Two popular small business retirement plans are the SEP-IRA and Solo 401(k).

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

SEP-IRA vs. Solo 401(k)

SEP-IRA Solo 401(k)
Who can contribute? Employer contributions only. Employer contributions and employee deferrals.
Employer contribution limits The maximum for 2019 is $56,000 and increases to $57,000 for 2020. Contributions are deductible as a business expense and are not required every year. For 2019, employer plus employee combined contribution limit is a maximum of 25% of compensation up to the maximums are $56,000 and $62,000, respectively. For 2020 these limits increase to $57,000 and $63,500. Employer contributions are deductible as a business expense and are not required every year.
Employee contribution limits A SEP-IRA only allows employer contributions. Employees can contribute to an IRA (Traditional, Roth, or Non-Deductible based upon their individual circumstances). $19,000 for 2019. An additional $6,000 for participants 50 and over. In no case can this exceed 100% of their compensation. The limits for 2020 increase to  $19,500 and $26,000 respectively.
Eligibility Typically, employees must be allowed to participate if they are over age 21, earn at least $600 annually, and have worked for the same employer in at least three of the past five years. No age or income restrictions. Business owners, partners and spouses working in the business. Common-law employees are not eligible.

Note the Solo 401(k) is also referred to as an Individual 401(k).

  • While a SEP-IRA can be used with employees in reality this can become an expensive proposition as you will need to contribute the same percentage for your employees as you defer for yourself. I generally consider this a plan for the self-employed.
  • Both plans allow for contributions up your tax filing date, including extensions for the prior tax year. Consult with your tax professional to determine when your employee contributions must be made. The Solo 401(k) plan must be established by the end of the calendar year.
  • The SEP-IRA contribution is calculated as a percentage of compensation. If your compensation is variable the amount that you can contribute year-to year will vary as well. Even if you have the cash to do so, your contribution will be limited by your income for a given year.
  • By contrast you can defer the lesser of $19,000 ($25,000 if 50 or over) or 100% of your income for 2019 and $19,500/$26,000 for 2020 into a Solo 401(k) plus the profit sharing contribution. This might be the better alternative for those with plenty of cash and a variable income.
  • Loans are possible from Solo 401(k)s, but not with SEP-IRAs.
  • Roth feature is available for a Solo 401(k) if allowed by your plan document. There is no Roth feature for a SEP-IRA.
  • Both plans require minimal administrative work, though once the balance in your Solo 401(k) account tops $250,000, the level of annual government paperwork increases a bit.
  • Both plans can be opened at custodians such as Charles Schwab, Fidelity, Vanguard, T. Rowe Price, and others. For the Solo 401(k) you will generally use a prototype plan. If you want to contribute to a Roth account, for example, ensure that this is possible through the custodian you choose.
  • Investment options for both plans generally run the full gamut of typical investment options available at your custodian such as mutual funds, individual stocks, ETFs, bonds, closed-end funds, etc. There are some statutory restrictions so check with your custodian.
  • For those wishing to invest in alternative assets inside of their SEP or solo 401(k), a number of self-directed retirement plan custodians offer this option.

Both plans can offer a great way for you to save for retirement and to realize some tax savings in the process. Whether you go this route or with some other option I urge to start saving for your retirement today 

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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How is My Financial Advisor Compensated?

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Many investors do not understand how their financial advisor is compensated.  It is important that all clients fully understand how their financial advisor is compensated and how much this relationship is truly costing them.

The three basic financial advisor compensation models 

Commissions: The advisor is compensated for the sale of investments, insurance, or other financial products. Compensation is paid by the firm that provides the financial product, usually a mutual fund or an insurance company. This may be in the form of an up-front charge, trailing (ongoing) fees or a combination of both. Other names for commissions include front-end loads (A share mutual funds are an example), 12b-1 fees that serve as trailing commissions on some mutual funds and commissions paid to advisors for the sale of insurance products.

Fee-based: Typically, the advisor will charge a fee for putting together a financial plan for you. If you chose to implement the recommendations in the plan, such as the purchase of insurance, an annuity, or investments, the implementation will typically be done via the sale of commissioned products. Fee-based is often referred to as fee and commission as well.

How is My Financial Advisor Compensated?

Fee-based took on a whole new significance in light of the DOL fiduciary rules implemented a few years ago, then largely repealed by the Trump administration. Many firms have moved clients to fee-based or brokerage wrap accounts. The fee part arises from the wrap fee (typically a percentage of assets) charged to the client. Many of these accounts use mutual funds that throw off 12b-1 fees or other types of revenue sharing to the brokerage firm.

Fee-only: The advisor charges a fee for the services rendered. This can be one-time or ongoing based upon the nature of your relationship and the services rendered. Fees may be hourly, flat or retainer based, or based upon a percentage of the assets under advisement.

Why should you care how your advisor is paid? Because his/her compensation can impact the choice of the products recommended to you and your return from those products.

An advisor who is paid via commissions will likely recommend those products that offer him a commission or sales load. Sales people generally sell what they are compensated to sell. Commissions can therefore result in a huge conflict of interest for your advisor. Does she suggest the very best and lowest cost products, or does she suggest those products that pay her the highest commission?

Fee-only advisors do not have this inherent conflict of interest because they are paid by the client, not the financial product provider. They are free to suggest the best investment vehicles and financial products for each client’s individual situation.

Should compensation be the only metric used to select a financial advisor?

Of course not, but the advisor’s compensation should be made crystal clear to you. When interviewing an advisor ask very direct questions.

Ask them to detail ALL sources of compensation. These might include up-front commissions or sales loads; deferred or trailing commissions; surrender charges if you opt out of the mutual fund or annuity too early; a wrap fee on your overall investment account; or a myriad of other fees and charges in various combinations.

This extends to fee-only advisors as well. Be sure to understand how much you will be paying for their advice and what types of investing costs you can expect to incur.

While you will not be writing a check for any commissions or product-based fees, make no mistake you are paying the freight. Excessive commissions or expenses serve to directly reduce your return on investment.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit: Wikipedia

Annuities: The Wonder Drug for Your Retirement?

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Annuities: The Wonder Drug for Your Retirement?

Annuities are often touted as the “cure” for all that ails your retirement.  Baby Boomers and retirees are the prime target market for the annuity sales types. You’ve undoubtedly heard many of these pitches in person or as advertisements. The pitches frequently pander to the fears that many investors still feel after the last stock market decline. After all, what’s not to like about guaranteed income?

What is an annuity?

I’ll let the Securities and Exchange Commission (SEC) explain this in a quote from their website:

“An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.

Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments. While tax is deferred on earnings growth, when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates. If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties.

There are generally three types of annuities — fixed, indexed, and variable. In a fixed annuity, the insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing. The insurance company also agrees that the periodic payments will be a specified amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.

In an indexed annuity, the insurance company credits you with a return that is based on changes in an index, such as the S&P 500 Composite Stock Price Index. Indexed annuity contracts also provide that the contract value will be no less than a specified minimum, regardless of index performance.

In a variable annuity, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. The rate of return on your purchase payments, and the amount of the periodic payments you eventually receive, will vary depending on the performance of the investment options you have selected.

Variable annuities are securities regulated by the SEC. An indexed annuity may or may not be a security; however, most indexed annuities are not registered with the SEC. Fixed annuities are not securities and are not regulated by the SEC. You can learn more about variable annuities by reading our publication, Variable Annuities: What You Should Know.”

What’s good about annuities?

In an uncertain world, an annuity can offer a degree of certainty to retirees in terms of receiving a fixed stream of payments over their lifetime or some other specified period of time. Once you annuitize there’s no guesswork about how much you will be receiving, assuming that the insurance company behind the product stays healthy.

Watch out for high and/or hidden fees 

The biggest beef about annuities are the fees, which are often hidden or least difficult to find. Many annuity products carry fees that are pretty darn high, others are much more reasonable. In general, the lack of transparency regarding the fees associated with most annuity contracts is appalling.

There are typically several layers of fees in an annuity:

Fees connected with the underlying investments In a variable annuity there are fees connected with the underlying sub-account (accounts that resemble mutual funds) similar to the expense ratio of a mutual fund. In a fixed annuity the underlying fees are typically the difference between the net interest rate you will receive vs. the gross interest rate earned.  In the case of an indexed annuity product the fees are just plain murky.

Mortality and expense charges are fees charged by the insurance company to cover their costs for guaranteeing a stream of income to you. While I get this and understand it, the wide variance in these and other fees across the universe of annuity contracts and the insurance companies that provide them makes me shake my head.

Surrender charges are fees that are designed to keep you from withdrawing your funds for a period of time.  From my point of view these charges are heinous whether in an annuity, a mutual fund, or anyplace else. If you are considering an annuity and the product has a surrender charge, avoid it. I’m not advocating withdrawing money early from an annuity, but surrender charges also restrict you from exchanging a high cost annuity into one with a lower fee structure. Essentially these fees serve to ensure that the agent or rep who sold you the high fee annuity (and the insurance company) continue to benefit by placing handcuffs on you in terms of sticking with the policy.

Who’s really guaranteeing your annuity? 

When you purchase an annuity, your stream of payments is guaranteed by the “full faith and credit” of the underlying insurance company.  This differs from a pension that is annuitized and backed by the PBGC, a governmental entity, up to certain limits.

Outside of the most notable failure, Executive Life in the early 1990s, there have not been a high number of insurance company failures. In the case of Executive Life, 1,000s of annuity recipients were impacted in the form of greatly reduced annuity payments which in many cases permanently impacted the quality of their retirement.

Insurance companies are regulated at the state level; state insurance departments are generally the backstop in the event of an insurance company failure. In most cases you will receive some portion of the payment amount that you expected, but there is often a delay in receiving these payments.

The point is not to scare anyone from buying an annuity but rather to remind you to perform your own due diligence on the underlying insurance company.

Should you buy an annuity? 

Annuities are not a bad product as long as you understand what they can and cannot do for you. Like anything else you need to shop for the right annuity. For example, an insurance agent or registered rep is not going to show you a product from someone like Vanguard that has ultra-low fees and no surrender charges because they receive no commissions.

An annuity can offer diversification in your retirement income stream. Perhaps you have investments in taxable and tax-deferred accounts from which you will withdraw money to fund your retirement. Adding Social Security to the mix provides a government-funded stream of payments. A commercial annuity can also be of value as part of your retirement income stream, again as long as you shop for the appropriate product.

Annuities are generally sold rather than bought by Baby Boomers and others. Be a smart consumer and understand what you are buying, why a particular annuity product (and the insurance company) are right for you, and the benefits that you expect to receive from the annuity. Properly used, an annuity can be a valuable component of your retirement planning efforts. Be sure to read ALL of the fine print and understand ALL of the expenses, terms, conditions and restrictions before writing a check.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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The Bull Market Turns 10 – Now What?

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On March 9, 2009 the market downturn fueled by the financial crisis bottomed out as measured by the S&P 500 Index. On that day the index closed at 677. As we approach the tenth anniversary of the ensuing bull market, the index closed at 2,749 on March 7, 2019. This is an increase of 406%.

Looking at this another way, an investor who invested $10,000 in the Vanguard 500 Index fund (ticker VFINX) at the end of February of 2009 and held it through the end of February 2019 would have seen their investment grow to $46,135 according to data from Morningstar.

As the bull market turns 10, now what? Here are some thoughts for investors.

How does this bull market stack up?

According to data from JP Morgan Asset Management, the average bull market following a bear market lasts for about 55 months and results in a gain of about 160%. By both measures this bull market is a long one.

Does this mean that investors should brace for an imminent market correction? Not necessarily but bull markets don’t last forever either.

There have been some speed bumps along the way, including 2011, a sharp decline in the third quarter of 2015 and the sharp declines we saw to start off 2016. Most notable was 2018, the first down year for the index since 2008. This was punctuated by a 13.52% decline for the fourth quarter and a 4.38% loss for the year.

What should investors do now? 

None of us knows what the future will hold. The bull market may be getting long of tooth. The threat of tariffs and trade wars could weigh on the market. There are factors such as potential actions by the Fed, the threat of terrorism and countless others that could impact the direction of the stock market. It seems there is always something to worry about in that regard.

That all said, my suggestions for investors are pretty much the same “boring” ones that I’ve offered since I started this blog in 2009.

The Bottom Line 

The now ten-year old bull market has provided some very robust returns for investors. Nobody knows what will happen next. In my opinion, investors are wise to control the factors that they can, have a plan in place, follow that plan and adjust as needed.

Approaching retirement and want another opinion on where you stand? Are your investments in line with your financial plan? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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Will my Social Security be Taxed?

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Contrary to what some politicians might say, your Social Security benefits are not an entitlement. You’ve paid Social Security taxes over the course of your working life and you’ve earned these benefits.

Many retirees and others collecting Social Security wonder about the tax treatment of their benefit. The answer to the question in the title is that your Social Security benefits may be subject to taxes.

How do taxes on Social Security work? 

According to the Social Security Administration (SSA), about 40% of the people who receive Social Security pay federal taxes on their benefits.

The formula for the taxation of benefits works as follows:

For those who file as single:

  • If your combined income is between $25,000 and $34,000, up to 50% of your benefits might be subject to taxes.
  • If your combined income is over $34,000, up to 85% of your benefits might be subject to taxes.

For those who file a joint return:

  • If your combined income is between $32,000 and $44,000, up to 50% of your benefits might be subject to taxes.
  • If your combined income is over $44,000, up to 85% of your benefits might be subject to taxes.

According to the SSA, if you are married but file as single your benefit will likely be subject to taxes.

Source: Social Security Administration

What is combined income?

SSA defines your combined income as:

Your adjusted gross income (from your tax return) 

+ non-taxable interest (from a municipal bond fund for example) 

+ one-half of your Social Security Benefit

For example, if your situation looked like this:

  • Adjusted gross income $60,000
  • Non-taxable interest income of $1,500
  • Social Security benefit of $35,000

Your combined income would be: $60,000 + $1,500 + $17,500 (1/2 of your Social Security benefit) or $79,000. Whether single or married filing jointly, $29,750 (85%) of your Social Security benefit would be subject to taxes.

What this means is that $29,750 would be considered as taxable income along with the rest of the taxable income you earned in that year, this amount would be part of the calculation of your overall tax liability.

Is my Social Security subject to taxes once I reach my full retirement age? 

Your full retirement age (FRA) is a key number for many aspects of Social Security. For those born prior to 1960 your FRA is 66, it is 67 for those born in 1960 or after it is 67. For example, there is no reduction in your Social Security benefit for earned income once you reach your FRA. 

As far as the taxation of your Social Security benefit, age doesn’t play a role. Your benefit will potentially be subject to taxes based on your combined income, regardless of your age. Taxes can be paid via quarterly payments or you can have taxes withheld from your Social Security benefit payments. You will receive a Social Security Benefit Statement or form SSA-1099 each January listing your benefits for the prior year. This is similar to a 1099 form that you might receive for services rendered to a client if you are self-employed.

Related to this, if you are working into retirement your wages or self-employment income are subject to FICA and Medicare taxes regardless of your age.

Is Social Security subject to state income taxes? 

Thirteen states currently tax Social Security benefits. These states are:

  1. Colorado
  2. Connecticut
  3. Kansas
  4. Minnesota
  5. Missouri
  6. Montana
  7. Nebraska
  8. New Mexico
  9. North Dakota
  10. Rhode Island
  11. Utah
  12. Vermont
  13. West Virginia

The rate and method of taxing your benefits will vary by state, if you live in one of these states check with your state’s taxing authority or a knowledgeable tax professional for the details.

The Bottom Line 

Social Security represents a significant portion of retirement income for many Americans. Its important to understand how Social Security works, including any tax implications. This is part of the bigger picture of taxes in retirement. Its important for retirees to understand how taxes will impact their retirement finances and to include this in their retirement financial planning.

Note the information above is a review of the basics of how Social Security benefits are taxed and should not be considered to be advice. Your situation may differ. You should consult with the Social Security Administration, or a tax or financial advisor who is well-versed on Social Security regarding your specific situation.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo by NeONBRAND on Unsplash