Objective information about retirement, financial planning and investments

Stock Market Highs and Your Retirement

Share

After a rough year in 2018, both the S&P 500 and NASDAQ closed at record highs today. So far in 2019, stocks have staged a nice recovery. 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If you don’t have a financial plan in place, or if the last one you’ve done is old and outdated, this is a great time to have one done. 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

Social Security and Working – What You Need to Know

Share

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 $17,640 for 2019. 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 2019 this increased limit is $46,920. 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 2019.

                                         Reduction of Benefits – 2019

Age $25,000 earned income $50,000 earned income $75,000 earned income
Younger than FRA $307 per month $1,348 per month reduction $2,390 per month reduction
Year in which you reach FRA No reduction $86 per month reduction $780 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 its 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

Will my Social Security be Taxed?

Share

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

Am I on Track for Retirement?

Share

Financial advisors are frequently asked some version of the question “Can I Retire?”  The Employee Benefit Research Institute (EBRI) recently released its 2018 Retirement Confidence Survey. The latest survey offered several key findings:

  • Only 32% of retirees surveyed felt confident that they will be able to live comfortably throughout their retirement.
  • Retiree confidence in their ability to over basic expenses and medical expenses in retirement dropped from 2017 levels.
  • Less than one-half of the retirees surveyed felt confident that Medicare and Social Security would be able to maintain benefits at current levels.

English: Scanned image of author's US Social S...

It is essential that Baby Boomers and others approaching retirement take a hard look at their retirement readiness to determine any gaps between the financial resources available to them and their desired lifestyle in retirement. Ask yourself a few questions to determine if you can retire.

What kind of lifestyle do you want in retirement?

You’ll find general rules of thumb indicating you need anywhere from 70% to more than 100% of your pre-retirement income during retirement. Look at your individual circumstances and what you plan to do in retirement.

  • Will your mortgage be paid off?
  • Do you plan to travel?
  • Will you live in an area with a relatively high or low cost of living?
  • What’s your plan to cover the cost of healthcare in retirement?

Remember spending during retirement is not uniform. You will likely be more active earlier in your retirement.  Though you may spend less on activities as you age, it is likely that your medical costs will increase as you age.

How much can you expect from Social Security?

Social Security benefits were never designed to be the sole source of retirement income, but they are still a valuable source of retirement income. Those with lower incomes will find that Social Security replaces a higher percentage of their pre-retirement income than those with higher incomes.

Recent news stories indicating that the Social Security trust fund is in trouble is not welcome news for those nearing retirement or for current retirees.

What other sources of retirement income will you have?

Other potential sources of retirement income might include a defined-benefit pension plan; individual retirement accounts (IRAs); your 401(k) plan, and your spouse’s employer-sponsored retirement plans. If you have other investments, it is important to have a strategy that maximizes these assets for your retirement.

If you are fortunate enough to be covered by a workplace pension, be sure to understand how much you will receive at various ages.  Look at your options in terms of survivor benefits should you predecease your spouse.  If you have the option to take a lump-sum distribution it might make sense to roll this over to an IRA.  Also determine if your employer offers any sort of insurance coverage for retirees. 

Where does this leave me? 

At this point let’s take a look at where you are.  We’ll assume that you’ve determined that you will need $100,000 per year to cover your retirement needs on a gross (before taxes are paid) basis.  Let’s also assume that your combined Social Security will be $30,000 per year and that there will be $20,000 in pension income.  The retirement gap is:

Amount Needed

$100,000

Social Security

30,000

Pension

20,000

Gap to be filled from other sources

$50,000

 

Where will this $50,000 come from?  The most likely source is your retirement savings.  This might include 401(k)s, IRAs, taxable accounts, self-employment retirement accounts, the sale of a business, and inheritance, earnings during retirement, or other sources. 

To generate $50,000 per year you would likely need a lump sum in the range of $1.25 – $1.67 million at retirement.

Everybody’s circumstances are different.  Many retirees do not have a pension plan available to them, some don’t have a 401(k) either.

Look at where you stand and take action 

Some steps to consider if you feel you are behind in your retirement savings:

  • Save as much as possible in your 401(k) or other workplace retirement plan while you are still employed
  • Contribute to an IRA
  • If you are self-employed start a retirement plan for yourself
  • Keep your spending in check
  • Scale back on your retirement lifestyle if needed
  • Plan to delay your retirement or to work part-time during retirement

Providing for a comfortable retirement takes planning. Don’t be lulled into thinking your 401(k) plan alone will be enough. If you haven’t put together a financial plan, don’t be afraid to enlist the aid of a professional if you need help.

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 more detailed 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 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 credit:  Wikipedia

A Pre-Retirement Financial Checklist

Share

Are you within a few years of retirement? It’s time to get your financial house in order. We are now almost eight years into a bull market for stocks that has seen the S&P 500 move from 677 at the lows of the financial crises to a recent intraday high of over 2,350. Hopefully these stock market highs have favorably impacted your retirement readiness?

Here are several items to include on your pre-retirement financial checklist.

Review your company benefits  

Your 401(k) plan might be your largest and most significant employee benefit, but there may be others to consider as well. Does your company offer any sort of retiree medical coverage? Are there other benefits that you can continue at reduced group rates?

In the case of your 401(k) you will have choices to make at retirement. You will need to determine if you want to leave it with your soon-to-be-former employer, roll it into an IRA, or take a distribution. The last choice will likely result in a hefty tax bill, so this is generally not a good idea for most folks.

Do you have company stock options that you haven’t exercised? Check the rules here. Speaking of company stock, there are special rules called net unrealized appreciation to consider when dealing with company stock held in your 401(k) plan.

Do you have a pension from your current or former employer?

While a pension is certainly an employee benefit, I feel that it deserves its own section. You might have several decisions to make regarding your pension benefit if you are fortunate enough to be covered by one.

  • Do you take the benefit immediately upon retirement, or wait?
  • If you have the option, do you take the pension as a lump-sum and roll over to an IRA or take it as a monthly annuity?
  • Generally, there will be several annuity payment options to consider, which one is right for your situation?

These decisions should be made in the context of your overall financial situation and your ability to effectively manage a lump sum. Since any lump-sum would be taxable if taken as a distribution, it is usually advisable for you to roll it over into a tax-deferred account such as an IRA. If you have earned a pension benefit from a former employer, be sure to contact your old company to get all the details and to make sure they have your current address and contact information so there are no delays or glitches when you want to start drawing on this pension.

Determine your Social Security benefits and when to take them

While you can start taking Social Security at age 62, there is a significant reduction in your monthly benefit as opposed to waiting until your full retirement age. Further, if you can wait until age 70 your benefit level continues to grow. If you are married the planning should involve both spouses’ benefits. There are several planning opportunities for married couples around when each spouse should claim their benefit.

Review your retirement financial resources 

Over the course of your working life you have likely accumulated a variety of investments and other assets that can be used to fund your retirement which might include:

  • Your 401(k)or similar retirement plan such as a 403(b) or other defined contribution plan.
  • IRA accounts, both traditional and Roth.
  • A pension.
  • Stock options or restricted stock units.
  • Social Security
  • Taxable investment accounts.
  • Cash, savings accounts, CDs, etc.
  • Annuities
  • Cash value in a life insurance policy
  • Inheritance
  • Interest in a business
  • Real estate
  • Any income from working into retirement

In the years prior to retirement it is a good idea to review all your anticipated assets and retirement resources to determine how they can be best utilized to support your desired retirement lifestyle.

Determine how much you will need to support your retirement lifestyle 

While this might seem intuitive you’d be surprised how many folks within a few years of retirement haven’t done this. Basically, you will want to put together a budget. Will you stay in your home or downsize? What activities will you engage in? What will your basic living expenses be? And so on.

Compare this to the income that your various retirement resources might generate for you and you will have a good idea if you will be able to support your desired lifestyle in retirement. If there is a gap, you still have some time to make adjustments to close that gap.

You will need to do some planning in terms of which financial resources to tap and the sequencing of these withdrawals over the course of your retirement.

This is a very cursory “checklist” for Baby Boomers and others within a few years of retirement. This might be a good point to engage the services of a fee-only financial advisor if you’ve never done a financial plan, or if your plan is out of date. Retirement can be a great time of life, but proper planning is required to help ensure your financial success.

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.