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 $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.

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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.

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My Top 10 Most Read Posts of 2018

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I hope that 2018 was a good year for you and your families and that you’ve had a wonderful holiday season. For us it was great to have our three adult children home and to be able to spend time together as a family. We all ate way too much good food.

As far as the stock market, 2018 was certainly a volatile year, we will have to wait and see what 2019 holds for investors and those looking toward retirement.

Hopefully you find many of the posts here at The Chicago Financial Planner useful and informative as you chart your financial course. Whether you do your own financial planning and investing, or you work with a financial advisor, my goal is to educate and provide some food for thought.

In the spirit of all the top 10 lists we see at this time of year, here are my top 10 most read posts during 2018:

Is a $100,000 Per Year Retirement Doable?
Year-End 401(k) Matching – A Good Thing?
401(k) Fee Disclosure and the American Funds
4 Reasons to Accept Your Company’s Buyout Offer
Life Insurance as a Retirement Savings Vehicle – A Good Idea?
4 Benefits of Portfolio Rebalancing
7 Tips to Become a 401(k) Millionaire
Should You Accept a Pension Buyout Offer?
Five Things to do During a Stock Market Correction
Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

 

This past year saw me expand my freelance financial writing business, while continuing to serve a number of long-time financial advisory clients. I wrote a number of pieces for various financial services firms and other financial advisors over the past year. I’m looking forward to continuing to grow my business into 2019 and beyond.

Thank you for your readership and support. Please let know what you think about any of the posts on the site (good or bad) and please let me know if there are topics that you would like to see covered in 2019. Please feel free to ask any questions you may have via the contact form.

I wish you and your families a happy, healthy and prosperous 2019.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Concerned about stock market volatility? 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 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.

 

7 Tips to Become a 401(k) Millionaire

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According to Fidelity, the average balance of 401(k) plan participants stood at $104,000 at the end of the second quarter of 2018, just shy of the all-time high level of $104,300 at the end of 2017. This data is from plans using the Fidelity platform.

They indicate that about 168,000 participants had a balance of $1 million, which is about 41 percent higher than a year earlier. What is their secret?  Here are 7 tips to become a 401(k) millionaire or to at least maximize the value of your 401(k) account.

Be consistent and persistent 

Investing in your 401(k) plan is more of a marathon than a sprint.  Maintain and increase your salary deferrals in good markets and bad.

Contribute enough 

In an ideal world every 401(k) investor would max out their annual salary deferrals to their plan which are currently $18,500 and $24,500 for those who are 50 or over. These amounts increase to $19,000 and $25,000 for 2019.

If you are just turning 50 this year or if you are older be sure to take advantage of the $6,000 catch-up contribution that is available to you. Even if your plan limits the amount that you can contribute because of testing or other issues, this catch-up amount is not impacted. It is also not automatic so be sure to let your plan administrator know that you want to contribute at that level. 

According to a Fidelity study several years ago, the average contribution rate for those with a $1 million balance was 16 percent. According to their most recent data, the average contribution across all 401(k) investors they surveyed was about 8.6 percent. The 16 percent contribution rate translated to a bit over $21,000 for the millionaire group.

As I’ve said in past 401(k) posts on this site, it is important to contribute as much as you can. If you can only afford to defer 3 percent this year, that’s a start. Next year try to hit 4 percent or more. As a general rule it is a good goal to contribute at least enough to earn the full match if your employer offers one.

Take appropriate risks 

As with any sort of investment account be sure that you are investing in accordance with your financial plan, your age and your risk tolerance.  I can’t tell you how many times I’ve seen lists of plan participants and see participants in their 20s with all or a large percentage of their account in the plan’s money market or stable value option.

Your account can’t grow if you don’t take some risk.  

Don’t assume Target Date Funds are the answer 

Target Date Funds are big business for the mutual fund companies offering them. They also represent a “safe harbor” from liability for your employer. I’m not saying they are a bad option but I’m also not saying they are the best option for you.

I like TDFs for younger investors say those in their 20s who may not have other investments outside of the plan. The TDF offers an instant diversified portfolio for them.

Once you’ve been working for a while you should have some outside investments. By the time you are say in your 40s you should consider a more tailored portfolio that fits you overall situation.

Additionally Target Date Funds all have a glide path into retirement. They are all a bit different, you need to understand if the glide path offered by the TDF family in your plan is right for you. 

Invest during a long bull market 

This is a bit sarcastic but the bull market for stocks that started in March of 2009 is in part why we’ve seen a surge in 401(k) millionaires and in 401(k) balances in general. The equity allocations of 401(k) portfolios have driven the values higher.

The flip side are those who swore off stocks at the depths of the 2008-2009 market downturn have missed one of the better opportunities in history to increase their 401(k) balance and their overall retirement nest egg.

Don’t fumble the ball before crossing the goal line 

We’ve all seen those “hotdogs” running for a sure touchdown only to spike the ball in celebration before crossing the goal line.

The 401(k) equivalent of this is to just let your account run in a bull market like this one and not rebalance it back to your target allocation. If your target is 60 percent in stocks and it’s grown to 80 percent in equities due to the run up of the past few years you might well be a 401(k) millionaire.

It is just as likely that you may become a former 401(k) millionaire if you don’t rebalance.  The stock market has a funny way of punishing investors who are too aggressive or who don’t manage their investments.

Pay attention to those old 401(k) accounts 

Whether becoming a 401(k) millionaire in your current 401(k) account or combined across several accounts, the points mentioned above still apply. In addition it is important to be proactive with your 401(k) account when you leave a job.  Whether you roll the account over to an IRA, leave it in the old plan or roll it to a new employer’s plan if allowed do something, make a decision.  Leaving an old 401(k) account unattended is wasting this money and can be a huge detriment to your retirement savings efforts.

The Bottom Line 

Whether you actually amass $1 million in your 401(k) or not, the goal is to maximize the amount accumulated there for retirement.  The steps outlined above can help you to do this. Are you ready to start down the path of becoming a 401(k) millionaire?

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.

Review Your 401(k) Account

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For many of us, our 401(k) plan is our main retirement savings vehicle. The days of a defined benefit pension plan are a thing of the past for most workers and we are responsible for the amount we save for retirement and how we invest that money.

Managed properly, your 401(k) plan can play a significant role in providing a solid retirement nest egg. Like any investment account, you need to ensure that your investments are properly allocated in line with your goals, time horizon and tolerance for risk.

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You should thoroughly review your 401(k) plan at least annually. Some items to consider while doing this review include:

Have your goals or objectives changed?

Take time to review your retirement goals and objectives. Calculate how much you’ll need at retirement as well as how much you need to save annually to meet that goal. Review the investments offered by the plan and be sure that your asset allocation and the investments selected dovetail with your retirement goals and fit with your overall investment strategy including assets held outside of the plan.

Are you contributing as much as you can to the plan?

Look for ways to increase your contribution rate. One strategy is to allocate any salary increases to your 401(k) plan immediately, before you get used to the money and find ways to spend it. At a minimum, make sure you are contributing enough to take full advantage of any matching contributions made by your employer. For 2018 the maximum contribution to a 401(k) plan is $18,500 plus an additional $6,000 catch-up contribution for individuals who are age 50 and older at any point during the year.

Are the assets in your 401(k) plan properly allocated?

Some of the more common mistakes made when investing 401(k) assets include allocating too much to conservative investments, not diversifying among several investment vehicles, and investing too much in an employer’s stock. Saving for retirement typically encompasses a long time frame, so make investment choices that reflect your time horizon and risk tolerance. Many plans offer Target Date Funds or other pre-allocated choices. One of these may be a good choice for you, however, you need to ensure that you understand how these funds work, the level of risk inherent in the investment approach and the expenses.

Review your asset allocation as part of your overall asset allocation

Often 401(k) plan participants do not take other investments outside of their 401(k) plan, such as IRAs, a spouse’s 401(k) plan, or holdings in taxable accounts into consideration when allocating their 401(k) account.

Your 401(k) investments should be allocated as part of your overall financial plan. Failing to take these other investment assets into account may result in an overall asset allocation that is not in line with your financial goals.

Review the performance of individual investments, comparing the performance to appropriate benchmarks. You shouldn’t just select your investments once and then ignore them. Review your allocation at least annually to make sure it is correct. If not, adjust your holdings to get your allocation back in line. Selling investments within your 401(k) plan does not generate tax liabilities, so you can make these changes without any tax ramifications.

Do your investments need to be rebalanced?

Use this review to determine if your account needs to be rebalanced back to your desired allocation. Many plans offer a feature that allows for periodic automatic rebalancing back to your target allocation. You might consider setting the auto rebalance feature to trigger every six or twelve months.

Are you satisfied with the features of your 401(k) plan?

If there are aspects of your plan you’re not happy with, such as too few or poor investment choices take this opportunity to let your employer know. Obviously do this in a constructive and tactful fashion. Given the recent volume of successful 401(k) lawsuits employers are more conscious of their fiduciary duties and yours may be receptive to your suggestions.

The Bottom Line

Your 401(k) plan is a significant employee benefit and is likely your major retirement savings vehicle. It is important that you monitor your account and be proactive in managing it as part of your overall financial and retirement planning efforts.

NEW SERVICE – Do you have questions about retirement planning and making the financial transition to retirement? Schedule a coaching call with me to get answers to your questions.

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.

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. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.