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Archives for October 2015

Secured Retirement Radio: The Golden Decade

Blog post written by Dale Decker

If you are 59 ½ up to 70 ½, you are in the Golden Decade when everything you do relative to your retirement matters.

There is a long list of do’s and don’ts during this period. On Saturday’s Secured Retirement Radio Show, CFPs Joe Lucey and Derek Fautsch outlined a few.

For example:

Do: Map out income.

When 60 and retiring, one needs to plan the next 30 years without a paycheck. Everyone’s situation is different, but in each case, there’s a way to manage income, Social Security, taxes, and possibly employment to enhance your chances for a successful retirement. Make mail box income work for you during this period.

Don’t: Take Social Security too lightly. There are a lot of variables for most individuals and couples. What can seem like a simple process is actually very intricate and the devil is in the details. The 10 percent that you don’t know about Social Security can make an income difference in the thousands and influence the success of your retirement years.

For more do’s and don’ts, to find out about our upcoming retirement classes, or to register for one of our free consultations, call us at 952-460-3260.

Planning For a Ticking Tax Time Bomb in Your Golden Decade

No one likes a tax surprise. But the tax man never sleeps. If you have been saving for years so you can enjoy a cozy retirement, be careful to sleep with one eye open. Unexpected taxes can leave you with less money for living expenses than you are anticipating during your golden decade. That is what prompted me to write this article.

The Golden Decade is a term we use in our office that refers to a defined time span of 11 years, comprised of people that are ages 59 ½ to age 70 ½.  During these years, retirees need to make plans to protect their money.

As a financial advisor, I am constantly reciting my golden rule to my clients: “It’s not what you earn, but what you keep.” No comprehensive retirement plan can omit the discussion of how to tactically plan for taxes. The IRS will inevidably attempt to tax some of your golden nest egg in ways you may not expect until it is too late.

Conventional wisdom would have retirees withdraw or sell investments held in taxable accounts before touching the sums in their tax-deferred accounts. Doing so might could cost you more in tax liabailty after calcualting your after-tax wealth. Tax laws tend to take a longer view of retirement savings accounts, and likewise, so should you.

One ticking tax bomb you need to know about sooner rather than later is RMDs.

RMDs

Every investor understands that withdrawing funds from traditional and Roth IRAs and 401(k)s causes those funds to be taxed at a higher rate. What is not commonly understood is that at age 70 ½, owners of these accounts are required to withdraw RMDs (required minimum distributions). If the balance in these accounts has been allowed to grow to a large sum, the RMDs  might cause the owner of the account to be shifted into a higher tax bracket. The required distributions become taxable income.

RMDs are just one of the many ways that IRAs differ from other retirement savings vehicles.

I am in Ed Slots Elite IRA Advisor Group℠, and at least two of weekends per year I attend Ed Slot’s IRA Advisor Group for IRA education. I like getting an updated refresher twice a year because I am always reminded that IRAs differ from other retirement savings vehicles.

Here are other tax rules to keep in mind with regards to IRA accounts:

  • IRA distributions can incur tax penalties IRA’s investment gains receive no capital gains tax rates
  • IRA equity cannot by tapped the way home equity can be tapped without triggering tax and potential IRS penalties

Social Security

One smart way to draw down a significant sum in IRA accounts to avoid higher RMDs at age 70 is to defer your Social Security benefit to full retirement age, and begin taking withdrawls from your tax deferred accounts instead.

Depending on how much money you have saved in tax-deferred accounts, your strategy to increase your after-tax wealth should include maximizing your Social Security benefit. Americans are allowed to begin early retirement withdrawals of their Social Security benefit at age 62. However, age 62 is considered an old retirement age by the Social Security Administration and opting for your benefit at this early age will automatically reduce it by 20 percent.

Also, if you’re taxable income earnings exceed a certain level, up to 85 percent of your Social Security benefits may be taxable. At age 62, income limitations are $25,000 for a single person and $32,000 for married couples filing jointly from Social Security.

Deferring your Social Security benefit to full retirement age triggers several financial rewards.

  • Waiting until full retirement age allows you to receive 100% of your Social Security monthly benefit. Opting to take it at age 62 reduces it by 20%.
  • Waiting until full retirment age will allow your monthly Social Security benefit to grow 8% every year from full retirement age through age 70.
  • In addition to receiving a higher Social Security monthly benefit growing at 8% annually, Social Security also provides annual cost-of-living adjustments that may increase the rate of return even greater.
  • Your Social Security benefit offers survivor benefits. Waiting until full retirement age ensures that your spouse will be able to collect the highest monthly benefit possible if you should pass away. In contrast, IRA survivor benefits get tricky.

Tax Savings for Your Loved Ones

IRAs are subject to double tax at death, both Federal estate and income taxes, plus our special Minnesota version of estate taxes. If you own both a traditional IRA and a Roth IRA, it is wiser to draw down the traditional IRA first. While Roth accounts might still be included in your taxable estate, your beneficiaries will be able to take distributions tax-free at least. Since an IRA account cannot be held jointly, setting up the beneficiaries on your IRA accounts should be done carefully.

  • The choice of IRA beneficiary determines the ultimate future potential value of that IRA to beneficiaries – THIS IS THE AREA WHERE WE MOST COMMONLY SEE MISTAKES.
  • Trusts named as IRA beneficiaries must qualify under specific IRS rules so that trust  beneficiaries are eligible for stretch IRA tax benefits, and there are no separate account rules for IRA trusts.
  • IRA beneficiaries may qualify for special tax breaks that are often missed.
  • IRAs have no principal and income concept. The entire IRA (principal and income) may be distributed to the income beneficiary of a trust leaving little or nothing to remainder trust beneficiaries. IRAs in a trust are all principal because, under trust law, IRD (income in respect of a decedent) is principal in a trust and IRAs are IRD.
  • IRAs require their estate plans, and then those estate plans must be integrated within the overall estate plan that includes all other assets
  • IRAs are subject to double tax at death, both Federal property and income taxes, plus our own special Minnesota version of estate taxes, in addition to IRS penalties that can apply to the withdrawals made by the owner.

 Strategies to Increase Your After Tax Wealth

One thing to consider is that crunching numbers year by year is the best way to determine the most strategic way to take tax-efficient withdrawals from your retirement assets. The algorithms required to run complicated scenarios require specific software programs. Finding a financial advisor that specializes in retirement planning is prudent. With the ability to show you a clear picture of tax, estate-planning, and all other financial considerations, maximizing your after-tax wealth will become more apparent for you. Every case is different because every case is different. At Secured Retirement Advisors, we focus on helping our clients to both preserve and protect their wealth through comprehensive financial planning that includes a custom fit plan for you.

I feel blessed and grateful to have the opportunity to be of service to you. What’s more, my team and I are always here to answer your questions.

If you want to reach out for assistance in planning for your retirement, or if you have specific questions with regards to your own Social Security benefits, please don’t hesitate to connect with me at   info@securedretirements.com or come in for a quick 30 minute strategy session.

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  Image by oatsy40 via flickr, licensed under CC by 2.0

Have You Ever Thought of Your Social Security as Life Insurance?

A newly widowed client came to my office this month in despair. Her husband Dave had just passed away from an unexpected and sudden heart attack. She, the surviving spouse, was not currently working, opting instead to stay home to raise her son, (age 13) and step-daughter (age 17) who are both in public school.

Understandably she came to me asking for guidance and financial advice. She had no idea how she was going to be able to take over paying the families bills.My answer?: My client and her children can apply for a Social Security survivor payment.

When Dave worked, he paid into Social Security, because his employer deducted a portion of his earnings from every paycheck. Many people see this deduction on their paychecks and think FICA is code for Uncle Sam sticking his hand into their wallet.

In reality, Dave was paying for insurance for his survivors. Social Security calls this protection survivor benefits.

Through this program, spouses and children under the age of 18, and even dependent parents can become eligible to be paid survivor benefits.

Based on their father’s former earnings level, and the number of years worked; Dave accumulated worker credits that Social Security will use to determine how much each of Dave’s surviving family will receive as a monthly benefit. Both his spouse and his children are eligible to receive a monthly benefit from Dave’s Social Security.

Social Security Survivors Benefits Can Be Paid to:

  • A widow or widower—full benefits at full retirement age, or reduced benefits as early as age 60
  •  A disabled widow or widower—as early as age 50
  • A widow or widower of any age who takes care of the deceased’s child who is younger than age 16 or physically challenged, and receiving Social Security benefits
  • Divorced spouses under certain conditions
  • Unmarried children younger than age 18, or up to age 19 if they attend elementary or secondary school full time
  • Dependent parents age 62 or older

Under certain circumstances, benefits can be paid to stepchildren, grandchildren, or adopted children who were disabled before age 22 and remain physically challenged.

Source: 2015 How to Earn Credits Brochure- Social Security Administration

Worker Credits

The Social Security Administration requires up to 10 years of work, to be eligible for survivor benefits, at the family member’s time of death. Anyone born in 1929 or later needs ten years of work (40 credits) to be eligible for retirement benefits. People born before 1929 need fewer years of work. Survivors of very young workers may be eligible if the deceased worker was employed for 1½ years during the three years before his or her death.

When Dave died at age 57, he had only achieved 35 credits on his work record.

Since the number of credits needed for Dave’s case was 40, his family will be unable to apply for fully insured status. However, they will be able to apply for currently insured status through Social Security by using Dave’s credits for one and one-half year’s work (6 credits) in the three years just before his death. 

If the Spouse Is Younger than Full Retirement Age

My client was the same age as her husband – age 57. She has not yet reached full retirement age. Since she is caring for the worker’s (Dave’s) children, she will receive his Social Security benefit as a widow now. If she were not caring for his children, she would still receive a widow’s survivor’s benefit, but it would have been reduced, and would represent a smaller amount of his Social Security benefit. Social Security calculates full retirement ages for survivors based on the year they were born.

In the chart from their website listed below they include an example of 62 survivor benefits based on an estimated monthly benefit of $1,000 at full retirement age. If monthly benefits are applied for prior to full retirement age, the amount is smaller to take into account the lengthier period a person will receive them.

Social Security Administration’s Survivor Benefits Age Chart
Full (survivors) Retirement Age 2.At age 62 3. a $1000 survivors benefit would be reduced to Months between age 60 and full retirement age Monthly % reduction 4.
1939 or earlier65$82960.475
194065 and 2 months$82562.460
194165 and 4 months$82264.445
194265 and 6 months$81966.432
194365 and 8 months$81668.419
1944 65 and 10 months$81370.407
1945 – 1956 66$81072.396
195766 and 2 months$80774.385
195866 and 4 months$80576.375
195966 and 6 months$80378.365
1960 66 and 8 months$80180.356
196166 and 10 months$79882.348
1962 and later 67$79684.339

Source: Social Security Administration

Children’s Benefits

Unmarried children who are under age 18 (up to age 19 if attending elementary or secondary school full time) are also eligible to receive Social Security benefits when parent dies.

In some cases stepchildren, grandchildren, step grandchildren or adopted children may also be eligible to receive survivor benefits under certain circumstances.

The Social Security Administration Requires Surviving Children to be:

  • Unmarried
  • Younger than age 18
  • 18-19 years old and a full-time student (no higher than grade 12)
  • 18 or older and disabled. (The disability must have started before age 22.)

Within a family, a child may receive up to one-half of the parent’s full retirement or disability benefit, or 75 percent of the deceased parent’s basic Social Security benefit.

The formula used to compute the family maximum in 2015 is similar to that used to calculate the Primary Insurance Amount (PIA).

The family maximum payment is determined as part of every Social Security benefit computation. The formula sums four separate percentages of portions of the worker’s PIA. For 2015 these portions are the first $1,056, the amount between $1,056 and $1,524, the amount between $1,524 and $1,987, and the amount over $1,987.

Determination of family-maximum bend points for 2015
Amounts in formula
Average wage indices
For 1977:9,779.44
For 2013:44,888.16
Bend points for 1979
First:$230
Second:$332
Third:$433
Computation of bend points for 2015First bend point
$230 times 44,888.16 divided by $9,779.44 equals $1,055.71, which rounds to $1,056
Second bend point
$332 times 44,888.16 divided by $9,779.44 equals $1,523.90, which rounds to $1,524
Third bend point
$433 times 44,888.16 divided by $9,779.44 equals $1,987.49, which rounds to $1,987

Source: Social Security Administration

Exemptions

While most employers in the United States deduct Social Security from workers’ paychecks, there are some jobs that still do not. As a result, survivors would be ineligible Social Security survivor benefits. These employers include those who have worked for a railroad for at least ten years, and some employees of state and local governments who opted not to pay into Social Security. In these situations, their employers provided them a retirement pension plan instead of Social Security.

Conclusion

Naturally each survivor’s situation is different. Monthly survivor benefits from Social Security may not be the only payments possible for your surviving family members. Social Security offers a one-time LSDP payment ( Lump Sum Death Payment.) Of course, additional life insurance is recommended. In most cases, Social Secuirty helps but does not adequately cover the income needed when a spouse passes away.

It is prudent to contact a financial advisor to discuss not only your Social Security for retirement, but also explore what options your family would be able to have, in case something happened to you before reaching a full retirement age.

Social Security survivor benefits provide a valuable income for your surviving family members. Knowing how to apply and how to maximize these payments can significantly help family members through a difficult time.

three step review

Image by Pictures of Money via flickr, licensed under CC by 2.0

Secured Retirement Radio: Blackjack

Post written by Dale Decker

In the first Austin Powers movie, the lead plays blackjack with Dr. Evil’s henchman, “Number 2.”

Number 2, with x-ray vision, holds a 17, and scopes the next card as a 4. He hits for a 21 saying that he likes to live…dangerously. Austin Powers in turn then stays on his 5 and says slowly with a wink: “I too like to live dangerously.”

In retirement and regarding social security, we shouldn’t stay on a 5 or leave money on the table. It’s funny in movies, but in real life…not so much. On last Saturday’s Secured Retirement Radio show, Joe Lucey and Derek Fautsch talked about the paradigm shift that occurs when we approach retirement–the transition from accumulation to return.

In years past, it was all about growth. Now transition income and endurance are more important. In that context, retirement is the time to be informed of options before funds from income and Social Security are left on the table. Don’t stay on a 5!

At Secured Retirement Financial we offer classes, workshops, Social Security analyses, and a 3-step review to keep you informed. These are all built to help maximize income and Social Security while reducing taxes to enhance your retirement years. Contact us here for more information.

Here’s a link to this week’s show:

three step review