Tag: Retirement

Are You Effectively Managing Your Social Security Retirement Benefits?

With employment opportunities becoming increasingly challenging for seniors, more and more clients in their 60s are addressing social security issues sooner than they expected, and many of them have these questions:

  1. Early Retirement Benefits: When should I begin taking my benefits?
  2. Taxation of Benefits: How can I minimize the tax on my benefits?
  3. Delayed Retirement Credits: Does it make sense to postpone my benefits?
  4. Spousal Benefits: When should my spouse take benefits?
  5. Benefit Contingency Plans: How can I replace some/all of my benefits if social security changes?
  6. Strategies to Consider: What tactics might enhance my lifetime benefits?

Early Retirement Benefits

Allows eligible recipients to begin receiving their benefits four to five years prior to their full retirement age (65-67 depending on year of birth). The major disadvantage is that benefits are reduced by 20-30 percent for the recipient’s lifetime; spousal benefits can also be limited depending on circumstances.

Despite these drawbacks, about 45 percent of eligible Americans elect to receive early benefits (SSA Annual Statistical Supplement, released Feb 2015). Early benefits have appeal to those who are not working, need cash flow, and/or are concerned that social security’s days may be numbered—a “take the money and run” philosophy.

Helping clients calculate their “break-even age” can assist with this decision. As an example, if you are currently 62 and your full retirement age is 66, your monthly benefit of $1,600 would be reduced to $1,200 (by 25 percent) if you started today.  By about age 77, you could break even (total early benefits would equal those received at full retirement) at $230,400.  The break-even age increases to age 82 if we assume the early benefits were invested at 6 percent annually.  So, in this simplified example, if the client has a high probably of living past 77 (or 82, depending on your assumptions), he/she would be better off waiting until full retirement.  The Social Security Administration’s on-line calculator (http://www.ssa.gov/pubs/10147.html) is a great resource to help with these calculations. 

Early Benefits Earning Limits

For those who take early benefits and are employed with compensation over the “earnings limit,” Social Security will take back $1 of benefit for every $2 earned over the limit. This continues until the year in which full retirement age is reached. During the year they reach full retirement age, the new earnings limit applies only for the period before the month they reach FRA. If earnings exceed the limit in this period, benefits are reduced $1 for every $3 earned over the annual earnings limit.

The amount that is withheld, however, may not be lost. That is because the SSA will, after full retirement age, recalculate the benefit amount and give credit for any months when benefits were reduced because of earnings.

Taxation on Benefits

Benefits can be taxed as ordinary income, depending on the recipient’s Preliminary Adjusted Gross Income. Preliminary Adjusted Gross Income (P-AGI) includes earnings, pensions, interest, dividends, municipal bond interest, and 50 percent of social security benefits.  For P-AGI over certain amounts, a percentage of benefits become taxable. This applies to all social security recipients; there is no age forgiveness so it is important to check the prevailing AGI threshold to coordinate discretionary income such as IRA withdrawals.  We might consider “bunching” income and deductions in alternate years.

Delayed Retirement Credits

For those who postpone benefits and continue working past full retirement age, their lifetime benefit can be increased up to 8 percent for each additional year worked through age 69. The precise formula is based on birth year.  So for a client who is 66 this year and entitled to $1,600 of full retirement benefit today, working an additional two years could increase their monthly benefit to $1,856.  Thus, for clients who are active, in good health and have a family history of longevity, there may be benefit to continue working. (see http://www.ssa.gov/OP_Home/handbook/handbook.07/handbook-0720.html)

Spousal Benefits

For those age 62 and over whose spouses are alive and receiving benefits, they may be eligible for spousal benefit even if they do not have enough of their own work credits or have never worked at all. The maximum is 50 percent of the spouse’s benefit and may be reduced depending on how many months prior to full retirement age that payments begin.  Upon application, the Social Security Administration will automatically pick the greater of the spousal benefit or actual benefit based on own work credits.

The wife’s benefit may be optimized if she claims her benefit at age 62 (see study by Steven A. Sass, Wei Sun Center for Retirement Research at Boston College http://works.bepress.com/anthony_webb/26/). Because most husbands have higher lifetime earnings and shorter life spans, women often receive the majority of spousal and survivor benefits.  When a spouse dies, the survivor can claim the greater of their own earned benefit or their spouse’s earned benefit.  This may be reduced if claimed prior to full retirement age.  

Benefit Contingency Plans

We prepare clients for a number of possible changes as the social security system works to remain viable. Proposals that may be considered include:

  1. Raising the ceiling on the maximum wage base from current levels ($127,200 in 2017) to $250,000;
  2. Accelerating by 5 years the gradual increase in full retirement age to 67;
  3. Modifying the benefit calculation to reduce benefit growth;
  4. Introducing “means testing” that could increase taxation and/or reduce benefits for recipients with household income over specified thresholds.

Whatever the outcome, it is critical that we offer clients “contingency plans” capable of replacing benefits that could be lost as a result.

Strategies to Consider

Taking Early Benefits and Investing the Cash: Consider the above example wherein a client begins his $1,200 early benefit at age 62 and invests it at 6 percent annually. After 5 years he would have about $57,811 accumulated, which could potentially generate the $400 per month difference (between full and early retirement benefit) for about 22 years.  But if the money earns 3 percent, that benefit is only generated for about 13 years.  Obviously much here depends on actual investment returns and longevity.

Make Up for Low Earnings Years: In general, for those born after 1928, benefits are calculated by averaging 35 highest years of indexed earnings. For those who made little or nothing in one or more of those 35 years (often those who took off to raise family), waiting to retire until normal retirement age might increase benefits because each year they wait to retire gives a chance to earn enough to replace a lower year of earnings in the calculation.

Social Security Buy Back: Undoing a decision to receive early retirement benefits could be advantageous under certain circumstances.   Say a couple, both now 70, took early benefits at 62 and now receive $11,556 annually.  Had they waited until 70, they would be receiving $20,000 annually instead, despite their not having worked since age 62.  If they each pay back $79,305 in benefit and reapply, they effectively purchased an additional $8,444 of annual inflation adjusted annuity benefits.

Bottom line, there are no hard fast rules as each client situation needs to be evaluated based on their individual circumstances. Also, while we can educate, there is no substitute for the client having a face-to-face meeting with a Social Security Administration representative and consulting their tax adviser. As advisors we can add tremendous value by making clients aware of the various issues and guiding them through their decision making process.

Uncertainty over the economy and financial markets has many people concerned about their financial futures. For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours—one that delivers services according to the needs and perspectives of its clients.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.

 

Can Innovative Strategies Help Address Your Long-Term Care Challenge?

When planning for retirement, all possible risks must be considered and evaluated. One of the most commonly overlooked is the potential need for long-term health care (LTHC) for you and/or your spouse. The cost of LTHC can be staggering and can derail even the best laid financial plans. When evaluating the risk of the cost for LTHC, the old adage about three ways to manage risk can be clearly applied.

Continue reading “Can Innovative Strategies Help Address Your Long-Term Care Challenge?”

How Can You Avoid the Top 10 Estate Planning Pitfalls?

Upon your death, the best thing you can do for loved ones upon death is allow them to resolve your estate quickly and easily, so they can get on with their lives. But people often fall into 10 estate planning traps. Here is how to avoid them. Understanding and avoiding these common errors can help minimize the tax bite for your heirs and assure that your wishes are fulfilled.

1.  Not funding your living trust

This important trust places your assets “in bin” while you are alive. Postmortem a pre-appointed trustee is provided to manage them. Living trusts can usually help avoid probate (a costly court proceeding that decides which heirs receive your assets after your death) and help reduce taxes on your estate. No matter how thorough your living trust is, it needs to be adequately funded. Generally, to be effective, you must move property and assets into the trust by making the trust the legal owner of those assets. If you don’t make the appropriate title transfers, assets may be subject to probate and eventually, estate taxes.

2.  Too much JTWROS property

Joint-tenancy-with-right-of-survivorship (JTWROS) is a type of brokerage account that you share with your family members while you are alive. After you pass away, your survivors inherit your share of the account. While titling assets under JTWROS does avoid probate, it does not avoid estate taxes. It is important to keep in mind that property titled JTWROS goes to the surviving joint tenant regardless of what a will or trust says.

3.  Leaving too many assets to a surviving spouse

Under the current tax laws, you are allowed to transfer as many assets in your estate as you wish to your spouse either while you are alive or at your death. The problem and extra tax may come when those assets pass to the next generation. A major goal of a living trust is to preserve the first-to-die spouse’s applicable exclusion amount. This is the amount that is exempt from estate and gift taxes. It is advisable to check the current amounts with your attorney.

4.  Not equalizing assets through gifts between spouses

This is another example of improper titling and wasting the applicable exclusion amount. Having all property titled in one spouse’s name can create problems when the non-titled spouse dies first and does not pass on any property under his or her credit.

5.  Not having a will

If you die without a will, the disposition of property falls under the purview of the state intestacy laws. In effect, a judge decides who gets what according to a preset formula based on lineage. Not only can your wishes be thwarted, but this process can also bring additional legal costs, taxes, delays and frustrations to your heirs.

6.  Improper ownership of life insurance

Policies are often owned by the insured, payable to the insured’s estate or survivors. This is included in the owner’s taxable estate and is therefore subject to estate taxes. You can avoid this by giving the policies directly to the beneficiaries or transferring them to an irrevocable trust.

7.  Being donor and custodian of a UTMA account

If you are the custodian and donor to a uniform transfer to minors account, that account will be included in your estate and possibly subject to painful estate taxes.

8.  Not knowing where all the documents are

Heirs are often burdened with hunting down accounts and documentation. A scattered estate plan by a secretive deceased person may cause some assets to be left uncollected, undistributed and even lost. It is best to keep copies of documents, recent account statements and safe deposit box information in a notebook and to make your trusted heirs aware of its contents.

9.  Naming the wrong executor

The tasks facing an executor are often formidable and demanding. If you are concerned that your spouse, relatives or friends are not up to the task, consider hiring a professional or a trust company.

10. Not periodically updating an estate plan

It is human nature to think about dying. That makes estate planning one of the most frequently procrastinated aspects of our financial plans. Often when the original documents are drafted, people are tempted to put it on a shelf and be done with them.

As your economic situation, health, family and the tax code inevitably change, so too should your estate plan. You should review your estate plan at least every couple of years. It’s best to work with an experienced advisor who can help make the necessary modifications.

Even the most sophisticated estate planning tools can go awry due to some simple oversights. Be sure to work with an experienced financial professional to help you achieve your estate planning goals.

Uncertainty over the economy and financial markets has many people concerned about their financial futures. For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours—one that delivers services according to the needs and perspectives of its clients.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.

 

Financial Confidence in Retirement: 10 Planning Mistakes to Avoid

As more Baby Boomers approach their golden years, they are faced with a plethora of challenges. Especially for those with greater resources, the issues can be formidable. To the extent that these are effectively addressed, the promise of those Golden Years can be more readily achieved with less stress—both during and after the transition.

The Top 10 Most Common Mistakes to Avoid

  1. Procrastinating

Often people do not begin their retirement planning until retirement is upon them. Depending on your situation, most experts urge that this process begin no later than 5 years prior; ideally, at least 10 years or more.1

  1. Not Considering How Much Retirement Income Will Be Needed

Estimates vary as to how much a person’s or couple’s expenditures will change once they retire. Generally, 75 percent of current income is the rule of thumb. Obviously this has to be adjusted for factors such as projected mortgage (if any), downsizing of residence, travel, etc.

  1. Not Estimating How Long Retirement Income Will Need to Last

You hear it all the time: People are living longer, and hopefully you will be among the growing number of centenarians. Other issues may arise as well, such as the likelihood of needing to provide financial assistance to your parents, children or even siblings. Careful, objective planning and on-going management will be needed to make sure there will be enough income.

  1. Overreliance on Social Security

This program was always intended as a safety net and not to meet all of a retiree’s income needs. With questions arising as to the system’s soundness, it is more important than ever to have sound planning in our financial affairs.

  1. When to Begin Taking Social Security Benefits

While it is certainly tempting to begin retirement benefits as soon as eligible, there are some important considerations. First and foremost is the fact that, while benefits can start as early as age 62 for eligible recipients, taking those early benefits can permanently reduce the monthly amount by up to 25 percent for a recipient’s entire lifetime! And if the recipient is working and earning over the prevailing threshold amount, they could see up to a 50 percent reduction of benefits until they reach full retirement age. On the other hand, some studies imply that recipients can benefit by taking early payments and investing the amount until full retirement age is reached, while others suggest that receiving a lower benefit for a longer time can be more advantageous. Before making any decisions, it is important to consult with your local Social Security Administration Office, then carefully review your circumstances with your tax and financial advisors.

  1. Dismissing the Possible Need of Long-Term Care

It is easy to dismiss the prospect of long-term care, particularly if someone close has not fallen victim to chronic diseases such as Alzheimer’s. The reality is that if not properly planned, the ever-increasing costs of long-term home and nursing care can rapidly deplete a lifetime’s savings. If necessary, long-term care insurance can make the difference between a comfortable, calm retirement and one filled with financial insecurity.

  1. Retiring Early Without Adequate Planning

An early retirement can present exponentially greater challenges to one’s savings. Not to say it should not be done, but it is particularly critical that a game plan be developed well ahead of time to help ensure there will be enough income to last.

  1. Assuming Retirement Planning is a One-Time Event

Especially with the rapidity of life’s changes today, a plan constructed even a year ago could be sorely in need of revision. Changes in the markets, interest rates, even our own personal preferences, necessitate periodic, on-going review and adjustments.

  1. Forgetting About Income Taxes

Just because we retire does not mean income taxes go away, starting with how best to handle lump sum distributions from a retirement plan. During retirement, income tax planning can be even more critical to preserve the nest egg. Especially with the onset of required retirement plan distributions, it is important to continually evaluate whether to take the minimum or to accelerate withdrawals.

  1. Believing in Retirement Nirvana

Just like “the grass is always greener…,” retirement can be seen as the cure for many of life’s woes. For those unprepared, the added time available can create a whole new set of challenges. Statistics show that the average new retiree spends about 45 hours a week watching television (see http://www.cebcglobal.org/index.php?/knowledge/the-age-wave/). For a fulfilling retirement, it is important to prepare for the psychological as well as the financial aspects.  Just as a surgeon is advised not to operate on herself or loved ones, it is often invaluable to have independent, objective, expert advice in developing and managing a program for your retirement years.

Uncertainty over the economy and financial markets has many people concerned about their financial futures. For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours—one that delivers services according to the needs and perspectives of its clients.

1Anspach, D. (2016, November 17). Steps You Must Take Within 5 Years of Retirement.Retrieved from http://www.thebalance.com.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of Fargo Financial Network LLC (WFAFN).  The information has been obtained from sources considered to be reliable, but Wells Fargo Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years. Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community. 

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), SIPC.  Kauffman Wealth Management is a separate entity from WFAFN, Member SIPC.

Insurance products are offered through nonbank insurance agency affiliates of Wells Fargo & Company and are underwritten by unaffiliated insurance companies.

A Unique Approach to Life Transitions

“What am I going to do after I retire?” “How can I stay relevant?” “Do I have all of my bases covered to help assure financial independence after I stop working?”

Certainly questions such as these are often posed by both men and women as they ponder their future after retiring from a career. Considering 75 million baby boomers will be reaching retirement age over the coming years, there will be no shortage of inquisitors in the foreseeable future. Continue reading “A Unique Approach to Life Transitions”