by Joe Hearn | May 4, 2012 | Social Security
I’m back from the land of the midnight sun and trying to get caught up on any retirement news I missed while on the road. One item that caught my eye was the Social Security Administration’s decision to provide online statements for estimated retirement benefits. You may have noticed that they quit mailing the paper statements last year in a bid to save about $70 million a year in mailing costs. Saving money is good, but being in the dark about your potential benefits is bad, so I’m glad they’re making the change.
To access your statement, go to www.ssa.gov and create a secure account. Once done you will be able to see your complete earnings history as well as the total Social Security and Medicare taxes paid over your career. More importantly, you can see the retirement benefits you can expect to receive at different ages (i.e. 62, full retirement age, and 70) so you can factor that information into your planning.
For more information on Social Security, just scan through the list of related posts below. Have a great weekend and touch base if I can ever help.
Joe
by Joe Hearn | Mar 13, 2012 | Investing, Retirement
Update: Before jumping into today’s article I wanted to give you an update on the learning post from last week. It must have struck a chord with the IR community (who, like those from Lake Wobegon are good looking and above average), because it was the most read and forwarded article on the site to date. If you enjoy learning new things, follow along with the challenges as we go and you’ll have plenty of things to talk about at the next cocktail party.
With the current challenge I’ve memorized the Americas, Europe and Africa. A good start, but there are a lot of countries in Asia and Oceania that will be challenging. With that update, let’s move on to today’s post, which is an article that I wrote for the Financial Planning Association. With tax time upon us, I thought many of you would find it helpful.
As April 17 (you have two extra days this year) rapidly approaches, people all across the fruited plain are sharpening their pencils, firing up their calculators, and figuring out what, if anything, they owe Uncle Sam. For all the ink spilled lamenting the complexity of the tax code, doing your taxes during your working years is a pretty straightforward task for most people. Just add up what you made, subtract any allowable credits or deductions, and then grab your checkbook.
The process is similar during retirement, with the exception that you have greater control over your income, which means greater control over your tax bill. That control means you can stretch your nest egg further by making good distribution decisions. With that in mind, here are five ways to minimize your tax bite during retirement.
Know which accounts to access first
The money you’ve saved for retirement is likely held in different types of accounts that are taxed differently. Some accounts are fully taxable, while others, like traditional IRAs, defer taxes until you withdraw the money. Still other accounts, like Roth IRAs, may be free from federal taxes altogether.
Which accounts should you tap first? A good rule of thumb is to take money from your taxable accounts first. This will allow the money in your tax deferred accounts to continue compounding. Access tax-free accounts last.
One exception to the rule of thumb might be if you are in a lower tax bracket now and anticipate that you will be in a much higher tax bracket in the future. In that case, you may want to begin taking distributions from your tax-deferred accounts earlier. In any event, work closely with your tax and financial advisers each year to make distributions decisions that make the most sense for your specific situation.
Minimize taxes on Social Security
If Social Security is your only source of income, chances are that you will not need to pay taxes on those benefits. If you have other income sources, however, you may need to pay taxes on a portion of your benefits if your modified adjusted gross income (MAGI) plus one-half of your Social Security benefits exceeds what the IRS calls the base amount for your filing status.
For example, if your MAGI plus one half of your Social Security benefits is between $32,000 and $44,000 (for those married filing jointly) in 2012, you may need to pay taxes on 50 percent of your Social Security benefits. If your income exceeds $44,000, you will likely need to pay taxes on 85 percent of your Social Security benefits. Armed with this knowledge, it’s easy to see how a poorly timed IRA distribution or acceptance of some part-time work during retirement can impact your tax bill in a given year.
Relocate to a tax-friendly state
Different states tax things differently. Consequently, where you decide to live during retirement is no small decision when you think about the various types of taxes that you pay (e.g. income taxes, Social Security and Medicare taxes, capital gains taxes, dividend taxes, property taxes, sales taxes, estate taxes and inheritance taxes). If a particular state is willing to cut you a break in one or more of these areas, it is worth factoring that into your decision making.
For example, do you plan on working at least part time during retirement? There are seven states that do not impose personal income taxes. Will most of your income be from Social Security? Thirty-six states don’t tax Social Security benefits. Do you anticipate a free-spending retirement? There are five states with no sales taxes. Do you have a pension? Ten states don’t tax federal, state and local pension income. Before deciding where to live, inventory your income streams and decide which state will allow you to keep more of what you make.
Consider tax-free bonds
Municipal bonds are issued by states or municipalities and are usually exempt from federal taxes. They may also be exempt from state and local taxes if you live in the state that is issuing the bond. This preferred tax treatment along with their historically low default rate make municipal bonds a staple in many peoples’ retirement accounts.
Take advantage of Net Unrealized Appreciation (NUA)
If you own highly appreciated company stock in your 401(k) or other employer sponsored plan, you should review your options carefully before rolling that money into an IRA when you retire. That’s because tax law permits you to distribute those shares from your 401(k) and pay income tax on the basis (your original purchase price) of the shares while continuing to defer the taxes on the unrealized gains. Once the stock is eventually sold, you will only pay capital gains taxes on the difference between your basis and the sale price. If, however, you roll all of those shares into your IRA at retirement, you will pay ordinary income taxes on the entire amount when you eventually distribute it from your IRA.
This strategy might be particularly appealing to someone in a high marginal tax bracket who currently pays income taxes at a much higher rate (35 percent) than capital gains taxes (15 percent).
Unfortunately, your tax bill doesn’t retire when you do, but there are actions you can take to minimize what you owe. By working closely with your advisers, you can maximize your income and increase retirement security.
by Joe Hearn | Feb 23, 2012 | Distribution Planning
(Note: This is Part 3 in a 3 part series that I did for the Omaha World Herald on retirement planning for different life stages.)
To state the obvious, farming and cooking are two different things. One is about creating. The other is about consuming. A similar relationship exists between preparing for retirement and being retired. One is about filling the barn—your 401(k), IRA, pension, Social Security credits, etc.—and the other is about emptying it by using what you created to provide for your needs.
That transition—from accumulation to distribution—has a lot of moving parts. Any missteps can impact your retirement for years to come. Taking too much too soon from the wrong accounts or in the wrong markets can be the difference between retirement bliss and retirement blunder. So what can you do to improve your odds of success and get your retirement off on the right foot? Begin by asking yourself the following four questions.
How much do I need?
Before you can begin drawing income, you need to figure out how much you’re going to need. Your costs will largely depend on the lifestyle you choose to live, so start by thinking about what you have planned for retirement. Do you want to travel? Are you planning on moving? Is there a particular hobby you want to focus on? Once those decisions come into focus, it will be easier to craft a detailed retirement budget. To help with this process, you can download a free Retirement Budget Worksheet at www.intentionalretirement.com/resources/.
Where is it going to come from?
Once you have a good handle on your expenses, determine what percentage of them will be your responsibility. Start by making a list of all of your potential income sources. Social Security and Medicare will likely do some of the heavy lifting. If you are lucky enough to have a pension, it will cover another portion of your expenses. If you plan on working part-time or have some other source of income, list that as well. Using this information, fill in the blanks to the equation below. The difference between your total need and the income provided by things like Social Security and your pension is the amount that you will need to draw from your nest egg each year to fund your retirement.
Is my nest egg up to the task?
Now that you know how much you need and where it’s going to come from, you can determine if your nest egg is up to the task. When you retire, your portfolio takes over the job that the payroll department handled during your working years. If you retire at 65 and live until you’re 85, it needs to cut you 240 monthly paychecks. There is no foolproof answer for how much you can safely draw from your portfolio each year, but much of the research points to around 4 percent.
With that in mind, grab a calculator and divide the number you came up with in the previous question by your total retirement assets. If the result is less than or equal to .04 (4 percent), you’re in pretty good shape. If it is greater than .04, it should raise a red flag. All is not lost, but some changes are likely in order. To avoid running out of money, you may need to save more, work longer, work part-time, or cut retirement expenses.
What is my withdrawal strategy?
The last piece of the puzzle is to decide on a withdrawal strategy that is right for you. There are a number of ways to draw from your accounts. You can take dividends only, convert all or a portion of your accounts to guaranteed payments by purchasing an annuity, or structure the accounts to self-liquidate over your lifetime, to name a few.
The strategy that I prefer is often referred to as the bucket strategy. Done correctly, it gives you the most flexibility and greatly increases your chances of outliving your money. It involves structuring your investments into different “buckets” that you can pull from at different times or under different conditions.
For example, you would have one bucket that contained several years of needed distributions in a very safe investment like a money market or certificate of deposit. In another bucket you would have riskier investments like your stocks and bonds. In still another bucket, you would have your tax advantaged investments like your IRA or an annuity.
The idea is to pull your distribution each year from the most appropriate bucket. If you retire just prior to a bull market, you can pull income from your growing investments. If you retire on the cusp of a bear market, you can take withdrawals from your cash. The safe bucket keeps you from being forced to sell your riskier assets in a declining market. The risk bucket increases your odds of outpacing inflation. The tax-advantaged bucket allows you greater control over your tax bill.
The primary advantage of this strategy is that it gives you options. If you, your spouse, and your advisers are able to evaluate those options and make distribution decisions each year that accrue maximum benefit to you, you are likely to see a significant increase in the amount of money you can draw from your portfolio over the years without a commensurate increase in your risk of running out of money.
Monitor and adjust
No matter which distribution strategy you choose, you should never “set it and forget it.” Take time each year to meet with a trusted adviser for a periodic portfolio check-up. This is especially critical during the early years of retirement when your sequence risk (the risk that you will retire and begin withdrawing money during a period of low or negative investment returns) is highest. Some questions you should consider during your annual review:
- Is your withdrawal rate sustainable?
- Is your income still sufficient and keeping pace with inflation?
- Is your asset allocation still appropriate?
- Is the amount of risk you’re taking still suitable?
- Has the value of your assets changed significantly?
- Has your life expectancy changed?
Your answers will help determine if you can keep your withdrawals the same or if a change is in order.
Keep in mind that anyone can retire. Staying retired is the challenge. By crafting a well thought out distribution strategy you can help ensure that your resources will see you through your retirement years.
by Joe Hearn | Jan 10, 2012
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2015
December
31 Year end wrap up
4 Harnessing the power of compounding for an exponentially richer life
November
25 Happy Thanksgiving plus huge Retirement Guide Discount
4 Congress just made huge changes to your Social Security claiming options
October
8 The happiness paradox
September
17 Just go already!
August
27 How to keep your retirement plans on track despite the volatility
5 Does Medicare cover you when you travel?
July
June
26 Zen and the art of retirement
18 Three easy ways to take interesting online courses
3 Big changes to Medicare that could affect you
May
22 What science teaches us about making retirement decisions
8 Walking the Camino de Santiago
April
29 9 Proven ways to live a long, healthy life
16 Retirement readiness flow chart
3 5 behaviors that will ruin your retirement
March
25 Here is how much you should have saved for retirement by now
8 How to make time lapse videos with your smart phone
5 5 things that matter more than money in retirement
February
26 How to create a predictable paycheck in retirement
21 Thoughts on losing a loved one
8 Bucket List Books: How and why to add reading to your bucket list
January
31 Lunch at the Eiffel Tower
29 Can you pass a basic retirement quiz?
24 How to find purpose in retirement
22 The 2015 Bucket List Giveaway
7 What one man’s wilderness adventure can teach you about retirement
1 Happy New Year!
2014
December
10 Choose your own adventure: Real life edition
4 A 12 week action plan for retirement
November
26 Update on The Ideal Retirement Design Guide
14 Retirement lessons from Walden
October
29 Seven decisions you will never regret
7 Your biggest retirement expense (and how to get rid of it)
September
26 5 key elements of a great quest
19 The happiness of pursuit
11 The most important question to ask about your to-do list
August
19 Are bonds safe or a ticking time bomb?
4 3 ways to protect your nest egg and prepare for the coming volatility.
July
17 Want to retire early? Do this one thing.
11 Weekend reading: The best retirement articles from around the web.
8 One month ago I left for a mini-retirement. Here’s what happened.
June
2 Bon Voyage!
May
23 The fierce urgency of now
16 How to simplify life in retirement
April
30 Two things on a crash course for your retirement
14 How to accidentally disinherit your kids
March
28 The secret to doing big things
14 Why retirement will be cheaper than you think
February
25 15 retirement words that don’t exist, but should
7 Two proven ways to delay or prevent dementia
January
22 How to be happy: Part 4
9 Most popular posts of 2013 plus retirement rules that work
2013
December
19 Annual Review: 2013 Edition
6 Mini-Retirement update: And the winner is…
November
27 10 questions that will help you decide what to do during retirement.
13 How to design your ideal retirement.
October
30 8 key retirement ages and what to do at each
18 You have 28,835 days. Here’s how you’ll spend them.
7 How the government is cutting your Social Security benefits
September
23 Mini-retirements and work: A how-to guide.
10 The case for mini-retirements
August
29 15 practical ways to live a purposeful life
26 The funny thing about time
12 What is your shot clock
6 The 15 minute retirement readiness review
July
22 On the road again…
3 Repurpose your life insurance to pay for long-term care
June
21 How rising rates will affect your portfolio
12 Channeling my inner Bear Grylls
7 A Brief Guide to Retirement Bliss
May
30 Free long-term care conference call
24 One year to live
17 How retired are you?
9 Retirement Planning Toolkit
April
30 Learning challenge update and what’s next
26 Keep calm and retire on
24 Two surefire ways to retire sooner
11 4 ways to maximize your Social Security benefits
1 The cure for “Where did the time go?”
March
21 Cash rich. Lifestyle poor.
12 30 day learning challenge: Speed reading edition
5 Which state will give you the lowest tax bill?
February
22 Retirement: What Seuss might say
15 A new tool to help reduce prescription costs
13 Why you need a vacation
January
24 How to be happy: Part 3
7 Financial Checkup Checklist
3 7 retirement resolutions for 2013
2012
December
26 40 lessons from my first 40 years
17 Annual Review: 7 questions for your adviser
7 Schedule your good stuff
November
28 A short lesson in perspective
20 Fiscal Cliff cheat sheet
15 Retirement fire drill
9 Contentment demands little
5 How to stay mentally sharp as you age
October
31 Let your paycheck be your portfolio
25 Discipline vs. Motivation
23 How aging affects your financial decision making
17 When should you claim Social Security?
12 Eat, Move, Learn
10 Medicare open enrollment starts October 15
5 How strong is your why?
3 Houston, we have a problem.
September
28 The dual processes of an ideal retirement
27 Why you should roll your 401(k) into your IRA when you retire
18 How to be happy, Part 2: The hedonic treadmill
11 Where were you when…
7 The top 10 posts from the first 100
4 Retirement health: Foods that minimize Alzheimer’s risk
August
30 Ten years is not enough
27 How to be happy: Part 1
22 Will you spend less in retirement
17 When are your retirement dreams most at risk?
13 The surprising truth about how retirees spend their day
8 5 key relationships for people over 50
2 Curate your life
July
30 How to cure the Busy Virus
24 30 day learning challenge: Croissant edition
18 5 reasons to keep your life insurance during retirement
13 Case Study: When can I afford to retire?
11 Ray Bradbury on how to predict your future
9 Can the new health care law help you retire early?
2 How to maximize fun and minimize stress
June
14 London calling: Should you retire overseas?
11 How much is enough? A simple formula for calculating how much you’ll need
7 Retirement is a path, not a door
5 30 day learning challenge: SCUBA edition
1 An open letter to the Class of 2012 and the monthly rewind
May
24 What if it doesn’t work out that way?
21 The benefits of an extravagantly modest lifestyle
15 Tiger’s advice for your retirement
8 Don’t let death of a spouse derail retirement
4 Social Security statement now available online
April
25 How to retire early (i.e. today)
18 30 day learning challenge: World geography edition
13 Free “8 Habits” poster
10 5 questions before you quit
5 You will be who you are becoming
March
30 Monthly rewind: March edition
26 Required minimum distributions due April 1 for some
19 Get your dreams off the drawing board
15 Kindle Touch giveaway
13 How to minimize taxes during retirement
8 How (and why) to be a lifelong learner
2 One small change that will produce huge results
February
28 Say yes to adventure
23 How to turn your savings into an income stream
20 Abe Lincoln’s favorite poem
14 A little something for you on Valentine’s Day
9 The problem with delayed gratification
6 20 tips to ensure a nice nest egg in 20 years
January
31 Monthly rewind: January edition
31 How to help your kids and grandkids
26 Reaching retirement escape velocity
20 Retirement budget worksheet
17 8 habits of successful retirees
10 Caring for your aging parents: A checklist
5 2012 IRA and 401(k) contribution limits
3 How (and why) to make a time budget for the New Year
2011
December
28 10 Resolutions that will keep you on track for a secure retirement
20 My brain made me do it: How to avoid bad investment decisions
16 Hurry up! You have plenty of time.
13 The glass is half full
9 A little pre-weekend inspiration
6 Answers to the top 10 Social Security questions
November
30 Monthly rewind: November edition
29 Your plan for the New Year in 3 easy steps
23 Commander’s Intent (a.k.a. Eisenhower’s advice for your retirement)
15 A To Do List for year’s end
10 11 great travel apps for your retirement (and pre-retirement) adventures
7 Don’t wait. Start taking your plans very seriously.
October
31 Monthly rewind: October edition
21 Estate Planning: A short primer
18 The most important thing to know about your retirement budget
7 Three key retirement mistakes to avoid
September
30 Monthly rewind: September edition
28 Medicare: A short primer
22 The power of deciding
13 10 essential documents for retirement
7 Essential financial tips for empty nesters
August
31 How can I help you?
26 Designing a retro retirement
19 What are you looking forward to?
11 Anxious? Focus on what you can control.
9 How the U.S. debt downgrade will affect your retirement
1 Sometimes the best plan is not having a plan
July
25 Are you a system thinker?
12 How (and why) to retire debt free
1 9 tips for taking great travel photos
June
22 How to maximize your time in retirement
20 Should you buy long-term care insurance?
May
22 10 questions to ask your spouse before you retire
22 Traveling? Should you buy travel insurance?
18 How do you define retirement?
18 Annual retirement review checklist
17 Can you count on Social Security and Medicare?
16 Maximizing retirement: Time vs. Tasks
14 Maximizing retirement: Maintenance vs. Milestones
14 Maximizing retirement: Assets vs. Experiences
10 Social Security: When can I file?
10 Seven signs it’s time to retire
8 Should you move when you retire?
4 Be specific with retirmeent plans
3 Seven ways to disaster-proof your life
3 Be ready for all phases of retirement
3 The arithmetic of loss
April
29 When do you plan on retiring?
27 Three crucial questions
by Joe Hearn | Jan 10, 2012 | Estate Planning, Retirement
Does your retirement plan include your parents? It probably should. Chances are good that they are counting on you to handle their affairs if they die or become incapacitated. How confident are you that you have everything you need to handle that role effectively? Do you know their wishes regarding life-prolonging care? Have they given you power of attorney? Will they have adequate resources to pay for the cost of their care?
Many parents are reluctant to discuss these things with their children because they think they are private matters, they fear losing control, or they want to appear to have it all together. Be sensitive to that, but don’t let it keep you from starting the conversation because the stakes are high.
A recent study by MetLife found that there are nearly 10 million adults over age 50 caring for their aging parents. The study estimates the potential costs for caregivers (in terms of lost wages, pension and Social Security benefits) to be around $3 trillion or an average of $300,000 per caregiver. Many risk putting a significant dent in their own retirement plans if they haven’t properly planned for how to help mom and dad.
The sooner you begin talking and planning, the easier it will likely be on everyone involved. Helping is much more difficult after a crisis, so start talking while your parents are still healthy and active. Here are five steps to cover as you work through the process.
Dialogue
An easy way to begin the conversation is to talk to your parents about the planning you have done for yourself. Be transparent about areas like your finances and legal affairs and ask their opinion on your situation. Then ask them about their planning and what role you might play in helping them as they age.
Be sure to communicate that any involvement on your part would be gradual and based on their needs. You aren’t looking to take control of their affairs, but simply want to understand their situation so you can be an effective advocate for them if they ever need your help. Make clear that you are just the understudy and you won’t step in to help unless or until they need you.
Review
Once everyone is talking, it’s time to review your parents’ current state of affairs. What are their current assets and liabilities? What accounts do they have at different banks or investment firms? Who are their key financial and legal advisers? Do they have a will and powers of attorney? Do those documents reflect their current wishes? Where do they keep important documents? How is their health? What doctors do they see and what medications do they take? Do they have long-term care insurance? By asking these and other questions, you will get a broad overview of their affairs and be in a better position to not only offer assistance, but also spot potential problems.
Remedy
If the Review stage uncovered any holes in your parents’ planning, now is the time to fix them. Pay particular attention to five key areas: 1) Finances, 2) Insurance, 3) Legal documents, 4) Living arrangements and 5) Health. Work with your parents and their advisers to make sure that all bases are covered. Here is a simple checklist of key points to consider for each area:
Finances
- Make a list of all accounts and where they are held
- Get contact information for their advisers
- Consolidate and simplify accounts where possible
- Make sure the accounts are titled correctly
- Offer to sit in on a meeting with their financial adviser to review investments, make sure the asset allocation is appropriate and make sure there are adequate resources to support your parents’ lifestyle
- Review Social Security benefits
- Make sure all beneficiary designations are up to date
- Streamline bill paying
Insurance
- Make a list of all insurance policies (life, health, long-term care, etc.) and where they are located
- Get contact information for their insurance advisers
- Offer to sit in on a meeting with their insurance adviser to see if a long-term care insurance policy would be appropriate
- Review homeowners, auto and umbrella liability insurance to make sure they are adequate, appropriate and up-to-date.
- Review health insurance coverage and consider whether it would be appropriate to add a Medigap policy to pay for costs not covered by Medicare
Legal Documents
- Do they have a will or estate plan?
- If so, does it reflect their current wishes (i.e. does it pass property to the correct people and have the correct people taking charge)?
- Do they have an up-to-date durable power of attorney for finance?
- Do they have an up-to-date durable power of attorney for health care?
- Does their health care power of attorney contain a health care directive that spells out their wishes for life-prolonging care?
Living arrangements
- Is the current housing situation suitable?
- Do any changes, updates or modifications need to be made to the house?
- Have they made contingency plans for illness, disability or death of a spouse?
- Is there money available to pay for those contingencies (e.g. savings or long-term care insurance)?
Health
- Make a list of their doctors as well as any medications they are taking
- Help coordinate benefits between care providers and insurance companies
Organize
Once the initial planning is done, get it organized. People usually need important documents during painful or stressful times. A will is needed after someone dies. A medical power of attorney is needed after someone has become incapacitated. Having everything organized will not only minimize stress, but it will also help those in charge to make informed decisions during difficult circumstances.
Implement
Helping a parent is typically a gradual process. Once the initial planning is done, keep the lines of communication open. If they need help in a certain area or with a particular task, you will be there to lend a hand. As they need more help, you can gradually implement the planning that you did with them previously.
Becoming a parent to your parent is never easy, but you owe it to both them and yourself to get things in order. Proper planning will give peace of mind, help avoid family conflict and minimize the financial impact on everyone involved.
Thanks for reading. Touch base if I can ever help.
Joe
Note: I originally published this article at www.fpanet.org.
