1099 Details for Tax Season

Contributed by: Nick Defenthaler, CFP®, RICP®

Tax season is in full swing (everyone’s favorite time of year, right?!), and 1099s are in the process of being developed and distributed by investment broker-dealers and custodians. The two most common accounts clients own are retirement accounts (Roth IRAs, Traditional IRAs, SEP-IRAs, etc.) or after-tax investment/brokerage accounts (Joint brokerage account, individual brokerage account, trust brokerage account, etc.). Because retirement accounts and after-tax accounts are vastly different from a tax perspective, the 1099s that are generated will be much different as well. Let’s review the differences.

Retirement Accounts (Traditional IRAs, Roth IRAs, SEP-IRAs, 401k, 403b, etc.)

Retirement accounts produce what’s known as a 1099-R. Yes, you guessed it – the “R” stands for retirement account! Because retirement accounts are tax-deferred vehicles, the IRS only cares about how much was withdrawn from the account and if there was any tax withheld on those distributions (the 1099-R is also accompanied by form 5498, which also shows any contributions to the retirement account). Because of the simplicity and what’s captured on this tax form, I commonly refer to a client’s 1099-R as their “retirement account’s W2”. Because of the tax-deferred nature of retirement accounts, portfolio income such as dividends, interest, and capital gains are completely irrelevant from a tax reporting standpoint. Because these income sources do not play a role within the 1099-R, there’s far less accounting that goes into producing the 1099-R, which means they are released early in the year – typically in late January/early February (around the same time most W2s are produced for those still working).

**Important Tip: For those over 70 ½ that have chosen to utilize the Qualified Charitable Distribution or ‘QCD’ strategy (click here to learn more about QCDs) and gift funds directly from their IRA, please note that not all investment companies will report these gifts on your 1099-R! If the gifts you made from your IRA directly to charity do not appear on your 1099-R, it will be your responsibility (or you can ask your advisor) to communicate how much you’ve gifted throughout the year to your tax preparer to ensure you’re receiving the tax benefits you’re fully entitled to! If gifts are missed, you would be able to file an amended tax return, but this is a time-consuming and sometimes costly step I would recommend avoiding, if possible.**

After-Tax Investment/Brokerage Accounts (Trust accounts, joint accounts, individual accounts, etc.)

After-tax investment or ‘brokerage accounts’ are very different compared to retirement accounts when it comes to tax reporting. Because these accounts are funded with after-tax dollars and not held in a retirement account, there is no tax-deferral. This means that income sources such as dividends, interest, and capital gains are taxable to clients each year – the 1099 produced for these accounts captures this data so your tax preparer can accurately complete your tax return each year. Within the 1099 summary, there are three common sections:

• 1099-Div: Reports dividends paid throughout the year

• 1099-Int: Reports interest paid throughout the year

• 1099-B: Reports capital gains or losses generated throughout the year

Unlike retirement accounts that are tax-deferred, dividends, interest, and capital gains/losses play a significant role within the 1099 because they are reportable on your tax return each year. Because of this, a significant amount of accounting from the various investments within your account is required to ultimately determine these figures that will be captured on your 1099. Because taxes are not withheld in these accounts if distributions ever occur, withdrawals are not captured on these 1099s as they would be on a 1099-R. Given the extensive accounting that occurs to ensure errors are not made on reportable income, the earliest these 1099s become available is typically mid-February. That said, it’s quite common for many 1099s to be distributed closer to mid-March. Because of this, I always recommend consulting with your tax professional to see if filing a tax extension would be appropriate for your situation.

As you can see, there are important differences between these different tax reporting documents. Having a better understanding of each will hopefully make your upcoming tax season a bit more manageable. 

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

The Widow’s Penalty: Lower Income, Higher Taxes

Contributed by: Nick Defenthaler, CFP®, RICP®

A newly widowed example client, whom we'll call "Judy," receives communication from Medicare that her Part B and D premiums are significantly increasing from the prior year. To make matters worse, she also notices that she's now in a much higher tax bracket when filing her most recent tax return. What happened? Now that Judy's husband is deceased, she is receiving less in Social Security and pension income. Her total income has decreased, so why would she have to pay more tax and Medicare premiums? Unfortunately, she's a victim of what's known as the "widow's penalty."

Less Income and More Taxes. What Gives?

Simply put, the widow's penalty is when a surviving spouse ends up paying more taxes on less income after the death of their spouse. This happens when a widow or widower starts filing as a single filer the year after their spouse's death.

When the first spouse dies, the surviving spouse typically sees a reduction in income. While the surviving spouse will continue to receive the greater of the two social security benefits, they will no longer receive the lower benefit. In addition, it's also very likely that the surviving spouse will either entirely or partially lose income tied only to the deceased spouse (ex., employment income, annuity payments, or pensions with reduced or no survivor benefits). Depending on how much income was tied to the deceased spouse, the surviving spouse's fixed income could see a sizeable decrease. At the same time, the surviving spouse starts receiving less income, and they find themself subject to higher taxes.

With some unique exceptions, the surviving spouse is required to start filing taxes as single instead of as married, filing jointly in the year following their spouse's death. In 2024, that means they will hit the 22% bracket at only $47,150 of taxable income. Married filers do not reach the 22% bracket until they have more than $94,300 of income. To make matters worse, the standard deduction the widow will receive will also be cut in half. In 2024, for a married couple (both over 65), their standard deduction will be $32,300. A single filer (over the age of 65) will only have a $16,500 deduction! Unfortunately, even with less income hitting the tax return, widowed tax filers commonly end up paying higher taxes due to the compression of tax brackets and the dramatic standard deduction decrease for single filers.

Medicare Premiums Increase

Tax brackets are not the only place surviving spouses are penalized. Like the hypothetical example above, many surviving spouses see their Medicare premiums increase even though their income has decreased because of how the income-related monthly adjusted amount (IRMAA) is calculated (click HERE to visit our dedicated Medicare resource page). Whereas there is no surcharge until a married couple filing jointly reaches an income of $206,000, single filers with a modified adjusted gross income (MAGI) of more than $103,000 are required to pay a surcharge on their Medicare premiums. This means that a couple could have an income of $127,000 and not be subject to the Medicare IRMAA surcharge. However, if the surviving spouse now has income over $106,000, their premium will increase by almost $1,000 per year. In this same example, the widow could now be in the 22% bracket (as compared to the 12% bracket with $120k of income filing jointly) and be paying approximately $3,600 more in federal tax.

Proactive Planning

Short of remarrying, there is no way to avoid the widow's penalty. However, if your spouse has recently passed away, there may be some steps you can take to minimize your total tax liability.

For most widows, the year their spouse dies will be the last year they will be allowed to use the higher married filing jointly tax brackets and standard deduction. In some cases, it can make sense to strategically realize income during the year of death to minimize the surviving spouse's lifetime tax bill. A surviving spouse might do this by converting savings from a Traditional IRA to a Roth IRA while they are still subject to the married filing jointly rates.

Let's look at a hypothetical scenario with a couple we'll call John and Mary. After several years in a long-term care assisted living facility, John sadly passed away at age 85. Because John and Mary did not have long-term care insurance, they had sizeable out-of-pocket medical expenses that resulted in a significant medical deduction in the year of John's passing. Several months after her husband's passing, over $100,000 was converted from her IRA to a Roth IRA. Because this was the last year she could file jointly on her taxes and had the significant medical deduction for the year John passed, Mary only paid an average tax rate of 10% on the $100,000 that was converted. As we stand here today, Mary would now be filing single and find herself in the 24% tax bracket (which will likely increase to 28% in 2026 as our current low tax rates expire at the end of 2025).

The widow's penalty should be on every married couple's radar. It's possible that while both spouses are living, their tax rates will always remain the same, as we've highlighted above. Unless both spouses pass away within a very short period of time from one another, higher taxes and Medicare premiums are likely inevitable. However, proper planning can help dramatically reduce the impact of this penalty on your plan.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Center for Financial Planning, Inc is not a registered broker/dealer and is independent of Raymond James Financial Services Investment advisory services are offered through Center for Financial Planning, Inc. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James.

Raymond James and its advisers do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

These examples are hypothetical illustrations and are not intended to reflect any actual outcome. they are for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.

The Top 5 Tips for Managing Beneficiary Selections

Contributed by: Nick Defenthaler, CFP®, RICP®

Checking your beneficiary designations each year on your investment accounts is always a wise move. Our team does this before each planning meeting with our clients, and I can't tell you how many times this has prompted an individual or family to make a change. As tax law has continued to evolve and new rules related to inherited retirement accounts have emerged, it's now even more important to be intentional with your beneficiary selections.

Here are my top five tips and considerations when it comes to prudent beneficiary management and selection:

1. Review Beneficiary Elections Annually

As we all know, mistakes happen, and life changes. Kids might now be older and more responsible for making financial decisions, family members you've listed may have passed away, and dear friends you've named as a beneficiary might no longer be part of your life. Let’s look at a hypothetical investor who we’ll call “Sam”. Sam is in his early 70s and had become divorced three years prior. Sam was also less mobile and, as a result, decided he wanted to hire a new adviser who was closer to his home.

His former wife had been named on his retirement account, which had grown to $1M. If Sam didn't take any action of the time of his divorce, his account would go to his ex-wife, and not his two children as he wants. When we identify a beneficiary that needs to be updated, we make sure the client addresses it immediately as that determines who gets that account.

2. Charitably Inclined? Consider Pre-Tax Retirement Accounts

If you have the desire to leave a legacy to charity, naming the charity as a partial or 100% primary beneficiary on a retirement account could be a very smart tax planning move. Unlike an individual, when a charitable organization receives assets from an individual's pre-tax IRA, 401k, etc., the charity does not pay tax on those dollars. Let’s look an at example client who owns a pre-tax traditional IRA ($1M) and a Roth IRA ($500k). She indicates that she wants 10% of her $1.5M portfolio to go to her church, with the remaining amount being split evenly amongst her four adult children.

To accomplish this goal, we’ll name her church as a beneficiary on her traditional IRA for a specific dollar amount of $150,000. The entire bequest would come from the traditional IRA and nothing from her Roth IRA. This amount could be adjusted as needed. By specifically naming the IRA as the account to fund her charitable bequest, more of her Roth IRA will ultimately go to her kids. If the charity received proceeds from her Roth IRA upon death, the charity would still receive the assets tax-free, so it would be foolish to not have more of these assets go to her kids. Assuming each child is in the 25% tax bracket, this move helped to save her estate almost $38,000 in tax.

3. Naming a Trust? Understand the Ramifications

It is common for clients to name their trust as either the primary or contingent beneficiary of their retirement account. However, when naming a trust, it's important to understand the tax ramifications. Irrevocable trusts aren't used as often as revocable living trusts but have a place in certain cases. While irrevocable trusts typically offer a high level of control, the tax rates for these trusts upon the death of the original account owner are much higher than individual rates with much less income.

Revocable living trusts are the most common trusts we see with a client's name listed as a beneficiary (primary or contingent). However, the correct language must be used within the trust to ensure tax-efficient distributions for the beneficiaries of the actual trust (ex., 'see through' trusts). As always, be sure to consult with your attorney on this matter. Our team always wants to collaborate with your attorney and other professionals on your financial team to ensure the right strategy is in place for you and your family.

4. Beneficiaries in Different Tax Brackets: How to Choose

In addition to intentionally identifying which account would be best served to go to a charity, the same rule applies to individuals who find themselves in very different tax brackets. Let's look at a family we'll call the 'Jones Family' as an example. Mrs. Jones is recently widowed and is in her early 80s. She has two adult children: Ryan (51) and Mark (55). All of them reside in Florida, where there is a 0% state income tax. Mrs. Jones' current portfolio value sits at just shy of $1.1M, allocated as follows: $575,000 in a traditional IRA, $300,000 in a Roth IRA, and $200,000 held in an after-tax brokerage account. Her youngest son, Ryan, finds himself in the 12% federal tax bracket, while her older son, Mark, is in the 35% tax bracket. While Mrs. Jones still wants her estate to be split 50/50 between Ryan and Mark, she wants to make sure the least amount of income tax is paid over time on the inheritance her boys will be receiving. To accomplish this goal, we structure her beneficiary designations as follows:

• Ryan: 100% primary beneficiary on traditional IRA (Mark 100% contingent).

• Mark: 100% primary beneficiary on Roth IRA and after-tax brokerage account (Ryan 100% contingent on both accounts).

• Ryan would be subject to Required Minimum Distributions (RMDs) from the Inherited traditional IRA from his mother, and the account must be depleted in 10 years. However, he would only pay 12% in tax on these distributions. If we assume he stays in this bracket for the next decade, Ryan will end up with $506,000 net of tax [$575,000 x .88 (1 – 12% tax rate)] from the account.

• Being that Mark is in a significantly higher tax bracket, it would be much more tax-efficient for him to inherit his mother's Roth IRA and after-tax brokerage account. While Mark's Inherited Roth IRA will also carry an annual RMD and must be depleted in 10 years, the RMDs he would be taking would NOT be taxable to him. The after-tax brokerage account would also receive what's known as a 'step-up' in cost basis upon Mrs. Jones' death, thus eliminating any large, unrealized capital gains she had in several meaningful stock positions in her account.

While there is never a 'perfect' beneficiary plan, the one outlined above accomplishes Mrs. Jones' goal in the best way possible. If we had named Ryan and Mark as 50% beneficiaries on each account, the total tax burden on the overall inheritance would have been $66,000 higher, primarily due to Mark paying a much higher tax rate on the RMDs from the traditional IRA. Our plan gives Ryan and Mark' net' the same amount. This means more of Mrs. Jones' estate is staying with her family, and a lot less will be going towards tax.

5. End of Life Tax Planning Strategies

As clients age in retirement, they may spend less money and/or incur large medical costs that would result in significant tax deductions. If the owner of a traditional IRA or 401k finds themselves in this situation, they should closely evaluate completing Roth IRA conversions (full conversions, a single partial Roth conversion, or partial conversions over the course of several years).

When converting funds from a traditional IRA to a Roth IRA, the converted funds are considered taxable income. In general, a conversion only makes sense if the rate of tax paid today on the conversion will be less than the tax rate on distributions in the future (either by the current account owner or a future beneficiary). If an individual or family is spending much less and is now well within the 12% bracket, it could make sense to complete annual Roth conversions to completely 'fill up' this low bracket. Another common occurrence that clients might experience is large medical deductions. Unfortunately, these tax deductions ultimately either go to waste or are greatly diminished because there is not enough taxable income to offset the deduction. I have seen scenarios where clients could have converted $30k+ to a Roth IRA completely tax-free due to a large medical deduction. However, the deduction essentially went to waste because no income was generated on the tax return for this deduction to offset. In a sense, this is like striking a match to free 'tax money'. Keep in mind that inherited IRAs cannot be converted to one's own Roth IRA or an Inherited Roth IRA, so exploring conversions during the original account owner's life is imperative. Roth conversions will not make sense for everyone, but when they do, the potential tax dollars saved can be massive.

Naming beneficiaries and having a clear understanding of how you would like funds allocated is step one. Once this is known, the job is usually not complete. A quality adviser who has extensive knowledge of tax planning should be able to offer guidance on how to accomplish this goal in the most tax-efficient manner possible. As mentioned previously, collaboration with other professionals on the client's financial team (ex., CPA and attorney) is ideal. Doing so could allow more of your hard-earned money to stay in the pockets of those you care most for and less going to the IRS!

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Center for Financial Planning, Inc is not a registered broker/dealer and is independent of Raymond James Financial Services Investment advisory services are offered through Center for Financial Planning, Inc. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James.

Raymond James and its advisers do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

These examples are hypothetical illustrations and are not intended to reflect any actual outcome. they are for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.

Beyond the 4% Rule: Five Strategies to Ensure Your Retirement Income Lasts a Lifetime

Contributed by: Nick Defenthaler, CFP®, RICP®

In a prior article, I focused on the popular 4% rule and discussed safe portfolio distribution rates over the course of retirement. While the percentage you are drawing from your portfolio is undoubtedly very important, other factors should also be taken into consideration to ensure the income you need from your portfolio lasts a lifetime.

Asset Allocation

It's common for retirees to believe their portfolio should become extremely conservative when they're in retirement. But believe it or not, having too little stock exposure has proven to do MORE harm than holding too much stock. While having a 90-100% stock allocation is likely not prudent for most retirees, maintaining at least 50-60% in equities is typically recommended to ensure your portfolio is outpacing inflation over time.

Reducing Your Withdrawal Rate

Spending less during market downturns is one of the best ways to preserve your portfolio's long-term value. When I think of this concept, I always go back to March 2020. When the global pandemic hit, the U.S. stock market fell 35% in only two weeks, resulting in the quickest bear market in history.

Due to the COVID-19-induced recession we were living through, we were all forced to dramatically reduce activities such as travel, entertainment, and dining out. This reduced spending for many, which helped tremendously while portfolio values recovered. This highlights the importance of reducing fixed expenses (e.g., mortgage, car payments, etc.) over time to provide flexibility. In years when markets are down significantly, having the ability to reduce variable expenses will prove to be an advantage.

Impact of Fixed Income Sources

Often, we recommend delaying Social Security into your mid-to-late 60s to take advantage of the over 7% permanent annual increase in benefits. It's also fairly common to have pension and annuity income start around the same time as Social Security, which could mean several years of drawing on your portfolio for your entire income need. In many cases, this means a significantly higher portfolio withdrawal rate for several years.

To plan for this short-term scenario with elevated distributions, you might consider holding at least several years' worth of cash needs in highly conservative investments (i.e., cash, money market funds, CDs, short-term treasuries, and bonds). Doing so helps reduce the likelihood of being forced to sell stocks while down considerably in a bear market, something we want to avoid at all costs — especially in the first several years of retirement (also referred to as a sequence of return risk).

Intentional Withdrawal/Distribution Strategy

Being highly intentional about what accounts you draw from and when you draw from them throughout retirement could be a game changer for your long-term financial plan. Chances are, our tax code will change several times throughout your 25+ year retirement. When it does, it's imperative to work with an adviser who understands how these changes could impact your situation and help you plan accordingly.

In some years, drawing from IRAs and 401(k)s and less from after-tax brokerage accounts will make more sense. Then, in other years, it will be the exact opposite. Prudent spend-down strategies, implementing Roth IRA conversions when tax rates are low, and strategically realizing capital gains at preferential tax rates have been shown to increase the "lifespan" of an investment portfolio by 2-3 years.

Part-time Income

Let's be honest – most of us don't want to think about work after retirement. That said, I'm seeing more and more retirees take the "retire from working full-time" approach for several years. In these cases, someone might work 15-30 hours per week at a job they enjoy (or can at least tolerate). This helps reduce distributions from their portfolio during a time when the sequence of return risk is at its peak. I find that most folks dramatically underestimate how valuable even earning $15,000 annually for 2-3 years can be in the long-term sustainability of their overall financial plan.

While working part-time in retirement certainly has its financial benefits, I've also seen it help with the emotional/lifestyle transition to retirement. Going from working full-time for 40+ years to a hard stop can prove challenging for many. Phasing into retirement through part-time work can be an excellent way to ease into this exciting next chapter of your life.

If you're within five years of retirement, I would encourage you to discuss these concepts and ideas with your adviser. Having these conversations early is advisable to ensure a well-thought-out plan is in place to help with your retirement transition.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Center for Financial Planning, Inc is not a registered broker/dealer and is independent of Raymond James Financial Services Investment advisory services are offered through Center for Financial Planning, Inc.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.

Is the 4% Rule Dead?

Contributed by: Nick Defenthaler, CFP®, RICP®

In 1994, financial adviser and academic William Bengen published one of the most popular and widely cited research papers titled: "Determining Withdrawal Rates Using Historical Data," published in the Journal of Financial Planning. Through extensive research, Bengen found that retirees could safely spend about 4% of their retirement savings in the first year of retirement. In future years, they could adjust those distributions with inflation and maintain a high probability of never running out of money, assuming a 30-year retirement time frame. In Bengen's study, the assumed portfolio composition for a retiree was a conservative 50% stock (S&P 500) and 50% in bonds (intermediate term Treasuries).

Is the 4% Rule Still Relevant Today?

Over the past several years, more and more consumer and industry publications have written articles stating that the 4% rule could be dead and that a lower distribution rate closer to 3% is now appropriate. In 2021, Morningstar published a research paper calling the 4% rule no longer feasible and proposing a 3.3% withdrawal rate. Fast forward 12 months later to mid-2022, and the same researchers updated the study and changed their proposed sustainable withdrawal rate to 3.8%.

When I read these articles and studies, I was surprised that none of them referenced what I consider critically important statistics from Bengen's 4% rule that should highlight how conservative this retirement income rule of thumb truly is:

• 96% of the time, individuals who took out 4% of their portfolio each year (adjusted annually by inflation) over 30 years passed away with a portfolio balance that exceeded the value of their portfolio in the first year of retirement.

Example: A couple with a $1,000,000 portfolio who adhered to the 4% rule over 30 years had a 96% chance of passing away with a portfolio value of over $1,000,000.

• An individual had a 50% chance of passing away with a portfolio value 1.6 times the value of their portfolio in the first year of retirement.

Example: A couple with a $1,000,000 portfolio who adhered to the 4% rule over 30 years (adjusted annually by inflation) had a 50% chance of passing away with a portfolio value of over $1,600,000.

We must remember that the 4% rule was developed by looking at the worst possible time frame for someone to retire (October of 1968 – a perfect storm for a terrible stock market and high inflation). As more articles and studies questioned if the 4% rule was still relevant today, considering current equity valuations, bond yields, and inflation, William Bengen was compelled to address this. Through additional diversification, Bengen now believes the appropriate withdrawal rate is actually between 4.5% - 4.7% – nearly 15% higher than his original rule of thumb.

Applying the 4% Rule

My continued takeaway with the 4% rule is that it is a great starting place when considering a retirement income strategy. Factors such as age, health status, life expectancy, fixed income sources, evolving spending goals in retirement, etc., all play a vital role in how much an individual or family can draw from their portfolio now and in the future. As I always say – there are no black-and-white answers in financial planning; your story is unique, and so is your financial plan.

Sources for this article includE:

• https://www.financialplanningassociation.org/article/journal/MAR04-determining-withdrawal-rates-using-historical-data

• https://www.morningstar.com/lp/the-state-of-retirement-income

• https://finance.yahoo.com/news/even-inventor-bill-bengen-revisiting-143000007.html

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Center for Financial Planning, Inc is not a registered broker/dealer and is independent of Raymond James Financial Services Investment advisory services are offered through Center for Financial Planning, Inc. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James.

Investing involves risk and you may incur a profit or a loss regardless of strategy selected. The S&P 500 is comprised of approximately 500 widely held stocks that is generally considered representative of the U.S. stock market. It is unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Beat the Squeeze: ACA Income Planning for Pre-Medicare Retirees

Contributed by: Nick Defenthaler, CFP®, RICP®

Are you currently retired or planning on retiring before Medicare begins at age 65? If so, congratulations! If you have the ability to retire in your early 60s, chances are that you’ve saved aggressively over the years and have prepared well for retirement. In our experience, the top concern or area of stress for those retiring before 65 is the potential cost of health insurance and the impact it could have on their long-term financial plan.

Prior to the Affordable Care Act (ACA), private health care for those in their early 60s could be rigid and very expensive. Since the ACA was signed into law in 2010, a lot has changed. While certainly not perfect, the ACA now allows individuals to obtain private health insurance, the premiums of which are based on their current or projected income for the upcoming year.

If your income is within a certain percentage of the federal poverty level, you will receive a subsidy on your monthly health insurance premiums. Through recent legislation, these income parameters have substantially expanded, now benefiting individuals and couples with income levels that would previously disqualify them from receiving any subsidy on their health insurance premiums.

Open enrollment for ACA plans typically runs from early November until mid-January. When applying for coverage, you must estimate your income level for the upcoming year. From this information, your potential subsidy is determined.

If your actual income level is higher than projected, you will have to pay back a portion (or potentially all) of your subsidy. Your payback amount will depend on how much higher your income is as compared to your original projection. This determination occurs when you file your taxes for the year. On the flip side, if your income is lower than initially projected, you’ll be entitled to the higher subsidy amount you should have received all along (once again, determined when you file your taxes and received as a tax credit).

If you are someone who has saved very well in preparation for your retirement, you likely have various forms of retirement/investment accounts as well as future fixed income sources, which create retirement income flexibility for you. This flexibility makes it possible to structure a “retirement paycheck” that assures your spending needs are met but with significantly less income reported on your tax return. We call this “ACA income planning,” and it allows you to structure your income in a way that could help save you tens of thousands of dollars in reduced health insurance premiums! Read on as we dive into the details of the key elements of ACA income planning to see if this concept could make sense for you.

Overview of Income Sources

As discussed above, the premiums you pay for pre-65 health insurance are based on your projected modified adjusted gross income (MAGI) for the upcoming year. Because of this, it’s important to understand what constitutes as income in the first place:

• Employment/Earned Income: Will generally be 100% included in your MAGI for the year.

• Pension Income: Will generally be 100% included in your MAGI for the year.

• Social Security: While you may not pay tax on your full Social Security benefit, your ENTIRE monthly benefit (taxable and non-taxable component) is included in your MAGI for ACA income determination purposes.

• Traditional IRA/401(k)/403(b) Distributions: Because these retirement accounts were funded with pre-tax income, distributions will generally be 100% taxable and included in MAGI.

• Roth IRA Distributions: Because this retirement account was funded with after-tax dollars, distributions will NOT be taxable or included in MAGI (certain rules such as attaining age 59 ½ and having the Roth IRA open for at least five years will come into play, however).

• After-Tax Investment or “Brokerage” Account: Unlike 401(k) or Roth IRAs, these accounts are not tax-deferred and were initially funded with after-tax dollars. Capital gains, dividends, and interest (even tax-free, municipal bond interest) produced by the investments within this account will be included in MAGI. However, funds withdrawn from this account that have previously been taxed (the cost basis) will NOT be included in MAGI.

• Cash: Similar to an after-tax investment/brokerage account, funds initially deposited into a cash account, such as checking or savings, have already been taxed. Because of this, when funds are withdrawn from your checking/savings account for spending, these dollars are NOT included in MAGI.

• For even more details on various income sources and how they can impact MAGI, please click HERE.

Intentional Distribution Strategy

Because drawing from different accounts will have drastically different tax consequences, it is imperative to have a sound retirement income plan in place while on an individual health care plan before Medicare.

Consider a retired married couple in their early 60s who have saved into other accounts besides 401(k)s or IRAs (e.g., Roth IRAs or after-tax brokerage accounts). Some significant tax and health insurance premium planning opportunities could exist. In many cases, it could be wise for them to spend less out of their pre-tax IRA or 401(k) accounts during this time and take more funds out of Roth IRAs or an after-tax brokerage account. By doing so, income hitting their tax return would likely be significantly less compared to drawing the majority of income from the IRA or 401(k). This, in turn, could qualify them for large health insurance premium subsidies that could save them tens of thousands in the years leading up to Medicare.

Conclusion

As with any retirement income planning strategy, multiple factors must be considered, and the above example is certainly not a one-size-fits-all approach. If you find yourself in this window, where you are on an individual plan before Medicare, I encourage you to discuss your retirement income plan with your adviser. Not doing so could end up costing you thousands in unnecessary tax and insurance premiums.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Bob Ingram, CFP® and are not necessarily those of RJFS or Raymond James. Raymond James Financial Services, Inc. and its advisors do not provide advice on tax issues, these matters should be discussed with the appropriate professional.

Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) I the U.S. which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Can I Avoid IRMAA Surcharges on Medicare Part B and Part D?

Contributed by: Nick Defenthaler, CFP®, RICP®

In 2023, Medicare Part B premiums for 95% of Americans will be $164.90/mo. However, the other 5% will have to face what’s known as the Income Related Monthly Adjustment Amount or IRMAA and pay higher Part B and D premiums. Each year, the chart below is updated, and in most cases, premiums increase gradually with inflation, as do the income parameters associated with each premium tier.

Source: Medicare.gov

Receiving communication that you’re subject to IRMAA and facing higher Medicare premiums is never a pleasant notification. With proper planning, however, there are strategies to potentially avoid IRMAA both now and in the future.

But first, let’s do a quick refresher on the basics

Medicare bases your premium on your latest tax return filed with the IRS. For example, when your 2023 Part B and D premiums were determined (likely occurred in October/November 2022), Medicare used your 2021 tax return to track income. If you are married and your Modified Adjusted Gross Income (MAGI) was over $194,000 in 2021 ($97,000 for single filers), you’re paying more for Part B and D premiums aka subject to IRMAA. Unlike how our tax brackets function, Medicare income thresholds are a true cliff. You could be $1 over the $194,000 threshold and that’s all it takes to increase your premiums for the year! As mentioned previously, your Part B and D premiums are based off of your Modified Adjusted Gross Income or MAGI. The calculation for MAGI is slightly different and unique from the typical Adjusted Gross Income (AGI) calculation as MAGI includes certain income “add back” items such as tax-free municipal bond interest. Simply put, while muni bond interest might function as tax-free income on your return, it does get factored into the equation when determining whether or not you’re subject to IRMAA.

Navigating IRMAA with Roth IRA conversion and portfolio income 

Given our historically low tax environment, Roth IRA conversions are as popular as ever. Current tax rates are set to expire in 2026, but this could occur sooner, depending on our political landscape. When a Roth conversion occurs, a client moves money from their Traditional IRA to a Roth IRA for future tax-free growth. When the funds are converted to the Roth, a taxable event occurs, and the funds converted are considered taxable in the year the conversion takes place. Because Roth IRA conversions add to your income for the year, it’s common for the conversion to be the root cause of an IRMAA if proper planning does not occur. What makes this even trickier is the two-year lookback period. So, for clients considering Roth conversions, the magic age to begin being cognizant of the Medicare income thresholds is not at age 65 when Medicare begins, but rather age 63 because it’s that year’s tax return that will ultimately determine your Medicare premiums at age 65! 

Now that there are no “do-overs” with Roth conversions (Roth conversion re-characterizations went away in 2018), our preference in most cases is to do Roth conversions in November or December for clients who are age 63 and older. By that time, we will have a clear picture of total income for the year. I can’t tell you how often we’ve seen situations where clients confidently believe their income will be a certain amount but ends up being much higher due to an unexpected income event.

Another way to navigate IRMAA is by being cognizant of income from after-tax investment/brokerage accounts. Things like capital gains, dividends, interest, etc., all factor into the MAGI calculation previously mentioned. Being intentional with the asset location of accounts can potentially help save thousands in Medicare premiums.

Ways to reduce income to potentially lower part B and D premiums

Qualified Charitable Distribution (QCD) 

• If you’re over 70 ½ and subject to Required Minimum Distributions (RMD), gifting funds from your IRA directly to a charity prevents income from hitting your tax return. This reduction in income could help shield you from IRMAA. 

Contributing to a tax-deductible retirement account such as a 401k, 403b, IRA, SEP-IRA, etc.

• Depositing funds into one of these retirement accounts reduces MAGI and could help prevent IRMAA.

Deferring income into another year 

• Whether it means drawing income from an after-tax investment account for cash flow needs or holding off on selling a stock that would create a capital gain towards year-end, being strategic with the timing of income generation could prove to be wise when navigating IRMAA. 

Accelerating business expenses to reduce income 

• Small business owners who could be facing higher Medicare premiums might consider accelerating expenses in certain years, which in turn drives taxable income lower if they’re flirting with IRMAA. 

Putting IRMAA into perspective 

Higher Medicare premiums are essentially a form of additional tax, which can help us put things into perspective. For example, if a couple decides to do aggressive Roth IRA conversions to maximize the 22% tax bracket and MAGI ends up being $200,000, their federal tax bill will be approximately $30,000. This translates into an effective/average tax rate of 15% ($30,000 / $200,000). However, if you factor in the IRMAA, it will end up being about $1,700 total for the couple between the higher Part B and D premiums. This additional "tax" ends up only pushing the effective tax rate to 15.85% - less than a 1% increase! I highlight this not to trivialize a $1,700 additional cost for the year, as this is real money we're talking about here. That said, I do feel it's appropriate to zoom out a bit and maintain perspective on the big picture. If we forgo savvy planning opportunities to save a bit on Medicare premiums, we could end up costing ourselves much more down the line. However, not taking IRMAA into consideration is also a miss in our opinion. Like anything in investment and financial planning, a balanced approach is prudent when navigating IRMAA – there is never a "one size fits all" solution. 

Fighting back on IRMAA

If you've received notification that your Medicare Part B and D premiums are increasing due to IRMAA, there could be ways to reverse the decision. The most common situation is when a recent retiree starts Medicare and, in the latest tax return on file with the IRS, shows a much higher income level. Retirement is one example of what Medicare would consider a "life-changing event," in which case form SSA-44 can be completed, submitted with supporting documentation, and could lead to lower premiums. Other "life-changing events" would include:

• Marriage

• Divorce

• Death of a spouse 

• Work stoppage

• Work reduction

• Loss of income producing property 

• Loss of pension income 

• Employer settlement payment 

Medicare would not consider higher income in one given year due to a Roth IRA conversion or realizing a large capital gain a life-changing event that would warrant a reduction in premium. This highlights the importance of planning accordingly with these items.

If you disagree with Medicare's decision in determining your premiums, you have the ability to have a right to appeal by filing a "request for reconsideration" using form SSA-561-U2.

Conclusion

As you can see, the topic of IRMAA is enough to make anyone's head spin. To learn more, visit the Social Security Administration's website dedicated to this topic. Prudent planning around your Medicare premiums is just one example of much of the work we do for clients that extends well beyond managing investments that we believe add real value over time. 

If you or someone you care about is struggling with how to put all of these pieces together to achieve a favorable outcome, we are here to help. Our team of CERTIFIED FINANCIAL PLANNER™ professionals offers a complimentary "second opinion meeting" to address your most pressing financial questions and concerns. In many cases, by the end of this 30-45 minute discussion, it will make sense to continue the conversation of possibly working together. Other times, it will not, but our team can assure you that you will hang up the phone walking away with questions answered and a plan moving forward. We look forward to the conversation!

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) I the U.S. which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James.

There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Strategies to Help Protect Your Income Plan

Contributed by: Nick Defenthaler, CFP®, RICP®

In my recent blog focused on the popular '4% rule', we discussed safe portfolio distribution rates over the course of retirement. While the percentage one is drawing from their portfolio is undoubtedly very important, other factors should also be taken into consideration to ensure the income you need from your portfolio lasts a lifetime:

Asset Allocation

• It's common for retirees to believe their portfolio should become extremely conservative when they're in retirement, but believe it or not, having too little stock exposure has proven to do MORE harm than holding too much stock! While having a 100% stock allocation is likely not prudent for most retirees, maintaining at least 60% in equities is typically recommended to ensure your portfolio is outpacing inflation over time.

Reducing your Withdrawal Rate 

• Spending less during market downturns is one of the best ways to protect the long-term value of your portfolio. When I think of this concept, I always go back to March 2020, when the global pandemic hit, causing the US stock market to fall 35% in only two weeks. Due to the COVID-induced recession we were living through, we were all forced to dramatically reduce activities such as travel, entertainment, and dining out. This reduced spending for many clients, which helped tremendously while portfolio values recovered. This highlights the importance of reducing fixed expenses over time to provide flexibility. In years when markets are down significantly, having the ability to reduce variable expenses will prove to be an advantage.

Part-time Income

• Let's be honest – most of us don't want to think about work after retirement! That said, I'm seeing more and more retirees work 15-20 hours/week at a job they're enjoying, which is helping to reduce distributions from their portfolio. I find that most folks dramatically underestimate how valuable even earning $15,000 annually for several years can be on the long-term sustainability of their portfolio. While working part-time in retirement certainly has its financial benefits, I've also seen it help with the transition to retirement. Going from working full-time for 40+ years to a hard stop can prove challenging for many. 'Phasing into retirement' through part-time work can be an excellent way to ease into this exciting next chapter of your life.  

Impact of Fixed Income Sources 

• Often, we recommend that clients consider delaying Social Security into their mid-late 60s to take advantage of the over 7% permanent annual increase in benefits. It's also fairly common to have pension and annuity income start around the same time as Social Security, which could mean several years when a client draws on their portfolio for their entire income need. In many cases, this means a significantly higher portfolio withdrawal rate for several years. To plan for this short-term scenario with elevated distributions, one might consider holding at least several years' worth of cash needs in highly conservative investments (i.e., cash, money market funds, CDs, short-term treasuries, and bonds). Doing so helps to reduce the likelihood of being forced to sell stocks while down considerably in a bear market, something we'll want to avoid at all costs – especially in the first several years of retirement.

As someone who primarily works with clients either currently retired or within a few years of retirement, I can tell you that completing this retirement income puzzle requires a high level of customization and intention. Over time, your plan and strategy will have to adjust to changes in the market and tax law, to name a few. Please feel free to reach out if you'd like to discuss your plan in greater detail – our team and I are always happy to serve as a resource for you!

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Center for Financial Planning, Inc is not a registered broker/dealer and is independent of Raymond James Financial Services Investment advisory services are offered through Center for Financial Planning, Inc.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Sources:

https://www.financialplanningassociation.org/article/journal/MAR04-determining-withdrawal-rates-using-historical-data

Stellantis Announces Buyout Offer

Contributed by: Nick Defenthaler, CFP®, RICP®

Stellanits, the European automaker that builds vehicles for the US market under Jeep, Ram, Dodge, and Chrysler brands, recently announced that it is offering buyouts to half of its salaried US staff in a cost-cutting move. Over the past several years, the ‘Big 3’ have all offered similar buyouts, and many of our clients have come to us for guidance to ensure they make an informed decision. Above is a webinar recently hosted by partner and Senior Financial Planner Nick Defenthaler, CFP®, RICP®. During this educational session, Nick discusses five important considerations when going through a layoff or a recent job transition: 

Timestamps:

• Cash Flow Planning - 6:01

• Health Care & Insurance Guidance - 11:49

• Tax Considerations - 18:19

• Retirement Account & Pension Decisions - 23:41

• Putting It All Together - 35:21

If you, friends, family members, or colleagues have recently received a buy-out offer from Stellantis and would like to discuss the details with one of our team’s Certified Financial Planners, please feel free to reach out, and we’d be happy to arrange a time to chat. Our team has nearly four decades of experience helping clients navigate significant life transitions such as this – we’d be honored to serve as a resource for you. 

Office Line: 248-948-7900

Website Contact Inquiry: https://www.centerfinplan.com/contact 

If you’d like to receive a copy of our “Should I roll over my 401k to an IRA?” checklist, please click HERE! 

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Does the 4% Rule Still Make Sense?

Contributed by: Nick Defenthaler, CFP®, RICP®

'4% rule' history

In 1994, financial advisor and academic William Bengen published one of the most popular and widely cited research papers titled: 'Determining Withdrawal Rates Using Historical Data' published in the Journal of Financial Planning. Through extensive research, Bengen found that retirees could safely spend about 4% of their retirement savings in the first year of retirement. In future years, they could adjust those distributions with inflation and maintain a high probability of never running out of money, assuming a 30-year retirement time frame. In his study, the assumed portfolio composition for a retiree was a conservative 50% stock (S&P 500) and 50% in bonds (intermediate term Treasuries).

Is the 4% rule still relevant today? 

Over the past several years, more and more consumer and industry publications have written articles stating 'the 4% rule could be dead' and that a lower distribution rate closer to 3% is now appropriate. In 2021, Morningstar published a research paper calling the 4% rule no longer feasible and proposing a 3.3% withdrawal rate. Just over 12 months later, the same researchers updated the study and withdrawal rate to 3.8%!

When I read these articles and studies, I was surprised that none of them referenced what I consider critically important statistics from Bengen's 4% rule that should highlight how conservative it truly is:

• 96% of the time, clients who took out 4% of their portfolio each year (adjusted annually by inflation) over 30 years passed away with a portfolio balance that exceeded the value of their portfolio in the first year of retirement.

• Ex. A couple with a $1,000,000 portfolio who adhered to the 4% rule over 30 years had a 96% chance of passing away with a portfolio value of over $1,000,000!

• A client had a 50% chance of passing away with a portfolio value 1.6X the value of their portfolio in the first year of retirement.

• Ex. A couple with a $1,000,000 portfolio who adhered to the 4% rule over 30 years (adjusted annually by inflation) had a 50% chance of passing away with a portfolio value of over $1,600,000!

We must remember that the 4% rule was developed by looking at the worst possible time frame for someone to retire (October of 1968 – a perfect storm for a terrible stock market and high inflation). As more articles and studies questioned if the 4% rule was still relevant today, considering current equity valuations, bond yields, and inflation, William Bengen was compelled to address this. Through additional diversification, Bengen now believes the appropriate withdrawal rate is actually between 4.5% - 4.7% – nearly 15% higher than his original rule of thumb!

Applying the 4% rule 

My continued takeaway with the 4% rule is that it is a great starting place when guiding clients through an appropriate retirement income strategy. Factors such as health status, life expectancy, evolving spending goals in retirement, etc., all play a vital role in how much an individual or family can draw from their portfolio now and in the future. As I always say – there are no black and white answers in financial planning; your story is unique, and so is your financial plan! In my next blog, I'll touch on other considerations I believe are important to your portfolio withdrawal strategy – stay tuned!

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Center for Financial Planning, Inc is not a registered broker/dealer and is independent of Raymond James Financial Services Investment advisory services are offered through Center for Financial Planning, Inc.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

One cannot invest directly in an index. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Past performance does not guarantee future results.

Sources:

• https://www.financialplanningassociation.org/article/journal/MAR04-determining-withdrawal-rates-using-historical-data

• https://www.morningstar.com/lp/the-state-of-retirement-income

• https://finance.yahoo.com/news/even-inventor-bill-bengen-revisiting-143000007.html