New Guidelines May Help Retirees Retain More Savings

Contributed by: Josh Bitel, CFP®

In late 2022, the treasury department quietly updated life expectancy tables, reflecting that Americans are living longer and should have a longer time horizon for full distribution of retirement accounts.

When retirement accounts came into law via the Employee Retirement Income Security Act of 1974, required minimum distributions (RMDs) were established. This is an amount mandated by the IRS that individuals must take out of their retirement account each year (for those aged 72 and above) to avoid paying a stiff penalty. Two components make up the size of the RMD – the account holder's age and the account value. Generally speaking, the older an account holder is, the larger their distribution must be in relation to their account size (for example – assuming a $1,000,000 account, someone 72 years of age must distribute $36,496 by year-end, while an 85-year-old must distribute $62,500). These figures are gathered by taking your account balance and dividing it by your life expectancy factor, as dictated by the IRS (table shown at the end of this blog).

New RMD tables now reflect longer life expectancies, which means a reduction in yearly required distributions. So if you're someone who only takes out the minimum distribution every year, in theory, you can retain more of your savings in tax-advantaged accounts.

Of course, satisfying annual RMDs doesn't always mean taking your distributions and putting them into your bank account for spending. There are strategies available to reinvest these funds, avoid taxes by sending them to charities, and fund college savings plans, among other things to help you achieve your financial goals.

RMDs are truly in place so that account owners aren't able to defer their taxes indefinitely. Like anything else in the world of finance, it's best to fully understand the rules before making decisions. For this reason, you may be best suited to consult with a financial advisor to avoid any pitfalls.

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

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 Josh Bitel, CFP® 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. Examples used are for illustrative purposes only.

Save Some Bucket List Items for Your Own

Contributed by: Sandra Adams, CFP®

As parents, it's not uncommon for us to want to give our children more than we had when we were growing up. Whether that be more or better extra-curricular experiences, the camps our parents couldn't afford to send us to, the Florida senior trip with a friend, or the international summer travel experience or internship in college that we missed out on when we were young. Kids now seem to have so many opportunities that weren't available to us when we were growing up. Not only because they may not have been offered back then, but also because we're willing to help pay for them to give our children those experiences now — but at what cost?

As a financial planner, I work with clients annually to determine if their goals to give their children these valuable experiences fit within their ongoing cash flow and don't impact their long-term financial goals. As you can imagine, the real risk is trying to provide every opportunity to your children that you may have missed out on (and maybe even those that you still wish you could do yourself) and potentially compromising your financial future. And besides the financial aspect, you also risk having bad feelings towards your children without realizing it. When they're doing the things you always wished you could do, you may run out of time or money to do those things in your own retirement. As one client said to me in a meeting, "One day, I thought in my head – "Hey, step off my bucket list!"

There's always a fine line between what we do for our children now and what we save for our own financial futures later. Our job is to give our children a good education, our love, and a solid financial start to their future. Our next biggest job is to make sure that we've saved enough to support ourselves so that we don't have to rely on our children at any point in time. If we've done both of those things, we've done our jobs as parents. And, if we've provided some enjoyment for our children and saved some bucket list items for ourselves to enjoy — even better!

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

Any opinions are those of Sandra D. Adams, CFP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Strategies for Retirees: Understanding Your Tax Bracket

Contributed by: Michael Brocavich, CFP®, MBA

Over the last few years, most Americans have seen lower taxes due to the Tax Cuts and Jobs Act put into effect in January 2018. With the increase in the standard deduction and lower tax rates, taking income from your retirement accounts has cost you less in taxes than in previous years. This has allowed retirees to do some strategic income and tax planning in the early years of retirement before they have to start taking Required Minimum Distributions ("RMD") from their Qualified Retirement Accounts.

First, it is important to look at some significant tax changes that came with the Tax Cuts and Jobs Act. The standard deduction for 2022 is $12,950 for single filers and $25,900 for married filing jointly. For married couples over the age of 65, there is an additional $1,300 deduction each. Add that all up, and joint filers who are both 65 or older will have a standard deduction of $28,500. That means that your first $28,500 of income will be federal tax-advantaged!

The current tax laws have reduced the 15% tax bracket rate to 12%. For married filing jointly, the top of the 12% tax bracket for 2022 is $83,550. That means that retirees aged 65 and older could potentially have up to $112,050 of adjusted gross income and remain in the lowest tax bracket. Understanding the tax laws and taking money from the proper accounts at the right time could help reduce your future taxes throughout retirement and reduce taxes significantly for your heirs.

Strategies for Retirees

1) Roth Conversions: If you are like most retirees, you do not have substantial assets in your Roth IRA, if you even have one at all. With income limits on Roth contributions and clients preferring to save in tax-deductible accounts first, many older taxpayers never opened Roth IRA's. The early part of retirement allows you to strategically take money from your IRA and convert it to a Roth IRA. There is no income limit or even minimum dollar amount requirements for Roth conversions. Still, you have to be aware that pulling money from your Traditional IRA and moving to your Roth IRA is taxable. By understanding your tax situation in retirement, you can move money into your Roth IRA and pay tax at lower rates than you potentially would later in retirement while building tax-advantaged assets and reducing your future RMDs (Required Minimum Distributions).

Common sense would tell you to try and take income and pay the least amount of taxes possible. This is prudent, but many retirees either forget about or do not truly understand their future RMDs and their impact on taxes in the future. With RMDs on Qualified Retirement Accounts at age 72, many retirees will be forced to withdraw more money from their Qualified Retirement accounts than they need and pay taxes on those distributions. You can take money strategically out of these qualified retirement accounts and convert the funds to Roth IRA accounts that do not have minimum distributions at 72. This, in turn, will reduce the values in your Qualified Retirement Accounts, reduce your future RMDs, and give you more tax-advantaged assets to use in retirement or to pass on to your heirs.

Investor Situation:

(This is a hypothetical example for illustration purposes only)

John and Cindy are now ready to retire at age 65 with a desired retirement income of $100,000. Typically it would be suggested that they take their Social Security at their full retirement age of 66 and use their taxable brokerage account for retirement income, delaying WD's from their IRAs till 70 1/2. In this scenario, their taxes could be as minimal as 85% or less of their Social Security. With a standard deduction of $28,500, their Federal Income Taxes would be only a couple thousand dollars or less depending on the capital gains they realized. What is not being considered is that with just a modest growth rate on their Qualified Retirement Accounts of 6%, when they reach 72, they could have an RMD of $85,000 - $90,000, giving them much more income than they need.

Suppose they were to delay taking Social Security to age 70 and do a Roth Conversion of $60,000 per year to top out their 12% tax bracket from ages 65 through 69. They could reduce their future RMDs to align with their retirement income needs, reduce their future taxes, and build a substantial tax-advantaged Roth IRA. In addition, they would also benefit from the delay in Social Security, giving them their maximum benefit assuming they have good longevity.

Base Scenario, no Roth conversions, SS at 66:

(Assumptions: Annual rate of return of 6.0% with a $100,000 per year income adjusted for inflation at 2.58% per year.  Social Security income uses a 1% COLA)

Utilizing Roth Conversion Strategy, $60,000 converted annually, SS at 70:

(Assumptions: Annual rate of return of 6.0% with a $100,000 per year income adjusted for inflation at 2.58% per year.  Social Security income uses a 1% COLA. This is a hypothetical example for illustration purposes only and does not represent an actual investment)

So let’s examine what happened here:

• Over their lifetime, they took $533,000 less in required minimum distributions by doing the conversions, much of which would have been taxed at the 22% tax rate vs. 12% rate;

• They are passing on $1,348,960 in Roth IRA assets to their children that can grow and never be taxed, if certain conditions are met;

• They are passing on $761,306 less in IRA assets to their children, which will be taxed over time at whatever rate applies to the children as adults; and

• In total, the heirs are getting an additional $164,000 than they would have had. The assets are also now positioned to be much more tax-efficient going forward.

2) Harvesting Tax Gains: For clients like above that have also been able to save not only in Qualified Retirement Accounts but also brokerage accounts, there may be an opportunity to harvest taxable gains in the first years of retirement as well. Another advantage of the 12% (formally 15%) tax bracket is that capital gains realized up to the top of the 12% bracket are not taxable to the account owner.

Brokerage accounts allow you to sell stocks or mutual funds that you have held for a long time with large gains in them. You can then use these highly appreciated funds for income in retirement or to rebalance your brokerage account to reduce risk and future taxes.

Combining the two strategies would create multiple advantages. Using your assets in your brokerage account for income in the first years while converting IRA assets to Roth IRA can potentially convert more money to a Roth while still staying in the 12% tax bracket. You will have to be aware of the amount of long-term capital gains, as the combination of those gains and your conversions could put some of your taxable income over the 12% tax bracket threshold.

Optimizing withdrawals in retirement is a complex process that requires a firm understanding of tax situations, financial goals, and how accounts are structured. However, the two simple strategies highlighted here could potentially help reduce the amount of tax due in retirement.

It is important to take the time to think about taxes and make a plan to manage withdrawals. Be sure to consult with a tax advisor and your financial planner to determine the course of action that makes sense for you.

Michael Brocavich, CFP®, MBA is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He has an extensive background in both personal and corporate finance.

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 Michael Brocavich, CFP®, MBA and not necessarily those of Raymond James.

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James financial advisors are not qualified to render advice on tax or legal matters. You should discuss any 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.

Examples used are for illustrative purposes only.

Tips for Investors During Times of Market Volatility

Contributed by: Michael Brocavich, CFP®, MBA

When faced with volatility in the market, emotions can be triggered in investors that can impact their judgment and potentially affect returns. These pullbacks can make folks want to pull up stakes and run – a reaction that is often a mistake, especially for long‐term investors.

The likelihood that we will continue to see volatility this year is high. The Fed has slowed down its bond buying activities and is raising interest rates, the threat of a new COVID variant that could shut down the economy still exists, and there are supply chain and labor issues around the globe. To top it all off, we are gearing up for mid‐term elections in November.

Here are some tips to consider when we do face a volatile market. Having a plan during this time can help provide clarity, confidence, and even strategies to take advantage of the volatility.

• First, we need to remember that market volatility is normal. As investors, when we experience long periods of upward markets with little volatility, we forget how regular market volatility really is. We need to remember that historically, the market will dip by 5% at least three times a year. Also, on average, the market will have a 10% correction once a year. Understanding that volatility is a natural process of investing and challenging to avoid can help curb some emotions triggered by these markets.

• Make sure your employer retirement accounts are rebalanced appropriately. Over the last few years, money invested in stocks have severely outperformed the bond market. Now is a good time to revisit the allocations in your Employer‐Sponsored Retirement plans to make sure your allocation is still within your risk tolerance. You will want to make sure that your allocation to stock funds and bonds funds is appropriate for the amount of risk you want to take. If you are unsure of how you should

• Increase Plan contributions when markets are down. For younger investors still in the accumulation stage, a volatile market is a great time to increase your contributions. Though it may seem scary to increase your contributions when markets are volatile, you are actually buying into the market when prices are on sale. Contributions added when the market is down 5‐10% from the previous high have much more earning power than contributions made when the market is up 5‐10% from its last high.

• Have additional cash on hand to invest in dips and corrections. For investors who have been able to max out their Employer‐Sponsored plans and still have additional cash to invest, a volatile market can make for an excellent opportunity to do so. Consider talking with your advisor about moving extra cash to your investment accounts to invest on dips and corrections. Together, you can develop a strategy to get your cash invested over time or all at once, depending on market conditions.

Stumbling through bad times without a strategy makes a troubling situation even worse. If you do not have a retirement or investment plan, you will not accurately assess the damage when markets do take a dive. This could increase stress and cause investors to make bad decisions.

These periods of volatility are an opportunity to connect with your advisor, enabling them to act as a sounding board for your concerns. By talking about current events in light of your overall financial plan, your advisor can provide a reassuring perspective to help you stay the course or even invest extra cash during an opportune time.

Michael Brocavich, MBA is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He has an extensive background in both personal and corporate finance.

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Past Performance does not guarantee future results.

How to Find the Right Retirement Income Figure for You

Contributed by: Sandra Adams, CFP®

A big part of the planning work that we do is planning for future retirement. Simply put, how much income will you need each year to support the expenses you will have in retirement, and what income sources and assets will you have once you get there to support those needs throughout your lifetime.

For many clients, they have an accurate calculation of the income they will need. This is based on what expenses they have pre-retirement adjusted by the expenses that will go away (like mortgages, employment-related expenses, etc.), and those that may increase (like travel, those related to additional hobbies, etc.). For other clients, coming up with a future retirement income need is truly a wild guess. They may not have a good handle on what they spend now, and knowing what they need in retirement is even more of a mystery to them. So, where should you start to develop your correct retirement income figure?

First, we suggest tracking expenses before retirement to determine your average monthly spending. We suggest using a budget tracking tool to track spending for two or three months at least a couple of times, during different times of the year, to catch irregular expenses and trends. Once you feel that you have a good handle on your average income needed monthly, you can estimate your annual need. This method also helps you understand WHERE you are spending and where that might change once you retire. You can also develop an annual expense need estimate by backing into it. For example, start with your gross salary and subtract what you pay in taxes and save to 401k or other savings vehicles. You can generally assume what is left is going towards spending. However, this method will not tell you where you are spending and how it will change. Now, we at least have a number to start with for our planning projections.

Next, I often suggest that clients very close to retirement try living on their future retirement income BEFORE they retire to see if it feels comfortable. For instance, I have had clients live on just one of a couple’s salary to see if they could do it without feeling like they were denying themselves. Trying to live on the amount you are planning on living on in future retirement, even for a few months, gives you a taste of your future reality. If it feels comfortable, you likely have the correct number. However, if you feel like you are denying yourself and completely changing how you live, perhaps you need to go back to the drawing board and plan for a different income goal to see if that is possible. Not planning for the retirement you want from the beginning will only set you up for years of retirement planning. Why not see if the retirement you want is possible by starting with the right retirement income number?

When it comes to retirement income, you do not want to guess the number. It is worth your time and effort to come up with the most accurate number for you to meet your ideal retirement goals. Retirement planning projections are only as good as the assumptions we use. If we are not using the right assumptions, especially the right number for your retirement income, the projections for your retirement success will not be as accurate as you want them to be.

Work with your financial planner to find the tools you need to come up with YOUR most accurate retirement income need, and then make sure your plan can support those needs. We want you to have the most successful retirement possible!

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

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 Sandra D. Adams, CFP® and not necessarily those of Raymond James.

What Happens to my Social Security Benefit If I Retire Early?

Contributed by: Kali Hassinger, CFP®, CSRIC™

Did you know that the benefit shown on your Social Security estimate statement is not just based on your work history? Your estimated benefit actually assumes that you will work from now until your full retirement age, and on top of that, it assumes that your income will remain about the same that entire time. For some of our younger, working, and successful clients, early retirement is becoming a frequent discussion topic. What happens, however, if you retire early and do not pay into Social Security for several years? In a world where pensions have become a thing of the past for most people, Social Security will be the largest, if not the only, fixed income source in retirement. 

Your Social Security benefit is based on your highest 35 earning years, with the current full retirement age at 67. So, what happens to your benefit if you retire at age 50? That is a full 17 years earlier than your statement assumes you will work, effectively cutting out half of what could be your highest earning years.

We recently had a client ask about this exact scenario, and the results were pretty surprising! This client has been earning an excellent salary for the last ten years and has maxed out the Social Security tax income cap every year. Her Social Security statement, of course, assumes that she would continue to pay in the maximum amount (which is 6.2% of $147,000 for an employee in 2022 - or $9,114 - with the employer paying the additional 6.2%) until her full retirement age of 67. By completely stopping her income, and therefore, her contributions to Social Security tax at age 50, she wanted to be sure that her retirement plan was still on track.

We were able to analyze her Social Security earning history and then project her future earnings based on her current income and future retirement age of 50. Her current statement showed a future annual benefit of $36,000. When we reduced her income to $0 at age 50, her estimated Social Security benefit actually dropped by 13% or, in dollars, $4,680 per year. That is still a $31,320 per year fixed income source that would last our client throughout retirement. Given that she is working 17 years less than the statement assumes, a 13% decrease is not too bad. This is just one example, of course, but it is indicative of what we have seen for many of our early retirees. 

If you are considering an early retirement, Social Security is not the only topic you will want to check on before making any final decisions. There are other issues to consider, such as health insurance, having enough savings in non-retirement accounts that are not subject to an early withdrawal penalty, and, of course, making sure you have saved enough to reach your goals! If you would like to chat about Social Security and your overall retirement plan, we are always happy to help!

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

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 Kali Hassinger, CFP®, CSRIC™ and not necessarily those of Raymond James.

Is My Pension Subject to Michigan Income Tax?

Contributed by: Nick Defenthaler, CFP®, RICP®

It is hard to believe, but it has been ten years since former Michigan Governor Rick Snyder signed his budget balancing plan into law, which became effective in 2012. As a result, Michigan joined the majority of states in the country in taxing pension and retirement account income (401k, 403b, IRA, distributions) at the state income tax rate of 4.25%. 

As a refresher, here are the different age categories that will determine the taxability of your pension:

1) IF YOU WERE BORN BEFORE 1946:

• Benefits are exempt from Michigan state tax up to $54,404 if filing single, or $108,808 if married filing jointly.

2) IF YOU WERE BORN BETWEEN 1946 AND 1952:

• Benefits are exempt from Michigan state tax up to $20,000 if filing single, or $40,000 if married filing jointly.

3) IF YOU WERE BORN AFTER 1952:

• Benefits are fully taxable in Michigan.

What happens when spouses have birth years in different age categories? Great question! The state has offered favorable treatment in this situation and uses the oldest spouse’s birthdate to determine the applicable age category. For example, if Mark (age 69, born in 1953) and Tina (age 74, born in 1948) have combined pension and IRA income of $60,000, only $20,000 of it will be subject to Michigan state income tax ($60,000 – $40,000). Tina’s birth year of 1948 is used to determine the applicable exemption amount – in this case, $40,000 because they file their taxes jointly. 

Taxing retirement benefits has been a controversial topic in Michigan. As we sit here today, Governor Whitmer is advocating for a repeal of taxing retirees – however, no formal proposal has been released at this time. The following states are the only ones that do not tax retirement income (most of which do not carry any state tax at all) – Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, Illinois, Mississippi, Pennsylvania, and Wyoming. Also, Michigan is one of 37 states that still does not tax Social Security benefits.

Here is a neat look at how the various states across the country match up against one another when it comes to the various forms of taxation:

Source: www.michigan.gov/taxes

Taxes, both federal and state, play a major role in one’s overall retirement income planning strategy. In many cases, there are strategies that could potentially reduce your overall tax bill by being strategic on which accounts you draw from in retirement or how you choose to turn on various forms of fixed retirement income. If you would like to dig into your situation to see if there are planning opportunities you should be taking advantage of, please reach out to us for guidance or a second opinion.

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.

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.

Tips to Help You Achieve Your Financial Goals

Contributed by: Kelsey Arvai, MBA

We hope your 2022 is off to a great start! As we all know, the New Year is an opportune time to reset and reevaluate your goals. With this in mind, we have come up with some simple yet effective strategies to position yourself for a prosperous year ahead.

Automate Savings and Debt Reduction

Establishing and maintaining a positive cash flow is a top-tier priority for your financial health. Automation is key to being efficient and effective while working toward your financial goals. Prioritizing your savings contribution through automation helps hedge against the temptation to spend the funds elsewhere. Additionally, utilizing automatic payments for your credit card could help your credit score if the time the payment happens is before your due date. After establishing an emergency fund through your automated savings, you might consider directing excess cash to your retirement and health savings plans.

Max Out Your 401(k) and Health Savings Account (HSA)

The beginning of the year is a great time to review your 401(k) and HSA contributions. In doing so, you can ensure that you are maximizing your benefits and taking advantage of increased deferral limits for 2022. 401(k), 403(b), and most 457 plan contribution limits have been bumped up to $20,500 for elective employee deferral.

HSA contribution limits have also been increased to a maximum of $3,650 for individuals and $7,300 for family coverage. It is estimated that couples retiring today will face $200,000-$300,000 of out-of-pocket medical expenses over the course of their retirement years. HSA balances can build and grow over time, and these accounts can be used to offset healthcare costs in retirement.

Plan for Charitable Giving

The beginning of the year is also a great time to determine your charitable goals and budget for the year ahead. We have written extensively on how to best pick a charity, so if you are unsure of which causes or organizations you would like to support, these blogs may be helpful!

How to Pick a Charity…During a Pandemic Part 1: Important Documents

How to Pick a Charity…During a Pandemic Part 2: Commitment to the Mission

How to Pick a Charity…During a Pandemic Part 3: Resources

Invest in Your Emotional and Physical Well-Being

As you take stock of your financial health this year, carving out time for your physical health is equally paramount. There is a connection between health and wealth, and each should be reviewed by a professional, at least annually.

Reach Out to Your Financial Advisor 

Working with your advisor on an ongoing basis can provide you support to keep you on track while you are determining and working towards financial goals. If you ever have any questions, please reach out to us. We are always happy to help!

Kelsey Arvai, MBA is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

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 Kelsey Arvai, MBA and not necessarily those of Raymond James.

Reviewing your Social Security Benefit Statement

Contributed by: Nick Defenthaler, CFP®, RICP®

According to the Social Security Administration, on average, Social Security will replace about 40% of one’s pre‐retirement earnings. Given the diligent savings and consistently wise financial decisions many of our clients at The Center have made over the years, this percentage might not be quite as high. However, in our experience, Social Security is still a vital component of one’s retirement plan. Let’s review some of the important aspects of benefit statements to ensure you’re feeling confident about your future retirement income.

History of Mailed Statements

In 1999, the Social Security Administration (SSA) began mailing paper copies of Social Security statements to most American workers. Since that time, through several budget reduction initiatives, this process has dramatically changed. As we stand here today, no worker under the age of 60 receives a projected benefit statement by mail. Only those who receive statements by mail are both 60 and older and have not yet registered for an online SSA account.

Online Access – The “my Social Security” Platform

I have to hand it to Social Security – they’ve done a fantastic job, in my opinion, by creating a very user-friendly and easy‐to‐follow online platform to view benefit statements and projections. To create a user account or to sign in to your existing account, click here. If you have not set your account up and wish to do so, you’ll be prompted to provide some basic personal identifiable information such as your name, Social Security number, date of birth, address, e‐mail address, etc. The SSA has also made several great cyber security improvements, including dual‐factor authentication and a photo of a state‐issued photo ID, such as a driver’s license, to verify identification. This is similar to a mobile check deposit that many banks now offer on a smartphone.

Interpreting your Projected Future Income

Benefit projections at various ages can be found on page 2 of your Social Security statement. As you’ve likely heard your advisor share in the past, each year you delay benefits, you’ll see close to an 8% permanent increase on your income stream. Considering our low‐interest‐rate environment and historically high cost of retirement income, this guaranteed increase is highly attractive. It’s important to note that estimated benefits are shown on your statement in today’s dollars and do not take inflation into account. That said, the latest 2020 annual reports from SSA and Medicare Boards of Trustees use 2.4% as an expected future annual inflation amount. Click here to learn more about the sizeable cost of living adjustment in 2022 for those currently receiving Social Security. You should also be aware that Social Security assumes your current earnings continue until “retirement age,” which is not necessarily the same as “full retirement age.” This can potentially be a significant issue for those retiring earlier (i.e., before age 60 in most cases). Click here to learn more about how your income benefits are determined.

Earnings History and Fixing Errors

Page 3 of your Social Security statement details the earnings that the SSA has on file for each year since an individual began working. Believe it or not, SSA does make mistakes! Our team makes it a best practice to review a client’s earnings history on the statement to see if there are any significant outlier years. In most cases, there’s a good reason for an outlier year with income, but it’s simply an error in others. If you do notice an error with your earnings that needs to be fixed to ensure it does not negatively impact your future Social Security benefit, you have a few options. Once supporting documentation is gathered (i.e., old tax returns, W2s, etc.), you can contact the SSA by phone (800‐722‐1213), visit a local SSA office, or complete Form SSA-7008.

Believe it or not, in some circumstances depending on filing strategies, one can generate as much as $1M in total lifetime benefits from Social Security! If you have yet to file, however, there’s a good chance it’s been a bit since you’ve reviewed your benefit statement. If our team can help interpret your benefit statements, please feel free to reach out. The stakes are too high with Social Security, and we are here to help you in any way we can!

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.

Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional. The information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Defenthaler, CFP®, RICP®, and not necessarily those of Raymond James. Every Investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment, Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Finding Meaningful Ways to Spend When Your Financial Plan Allows

Contributed by: Sandra Adams, CFP®

Several months ago, I wrote about clients who had developed such great savings habits to retire that they were shocked they could spend more in retirement than they had been spending in pre-retirement (“Can You Change Your Spending Habits in Retirement”). Of course, by the time this happens, most clients realize that it is very difficult, if not impossible, to change their spending habits or their lifestyle in general. Ultimately, they have trouble spending the money they have available to them.

I continue to have discussions in financial planning reviews with these clients when their retirement spending continues to be well below what is possible for their long-term financial success. Often this generates meaningful conversations regarding what might be possible with the excess funds, for the clients to make their lives more enjoyable and valuable, and for their families and communities.

Here are just some of the ideas that have come out of these discussions:

• Annual gifting to children — in cash or specifically for the individual needs for the children and/or their families.

• Assisting with grandchildren’s education.

• Taking a memorable trip(s) that the client has always dreamed of taking.

• Creating or contributing to a scholarship program at the client’s former school/university.

• Making a significant donation to a charity that has special meaning to the client.

• Investing in a hobby that has significant meaning/value to the client.

• Helping a family member that is struggling financially.

While spending more than what is necessary is still not easy for most of these clients, they begin to find that it makes more sense and is easier to do when the spending is meaningful for them, their families, or their community. And with the help of a financial advisor along the way to make sure that the spending is still in line with their plan, even if they do those things that are meaningful (and sometimes fun), they can move forward with confidence and find new ways to be creative with their spending.

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.