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.

Another Way to Make Retirement Purposeful for You

Contributed by: Sandra Adams, CFP®

One of our Center values is Education and Personal Growth. Continuously learning and growing in our personal and professional lives is core to what we are and what we do. It is also something we incorporate into conversations with clients as they think about what might make their retirements meaningful to them. 

Beyond knowing that clients are financially prepared for their retirement, we want to help make the next stage of their lives as purposeful and satisfying as possible. Part of that is helping clients explore hobbies, volunteer activities, travel, and learning that will fulfill them and make their lives full.  

Locally, there are several universities that can help fulfill the need of those looking to continue to learn and grow personally in retirement. We have three universities in Michigan that have been named Age-Friendly Universities – Michigan State University, Eastern Michigan University, and Wayne State University. In particular, Wayne State University offers a 75% tuition reduction to students 60 or older and sponsors the Society of Active Retirees, a 1,200-member lifelong learning community. Its volunteer force includes 300 persons 50 and up, and more than half of its faculty and 40% of staff are 50 or older. The WSU Institute of Gerontology also has an extensive research portfolio on aging, having received $54 million in funding for aging issues since 2015.

If you are interested in learning more about Wayne State University’s Age-Friendly University benefits, click here. And if you are interested in learning more about the Society for Active Retirees, click here. If you are interested in having a conversation about exploring other options for developing your own purposeful retirement, please reach out to one of our planners at The Center to start that conversation today.

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.

Opinions expressed in the attached article are those of Sandra D. Adams, CFP® and are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services 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.

How Can I Estimate Retirement Income Needs?

Contributed by: Josh Bitel, CFP®

Planning for retirement is on everyone's mind at some point in their career. But figuring out where to begin to project how much income will be needed can be a tall task. Sure, there are rules of thumb to follow, but cookie-cutter approaches may only work for some. When estimating your retirement needs, here is a quick guide to get you started.

Use Your Current Income as a Starting Point

One popular approach is to use a percentage of your current working income. Industry professionals disagree on what percentage to use; it could be anywhere from 60% to 90% or even more. The appeal of this approach lies in its simplicity and the fact that there is a fairly common-sense analysis underlying it. Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect that there will be certain expenses you will no longer have is a good way to sustain a comfortable retirement.

The problem with this approach is that it does not account for your unique situation. For example, if you intend to travel more in retirement, you might need 100% (or more) of your current income to accomplish your goals. 

Estimate Retirement Expenses

Another challenging piece of the equation is figuring out what your retirement expenses may look like. After all, a plan will only be successful if it accounts for the basic minimum needs. Remember that the cost of living will go up over time. And keep in mind that your retirement expenses may change from year to year. For example, paying off a mortgage would decrease your expenses, while healthcare costs as we age will have the opposite effect on your budget.

Understand How Retirement Age Can Change the Calculation

In a nutshell, the earlier you retire, the more money you will need to rely on to support your lifestyle. I recently wrote a blog simplifying this topic: click here to see more.

Account For Your Life Expectancy

Of course, when you stop working is only one piece of the pie to determine how long of a retirement you will experience. The other, harder to estimate, piece is your life expectancy. It is important to understand that the average life expectancy of your peers can play into the equation. Many factors play into this, such as location, race, income level, etc., so getting a handle on your specific situation is key. There are many tables that can be found online to assist with this; however, I always encourage people to err on the side of caution and assume a longer-than-average life expectancy to reduce the possibility of running out of money.

Identify Your Sources of Retirement Income

So you have an idea of how much you spend to support your lifestyle and how long your retirement may last, next is understanding where the money comes from. A good place to start for most Americans is Social Security. Check out http://www.ssa.gov to see your current benefit estimate. Other fixed income sources may include a pension or annuity. Beyond that, we normally rely on investments such as a 401k plan at work or other retirement plans.

Address Any Income Shortfalls

In a perfect world, we have added up our retirement lifestyle and compared it with our sources of retirement income, and found that we have plenty set aside to support a comfortable retirement. However, this is not always the case. If you have gone through this exercise and come to the conclusion of an income shortfall, here are a few ideas to help bridge that gap:

• Consider delaying your retirement for a few years

• Try to cut current expenses so you will have more money to save for retirement

• Work part-time during retirement for extra income

As always, an advisor can help with this calculation and inspire confidence in your path to financial independence. Reach out to us today if you are thinking about that light at the end of the tunnel!

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.

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 the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. 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. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72.

How Much Does It Actually Take to Retire Early?

Contributed by: Josh Bitel, CFP®

Like most people, you have probably thought of the possibility of an early retirement, enjoying your remaining years doing whatever brings you joy and being financially independent. Whether you have your eyes set on traveling, lowering your golf score, spending more time with your family, or any other hobbies to take up your time, you may wonder… How much money does it actually take to retire at age 55?

If you have thought about retirement, you are likely familiar with the famous “4% rule”. This rule of thumb states that if you withdraw 4% of your investment portfolio or less each year, you will more than likely experience a ‘safe’ retirement, sheltered from the ebbs and flows of the stock market as best you can. However, some may not know that this rule assumes a 30-year retirement, which is typical for most retirees. If we want to stretch that number to 40 years, the withdrawal rate is slightly lower. For this blog, we will assume a 3.5% withdrawal rate; some professionals have argued that 3% is the better number, but I will split the difference.

A key component of a retiree’s paycheck is Social Security. The average working family has a household Social Security benefit of just under $3,000/month. For our calculations, we will assume $35,424/year for a married couple retiring at age 65. For a couple retiring ten years sooner, however, this benefit will be reduced to compensate for the lost wages. The 55-year-old couple will collect $27,420/year starting as soon as they are able to collect (age 62).

For simplicity’s sake, we will assume a retirement ‘need’ of $10,000/month in retirement from all sources. A $120,000/year budget is fairly typical for an affluent family in retirement nowadays, especially for those with the means to retire early. Of course, we get to deduct our Social Security benefit from our budget to determine how much is needed from our portfolio to support our lifestyle in retirement. (Note that we are assuming no additional income sources like pensions or annuities for this example). As the 4% (or 3.5%) safe withdrawal rule already accounts for future inflation, we can apply this rule to determine an approximate retirement fund ‘need.’ See the following table for the results:

As you can see, over $500,000 in additional assets would be needed to retire ten years earlier. These rules can be applied to larger or smaller retirement budgets as well. While this exercise was heavily predicated on a rule of thumb, it is worth noting that no rule is perfect. Your experience could differ considerably from the assumptions listed above.

This exercise was your author’s best attempt to simplify an otherwise exceptionally complex life transition. This is merely scratching the surface on what it takes to retire comfortably. To increase your financial plan’s success rate, many other factors must be considered, such as tax treatment of distributions, asset allocation of your investments, life expectancy, etc. If you are interested in fine-tuning your own plan to try to retire earlier, it is best to consult an expert.

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 the author 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.

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.

Planning Opportunities for LGBTQ+ Elders

Contributed by: Lauren Adams, CFA®, CFP®

For over 35 years, our independent wealth management firm Center for Financial Planning, Inc. has partnered with Raymond James Financial Services to achieve our mission of “Improving lives through financial planning done right.” In addition to providing our clients with custodial services for their investment accounts, Raymond James also offers a wide range of resources to The Center from everything from equity research reports to educational opportunities to stay on top of the ever-changing financial planning landscape.

One wonderful resource example is the Raymond James Pride Financial Advisors Network, a network of advisors serving the Lesbian, Gay, Bisexual, Transgender, and Queer (LGBTQ+) community that was founded in 2020, and its “Inaugural Business of Pride Symposium,” held in June 2021. At the Symposium, I had the opportunity to attend a session titled, “The LGBT+ Aging Crisis – Planning Opportunities for our LGBT+ Elders,” presented by Dan Steward, National Program Director for the Human Rights Campaign Aging Project, and Sherrill Wayland, Director of National Education Initiatives for SAGE.

In the presentation, Steward and Wayland discussed practical ways for financial planners to address and better serve members of the LGBTQ+ community:

• Recognize the distinct needs of this growing and diverse community: It is estimated that there are over 2.7 million older adults that self-identify as members of the LGBTQ+ community. Citing the work of leading researcher Professor Karen Fredriksen-Goldsen, the presenters explained that within this group, however, there is a wide range of generational experiences: from the oldest “Invisible Generation” that grew up when public discussion of LGBTQ+ issues was unheard of, to “The Silent Generation” that grew up when issues were being discussed but faced heavy discrimination, to the younger “Pride Generation” where many have been out for decades. Recognizing that there are nuances within the community, but also understanding the overarching themes of discrimination and resiliency, is an important component of developing the cultural competency required to best serve these clients.

• Plan, Plan, Plan: I’ve seen firsthand how the benefits of pairing comprehensive financial planning with a thoughtfully constructed, well-diversified investment portfolio that fits the clients’ needs and objectives can be liberating and even life-changing for so many. Working with a financial planner early on can help members of the community develop good financial health and financial security that will position them well later in life. Thoughtful estate planning (including considering if wills, Durable Powers of Attorney for Healthcare and Financial Matters, and living trusts are right for the situation) become all the more critical given that members of the LGBTQ+ community still face legal discrimination in many areas. Proper insurance planning can help manage risks and protect assets, including the potential need for long-term care coverage, over a client’s lifetime.

• Be aware of the elevated risk of financial exploitation and barriers to seeking help: According to SAGE, a significant portion of the elder LGBTQ+ community does not wish to live alone, has shrinking support networks, and may be inclined to seek companionship online. These factors can conspire to put these clients at higher risk of financial exploitation (including online “sweetheart scams”) and elder abuse. At the same time, coming from a place of resilience and self-sufficiency after facing discrimination throughout their lives, LGBTQ+ elders may be reluctant to seek help. They may fear being outed if they need assistance, that they won’t be believed by authorities, the loss of financial support from the abusive person, or the prospect of living alone. Financial planners – who may be some of the most trusted people in the client’s life – must be aware of these concerns and be ready to help encourage reaching out to authorities or seeking assistance if needed.

• Know your resources: In the effort to assist, planners must know what resources are available and be cognizant of the added layer of being able to identify inclusive service providers. Steward and Wayland identified several resources that financial planners serving this community should be aware of:

  • The Long-Term Care Equality Index – The first national benchmarking system for residential long-term care communities. The index was launched in June 2021 and 184 communities participated. It was created by a partnership between the Human Rights Campaign Foundation and SAGE to promote equitable and inclusive care for LGBTQ+ older adults.

  • National Resource Center on LGBT Aging – This project is funded by the U.S. Administration for Community Living and serves as a resource center to improve the quality of services and support offered to LGBTQ+ older adults. It offers a host of resources ranging from caregiver support to Social Security, Medicare, and Medicaid guides to resource directories on the national and state level.

  • SAGE – SAGECare provides LGBTQ+ cultural competency training on aging issues to service providers. Their “Find a Provider” tool can be used to locate service providers that have participated in their cultural competency training programs.

 By keeping these considerations and resources in mind, financial professionals can ensure all clients –regardless of sexual orientation or gender identity – can benefit from the power of financial planning and act as true advocates for the aging LGBTQ+ community.

Lauren Adams, CFA®, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals and also leads the client service, marketing, finance, and human resources departments.

Tips for Managing Restricted Stock Units

Contributed by: Robert Ingram, CFP®

Does your employer offer company stock as part of your compensation package? There are many forms of equity compensation ranging from different types of stock awards to employee stock options (ESO) and employee stock purchase plans (ESPP). Over the last several years, Restricted Stocks Units (RSU) have become one of the most popular alternatives offered by companies. 

 Unlike pure stock awards that grant shares of stock or stock options that provide an employee the right to purchase shares at a predetermined price for a specific period of time, grants of RSUs are not actual shares of stock (yet). An RSU is essentially a promise made by the employer company to deliver to the employee shares of stock or cash payment for the value of stock shares following a vesting schedule. The vesting schedule is often based on a required length of employment, such as a three-year or four-year period, or other company performance goals. The number of units generally corresponds to shares of stock, but the units have no value until the employee receives the corresponding stock shares (or equivalent payment) when they vest.  

 How do RSUs Work? 

Let’s say your employer company grants you 1,000 Restricted Stock Units this year with a grant date of September 1st, and a 4-year vesting schedule under which 25% of the units vest each year as shares of the company’s stock. The following September 1st after the original grant date (one year later) as long as you had continued your employment, the first 25% of your 1,000 RSUs vests as actual company stock shares. Assuming the market value of the stock at the time of vesting is $50 per share, you would have 250 shares of stock worth $12,500. 

 Once the shares have vested and been delivered, you now have ownership rights such as voting rights and rights to dividend payments. You can also choose to hold or to sell the shares from that point. In each subsequent year going forward, the next 25% of your RSUs would vest until the 4th year when the remaining 250 of the 1,000 units vest. 

 One of the first important planning considerations for Restricted Stock Units is their taxation. How are RSUs taxed and how might that impact your tax situation?

 There are three triggering events with RSUs to understand.

 When You Receive RSU Grants

In most cases, at the time you receive your RSU grants, there are no tax implications. Because there is no transfer of actual property by the company until vesting in the form of shares or cash payment, the IRS does not consider the value of the stock represented by RSUs as income compensation when the grant occurs. This means the RSU grants themselves are not taxed.

 When RSUs Vest 

 Once the restricted units vest and the employer delivers the shares of stock or equivalent cash payment, the fair market value of the vested shares or cash payment as of that date (minus any amount the employee had to pay for the RSUs) is considered income and is taxed as ordinary income. Typically, companies grant RSUs without the employee paying a portion, so the full value of the vested shares would be reported as income.  

 In our example above with the 1,000 RSU grants, 250 RSUs vested with the fair market value of $50 per share for a total value of $12,500. This $12,500 would be considered compensation and would be reportable as ordinary income for that tax year. This would apply to the remaining RSUs in the years that they vest. Because this amount is treated as ordinary income, the applicable tax rate under the federal income tax brackets would apply (as well as applicable state income taxes).  

 To cover the tax withholding for this reported income at vesting, most companies allow you a few options. These may include:

• Having the number of shares withheld to cover the equivalent dollar amount

• Selling shares to provide the proceeds for the withholding amount

• Providing a cash payment into the plan to cover the withholding

When You Sell Shares 

 At the time RSUs vest, the market value of those shares is reported as ordinary income. That per-share value then becomes the new cost basis for that group of shares. If you immediately sell the vested shares as of the vesting date, there would be no additional tax. The value of the shares has already been taxed as ordinary income, and the sale price of the shares would equal the cost basis of the shares (no additional gain or loss).

 If however, you choose to hold the shares and sell them in the future, any difference between the sale price and the cost basis would be a capital gain or capital loss depending on whether the sale price was greater than or less than the cost basis.  

 Once again using our example of the 1,000 RSU grants, let’s assume the fair market value of 250 shares at vesting was $50 per share and that you held those shares for over one year. If you then sold the 250 shares for $75 per share, you would have a capital gain of $25 per share ($75 - $50) for a total of $6,250. Since you held the shares for more than one year from the vesting date, this $6,250 would be taxed as a long-term capital gain and subject to the long-term capital gains tax rate of either 0%, 15%, or 20% (as of 2021) depending on your total taxable income. 

 If you were to sell shares within one year of their vesting date, any capital gain would be a short-term capital gain taxed as ordinary income. Since the federal tax brackets apply to ordinary income, you may pay a higher tax rate on the short-term capital gain than you would on a long-term gain even at the highest long-term capital gains rate of 20% (depending on where your income falls within the tax brackets).

 Planning for Additional Income

Because Restricted Stock Units can add to your taxable income (as the units vest and potentially when you sell shares), there are some strategies you may consider to help offset the extra taxable income in those years. For individuals and couples in higher tax brackets, this can be an especially important planning item.  

Some examples could include:

• Maximizing your pre-tax contributions to your 401k, 403(b), or other retirement accounts. If you or your spouse are not yet contributing to the full annual maximum, this can be a great opportunity. ($19,500 in 2021 plus an extra $6,500 “catch up” for age 50 and above). In some cases, if cash flow is tight, it could even make sense to sell a portion of vested RSUs to replace the income going to the extra contributions.

• Contributions to a Health Savings Account (HSA) are pre-tax/tax-deductible, so each dollar contributed reduces your taxable income. If you have a qualifying high deductible health plan, consider funding an HSA up to the annual maximum ($3,600 for individuals/$,7,200 for family coverage, plus an extra $1,000 “catch up for age 55 and above)

 Deferred Compensation plans (if available) could be an option. Many executive compensation packages offer types of deferred compensation plans. By participating, you generally defer a portion of your income into a plan with the promise that the plan will pay the balance to you in the future. The amount you defer each year does not count towards your income that year. These funds can grow through different investment options, and you select how and when the balance in the plan pays out to you, based on the individual plan rules. While this can be an effective way to reduce current income and build another savings asset, there are many factors to consider before participating. 

• Plans can be complex, often less flexible than other savings vehicles, and dependent on the financial strength and commitment of the employer.

• Harvesting capital losses in a regular, taxable investment account can also be a good tax management strategy. By selling investment holdings that have a loss, those capital losses offset realized capital gains. In addition, if there are any remaining excess losses after offsetting gains, you can then offset up to $3,000 of ordinary income per year. Any excess losses above the $3,000 can be carried over to the following tax year.

 When Should I Sell RSUs?

 The factors in the decision to sell or to hold RSUs that have vested as shares (in addition to tax considerations) should be similar to factors you would consider for other individual stocks or investment securities. A question to ask yourself is whether you would choose to invest your own money in the company stock or some other investment. You should consider the fundamentals of the business. Is it a growing business with good prospects within its industry? Is it in a strong financial position; or is it burdened by excessive debt? Consider the valuation of the company. Is the stock price high or low compared to the company’s earnings and cash flow?

Consider what percentage of your investments and net worth the company stock represents. Having too high a concentration of your wealth in a single security poses the risk of significant loss if the stock price falls. Not only are you taking on overall market risk, but you also have the risk of the single company. While each situation is unique, we generally recommend that your percentage of company stock not exceed 10% of your investment assets.

You should also consider your financial needs both short-term and long-term. 

Do you have cash expenses you need to fund in the next year or two and do you already have resources set aside? 

If you’re counting on proceeds from your RSUs, it could make sense to sell shares and protect the cash needed rather than risk selling shares when the value may be lower.  

 As you can see, equity compensation and specifically RSUs can affect different parts of your financial plan and can involve so many variables. That’s why it’s critical that you work with your financial and tax advisors when making these more complex planning decisions. 

So please don’t hesitate to reach out if we can be a resource.

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Disclosure: 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.

How Much Guaranteed Income Should You Have In Retirement?

Contributed by: Nick Defenthaler, CFP®, RICP®

How much guaranteed income (we’re talking Social Security, pension, and annuity income) should you have in retirement? I am frequently asked this by clients who are nearing or entering retirement AND are seeking our guidance on how to create not only a tax-efficient but well-diversified retirement paycheck. 

“The 50% Rule”

Although every situation is unique, in most cases, we want to see roughly 50% or more of a retiree’s spending need satisfied by fixed income. For example, if your goal is to spend $140,000 before-tax (gross) in retirement, ideally, we’d want to see roughly $70,000 or more come from a combination of Social Security, pension, or an annuity income stream. Reason being, this generally means less reliance on the portfolio for your spending needs. Of course, the withdrawal rate on your portfolio will also come into play when determining if your spending goal would be sustainable throughout retirement. To learn more about our thoughts on the “4% rule” and sequence of return risk, click here.  

Below is an illustration we use frequently with clients to help show where their retirement paycheck will be coming from. The chart also displays the portfolio withdrawal rate to give clients an idea if their desired spending level is realistic or not over the long-term.

Cash Targets

Once we have an idea of what is required to come from your actual portfolio to supplement your spending goal, we’ll typically leave 6 – 12 months (or more depending of course on someone’s risk tolerance) of cash on the “sidelines” to ensure the safety of your short-term cash needs. Believe it or not, since 1980, the average intra-year market decline for the S&P 500 has been 13.8%. Over those 40 years, however, 30 (75% of the time) have ended the year in positive territory:

Market declines are imminent and we want to plan ahead to help mitigate their potential impact. By having cash available at all times for your spending needs, it allows you to still receive income from your portfolio while giving it time to “heal” and recover – something that typically occurs within a 12-month time frame.

A real-world example of this is a client situation that occurred in late March 2020 when the market was going through its bottoming process due to COVID. I received a phone call from a couple who had an unforeseen long-term care event occur which required a one-time distribution that was close to 8% of their entire portfolio. At the time, the stock portion of their accounts was down north of 30% but thankfully, due to their 50% weighting in bonds, their total portfolio was down roughly 17% (still very painful considering the conservative allocation, however). We collectively decided to draw the income need entirely from several of the bond funds that were actually in positive territory at the time. While this did skew their overall allocation a bit and positioned them closer to 58% stock, 42% bond, we did not want to sell any of the equity funds that had been beaten up so badly. This proved to be a winning strategy as the equity funds we held off on selling ended the year up over 15%.  

As you begin the home stretch of your working career, it’s very important to begin dialing in on what you’re actually spending now, compared to what you’d like to spend in retirement.  Sometimes the numbers are very close and oftentimes, they are quite different.  As clients approach retirement, we work together to help determine this magic number and provide analysis on whether or not the spending goal is sustainable over the long-term.  From there, it’s our job to help re-create a retirement paycheck for you that meets your own unique goals.  Don’t hesitate to reach out if we can ever offer a first or second opinion on the best way to create your own retirement paycheck.

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.

---

Opinions expressed are those of the author but not necessarily those of Raymond James, and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Charts in this article are for illustration purposes only.

How to Decide Where to Live in Retirement

Contributed by: Sandra Adams, CFP®

One of the issues for most retirees, once you have determined that you are ready to retire and can afford to do so, is where you want to live in retirement? This, of course, is a loaded question. There are so many factors that go into making this decision, and it is as much emotional as it is financial. I could certainly write a detailed commentary on this topic, but here we will provide some bullet points to provide some issues and decision points to consider.

Location, Location, Location.  For the majority of people, the most important decision in making the retirement living decision is the location. Will you remain in your pre-retirement community that you are familiar with?  Where are your friends, connections and social contacts?  Or will you make a change, perhaps to a different or warmer climate? To a more rural setting?  Or maybe closer to the city where health care, transportation, resources and cultural activities are more accessible?  You may decide to move closer to family at this point in your life — this may be a dangerous proposition — as growing and maturing families tend to move again just as you move to be near them, leaving you again stranded in a place where you know no one.  You may find that it is more important to find a location where you can be near friends that you can socialize with, that you have commonalities with and that will provide mutual support.

Once the location is determined, the physical space becomes important.  Will you stay in the same home you’ve always lived in and “age in place”?  If you decide to do that, it may become necessary to take a good hard look at your home and make sure that it is equipped to be safe and easy for you to live in for the next 20 – 30 years or so of your retirement, if that is your plan. And if you truly do wish to stay in your own home to age (according to a recent survey by the National Council on Aging, 9 in 10 seniors plans to stay in their own home to age), you have to plan ahead to make things as safe and accommodating for yourself and your spouse as possible, so there is not a need for you to need to move to an assisted living or nursing care facility in the unfortunate case that you have a medical emergency and your home is not equipped for you to stay there.  

For those who don’t desire to stay in their pre-retirement home, there are endless choices:

• You might decide to downsize to a smaller home, condo or apartment.

• You might choose to move into a senior-only community so that you can associate with people that are in the same life situation.

• You might choose to live in a multi-generational planned community.

• You might choose to live in a shared home situation — think of older adults sharing the same living space, expenses, and providing support and resources with one another (circa the Golden Girls).

• You might decide to move in with or share space with family members.

So, how do you go about making your decision about where and in what kind of house/housing facility to live in retirement?      

• Develop your criteria – What kind of climate are you looking for?  How active do you want your social life to be? What kind of access do you want to health care and other facilities? Make a list and search locations that fit your criteria.

• Identify neutral professionals to guide you

• Do a trial run

• Consult your family

• Put together a transition team

To move or not to move, that is the question.  And even making not to move — aging in place — does not mean that there are no choices or changes to make.  But if you do decide to make a move, it is a process that takes planning, and one that should not be taken lightly. Give the process serious consideration — it is a large part of your potential retirement planning picture.

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.

Why We Grow Happier With Age

Contributed by: Sandra Adams, CFP®

Having had a “milestone” birthday at the end of last year, I came across a book recently that caught my attention. The Happiness Curve: Why Life Gets Better After 50 by Jonathan Rauch seemed like a book that I had to read – who wouldn’t want to know how and why life was going to start getting better!?!  I was completely intrigued by this book. It is backed by the personal experience of the author, actual case studies, and long-term social research.  So, what did I learn?

Research indicates that life satisfaction declines in your forties. Despite being dubbed as having a “midlife crisis”, your forties are less of a crisis and more of a sense of despair. Why could this happen?

• We realize that we’re not going to achieve everything we once imagined

• We compare ourselves to others who’ve achieved more and question our self-worth

• We lack gratitude and feel shame or embarrassment

However, by age 50 (or shortly thereafter) our “sour” mood changes and we begin to feel more life satisfaction. As each decade passes, our happiness “ranking” gets even higher.

• We become less focused on our own goals and become more focused on serving others

• We accept our life and focus on personal relationships instead of external achievements

• We stop comparing ourselves to others and focus more on our own internal satisfaction

Key takeaways:

• Be self-aware of the psychology behind your feelings

• Know that the “midlife crisis” isn’t forever and better times are ahead

• The future is an opportunity to live our happiest and most socially satisfying years

For those who are focused on the negatives of aging such as an ailing body or a failing mind, I challenge you to pick up The Happiness Curve to get a different perspective on your future retirement years. What you learn just might surprise you! If you’d like to have a conversation about this topic or additional topics around retirement or longevity planning, feel free to contact me at sandy.adams@centerfinplan.com.

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.