Monthly Archives

October 2018

Your Social Security Benefits Get A Boost

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Some seniors are dependent on their Social Security benefits, but the majority of your retirement income may be derived from other sources. While your Social Security income may not be your primary source of income in retirement, you nonetheless may be counting on that income to provide financial support for your quality of life in a modest capacity. Social Security benefits increases have been minimal most years since 2000. The exception was in 2012 when benefits increased by 3.6 percent. However, in 2010, 2011 and 2016, there was no cost-of-living adjustment. The announced cost-of-living increase for the 2019 calendar year is 2.8 percent.

More than 67 million Americans are Social Security beneficiaries, so this has a major impact on the lives of many people. The modest increase in income is not the only change made by the Social Security Administration for 2019. The amount of income that can be taxed for Social Security has increased, and the earnings limit for some individuals has also been adjusted.

While this year’s increase is substantially higher than the increase in most years in recent history, it is not enough to compensate recipients for the diminished buying power of their Social Security income. The Senior Citizens League has estimated that the buying power of Social Security benefits has decreased by 34 percent since 2000. This estimate takes into account the planned increase in benefits for 2019. Over this same period of time, this organization estimates that expenses for seniors have increased by as much as 96 percent. For example, homeowners insurance premiums for seniors have increased by 164 percent and property taxes have increased by 129 percent in this time period. Prescription drug costs have increased by 188 percent, and home heating oil costs have increased by 181 percent.

In recent years, cost-of-living adjustments to Social Security benefits has also resulted in an increased premium for Medicare premiums. In fact, the net benefit for many retirees has been minimal when both factors are taken into account. Updates to Medicare premiums for 2019 have not yet been released. However, because the cost-of-living adjustment for this year is substantial, any premium increases are not expected to make a huge impact on the raise that many beneficiaries are receiving for 2019. Keep in mind that Medicare premiums have increased by 195 percent between 2000 and today, and Medigap costs have increased by 158 percent.

While the impact of the Social Security benefits increase this year and in the next few years may have a modest impact on your financial situation at the moment, you can see that continued increases to senior living expenses could make you more reliant on Social Security benefits in the years ahead. It is important that you pay attention to benefits adjustments, Medicare costs and cost-of-living increases in the years ahead as their effects can become increasingly significant as you get older. In addition, now that you know more about the increase to Social Security benefits in 2019, you can update your financial plan and budget going forward.

Retirement Should Not Scare Women

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Halloween may be an appropriate time for a good scare, we should limit unwanted surprises in retirement!  Generalizations may not necessarily reflect your individual circumstance although there are fact-based reasons why the average woman faces greater hurdles than the average man does in securing her retirement. However, an awareness of the negatives and a proactive plan to take full advantage of some positives should demonstrate that retirement should not scare women.

More years of retirement and with fewer assets

The deck is stacked against some women before they even think about enjoying their first day of retirement. Some of the factors include:

• Longer life expectancy
• Greater likelihood of being the surviving spouse
• Wage gap as compared to male counterparts
• Less working years due to child rearing and caring for aging parents

One factor that may be interpreted as either a positive or negative is risk tolerance. Women tend to invest more conservatively than men, which can lead to lower potential returns. Conversely, conservative investors tend to move money around less often and continuity can lead to more consistent growth in the long term.

Take control

Where one starts is seldom as important as where one ends up. Consider these strategic goals to level the retirement playing field:

Save – Start early, continue to save and save as much as possible. 20 percent of income is a nice goal but maximizing what is practical is the ultimate goal.

Know what is needed – In our sunset years, we tend to fear dying less than outliving our retirement money. One way to prevent that is to begin with knowledge of what it costs to live. Be realistic about expenses that are fixed and what will no longer be needed once work is no longer in the picture. Ideally, the fixed expenses of one year of retirement living is generated annually by retirement income.

Invest the savings – This comes with one caveat – invest savings once an emergency fund for unexpected expenses is established. Most experts recommend six months of living expenses in cash assets as a minimum. Once that is accomplished, an asset allocation plan should be devised based primarily on age and ultimate financial goals.

Keep working – Other than the satisfaction work can provide as wells as a longer timeline to save, extending work past age 65 pays dividends in social security benefits. Although many women are concerned social security may one day fail, experts predict its pending demise is over exaggerated. One thing that is certain is that the longer a worker waits before taking benefits, the better. Consider that at age 62 a worker receives 70 percent her full retirement benefits, but that number rises to 132 percent at age 70.

Include an estate plan

Careful planning includes what-if scenarios. Take the time to set up a will and more preferably a trust, as well as a financial power of attorney and durable power of attorney for healthcare.

There’s no reason any woman should fear retirement. A realistic analysis, a well-crafted plan and disciplined execution will go a long way towards a secure and serene future.  We are here to help, give us a call, today.

Top 5 Things Baby Boomers Should Know

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  1. The Social Security COLA (cost of living adjustment) in 2019 will be 2.8%.

This is the largest COLA increase from the Social Security Administration since 2012.1

  1. Social Security benefits are often taxed.

If you work and are at full retirement age or older, you can earn as much as you want and your benefits will not be reduced; however, you may have to pay taxes on them. If your annual combined income is from $32-$44,000 filing jointly, you may have to pay taxes on 50% of your benefits. If your income is more than $44,000 filing jointly, then you may have to pay taxes on up to 85% of your benefits.2

Social Security calculates “combined income” by adding one-half of your Social Security benefits to your other income.2

  1. RMDs can have a profound effect on taxes.

Many people forget that RMDs (Required Minimum Distributions) begin at age 70½. You are required by the IRS to start withdrawing money annually from your 401(k)s, traditional IRAs and other tax-deferred accounts using a precise formula, and you must do so by December 31st of each year or owe the income tax plus a 50% penalty.

Since you’ve never paid taxes on this money, you will owe income tax on your withdrawals based on your tax bracket for the year, and the income from your withdrawals are added in to the combined income amount that Social Security calculates. Some Baby Boomers are shocked at the amount of income tax they will actually owe, and come to the realization that their nest egg is actually much less than they thought.

RMDs, tax planning and income planning are the major reasons having a retirement plan in place is so important.

  1. Medicare isn’t free.

Not only is Medicare not free, but the premiums are usually deducted from your Social Security check.

Medicare health and drug plan providers often make changes to their policies each year, including changes to costs, coverage, deductible and coinsurance amounts, and what pharmacies and providers are in their network, so it pays to do your homework every year. Medicare Open Enrollment runs from October 15 through December 7, and this is your opportunity to make new choices and pick plans that work best for you; changes made are effective as of January 1, 2019.

During Medicare Open Enrollment you can sign up for a Medicare Prescription Drug (Part D) Plan, switch plans, drop your Part D coverage altogether, switch from Original Medicare to a Medicare Advantage plan or select a Medicare Advantage plan from another provider.

You should review drug costs because the prices of some brand-name drugs could be lower next year. As part of the recent tax plan changes, some drug manufacturers will pay more of the costs for enrollees in the drug coverage gap (also known as the “donut hole”) starting in 2019.3

  1. Everyone should have an estate plan

Estate plans are for the people you leave behind when you pass away. Here are some things you should be aware of:

  • An estate plan helps ensure your final wishes get carried out, and also let your family, trustees and health care providers know what your wishes are in terms of finances, possessions and end-of-life health desires.
  • Having a trust in place usually allows your estate to avoid probate court and keeps your finances private.
  • A will allows you to name guardians for minor children and to specify how possessions will be distributed. But if you have only a will in place, your estate will have to go through probate court, which could be a lengthy and costly process for your heirs. Probate also leaves your finances open to public scrutiny.
  • Beneficiaries you have named on individual life insurance policies, 401(k)s and other financial accounts take precedence over your estate planning documents. There have been cases where a former spouse has received financial benefits that weren’t intended, simply because the beneficiaries were never changed on individual accounts. Make sure you review and make updates to all documents on a regular basis.
  • The estate tax exemption, which was doubled by the latest tax legislation to $22.36 million per couple until 2025, means that you should investigate to see if or how you might be able to take advantage of the favorable tax laws while they exist.4

 

For more information about issues related to retirement planning, please call SF Financial in Colorado Springs for retirement advice at (719) 597-2179.

 

Sources:
1 “Social Security Benefit to Increase 2.8 Percent in 2019,” AARP.org. https://www.aarp.org/retirement/social-security/info-2018/new-cola-benefit-2019.html (accessed October 16, 2018).
2 “Benefits Planner | Income Taxes And Your Social Security Benefit,” SSA.gov. https://www.ssa.gov/planners/taxes.html  (accessed October 16, 2018).
3 “Medicare ‘Doughnut Hole’ Will Close in 2019,” AARP. https://www.aarp.org/health/medicare-insurance/info-2018/part-d-donut-hole-closes-fd.html (accessed October 9, 2018).
4 “How the new tax law upends estate planning,” Financial-planning.com https://www.financial-planning.com/news/how-the-new-tax-law-changes-estate-planning-trusts-income-tax-planning  (accessed October 17, 2018).

 

How Are Your Social Security Benefits Calculated?

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We all think we know the basics about Social Security, but do we really know how different the benefits can be?

The standard retirement age is between 65 and 67, depending on your birthday. Your monthly income, also called your PIA, is determined by your highest 35 years of indexed earnings. You can start taking benefits as early as age 62, but your monthly income will be reduced by at least 25%.

Say your full retirement age is exactly 66 years old, then you can delay until age 70 and your monthly income will be 32% higher. Your strategy needs to be based upon a number of factors: how much retirement income you need, other sources of income, income taxes and your general health condition. Other factors also weigh in, like survivor needs, divorce, dependent children, and available liquid assets.

Proper planning requires attention to all these details. Give us a call today for help with planning your Social Security strategies.

(719) 597-2179

 

Retirement Planning Mistakes To Avoid

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Retirement should be a time of rest, relaxation, and play. It should be about focusing on those pursuits that you wanted to do when you were younger, but you have yet to cross them off of your bucket list. 

Failing to plan for a comfortable retirement, however, can be a major stressor in the life of someone facing their golden years. Recreational hopes and dreams can quickly be squashed in the wake of news that you haven’t set up things to be nearly as prosperous as you’d hoped. Learning what to do, and what NOT to do, as you plan for this time in your life will be key to being able to enjoy these years. Here are some things to avoid as you plan for this exciting time in your life: 

Don’t Rely Solely On Social Security 

You may have been somewhat misled with regard to social security—it was never meant to replace your original paycheck. Social security will cover approximately 40 percent of your pre-retirement income, and unless you are intending to pare down your expenses in retirement, its best to put other things in place to make sure you can live comfortably. 

Social security funds are also subject to availability, so if market fluctuations affect the overall health of this national account pool, you could also be affected. 

Don’t Assume Cost Of Living Will Be Cheaper

If you think of your day to day living expenses like food, clothing, and utilities, it is likely that these expenses will not go away in retirement. You might even find that certain expenses, like health care and leisure entertainment, actually go up during this time. To plan for a comfortable retirement, you’ll need to take into account all of these potential expenses when you budget what your cost of living will be. 

Don’t Neglect Catch-Up Contributions 

Many people simply don’t prioritize adding to their retirement savings in their early years of contribution to the workforce–most of their income is spent on student loan payments, housing, and supporting their families. 

After 50, people can take advantage of a catch-up contribution option, where you are able to put additional money into an IRA or another retirement account. While a startlingly low percentage of people over 50 do take advantage of the catch-up option, it is strongly recommended that you look into this as an efficient way to expand and grow your retirement portfolio. 

Don’t Forget Those Taxes 

It may seem at first with social security and other avenues of income streaming in that you have a pretty healthy influx of cash at your disposal. Stop and consider whether you have paid Uncle Sam his dues. Most retirement income is still taxable by law; up to 85 percent of social security income is still taxable! Interest and investment income are not immune to tax regulations either, even in retirement. Staying informed and making wise decisions with the counsel of trusted financial advisors will be key to maximizing your profit while minimizing your tax liability. 

An Ounce Of Prevention 

You’ve heard the phrase, “an ounce of prevention is worth a pound of cure”. It is especially true when planning for retirement. Making smart decisions now and preparing for this time will help ensure that your golden years are just that.  We are here to help you create a plan that will help you pursue a successful retirement.

Passing Your Estate to Imperfect Heirs

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When planning one’s last will and testament, one always hopes that the people they will be passing on their hard-earned wealth to will be responsible enough to handle it well and if possible, carry on their legacy. This is a hope which can be difficult to keep alive, especially in cases where the heirs have issues such as bad spending habits, drug addiction, gambling problems, and other weaknesses which compromise their judgment. When passing your estate to an imperfect heir, you need to make sure that you have put in place measures to control the manner in which they will use the money to prevent wastage. Here are some of the most common approaches.

Creating a trust

A trust is one of the ways in which you can pass on wealth to an heir while at the same time controlling the manner in which they use the money.  You can open a trust fund and appoint someone to play the role of trustee. The trustee is usually an independent and non-partisan party to the agreement. They should also be responsible, trustworthy, firm and principled. There are people who opt to appoint family members as trustees although there are times that these arrangements do not work out because of the possibility that they will cave when pressured by a family member who needs the money.  The ideal features of a trust is that they can specify the circumstances under which the money can be withdrawn. There are also trusts which state that it is only the trustee who will have discretion on when the funds can be disbursed.

Structured ideas

There are other approaches proven to have some success;

· You could decide to only have a lump sum payment made to them after they graduate from college

· You could decide to have chunks of the money offered to them after a specified period of time of sobriety. For instance, you could have money released to them after five years of being sober.

· You could create a will which says that payments are made directly to their utility providers such as their landlords and other utility companies.

There are many other specifications which you can make, but the most important part of to ensure that you are dealing with a professional who understands the rules and regulations of the process.

Dealing with the problem at the present

Another approach that many people never think about, and one that can be more helpful than trying to make safety nets, is dealing with the problem in the present. For instance, if you have a child that has an addiction issue, you can work to correct the issue now. Speak to them in the present and tell them that they need to get help. Create incentives that work in the present and work towards making sure that by the time you are approaching your sunset, the child has tried their best to reform.

Disinheritance

This may sound harsh, but in some circumstances, when you have tried all other approaches and when you are sure that leaving the property to the problematic heir will just be the same as throwing it away, you can choose to disinherit them. However, this is a last resort and usually applied if everything else that you can think about has completely stopped working.

These are just a few of the ways in which you can resolve the inheritance issue when their heirs are less than perfect. Ensure that you start looking for a solution long beforehand so that you can protect the child and/or family member from further destruction.

Life Insurance, It’s Not For You.

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Life insurance is one of those things that many people prefer to avoid thinking about because it often conjures up dark images.  Many people are jarred into realizing the importance of buying life insurance after a close friend or family member has passed away or even after hearing a news story about a tragic death that hit close to home. The reality is that it is better to be prepared and know that our loved ones will not be left to fend for themselves. Consider these important questions to determine your need for life insurance.

How Will Your Loved Ones Live Without Your Income?

Some households are run on a paycheck to paycheck basis. Some people may have a modest amount of savings, but it may take two incomes to pay the monthly bills. Your spouse and children may quickly run out of money without your income to support them. Life insurance benefits are most commonly used to supplement lost wages and to eliminate debts after an income-producing adult passes away. By eliminating debts with insurance proceeds, your loved ones will need less money to live off of each month. Some people will purchase enough insurance to pay off all outstanding debts including the home mortgage. The surviving spouse may even be able to support the family through his or her income alone after the debts have been eliminated. Others will purchase enough coverage so that the proceeds can be invested to generate supplemental income.

How Will Your Spouse Be Able to Retire?

While some life insurance is needed to help your loved ones to survive on a monthly basis, you also need to think about the future. Your income may currently be instrumental in your spouse’s ability to fund a retirement account. Without your income, your spouse may be forced to work for many years past the traditional retirement age, this can create an unnecessary hardship on him or her. It can be wise to purchase extra coverage to fund a retirement account.

Do Your Kids Need Financial Assistance Getting Their Adult Lives Started?

If you have kids, you may be well aware of their financial dependence on you, and this will often not simply evaporate when they turn 18. Many children need financial assistance buying their first car, paying for their wedding, paying for college and more. Some parents will purchase additional death benefits so that their kids’ lives are not financially impacted by a death.

How Much Coverage Do You Need?

This is a complicated question that often requires you to create a solid financial plan for the future. Funds can be used strategically in different ways, such as to purchase income-producing assets, to pay off debts and more. Your current lifestyle, debts and assets all must be taken into account. It is wise to work with an experienced life insurance professional to review your financial needs.

Remember, life insurance has evolved over the years and there are many benefit programs that can come to your families rescue even if you don’t pass away but are too sick to work.  Now can be a great time to review what coverage you currently have and what coverage is available to you. Some people will live well into their 90s or beyond, but others have a life that is cut short far too soon.