Retirement

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

2. 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

3. 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 31^st 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.

4. 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

5. 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).

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.

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 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. 

It may seem as if the end of the year is very far away and that there is no need to start making end of the year financial plans as of yet. However, the reality is that the end of the year, and the activities which surround it are busy.  At times, with all the festivities going on, it becomes close to impossible to do anything sensible where financial planning is concerned. You should consider starting your end of year plans now because early plan may spare you the heavy fines. Here are a few things that you should consider doing right now.

If It’s Time, Get Your RMD

You probably know that you are supposed to start making withdrawals from your IRA or other retirement plans when you reach the age of 70 and a half. If you don’t take your RMD on time, you may be forced to pay a 50 percent excise tax on the amount which you will have failed to distribute. This is another reason why working with a Financial Advisor can help you avoid penalty’s and anxiety.

Making A Charitable Contribution

Did you know that if you make a charitable contribution using a Qualified Charitable Distribution, you will get a tax exemption of the amount and the amount donated could also qualify as RMD?   If you have not made any donation this year, perhaps now is the right time to make a meaningful contribution from your IRA.  Again, seek professional guidance on this strategy.

Other Tax Mitigating Strategies

This is the perfect time to look into all your accounts and see whether there are tax gains which you can still capitalize on this year. If you do not understand how having investments such as mutual funds could affect your taxes and distribution, talk to a financial expert and have everything straightened out before the year ends and you are left with massive losses in your hands.

Avoid Tax Deferral

Don’t Delay!   When the year is coming to an end, some postpone all their tax related items until a later date. Tax deferral may seem like a quick fix to grow your money, but it is important to note that it puts off your taxes as opposed to getting a permanent resolution to the problem. If you are employed, it may be wise to fund your employer sponsored plan as much as possible to get the full match of the company.  After all, free money is indeed the best kind that there is, right?

Yes, all of this takes knowledge and effort but can pay off with the proper plan.  We are here to help you plan for everything that comes with a successful retirement.  Start early, plan ahead and you will have the best shot at a confident retirement.

President Donald Trump signed an executive order Friday, August 31, that proposes asking for reviews on changing certain rules for tax-deferred retirement savings such as 401(k)s and individual retirement accounts, or IRAs. Trump signed the order during a scheduled visit to Charlotte, N.C., and asked the Treasury Department to review the rules for mandatory withdrawals from 401(k)s and IRAs. These mandatory withdrawals are better known as RMDs, and they are required in the year the owner of these tax-deferred accounts turns 70 1/2. According to the Wall Street Journal, the White House is promoting these actions to better prepare the workforce for retirement.

The executive order has tasked the Labor Department to consider permitting small businesses to join together in offering combined 401(k) plans, as detailed by POLITICO. Currently, the Labor Department does not allow unrelated small businesses to offer joint open multiple employer 401(k) plans. The executive order is requesting the Labor Department to search for ways to decrease administrative and paperwork requirements that might be prohibitive to small businesses offering savings plans.

These open multiple employer plans would supposedly help more small businesses to offer their employees savings plans because of the decreased expenses incurred if the plans are jointly administered by several businesses. As reported by POLITICO, Preston Rutledge, assistant secretary of the Employee Benefits Security Administration at the Labor Department, said “Basically, we will be trying to find policy ideas that will help make joining a 401s(k) plan a more attractive proposition for small employers.”

Currently, holders of tax-deferred retirement accounts are required to begin minimum withdrawals from the accounts beginning the year they turn 70 1/2. These RMDs are predetermined amounts in a table set by the IRS according to age and must be taken on an annual basis. The purpose of the withdrawals is for the government to start collecting the taxes owed on these accounts, which have enjoyed tax-free status until then.

According to CNBC, the reviews would be of the life expectancy tables from the IRS for the purpose of updating the tables, which may allow retirees to withdraw lower RMDs from their tax-deferred retirement accounts. These tables were last updated in 2002, and the average life expectancy has risen since then from under 77 to 78 1/2, as derived from data compiled from the Federal Reserve Bank of St. Louis and noted by CNBC.

This would be helpful to retirees because the tax hit of these withdrawals can be spread out more over a longer period of time. Taking large withdrawals can significantly increase income levels, which translates to a higher tax bracket for many. These smaller distributions can also help those who have inherited tax-deferred accounts and are taking distributions.

If the rules for open multiple employer plans are relaxed, small business owners could join with other, dissimilar small business and implement savings plans for their employees. That could help these business owners attract more skilled employees because of the retirement savings plans added to their employee benefit packages.

The average individual can spend less during their retirement due to a budget. One exception can be giving to charitable causes. A study by the WPI or the Women’s Philanthropy Institute looked at the way households in America spent money as they retired. The study revealed both single women and married couples maintained the same level of giving to charities both prior to and after they retired. The charitable giving of single men decreased once they retired.

The report from the WPI also showed both married and single women have less confidence regarding their financial health upon retirement than men. Their focus is not on outliving their savings. Considering women generally live longer than men, this fear is justified. There are numerous ways for both women and men, married and single, to donate to charitable causes without being concerned about running out of money. Using savings meant for retirement to make donations is most likely to cause the individual to outlive their savings unless they use proper care.

A way to donate to causes in retirement is to plan for them just as you did your retirement savings portfolio.  A portfolio likely plans for retirement income to last the life of the individual. One of the most important aspects of the retirement portfolio are the monthly retirement paychecks. These are guaranteed and will last for a lifetime. If the stock market crashes, this income will not decrease. These paychecks can then be supplemented with either yearly or monthly retirement bonuses. These may have fluctuations depending on the investment performance, but they can last for life.

When the portfolio is properly in place, charitable giving can be funded with these bonuses and paychecks. It is important to allow for charitable giving as part of the budget in addition to the other living expenses. This will enable the individual to give to charities while ensuring the person will not outlive their savings. There is another excellent method for planning to increase effectiveness for charitable giving. Many individuals have concerns the recent changes made to the tax laws may decrease their income and impact their charitable giving.

The concern is there will be a significant decrease in the taxpayers itemizing their deductions. This makes it harder to use taxable income to make donations. Any individual age 70 and 1/2 or above has another option. A traditional IRA can be used for a qualified charitable distribution. This distribution will not be included in the taxable income. The distribution will also apply towards the minimum required distribution.

There is an annual limit of $100,000 for qualified charitable distributions. This cannot be funded from both 401 (k) plans and IRA’s. If the 401 (k) plan contains a substantial savings, these funds can be used for charitable giving by rolling over the savings into an IRA. The IRA platform must enable the individual to be able to write checks.

The report from the WPI also revealed married couples and single women have a higher likelihood of volunteering once they retire than single men. There is a lot of research showing volunteers enjoy financial security and health benefits while providing their communities with substantial contributions. The documentation for this research is located in the Hidden in Plain Sight report prepared by the Center on Longevity located at Stanford. Anyone not currently volunteering may want to give some thought to pursing this activity once they have retired.

Planning for both volunteering and charitable giving may be important when determining retirement planning. This will not only enable the individual to give something back to their community, it often increases the enjoyment of life.  Let’s review your plan today, contact us to set up a time to talk.

It’s important to understand the facts about Medicare before heading into retirement. Here is a basic overview of seven things you should be aware of when it comes to this important federal health insurance benefit. But keep in mind that certain parts of the Medicare program vary by state, so you will want to get more in-depth information before you turn 65 based on your primary retirement residence.

1. It’s not free.

Even though studies have shown that Medicare is cheaper than most health plans offered by private insurers, it still does not cover all health costs when a person retires. In some cases, Medicare is one of the largest expenses for retired individuals. A retired couple aged 65 in 2018 may need an average of $280,000 to cover Medicare expenses (not including over-the-counter medications, most dental services, or long-term care) according to Fidelity Investments.¹

2. There is no out-of-pocket annual or lifetime limit.

When it comes to Medicare, there is no yearly or lifetime out-of-pocket maximum. In addition to deductibles, for Medicare Part B retirees usually pay at least 20% coinsurance for approved costs, regardless of how high the costs may be.

3. The four parts of Medicare.

The “alphabet soup” of Medicare consists of four separate parts: A, B, C, and D.

Part A: This part is sometimes called “original” Medicare, and is basically hospitalization insurance. It covers inpatient care, short stays at skilled nursing facilities, hospice stays, lab tests, surgery, doctor visits and home health care related to a hospital stay. Part A is usually free.

Part B: Part B is the medical insurance portion of “original” Medicare coverage. It covers outpatient care, doctor’s office visits, lab work, preventative services, ambulance services, and medical equipment. The standard premium for 2018 is $134 per person, per month, but premiums are higher for people in higher income brackets.

Part C: This optional part refers to Medicare Advantage plans. Medicare Advantage is not a separate benefit, but is used for private health insurers that provide Medicare benefits. Part C plans replace Parts A and B, and usually replace Part D (optional).

Medigap: Sometimes called Medicare supplement insurance, Medigap is not a Part C plan. Medigap policies do not replace Parts A and B, in fact, Parts A and B are required in order to have it. Medigap is private insurance that helps supplement or pay some of the costs not covered by Parts A and B, which may include copayments, coinsurance, and deductibles. There are many rules which apply to Medigap, and plans are standardized by state.

Part D: This optional part provides prescription drug coverage. A person is eligible for Part D if they are enrolled in Part A and B, or Part C replacement coverage (which may include Part D coverage.) Part D coverage varies by plan and types of prescription drugs.

4. Medicare does not cover everything.

The question in regard to Medicare is not what is covered, but what is not covered. Parts A and B of Medicare do not cover the following:

• Amounts not covered by deductibles and coinsurance (20%), with no limits
• Care outside of the U.S.
• Eye exams (except for diabetics), vision care or eyeglasses
• Hearing exams or hearing aids
• Most dental care services or dentures
• Routine foot care (except for diabetics)
• Limited physical therapy, occupational therapy, speech pathology services
• Long-term care (LTC) or custodial care

Some Part C or Medigap plans may offer some coverage for these, depending on the policy or plan.

5. Medicare is mandatory.

Once you are 65 and receive Social Security there is no way to opt out of Medicare.

6. When to sign up for Medicare.

An individual must sign up for Medicare within three months after they turn 65 years old, unless they are covered by an employer plan (subject to certain rules.) If a person is already receiving Social Security benefits when they turn 65, they will automatically be enrolled in the original Medicare plan Parts A and B.

7. How Medicare is deducted.

Medicare Parts A and B are automatically deducted from a Social Security check if the individual is 65 and receiving Social Security benefits. Coverage begins the first month that an individual turns 65-years-old. Medicare Part B premiums must be deducted from Social Security if the monthly benefit amount covers the deduction. If deduction exceeds the benefit amount then the individual will be billed quarterly. Optional plans like Part C, Medigap or Part D may have other payment options, or may also be deducted from Social Security.

For more information about Medicare, as well as many other retirement issues, please call SF Financial in Colorado Springs at (719) 597-2179.

Be sure to request your free copy of our Medicare whitepaper, which goes into more detail about the Medicare program.

Sources:

This overview has been compiled from information sourced from the official Medicare website, https://www.medicare.gov/. Please visit the site for more information.

¹ Fidelity Investments, “How to plan for rising health care costs,” April 18, 2018. Fidelity.com. https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs (accessed August 7, 2018).