MAKING SENSE OF TAXES IN RETIREMENT

Making Sense of Taxes in RetiremeNT

During your working years, everyone told you retirement was the easy life. As you near retirement, however, perhaps it’s seeming like a bit more work than you had imagined. After all, correctly positioning your various retirement accounts, honing in on your risk tolerance, determining your income sources, creating a budget, and deciding the age to start accepting your Social Security benefit are all important issues that should be at the forefront of your retirement planning checklist.

But have you given much thought to the role taxes will play in your retirement lifestyle?

Sadly, most retirees have not, and risk detonating the potential ticking tax time bomb in their portfolio that could have been avoided with a little bit of education and a touch of guidance.

Although taxes are imminent to some extent, once you retire you have the distinct advantage of being able to choose what to pay yourself for income each year by withdrawing from your various accounts or accepting a Social Security benefit. Estimate your taxes for the year and see how much additional room you have in your current tax bracket before you reach the upper threshold. “Maximizing your tax bracket” refers to taking additional withdrawals to “fill up” the entire bracket without going into the next one.

Tax planning for retirement seems simple at first glance, however, retirees face a completely different set of challenges than do younger taxpayers. Oftentimes, clients come to a financial services professional (FSP) with a tax situation they weren’t ever expecting to face, and many of them have forgotten to account for taxes altogether when making important calculations. Each year you should carefully plan out you and your spouse’s income to ensure you know which tax bracket you’re going to land in. By developing and utilizing tax-efficient withdrawal sequences for your income, you can delay having to tap into your tax-deferred accounts until later in life. Many people seem to think that taxable income decreases or goes away in retirement, but that is not the case.

In order to pay Uncle Sam as little as possible over the course of your retirement, you must understand how your different modes of income will be taxed. Planning carefully – on both a long-range and an annual basis – in regards to your tax brackets, will help you increase your post-tax income for retirement. Remember that in retirement, you control (to some degree) how much you pay yourself in income each tax year from actualizing the funds from your retirement accounts.

Long-range tax bracket planning entails putting together a snapshot of the amounts you’ll withdraw from your retirement accounts and other financial vehicles through the years, and carefully coordinating it with when you start accepting your Social Security benefit. In doing so, many retirees are able to rearrange their income sources in such a way that delivers them more after-tax income. While long-range planning assists in designing an overall tax and income strategy over the course of retirement, annual planning, or being able to “control your tax bracket” each year provides an opportunity to revisit ways to reduce tax burden by taking full advantage of standard or itemized deductions and personal exemptions.

As our lives evolve and change, so does our tax situation. Just as it is important to revisit your risk tolerance as your financial landscape continues to undergo major life events and changes, it’s also necessary to do so from a tax perspective. As many retirees leave the working world, they drop into a lower tax bracket initially from the time they retire and stop receiving normal paychecks on through their 60s. At age 70½, however, you’ll be required to take required minimum distributions (RMDs) from your 401(k) or your traditional IRA.

These distributions, along with any other income you’ve still got coming in, has the potential to push you into a higher tax bracket. Some retirees have found success in taking distributions to steadily and carefully draw from their IRA while still in their 60s, and remain in the same tax bracket – many times this helps them avoid getting bumped into a higher bracket.

As most of us know, you’re not able to dismiss taxes altogether. If you are proactively taking measures to be as tax-efficient as possible, however, you will have a leg up on many retirees. It’s always recommended that you work with a tax or financial services professional to help you prepare. With proper tax bracket management, allocation and diversification of your assets, you can be better prepared and help keep as much of your retirement funds as possible.

If you have any questions, please contact us at 484-206-4200.

Thinking About Your Lifestyle In Retirement

Thinking About Your Lifestyle In Retirement

If you are nearing retirement age, you may be exploring ways to put your retirement savings to work in creating a reliable income for yourself well beyond your working years. You may have already devoted some time to speaking with someone to help you accomplish this, because let’s face it, retirement is complicated. Most of the topics surrounding retirement involve money, and rightfully so – it’s the main thing on most American retiree’s minds. Aside from money, however, there are other lifestyle factors that will be key drivers of your retirement success.

Balancing both the management of your finances and your lifestyle in retirement will play large roles in how you’re able to enjoy your new chapter of life.

By exploring the topics listed below, you may gain some insight on ways to make your retirement more comfortable and enjoyable.

1. Downsizing may make a lot of sense

The choice to downsize your home once you enter retirement is a big decision, but, depending on your home ownership costs, it may potentially be one of the best ways to create retirement income by extracting equity from your home to serve you elsewhere in your retirement budget. Many retirees require a larger house and more property to raise their family – commonly in houses with multiple floors and two or more bedrooms and bathrooms. Once the children become adults and move out, retirees often find themselves with too much space.

In addition, many retirees, as they prepare to grow older, may have a desire to have all their rooms and utilities located on one floor, eliminating the need to travel up and down stairs to complete daily tasks like laundry, cleaning or cooking. A smaller yard may also mean less upkeep and maintenance. As mentioned, downsizing to something more modest may create immediate equity to help accomplish other retirement goals, and likely will also cost you less in taxes, insurance and utilities. Beware, however, the costs associated with downsizing. Do your homework to ensure real estate and moving costs don’t eat away your newly-recognized equity.

2. Make your physical health a priority and a hobby

The cost of assisted living facilities jumped 14 percent in 2017, to more than $54,0001 per year, so it’s easy to understand why so many Americans have large amounts of their retirement savings wiped away due to the need for some sort of long-term care. A multitude of factors play into your health in retirement but staying active and working on building and maintain strength can make a world of difference in preserving your mobility, balance, posture and overall well-being. While we as humans will undoubtedly age, and if we live long enough, may eventually require some form of living assistance, you can help stave off the aches and pains of old age with a healthy diet and regular workout routine. In addition, many retirees are making a hobby out of their fitness activities, and it’s easy to see why – yoga, cycling, water aerobics, dance classes and golf are all great ways to stay fit and meet new friends. In addition, studies show exercise can reduce your chances of a fall and can boost memory and prevent dementia.2

3. Consider a part-time job to stay active

Many retirees find it difficult going from forty or more hours of work per week down to zero when they retire. With so much more free time, it’s easy to see why. In addition to extra time, many retirees underestimate the socialization aspect of working life. Many Americans are finding that going from full-time employment to an enjoyable part-time job strikes the perfect balance – it allows them to retain some semblance of work-related accomplishment, along with the socialization factor mentioned previously. In addition, the added income from working part time allows you to stretch your retirement budget further or leverage the extra cash for investments. Working part time may also allow you to delay touching your tax-deferred dollars, saving them until you absolutely need to withdraw them, and they become subject to taxes.

If you have questions about preparing for retirement, call me at (484) 206-4200.

Sources:
1 http://www.richmond.com/business/local/study-shows-cost-of-long-term-care-continues-to-rise/article_1fb90ff2-9a6a-5914-8574-5ba90be7e4ba.html
2 https://www.webmd.com/healthy-aging/features/exercise-older-adults#1

Retirement planning course corrections to consider

It’s no secret that millions of Americans are approaching their retirement years with meager savings and high anxiety about their financial security. And a recent study from Merrill Lynch and Age Wave reveals steps that Americans are willing to take to get their retirement back on track.

The overwhelming majority (88 percent) of people surveyed said their primary objective is peace of mind, while just 12 percent say they want to accumulate as much wealth as possible. But peace of mind means different things to different people:

·         57 percent report they want to live comfortably within their means.

·         39 percent say they want to have the financial resources to live the life they choose.

·         34 percent want to feel they could handle a major unexpected expense.

·         25 percent want to feel confident they won’t outlive their money.

·         17 percent want to provide for their family if something happens to them.

Only 8 percent of survey respondents feel personal finances can be discussed openly, while the remainder consider the topic a private matter or one that can be discussed with a spouse or partner or only very close family and friends. It would certainly help if older workers and retirees would share their ideas and insights with their family and friends. 

What changes are people willing to make to enhance their financial security in retirement? Here are steps the survey found Americans are willing to take:

·         90 percent would be willing to cut back on their expenses. Perhaps they can focus on spending just enough to meet their basic living needs and what truly makes them happy.

·         79 percent would seek financial advice. In this case, they’ll want to make sure their advisers are qualified and act in their best interests.

·         77 percent would increase the use of tax-protected retirement accounts.

·         75 percent would seek expert advice on how to pay lower taxes. Note that this may not be a good use of time for Americans with meager savings, since they could already be in a very low tax bracket when they retire.

·         66 percent would sell real estate or other personal belongings. Finding the best way to deploy home equity is a good use of time for older workers and retirees who own a home but have modest retirement savings.

·         64 percent would postpone taking Social Security. This is a smart move for virtually all retirees.

·         43 percent would withdraw the cash value from a life insurance policy. Such people would want to explore their options: Many policies allow the holder to convert the policy’s cash value into a lifetime annuity.

In addition to taking these steps, older workers would be wise to develop a strategy for generating lifetime retirement income, explore their options for continuing to work and make sure they have adequate medical insurance that supplements Medicare.

As you can see, your financial security in retirement has many moving parts. It is well worth spending hours and days planning for peace of mind in your retirement years, so you can go enjoy the rest of your life.

http://www.cbsnews.com/news/retirement-planning-course-corrections-to-consider/

Four Common Questions About Social Security

As you near retirement, it's likely you'll have many questions about Social Security. Here are a few of the most common questions and answers about Social Security benefits.

Will Social Security be around when you need it?

You've probably heard media reports about the worrisome financial condition of Social Security, but how heavily

should you weigh this information when deciding when to begin receiving benefits? While it's very likely that some changes will be made to Social Security (e.g., payroll taxes may increase or benefits may be reduced by a certain percentage), there's no need to base your decision about when to apply for benefits on this information alone. Although no one knows for certain what will happen, if you're within a few years of retirement, it's probable that you'll receive the benefits you've been expecting all along. If you're still a long way from retirement, it may be wise to consider various scenarios when planning for Social Security income, but keep in mind that there's been no proposal to eliminate Social Security.

If you're divorced, can you receive Social Security retirement benefits based on your former spouse's earnings record?

You may be able to receive benefits based on an ex-spouse's earnings record if you were married at least 10 years, you're currently unmarried, and you're not entitled to a higher benefit based on your own earnings record. You can apply for a reduced spousal benefit as early as age 62 or wait until your full retirement age to receive an non-reduced spousal benefit. If you've been divorced for more than two years, you can apply as soon as your ex-spouse becomes eligible for benefits, even if he or she hasn't started receiving them (assuming you're at least 62). However, if you've been divorced for less than two years, you must wait to apply for benefits based on your ex-spouse's earnings record until he or she starts receiving benefits.

If you delay receiving Social Security benefits, should you still sign up for Medicare at age 65?

Even if you plan on waiting until full retirement age or later to take your Social Security retirement benefits, make sure to sign up for Medicare. If you're 65 or older and aren't yet receiving Social Security benefits, you won't be automatically enrolled in Medicare Parts A and B.

You can sign up for Medicare when you first become eligible during your seven-month Initial Enrollment Period. This period begins three months before the month you turn 65, includes the month you turn 65, and ends three months after the month you turn 65.

The Social Security Administration recommends contacting them to sign up three months before you reach age 65, because signing up early helps you avoid a delay in coverage. For your Medicare coverage to begin during the month you turn 65, you must sign up during the first three months before the month you turn 65 (the day your coverage will start depends on your birthday). If you enroll later, the start date of your coverage will be delayed. If you don't enroll during your Initial Enrollment Period, you may pay a higher premium for Part B coverage later. Visit the Medicare website, www.medicare.gov to learn more, or call the Social Security Administration at 800-772-1213.

Will a retirement pension affect your Social Security benefit?

If your pension is from a job where you paid Social Security taxes, then it won't affect your Social Security benefit. However, if your pension is from a job where you did not pay Social Security taxes (such as certain government jobs) two special provisions may apply.

The first provision, called the government pension offset (GPO), may apply if you're entitled to receive a government pension as well as Social Security spousal retirement or survivor's benefits based on your spouse's (or former spouse's) earnings. Under this provision, your spousal or survivor's benefit may be reduced by two-thirds of your government pension (some exceptions apply).

The windfall elimination provision (WEP) affects how your Social Security retirement or disability benefit is figured if you receive a pension from work not covered by Social Security. The formula used to figure your benefit is modified, resulting in a lower Social Security benefit.

Broadridge Investor Communication Solutions, Inc. Copyright 2016.

Why don’t you have a pension?

When it comes to choosing a retirement plan, there are several options we have to choose from, but many of us forget or are unaware that we can have almost all of them and not be held to just one or two plans. In fact, I recommend you have at least five types of retirement plans. But, how do you know which ones are right for you? That is something we look at on an individual level with each of our clients because there are many factors that will determine what plans are best for you so  if you are not working with an advisor to help you select these plans based on your needs, family, risk tolerance, tax rate, age, etc. then you are not set up properly for retirement.

Sadly, one of my favorite retirement plans is slowly fading away, the pension plan. A pension plan, according to Investopedia.com, is a retirement plan that requires an employer to make contributions into a pool of funds set aside for a worker's future benefit. The pool of funds is invested on the employee's behalf, and the earnings on the investments generate income to the worker upon retirement.

This means that retirees would be able to receive this money guaranteeing lifetime income, in almost all cases, as long as the employer is in business. It all changed in the early 1980’s when companies started introducing the 401(k) plans named after the IRS code of The Revenue Act of 1978 which allowed employees to put money aside for retirement on a tax deferred basis and was meant as a supplement to the pension plans and Social Security. However, companies saw this as an opportunity to reduce and eliminate pension plans over the years saving themselves from paying retirees a salary for the rest of their lives.  When the 401(k) plans were introduced, we were in a high interest rate market so it made sense to defer taxes to a later period of time when interest rates came down. Now we are at historically low interest rates, does it make sense to defer taxes to a later period of time?

Most employees enter the workforce today with knowledge of one or two types of retirement plans. The 401(k) or the 403(b) plan that their company offers allows you to contribute as the company may offer matching contributions. Rarely are the employees educated by their employer on other types of retirement plans available to them or whether they are a good fit. Another type of retirement plan, the IRA (Traditional and Roth) is also commonly known to many employees but usually only after they have left a previous employer and was told to “rollover their 401(k) into an IRA” or they may be instructed to fund one at the advice of their tax advisor or accountant. Many workers have both a 401(k) plan with their current employer and an IRA from their previous employer, and there is usually nothing wrong with that. However, neither can guarantee that you will not run out of money before you pass away like a pension does, and you may end up paying more taxes.

So what can you do? You can actually create your own pension plan using your own money. Where many advisors will tell you how much money you need to retire, we at Thrive do not do it that way because we know that number may not be enough and it has a finite end to it. Contact us today to find out how we are different and how you can create strategies to help you avoid the possibility of running out of money and create your five retirement plans.       

484-206-4200

800-516-5861

How To Get a Bigger Social Security Retirement Benefit

Many people decide to begin receiving early
Social Security retirement benefits. In fact, according to the Social Security Administration, about 72% of retired workers receive benefits prior to their full retirement age. But waiting longer could significantly increase your monthly retirement income, so weigh your options carefully before making a decision.

Timing counts

Your monthly Social Security retirement benefit is based on your lifetime earnings. Your base benefit--the amount you'll receive at full retirement age--is calculated using a formula that takes into account your 35 highest earnings years.

If you file for retirement benefits before reaching full retirement age (66 to 67, depending on your birth year), your benefit will be permanently reduced. For example, at age 62, each benefit check will be 25% to 30% less than it would have been had you waited and claimed your benefit at full retirement age (see table below).

Alternatively, if you postpone filing for benefits past your full retirement age, you'll earn delayed retirement credits for each month you wait, up until age 70. Delayed retirement credits will increase the amount you receive by about 8% per year if you were born in 1943 or later. The chart below shows how a monthly benefit of $1,800 at full retirement age (66) would be affected if claimed as early as age 62 or as late as age 70. This is a hypothetical example used for illustrative purposes only; your benefits and results will vary.

Early or late? 

Should you begin receiving Social Security benefits early, or wait until full retirement age or even longer? If you absolutely need the money right away, your decision is clear-cut; otherwise, there's no ''right" answer. But take time to make an informed, well-reasoned decision. Consider factors such as how much retirement income you'll need, your life expectancy, how your spouse or survivors might be affected, whether you plan to work after you start receiving benefits, and how your income taxes might be affected.


Broadridge Investor Communication Solutions, Inc. Copyright 2016.

Outliving Your Money

As we grow older, we are spending more and more time in the retirement phase of our life thanks to medical advances and healthier diets which are causing us to live longer. But at what cost?

If you knew today that you were going to live to be a healthy 125 years old, what would you change? If you had the ability to walk, talk, hear, see, and do all the normal functions of life without any outside help, would you want to live that long? Many people I have talked with said "YES", however, they all had one fear. That fear is not being able to live the same lifestyle due to the possibility of not being able to afford it. So people are afraid that they are going to run out of money. Here is my biggest issue with that, there are ways to avoid it that many people have no idea about!

That is what we do at Thrive, we educate our clients on what all of their options are so they can make an informed decision and live a comfortable and happy retirement without the fear of running out of money. If you are currently working with an advisor, talk to him or her about guaranteeing your future. If they can't, then what are you paying them for? It may be time for a new advisor. Contact us set up a meeting for a complimentary second opinion on your retirement income and discuss how YOU can secure your future.