Year-end 2022 Tax and Financial Planning for Individuals

November 30, 2022 — Sam H. Fawaz

As we wrap up 2022, it’s important to take a closer look at your tax and financial plans and review steps that can be taken to reduce taxes and help you save for your future. Though there has been a lot of political attention to tax law changes, inflation and environmental sustainability, political compromise has led to smaller impacts on individual taxes this year.

However, with the passage of the Inflation Reduction Act of 2022, there are new tax incentives for you to consider. There are also several tax provisions that have expired or will expire soon. We continue to closely monitor any potential extensions or changes in tax legislation and will update you accordingly.

Here’s a look at some potential planning ideas for individuals to consider as we approach year-end:

Charitable Contribution Planning

If you’re planning to donate to a charity, it may be better to make your contribution before the end of the year to potentially save on taxes. There are many tax planning strategies related to charitable giving. For example, if you give gifts larger than $5,000 to a single organization, consider donating appreciated assets (such as collectibles, stock, exchange-traded funds, or mutual funds) that have been held for more than one year, rather than cash. That way, you’ll get a deduction for the full fair market value while side-stepping the capital gains taxes on the gain.

Because of the large standard deduction, most people no longer itemize deductions. But bunching deductions every other year might give you a higher itemized deduction than the standard deduction. One way to do this is by opening and funding a donor-advised fund (DAF). A DAF is appealing to many as it allows for a tax-deductible gift in the current year for your entire contribution. You can then grant those funds to your favorite charities over multiple years. If you give $2,000 or more a year to charity, talk to us about setting up a DAF.

Qualified charitable distributions (QCDs) are another option for certain taxpayers (age 70.5+) who don’t typically itemize on their tax returns. If you’re over age 70.5, you’re eligible to make charitable contributions directly from your IRA, which essentially makes charitable contributions deductible (for both federal and most state tax purposes) regardless of whether you itemize or not. In addition, it reduces future required minimum distributions, reducing overall taxable income in future years. QCDs keep income out of your tax return, making income-sensitive deductions (such as medical expenses) more viable, lowers the taxes on your social security income, and can lower your overall tax rate. They may also help keep your Medicare premiums low.

Last year, individuals who did not itemize their deductions could take a charitable contribution deduction of up to $300 ($600 for joint filers). However, this opportunity is no longer available for tax year 2022 (and future years).

Note that it’s important to have adequate documentation of all donations, including a letter or detailed receipt from the charity for donations of $250 or more. That letter/receipt must include your name, the taxpayer identification number of the institution, the amount, and a declaration of whether you received anything of value in exchange for the contribution.

Required Minimum Distributions (RMDs)

Tax rules don’t allow you to keep retirement funds in your accounts indefinitely. RMDs are the minimum amount you must annually withdraw from your retirement accounts once you reach a certain age (generally age 72). The RMD is calculated and based on the value of the account at the end of the prior tax year multiplied by a percentage from the IRS’ life expectancy tables. Failure to take your RMD can result in steep tax penalties–as much as 50% of the undistributed amount.

Retirement withdrawals obviously have tax impacts. As mentioned above, you can send retirement funds to a qualified charity to satisfy the RMD and potentially avoid taxes on those withdrawals.

Effective for the 2022 tax year, the IRS issued new life expectancy tables, resulting in lower annual RMD amounts. We can help you calculate any RMDs to take this year and plan for any tax exposure.

Digital Assets and Virtual Currency

Digital assets are defined under the U.S. income tax rules as “any digital representation of value that may function as a medium of exchange, a unit of account, and/or a store of value.” Digital assets may include virtual currencies such as Bitcoin and Ethereum, Stablecoins such as Tether and USD Coin (USDC), and non-fungible tokens (NFTs).

Unlike stocks or other investments, the IRS considers digital assets and virtual currencies as property, not as capital assets. As such, they are subject to a different set of rules than your typical investments. The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment, generally have tax impacts –– and the IRS continues to increase its scrutiny in this area. We can help you understand any tax and investment consequences, which can be quite convoluted.

Energy Tax Credits

From electric vehicles to solar panels, “going green” continues to provide tax incentives. The Inflation Reduction Act of 2022 included new and newly expanded tax credits for solar panels, electric vehicles, and energy-efficient home improvements. The rules are complex, and some elements of the law are not effective until 2023, so careful research and planning now can be beneficial. For example, previously ineligible electric vehicles are now eligible for credits, while other eligible vehicles are now ineligible for credits if they don’t contain the right proportion of parts and assembly in the United States.

Additional Tax and Financial Planning Considerations

We recommend that you review your retirement plans at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional individual retirement accounts (IRAs), Roth IRAs, and company retirement plans. It’s also advisable to take advantage of and maximize health savings accounts (HSAs), which can help you reduce your taxes and save for medical-related expenses.

Also, if you withdrew a Coronavirus distribution of up to $100,000 in 2020, you’ll need to report the final one-third amount on your 2022 return (unless you elected to report the entire distribution in 2020 or have re-contributed the funds to a retirement account). If you took a distribution, you could return all or part of the distribution to a retirement account within three years, which will be a date in 2023.

We can work with you to strategize a plan to help restore and build your retirement savings and determine whether you’re on target to reach your goals.

Here are a few more tax and financial planning items to consider and potentially discuss with us:

  • Life changes –– Let us (or your current financial planner) know about any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business, and significant capital expenditures (such as real estate purchases, college tuition payments, etc.).
  • Capital gains/losses –– Consider tax benefits related to harvesting capital losses to offset realized capital gains, if possible. Net capital losses (the result when capital losses exceed capital gains for the year) can offset up to $3,000 of the current year’s ordinary income (salary, self-employment income, interest, dividends, etc.) The unused excess net capital loss can be carried forward to be used in subsequent years. Consider harvesting some capital gains if you have a large capital loss from the current or prior years.
  • Estate and gift tax planning –– There is an annual exclusion for gifts ($16,000 per donee in 2022, $32,000 for married couples) to help save on potential future estate taxes. While you can give much more without incurring any gift tax, any total annual gift to one individual larger than $16,000/$32,000 requires the filing of a gift tax return (with your form 1040). Note that the filing of a gift tax return is an obligation of the giver, not the recipient of the gift. The annual exclusion for 2023 gifts increases to $17,000/$34,000.
  • State and local taxes –– Many people are now working from home (i.e., teleworking). Such remote working arrangements could potentially have state or local tax implications that should be considered. Working in one state for an employer located in another state may have unexpected state tax consequences. Also, ordering merchandise over the internet without paying sales or use tax might obligate you to remit a use tax to your home state.
  • Education planning –– Consider a Section 529 education savings plan to help save for college or other K-12 education. While there is no federal income tax deduction for the contributions, there can be state income tax benefits (full or partial deductions) for doing so. Funds grow tax-free over many years and can be distributed tax-free when used for qualified education purposes. Lower-income taxpayers (less than $85,800 if single, head of household, or qualifying widow(er); $128,650 if married filing jointly) can redeem certain types of United States savings bonds tax-free when redeemed for college.
  • Updates to financial records –– Tax time is the ideal time to review whether any updates are needed to your insurance policies or various beneficiary designations (life insurance, annuity, IRA, 401(k), etc.), especially if you’ve experienced any life changes in the past year.
  • Last Call for 401(k), 403(b) & Other retirement Plan Contributions –– Once the calendar turns to 2023, it’s too late to maximize your employer plan contributions. It may not be too late to make sure that you’ve contributed the $20,500 maximum (plus $6,500 for those age 50 and older) to the plan. Review your last pay stub and check with your human resources or retirement plan website to see if you can still increase your current year contributions (don’t forget to reset the percentage in early 2023). Remember, if you’ve worked for more than one employer in 2022, your total contributions via all employers cannot exceed the annual maximum, so you must monitor this. For IRAs, you have until April 18, 2023, to make up to a $6,000 contribution for 2022 (plus a $1,000 catch-up contribution for those age 50 and older)
  • Roth IRA conversions –– Depending on your current year’s highest tax rate, it may be prudent to consider converting part of your traditional IRA to a Roth IRA to lock in lower tax rates on some of your pre-tax retirement accounts. A conversion is nothing more than a taxable distribution from your IRA which is immediately deposited into your Roth IRA (while income taxes apply, no early withdrawal penalty applies). Roth conversions can help reduce future required minimum distributions and help keep future Medicare premiums lower.  The ideal time to consider Roth conversions is after you retire and before you start collecting your pension or social security checks (or whenever your income is much lower in any particular year).
  • Estimated tax payments –– Review your year-to-date withholding and estimated tax payments to assess whether a 4th quarter 2022 estimated tax payment might be required. An easy way to do this is to compare the total tax line on your 2021 income tax return with your total withholding and estimated payments (total payments) made to date. If your total payments made to date are at least 110% of your 2021 total tax, chances are, you are adequately paid in. While you may owe some tax with the filing of your 2022 return (due on April 18, 2023), you likely won’t owe any penalties for underpayment of estimated tax. Similarly, you may not need to pay 110% of last year’s tax if your income has decreased substantially versus the prior year.

Year-End Planning Means Fewer Surprises

Whether it’s working toward a tax-optimized retirement or getting answers to your tax and financial planning questions, we’re here to help. As always, planning can help you anticipate and minimize your tax bill and position your family and you for greater financial success.

If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

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Some Cures For Your “Social InSecurity”

July 27, 2022 — Sam H. Fawaz

One of the most common questions I hear from clients and prospects concerns the viability of the social security system and the likelihood it will be solvent enough to pay their benefits when they eventually reach retirement age. Their default instinct is to draw social security at the earliest possible age in case benefits were to run out prematurely. As you’ll read below, the Social Security program has many possible tweaks to help extend the payment of benefits for many decades to come and should help alleviate much of your Social InSecurity.

With approximately 94% of American workers covered by Social Security and 65 million people currently receiving benefits, keeping Social Security healthy is a major concern. According to the Social Security Administration, Social Security isn’t in danger of going broke — it’s financed primarily through payroll taxes — but its financial health is declining, and future benefits may eventually be reduced unless Congress acts.

Each year, the Trustees of the Social Security Trust Funds release a detailed report to Congress that assesses the financial health and outlook of this program. The most recent report, released on June 2, 2022, shows that the effects of the pandemic were not as significant as projected in last year’s report — a bit of good news this year.

Overall, the news is mixed for Social Security

The Social Security program consists of two programs, each with its own financial account (trust fund) that holds the payroll taxes that are collected to pay Social Security benefits. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability     Insurance (DI) program. Other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation) is also deposited in these accounts.

Money that’s not needed in the current year to pay benefits and administrative costs is invested (by law) in special government-guaranteed Treasury bonds that earn interest. Over time, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits, and these reserves are now being drawn down. Due to the aging population and other demographic factors, contributions from workers are no longer enough to fund current benefits.

In the latest report, the Trustees estimate that Social Security will have funds to pay full retirement and survivor benefits until 2034, one year later than in last year’s report. At that point, reserves will be used up, and payroll tax revenue alone would be enough to pay only 77% of scheduled OASI benefits, declining to 72% through 2096, the end of the 75-year, long-range projection period.

The Disability Insurance Trust Fund is projected to be much healthier over the long term than last year’s report predicted. The Trustees now estimate that it will be able to pay full benefits through the end of 2096. Last year’s report projected that it would be able to pay scheduled benefits only until 2057. Applications for disability benefits have been declining substantially since 2010, and the number of workers receiving disability benefits has been falling since 2014, a trend that continues to affect the long-term outlook.

According to the Trustees report, the combined reserves (OASDI) will be able to pay scheduled benefits until 2035, one year later than in last year’s report. After that, payroll tax revenue alone should be sufficient to pay 80% of scheduled benefits, declining to 74% by 2096. OASDI projections are hypothetical, because the OASI and DI Trust Funds are separate, and generally one program’s taxes and     reserves cannot be used to fund the other program. However, this could be changed by Congress, and combining these trust funds in the report is a way to illustrate the financial outlook for Social Security as a whole.

All projections are based on current conditions and best estimates of likely future demographic, economic, and program-specific conditions, and the Trustees acknowledge that the course of the pandemic and future events may affect Social Security’s financial status.

You can view a copy of the 2022 Trustees report at ssa.gov.

Many options for improving the health of Social Security

The last 10 Trustees Reports have projected that the combined OASDI reserves will become depleted between 2033 and 2035. The Trustees continue to urge Congress to address the financial challenges facing these programs so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. Many options have been proposed, including the ones listed below. Combining some of these may help soften the impact of any one solution:

  • Raising the current Social Security payroll tax rate (currently 12.4%). Half is currently paid by the employee and half by the employer (self-employed individuals pay the full 12.4%). An immediate and permanent payroll tax increase of 3.24 percentage points to 15.64% would be needed to cover the long-range revenue shortfall.
  • Raising or eliminating the ceiling on wages subject to Social Security payroll taxes ($147,000 in 2022).
  • Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
  • Raising the early retirement age beyond the current age of 62.
  • Reducing future benefits. To address the long-term revenue shortfall, scheduled benefits would have to be immediately and permanently reduced by about 20.3% for all current and future beneficiaries, or by about 24.1% if reductions were applied only to those who initially become eligible for benefits in 2022 or later.
  • Changing the benefit formula that is used to calculate benefits.
  • Calculating the annual cost-of-living adjustment (COLA) for benefits differently.

A comprehensive list of potential solutions can be found at ssa.gov.

As for when Congress will act to fix the system, in my opinion, it will probably be at the last minute when it becomes a crisis. But make no mistake-Congress will act, and any rumors or stories that social security won’t be around for the long term are simply false. Any member of Congress who votes against fixing and extending the system’s heath won’t be re-elected, and therefore you know they eventually will.

As for when you should consider drawing your own social security benefits, the unsatisfying answer is: it depends. Whether you should draw benefits at your early retirement age (usually 62), full retirement age (usually 67) or latest retirement age (70), depends on your financial situation, your spending needs, expected longevity and other factors. Only working with a financial planner or a comprehensive social security optimizer can help you figure out the optimal timeframe to claim social security. The right or wrong decision can increase or decrease your lifetime benefits by five or six zeroes—it’s worth the time and effort to do the analysis. We can, of course, help.

If you would like to review your current investment portfolio or discuss your social security benefits, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Posted in Elder Care, estate planning, Financial Planning, General, retirement, retirement planning, Social Security Benefits. Leave a Comment »

Love, Marriage and Finances

January 28, 2015 — Sam H. Fawaz

Marriage affects your finances in many ways, including your ability to build wealth, plan for retirement, plan your estate, and capitalize on tax and insurance-related benefits. There are, however, two important caveats. First, same-sex marriages are recognized for federal income and estate tax reporting purposes. However, each state determines its own rules for state taxes, inheritance rights, and probate, so the legal standing of same-sex couples in financial planning issues may still vary from state to state. Second, a prenuptial agreement, a legal document, can permit a couple to keep their finances separate, protect each other from debts, and take other actions that could limit the rights of either partner.

Building Wealth

If both you and your spouse are employed, two salaries can be a considerable benefit in building long-term wealth. For example, if both of you have access to employer-sponsored retirement plans and each contributes $18,000 a year, as a couple you are contributing $36,000, twice the maximum annual contribution for an individual ($18,000 for 2015). Similarly, a working couple may be able to pay a mortgage more easily than a single person can, which could make it possible for a couple to apply a portion of their combined paychecks for family savings or investments.

Retirement Benefits

Some (but not all) pensions provide benefits to widows or widowers following a pensioner’s death. When participating in an employer-sponsored retirement plan, married workers are required to name their spouse as beneficiary unless the spouse waives this right in writing. Qualifying widows or widowers may collect Social Security benefits up to a maximum of 50% of the benefit earned by a deceased spouse.

Estate Planning

Married couples may transfer real estate and personal property to a surviving spouse with no federal gift or estate tax consequences until the survivor dies. But surviving spouses do not automatically inherit all assets. Couples who desire to structure their estates in such a way that each spouse is the sole beneficiary of the other need to create wills or other estate planning documents to ensure that their wishes are realized. In the absence of a will, state laws governing disposition of an estate take effect. Also, certain types of trusts, such as QTIP trusts and marital deduction trusts, are restricted to married couples.

Tax Planning

When filing federal income taxes, filing jointly may result in lower tax payments when compared with filing separately.

Debt Management

In certain circumstances, creditors may be able to attach marital or community property to satisfy the debts of one spouse. Couples wishing to guard against this practice may do so with a prenuptial agreement.

Family Matters

Marriage may enhance a partner’s ability to collect financial support, such as alimony, should the relationship dissolve. Although single people do adopt, many adoption agencies show preference for households that include a marital relationship.

The opportunity to go through life with a loving partner may be the greatest benefit of a successful marriage. That said, there are financial and legal benefits that you may want to explore with your beloved before tying the knot.

If you would like to discuss financial planning related to your upcoming or existing marriage or any other investment portfolio management matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

 

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2014 Investment Report: Dare to Believe?

January 4, 2015 — Sam H. Fawaz

Looking back on 2014, people are going to say it was a great year to be an investor. They won’t remember how uncertain the journey felt right up to the last day of a year that saw the S&P 500 close at a record level on 53 different days. Think back over a good year in the market. Was there ever a time when you felt confidently bullish that the markets were taking off and delivering double-digit returns? I know I didn’t.

The Wilshire 5000–the broadest measure of U.S. stocks and bonds—finished the year up 13.14%, on the basis of a strong 5.88% return in the final three months of the year. The comparable Russell 3000 index will go into the history books gaining 12.56% in 2014.

The Wilshire U.S. Large Cap index gained 14.62% in 2014, with 6.06% of that coming in the final quarter. The Russell 1000 large-cap index gained 13.24%, while the widely-quoted S&P 500 index of large company stocks posted a gain of 4.39% in the final quarter of the year, to finish up 11.39%. The index completed its sixth consecutive year in positive territory, although this was the second-weakest yearly gain since the 2008 market meltdown.

The Wilshire U.S. Mid-Cap index gained a flat 10% in 2014, with a 5.77% return in the final quarter of the year. The Russell Midcap Index gained 13.22% in 2014.

Small company stocks, as measured by the Wilshire U.S. Small-Cap, gave investors a 7.66% return, all of it (and more) coming from a strong 8.57% gain in the final three months of the year. The comparable Russell 2000 Small-Cap Index was up 4.89% for the year. Meanwhile, the technology-heavy Nasdaq Composite Index gained 14.39% for the year.

While the U.S. economy and markets were delivering double-digit returns, the international markets were more subdued. The broad-based EAFE index of companies in developed economies lost 7.35% in dollar terms in 2014, in large part because European stocks declined 9.55%. Emerging markets stocks of less developed countries, as represented by the EAFE EM index, fared better, but still lost 4.63% for the year. Outside the U.S., the countries that saw the largest stock market rises included Argentina (up 57%), China (up 52%), India (up 29.8%) and Japan (up 7.1%).

Looking over the other investment categories, real estate investments, as measured by the Wilshire U.S. REIT index, was up a robust 33.95% for the year, with 17.03% gains in the final quarter alone. Commodities, as measured by the S&P GSCI index, proved to be an enormous drag on investment portfolios, losing 33.06% of their value, largely because of steep recent drops in gold and oil prices.

Part of the reason that U.S. stocks performed so well when investors seemed to be constantly looking over their shoulders is interest rates—specifically, the fact that interest rates remained stubbornly low, aided, in no small part, by a Federal Reserve that seems determined not to let the markets dictate bond yields until the economy is firmly and definitively on its feet. The Bloomberg U.S. Corporate Bond Index now has an effective yield of 3.13%, giving its investors a windfall return of 7.27% for the year due to falling bond rates. 30-year Treasuries are yielding 2.75%, and 10-year Treasuries currently yield 2.17%. At the low end, 3-month T-bills are still yielding a miniscule 0.04%; 6-month bills are only slightly more generous, at 0.12%.

Normally when the U.S. investment markets have posted six consecutive years of gains, five of them in double-digit territory, you would expect to see a kind of euphoria sweep through the ranks of investors. But for most of 2014, investors in aggregate seemed to vacillate between caution and fear, hanging on every economic and jobs report, paying close attention to the Federal Reserve Board’s pronouncements, seemingly trying to find the bad news in the long, steady economic recovery.

One of the most interesting aspects of 2014—and, indeed, the entire U.S. bull market period since 2009—is that so many people think portfolio diversification was a bad thing for their wealth. When global stocks are down compared with the U.S. markets, U.S. investors tend to look at their statements and wonder why they’re lagging the S&P index that they see on the nightly news. This year, commodity-related investments were also down significantly, producing even more drag during what was otherwise a good investment year.

But that’s the point of diversification: when the year began, none of us knew whether the U.S., Europe, both or neither would finish the year in positive territory. Holding some of each is a prudent strategy, yet the eye inevitably turns to the declining investment which, in hindsight, pulled the overall returns down a bit. At the end of next year, we may be looking at U.S. stocks with the same gimlet eye and feeling grateful that we were invested in global stocks as a way to contain the damage; there’s no way to know in advance. Indeed, we increased our allocations to overseas markets in 2014 as a matter of prudent re-balancing.  For 2014, that proved to be a tad early, providing a bit of a headwind.

Is a decline in U.S. stocks likely? One can never predict these things in advance, but the usual recipe for a terrible market year is a period right beforehand when investors finally throw caution to the winds, and those who never joined the bull market run decide it’s time to crash the party. The markets have a habit of punishing overconfidence and latecomers, but we don’t seem to be seeing that quite yet.

What we ARE seeing is kind of boring: a long, slow economic recovery in the U.S., a slow housing recovery, healthy but not spectacular job creation in the U.S., stagnation and fears of another Greek default in Europe, stocks trading at values slightly higher than historical norms and a Fed policy that seems to be waiting for certainty or a sign from above that the recovery will survive a return to normal interest rates.

On the plus side, we also saw a 46% decline in crude oil prices, saving U.S. drivers approximately $14 billion this year. On the minus side, investments in the energy sector during 2014 proved be a downer to portfolios. Oil, like most commodities, tends to be cyclical, and should turn back upward should the rest of the world find its footing and show healthier signs of growth. Should crude continue to slide, we may see collateral damage in the form of lost jobs, shuttered drilling projects and loan defaults by independent, not so well capitalized producers. This would be your classic case of “too much of a good thing.”

The Fed has signaled that it plans to take its foot off of interest rates sometime in the middle of 2015. The questions that nobody can answer are important ones: Will the recovery gain steam and make stocks more valuable in the year ahead? Will Europe stabilize and ultimately recover, raising the value of European stocks? Will oil prices stabilize and remain low, giving a continuing boost to the economy? Or will, contrary to long history, the markets flop without any kind of a euphoric top?

We can’t answer any of these questions, of course. What we do know is that since 1958, the U.S. markets, as measured by the S&P 500 index, have been up 53% of all trading days, 58% of all months, 63% of all quarters and 72% of the years. Over 10-year rolling time periods, the markets have been up 88% of the time. These figures do not include the value of the dividends that investors were paid for hanging onto their stock investments during each of the time periods.

Yet since 1875, the S&P 500 has never risen for seven calendar years in a row. Could 2015 break that streak? Stay tuned.

Sources:

Wilshire index data: http://www.wilshire.com/Indexes/calculator/

Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp

S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–

http://money.cnn.com/2014/09/30/investing/stocks-market-september-slump/index.html

Nasdaq index data: http://quicktake.morningstar.com/Index/IndexCharts.aspx?Symbol=COMP

International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html

Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci

Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

http://blogs.marketwatch.com/thetell/2014/06/30/one-chart-explains-the-unexpected-first-half-treasury-rally/

Aggregate corporate bond rates: https://indices.barcap.com/show?url=Benchmark_Indices/Aggregate/Bond_Indices

Aggregate corporate bond rates: http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/

http://www.reuters.com/article/2014/12/31/us-usa-markets-2015-analysis-idUSKBN0K908820141231

http://moneyover55.about.com/od/howtoinvest/a/bearmarkets.htm?utm_term=historical%20performance%20of%20s&p%20500&utm_content=p1-main-7-title&utm_medium=sem&utm_source=msn&utm_campaign=adid-ac372107-3fb5-4c61-a1f3-6ab4e1340551-0-ab_msb_ocode-28813&ad=semD&an=msn_s&am=broad&q=historical%20performance%20of%20s&p%20500&dqi=S%2526P%2520500%2520yearly%2520performance&o=28813&l=sem&qsrc=999&askid=ac372107-3fb5-4c61-a1f3-6ab4e1340551-0-ab_msb

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Providing for Pets

December 7, 2014 — Sam H. Fawaz

This past summer, the entertainment world lost one of its most prominent and popular figures: Joan Rivers. When her estate planning documents were unveiled, it became clear that she was a careful planner of her legacy–and also a devoted pet owner. One of the most interesting details of her estate plan was the careful provisions Rivers made for her pets.

Rivers left the bulk of her estate to her daughter Melissa and her grandson Cooper–an estimated $150 million in total value. The two rescue dogs who shared her New York residence, and two other dogs who lived at her home in California, were beneficiaries of pet trusts, which included an undisclosed amount of money set aside for their ongoing care, and carefully written provisions that described the standard of living that Rivers expected them to receive for the remainder of their lives.

Traditional pet trusts are honored in most U.S. states, as are statutory pet trusts, which are simpler. In a traditional trust, the owner lists the duties and responsibilities of the designated new owner of the pets, while the statutory trusts incorporate basic default provisions that give caregivers broad discretion to use their judgment to care for the animals. Typical provisions include the type of food the animal enjoys, taking the dog for daily walks, plus regular veterinary visits and care if the pet becomes ill or injured. The most important provision in your pet trust, according to the American Society for the Prevention of Cruelty to Animals, is to select a person who loves animals and, ideally, loves your pets.

The trust document will often name a trustee who will oversee the level of care, and a different person will be named as the actual caregiver. In all cases, the trusts terminate upon the death of the last surviving animal beneficiary, and the owner should choose who will receive those residual assets.

Some states have different laws that require different arrangements. Idaho allows for the creation of a purpose trust, and Wisconsin’s statute provides for an “honorary trust” arrangement. There are no pet trust provisions on the legal books in Kentucky, Louisiana, Minnesota and Mississippi, but pet owners living there can create a living trust for their pets or put a provision in their will which specifies the care for pets. A popular (and relatively simple) alternative is to set aside an amount of money in the will to go to the selected caregiver, with a request that the money be used on behalf of the pet’s ongoing care.

It should be noted that a pet trust is not designed to pass on great amounts of wealth into the total net worth of the animal kingdom. The poster child of an extravagant settlement is Leona Helmsley’s bequest of $12 million to her White Maltese, instantly putting the dog, named “trouble,” into the ranks of America’s one-percenters. Rather than confer a financial legacy on an animal, the goal should be to ease any financial burdens the successor owner might incur when caring properly for your loved animals for the remainder of their lives, including food and veterinary bills.

How long should you plan for the funding to last? Cats and dogs typically live 10-14 years, but some cats have lived to age 30, and some dogs can survive to see their 24th birthday. Interestingly, estate planners are starting to see some pet trusts extend out for rather lengthy periods of time, as owners buy pets that have longer lifespans. For example, if an elderly person has a Macaw parrot as a companion, the animal could easily outlive several successor owners, with a lifespan of 80-100 years. Horse owners should plan for a life expectancy of 25-30 years, and, since horses tend to be expensive to care for, the trust will almost certainly require greater levels of funding. On the extreme end, if you know anyone who happens to have a cuddly Galapagos giant tortoise contentedly roaming their backyard, let them know that their pet trust would need to be set up for an average 190-year lifespan.

If you would like to discuss your estate planning or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:
http://www.dailyfinance.com/2014/09/11/what-joan-rivers-just-taught-pet-lovers-about-estate-planning/
http://www.dailyfinance.com/2014/08/14/robin-williams-estate-plan-spares-his-heirs-drama/
http://www.1800petmeds.com/education/life-expectancy-dog-cat-40.htm
http://abcnews.go.com/US/leona-helmsleys-dog-trouble-richest-world-dies-12/story?id=13810168
http://www.aspca.org/pet-care/planning-for-your-pets-future/pet-trust-primer

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Massive withdrawals from 401(k)s thwart Americans’ retirement planning efforts

December 3, 2014 — Sam H. Fawaz

As the IRS released the 401(k) contribution limits for 2015, attention turned, as it has in prior years, to the large number of plan participants who come nowhere close to contributing these amounts. In contrast, many individuals use their 401(k) accounts as a means to pay off loans and other current expenses.

The amounts withdrawn are not negligible. According to a recent study by Vanguard, the average withdrawal represents one-third of the participant’s account balance. Additionally, most withdrawals are not for hardship — non-hardship withdrawals outnumber hardship withdrawals 2-to-1, and the rate of new non-hardship withdrawals doubled between 2004 and 20131.

So, why are so many withdrawals occurring? One reason is to pay off debt, including student loans. Another may be to help make ends meet when people are between jobs. Fidelity reported earlier this year that 35% of participants took all or part of their 401(k) savings when leaving a job2.

No matter the reason, the long-term implications of early 401(k) withdrawals can be considerable. In withdrawing from the account, plan participants will miss out on tax-deferred compounding of that money, which can add up over time.

Alternatives to Raiding Your 401(k)

Withdrawing from a tax-deferred retirement plan to meet short-term needs should be a last resort. Before doing so, consider alternatives such as the following:

  • Savings accounts or other liquid investments, including money market accounts. With short-term investment rates at historically low levels, the opportunity cost for using these funds is relatively low.
  • Home equity loans or lines of credit. Not only do they offer comparatively low interest rates, but interest payments are generally tax deductible.
  • Roth IRA contributions. If there is no other choice but to withdraw a portion of retirement savings, consider starting with a Roth IRA. Amounts contributed to a Roth IRA can be withdrawn tax and penalty free if certain qualifications are met. See IRS Publication 590 for more information.

If withdrawing from a 401(k) is absolutely necessary, consider rolling it over to an IRA first and then withdrawing only what is needed. According to the Vanguard study, fewer than 10% of withdrawals were rolled into an IRA; more than 90% were taken in cash1, which typically generates withholding taxes and IRS penalties.

If you would like to discuss your retirement investments or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:
1Vanguard Investment Group, How America Saves 2014, June 2014.
2The New York Times, “Combating a Flood of Early 401(k) Withdrawals,” October 24, 2014.

Posted in Fee-only, Financial Planning, retirement, retirement planning. Tags: , , . Leave a Comment »

Relative Prosperity

November 30, 2014 — Sam H. Fawaz

You might have read that the U.S. investment markets are jittery on the news that Japan has experienced two consecutive quarters of economic decline—the official definition of a recession.  But if you turn the news around, it offers us a reminder that, however much we complain about slow-growth recovery from 2008, Americans are actually part of one of the most robust economies in the world.

The statistics tell an interesting story.  The U.S. economy is growing at a rate of about 2.95% for the year, which is (as the complainers correctly point out) slightly below its long-term pace.  But this doesn’t look so bad compared to the 2.16% growth average for the G7 nations in aggregate, and our growth numbers are well ahead of the European Union, whose economies are expanding at an anemic 1.28% rate this year.

Look deeper and our story looks even better.  The current recession is Japan’s fourth in six years, despite long-term stimulus efforts that make the Fed’s QE program look like a purchase at the candy store.  Europe is rumored to be teetering on the edge of recession, which would be its second since the 2008 meltdown.  The published GDP figures coming out of China (which are very unreliable due to heavy government editing) could drop to about half the long-term rate this year, and Brazil entered recession territory last summer.

But what about the 5.8% unemployment rate in the U.S.?  That’s better than the 10% rate at the end of 2008, but it’s not good—right?  Compared with the rest of the world, America’s jobs picture looks downright rosy.  The list, below, shows that only 13 countries have lower jobless rates than the American economy, and some of those (Malaysia, Russia, Saudi Arabia) may be giving out numbers that their leaders want to hear.  Yes, it would be nice if the long, sustained GDP growth we’ve enjoyed these last six years were faster, and we all hope that the unemployment rate continues dropping.  But compared with just about everywhere else, life in the U.S.—on the economic front, at least—is pretty good

Global unemployment rates

Malaysia (2.7%)
Switzerland (3.1%)
South Korea (3.5%)
Japan (3.6%)
Norway (3.7%)
Taiwan (3.9%)
Denmark (4.0%)
Brazil (4.9%)
Russia (4.9%)
Germany (5.0%)
Mexico (5.1%)
India (5.2%)
Saudi Arabia (5.5%)
UNITED STATES (5.8%)
Indonesia (5.9%)
Pakistan (6.0%)
United Kingdom (6.0%)
Australia (6.2%)
Israel (6.5%)
Canada (6.5%)
Chile (6.6%)
Philippines (6.7%)
Venezuela (7.0%)
Czech Republic (7.1%)
Argentina (7.5%)
Sweden (7.5%)
Netherlands (8.0%)
Austria (8.1%)
Colombia (8.4%)
Finland (8.5%)
Belgium (8.5%)
Iran (9.5%)
Turkey (10.1%)
France (10.2%)
Ireland (11.0%)
Poland (11.3%)
Egypt (12.3%)
Italy (12.6%)
Portugal (13.1%)
Iraq (15.1%)
Spain (23.7%)
Nigeria (23.9%)
South Africa (25.4%)
Greece (25.9%)

If you would like to discuss your current portfolio/asset allocation or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:
http://www.washingtonpost.com/business/economy/japan-recession-europe-stagnation-cast-pall-over-global-economic-outlook/2014/11/17/5cd81612-6e8f-11e4-ad12-3734c461eab6_story.html

http://www.washingtonpost.com/world/japans-economy-tips-back-into-recession-in-another-blow-for-abe/2014/11/16/9a8f2e94-8c9c-44cf-a5e8-b57a470fd61f_story.html

http://www.washingtonpost.com/world/japans-abe-says-tpp-trade-talks-with-us-are-near-the-final-stage/2014/11/07/24ba0b42-63a8-11e4-ab86-46000e1d0035_story.html

http://www.washingtonpost.com/world/british-prime-minister-david-cameron-says-red-warning-lights-flashing-on-global-economy/2014/11/17/acc29d06-c38f-49a1-b478-30d334fd3389_story.html

http://www.tradingeconomics.com/country-list/unemployment-rate

http://www.economywatch.com/economic-statistics/year/2014/

http://vicshowplanet.blogspot.com/2014/08/brazils-economy-falls-into-recession.html

https://uk.news.yahoo.com/ebrd-says-russia-certain-fall-economic-recession-122646029–business.html#PklpsIB

http://online.wsj.com/articles/chinas-slowdown-raises-pressure-on-beijing-to-spur-growth-1413893980

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What Is the Difference Between Disability Insurance and Long-Term Care Insurance?

November 11, 2014 — Sam H. Fawaz

Disability insurance addresses lost wages that stem from an inability to work. Long-term care insurance, in contrast, addresses expenses associated with medical care provided to you in your home, a nursing home, a rehabilitation center, or an assisted living facility.

Disability insurance policies may address either short-term or long-term needs for income. Short-term disability policies provide coverage on a temporary basis, usually up to several months, while you recover from an accident or illness. Long-term disability insurance provides benefits when a disability is of a more permanent nature. Most long-term disability policies will cover you throughout your working years, usually until you reach age 65. Policies vary considerably in terms of the cost of premiums, the percentage of your prior salary paid out as a benefit and the definition of what constitutes a disability.

Long-term care insurance is designed to help cover costs of health care services provided to you in your home, a nursing home, a rehabilitation center, or an assisted living facility. Many long-term care insurance policies provide benefits when you require assistance with activities of daily living such as bathing, dressing, and feeding yourself. Loss of wages typically is not an issue with this type of coverage.

Long-term care insurance can be purchased at any time in your life. However, premiums tend to rise considerably with age and applicants can be turned down due to pre-existing medical conditions. Although individuals of any age may receive benefits from a long-term care insurance policy, these policies typically are intended to help finance the medical costs of the aged.

Why do many financial experts recommend their clients purchase both disability and long-term care insurance?

•    According to the Social Security Administration, a 20-something worker today has a 30% chance of becoming seriously disabled before reaching retirement.1
•    The average daily charge for a semi-private room at a nursing home is $207. The average monthly charge for care in an assisted living facility is $3,450. 2

If you’d like to know more about disability and long-term care insurance, or if you want to discuss other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.

Sources:
1 Social Security Administration.
2 Genworth, 2013 Cost of Care Survey, March 2013.

Posted in Financial Planning, Healthcare Planning, retirement, Social Security Benefits. Tags: , , , . Leave a Comment »

Trading Places: Baby Boomers More Aggressive Than Millennials in Retirement Goals

November 6, 2014 — Sam H. Fawaz

Popular investing wisdom states that the younger you are, the more time you have to ride out market cycles and therefore the more aggressive and growth-oriented you can be in your investment choices. But that is not how individuals surveyed recently are thinking or behaving with regard to their retirement investments.

In fact, the new study sponsored by MFS Investment Management suggests that Baby Boomers take a more aggressive approach to retirement investing than the much younger Millennials — those who are 18 to 33 years old. Further, each group’s selected asset allocation is inconsistent with what financial professionals would consider to be their target asset allocation, given their age and investment time horizon.

For example, Baby Boomers, on average, reported holding retirement portfolio asset allocations of 40% equities, 14% bonds, and 21% cash, while Millennials allocated less than 30% of their retirement assets to equities, and had larger allocations to bonds and cash than their much older counterparts — 17% and 23% respectively.

Further, when asked about their retirement savings priorities, 32% of Baby Boomers cited “maximizing growth” as the most important objective, while two-thirds of Millennials cited conservative objectives for their retirement assets — specifically, 31% said “generating income” was a top concern and 29% cited “protecting capital” as their main retirement savings goal.

Perception Is Reality

The study’s sponsors infer that the seemingly out-of-synch responses from survey participants reflect each group’s reactions — and perhaps overreactions — to the recent financial crisis. For Baby Boomers, the loss of retirement assets brought on by the Great Recession has made them more aggressive in their attempts to earn back what they lost. Fully half of this group reported being concerned about being able to retire when they originally planned. For Millennials, the Great Recession was a wake-up call that investing presents real risks — and their approach is to take steps to avoid falling foul to that risk even though they have decades of investing ahead of them.

Educating Investors: An Opportunity for Advisors

The study’s findings suggest that there is a considerable opportunity for advisors to dispel fears and misperceptions by educating investors of all ages about the importance of creating and maintaining an asset allocation and retirement planning philosophy that is appropriate for their investor profile.

If you have any questions or concerns about asset allocation, retirement and financial planning or investment management, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.

Posted in Financial Planning, retirement. Tags: , , , . 2 Comments »

Towards Better Social Security Income Planning

October 4, 2014 — Sam H. Fawaz

As you approach your social security retirement age, your thoughts turn to deciding when you should begin receiving social security benefits. With over 2,700 rules in the social security manual, you’d be forgiven (and, for that matter, so would most social security case workers) for being bewildered and confused about all of the options available to claim social security. In this article, I attempt to distill the most frequently asked questions and help reduce confusion about claiming social security benefits (SSB).

The crux of this article is to discuss the advantages of planning the payout of your (or your spouse’s) benefits to maximize your ultimate financial payoff. Coordinating your benefits with your spouse’s benefits introduces complexities that must be understood to maximize your overall benefits. Combined with the ability to file for benefits, then suspend them or filing for benefits using your ex-spouse’s earnings records, planning for social security benefits can be quite complex.

I realize that, as a financial planner, it’s somewhat self-serving to say that each person’s situation is unique and requires a personalized and thorough analysis of the facts and circumstances to determine the optimal timeframe to claim SSB. Nonetheless, no article, however detailed, can take into account all individual situations.

Note that this article doesn’t attempt to discuss the viability of the social security system or whether benefits will be available in the future (I believe that they will be, perhaps on a somewhat reduced basis).

Social Security Basics

In general, if you’ve worked and sufficiently paid into the social security system for at least 40 quarters of work in your lifetime, you probably have some SSB coming to you when you retire. Calculation of the level of your benefit is quite complicated, but mostly affected by your lifetime earnings.

Even if you’ve never worked a day in your life, your spouse’s (or ex-spouse’s) earnings and qualifications may be your “ticket” to qualify for benefits. If you’ve earned little money in your lifetime (as is the case for a stay-at-home spouse), you can often qualify for a much higher benefit if you file based on your spouse’s (or ex-spouse’s) earnings.

There are three dates in which to begin drawing social security: early retirement age (ERA), full retirement age (FRA) and deferred retirement age (DRA), each one being a later date in life than the previous. Your ERA and FRA vary depending on your birthday, and are generally higher for younger retirees (for anyone born after 1959, their FRA is 67).  For general discussion purposes, let’s assume that age 62, 67, and 70 are the ERA, FRA, and DRA respectively.

Deferring the date that you begin receiving benefits obviously means that you (and your spouse) may receive higher benefits per month until your date of death. Currently, less than 50% of filers wait until their FRA to claim benefits, and less than 6% wait until their DRA to claim benefits, despite the much higher DRA benefit (about 75% higher). The DRA benefit is generally about 30% higher than the FRA benefit. Reasons people cite for not deferring benefits include financial need, bad health, fear of social security insolvency, dying early, or plain ignorance about the overall benefits of waiting.

Once you begin receiving benefits, you may have options to suspend them within 12 months of starting them to qualify for a higher later benefit. This mostly involves repaying all of the benefits received. As more fully described below, there may be circumstances where you might want to file for SSB and immediately suspend them at FRA (without receiving payments) to allow your spouse to receive a higher (spousal) benefit or to receive a higher benefit at DRA.

Deferring Benefits

In general, deferring SSB as long as possible makes a lot of sense if you can afford to do so. The significant increase in benefits is primarily due to the additional years of compounding that occurs when you defer benefits.

At its very core, social security is exactly like taking the sums that you contributed into the system over your working years and continuing to invest it. Just like any investment, the primary factors that affect the payout are the length of time for compounding and the rate of return applied. The longer you wait for benefits, the larger the invested sum grows.

Making a decision to begin or defer benefits is an exercise in making a best guess on how long you (and your spouse if you’re married) will live. “Gaming” social security is about maximizing the benefits you collect over your lifetime. Deciding to defer social security until age 70 is a losing proposition if you’re in bad health and don’t have much of a chance to make it to or much past that age. Conversely, if you’re healthy and your family has a past history of living well into their nineties, deferring benefits may or may not lead to a higher overall lifetime payout. Obviously, the “game” ends when you die, since your benefits cease then. So just like investing, the outcome of the decision to defer isn’t known until the investing and disbursement period is over.

Essential Rules/Facts

Given the forgoing background, here are some of the essential rules/facts to know about filing for SSB and some potential tax planning points:

1.    At full retirement age (FRA), one may receive the higher of their own retirement benefit or a spousal benefit equal to 50% of their spouse’s retirement benefit.  Many do not realize that in order to claim that spousal benefit, the spouse on whose record the 50% payment is based must be receiving or have filed for (and perhaps suspended) retirement benefits.

2.    If a worker starts benefits prior to his/her FRA, and his/her spouse is receiving retirement benefits, the worker does not get to choose between their retirement benefit and a spousal benefit. They are automatically deemed to have begun their retirement benefit, and if their spouse is receiving retirement benefits, a supplement is added to reach the spousal benefit amount.  All this is reduced for starting early. The total will be less than half the normal retirement benefit.If you start your retirement early and your spouse has not claimed or suspended his/her retirement benefit, you cannot get a spousal supplement until they do file.

3.    A person needs to have been married to an ex-spouse for at least ten years immediately before a divorce is final, in order to be eligible to receive a spousal benefit based on a former spouse’s record. The ex-spouse need not approve this and may never know this is the benefit being claimed.If you marry again, you are no longer eligible for a spousal benefit on your ex’s record and a new 10-year clock starts on the marriage to your new spouse. If you are over 60 when you get married again, you will still be able to claim survivor benefits on your ex.

4.    If you take your retirement early, it not only reduces your retirement benefits, benefits for your survivor (if any) are also based on that permanently reduced amount.

5.    If you have claimed your retirement benefit early, when you reach your FRA, if your spouse then files for his/her retirement and you want to switch to a spousal benefit, you will not get 50 percent. The formula is (A-B) + C where A= ½ the worker’s Primary Insurance Amount (PIA, their benefit at their FRA), B= 100 percent of the spouse’s PIA, and C= the spouse’s EARLY retirement benefit. Since starting early means C is less than B, the total is less than 50%.  One only gets half their spouse’s benefit if the spousal benefit is claimed at FRA.

6.    Spousal benefits do not receive delayed credits. In other words, if taking the spousal benefit is good for a couple, delaying the claim for spousal benefits past the recipient’s FRA has no additional benefit.  The same applies for widow/widower benefits. They can be started early but there is no benefit to delaying past FRA as no delayed credits apply. Before a worker dies, delaying does increase the potential survivor’s benefit.

7.    Taxpayers whose income is low can find that some forms of tax planning can result in higher than expected taxation. Many retirees will make distributions from IRAs or qualified retirement plans prior to age 70½ to have a low tax rate applied. Roth conversions are often done for the same reason. A relatively small amount of taxable income can cause up to 85% of Social Security payments to become taxable.

8.    Because the income thresholds that determine how much of one’s Social Security is taxable are not indexed for inflation, over time, more and more of the benefits can become taxable.

9.    New this year, an increase in taxable income as just described can also cause a reduction or elimination of subsidies available to lower income households under the new health insurance law. Social Security payments, even the tax-exempt portions, are included in this evaluation. Supplemental Security Income (SSI) is excluded.

10.    With today’s mobile workforce, it is not unusual to find some taxpayers that worked at a job and earned a pension benefit but were not subject to withholding for Social Security taxes and another job that was subject to Social Security taxes. Many such folks are unpleasantly surprised that their Social Security benefits may be reduced due to the Windfall Elimination Provision.

11.    If you “file and suspend” for SSB, Medicare premiums cannot be paid automatically from Social Security income and must be paid directly to the Center for Medicare & Medicaid Services (CMS). Affected taxpayers should be sure to get billed properly by CMS. If it is not paid timely, you can lose your Medicare Part B coverage.

12.    When collecting retirement benefits, increases in Medicare Part B premiums are capped to the same rate of increase of the retirement benefits under a “hold harmless” provision.  This is tied to actual receipts so while delaying past your FRA earns delayed credits, there is no cap on the Medicare increases. Worse yet, the uncapped increase is locked into every future premium. This hold harmless quirk is not relevant to high income taxpayers. Hold harmless does not apply to high income taxpayers paying income-related Medicare B premiums.

13.    Because it used to be allowable to pay back all of your retirement benefits and start over, many people think that they can change their minds about starting SSB early. Withdrawing your claim this way basically erased the claim as though it never happened and future benefits would therefore be higher. Today, if you regret your choice, you can only withdraw your claim and pay back benefits within 12 months of your early start. After 12 months, you are stuck with your choice until your FRA, at which point you can suspend and earn delayed credits up to age 70. The credits are applied to your reduced benefit.

Some Strategies and Conclusion

Here are some final considerations to make when deciding to file a claim for SSB (by necessity, these are generalities that must take into account each individual’s/couple’s facts and circumstances):

•    Assess your own life expectancy, and, if married, your joint life expectancy.
•    If married, and either spouse is healthy, delay the higher earner’s benefits as long as possible.
•    If married and one spouse is unhealthy, get the lower payout as soon as possible.
•    Supplement benefits with spousal amounts, if within FRA.

As mentioned above, the decision of when to file for social security benefits can become very complex and requires assessment of many factors. Since the determination can involve differences of thousands of dollars per person, per year, it’s worthwhile to carefully assess and model all of the facts and circumstances before starting benefits.  Even though a total SSB re-do is no longer available, there are some options still available to modify benefit payouts.

It may be tempting or convenient to utilize a simplified web-based social security calculator to help you make an estimate, but be wary of any program that doesn’t model multiple scenarios or doesn’t require entry of many variables that may ultimately affect your optimum benefit. In the end, there’s no perfect answer, but perhaps a “best fit” for your situation is good enough.

If you have any questions about social security planning or any other financial planning matter, please don’t hesitate to contact me or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.

Posted in retirement, Social Security Benefits. Tags: , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »
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