Checking up on things

While we regularly monitor our client’s investments, there are some things you should be regularly checking up on. Just like your annual physical, we recommend that you review the following on a regular basis.

Social Security….For most people, Social Security benefits are a key component of their retirement planning. If you have not yet started collecting Social Security, you should regularly review your Social Security information and future benefit projections. You should verify that the earnings data on record is accurate. You should review this information with your financial advisor.

Social Security stopped sending everyone annual paper statements a number of years ago. To review your data online, go to: www.ssa.gov/myaccount to establish your own Social Security account. Each individual needs to do this. It cannot be done as a couple. You will need to create a user name and password. SSA’s password requirements are very strong, which is good. Be sure to save it, and they require you to establish a new password every 6 months.

Credit scores…You should regularly monitor your credit score and credit report activity.

There are now many credit cards that provide you with your credit score for free, so this is much easier to obtain than it was years ago. It is a good idea to track your score, to monitor if there are changes, and especially declines. Again, if you are married, you should check the score for each spouse, as scores can be quite different.

Your credit score is not influenced at all by your income or assets. Credit scores are based on formulas which factor your total debt, the age of your various types of debt, how much of your credit you have used, the type of debt you have and your payment history, including late payments.

We recommend that every adult should have some credit cards in their individual name only, in addition to any joint credit.

You should review your full credit report at least annually. This way, you can review all of your current and past credit and to see if anyone has established credit cards or other debt that you did not authorize. Each spouse should review their own report, as they are separate.

The best website to obtain a free credit report is: http://www.annualcreditreport.com/. This site is governed by the Federal Trade Commission (FTC). You may also call 877-322-8228.  This site will provide you with a link to get your credit report and you will need to answer a number of personal questions, for identification purposes.

The Fair Credit Reporting Act guarantees consumers access to their credit report information from each of the three credit reporting companies, once per year, for free. The best and only way to ensure that you are getting this information for free is to use the above website, http://www.annualcreditreport.com/.

One member of our firm uses Credit Karma. Credit Karma can be accessed through their website, https://www.creditkarma.com/, or you can install the app on your smart phone. Credit Karma gives you free access to your credit scores, reports and monitoring. You can get your scores and reports from TransUnion and Equifax with weekly updates. The app is free to use.

We hope these are helpful reminders. 

If you have any questions on the information you gather from getting these reports, please let us know.

2019 Social Security Benefit and Payroll Tax Increases

Social Security recipients will be receiving a 2.8% increase in 2019 benefits. Unlike in 2018, this benefit increase should not be offset by higher Medicare health premiums in 2019, so these should be higher net monthly benefits.

The increase in gross benefits would be the largest annual COLA change (cost of living allowance) since 2012, as inflation has been very low over the past years. Recent changes have been: 2018-2%, 2017-.3% and 2016-no increase.

The earnings limit for those who claim Social Security benefits before their full retirement age will increase from $17,040 to $17,640 in 2019. If this applies to you, you lose $1 benefit for every $2 earned in wages or earned income over $17,640.

In 2019, the maximum wage base subject to Social Security and Medicare taxes will increase $4,500, from $128,400 to $132,900, a 3.5% increase. This will cost employees and employers each $344.25 in 2019. Additionally, all earnings, even above the $132,900 Social Security maximum, are subject to a 1.45% Medicare tax. Plus, individuals with earned income above $200,000 and married filers with earned income above $250,000 pay an additional .9% in Medicare taxes.

 

This week’s Takeaway: Social Security is still vital for nearly all Americans. Annual payments can be $20-40,000, which is the equivalent of withdrawing 4% per year from an account value of $500,000-$1,000,000.

 

Source: “Social Security to get 2.7% COLA,” Investment News, Mary Beth Franklin, October 15, 2018.

Guidance for a Key Social Security Decision

Social Security benefits are more significant than many people realize. The amount you collect from Social Security could be $15-30,000+ per year, depending on your earnings history. As life expectancies increase significantly, Social Security benefits for a couple may be more than $1 million.

Social Security income is not subject to fluctuations and volatility like the stock market, which is a great source of stability in determining your financial future.

One key decision surrounding Social Security is when to start receiving benefits. This is the main topic of this post. For more information on other aspects of Social Security, please see our prior post, Social Security Basics: What you Should Know.

The earliest you can begin receiving Social Security retirement benefits is at least age 62. You must have earned at least 40 work credits during your lifetime, meaning you earned at least $4,800 per year for 10 years.

Your monthly Social Security benefits are based on “Full Retirement Age,” or FRA. This is the age when you can receive 100% of your Social Security retirement benefits.

  • Historically, this was age 65, but it is now gradually increasing to age 67.
  • For those born before 1943, FRA is before age 66.
  • For those born between 1943-1954, Full Retirement Age is age 66.
  • For those born between 1955-1959, FRA is 66 plus additional months.
  • If you were born in 1960 or later, your Full Retirement Age will be 67.

The age that you begin collecting Social Security determines the initial amount of benefits that you will receive for the rest of your life.  It is that important.

If you begin collecting before your Full Retirement Age (FRA), your benefits are permanently reduced. If you wait until after your FRA, your benefits will be greater.

  • If you file for early retirement payments at age 62, your monthly benefits will be permanently reduced to approximately 75% of the FRA benefit amount.
  • If you wait to receive benefits until after FRA, your benefits will increase by 8% per year, for each year after your FRA year, until age 70.
  • If you were born between 1943-54, delaying your benefits until age 70 will increase your monthly benefit to 132% of your FRA benefit amount.

Given the above information, why wouldn’t everyone just wait until age 70 and receive the maximum amount possible, based on their wage history? This is where financial planning and our advice can be so valuable.

We feel that this decision should be based on each person’s or family’s specific situation, and clearly not everyone should wait until age 70. We actually recommend that most people begin collecting Social Security well before age 70.

Though many articles encourage people to delay starting to receive Social Security for as long as possible, so many other variables should be considered that “one size fits all” advice should not be followed for this decision.

We recommend a comprehensive review of your full financial situation, as well as other non-financial factors. Key factors are when you want to retire, work part-time and your quality of life. If receiving your benefits earlier enables you to retire and that is a priority, then waiting years to receive Social Security does not make sense.

If you have any significant health issues or your family does not have a history of longevity, then you should not delay beginning to receive Social Security. As a rule of thumb, if you begin collecting around age 62 (or your earliest eligible age), you need to live longer than 82-83 for that decision to have been a “negative” one in terms of total lifetime benefits.

Even with longer life expectancy, no one can know if they will live until their early 80s. Thus, we feel that collecting early is a good and rational decision for many clients.As Social Security is a given, at least for decades, collecting your benefits could delay the need to withdraw/spend some of your other investable assets, if your Social Security benefits replace what you would have withdrawn from other sources.

We work with clients to evaluate both the financial and non-financial aspects of when to begin collecting Social Security. This is part of long term financial planning, which can be done many years before you reach your 60s. Along with the Social Security Administration’s projections, we have financial software to assist in planning for decisions like this. We would incorporate Social Security, along with your other assets and financial goals, to help you make this very personal and critical decision.

We remind you that there are many technical details regarding Social Security, including when you retire and your lifetime earnings. We recommend that you review our earlier blog post, as well as consult with a financial professional regarding your specific situation, in making this decision.

 

Tax reform update and 2018 Social Security Projections

Tax reform update: On Wednesday, Republican legislators released a broad framework of individual and corporate tax changes. The proposal is far from enactment and many details will need to be negotiated.  It is not yet in the form of a bill which is ready to be voted upon, as the proposal is a 9 page PDF.  We will provide more detailed commentary and analysis as it progresses further.

The proposal includes eliminating most itemized deductions except for mortgage interest and charitable contributions and eliminates the Alternative Minimum Tax and Estate tax.  The framework proposes significant corporate tax reductions.

 

2018 Social Security Projections: Social Security recipients are projected to receive at least a 1.8% increase in 2018 benefits, but this could be partially or fully offset by higher Medicare premiums for most recipients. So, there may be no net increase in monthly Social Security payments for most recipients in 2018.

The Social Security Administration will officially announce the changes for 2018 in October, based on inflation figures through September 30th.

The increase in gross benefits would be largest annual COLA change (cost of living allowance) since 2012, as inflation has been very low over the past 5 years.

However, for many high income individuals and couples, they may have no change or even face net reductions in their monthly deposits, due to higher Medicare premium tiers which take effect in 2018.

For 70% of Medicare enrollees who are Social Security recipients, any Medicare insurance premium increase cannot exceed the increase in gross Social Security benefits. Thus, their net benefits may remain the same in 2018.

High income seniors, defined as singles with income over $85,000 and couples with income above $170,000, are not protected by this “hold harmless” provision regarding Medicare insurance premiums exceeding Social Security benefit changes.

There is not any planning which can be done to avoid the impact of the Medicare premium increase, as it is based on past income tax returns.   The Medicare premiums for 2018 are based on your 2016 tax return information.

If you have not yet begun to collect Social Security and are nearing the age which you can begin to collect Social Security (62-70), you may want to contact us to discuss this important decision.

 

This week’s Takeaway: While net Social Security deposits may stay the same or decrease in 2018, these are still vital benefits for nearly all Americans. Annual payments can be $20-40,000, which is the equivalent of withdrawing 4% per year from an account value of $500,000-$1,000,000.

 

 

Source: Investment News, Mary Beth Franklin, September 25, 2017

How do you define financial success?

Defining success, and specifically financial success, can be very personal and subjective.

A speaker at a recent national investment conference I attended stated that men tend to evaluate investment success based on their principal balance, performance and returns.  Women are different, as they tend to be much more focused on their annual cash flow.  Women are generally more concerned about not running out of money.

Both of these are very valid ways to judge your financial progress and how well you are doing.  Our role is to make sure that we understand what is most important to you, and help you meet those objectives.

When working with clients, and particularly those who have gone through a life transition, we focus on helping you to figure out how much money you will need each year to live comfortably and maintain your lifestyle.  Discussing this in detail leads to developing a personalized investment plan for you. Providing you with comfort and clarity are key to us.

As life expectancy is increasing, planning so that you and your family have adequate resources for longer periods of time has increased in importance.  Once we understand your cash flow needs, we can implement our investment strategy, which is designed for the long term.  Our focus is not on outperforming a given index for a month or a year.  Our goal is investment performance that will provide you with adequate financial resources throughout your life.  This is true investment success.

Clearly a significant role is for us to provide you with solid long term investment performance.  In terms of stock market performance, academic research shows that the vast majority of active mutual funds and money managers do not outperform their respective benchmarks over the long term.  The mutual funds we have recommended since we started our firm have outperformed the vast majority of the actively managed mutual funds in each of their respective asset classes.  Defined in this manner, we are successful.

Another measure of financial success is whether you have avoided big financial mistakes.  This is another role that we view as very critical.  During your life, you may be faced with some major decisions, which we can assist you with.  When clients have to make decisions about whether to take a pension distribution over their joint lives or a single life, there is usually a definitive answer.  We can assist clients in deciding when to begin taking Social Security or other retirement distributions.  We help clients with multi-generational planning with their estate plans, as well as charitable giving.  As discussed above, we help you to determine how much you can safely withdraw each year, so you can live comfortably, while being confident that you will not run out of money.

One of our core investment philosophies is diversification.  While the 2015 stock market performance for the funds that we recommend in the US and Internationally are up or down slightly for the year, we have avoided some of the major losses that a number of individual stocks and huge hedge funds and private money managers have incurred.  There have been many reports of billion dollar money managers that have lost 10%, 20% or 30% this year, and some have even announced they are closing their funds.  These funds have usually made large bets on specific companies, oil and gas, or other commodity related companies.  By being well diversified across companies, industries and countries, we have avoided these types of “preventable” losses and risks.  We know that being highly diversified the right strategy for your long term investment success.

As interest rates have been so low for many years, we have been very disciplined not to “reach for yield.” This means we have not purchased high yield bonds to get a little more interest rate return, at the potential cost of risking your investment principal.  Many investors may have purchased “high yield” or “junk” bonds for these reasons, but have not fully understood the potential downside.  It was reported in the WSJ on December 10, 2015 that a formerly large bond mutual fund, Third Avenue Focused Credit Fund, which once had $2.4 billion in assets, is down 27% for 2015 and is now blocking investors from being able to redeem their money.  This is an example of why we only purchase investment grade bonds or bond funds.  The risk is not worth it.

Similarly, some stock investors have focused on buying stocks with large dividend yields, to make up for low interest rates on bonds or CDs.  We don’t feel that this is the right strategy, as this is risking investment principal in search of higher yield.  If the stock drops, your net return can be far worse than the potential extra interest you were trying to obtain.  A recent example is Kinder Morgan, an energy company.  This stock, which was considered safe and a source of steadily rising dividends, has lost over 60% of its value in 2015 and just reduced its dividend by 75%.  Likewise, IBM pays above a 3.5% dividend yield, but its stock has been steadily dropping for years and has underperformed the S&P 500 by over 11.5% per year for the past 5 years.

The financial world can be complex.  We can provide you with clarity and answers.  Even though none of us can predict the future, we can work with you to develop strategies and solutions that you will be able to understand, so that you and your family can live comfortably and with peace of mind.

 

Financial and Tax Figures for 2016

As 2016 is nearing, you should be aware of the following financial and tax amounts:

$18,000: amount which can be contributed to most 401(k) and 457 plans for 2016.  If you are older than age 50, you can contribute an additional $6,000 above those levels for 2016.  Both of these are the same as the 2015 contribution limits.

$5,500 and $1,000: maximum amounts which can be contributed to Traditional and Roth IRA accounts for 2016, which are unchanged from 2015.

$5,450,000: the 2016 federal unified credit against the federal estate tax for one person, which is an increase of $20,000 from the 2015 amount of $5,430,000.  For a married couple, $10.9 million of assets can pass estate tax free upon death, if they had not previously used any of their unified credit during their lifetimes.

$14,000: the 2016 annual gift tax exclusion amount, which is unchanged from 2014 and 2015.  This is the amount you can gift to any one individual without affecting your federal estate tax exemption (or unified credit).  If you are married, a couple can give $28,000 to a person.

Zero: the percentage increase in Social Security benefits from 2015 to 2016.  Because the Consumer Price Index, as calculated by the government did not increase form the 3rd quarter, 2014 to 3rd quarter, 2015, there will be no cost of living increase to Social Security recipients for 2016.

$118,500: the maximum amount of wages (or self-employment earnings) subject to the 6.2% Social Security withholding tax.  This amount remains unchanged from 2015, as by law, the wage base must remain the same if there are no COLA benefit increases.

Unlimited: the amount of earnings subject to the 1.45% Medicare tax.

$15,720: the amount a worker under full retirement age can earn, if also collecting Social Security benefits, before Social Security benefits are reduced.  This limit is the same as in 2015, after which benefits are reduced for every $2 earned about this limit.

 

What is Your One Thing?

As fall begins and we approach the last three months of 2015, what deserves your attention before December 31, 2015?

Take a step back. What is one thing, which if you focus on, will make a difference in your life, or the life of your family?

As Stephen Covey said, what is something that is important, but not necessarily urgent, that needs to be done?

What comes to mind? What can you be pro-active about? What have you been procrastinating or avoiding?

If you are young, are you saving enough? Are you participating in your company’s 401(k) program? Are you properly allocating your investments within your 401(k)? We can help you with this.

If you have children who are young, have you prepared a will and designated guardians for them? Do you have adequate life insurance? Have you started to properly save for their college education? We can help you with these.

If you are older than 50, have you started to plan how much income you will need for your retirement? Have you checked your social security benefits online? Have you developed a financial plan for a 30 year retirement span? With longer life expectancies, a 30 year retirement will become the norm for many. We can help you with these.

Is there a medical test that you should have done, which you have been putting off? Are you getting regular physicals? We can’t help you with these, but hopefully this gentle reminder will encourage someone to make an important appointment or phone call. I will make the appointment that I have been putting off.

Is there an important conversation that you need to have with someone, or a group of people, which you have been putting off? Please take the initiative and have the conversation. Some of the most important things are accomplished by having what appear to be, in advance, uncomfortable conversations. They may be uncomfortable, but they are usually very worthwhile. We can help you with these.

If you don’t have an idea yet, are you using a password management program, like 1Password or Last Pass? If not, please read these blog posts: How to Securely and Efficiently Manage Your Passwords, Practical Tips for Online Security and 5 Password Security Tips. Password management may not be as important as many of the topics above, but it should be on your list to get updated. We can help you with this.

We view our roles as financial advisors very broadly. We provide our clients with investment management, tax and estate planning advice. We counsel families, individuals and people who are going through life transitions regarding numerous topics, both financial and non-financially related.

We hope this essay helps you to improve some facet of your life. If we can assist you to do this in any way, please contact us.

Social Security Benefits, Medicare Premiums and Payroll Taxes: 2016 Projections

Social Security recipients are projected not to receive a benefit increase for 2016. However, for high income individuals and couples, they may actually face a net benefit decrease, due to a huge potential increase in Medicare premiums. The projected Social Security wage base for 2016 would remain the same, at $118,500, but the Medicare portion of payroll taxes would continue to apply to all wages. The .9% Medicare surtax would apply to wages over $200,000 for single files and $250,000 for joint returns.

The Social Security Administration will officially announce the changes for 2016 in October. Early projections indicate that there will be no Social Security COLA (cost of living adjustment) increase for 2016. COLA changes are based on Consumer Price Index (CPI) data. CPI, or the inflation rate, is negative for the first two quarters of 2015, mostly due to the huge decline in gasoline prices. Since COLA changes to Social Security benefits were introduced in 1975, only in 2010 and 2011 has there not been a COLA Social Security benefit increase.

Social Security trustees project a 3.1% COLA benefit increase for 2017. We are not sure how this can be predicted at this point, so we are not sure how reliable this projection is.

Of significant importance to high income retirees, individuals with Modified Adjusted Gross Income (MAGI) over $170,000 for couples and over $85,000 for individuals, are potentially facing a 52% increase in their Medicare Part B premiums for 2016. MAGI is your annual gross income plus municipal bond interest.

There are 5 Medicare premium brackets, based on your income level. The top premium surcharge is $230.80 per month, per person, in addition to the standard of $104.90. A high income couple would currently be paying $671.40 per month, as a monthly deduction from their 2016 Social Security benefits. If the projected increase is approved by Department of Health and Human Services in October, their Social Security benefits would remain the same but their net deposit would decline by over $100 per month due to the Medicare premium increase.

The reason for this huge Medicare premium increase is that the Social Security Act protects about 70+% of the people considered lower income Social Security recipients from Medicare increases when there are no offsetting COLA increases. For these people, their net benefits (Social Security benefits and Medicare deductions) are not allowed to decline.

Thus, for the approximately 25-30% of the Social Security recipients who earn the most, they will be absorbing the increased Medicare burden for all Medicare beneficiaries. The Secretary of Health and Human Services Department may possibly intervene and set a lower Medicare premium, to be announced in October.

These premium increases do not impact those who begin to collect Social Security in 2016 or those who have enrolled in Medicare, but who have not yet started to collect Social Security benefits.

There is not any planning which can be done to avoid the impact of the Medicare premium increase, as it is based on past income tax returns. If you have not yet begun to collect Social Security and are nearing the age which you can begin to collect Social Security (62-70), you may want to contact us to discuss this important decision.

 

 

Sources:
Mary Beth Franklin, Investment News, August 3, 2015
Michael Kitces, kitces.com, blog post dated August 19, 2015

Spending and Your Financial Security

A key factor in your financial success is knowing how much you spend. Not to the penny, but with some measure of accuracy, how much do you and your family spend in a year?

Knowing your annual expenditures is critical to your ability to save. How else can you accurately answer these questions: Is your income greater than you are spending? Do you need to make any changes?

When you are in the earlier stages of your life, determining your annual expenses and comparing this to your income is the basis for what you can save and invest. The earlier you can begin to save, the better you will be. You will have greater financial security and more financial freedom. You will be able to have more choices and flexibility. You will not have to take on as much financial risk later in your life.

For clients nearing retirement, a critical part of their financial planning with us is determining how much they need from their investments and other sources to provide the life they want. To do this, we compare their future projected income versus their expected expenses.

Income can come from various sources, usually from distributions or withdrawals from their investments, as well as Social Security, pensions or other retirement plans. We work with clients to quantify these amounts and make reasonable assessments of how much they can expect to generate or withdrawal from these sources, so they will not outlive their assets.

The other side of this equation is how much you will be spending. For many, this is a challenge to determine or estimate. We are not saying you need to live on a specific budget. But the more accurately you can quantify your annual expected expenditures, the better planning we can do.

There are many ways to determine what your annual expenditures are, or will be. The more accurate you can be about tracking or determining your past spending and projected future expenses, the more confidence you will have in the financial planning process.

Determining your annual expenditures can be done in many ways. It does not need to be exact. Using technology and online resources, pretty realistic figures can be quickly determined. Consider what you can gather from just the following:

• Credit cards, over a year or two
• Review your checkbook for large and small expenses
• Mortgage and property tax payments
• Utility bills, which you could be paying through your checking account or credit cards
• Car payments, which are likely linked to your checking account

Many of these records can be obtained for a few years, online, such as credit card statements and bank statements. These will provide you with a good starting point. If you want to go a step further, you can track your finances with an online tool, such as Intuit’s QuickBooks or Mint.com.

As you near retirement, or to plan for your future, you will also want to consider changes or events that may occur in the future. Depending on your age and other factors, these could be things like: how long you plan to work, travel plans, education expenses, changes in your home, major family events and health care costs.

Gathering, reviewing and projecting your expenses provides you with necessary information we can use to help you plan a financially secure future. This information can also be an important step in evaluating how you are spending your money, and whether you want to make changes in your spending habits.

Good data leads to better decisions and better planning. We can work with you to assist in the various aspects of this process, so you and your family can have as much financial security as possible.

Having an Impact

Our firm has an impact on people’s lives. We can influence and affect the future of their life, their children and siblings, as well as the legacy they leave.

The more that we build relationships and trust with our clients, the deeper and broader this impact becomes.

A client gets referred or comes to us for investment planning. This is where it usually starts. Their first priority is to improve their investment portfolio, or to understand their investments. We evaluate the client’s financial situation and determine the appropriate amount of risk they should take. We almost always reduce their overall investment costs. We diversify their stock portfolio and improve the quality of their bonds.

And then, at some point, the topic changes from investing to….

  • They want to discuss how to make significant charitable contributions to organizations that are near to their hearts.
  • They want to know how to fund a child’s or grandchildren’s college education.
  • They want guidance regarding Social Security. How and when should we start to take Social Security? Should we start taking distributions at age 62, 66 or wait until age 70? This decision has a large impact on your financial future.
  • If a client is self-employed, as a consultant for example, they want guidance on how they can make huge annual retirement contributions, so they can save for retirement and reduce their taxes.

It is through these various discussions and meetings that real change and impact can occur.

  • Can you help me with my estate plan? The client knows that their estate plan needs to be reviewed or updated, but is not moving forward and resolving issues. We help through discussions and creative ideas. We assist by clarifying relevant issues and ensure that these are put into their Estate Plan documents.
  • How much life insurance do I need or is our life insurance appropriate? We help them to analyze these issues and reach decisions.
  • Can you review the portfolio that we still have with another broker? The client says they don’t understand what the other investment professional is saying or what they are doing. They tell us that our approach to investing and the discussions they have with us are “understandable.”

As the relationships develop, the conversations grow. And the impact deepens.

  • We advise a client that they can afford to pay off their grandchild’s student loans. This makes the grandmother and granddaughter happy. Both are less stressed when the debt burden is gone.
  • We tell someone it was OK to take that special trip after a loved one was very sick. It is not always about the money. It is about living the life they want, while both are alive. They now have peace of mind that this “luxury” was the right thing to do.

You may meet with us initially about your investments, but we can provide you value in so many more ways. It usually begins with a conversation and we are here to listen. It’s more than investing; we want to make a difference in your life.