Maximizing Social Security Benefits

Posted on January 26th, 2009 in Newsletter Articles, Retirement Planning by wayne

 

As a “leading edge” Baby Boomer, I am often asked: “When should I begin taking Social Security benefits?” The answer to this question is dependent upon many variables. However, the key is to understand how the complex Social Security benefit rules can be used to maximize your family’s retirement income. In the following scenario, we see how understanding the complex Social Security rules can increase a couple’s Social Security benefits by over $60,000.

George has just turned 66, his full retirement age (FRA), and has not yet filed for his Social Security benefits. He plans on waiting until he is age 70 to file for Social Security. By doing this, he will receive “delayed retirement credits” that will provide him with 132% of his full Social Security retirement benefit. This will allow him to collect $2,640 per month instead of the $2,000 per month he would get at age 66.

George’s wife, Barbara, has recently turned 62 and would like to start collecting her Social Security benefits. At age 66, her benefit would also be $2,000 per month. However, at age 62, Barbara will only receive 75% of her full retirement benefit or $1,500 per month.

When George and Barbara meet with their financial planner, they discovered a little known way for George to get a benefit now and still receive the full delayed benefit of $2,640 when he reaches age 70. George can immediately file for a spousal Social Security benefit and receive $1,000 per month. This amount is 1/2 of Barbara’s FRA Social Security benefit, since George is already at his FRA. Together, George and Barbara will receive $2,500 per month, until George turns 70.

When George turns 70, he will apply for Social Security benefits based on his earnings. He will then receive his delayed retirement benefit of $2,640 per month. When George turns 70, their combined Social Security benefit will increase from $2,500 per month to $4,140 per month.

There is another important advantage to this approach. If George dies before Barbara, a likely scenario since he is four years older and a male, Barbara may apply for “survivor benefits.” This will allow Barbara to receive George’s benefit of $2,640 per month instead of her $1,500 per month, for the rest of her life.

Assuming both George and Barbara live until they are age 80, this approach will provide George and Barbara $59,520 more in Social security benefits than if George had merely filed for his full benefit at age 66. In this scenario, I assume that there is no inflation. When inflationary increases are included, the increased amount of additional Social Security benefits collected are even greater.

This approach may not suit your needs. However, it demonstrates that Social Security is a very complex system. The decisions that you make on when and how to receive your Social Security benefits can have a significant impact on the retirement income that you will receive.

Before you file for Social Security, meet with a fee only financial planner who understands the vagaries of the Social Security system. By analyzing your financial situation this expert can help you choose when and how to take your Social Security benefits.

IRAs: SEP, Roth and Traditional

Posted on January 26th, 2009 in Newsletter Articles, Retirement Planning, Taxes by wayne

Would you like to discover a way to reduce your 2008 taxes? Funding an IRA between now and April 15 is one of the few remaining methods to reduce last year’s taxable income. Let’s look at three popular IRAs to determine if a year-end contribution is appropriate for you.

For someone who is self-employed, a SEP IRA is often the best way to reduce your taxable income and save for retirement. If your company is an S or C Corporation, you can contribute up to 25% of your W-2 income to a SEP IRA. With a sole proprietorship or an LLC your maximum contribution is 20% of your income. In either case, the maximum annual contribution is $46,000 for 2008.

If you have any employees, you must contribute the same percentage of income for any employee that is over 21, has worked for you for at least 3 years and receives at least $550 in annual compensation.

If you have no self employment income, you may be able to contribute to a traditional, deductible IRA or to a Roth IRA. To determine if you qualify for an IRA contribution, let’s look at the rules for each type of IRA.

To contribute to a traditional IRA, you must be under 70½ years old and you(or your spouse) must have earned income. In 2008, your maximum IRA contribution is $5,000 ($6,000 if you are over age 50).

If you are covered by a company retirement plan, you can deduct the maximum amount when your Adjusted Gross Income (AGI) is no more than $53,000 as a single tax payer or $85,000 as a joint filer. If your spouse has no earned income, they can contribute the maximum amounts to their own IRA, even when you are covered by a company retirement plan, as long as your AGI is under $159,000.

To contribute to a Roth IRA, your Adjusted Gross Income (AGI) must be less than $101,000 as a single filer or $159,000 as a joint tax filer. Your maximum Roth IRA contribution is $5,000 ($6,000 if you are over age 50). However, if you make any traditional IRA contributions, the maximum Roth contribution amount is reduced by the amount that you contributed to the traditional IRA.

Based on IRS rules, the decision on which IRA to fund is often obvious:

1. If you are not covered by a company retirement plan and, as a single filer have an AGI over $101,000 or as a joint filer have an AGI over $159,000, you can only fund a traditional IRA.

2. If you are covered by a company retirement plan and your AGI is over $85,000 but less than $159,000 as a joint filer or over $53,000 but less than $101,000 as a single filer, you can only fully fund a Roth IRA.

3. If you are over 70½ and have earned income, you can only fund a Roth IRA.

Funding a Roth IRA has the following advantages over a traditional IRA:

1. When buying your first home, a Roth IRA allows the withdrawal $10,000 of growth and income plus all of your contributions, with no taxes or penalties on the withdrawal.

2. For people under age 40, the tax free growth and withdrawal of funds during retirement often make Roth IRA contributions a better, after-tax choice.

3. When funds are required before age 59½, a Roth IRA typically allows the withdrawal of Roth contributions with no taxes or penalties on the withdrawal.

4. A Roth IRA in your estate is an excellent method of passing tax free funds to younger generations.

If there are no compelling reasons to chose a Roth over a traditional IRA, decide on whether you wish to reduce your current taxes with a traditional IRA or reduce your taxes during retirement with a Roth IRA.

2009 Financial Abundance Forecast

Posted on January 6th, 2009 in Investments, Newsletter Articles by wayne

Being in the financial services industry, I am often asked for my financial forecast. Since my crystal ball is no better than yours, I never predict what the future may hold. However, by paying attention to macro-economic conditions, we can make informed investment decisions that will likely increase our total returns.

For 2009, there are some financial indicators that should be considered when planning investment strategies. Let’s examine how these indicators can be used to increase investment returns in 2009 and beyond.

When evaluating your investment portfolio, always consider economic and market conditions as part of your portfolio allocation process. In late 2007, seeing that future economic conditions were weak and the stock market was at an all time high, I decided to dramatically lower my clients equity (stock) positions and add a small position in gold. This decision has lead to significantly lower losses for my clients in 2008 than if they had stayed with their normal equity allocations.

In 2009, we know that economic conditions remain very weak and will likely show little improvement in the short term. We also know that the federal government is going to provide a huge economic “stimulus” program that will likely take the 2009 and 2010 budget deficits to a trillion dollars or more. Finally, we know that decreasing housing and oil prices have created a deflationary environment.

With this information, it appears that stocks will have a more negative than positive bias in the next few months. Therefore, I am not adding to my client’s equity holdings at this point. When market volatility decreases and company profits stabilize, I will slowly bring equity positions back to normal allocations.

Even though deflationary pressures will likely remain for a while, the Fed and the Treasury are determined to print as much money as necessary to reduce deflationary pressures. As the economy recovers, the additional dollars in circulation, combined with our exploding federal deficit, will provide an ideal environment for inflation.

If high inflation occurs, Treasury Inflation Protected Securities (TIPS) will be an excellent investment. 10 year TIPS are currently priced to reflect inflation of less than .5% per year, over the next ten years. If inflation exceeds this amount, TIPS will provide both inflation adjusted yields and an increase in price.

Another likely beneficiary of future inflation is gold. Gold can also be considered a “safe haven,” if economic conditions further deteriorate or the dollar weakens.  If you decide to add gold to your investments, keep your gold position to no more than 5% -10% of your portfolio.  As gold will likely fluctuate in price over the next few months, if you are patient, you may be able to buy it when the price of an ounce of gold is in the low $700s. The easiest way to own gold is through the SPDR Gold Shares Exchange Traded Fund (GLD).

There are many investment philosophies to choose from. After trying several different investment approaches over the past 25 years, I have found that following macro economic data can provide good insight on asset allocations and investments. Combining this information with a simple, diversified, index fund based portfolio has provided for excellent investment returns over the past seven years.

The Path to Financial Abundance

Posted on January 6th, 2009 in Financial Abundance, Newsletter Articles by wayne

During these stressful times of financial turmoil, are you finding it difficult to live with a sense of financial abundance? Have your decreasing financial assets increased your fear of financial uncertainty? Have you lost the feeling of serenity about your ability to meet your financial goals?

If you answered yes to any of these, now is the time to commit to actively managing, protecting and controlling your finances. To move from a fear of financial scarcity to a sense of financial abundance, it may be time to practice:

The 7 Steps to Financial Abundance

1. Spend less than you earn.
2. Maximize your financial resources.
3. Minimize your taxes.
4. Manage your investments.
5. Protect your financial resources.
6. Control your personal finances.
7. Have faith in continued abundance.

Transforming financial fear into financial abundance requires a personal commitment to actively managing your finances. While practicing the Seven Steps to Financial Abundance will not guarantee fiscal security, as a minimum it will help reduce your fear of financial scarcity, leading to more serenity about your finances.

To help you get started on the path to financial abundance in 2009, let’s focus on the two most important steps, Step 1 and Step 7.

Step 1: Spend Less Than You Earn

This step is critical to maintaining a life of financial abundance. The time from which you begin working until you retire is your “financial accumulation period.” During this time, you accumulate financial resources to pay for your children’s college education, buy and furnish your house, meet on-going financial commitments and provide for an abundant retirement.

Unfortunately, many people are not using these critical years to accumulate the financial resources required to meet their financial goals. Due to “easy credit” provided by credit cards, home equity loans, interest only mortgages, etc, many people spend more than they earn during their critical accumulation years.

In 2009, to increase your financial health, commit to following Step 1. Attempt to save at least 15 percent of after-tax income. If you have a 401(k) or other retirement savings plan, funding this plan can be an excellent, tax deferred method of meeting this goal.

When you do not have a company provided retirement savings plan, use the “pay-yourself-first” savings approach. On payday, make your first payment to your savings account. If you cannot afford an initial 15%, save 5% in 2009, 10% in 2010 and 15% in 2011. This “forced savings” approach requires you to make decisions between “must have” and “nice to have” items and helps you begin the journey to financial abundance.

Use your savings to pay off any credit card, home equity or other non-mortgage debt. Once this is accomplished, build an “emergency fund.” This is a fund with at least six months of after-tax income that can protect you if a short-term emergency occurs. With an emergency fund, you can weather a job layoff or short-term disability, without prematurely using funds from your retirement account.

If you are not certain about whether you are spending less than you earn, if you contact me and I will send you a free Excel based Budget Worksheet that allows you to determine your annual financial accumulation or deficit.

Step 7: Have Faith in Continued Abundance

Overcoming the fear of scarcity requires developing faith in your continued financial abundance. The first six steps to financial abundance are based on actions that you can control and financial habits that you can change. One these are practiced, you have done everything in your power to control your financial abundance.

The seventh step is a spiritual step in which you decide to turn over the things that you cannot control (the economy, the stock market, etc) to your higher power. Knowing that you have done everything possible to ensure your financial abundance, having faith in your continued abundance is critical to your financial serenity. Without faith, doubts and fears of the unknown and the uncontrollable will often become overwhelming.

Practicing the Seven Steps to Financial Abundance requires that you control consumer-driven consumption patterns, maximize and protect your financial resources and nurture faith that financial abundance will continue, as long as you do your part.

Some people find that they need help in practicing these steps. If you would like to practice the Seven Steps to Financial Abundance, but find that you require assistance in their implementation, I would be honored to serve as a guide to help you on this journey.