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Does Your Retirement Plan Include Inflation Risk?

By Retirement

Inflation may not always be top of mind when you think about planning for retirement. Of course, you will likely consider your current expenses, but you need to account for what the costs of those expenses could be over time.

None of us can predict the future, but we can plan. Inflation diminishes purchasing power over the years and increases the costs of services that retirees and pre-retirees need. Given that more Americans are living longer, it can pay dividends to include inflation risk in your overall planning.

The other issue we have to contend with when it comes to inflation is that we may be lulled into a false sense of security since government measures of inflation have been very low in recent years. In addition, safer investments like money market funds, CDs and government bonds generally yield less than the cost of goods and services that many of us need. This makes it difficult for our safe money investments to keep pace with our expenses.

Lower government inflation measures also have an impact on Social Security benefits. Among the features of Social Security is that benefits are generally adjusted each year for inflation in what is known as a cost-of-living adjustment, or COLA. In October, the Social Security Administration announced a 1.6% COLA that takes effect in December for some beneficiaries and by January for most.

The average benefit increase for retired workers with the recently announced COLA is estimated to be $24 to $1,503 per month. Married couples both receiving benefits will see a $40 increase, on average, to a monthly payment of $2,531. The cost-of-living adjustment for 2020 is lower than that of 2019, which was 2.8%, and 2018, which was 2.0%.

Getting the most out of your Social Security benefit is extremely important for your retirement and it’s nice to have a feature that steps up with inflation. However, adjustments tracking official government statistics likely won’t cover the higher expenses you will face throughout retirement, so planning is important.

Health Care and Medical Cost Inflation

Then there is health care, among the biggest costs you may encounter in retirement and even now if you are still working and saving for retirement. Medical cost inflation is real and it can negatively impact your savings if you don’t have a way to offset it.

The Centers for Medicare & Medicaid Services (CMS) estimated earlier this year that health expenditures are projected to increase 4.8% overall in 2019, up from 4.4% growth in 2018.

For those still working and covered by an employer’s plan, costs are outpacing wages and inflation. Since 2009, the Kaiser Family Foundation says average family premiums have increased 54% and workers’ contributions have increased 71%, several times more quickly than wages (26%) and inflation (20%).

If you are already enrolled in Medicare and have been incurring out-of-pocket expenses then you know the impact of what higher drug costs or services that Medicare doesn’t cover can do to your monthly budget. We often cite figures from Fidelity Investments, estimating that a 65-year old couple retiring in 2019 can expect to spend $285,000 in today’s dollars for health care and medical expenses throughout retirement. The figure doesn’t include long-term care.

Once you have an idea of what your expenses are, we can get started now on developing or updating your plan to account for inflation. The other thing to keep in mind is that while inflation has been low in the past decade, it is best to plan using higher long-term averages.

There are several ways we can address inflation risk, depending on your situation. Strategies and options could include how your investments are positioned over time and guaranteed income solutions that adjust periodically to keep pace with inflation. You will want to meet with us, too, for a plan to cover long-term care as these costs can be a significant financial risk. Now is also a good time to contact us to discuss Medicare because the current open enrollment period runs through December 7 if you want to make changes or switch plans.

Let us know how we can help! Contact Drew Financial Private Capital in Lutz, Florida at (813) 820-0069.

 

 

Sources:

“Social Security Announces 1.6 Percent Benefit Increase for 2020,” October 10, 2019. Social Security Administration. Retrieved from: https://www.ssa.gov/news/press/releases/2019/#10-2019-1

“National Health Expenditure Projections 2018-2027,” February 2019. Centers for Medicare & Medicaid Services. Retrieved from: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/ForecastSummary.pdf

“Benchmark Employer Survey Finds Average Family Premiums Now Top $20,000,” September 25, 2019. Kaiser Family Foundation. Retrieved from: https://www.kff.org/health-costs/press-release/benchmark-employer-survey-finds-average-family-premiums-now-top-20000/

“How to plan for rising health care costs,” April 1, 2019. Fidelity Investments. Retrieved from: https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs


References to J.W. Cole Advisors, Inc. (JWCA) are from prior registrations with that company. J.W. JWCA and Advisory Services Network, LLC are not affiliated entities.

The IRA Had a Birthday Last Month

By Retirement

The IRA can provide many gifts as part of a comprehensive retirement plan.

The Individual Retirement Account (IRA) turned 45 on Labor Day. On September 2, 1974, the Employee Retirement Income Security Act, or ERISA, was enacted into law, introducing broad safeguards to protect employee savings in both defined benefit plans like pensions, and defined contribution plans.

The intent of Congress in initially establishing IRAs was to provide a tax-advantaged retirement savings plan for those workers at businesses that weren’t able to offer pensions. The IRA also made it possible to preserve the tax-deferred status of qualified plan assets when an employee changed jobs or retired, paving the way for rollovers.

It was still several years before the 401(k) plan would arrive, not through legislation, but rather a private letter ruling from the Internal Revenue Service (IRS). However, the 1974 act would benefit 401(k)s through the flexibility of rollovers.

Today, the IRA plays a vital role for Americans saving for retirement. IRA assets totaled $9.4 trillion at the end of March 2019, representing nearly one-third of the $29.1 trillion U.S. retirement market. Assets held in IRAs have been growing at an annual average pace of 10% over the past 25 years, from $993 billion in 1993, according to the Investment Company Institute (ICI).

Millions of Americans use IRAs to save for retirement. An estimated 42.6 million U.S. households, or 33.4%, owned IRAs as of mid-2018. An estimated 33.2 million households owned traditional IRAs, making it the most common type of IRA. A total of 22.5 million households owned Roth IRAs, and 7.5 million U.S. households owned employer-sponsored IRAs such as Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plan for Employees (SIMPLE) IRAs, according to the ICI.

The types of IRAs have expanded since 1974. SEP IRAs were created in 1978 to offset concerns that complex regulations were preventing smaller businesses from offering retirement plans. SIMPLE IRAs were created in 1996 specifically for employers with 100 or fewer employees.

The popular Roth IRA came into being as part of the Taxpayer Relief Act of 1997, enabling retirement savers with the option of contributing on an after-tax basis, and the ability to take tax-free withdrawals, so long as they qualify with IRS rules. However, Roth IRA contribution limits and eligibility are based on your modified adjusted gross income, or MAGI. For 2019, that means only single Americans with a MAGI of $135,000 or less may invest in a Roth IRA; while the MAGI limit for married Americans is $199,000.

The Roth IRA can be a beneficial tax-planning tool. While the traditional IRA offers tax-deferred savings benefits, it can have a downside. Once you reach age 70½, IRS rules require you to begin withdrawing from these accounts through Required Minimum Distributions (RMDs). But Roth IRAs – which have accumulated more than $800 billion in assets since first becoming available in 1998 – allow you to potentially garner their tax advantages through conversions.

In a conversion, taxes are paid on any pre-tax assets in a traditional IRA or 401(k)-like plan (if you qualify) that are moved into a Roth. In 2010, income limits were lifted on conversions so, these days, you can convert your IRA assets to a Roth regardless of your income or marital status. However, it’s important to do these conversions carefully, because as of 2018, they are no longer reversible (called a recharacterization.)

Now is the time to give us a call, if you have tax-deferred retirement accounts and are concerned that RMDs could bump you into a higher tax bracket in the future. It’s a good idea to begin tax planning several years before retirement and keep your tax bill low with periodic checkups on your interest income, potential capital gains and losses, and other tax planning needs. This way, we can help you minimize a portion of the taxes you may have to pay.

Lack of knowledge is the biggest obstacle preventing Americans from investing in an IRA. According to a LIMRA Secure Retirement Institute (LIMRA SRI) study published in early 2019, only 34% of Americans believe they are knowledgeable about IRAs. Men are far more likely to say they are knowledgeable about IRAs than women. Forty-two percent of men consider themselves knowledgeable about IRAs, compared with just 27% of women. Of those who don’t own an IRA, nearly half (46%) felt they did not understand enough about IRAs to contribute to them.

When it comes to retirement planning, everyone can use a helping hand. It doesn’t hurt from time to time to get an external check on how you’re progressing toward your financial goals. Whether it’s what investment options might make sense for your traditional IRA, tax planning, Roth IRA conversions, guidance on saving for retirement or an income plan you can’t outlive, we’re here whenever you need us!

Contact Drew Financial Private Capital in Lutz, Florida at (813) 820-0069.

 

Sources:
“Happy Birthday, IRA! Congratulations on 45 Years,” September 12, 2019. Sarah Holden and Elena Barone Chism. Investment Company Institute. Retrieved from: https://www.ici.org/viewpoints/19_view_irabirthday
“Frequently Asked Questions About Individual Retirement Accounts (IRAs),” June 2019. Investment Company Institute. Retrieved from: https://www.ici.org/pubs/faqs/faqs_iras
“This is your last chance ever to reverse a Roth IRA conversion,” March 2018. MarketWatch. Retrieved from: https://www.marketwatch.com/story/this-is-your-last-chance-ever-to-reverse-a-roth-ira-conversion-2018-02-10
“LIMRA Secure Retirement Institute: Only 34 Percent of Americans Are Confident in their IRA Knowledge,” February 27, 2019. LIMRA Secure Retirement Institute. Retrieved from: https://www.limra.com/en/newsroom/industry-trends/2019/limra-secure-retirement-institute-only-34-percent-of-americans-are-confident-in-their-ira-knowledge/

 


References to J.W. Cole Advisors, Inc. (JWCA) are from prior registrations with that company. J.W. JWCA and Advisory Services Network, LLC are not affiliated entities.

Christopher Drew Joins an Elite Group of Financial Professionals at Annexus NYC

By News

Exclusive Advisor Training Focused on New Retirement Solutions

 (Tampa, Florida) – Christopher Drew, President of Drew Financial Private Capital, attended Annexus NYC, a conference for elite financial professionals, to learn the newest advanced planning strategies. The invitation-only event, sponsored by independent retirement solution design leader Annexus, provided advisors with fresh insights and new tools to help clients grow and protect their retirement savings. The attendees engaged with some of the world’s largest investment banks and academic thought leaders, including Yale University Professor Emeritus Roger Ibbotson, one of the nation’s most influential experts in asset allocation.

“Traditionally, people nearing or in retirement seek to reduce risk by increasing their allocation to bonds, but today is different,” said Professor Ibbotson. “Today’s low interest rates and longer durations mean that investors may see negative bond returns going forward. Traditional thinking may no longer apply.”

“The financial markets are more complex than ever,” said Annexus Co-Founder Don Dady. “People choose their advisor to help them find solutions. Our goal is to provide advisors with innovative alternatives to help reduce exposure to market volatility, manage retirement risks, and prevent clients from outliving their retirement savings.”

Christopher Drew was one of just 100 elite professionals from across the nation invited to Annexus NYC. “The way Annexus has been able to bring Wall Street and Main Street together made this event truly unique in the industry,” said Drew. “Expert speakers addressed industry-level trends in index design and demonstrated how to eliminate downside risk, benefit from potential market growth, and guarantee lifetime income.”1

“Our program is designed to help already exceptional advisors become even better, said Annexus Co-Founder Ron Shurts. “We provide an unparalleled level of expertise designed around smarter strategies to help meet clients’ retirement goals. Annexus NYC helps elite advisors become even better equipped to serve their clients.”

Christopher Drew, a local financial professional who helps clients prepare for a more secure retirement, is with Drew Financial Private Capital located at 16021 N. Florida Ave, Lutz, FL 33549.16021

1 Guarantees and protections are based on the claims-paying ability of the issuing carrier.

About Annexus
Annexus designs solutions to help Americans grow and protect their retirement savings.
For over a decade, Annexus has developed market-leading retirement-focused insurance products. Find out more about Annexus and its products at www.annexus.com.


References to J.W. Cole Advisors, Inc. (JWCA) are from prior registrations with that company. J.W. JWCA and Advisory Services Network, LLC are not affiliated entities.

Social Security

Are your Social Security benefits taxable?

By Tax Planning

The answer is: Yes, sometimes.

If you don’t have significant income in retirement besides Social Security benefits, then you probably won’t owe taxes on your benefits. But if you have large amounts saved up in tax-deferred vehicles like 401(k)s, you could be in for a surprise later.

AGI (Adjusted Gross Income) versus Combined Income.

You are probably familiar with what AGI, or adjusted gross income, means. To find it, you take your gross income from wages, self-employed earnings, interest, dividends, required minimum distributions from qualified retirement accounts and other taxable income, like unearned income, that must be reported on tax returns.

(Unearned, taxable income can include canceled debts, alimony payments, child support, government benefits such as unemployment benefits and disability payments, strike benefits, lottery payments, and earnings generated from appreciated assets that have been sold or capitalized during the year.)

From your gross income amount, you make adjustments, subtracting amounts such as qualified student loan interest paid, charitable contributions, or any other allowable deduction. That leaves you with your adjusted gross income, which is used to determine limitations on a number of tax issues, including Social Security.

Combined Income is a formula used after you file for your Social Security benefits.

Whether or not your Social Security benefits are taxable depends on your combined income each year, which is defined as your adjusted gross income (AGI) plus your tax-exempt interest income (like municipal bonds) plus one-half of your Social Security benefits.

The IRS provides a worksheet for this. (See the worksheet here: https://www.irs.gov/pub/irs-pdf/p915.pdf#page=16)

If your combined income exceeds the limit, then up to 85% of your benefit may be taxable. But in accordance with Internal Revenue Service (IRS) rules, you won’t pay federal income tax on any more than 85% of your Social Security benefits.

What are the combined income limits?

Social Security benefits are only taxable when your overall combined income exceeds $25,000 for single filers or $32,000 for couples filing joint tax returns.

If you file a federal tax return as an “individual” and your combined income is:

  • Between $25,000 and $34,000 – you may have to pay income tax on up to 50% of your benefits.
  • More than $34,000 – up to 85% of your benefits may be taxable.

If you file a “joint” return, and you and your spouse have a combined income that is:

  • Between $32,000 and $44,000 – you may have to pay income tax on up to 50% of your benefits.
  • More than $44,000 – up to 85% of your benefits may be taxable.

RMDs (Required Minimum Distributions) can be an unwelcome surprise.

Starting at age 70-1/2, you are required to start taking money out of your tax-deferred accounts, whether you need the income or not. These accounts include:

  • Traditional IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • Rollover IRAs
  • Most 401(k) and 403(b) plans
  • Most small business retirement accounts

There are precise formulas for calculating how much you have to withdraw each year based on the IRS Uniform Lifetime Table. If you miscalculate, or if you or your plan administrator fail to move the money by December 31, you could face a 50% tax penalty; there is no grace period to April 15.

NOTE: The table goes up to age 115 and beyond. You can find the IRS life expectancy table as well as an IRS worksheet for calculating RMDs here: https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

Simplified RMD example for illustrative purposes only:*

Let’s say you are single, age 72, and you have one qualified account—$400,000 was the value of your 401(k) plan as of December 31 last year. You divide $400,000 by your life expectancy factor of 25.6 which give you $15,625.

This is the amount that you have to take out of your 401(k), which will count as part of your AGI.

Simplified Combined Income example for illustrative purposes only:*

To continue with our simplified example, let’s say you, our 72-year-old single person above, receives $2,800 per month in Social Security ($33,600 per year) and you don’t have any other source of income besides the RMD taken from your 401(k) account as illustrated above.

Based on the combined income formula:

AGI = $15,625

+ Non-taxable interest = $0

+ Half of Social Security = $16,800

—————

Your total combined income is = $32,425   

Because you are over the combined income limit of $25,000 for an individual, but less than the $34,000 which would require 85%, you would pay taxes on 50% of your Social Security benefit.

###

At Drew Financial Private Capital, we provide retirement planning and Social Security benefit optimization, and we work in conjunction with your CPA or tax professional to help you consider taxes and how to minimize them as part of your overall retirement plan. Call us at (813) 820-0069.

* This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local taxes or penalties. The information in this article is provided for general education purposes only. Do not rely on this information for tax advice. Check with your CPA, attorney or qualified tax advisor for precise information about your specific situation.

Sources:

https://www.investopedia.com/ask/answers/013015/how-can-i-avoid-paying-taxes-my-social-security-income.asp

https://www.investopedia.com/terms/t/taxableincome.asp

https://smartasset.com/retirement/how-to-calculate-rmd

https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf



References to J.W. Cole Advisors, Inc. (JWCA) are from prior registrations with that company. J.W. JWCA and Advisory Services Network, LLC are not affiliated entities.

It’s Tax Season for Your 2018 Returns – Will You Owe More?

By Tax Planning

This year, the deadline to file your income tax returns is April 15, 2019.

As of early February of 2019, Time Magazine1 reported that many Americans who had already filed their 2018 taxes were shocked by their lower refunds this year likely stemming from the “Tax Cuts and Jobs Act” law that passed in December 2017, which significantly overhauled the tax code in the U.S.

“The initial batch of tax refunds in the first two weeks of the season declined an average of 8.7% from last year as of Feb. 8, according to a report from the Internal Revenue Service. 1

“Because so many pieces of the tax code shifted, it’s difficult to tell why certain people are affected differently than others, according to tax specialists and financial experts. 1

“Those most at risk for receiving less money in their tax refunds are taxpayers who itemize their deductions and have no dependents, homeowners in high tax states and employees who have unreimbursed business expenses.” 1

Retirees in lower tax brackets who don’t itemize and who live in states with low taxes will probably not be affected, or may even pay less because of the higher standard deduction, which nearly doubled.

“The rise in the standard deduction might mean that retirees can achieve roughly the same overall deductible by taking the standard amount as they could by itemizing.”2

But there is much uncertainty as people approach this tax season with trepidation about their own situation.

Healthcare rule changes when it comes to taxes.

There are a couple things you should know about healthcare expenses this tax season.

  1. You may be able to deduct more for unreimbursed allowable medical care expenses. 2

For the 2018 tax year, the IRS allows you to itemize and deduct healthcare expenses if they totaled more than 7.5% of your AGI (adjusted gross income).

As an example, if your AGI is $45,000, you can itemize and deduct healthcare expenses from the 7.5% mark, or $3,375, up to your amount spent. In this scenario, if you spent $5,375 on allowable unreimbursed healthcare expenses, you will be able to deduct $2,000 of them.

For the 2019 tax year, this percentage will revert back to 10%, so the allowable deduction will be lower going forward.

  1. The ACA is still in effect.

For retirees who don’t have health insurance or Medicare yet, know that the ACA mandate and penalty for not having health insurance is still in effect for the 2018 tax year.

The federal penalty will disappear in 2019 per the new tax code. However, some states—like New Jersey, Massachusetts and the District of Columbia—will still charge penalties. And lawmakers in Vermont and Rhode Island and other states intend to impose new state penalties in the future.3

Regardless of the law changes, many retirees are shocked to find that they owe income taxes in retirement.

For retirees who have saved up a lot of money in tax-deferred accounts like traditional IRAs or 401(k) plans, when RMDs (required minimum distributions) begin at age 70-1/2, the tax ramifications can hit hard.

  1. Many people even have to pay taxes on their Social Security income.5

RMDs are taxable as income. For individuals, if your combined income* is between $25-$34,000 (or between $32-44,000 per year for couples), you may have to pay income tax on up to 50% of your Social Security benefits. More than that, and up to 85% of your benefits may be taxable.

*The IRS defines combined income as your adjusted gross income, plus tax-exempt interest, plus half of your Social Security benefits.6

  1. When you start RMDs makes a difference.4

As you approach 70 1/2, you can choose to take your first minimum withdrawal during the year you turn 70 1/2, or you can take it by April 1 of the year after you turn 70 1/2. Your choice can have significant tax implications, because if you don’t take your initial minimum withdrawal during the year you turn 70 1/2, you must take two—and pay the resulting double dip of taxes—in the following year.

  1. Calculations for withdrawals are tricky—and doing it wrong can be costly.4

For each year, you must take at least the required minimum withdrawal by Dec. 31 of that year or owe the tax plus a 50% penalty. There is no grace period to April 15.

The calculations for withdrawals require you to take your Dec. 31 prior year tax-deferred account balances and divide by your life-expectancy figure (from Table III in Appendix B of IRS Publication 590-B) based on your age as of the end of the tax year. You may be able to aggregate balances if you have multiple accounts and take the RMD from only one account, or you may not be able to, depending on IRS rules.

  1. You may be able to delay 401(k) distributions if you are still working after age 70 1/2.4
  2. You may be able to donate an IRA required distribution directly to a qualifying charity and satisfy the taxes which would have been due.4
  3. Roth IRA accounts don’t have distribution requirements in retirement.5

However, Roth 401(k) accounts do require withdrawals starting at age 70 ½. Income tax is generally not due on a Roth 401(k) distribution, except for any untaxed portion matched by an employer.

 

 

Don’t try to do this alone, we’re here to help.

As a service to our clients, we provide retirement tax planning in conjunction with your tax professional or CPA. Let’s talk about how we can create a plan now to pay the proper amount of tax later in retirement. Call Drew Financial Private Capital in Sarasota, Florida at (813) 820-0069.

 

This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local taxes or tax penalties. Please consult your tax professional, CPA, personal attorney and/or advisor regarding any legal or tax matters.

Sources:
1 “Many Americans Are Shocked by Their Tax Returns in 2019. Here’s What You Should Know.” Time.com. http://time.com/5530766/tax-season-2019-changes/ (accessed March 11, 2019).
2 “How Will the New Tax Law Affect Retirees?” Fool.com. https://www.fool.com/retirement/2019/01/07/how-will-the-new-tax-law-affect-retirees.aspx (accessed March 11, 2019).
3 “Changes to Obamacare in 2019 and the Effect on the Premium Tax Credit.” TheBalance.com. https://www.thebalance.com/changes-to-obamacare-and-insurance-4582310 (accessed March 11, 2019).
4 “Understanding the IRA mandatory withdrawal rules.” MarketWatch.com. https://www.marketwatch.com/story/understanding-the-ira-mandatory-withdrawal-rules-2015-03-09 (accessed March 11, 2019).
5 “7 New Taxes Retirees Face.” Money.usnews.com. https://money.usnews.com/money/retirement/iras/slideshows/new-taxes-retirees-face (accessed March 11, 2019).
6 “Avoid Paying Taxes on Social Security Income.” Investopedia.com. https://www.investopedia.com/ask/answers/013015/how-can-i-avoid-paying-taxes-my-social-security-income.asp (accessed March 12, 2019).

 


References to J.W. Cole Advisors, Inc. (JWCA) are from prior registrations with that company. J.W. JWCA and Advisory Services Network, LLC are not affiliated entities.