Category: Financial Planning

If you haven’t evaluated your current mortgage rate, now is the time. The 30 year mortgage is hovering around 2.75% and the 15 year mortgage is closing in on 2.50%. The economic turmoil caused from the pandemic hasn’t been all bad. Homeowners and prospective buyers are benefitting from lower interest rates. It’s become the best time to buy or refinance a home.  There will be well over $1 trillion in refinancing originations this year and this translates into real savings for homeowners.

On the bank quarterly conference calls, the common challenge for management was struggling to keep up with mortgage demand and all the paperwork from refi’s. Last quarter, bank profits would have been at a record if they were not setting aside money for future loan defaults. This refi boom should continue for the foreseeable future. I don’t expect interest rates to increase any time soon until job growth picks up. The unemployment data is going the wrong way and it’s very possible that interest rates could continue to drop. Yesterday, CNBC wrote an article on mortgage rates and said that rates could go down to 2.25% on the 30-year fixed. This would all depend on if the U.S. economy shuts down again.

The headlines continue to be negative as daily infection rates are at highs. The good news is the time table for the vaccine has moved up to later this year. Vaccines that are under development by Moderna Inc. and the partnership between Pfizer Inc. and BioNTech SE should be available in 6 months. This week Pfizer received $1.95 billion to produce 600 million doses of the vaccine with the first 100 million promised before the end of the year. The question on investors minds is what will happen to the economy when you fast forward to December?

If the vaccine is successful, life will return to normal overnight. My expectation is that interest rates will rebound and this refi boom will be replaced by an economic boom. Given this scenario, there is still time to refinance or buy a home in the next 6 months. Markets should gain more strength if phase 3 trials for the vaccine are positive. Never has there been a time that with just a flip of a switch an economic depression will turn into an economic recovery. In the meantime, the market volatility will remain elevated. This week the overvalued technology sector went up 5% to start the week and then down 5% in finish the week. By the end of the week, most account balances took a round trip and finished where they had started the week. I expect more of the same because most of the major technology companies are reporting earnings next week. Investors also continue to be torn between selling because virus cases are spiking and buying because the vaccine is just 6 more months away.

Stay safe!

This week the US Government and Federal Reserve took dramatic steps to stabilize the economy. The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 was signed into law on Friday. This is a $2.2 trillion package, including nearly half a trillion dollars in individual rebate checks, another $500B for support of several severely-damaged industries, nearly $400B support including tax credits for wages and payroll tax relief, over $300B of support for state and local governments, and almost $150B for various initiatives to support hospitals and the health care system.

Below is a summary of the CARES Act (Source: https://www.kitces.com/). I wanted to share only the sections from my financial planning resource that might be applicable to your personal situation. If you own a small to mid sized business, I can email you those sections to learn more.

Please feel free to reach out to me if you have any questions on how this CARES Act impacts you. I’m still digesting it and if I don’t know the answer immediately, I can research and get right back to you with the answer. Please feel free to send your questions. Stay well!!!

Cares ACT (source: www.kitces.com) 

Perhaps no single provision in the CARES Act has received more interest from the general public than Section 2201, Recovery Rebates For Individuals. In short, people want to know whether they should be expecting a check from Uncle Sam, and if so, how much the check will be for.

The good news is that according to estimates by the Tax Foundation, over 90% of taxpayers should receive some amount of Recovery Rebate. The bad news is that thanks to the way the law was drafted, there may be a substantial number of people who could really use help right now who won’t qualify, and even for those that do, practical issues with how such payments may be distributed could substantially delay their receipt!

CALCULATING THE AMOUNT OF A TAXPAYER’S RECOVERY REBATE ADVANCE

As a starting point, the CARES Act provides a refundable income tax credit against 2020 income of up to $2,400 (more on this in a bit) for married couples filing a joint return, while all other filers begin with a refundable credit of up to $1,200. The credit amount then increased by up to $500 for each child a taxpayer has under the age of 17.

Thus, a single taxpayer with one child would be eligible for up to a $1,200 + $500 = $1,700 refundable credit, while a single taxpayer with two young children would be eligible for up to a $1,200 +$500 + $500 = $2,200 credit. A married couple, on the other hand, with one child and who file a joint return, would be eligible for up to a $2,400 + $500 = $2,900 credit, while the same couple with four children would be eligible for up to a $2,400 + $500 + $500 + $500 + $500 = $4,400 credit.

If you’ve read the last two paragraphs closely, you probably noticed a lot of “up to”s in there. And there’s a reason for that. As a taxpayer’s income begins to exceed their applicable threshold, their potential Recovery Rebate Payment (their credit) begins to phase out. More specifically, for every $100 a taxpayer’s income exceeds their credit, their potential Recovery Rebate will be reduced by $5.

The applicable AGI threshold amounts are as follows:

Married Joint: $150,000
Head of Household: $112,500
All Other Filers: $75,000
Example #1: Mickey and Jackie are married and file a joint return. They have 4 children, ages 10, 13, 15, and 17, and have $176,000 of Adjusted Gross Income (AGI).

As such, they are eligible to receive a maximum Recovery Rebate of $2,400 + $500 + $500 + $500 = $3,900! (Note: Recall that the potential Recovery Rebate is only increased by $500 for each child under 17, so only three of the couple’s children qualify.

But while $3,900 is the maximum potential Recovery Rebate the couple to which the couple could be entitled, they have income in excess of their $150,000 threshold amount. More specifically, they are $26,000 over their threshold amount, so their recovery rebate must be reduced by $26,000 x 5% = $1,300.

As such, the ultimate Recovery Rebate check that Mickey and Jackie will receive will be $3,900 – $1,300 = $2,600!

RECOVERY REBATES WILL BE DISPERSED BASED ON 2018/2019 INCOME BUT ARE ACTUALLY FOR 2020
One of the more confusing aspects of the Recovery Rebate is that it has a bit of a ‘split personality’, in that the initial amount paid will be based on either a taxpayer’s 2018 or 2019 income tax return (whichever is the latest return that the IRS has on file), while it will ultimately be ‘trued up’ if a taxpayer is owed money based on their actual 2020 income.

Coronavirus-Related Distributions

Mirroring similar relief that has been provided to individuals in Federally declared disaster areas in the past (for things like hurricanes, wildfires, and floods), the CARES Act creates Coronavirus-Related Distributions. Coronavirus-Related Distributions are distributions of up to $100,000, made from IRAs, employer-sponsored retirement plans, or a combination both, which are made in 2020 by an individual who has been impacted by the Coronavirus because they:

Have been diagnosed with COVID-19;
Have a spouse or dependent who has been diagnosed with COVID-19;
Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease;
Are unable to work because they lack childcare as a result of the disease;
Own a business that has closed or operate under reduced hours because of the disease; or
Meet some other reason that the IRS decides to say is OK.
Given the laundry list of potential individuals who may qualify for relief under this provision, it seems rather clear that Congressional intent was to make this provision broadly available. The IRS will likely operate in kind, and take a liberal view of who has been impacted by the Coronavirus enough to qualify for a Coronavirus-Related Distribution.

There are a number of potential tax benefits associated with Coronavirus-Related Distributions. More specifically, these include:

Exempt From the 10% Penalty – Individuals under the age of 59 ½ may access retirement funds without the normal penalty that would otherwise apply.
Not Subject to Mandatory Withholding Requirements – Typically, eligible rollover distributions from employer-sponsored retirement plans are subject to mandatory Federal withholding of at least 20%. Coronavirus-Related Distributions, however, are exempt from this requirement. Plans can rely on a participant’s self-certification that they meet the requirements of a Coronavirus-Related Distribution when processing a distribution without mandatory withholding.
Eligible to be Repaid Over 3 Years– Beginning on the day after an individual receives a Coronavirus-Related Distribution, they have up to three years to roll all or any portion of the distribution back into a retirement account. Furthermore, such repayment can be made via a single rollover, or multiple partial rollovers made during the three-year period. Finally, if distributions are rolled using this option, an amended return can (and should) be filed to claim a refund of any tax paid attributable to the rolled over amount.
Income May Be Spread Over 3 Years – By default, the income from a Coronavirus-Related Distribution is split evenly over 2020, 2021, and 2022. A taxpayer can, however, elect to include all of the income from a Coronavirus-Related Distribution in their 2020 income.
(Nerd Note: Although, in general, spreading the income of a retirement account distribution over three years is likely to result in a better tax outcome than including all the income in just a single tax year, that may not be the case now. Notably, if an individual is experiencing significant financial difficulty, and to meet expenses they take a Coronavirus-Related Distribution, it likely indicates lower-than-normal income, at least temporarily, for 2020. If higher income is expected in future years as life returns to ‘normal’, it may be best to include all the income on 2020’s return. Plus, as an added bonus, if some or all of the distribution is later rolled over within the 3-year repayment window, it’s only one tax return to amend!)

Enhancements To Loans From Employer-Sponsored Retirement Plans

Many employer-sponsored retirement plans, such as 401(k)s and 403(b)s, offer participants the option of taking a loan of a portion of their retirement assets. For individuals who have been impacted by the coronavirus (using the same definition as outlined above for Coronavirus-Related Distributions), the CARES act enhances the ‘regular’ plan loan rules in the following three ways:

Maximum Loan Amount is Increased to $100,000 – In general, the maximum amount that may be borrowed from an employer plan is $50,000. The CARES Act doubles this amount for affected individuals.
100% of the Vested Balance May Be Used – In general, once an individual has a vested plan balance that exceeds $20,000, they are only eligible to take a loan of up to 50% of that amount (up to the normal maximum of $50,000). The CARES Act amends this rule for affected individuals, allowing them to take a loan equal to their vested plan balance, dollar-for-dollar, up to the $100,000 maximum amount.
Delay of Payments – Any payments that would otherwise be owed on the plan loan from the date of enactment through the end of 2020 may be delayed for up to one year.
Required Minimum Distributions Are Waived In 2020
Section 2203 of the CARES Act amends IRC Section 401(a)(9) to suspend Required Minimum Distributions (RMDs) during 2020. The relief provided by this provision is broad and applies to Traditional IRAs, SEP IRAs, and SIMPLE IRAs, as well as 401(k), 403(b) and Governmental 457(b) plans. Furthermore, the relief applies to both retirement account owners, themselves, as well as to beneficiaries taking stretch distributions.

In one somewhat surprising twist, the CARES Act not only eliminates RMDs for 2020 but any RMD that otherwise needed to be taken in 2020. More specifically, individuals who turned 70 ½ in 2019, but did not take their first RMD in 2019 (and thus, would have normally been required to take such a distribution by April 1st, 2020,  as well as a second RMD for 2020 by the end of 2020) do not have to take either their 2019 RMD or their 2020 RMD! Thus, these procrastinators get to escape two RMDs instead of just one!

Relief For Student Loan Borrowers

The CARES Act includes several provisions aimed at providing relief to student loan borrowers, including the following:

Student Loan Payments Deferred Until September 30, 2020 – Section 3513 suspends required payments on Federal student loans though September 30, 2020. During this time, no interest will accrue on this debt. Unfortunately, though, while required payments are suspended, voluntary payments are not prohibited. And by default, payments will continue unless individuals take proactive measures to contact their loan provider and pause payments.

Also notable is that this period of time will continue to count towards any loan forgiveness programs. As such, any student borrower who intends to qualify for a program that will ultimately forgive the entirety of their Federal student debt (such as via the Public Service Loan Forgiveness program) should immediately pause payments. Because whereas other borrowers who continue to pay Federal student loans during this time may simply be paying down what is effectively 0% debt (at least temporarily), those borrowers who will ultimately have their outstanding student debt forgiven (upon completion of whatever requirements are necessary for their particular loan forgiveness program) are paying down a debt that would otherwise be wiped clean anyway!

Finally, all involuntary debt collections are also suspended through September 30, 2020. This not only includes wage garnishment or the reduction of other Federal benefits, but the reduction of any tax refund (for student loan purposes). As such, borrowers of student debt who are delinquent on payments and would normally be subject to a reduction of their tax refund have an incentive to file their tax returns early enough so that the refund is processed before this relief expires.

Employers Can Exclude Student Loan Repayments From Compensation – Section 2206 provides employers a (very) limited window of time in which they can take advantage of a special rule to aid employees paying down student debt. In general, amounts paid by an employer to an employee which are used to pay student debt (or payments made by an employer directly to the loan provider) are considered compensation to the employee, and are subject to income tax.

Under Section 2206, however, employers have from the date of enactment of the law, through the end of the year, to provide employees with up to $5,250 for purposes of student debt payments, and exclude those amounts from their income. This amount, however, is coordinated with the ‘regular’ $5,250 limit that employers can provide employees tax-free for current education. As such, total maximum tax-free education assistance an employer can provide an employee in 2020 is $5,250.

Pell Grant and Subsidized Federal Student Loan Relief For Students Leaving School – Both Pell Grants and Subsidized Federal Student loans are subject to various limits. Section 3506 of the CARES Act excludes from a student’s period of enrollment any semester that a student does not complete due to a qualifying emergency. Section 3507 does the same with respect to the Federal Pell Grant duration limit.

Curiously, both provisions are contingent upon the Secretary of Education being “is able to administer such policy in a manner that limits complexity and the burden on the student.” Upon first glance, these provisions would appear to create far more “burden” for the Secretary of Education than they do on the student!

Finally, if a student withdraws from school during the middle of a semester (or equivalent) because of qualifying emergency, Section 3508(b) eliminates the amount of a student’s Pell Grant that would normally have to be returned, while 3508(c) cancels any direct loan that was taken to pay for the semester.

For the many who have already lost their jobs, and for the countless more who will likely find themselves subject to the same fate in the coming weeks, there is, thankfully, some (relatively) good news. Unemployment compensation benefits have been significantly expanded by the CARES Act. These enhancements include:

Pandemic Unemployment Assistance – Self-employed individuals (who are generally ineligible for unemployment compensation benefits), and other individuals who are ineligible for ‘regular’ unemployment, extended unemployment or pandemic unemployment insurance, or run out of such insurance, will be eligible for up to 39 weeks of benefits via this provision.

Uncle Sam Will Cover Unemployment for the First Week of Unemployment – In general, individuals are ineligible to receive unemployment benefits the first week that they are unemployed. It essentially amounts to an elimination period that’s meant to encourage people to try and get another job quickly so as to avoid the week without income. Of course, at present time, finding work quickly is difficult, if not impossible. And in recognition of this fact, the CARES Act offers to pay to states to provide unemployment compensation benefits immediately, without the ‘normal’ one week waiting period.

‘Regular’ Unemployment Compensation is ‘Bumped’ by $600 per Week – Section 2104 of the CARES Act provides states with the ability to increase their unemployment benefits by up to $600 per week with Federally funded dollars, for up to four months. This has the ability to dramatically increase the amount of money an individual is entitled to temporarily entitled to receive via unemployment compensation benefits, as the average weekly unemployment benefit nationwide is under $400! Thus, the many individuals will see their unemployment checks increase by 150% or more thanks to this part of the CARES Act.

Unemployment Compensation is Extended by 13 Weeks– In the event that people are nearing – and ultimately reach – the maximum amount of weeks of unemployment compensation provided under state law, Section 2107 of the CARES Act will allow them to receive such benefits for an additional quarter.

The Setting Every Community Up for Retirement Enhancement Act, also known as the SECURE Act, was signed into law on Friday, December 20.  This was a sweeping legislative reform that could impact your retirement plan. In my opinion, the SECURE Act is not a beneficial change for many of my clients. What it is gives with one hand, it takes away with another.

Here are the three provisions that matter most to anyone with an IRA.

• Required Minimum Distributions (RMDs) Will Start at Age 72, not 70½
  Starting January 1, 2020, the age increased to start a RMD from age 70 ½ to age 72.  If you turned 70½ in 2019, then you will still need to take your RMD for 2019 no later than April 1, 2020. If you are currently receiving RMDs because you are over age 70½, then you must continue taking these RMDs. Only those who will turn 70½ in 2020 or later may wait until age 72 to begin taking required distributions.
• You Can Contribute to Your Traditional IRA After Age 70½
  Beginning in the 2020 tax year, the new law will allow you to contribute to your traditional IRA in the year you turn 70½ and beyond, provided you have earned income. You still may not make 2019 (prior year) traditional IRA contributions if they are over 70 ½.
• Inherited Retirement Accounts
  This is the most notable change resulting from the SECURE Act. The law eliminated the “stretch” provision for most (but not all) non-spouse beneficiaries of inherited IRAs and other retirement accounts. Now upon death of the account owner, distributions to individual beneficiaries must be made within 10 years. The government is now going to be able to get their taxes sooner. There are exceptions for spouses, disabled individuals, and individuals not more than 10 years younger than the account owner. Minor children who are beneficiaries of IRA accounts also have a special exception to the 10-year rule, but only until they reach the age of majority.

This was the second major Congressional action within the last few years. It’s a good reminder that the rules of the game can change at any time. I recommend that you should take advantage of the rules that are in your favor before the government has a third major overhaul. The Roth IRA is the best retirement deal that the U.S. Government can give you. There is no better investment account than one that grows tax-free. I wouldn’t be surprised if the rules of the Roth IRA was eventually changed as well. The backdoor Roth IRA right now is a legal way to get around the income limits for normally restrict high-earners from contributing to Roths. This loophole could eventually be closed.

As for Social Security, I don’t see any sweeping changes in the near term. I anticipate that at some point the retirement age to claim Social Security benefits will be moved to 69 or 70.  If you have any questions regarding how these rule changes will impact your retirement plan, please feel free to send me an email or give me a call to discuss the change.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

I recently heard a radio advertisement for a Home Equity Line of Credit (HELOC). The bank that paid for the radio spot was one of the largest financial service companies in New England.  I’m sure this bank does many things well to help their customers, but in this case, they are not doing what is in their best interests.

There are many justifiable reasons to tap into the equity of your house. Families have used the equity in their homes to pay for home improvement, education, a health emergency, or to even help pay for the costs associated with a transition into a new career. This bank was advertising a HELOC for all the wrong reasons. They were trying to sway the audience to use a HELOC to buy a new car, take a dream vacation, or to consolidate all their debt.

Someone paying for a vacation with a home equity line will unlikely need any retirement planning. The dream vacation will last a week, but the HELOC loan will last a decade.  This advertisement actually endorsed skipping out of work to take that dream vacation.

If a vacation wasn’t your fantasy then this advertisement wanted you to buy that vehicle of your dreams. There is a reason why most auto loans are only for 5 years and not 10-15 years like a HELOC.  The car will eventually be worthless, while the interest on the HELOC will likely rise.  I could almost guarantee that the person who had a weak moment and used the HELOC to go on a vacation or purchase a car will have a bad case of buyers remorse when that first HELOC statement is delivered in the mail.

Amy Hoak wrote a post on MarketWatch and she said that financial planners caution homeowners against using home-equity loans to fund short-term expenses, including vacations. According to results of a recent Discover Home Equity Loans survey, the most popular use of money for a HELOC was taking a vacation for more than half of U.S. homeowners (ages 30 and 34 who have owned a home for three years or more).

These advertisements are very effective or they wouldn’t be running.  The likely target market and demographic for this advertisement, which aired on a sports radio show, are the millennials that never lived through the credit crisis. They must not realize that their home equity can disappear overnight.

A HELOC should never be used for any short-term splurges. A good case can be made to take out a HELOC for an emergency or to cover medical expenses. I realize that all of my readers are already financially savvy enough and know much better than to take a HELOC to take a vacation or buy a car. I wrote this post because it’s always good to know what other people are doing with their money. As we all learned in the technology bubble and credit crisis, it’s other peoples follies that can indirectly impact your employment, savings, and home value. Let’s hope that nobody acted on this advertisement because living through one credit crisis was enough for one lifetime.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Reshma Kapadia wrote a solid article in Barron’s last week titled, How Your Kids Can Ruin Your Retirement — and How to Make Sure They Don’t. This story resonated with me because I work with a number of clients that have set goals to delay retirement into their late 60’s so that they can help pay down their children’s college debt.  There are now more than 44 million parents and students who owe collectively over $1.5 trillion in education debt. This is about $521 billion more than the total U.S. credit card debt and $400 billion in U.S. auto loan debt. This election season, I expect that the debate over student loans is going to heat up.

Senator Bernie Sanders is championing the cause with this plan called College for All Act to Eliminate Undergraduate Tuition at 4-year Public Colleges and Universities. This legislation would provide $47 billion per year to states to eliminate undergraduate tuition and fees at public colleges and universities. I may not agree with much of Senator Sanders socialist agenda, but I do agree with helping students to re-finance their loans into more reasonable rates. I have reviewed many student loan statements and have seen students with frightful interest rates as high as 10%. The average student loan has interest rates between 6-7%. It’s no wonder why 70% of parents surveyed by T. Rowe Price said they would be willing to delay retirement to pay for college. Many of their children can’t even pay off the interest alone never mind the principal. I have one client with a child that graduated with $180,000 in debt and the interest in the last few years has increased the outstanding balance to $210,000.

Two stats in Reshma’s Barron’s article did not surprise me at all. The first was that nearly 80% of parents give some financial support to their adult children—to the tune of $500 billion a year, according to estimates by consulting firm Age Wave. That’s twice what parents put into retirement accounts, according to a 2018 survey from Bank of America Merrill Lynch and Age Wave. The second was that about 15% of 25- to 35-year-olds were living at home in 2016, based on a Pew Research report. That’s five percentage points higher than the share of Generation Xers living at home when they were the same age, and almost double the share of today’s older retirees who were in the same situation years ago. (source: Barron’s, Reshma Kapadia)

This article was written from the parent’s perspective. If it was written from the child’s perspective, Reshma would have likely highlighted how more young adults do not have enough money to afford a mortgage or how they are delaying marriage or putting off having babies.

U.S. Department of Education Secretary Betsy Devos says that student loan debt is now a crisis. The average student in the Class of 2017 has almost $40,000 in student loan debt. DeVos raised a “red warning flag” that student loan debt is crippling students, federal taxpayers and stealing from future generations. I’d take it one step further and predict that if student debt triples again, massive amounts of student debt could possibly trigger an economic slowdown.

I’m sure this topic touched many of you reading who have adult children.  I recognize that most of my retired clients greatest accomplishment was helping to put their children through college and how they sacrificed a large part of their own retirement savings to achieve this meaningful goal.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Ken Fisher hates annuities. You can find him on what seems like every other CNBC commercial screaming how much he despises annuities.  He calls variable annuities obtuse, confusing, and hence rarely read. The sales reps that are paid obscenely large commissions don’t even know what they are selling most of the time.

People buy variable annuities because they want stock exposure but don’t want to lose money in the stock market. They soon realize that there is no free lunch. The Financial Industry Regulatory Authority once sent out an investor alert that, the marketing efforts used by some variable annuity sellers deserve scrutiny—especially when seniors are the targeted investors. Sales pitches for these products might attempt to scare or confuse investors. One scare tactic used with seniors is to claim that a variable annuity will protect them from lawsuits or seizures of their assets. Many such claims are not based on facts, but nevertheless help land a sale.

An annuity is not an investment.  It is a product designed so that someone will not outlive their savings. They give up most of the upside of the S&P 500, but gain the certainty that a check will be in their mailbox each month. The guaranteed income in a very strong selling point.  When the stock market sells off and investor fear is high, annuity sales will always increase. In the midst of the 20% downturn back in November 2018, variable annuity sales went up 25% over a one year time period.

I believe that if I gave a 20 question exam on the bells and whistles of a variable annuity to a potential owner, they would fail. Most variable annuity buyers don’t understand the products. Here are a few reasons why  variable annuities are not a good product solution:

• There is no step-up in basis – A nonqualified annuity does not provide a step-up in cost basis at death. All of the deferred earnings (gains) will be taxable as ordinary income to a non-spousal beneficiary.
• Beware of the penalties – The surrender schedule of 8%, 7%, 6%, 5%, 4%, 3%, 2% indicates a 7-year surrender period. These schedules are long because they lock in buyers after they realize that they made a bad decision.
• High Expenses – The mortality expense, administrative fees, fund fees, special fees, will eat away investment returns at a clip of over 2% a year.
• No tax advantage for IRA’s – Investing in a variable annuity within a tax-deferred account, such as an individual retirement account (IRA) is a bad idea. Since IRAs are already tax-advantaged, a variable annuity will provide no additional tax savings. It will, however, increase the expense of the IRA, while generating fees and commissions for the broker or salesperson (Source: FINRA Investor Alert).
• No inflation hedge – During the annuitization phase the payout is a fixed payment that will not hedge against rising inflation.
• Limited investments – The investments inside many variable annuities have layered fees and many of the insurance companies will limit investment options to lower risk funds.
• Horrible death benefits – Your beneficiaries could potentially lose a substantial part of your annuity if they take the full cash value (immediate payout option) upon your death. They might be forced to take your annuity over 5 years to get the full death benefit.

Even though I’m not a fan of variable annuities, there are a few types of annuities that I would recommend to clients. An immediate fixed annuity is an appropriate product to provide a paycheck for life with a guaranteed income. This annuity could be a great way to manage risk and limit exposure to market volatility. It would also improve diversification and transfer all the risk to the insurance company.

If you want to learn more about annuities, I can provide you with a second opinion to find out if it’s the right fit for your retirement plan. Like all financial decisions, every choice is unique to your own personal situation and risk tolerance.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

One of most important decisions that you will make near retirement is when to take Social Security benefits. The internet is full of websites, recommendations, and articles on the best claiming strategies. It’s a complicated system and since the Social Security administrators don’t understand your unique personal situation, they can neither provide advice nor make recommendations.

The federal deficit clock recently surpassed $22 trillion and isn’t slowing down anytime soon. If anything, it’s been speeding up. The language that the Social Security Administration (SSA) added to every benefit statement this year is a follows: “By 2034, the payroll taxes collected will be enough to pay only about 77 percent of scheduled benefits.” This system is eventually going to run out of money (I added that last sentence). 🙂

The government will likely change the rules.  They always do. The last major change to Social Security was in 2016 when they ended the popular strategy known as “file and suspend”.  I expect that some benefits will be cut in the near future.  President Trump’s fiscal 2020 budget proposed spending $26 billion less on Social Security programs, including a $10 billion cut to the Social Security Disability Insurance program. I’m sure by 2034 the rules will have changed drastically.

It’s impossible to know when the government will change the rules and it is only a guess at this stage. It’s best to assume that the program will continue and that the decision on when to take Social Security should only be made after reviewing a full retirement financial plan. There are just too many considerations to factor in on when to take the benefits.  They include tax consequences, saving rates, investments, cash flows, budgets, insurance coverage, spousal benefits, and work history.

Most people claim benefits as soon as they qualify at age 62. Approximately 34% of people start collecting at their earliest retirement age or age 62. Social Security reduces your benefit by ⁵/9 of 1% for every month you claim before full retirement age, up to 36 months. Over 36 months, then your benefit is further reduced by ⁵/₁₂ of 1% per month. Taking benefits early at 62, amounts to 25% to 30% less than what you would get by waiting until your full retirement age (66 or 67, depending on the year you were born).

Only 3.7% of people delay their retirement benefits to age 70. From your full retirement age (66 or 67) up until age 70, you can receive delayed retirement credits of an 8% increase for every year that you delay.  Since Social Security payments are indexed to inflation, it is the best annuity that you can own. Delaying your benefits puts you in the best position to get the most out of the system.  The table below provides a good visual breakout of when people claim Social Security.

My recommendation for most people is to claim Social Security at their full retirement age. The chart above is exactly what I would have predicted. The majority of people claimed early and the next largest group waited until their full retirement age. With rising health care costs and life expectancy rates rising for retirees, the people that delayed their benefits will be able to keep better pace with inflation.

I plan to take my social security when I turn 70 but that’s not because I want to make the extra 8% per year from 67 to 70. I believe that my full retirement age will be increased to 70 at some point in the next few decades. I’d be shocked if my full retirement age was still 67 in 20 years.  If you have any questions on this topic, I can prepare a personalized analysis on when it is the best time for you to take Social Security.

Please read our disclosure statement regarding the contents of this post and our website as a whole.