All Things Financial Planning Blog


Social Security

Coming ‘Of Age’ – ‘Retirement Age’ That Is…As more and more of our ‘baby boomers’ come of age and near the time for applying for social security benefits, I thought it might be appropriate to review a little bit about our social security benefit program as it applies to everyone.

It is extremely important to understand what our social security options are before we make a potentially irrevocable decision about taking and receiving our benefits as the dollar amounts received over our lifetimes could be meaningfully more!

Taxes – Funding Benefit and Receiving Benefit
Social security benefits are funded by contributions made through payroll taxes that are half paid by the employer and half paid by the employee with self-employeds effectively paying both halves. When we receive social security benefits they are income tax free unless you ‘make too much money’.

So managing income recognition and managing the character or type of income (cash flow) received when we are drawing social security benefits can be extremely important in maximizing what we keep of this otherwise income tax free benefit!

Social Security Benefits Started Before Full Retirement Age (FRA)
If you start your social security benefits before FRA you will receive a reduced benefit of about 75% at age 62, about 80% at age 63, about 87% at age 64 and age 65 about 93%. Another complication of drawing social security before the year in which you turn FRA is that if you keep working you will have to give back some of your social security earnings.

In 2013 that $1 of ‘giveback’ for every $2 of earned income starts when you make more than $15,120. In the year you reach FRA the ‘giveback’ becomes $1 for every $3 of earnings above $40,080 (2013 amount).

Social Security Benefits Started At Full Retirement Age (FRA)
Social security benefits are calculated based on a minimum of 40 credits (quarters of covered work) to be eligible for benefits. Depending on your birth date, your age of retirement, FRA, will vary between 65 and 67 years of age (if you were born after 1960).

The Social Security Benefits Administration has a calculator for you to run some what-ifs about choosing a retirement date. They also have other calculators that can run estimated benefits, offset effects (see discussion below), etc., etc. Besides the when to take retirement question, there are other strategies to consider in maximizing the social security benefits to be received.

One such strategy is called ‘file-and-suspend’ which may allow a qualifying recipient to suspend payments while the spouse files for spousal benefits.

Another strategy comes available to us when we have been married to another for at least 10 years. In those cases, you may qualify for benefits based upon the former spouses earnings. If you wait until your FRA, you can file on your former spouses earnings for a spousal benefit and delay taking your retirement until age 70. This strategy will not work if you apply for the spousal benefit before FRA!

Social Security Benefits Started At Age 70 (Post-FRA)
By waiting until age 70 to draw upon our social security benefits a person born after 1943 would have their FRA benefit increase 8% per year by waiting until age 70! Very compelling, indeed!

Social Security Benefits Post the Windsor Supreme Court Decision
As a result of the US Supreme Court decision on same sex marriages the Social Security administration is no longer prohibited from recognizing same-sex marriages for purposes of determining benefit claims filed after June 26, 2013. The decision and its social security benefits impact are being discussed by the Administration and exact details on same-sex marriage benefits will be forthcoming.

Medicare Starts At Age 65
Social security is one matter, Medicare is another! If you do not sign up for Medicare at age 65, your Medicare coverage may be delayed and cost more!

‘Other Pension’ Offsets to Social Security Benefits Received
Two issues that could impact your benefit received are the following.

  • Government Pension Offset. If you receive a pension from a federal, state or local government based on work where you did not pay Social Security taxes, your Social Security spouse’s or widow’s or widower’s benefits may be reduced.
  • Windfall Elimination Provision. The Windfall Elimination Provision primarily affects you if you earned a pension in any job where you did not pay Social Security taxes and you also worked in other jobs long enough to qualify for a Social Security retirement or disability benefit. A modified formula is used to calculate your benefit amount, resulting in a lower Social Security benefit than you otherwise would receive.

Survivors Benefits and Benefits for Children
Benefits can be made available to others based on our benefit should we die or become disabled. Two of those are survivor benefits (spouse) and benefits for children.

  • Survivor Benefits. Your widow or widower may be able to receive full benefits at full retirement age. Your widow or widower can receive benefits at any age if she or he takes care of your child who is receiving Social Security benefits and younger than age 16 or disabled.
  • Benefits for Children. Children of disabled, retired or deceased parents may be entitled to a benefit. Your child can get benefits if he or she is your biological child, adopted child or dependent stepchild. (In some cases, your child also could be eligible for benefits on his or her grandparents’ earnings.)

To get benefits, a child must have:

  • A parent(s) who is disabled or retired and entitled to Social Security benefits; or
  • A parent who died after having worked long enough in a job where he or she paid Social Security taxes.
  • The child also must be:
    • Unmarried;
    • Younger than age 18;
    • 18-19 years old and a full-time student (no higher than grade 12); or
    • 18 or older and disabled. (The disability must have started before age 22.)

Concluding Thoughts.
Social security benefits have been providing a ‘safety net’ to our citizens since the program came into existence.

Pre-retirement benefit programs like ‘Benefits for Children’ and ‘Surviving Spouses’ provide support to those qualifying families who have lost a breadwinner.

Retirement benefit program options are diverse and not readily understood by many. For some households social security retirement benefits comprise as much as 85% of household income so ensuring that one receives as much as is legally possible of the benefits that they have earned the right to, is so important! Consult with your advisor before you make any decisions. You may well be bound to them for your lifetime!

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA


Not Your Father’s Retirement Plan

Personal-DebtA recent article in Time featured a study by the Deloitte Center for Financial Services suggesting many American pre-retirees are throwing in the towel when it comes to saving or planning for retirement. Insufficient savings combined with the market downturn five years ago, a housing bubble, extended low interest rate environment and a Federal government seemingly bent on making it difficult to plan for the long term has created a perfect storm for many. This will be a significant problem facing Boomers over the next few decades.

But, this blog is not meant for those near retirement. This is for the Millennials entering the workforce and the Gen Y folks already there. It’s a brief wakeup call about your future financial goals and retirement plans. The short version – you’re on your own. Your retirement plan is not and cannot be that of your parents.

For most, pensions are a thing of the past. 401(k)s and similar plans are great places to start saving, but have their limitations. Social security is likely headed for substantial reform that will leave future benefits unclear. Medicare will face significant changes over the long run. Many of the sources past generations have relied on to help care for them in their later years are more vulnerable than ever before.

Sound frightening? It is. But it’s no excuse to throw in the towel. Inaction is not an option. There are simple, but not always easy ways to put meaningful plans and processes in place to enjoy today while keeping a mindful eye on tomorrow. You just have to be willing to commit to a plan and stay true to your own values.

The bottom line? Knowledge is the key. Not about which stock to pick or what your magic number is for retirement. Instead, you need a firm grasp on what you really value in life, what you want to do for your children or others close to you, and a realistic view of what resources you have and how much you’re willing to balance those resources between goals for today and those for tomorrow. You need to revisit these questions on a regular basis to make sure you’re on track and be clear in how you communicate expectations to all those impacted by your financial decisions.

I’m no pessimist. Quite the opposite as I think the future ahead is very, very bright. I also believe that we can meet our goals, provided there’s a plan in place, we stay true to that plan, protect against the unexpected to a responsible degree and really have a grasp on what’s important to us as early as humanly possible.

The most dangerous things we put off are those that are important, but not urgent. The best time to start mapping out your plan for today, tomorrow and well down the road is now. It may not feel urgent, but it may be the most important thing you do any time soon. The you that is 20, 30 and 40 years down the road is counting on you.

Chip Workman, CFP®, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, OH


How Accurate is Your Retirement Model?

Insider’s Guide to Finding a Financial PlannerI recently had the opportunity to revisit retirement modeling software. As one of my jobs, I teach a economics course, and one of the things I tell my students and financial advising clients is that models can provide us with ideas of how things may work, but with all of the independent variables that exist in the world, they aren’t likely to play out like we hope.

I was revisiting modeling software in part due to a recent critic of those that do not use “advanced” software to project hypothetical outcomes for clients. I used to. I’ve since given it up for many reasons. Mostly because I’ve seen life-changing decisions being made based on a model. “Mr. & Mrs. Client, you can take $50,000 out of your portfolio to buy that RV, and still feel secure in your retirement.”

That was 2007’s annual review of the model. After the market drop, the model was quite different, but the investor at least had a 2nd mobile home now.

Retirement models, like economic models or model trains, can show us a lot about the thing we’re modeling, but it is no substitute for ongoing advice and planning. And, modeling a few worst cases along with the normal case is the least you should do when making decisions based on models.

Of utmost importance however is that you understand the assumptions and factors being used. I can not begin to describe the number of retirement models I’ve seen that were so flawed with incorrect data and bogged down by assumptions. There are often static assumptions (I save $6,000 to my IRA every year), and variable assumptions (rate of investment return).

In my opinion the mixing of so many assumptions in one software package most often leads to incorrect projections. For example, most individuals savings can be variable. You may make a Roth IRA deposit this year, you may not. But, how you project for it makes a difference in the outcome. Are you taking Roth IRA contributions from one account and putting it into another, depleting your savings in order to do so? Does your modeling software know the difference? If you know enough to tell it to.

Do you own a business? How is that being treated? Investments? What assumptions are being used for rates of return, interest, inflation…?

A recent tread is to model various social security strategies that couples may be able to benefit from. One variable that many who do this on their own may forget is the life expectancy. If you just ran the model without thinking beyond the various scenarios, would it give you the right answer, or is this just a case of garbage in, garbage out?

For that reason I strongly recommend a second opinion on any retirement strategy. Retirement models do not take into account the complexities that exist with the individual choices that feed into your personal financial plan. FPA’s PlannerSearch tool can help you find local financial advisors to give feedback on your financial plans, and advice on the strengths, or weaknesses, of your retirement projections and plan.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Clear Financial Advisors, LLC
Royal Oak, MI


How A Six-Year-Old Saves For Retirement

In our society of conspicuous consumption and spending-beyond-means, many parents face an uphill battle to encourage children to save for the future, resist instant gratification, and most importantly, understand how to budget and use credit wisely. At a recent dinner party with a group of parents with young children, the conversation turned to this exact topic. When I shared how I teach our kids about money, these parents encouraged me to write an article to share my approach. This article explains how my wife and I attempt to instill financial values in our six-year-old son. I recently began giving our six year old an allowance, but with a twist.

It’s never too early to learn about taxes. As Benjamin Franklin said, “The only things certain in life are death and taxes.” My six-year-old receives a gross allowance of $6 per week (one dollar for each year of his age), in the form of one-dollar bills. From this $6, he has to pay $1 in taxes to the Oghoorian-Family-IRS. In this way, he experiences the impact of “earning” (in this case getting) money and having to pay a portion of it to taxes. Of course the first thing he asked when I first collected taxes was what exactly his taxes pay for; my response was that his taxes pay for food, shelter, travel, and other services we deem “public” goods. So far, our son is subject to only a flat tax. But as his allowance grows with age (and he learns percentages), so will his tax bracket. I just hope he doesn’t get ensnarled in the Alternative Minimum Tax.

After paying taxes, our son must allocate another $1 toward savings; “forced savings”. Unlike the $1 tax that’s taken by the IRS, he gets to keep the $1 savings per week in a separate part of his cash box so that he can see it grow (rather than as a theoretical value he would see on a bank statement.) His savings rate is only 17 percent of his gross allowance, which is less than I typically recommend to my clients, but I wanted to keep things simple and in round numbers for now. Once he learns percentages, he will be required to save at least 20 percent.

Should our son be inclined to spend more than his net allowance, he may be granted a loan from the Bank of Mom & Dad at prevailing market interest rates charged by credit cards. A lower rate may be available if he’s willing to collateralize one of his toys. This will hopefully teach him the negative impact of interest as a debtor.

Keeping Track:
I also created a ledger, similar to an old checkbook for those of you who still remember them, for our son to write down his gross allowance, itemized deductions, calculate his net weekly allowance and his cumulative earnings and savings. This exercise strengthens his math skills and further reinforces the concepts already discussed.

Of course this is just the beginning. As our son learns more about money and saving, I will begin to introduce financial priorities that are important in our family such as charitable contributions and investing savings for capital appreciation. While he will certainly have to pay capital gains tax on his investment earnings, I haven’t decided yet whether to give him a tax deduction for his charitable contributions.

We hope that with this early and continued education in sound financial planning, that no matter what our son grows up to be and do in his life, he will always spend and save wisely. Of course, even with all our good intentions, we never truly know what the outcome will be. Check back in 20 years to hear about how our allowance experiment turned out!

Ara OghoorianAra Oghoorian, CFP®, CFA
Founder and President
ACap Asset Management
Los Angeles, CA


When to Rollover Your 401(k)

The financial industry wants to make sure you are fully aware you left something behind at your old employer. That retirement account that is “just sitting” there needs to be moved over to an IRA for you to invest in someone else’s mutual funds or investment products.

Generally speaking, it makes sense to rollover your 401(k), 403(b), or other retirement account to an IRA when you retire, or for any other reason are allowed to move your funds. The reasons to rollover a retirement account include:

  • Control. You no longer have to live with the changes your investments that are dictated by your employer.
  • Diversification. Most retirement accounts lack in their ability to diversify over all asset classes an investor may want. By rolling over your account, you can access the world of investment products. It used to be said that some (though definitely not all) retirement plans may provide institutional level pricing for investments that otherwise would require an investor have a significant amount to buy into a particular fund (hundreds of thousands of dollars, if not millions).

While that still may be true if you are concerned with having access to certain investment managers, most low-cost index funds today are available at reasonable minimum investment amounts.

However, there may be reasons to not rollover all or part of your account. They include:

  • You need access to the money before age 59½. IRA accounts are subject to a 10% early withdrawal penalty before age 59½ whereas your retirement account may allow access without penalty as early as age 55.
  • Have a significant amount of money in company stock that has appreciated above your purchases. There may be tax benefits to not rolling over company stock, if it has appreciated greatly and if you own a lot of it.
  • Possibly better creditor protection. A 401(k) is protected from lawsuit, while state laws can vary on the protections provided to IRA accounts.
  • If you expect to do a Roth Conversion with after-tax IRA accounts. If you have been accumulating after-tax IRA money, and plan to convert those funds in the future, it may be in your benefit to do so prior to rolling over a retirement plan.

Clearly every individual’s decision to rollover a retirement plan requires a review of their personal circumstances, so be sure to discuss your rollover potential with your financial and tax advisors before assuming a rollover is the best move for you.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Clear Financial Advisors, LLC
Royal Oak, M