Articles for October 2018

Debunking a Few Popular Retirement Myths

It seems high time to dispel some of these misconceptions.

Provided by Mike Moffitt

Generalizations about money and retirement linger. Some have been around for decades, and some new clichés have recently joined their ranks. Let’s examine a few.

“When I’m retired, I won’t really have to invest anymore.” Society still sees retirement as an end instead of a beginning – a finish line for a career. In reality, retirement is the start of a new and promising phase of life that could last a few decades. If you don’t keep one or two feet in the investment markets (most notably the equities markets), you risk quickly losing purchasing power as even moderate inflation will devalue the dollars you’ve saved. Keep saving, keep earning, and keep investing.

“My taxes will be lower when I retire.” Not necessarily. You may earn less, and that could put you in a lower tax bracket. On the other hand, you may end up waving goodbye to some of the tax breaks you enjoyed while working, and state and local taxes will almost certainly rise with time. In addition, you could pay taxes on money withdrawn from IRAs and other qualified retirement plans, perhaps even a portion of your Social Security benefits. While your earned income may decrease, you may end up losing a comparatively larger percentage of it to taxes after you retire.1

“I started saving too late; I have no hope of retiring – I’ll have to work until I’m 85.” If your nest egg is less than six figures, working longer may be the best thing you can do. You will have X fewer years of retirement to plan for, which means you can keep earning a salary, and your savings can compound longer. Don’t lose hope: remember that you can make larger, catch-up contributions to IRAs after 50, and remember that you can really sock away some savings in workplace retirement plans. If you are 50 or older this year, you can put as much as $24,500 into a 401(k) plan. Some participants in 403(b) or 457(b) plans are also allowed that privilege. You can downsize and reduce debts and expenses to effectively give you more retirement money. You can also stay invested (see above).2

“Medicare will take care of me when I’m really old.” Not true. Medicare may (this is not guaranteed) pay for up to 100 days of long-term care expenses you incur. If you need months or years of long-term care, you will pay for it out of pocket if you lack long-term care insurance. According to Genworth Financial’s Cost of Care Survey, the average yearly cost of a semi-private room in a nursing home is $235 a day ($85,775 per year).3,4 

“I should help my kids with college costs before I retire.” That’s a nice thought, but you don’t have to follow through on it. Remember, there is no retiree “financial aid.” Your student can work, save, or borrow to pay for the cost of college, with decades ahead to pay back any loans. You can’t go to the bank and get a “retirement loan.” Moreover, if you outlive your money your kids may end up taking you in and you will be a financial burden to them. Putting your financial needs above theirs is fair and smart as you approach retirement.

“I’ll live on less when I’m retired.” We all have the cliché in our minds of a retired couple in their seventies or eighties living modestly, hardly eating out, and asking about senior discounts. In the later phase of retirement, couples often choose to live on less, sometimes out of necessity. The initial phase of retirement may be a different story. For many, the first few years of retirement mean traveling, new adventures, and “living it up” a little – all of which may mean new retirees may actually “live on more” out of the retirement gate. 

“No one really retires anymore.” Well, it is true than many baby boomers will probably keep working to some degree. Some people love to work and want to work as long as they can. What if you can’t, though? What if your employer shocks you and suddenly lets you go? What if your health won’t let you work 40 hours or even 10 hours a week? You could retire more abruptly than you believe you will. This is why even workaholics need a solid retirement plan.

There is no “generic” retirement experience, and therefore, there is no one-size-fits-all retirement plan. Each individual, couple, or family needs a strategy tailored to their particular money situation and life and financial objectives.

Mike Moffitt may be reached at ph#641-782-5577 or email: mikem@cfgiowa.com

www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Securities and Registered Investment Advisory Services offered through Silver Oak Securities, Inc., Member FINRA/SIPC. Silver Oak Securities, Inc. and Cornerstone Financial Group are separate entities.   

Citations.

1 – money.usnews.com/money/retirement/iras/articles/2017-04-03/5-new-taxes-to-watch-out-for-in-retirement [4/3/18]

2 – fool.com/retirement/2017/10/29/what-are-the-maximum-401k-contribution-limits-for.aspx [3/6/18]

3 – medicare.gov/coverage/skilled-nursing-facility-care.html [9/13/18]

4 – fool.com/retirement/2018/05/24/the-1-retirement-expense-were-still-not-preparing.aspx [5/24/18]

Investing Means Tolerating Some Risk

That truth must always be recognized.

When financial markets have a bad day, week, or month, discomforting headlines and data can swiftly communicate a message to retirees and retirement savers alike: equity investments are risky things, and Wall Street is a risky place.

All true. If you want to accumulate significant retirement savings or try and grow your wealth through the opportunities in the markets, this is a reality you cannot avoid.

Regularly, your investments contend with assorted market risks. They never go away. At times, they may seem dangerous to your net worth or your retirement savings, so much so that you think about getting out of equities entirely.

If you are having such thoughts, think about this: in the big picture, the real danger to your retirement could be being too risk averse.

Is it possible to hold too much in cash? Yes. Some pre-retirees do. (Even some retirees, in fact.) They have six-figure savings accounts, built up since the Great Recession and the last bear market. It is a prudent move. A dollar will always be worth a dollar in America, and that money is out of the market and backed by deposit insurance.

This is all well and good, but the problem is what that money is earning. Even with interest rates rising, many high-balance savings accounts are currently yielding less than 0.5% a year. The latest inflation data shows consumer prices advancing 2.3% a year. That money in the bank is not outrunning inflation, not even close. It will lose purchasing power over time.1,2

Consider some of the recent yearly advances of the S&P 500. In 2016, it gained 9.54%; in 2017, it gained 19.42%. Those were the price returns; the 2016 and 2017 total returns (with dividends reinvested) were a respective 11.96% and 21.83%.3,4

Yes, the broad benchmark for U.S. equities has bad years as well. Historically, it has had about one negative year for every three positive years. Looking through relatively recent historical windows, the positives have mostly outweighed the negatives for investors. From 1973-2016, for example, the S&P gained an average of 11.69% per year. (The last 3-year losing streak the S&P had was in 2000-02.)5

Your portfolio may not return as well as the S&P does in a given year, but when equities rally, your household may see its invested assets grow noticeably. When you bring in equity investment account factors like compounding and tax deferral, the growth of those invested assets over decades may dwarf the growth that could result from mere checking or savings account interest.

At some point, putting too little into investments and too much in the bank may become a risk – a risk to your retirement savings potential. At today’s interest rates, the money you are saving may end up growing faster if it is invested in some vehicle offering potentially greater reward and comparatively greater degrees of risk to tolerate.

Having a big emergency fund is good. You can dip into that liquid pool of cash to address sudden financial issues that pose risks to your financial equilibrium in the present.

Having a big retirement fund is even better. When you have one of those, you may confidently address the biggest financial risk you will ever face: the risk of outliving your money in the future.

Mike Moffitt may be reached at ph#641-782-5577 or email: mikem@cfgiowa.com

www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Securities and Registered Investment Advisory Services offered through Silver Oak Securities, Inc., Member FINRA/SIPC. Silver Oak Securities, Inc. and Cornerstone Financial Group are separate entities.

Citations.

1 – valuepenguin.com/average-savings-account-interest-rates [10/4/18]

2 – investing.com/economic-calendar/ [10/11/18]

3 – money.cnn.com/data/markets/sandp/ [10/11/18]

4 – ycharts.com/indicators/sandp_500_total_return_annual [10/11/18]

5 – thebalance.com/stock-market-returns-by-year-2388543 [6/23/18]

When is Social Security Income Taxable?

To find out, look closely at two factors. 

Your Social Security income could be taxed. That may seem unfair or unfathomable. Regardless of how you feel about it, it is a possibility.

Seniors have had to contend with this possibility since 1984. Social Security benefits became taxable above a certain yearly income level in that year. A second, higher yearly income threshold (at which a higher tax rate applies) was added in 1993. These income thresholds have never been adjusted upward for inflation.1

As a result, more Social Security recipients have been exposed to the tax over time. About 56% of senior households now have some percentage of their Social Security incomes taxed.1

Only part of your Social Security income may be taxable, not all of it. Two factors come into play here: your filing status and your combined income.

Social Security defines your combined income as the sum of your adjusted gross income (AGI), any non-taxable interest earned, and 50% of your Social Security benefit income. (Your combined income is actually a form of modified adjusted gross income, or MAGI.)2

Single filers with a combined income from $25,000-$34,000 and joint filers with combined incomes from $32,000-$44,000 may have up to 50% of their Social Security benefits taxed.2

Single filers whose combined income tops $34,000 and joint filers with combined incomes above $44,000 may see up to 85% of their Social Security benefits taxed.2 

If you are a head of household, or a qualifying widow/widower with a dependent child, the combined income thresholds for single filers apply to you.2

What if you are married and file separately? No income threshold applies. Your benefits will likely be taxed no matter how much you earn or how much Social Security you receive. (The only exception is if you are married filing separately and do not live with your spouse at any time during the year. In that case, part of your Social Security benefits may be taxed if your combined income exceeds $25,000.)2

You may be able to estimate these taxes in advance. You can use an online calculator (a Google search will lead you to a few such tools) or the worksheet in I.R.S. Publication 915.2

You can even have these taxes withheld from your Social Security income. You can choose either 7%, 10%, 15%, or 22% withholding per payment. Another alternative is to make estimated tax payments per quarter, like a business owner does.2,3

Did you know that 13 states tax Social Security payments? In alphabetical order, they are: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. Sometimes, only higher-income seniors face such taxation. In Kansas, Missouri, and Rhode Island, for example, the respective AGI thresholds for the taxation of a single filer’s Social Security income are $75,000, $80,000, and $85,000.1

What can you do if it appears your benefits will be taxed? You could explore a few options to try and lessen or avoid the tax hit, but keep in mind that if your combined income is far greater than the $34,000 single filer and $44,000 joint filer thresholds, your chances of averting tax on Social Security income are slim. If your combined income is reasonably near the respective upper threshold, though, some moves might help.

If you have a number of income-generating investments, you could opt to try and revise your portfolio so that less income and tax-exempt interest are produced annually.

A charitable IRA gift may be a good idea. You can make one if you are 70½ or older in the year of the donation. Individually, you can endow a qualified charity with as much as $100,000 in a single year this way. The amount of the gift counts toward your Required Minimum Distribution (RMD) and will not be counted in your taxable income.4

You could withdraw more retirement income from Roth accounts. Distributions from Roth IRAs and Roth workplace retirement plan accounts are tax exempt as long as you are age 59½ or older and have held the account for at least five tax years.

Will the income limits linked to taxation of Social Security benefits ever be raised? Retirees can only hope so, but with more baby boomers becoming eligible for Social Security, the I.R.S. and the Treasury stand to receive greater tax revenue with the current limits in place.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com     

Website: www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Securities and Registered Investment Advisory Services offered through Silver Oak Securities, Inc., Member FINRA/SIPC. Silver Oak Securities, Inc. and Cornerstone Financial Group are separate entities.

Citations.

1 – fool.com/retirement/2018/08/30/everything-you-need-to-know-about-social-security.aspx [8/30/18]

2 – forbes.com/sites/kellyphillipserb/2018/02/15/do-you-need-to-pay-tax-on-your-social-security-benefits-in-2018 [2/15/18]

3 – cnbc.com/2018/09/12/the-irs-is-warning-retirees-of-this-impending-surprise-tax.html [9/12/18]

4 – fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds [9/17/18]

5 – irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts [10/25/17]