THE FISCAL BLUE PRINT
WITH COACH JEFF MONTGOMERY
Episode 9: Q&A Round1!
Welcome to our Q & A show where the next 4 episodes we are going to dive into some common questions we receive from listeners. As you can imagine, we receive all sorts of questions on a variety of topics; relating to both retirement and non-retirement topics.
So today, along with my co-host Joani Gursky, we are going to tackle some of the most frequent questions we receive. Social Security, Long Term Care, IRA’s and RMD’s… the list goes on!
Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you’re a client I can’t give you advice because I don’t know you. Think of this as helpful hints and education only! And please, before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser.
Practical planning segment: Even though some of the questions are personal in nature and relating specifically to the listeners circumstance I think we can generalize the questions to where it pertains to the larger audience!
Let’s start off with some social security questions…
When should we consider taking Social Security?
It is important to note that there is no one-size-fits-all solution to Social Security. Every individual’s situation is unique and it’s important to have your situation analyzed so you take the proper path!
Let’s go over some specific rules:
- Your own benefit rules. Let’s assume you qualify for social security based on your own work record. You have at least 40 quarters of earnings.
- Full Retirement Age (FRA) is the age you are entitled to 100% of your PIA (ie your full benefit). Based on your date of birth, PIA is based on your highest 35 years of SS earnings
- You could collect it early. As early as age 62 for a normal circumstance. But you could incur a permanent reduction of as much as 30%
- Watch out if you are still working and take it early
- You can also suspend it if you decided to take it early. You have 12 months to suspend and withdraw the application. IF you suspend and withdraw your application, all SS received must be paid back within 45 days.
- You could also take it after your FRA and you can wait as long as age 70. What are the advantages of waiting until age 70 to collect? You will earn Delayed Retirement Credits of about 8% per year. However, consider your family history of longevity..
- Spousal benefit rules
- Gets a little tricky since some rules changed in 2015 but generally speaking a lower earning spouse is entitled to their own benefit and an additional spousal benefit up to a maximum of 50% of the higher earning spouse.
- Survivor benefit rules
- Can collect as early as age 60 but still subject to earning restrictions and it will be reduced because of the early collection, prior to FRA.
- However, a survivor still has a choice to, at a later date, switch to their own benefit (based on their own work history), earning DRC
- Can wait all the way to age 70 to collect
(14:00) What is the likelihood of Social Security collapsing?
Back in 2012, the SS administration put out a statement talking about when the SS trust funds would be depleted. The media headline was that it would be depleted around 2032 (three years earlier than previously reported) The media took this a ran with it, and it scared a lot of people. Rightly so. But the information was misconstrued as a headline grab.
What the media didn’t mention was that at that time (2032) benefits would be reduced by 25% and that there would be enough payroll taxes coming in to pay 75% of the benefits. Now, if there are no changes or fixes within congress between now and that future date, then yes benefits would be reduced by 25%. Changes could include pushing the FRA up, increase the social security taxes, etc.
(18:00) Will my Social Security be taxed? Some of you have to pay federal income taxes on your Social Security benefits. This usually happens only if you have other substantial income in addition to your benefits (such as wages, self-employment, a pension, IRA withdrawals, interest, dividends and other taxable income that must be reported on your tax return).
- 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 percent of your benefits.
- more than $34,000, up to 85 percent of your benefits may be taxable.
- 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 percent of your benefits.
- more than $44,000, up to 85 percent of your benefits may be taxable.
- are married and file a separate tax return, you probably will pay taxes on your benefits.
Your adjusted gross income
+ Nontaxable interest
+ ½ of your Social Security benefits
= Your “combined income”
By the way, these numbers are not adjusted for inflation! So you can imagine that at some point in the future as social security increases… everybody will pay taxes on their social security, assuming the there are no changes to these rules.
(21:00) Should I wait to take SS and draw from my 401K instead?
Again, the first question to ask is ‘do you need the money?’ IF you do need the money, then it may not make sense to wait to collect SS. Consider your age, whether you are still working as well. We know at age 70 ½ you have to start withdrawing from your retirement accounts… unless you are still working for that same company where your 401k is held. If you have an old 401k at a different company, you will be subject to required minimum distributions at age 70 ½ even if you are still working at that age.
A big part of answering this question has to do with your tax situation. Maybe, if you just take social security and you don’t have any other income, you’ll be in a zero percent tax bracket.
Also, consider if your 401k is in a diversified portfolio, then you may want to just leave it be so it can continue to grow!
(24:30) Required Minimum Distributions (RMD’s) What are they and what are the factors that are considered when calculating your RMD?
Most people have some sort of a retirement account (IRA, 401K, SEP, 403B, etc.) The money that you’ve invested over time goes into these accounts pre-tax. One day, you’re going to have to start taking this out because the government needs those taxes (age 70 ½ ). There is a provision where you can wait until April 1st of the year after you turn 70 ½. BUT if you do wait, then you are required to take TWO RMD’s at that year, which could possibly put you into a higher tax bracket. For this reason, we don’t typically recommend that people wait to take their RMD, we usually recommend that you go ahead and take it the year that you turn 70 ½ .
The amount that you have to take out is based on the account value as of December 31st of the year before you turn 70 ½ . Then there is a formula based on your age/life expectancy (PS the government assumes that you are going to live until about 98) and it turns out to be about 3.6% that first year. Each year, that percentage increases slightly. Here’s a link to the RMD schedule:
You can take RMD’s annually, semi-annually, quarterly, monthly. It’s up to you and your preferences/needs. Some people take it annually right around the holidays for obvious reasons. And some people take it monthly because they like or need that monthly stream of income. Additionally, taking it out monthly might help out with something called reverse dollar cost averaging which acts like dollar-cost averaging in reverse to balance out the market highs and lows and avoid trying to time the market. In, simpler terms, if you take distributions on a monthly basis, sometimes the market might be up, sometimes it may be down. So, you are averaging your withdrawals and depending on the market fluctuations, you would limit your risk to market volatility over time.
Also, say you have multiple accounts… you don’t have to take money out of each of these accounts. You just have to satisfy the total dollar amount required which may mean taking it out of just one account, which you have the option to choose which one. However, we typically recommend that our clients consolidate their retirement into one account in order to simplify your situation.
(33:00) What happens if you miss your RMD? You encounter a 50% penalty to the IRS due immediately upon missing that deadline. No Bueno.
(34:00) What if you don’t need your RMD?
This depends on your goals. You could re-invest it into a personal, individual account. You could donate it. There is an option to do a qualified charitable distribution, where you never even touch the money. The custodian sends it directly to the charity of your choice, free of tax since you never actually touch the money!
Of course, you could spend it! We are big proponents of this option because we know that you worked hard for your money, so enjoy your retirement!
(36:20) What are the current and 2019 IRA contribution limits?
You must have earned income to fund an IRA or Roth IRA. If you are under the age of 50, you can fund up to $5,500 into your IRA (Assuming that you made at least that amount in 2018). By the way, you have until April 15th of 2019 to fund an IRA for 2018. There have been some positive changes for 2019. The number is increasing to $6,000.
(37:45) What if you are over 50? Earned income is still a requirement. Currently in 2018, you can put up to $6,500. In 2019, this will increase to $7,000. If you are married, you can contribute for your spouse even if they are not working! This is called a spousal IRA.
Closing Segment: We appreciate you joining us today for this episode of The Fiscal Blueprint. Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.
Remember it’s not about the money but about your life! Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!
Final Disclaimer: “Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment.”