3 Mistakes with 529 Plans to Avoid

Across America, some 20 million college students return to campus. Some prepare for their future, others intend to change it. And an interesting trend is emerging – tuition costs are growing at a slower rate.  According to the College Board, tuition grew an average of about 6% annually from 1990 through last year. That’s double the rate of inflation. However, this year the Labor Department estimates tuition costs have risen just under 2%. Factors include supply (more colleges), demand (less students going back to school with a healthy job market), and demographic shifts (declining birth rates). And more private schools are discounting their sticker prices – NACUBO reports that freshman are receiving higher price breaks on tuition via scholarships and grants.

Nevertheless, funding education costs has significant impact. The average cost for a four year private college is about $27,500. You’re either writing big checks – $66,000 annually 18 years from now if you have a newborn and 5 percent inflation – or graduate with student loans that compete with other financial goals – building cash reserves, buying a home and saving for retirement. Or the smarter ones start saving money early – saving $790 monthly for that newborn assuming a 5 percent return.

You have options on how to save and invest that $790. Each has its trade-offs. One popular way is via 529 plans. This article will address some of the mistakes to avoid with 529 plans. First, however, a refresher.

What are 529 plans? They help save for college and other post-secondary training on a tax-advantaged basis. There are two main types including “prepaid tuition plans” and “savings plans” and my focus will be on savings plans.  The key advantage is that withdrawals of earnings (you invested X and account has grown in value) might be tax free if funds are used for “qualified education expenses” or QEE’s.

Mistake # 1 – Using “Pre-paid plans” only

Prepaid plans are losing popularity. First, tuition might be only a third of the total college expense. What are you doing to fund other costs including room and board, transportation, and others? Second, they have their limitations. What if you buy prepaid for University A, but your kid prefers U of B? What if B tuition exceeds A? Will you support his or her enrollment in B and how make up the cost difference?

Mistake #2 – Withdraw too much

You cannot use 529 plans like an ATM. Withdrawals must be for QEE’s. Ineligible withdrawals are subject to tax consequences – earnings may be taxable and 10% penalty. QEEs are generally for the school’s published “estimated costs” – tuition and fees, room and board, books, supplies and equipment. Issues arise when students live off campus (and costs exceed on campus rent and meal plans), forget to adjust for scholarships and tax credits, and fail to report school refunds. Students are advised to keep record of their expenses and segregate purchases – lunchmeat and PBR on separate bills!

Mistake #3 – Overfunding

What if there’s left over money because they came in under budget (funded for four years and they were done in two)? The owner of the 529 plan generally doesn’t lose the money, however he or she may lose the tax benefits. You may change the beneficiary (you name a grandchild after your kid graduates), or you use the funds for your qualifying secondary education expenses. And if you’ve run out of beneficiaries, you can always make an ineligible withdrawal and pay the taxes and penalty.

You have options with education funding, and each may be subject to special rules. Know where the lines are, stay inside of them, and consult your advisors and especially your CPA. Tax issues can be complicated, and I like you hate to get a letter from the IRS. Good luck!

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Retiring Sooner

The Transcontinental Railroad brought thousands of settlers westward. In 1879, people began eyeing a dusty region known as the “Unassigned Lands.” The early group of supporters and promoters were known as “Boomers.” Farmers and ranchers sought new virgin territory to apply their advanced ranching and agriculture techniques and transform the arid and treeless landscape. Some began to survey, plant crops and even built homes on the yet-to-be-opened land. And a decade later, President Harrison finally declared that the region would be opened.

Cannons boomed precisely at noon on April 22, 1889, and the race was on. 50,000 land hungry settlers were eager to stake their claim for 160 acres of free land. However, there were some cheaters who illegally staked claims early. They were known as “Sooners.“ Together, the Boomers and Sooners became known as the Eighty-Niners. And regardless if the settlor was toeing the start line at high noon, or well beyond it hiding in the brush ready to claim his or her slice of heaven as the riders approached, those who would persevere in the new frontier likely possessed two characteristics – well prepared and full of grit.

What is your expected retirement date? Age 65 or 67 or whatever your full retirement age per Social Security? Later? Alternatively, when would you like to make work optional and retire earlier? Maybe you’re evaluating an early buyout, you’re tired, or expecting an inheritance. What are some of the implications of early retirement?

Fixed income sources may be lower. Common sources include Social Security, pensions, and annuity-like income. They’re considered fixed because payouts are generally consistent. However, payouts will be lower due to longer periods of payment and/or less benefit earnings.

Social Security benefits are generally determined by your Average Indexed Monthly Earnings (AIME) over 35 years. Generally, the longer you work, the higher your AIME and your accrued benefit. However, once you retire, you cease accruing additional benefits. The reduction in SS benefit at 62 is roughly 25 to 29% versus full retirement age, and the spouse’s benefit is 30 to 34% lower. Visit ss.gov for more information.

Let’s take Nevada PERS as a pension example. This benefit also is driven by your covered service – the longer you work (2.5% or 2.67% per year) and the greater the compensation (high 3-year compensation), then the greater the retirement benefit. Your retirement benefit may be reduced 10% if you retire 4 years early (4 times 2.5%). However, additional reductions may occur based on your age (with 5 years of service you can retire at 65, 10 years at age 60 and 30 years at any age), and the spousal benefit you chose. Other pension plans have similar provisions (STRS, FERS, etc.).

Annuity payouts – Say there’s $100,000 in an annuity with two scenarios (a) 10-year payout, or (b) 30-year payout. Which scenario will have the higher payout? The first one. The longer the money must “stretch,” the lower the payout.

It’s scary to switch from a saver to a spender. You’ve been hard-wired to save for decades, and it can be difficult to withdraw more than the account earnings. But consider a shift in your thinking. Instead of being like tens of millions of Americans who compulsively check their account balances, think of your savings as your personal pension (and prudently invest like one).

  • Retirement paycheck for lifetime
  • A periodic raise to keep pace with rising living costs
  • Have a cushion for the “just in case”
  • And the final check you write bounces (or reduce your paychecks to leave the desired amount at the end)

Any retirement takes preparation and grit. Early retirement might take a little more work – increase savings, adjust lifestyle, and plug cash flow gaps. And if you’re afraid to quit early, that’s ok too. A friend told why he continued to work … “I’m afraid if I get off the horse, it’ll be difficult to get back on.” He was talking about the speed of change, technological advancements, and the need for continual learning. Good luck.

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College and Career Readiness – New Hope on the Horizon

Rich Dad, Poor Dad author Robert Kiyosaki says “Financial freedom is available to those who learn about it and work for it.” A significant part of employee financial security comes from five benefit areas. However, first you’ve got to set a career path. This article centers on college and career readiness trends for high school graduates and a brief summary on funding methods, including the new Nevada Promise Scholarship which starts next year.

Some employees seek financial stability. Others want the opportunity to climb the income ladder. Successful businesses focus efforts internally on employee development and retention. And benefits can provide both – security/stability and growth. They include retirement savings, work/life balance, resources to enhance financial literacy, safety nets for “the unexpected” (insurance, wellness plans, etc.), and programs that increase employee marketability and growth.

But first you prepare for the job market by putting things in your favor. The US Bureau of Labor Statistics reports that 3.1 million youth graduated from high school last year. About 70% enrolled in college. Components of both segments worked – those that went to college (38%) and those that didn’t (72%) – however, the unemployment rate for those not enrolled in college was twice as high.

Where are the college-bound headed? The College Savings Foundation (CSF) is a non-profit helping American families save for higher education.  In their most recent CSF Youth Survey, graduating high school seniors were heading to public college 44%, community college 25%, private college 18%, and vocational school 8%.

Primary considerations?  Generation Z’s (aka Post-Millennials) are those born in 1995 or later. They deserve great attention because they comprise a quarter of the US population, contribute about $44 billion to the US economy, and are projected to comprise one-third of our population by 2020. They’re generally financially careful and debt adverse. Key factors regarding college decisions included “Costs” (79%) and “Career Paths” (69%) per CSF Survey. 54 percent are choosing public college, and 20 percent opt for community college. Nearly half consider vocational and career school the same as they think about public or private college. And a little more than half plan to live at home while attending college.

How are they funding school? Sallie Mae’s 10th survey of parents and students shows parents saving less and students borrowing more.  Both are related – the gap from less available savings and income is being filled by debt.  Here’s how the average American family financed college for 2016-2017 per their study: Scholarship and grants 35% (largest share in ten years), parent income and savings 23% (down 6%), student loans (up 6%), student income and savings 11%, parent loans 8% and relatives and friends 4%. Those who borrowed also spent more for college – those without loans spent an average of $17,356 for 2016-2017, and those with loans spent a total of $31,082 (about $13.6k borrowed).

What needs work? Nine of ten parents surveyed expected college costs since their kid was in pre-school. However, less than half (42 percent) had a plan to pay them.

Free Community College passes in Nevada? The Nevada Promise Scholarship was recently signed into law. Eligible students may be able to attend participating community colleges tuition free for up to three years beginning in 2018. The $3.5 million program is a last-dollar program meaning it’s designed to pay remaining registration and mandatory fees not meet by other gift aid (Pell Grant, Millennium, etc.). Nevada students leave about $14 million in federal aid on the table because students fail to apply for it. Contact your community college for more details, including the application requirements and deadlines.

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2 Areas That Will Make You Revisit Your Retirement Plan

The USS Enterprise stood as a formidable power and deterrent for half a century. She’s almost four football fields in length, has a flight deck that spans four and a half acres and weighed 94,000 tons. The “Big E” sailed a million nautical miles and played a role in major world events from Cuban Missile Crisis, to wars in Iraq and Afghanistan. She even did a cameo in Top Gun. However, she was the oldest active combat vessel in the fleet and readied for retirement in 2012. And she still sits today awaiting her fate of sink, scrap or save.
What’s holding up retirement of the world’s largest aircraft carrier? First is the issue of safely defueling and capping eight nuclear reactors. Budgetary issues arose. And others recommended she be saved – converted to a museum, or remodeled and placed into reserve. Hence, the Navy put on the brakes and studies alternatives.
So what’s holding you up in revisiting your retirement plans? Possibly it’s eyes on Washington watching four key issues. The year started with high hopes from sweeping policy changes – tax overhaul, healthcare reform, infrastructure spending and deregulation. However, as political dysfunctions continue, there are concerns that the anticipated policy changes could be scaled back, if they even happen at all.
However, life continues, we don’t get any younger, and there will be decisions to make often in the haze of uncertainty. Every day brings us closer to retirement, packing up our troubles and sending them to college or vocational training, and the next opportunity or life transition. Here are two actionable areas for your consideration.
How comfortable are you with your retirement spending budget? Cost of funding your future lifestyle is a core element in retirement planning. A big fear is the risk of outliving your wealth. However, MIT AgeLab reminds us of other risks, including inability to access big and little things in life. Don’t overlook something as mundane as “Transportation” in your budget. It plays important roles.

• Part of the glue that holds together many of life’s activities.
• Second largest cost in retirement – Tops for those aged 65-74 include housing                        (32%), transportation (17%), and food and healthcare (tied at 12%).
• Technology extends driving age – smart headlights, emergency response systems,                  etc.
• Alternative transportation modes when keys are “turned in” include friends and                    family, public transportation, van services, Uber and Lyft, etc. They can help reduce              depression and decreased activity level from loss of driving privileges.

Twenty year olds can get a jump on saving and for better future options. IRAs or Roths are convenient places to start. Both offer tax advantages and the details can be found in IRS Publication 590-A and B. I’ll focus on the powers of time value of money and compounding.
Advantages of starting early – It’s cheaper! You’ll be a millionaire (almost) by saving the current IRA limit of $5,500 for forty years (from age 25 to 65) and average a 6% annual return. The actual accumulation is about $902,000. If you delay saving by ten or twenty years (start at age 35 or 45), then your savings need to increase to about $10,800 and $23,000 respectively (2x or 4x original savings rate).
Small increases can have big results. For each $100 additional savings monthly for forty years starting at 25, your accumulated wealth at 65 grows by about $200,000.
And check out the website TheFinancialDiet.com. It’s written by young people, for young people, and discusses a wide range of topics. Recent headlines online read “5 Mistakes I made after college graduation (and what I learned from each)” and “Exactly how you can save $10k this year on a $40k salary.” Note: of course there’s a wide range of cost of living throughout different parts of the country. Key points include (a) making saving a priority, and (b)you’ve got to be more serious about your money than anyone else on the planet – even your financial advisor. Good luck.
Brian M Loy, CFA, CFP         Reno Gazette Journal         July 16, 2017

 

 

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Use Your $1.5 Million Wisely

Whaling played an enormous role in American life for almost 200 years. Over two thirds of the world’s 900 whaling ships sailed from American ports and making many East Coast ports rich including New Bedford, Massachusetts and Nantucket. Whale oil lit American homes and streets. Baleen helped shape American culture from umbrellas and buggy whips to corsets. Industries grew including ship building, coppering, sail making, blacksmithing and more. And fortunately for the whales, petroleum oil was discovered in Titusville, Pennsylvania in 1859.

It was also a tough and dangerous life for whalemen. The great ships roamed the Atlantic and Pacific seas. “Thar she blows!” The crews manned their 25-foot whale boats, gave chase with harpoons and lances, and towed their prize back to the ship for butchering and processing. And the process continued until the ships were full.

Ships needed supplies to feed, water and mend her crew and replace lost gear. A voyage would last up to four years. And a well-supplied and captained crew went a long ways to making for a successful trip and avoiding mutiny.

We too need to be well stocked for our financial voyages. The challenge is to support a 30-year retirement with a 40-year career. Headwinds commonly include longevity, inflation, the occasional market correction, health setbacks, raising a family, and others. And accelerants may include “windfalls” such as side gigs, entrepreneurial successes, and inheritances. So here are two related thoughts.

Lifetime earnings versus spending – Some people say “You can always earn more income, but you never get more time” encouraging reckless financial behavior such as living for today and not planning for the future. However, lifetime earnings are generally fixed and most people have 40 years to accumulate (age 25 to 65). (Some people have much greater flexibility in earning power… just humor me for this example). Ignoring inflation for a moment, Average Joe earns $35,000 a year, or $1.4 million over 40 years. The average college graduate earns $46,000, or $1.8 million lifetime. $70,000 a year is $2.8 million lifetime. And $200,000 a year is $3.6 million lifetime. So whether its $1.4 million, or $3.6 or whatever, that’s it… that’s all we have to work with. Use it wisely. Consider that the average “close to retirement” family has $163,000 in savings (Economic Policy Institute) – that’s only 13% of Average Joe’s lifetime savings (not a good saver and/or investor).

However, consider your lifetime spending for 60 years from age 25 to 85. First, you have significant control over it. And second, it generally exceeds your lifetime income. But don’t panic. Planning helps fill the “gap” by pension benefits (Social Security) and savings (401k, rentals, etc.).  It helps define your required savings rate.

Starting or shifting careers – Congratulations to you graduates. Some are planning to attend college in the fall. However, not everyone is meant for (or needs) a four year degree. And for those I encourage trade school to provide you greater career opportunities. First, there are many good paying jobs available. One example is our housing market where the demand for new homes exceeds new housing starts – slow permits are one issue, and another is the lack of skilled construction workers. Second, some skilled jobs pay more than college graduates. Go to BLS.gov and search the highest growth job areas and median salaries –medical assistant $32k, electrician $53k, computer system analyst $87k, software designer $100k, heavy truck driver $41k, RN $68k, sales reps (excluding technical) $57k. Third, trade school is often less expensive than four year college ($98k for moderate in-state and $197k for moderate private per College Board).

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Avoid Complacency – Time Catches Up

Avoid Complacency – Time Catches Up

Stewart Stafford said, “The quickest way to run out of time is to think you have enough of it.” Time catches up. Sometimes it’s a doozy. How can we keep our futures bright?

There are two common reasons we make mistakes. One is we’re rushed in getting all the intel and insights to make smart decisions. The other is when ramifications of our decisions occur down the road. We hesitate in taking corrective action. There’s less sense of urgency. I’ll fix it tomorrow. It’s one of the reasons why people don’t really get serious about their finances until five to ten years from retirement. It may be why about 38 percent of American adults and 17 percent of teenagers are obese says the CDC. And five to ten percent of adults are morbidly obese meaning they’re at a higher risk of disease. Complacency can be an enemy to both our financial and physical health.

America’s nest eggs continue to grow. Retirement assets are estimated to be about $25 trillion or triple that of twenty years ago. And half of that money is in individual accounts. But an interesting phenomena is hidden. While younger generations are falling behind in saving compared to earlier generations, older Americans sit on more and more wealth. Normally retirees should be cashing in on their savings. However, according to 20 years of University of Michigan survey data the average wealth of Americans when they die gradually creeps upward from their 60’s to their 80’s and starts declining in their 90’s. Older Americans, especially the affluent ones apparently have ignored the saying “You can’t take it with you.” Here are a couple reasons.

First is financial – the stock market and real estate booms. Second are behavioral. Few retirees are intentional Jack Benny or George Costanza-like cheapskates. It’s a hard transition to make shifting to “spender” when you’ve been a lifelong and hardcore “saver.” They tell me “Kid, I take my checkbook to the grocery store, not my passbook.” I’ll translate for younger readers… retirees may spend investment earnings, but they’re reluctant to dip into principal. Other concerns are reflected in retiree surveys – they’re nervous about (a) maintaining their lifestyle, (b) not being a burden on anyone, and (c) leaving a large enough inheritance. And finally, behavioral issues are reflected in retiree spending patterns. Retirees generally spend less than they expected – it’s “tightening the belt” and “what-if-I-need-it-tomorrow” concerns. And there’s a phenomena called the ‘Retirement Spending Smile’ coined by David Blanchett that describes the typical spending pattern – high initially as retirees travel more, and catch up on honey-dos and deferred maintenance, then settle down into a groove, then spending escalates as the costs of aging (assistance and medical) start catching up.

So a couple of planning tips:

Careful about complacency and change before you have to – Have you adjusted your investments to the new world, or do you have the same red, white and blue (and possibly overvalued) portfolio? And if you’re the type who likes holding lots of cash, do you have it working for you in insured money market accounts that are paying about a percent versus point-zero-zero-nothing?

Chuck unnecessary expenses – Should I make XYZ discretionary expenditure? What about reviewing recurring expenses for possible savings? For example, insurance (shop coverage periodically or cancel unneeded life insurance (or put on minimum payment)), transfer the timeshares (and maintenance) to the kids, etc.

Know what you can spend (and gift) safely – I’m not encouraging you to be a spendthrift, but maybe your kids are right. “Why aren’t you more comfortable in retirement?” Or maybe you’re just fine. This exercise can give you better confidence about not running out of money.

Finally, here are three simple rules. Spend less than you make, save more and earlier, and don’t make dumb mistakes. And sometimes it helps to have a trusted advisor help you along the way.

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The Art of Retirement Cash Flow

Part of the Oakland skyline is slowly vanishing as the demolition of the east span of the Bay Bridge continues. The bridge was built in the Great Depression. It was a “double decker” with two spans – western section connecting SF and Yerba Buena Island, and the eastern section to Oakland. The bridge closed for a month when the east span partially collapsed in the 1989 Loma Prieta quake. Construction for the new east span commenced in 2002. It is a single deck, and was the world’s widest bridge when it opened in September 2013.

Demolition of the old span will take four to five years – almost twice as long as construction took in the early 30’s. They’re essentially dismantling the old bridge, section by section, in reverse order. Why the complicated un-building process? Factors include engineering, safety and environmental. The high-tension pieces are like a highly strung bow of 50 million pounds of steel. You don’t simply cut it or you risk a nasty “boom.” Tension needs to be controlled. 80 year old steel doesn’t handle like modern steel. And you want to avoid contaminating the choppy bay waters below. Tearing down a bridge can be a dangerous art.

And so can converting your wealth into monthly paychecks in retirement that will last your lifetimes. Original instructions were simple –save early and be a smart investor. You shift at retirement and draw income. But how? Life’s complicated – costs of living rise, Uncle Sam wants a cut, an unexpected emergency, markets correct, lose your wingman, or your perspectives change. I’ll share four withdrawal strategies to discuss with your family and advisors.

Be flexible – Heard of the 4 percent withdrawal rate? It’s a standard for calculating how much to save (25 times your annual cash flow needed after pensions and SS) or the “safe” withdrawal rate for a 65 year old retiree (4 percent of your IRA accounts). However, be flexible. Most retirees spend less than they expect, and spending is not a straight line – often higher in the early years, then settle lower into a groove, then crank up like we do as we age (healthcare). What if your retirement is beyond 30 years, want a safety cushion or inheritance for heirs, or want “sure things” (what are CD’s paying now?), then a 2 or 3 percent factor may be prudent.

Fill tax brackets – Most dislike paying taxes and are taught to defer taxes (spend after-tax accounts first, then IRAs, and save Roth’s for last – see next note). But beware getting trapped with insufficient liquidity (and face a big repair bill, etc.) or significant tax increases from IRA required minimum distributions at age 70-1/2. Consider filling tax brackets in early retirement years. If you’re married, the 15% bracket runs from about $18,651 to $75,900, and the 25% runs $75,901 to $153,100. If your taxable income is $60,000 (or $130,000), then consider additional IRA withdrawal of $15,000 (or $23,000) and avoid creeping to the next bracket. Similar concept is when you need significant cash and only have IRA monies. Say you’re contemplating an RV purchase. Consider splitting tax years with IRA withdrawals in December and January, and/or finance a portion and payoff with future withdrawals.

Hit the Roth early? Conventional wisdom is reserve the Roth IRA for last, and pass it on to your spouse or your kids. (People generally do Roth’s when they believe tax brackets are higher when they withdraw than when contributed). But what if you want to gift to your kids now (versus inheritance), you’ve only got IRA and Roth money, and likely you won’t deplete wealth in retirement. (And ignore tax reform rumblings about 5-year withdrawals for non-spousal beneficiaries). Why would you take IRA monies, pay taxes, and gift your kids the balance? That’s expensive. Instead, consider withdrawing non-taxable Roth funds. You have more money to gift. And of course, consult your CPA on all tax matters.

Income is nice, but balance is better – Some thought the retirement ticket was owning real estate and collecting rent. Others focused on high dividend stocks or interest income. They make sense – they’re income-oriented. If you earn $20,000 on a $500,000 portfolio, that’s 4 percent. But if you’re getting the same $20,000 income ten years from now (don’t increase the rents, or rising expenses), then you’re losing to inflation. Hence balanced investing (diversification). On average, you may earn more than 4% withdrawals and can reinvest for future withdrawals. Hopefully, you’ve got a dependable monthly paycheck that grows with inflation, with less worry about the ebbs and flows of markets, interest rates, and sketchy tenants.

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Payoffs of Working Beyond 65

Working and collecting Social Security is a taxing problem. “Why should I work if I’m going to lose benefits to taxes, or even get my benefits reduced?” The rules are complex. However, they’re important because working during retirement is becoming more and more a trend. We’ll talk about the impacts of drawing a paycheck during retirement. However, first, let’s review how retirement is being redefined.

What do you consider to be normal retirement age? Somewhere around age 65? And there might be a few groaning “Never.” It’s generally labeled as when Social Security retirement benefits commence and essentially an artificial goal line. There was a time when people spoke in hushed terms as if working later was a bad thing. However, there are several reasons why Americans work past “retirement age.”

Supplement retirement income. We need to fund longer retirements and the responsibility has shifted to us. AARP’s Life Reimagined Survey of people 35 years-plus expect to work beyond age 65. It’s not that they want to get work forever – 87 percent say they want to retire someday but they don’t feel they will be able to stop. Some are non-financial. However, 70 million Americans suffer from sleepless nights and the primary culprit is money worries. According a CreditCards.com survey, 68 percent of women and 56 percent of men lose sleep occasionally. Retirement tops the list (49%) with “haven’t saved enough.” It’s the biggest purchase in life – 2.5 times the average price of a home – yet 80 percent don’t know what retirement will cost. Other concerns include education expenses (30%), health care (29%), mortgage/rent (26%) and credit card debt (22%).

The Merrill Lynch and Age Wave Retirement Study illustrates differing expectations by age groups. Three sources of retirement income are Government (SS), Employer pensions and Personal sources (savings/investments, employment and family). The Silent Generation (born 1925 – 45) counts on roughly half of their income from SS, and roughly a quarter each from the other two. Younger and younger generations expect less from Government and Employer, and rely more on Personal – Millennials expect 65% of their income to come from personal sources). And there’s a growing expectation for employment income – Millennials expect a quarter of their retirement funding to come from continued work.

Motivation, engagement and sense of purpose. Satchel Paige is one of the great baseball players. He took the mound for the last time at age 60, and pitched a three inning shutout for the KC Athletics. Among his many quotes is “How old would you be if you didn’t know how old you were?” And I recall a discussion in Mitch Anthony’s “The New Retirementality” asking “how many 25-year olds does it take to replace someone with forty years of work experience, insights and relationships?” Retirees work for many non-financial reasons. Age Wave/Merrill studies categorize four types of retirees: Driven Achievers (15%) keep right on working and accomplishing, Caring Contributors (33%) find ways to give back, often working for nonprofits, Life Balancers (24%) work largely for friendships and social connections, and Earnest Earners (28%) keep working primarily to pay the bills.

Working during retirement has two key drawbacks. First, if your start drawing SS benefits early your benefits can be reduced (1) for starting early (up to 20% to 30% reduction versus waiting for full retirement age 65 – 67) and (2) if you work (SS benefits reduced $1 for every $2 your earnings exceed $16,920 if you’re under the FRA, $1 for every $3 earnings exceed $44,880 in year you reach FRA, and no earnings limit after FRA). Second, SS benefits can be taxable depending on your income. If you’re married filing jointly and your “Provisional Income” (AGI excluding SS + tax-exempt interest + 50% of SS benefits) is under $32,000, then none of your SS is taxable. Between $32,000 and $44,000, then up to 50% is taxable. And over $44,000, then 85% is taxable.

However, do consider working despite the hits. “Don’t let the tax tail wag the dog” goes the saying. A
tax attorney explained the tax code to me on a golf course… “Brian, if I offered you this crisp $100 bill on the condition you had to give me $50 back, would you take it?” Wouldn’t you? And your future SS benefits may increase from the additional earnings. And of course, don’t take this as gospel. I don’t know your situation, and advise you to seek expert tax advice by your CPA and talk with Social Security.

So if money can’t buy you happiness, then possibly it buys you a good night’s sleep. May you plan and rest well.

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Why Isn’t There a Hug Your CPA Day?

Some surprises bring great joy – a call from an old friend, a door opened, or an unsolicited “You’re awesome!” But walking into your CPA’s office and saying “Oh, one more thing… Did I tell you about something that happened last year?” is likely to test her or his humor. Two types of CPAs are historians and advisors. The first might say “Yes, you’re hemorrhaging. Here’s your tax bill.” The other offers “Here are some ways to stop the bleeding.”

Use the conversations now as you work on your 2016 tax preparation and get a jump on the year ahead. It benefits both – you may save money, make more money and reduce surprises; and your CPA is engaged, informed and can better employ his or her talents.

Preparation

Getting organized saves you money. Where do you prefer to have your accountant’s billable time being applied… sorting through a shoe box of receipts and invoices, or confirming your neatly compiled financial information and helping you pay the least amount of taxes legally required? Tax organizers provided by your CPA or enrolled agent are provided for a purpose. And there’s a broad range of tools for organizing – including filing systems (online receipt apps like Expensify and Shoeboxed or organizers like Evernote) and accounting software (QuickBooks, FreshBooks, Zoho, Xero, AccountEdge, Outright.com, etc.).

Compare your information. Ideally, you’re reporting roughly what you forecasted at the beginning of the year. Does it look reasonable? Did you forget something for 2016 you reported in 2015 (e.g. bank account 1099, retirement payment, or charity)? Did you do something different in 2016 (e.g. dog walking business, medical event, new vehicle)?

Patience. Waiting for 1099’s or K-1’s? Should you wait for corrected 1099’s from investment accounts (anxious early tax filers face the possibility of filing amended returns and/or additional tax preparation fees)? And mistakes can happen when you rush.

Common “surprise” areas

Social Security retirement benefits may be taxable – Despite your payment of FICA taxes, a portion of your retirement benefits may be taxable depending on your income. If provisional income (AGI before SS + muni bond income + half of SS) exceeds $32,000 (married, $25,000 if single), then 50% or 85% may be taxable.

A bumper income year for retirees may result in higher Medicare premiums the following year. Part B premiums are based on your modified adjusted gross income, and Part D may have an income adjustment. B premiums generally range $134 to $429 a month, so heads up in case you have a significant gain from selling an asset sale, redeemed an annuity or Series E bonds, etc.

Significant event you didn’t communicate to your CPA. Examples of tax version of “Ripley’s Believe it or Not” are abundant and often result in missed opportunities. These include sales of property; family, job or business change; employee benefit (e.g. stock options), or a tax law change to name a few.

Get a jump on 2017

Update savings and spending plans. Modify withholding and estimated taxes accordingly. Retirement contribution limits remain generally the same as 2016 – IRAs and Roth $5,500, 401k deferrals $18,000, SIMPLE $12,500. However, you may be eligible to make “catch up” contributions that up your limits to $6,500, $24,000 and $15,500, respectively (note: defined contribution plan limit jumps from $54,000 to $60,000).

Plan for 2017 transactions. Is a business acquisition, relocation, or significant life event is on the chalk board, and have you circled at the fire with your advisors? What are the planning opportunities?

Tax reform issues were abundant this past election cycle from Federal down to local levels. Pay attention and be flexible in your planning.

And finally, bring a smile and a cup of cheer to your tax accountant. They’re the ones wrestling with 74,000 pages of the Tax Code and hopefully keeping you from harm’s way. You’re just writing the check.

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Your Guiding Angel

Frank Capra’s film “It’s A Wonderful Life” was released in the winter of 1946. It would take almost three decades before it became a classic. The finer things in life tend to take time.

Senior Angel: “A man down on earth needs our help.”

Clarence: “Is he sick?”

Senior Angel: “No, worse. He’s discouraged.”

The story’s about a desperately frustrated banker, father, husband and community man who was thinking about throwing away God’s greatest gift – his life. And Clarence who hadn’t yet earned his wings in 200 years was sent to be George Bailey’s guiding angel.

We’re about to leave 2016 which may go down as one of the most eventful years for investors since the Financial Crisis. The year started with a tumultuous market sell-off, then major geopolitical events including Brexit and the surprise Trump victory. The US stock markets (S&P and Dow Jones) have sky rocketed, the US dollar has soared to its highest level in 14 years, and interest rates are on the rise.

Some people are concerned. Others may be peering over the bridge’s edge into the icy waters below. There are reasons for nervousness. Maintain control and don’t be discouraged for 2017. Here are three areas all focused on the theme “Be Flexible.”

Goals and Financial Plan – Are you planning for the “right” goals? Consider both big goals (retiring in 20 years or funding a 30 year retirement) and easy win goals (create a budget, a 2-year credit card payoff plan, or update beneficiary designations). Stay motivated using “eat an elephant one bite at a time” and recognize your progress.

Why do people tend to make decisions they later regret? Some pay to remove tattoos they once thought were great ideas, and others divorce the ones they rushed to marry. Are you possibly saving for something you won’t want in the future? The concept called “The End of History Illusion” was published in an article by Quoidbach, Gilbert and Wilson (Science, January 2013). They surveyed people asking them how much they had changed in the past decade, and to predict their changes over the next decade. Surprisingly, people predicted minimal change in the future despite the significant changes they’ve made in the past “…leading people to overpay for future opportunities to indulge their current preferences.” This has significant planning implications. Will you sell the second home or downsize main home? Live longer than you think? (Inflation is a hidden menace – SS recipients get a measly pay raise of 0.3% or $5 a for the average recipient). What if SS isn’t fixed and benefits are reduced by 20% (or 30%) for future retirees? Will your family dynamics change? You dream that assisted living is for other people, not you? Be flexible.

Investment Plan – The year ends in about a week, and looks like US stocks outperform foreign stocks for fourth year in a row. S&P is up about 13% for 2016, DJIA up 16%, Russell 2000 up 22%, EAFA (foreign developed) up 1%, and EM (foreign emerging) up 8%. And interest rates are on the rise. What’s ahead for 2017?

A recent report in Barron’s summarized 2017 forecasts by 12 strategists from major Wall Street firms (Goldman, JP Morgan, BofA/Merrill, Blackrock, etc.). They’re forecasts, not guarantees, but predict returns to be slightly higher. The average GDP growth is about 2.6%, S&P up 5.4%, and 10 year Treasuries up slightly to 2.7%. Second, capital markets tend to have a permanent upward trend, but it’s not a straight line. The S&P is triple its March 2009 lows, and some argue we’re due for a correction. Third, there’s a saying “You drive like hell and you’re going to get there.” So diversify and trade the opportunity of ever making a killing for never getting killed. Look at your right hand as a reminder – five fingers representing a form of diversification – US stocks, foreign stocks, real estate, bonds and commodities. And fourth, all the hoopla about Dow hitting 20,000 – it’s just a number. It stood about 496 when I was born 59 years ago, and my daughter will see it hit 650,000 (that’s 6% growth over 60 years). Be flexible.

Tax and Estate Plans – The US elections marked a 9.0 policy earthquake. Four of Trump’s main issues were infrastructure, tax reform, immigration, and Obamacare. Policy changes mean adapting our financial plans. However, it’s too early to know what campaign rhetoric is ultimately enacted as policy. That process will take time, and as my partner Kirstin says “Breathe… if a wall’s going up, it won’t be built overnight.” Take tax reform as an example. Most agree that simplification makes sense. However, people differ on the details. Talk includes cutting corporate tax rates and eliminating estate taxes. For individuals, Trump’s and the GOP’s plans take 7 brackets down to 3, but they differ significantly on deductions, and thus impact on the deficit. And it’s a good sign there are dissenters among his cabinet nominees – expect healthy debate. For planning, a general idea is to accelerate losses into 2016 and defer income to 2017. However, it’s not prudent to make drastic changes or speculate on the outcome of tax reform. Be flexible.

May your list of worries be shorter than your New Year resolutions.

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