Posts in category: Advisory, Private Wealth

Social Security Ground Zero: 16 Years to Impact

Every year, the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (OASDI) issues its annual report on the Social Security system. The report details the current financial status of both Social Security and Medicare as well future projections. The 2018 report has one key takeaway—both programs are facing long-term financial pressures and potential shortfalls. 

How Social Security and Medicare are Funded 

To better understand the report’s conclusion, you need to understand how the programs are currently funded. Both self-employment income and wages are subject to Social Security and Medicare taxes, known together as FICA (Federal Insurance Contributions Act) taxes. 

Employees pay a Social Security tax of 6.2 percent and the employer also pays the same 6.2 percent again for a total 12.4 percent of every employee’s wages (under the wage cap of $128,400 for 2018) funding the system. Self-employed persons pay both halves themselves (although the “employer” side is tax deductible against total self-employment income). 

Unlike Social Security, all wages are subject to Medicare taxes at a rate of 1.45 percent, paid by both the employee and employer for a total of 2.9 percent contributed to the system. Again, the self-employed pay both sides of the Medicare tax, just like the Social Security tax. In addition, anyone who earns more than $200,000 ($250,000 if married filing jointly) pays a Medicare surtax of 0.9 percent on all wages above those amounts. 

Earning Your Benefits 

Taxpayers need to earn a certain amount of credits in order to be eligible for Social Security benefits, with the amount depending on when they are born. Everyone born on or after 1929 must accrue 40 credits—which equals roughly 10 years of full-time work—to be eligible to collect retirement benefits.

How much you receive in benefits depends on how much you earned during your career. As of the April 2018 tables, individual retirees currently receive an average of $1,411 per month, or just under $17,000 per year. 

Taxing Your Taxes 

Taxes on Social Security benefits themselves also help fund the system. Depending on your filing status, age, how much you earn, etc., you might have to pay income tax on your Social Security benefits. These taxes are added back to fund the system for other taxpayers. 

Historical Perspective 

The Social Security and Medicare systems are more than 83 years old. During this time, the programs have taken in approximately $20.9 trillion in revenue and paid out about $18 trillion; leaving $2.9 trillion in trust fund reserves at the close of 2017. 

Source of the Problem 

Here’s the issue: the initial recipients didn’t pay into the system themselves—their benefits were funded by those currently working. The problem is that those entering retirement today represent a large segment of the population, while the working population is increasingly smaller due to declining birth rates. Together, this means the system is paying out more than it’s taking in.

 For the first time since 1982, Social Security’s total costs will exceed its total income, according to the trustees’ report. As of now, the trustees expect to continue funding Social Security and Medicare using non-interest income (aka taxes), interest income on reserves and trust fund asset reserves. This leaves the system solvent through 2034, when the trust fund reserves will run out. 

How Bad Is It? 

Without structural changes or increased taxes, Social Security will be able to pay only about 75 percent of scheduled benefits after 2034 through 2092. Medicare is facing a similar, if not worse scenario. 

What’s Next? 

The trustees suggest addressing the shortfalls as soon as possible. This is easier said than done, as any solution is going to be untenable to some group of constituents. 

Potential solutions include reducing benefits now, raising the retirement age or increasing the wage cap for Social Security taxes. Even more draconian measures being considered include means testing to receive benefits or an outright increase in FICA tax rates. 

The trustees’ report places a great emphasis on taking action now rather than later. The longer Congress waits, the worse the problem will become. But since all solutions are politically unpopular, legislators are unlikely to take any immediate action.

Maximize Money as You Age

It is common knowledge that as we grow old, our bodies tend to not work as well. Some folks begin having physical challenges, some have cognitive issues and some have both. But what we don’t know is which, if any, of those challenges we will face. Worse yet, those who fall into cognitive decline often do not have the ability to recognize it.

The lesson here is to prepare for the unknown. If you’ve worked with financial advisors throughout your career, it’s a good idea to narrow your resources to one or two trusted people—possibly including a family member. That way, if and when you need help managing your finances, you’ll have a loved one who can help recognize when it’s time for you to relinquish control of the reins—and an expert to help take over.

The following are some common areas in which seniors make mistakes that could impact their future financial security.

Draw Social Security Too Early
Many of today’s current retirees started drawing Social Security at the earliest possible age of 62. This might have been due to a layoff, health issues or simply because they retired and needed to turn on the income stream. However, the earlier you start drawing benefits, the lower the payout—and this payout level is locked in for life (with the exception of periodic cost-of-living adjustments). It also locks in the amount a surviving spouse—whose benefit is derived from your earnings—will receive when you pass away. Waiting as long as you can before starting Social Security allows your benefits to accrue higher.

Spend Assets Too Soon
Once you retire, it’s important to create a household budget for regular and ad hoc expenses each year. Then, subtract the amount of Social Security and any pension benefits you (and your spouse) will receive to estimate how much you’ll need to withdraw from your savings and investments each year. One of the most common mistakes is withdrawing too much of these assets early on in retirement and then running out of funds.

Forget RMDs
When you turn age 70½, you will to make Required Minimum Distributions (RMDs) on all tax-deferred 401k and IRA accounts, even if you don’t need the money. Each year your brokerage will send you a notice indicating the withdrawal amount. You’ll need to make that withdrawal before the end of the calendar year and pay any taxes due on your return for that year. Any RMDs you do not withdraw will be subject to a 50 percent penalty. Remembering to take RMDs as a young retiree might be easy, but you should have a plan for someone to continue making these withdrawals on your behalf should you forget to in old age.

Cancel Life Insurance
Many couples stop paying for life insurance once their children are grown. However, consider how much your household income would be impacted should one of you die first. Would the elimination of a regular pension and/or Social Security benefit check impact your loved ones’ lifestyle or financial security? Consider purchasing life insurance for one or both spouses to help ensure that there is enough money for the survivor’s lifetime.

Chat With Strangers
Elder financial fraud is big business. Each year, $37 billion is fraudulently taken from seniors—often willingly given. Because many seniors live alone, they are more susceptible to chatting on the phone with a friendly caller, who uses this to their advantage. It’s a good idea to never respond to phone calls you receive from marketers or unsolicited offers from unfamiliar companies.

Keep Information in Different Places
The wider the range of your savings and investment accounts, the harder it is to look after them when you get older. Consider consolidating accounts into as few as possible, such as combining checking and savings accounts into a single bank and transferring investments to one investment firm.

Pay Bills By Hand
Stop paying your bills every month; have your bank pay them automatically. Enter all regular payors and authorize your bank to pay them from your bank account automatically. Also, get some help monitoring this process. As you get older, you’ll want someone helping sort through your mail on a regular basis to address periodic bills like homeowner’s insurance and your property tax bill.

 

 

 

According to the pundits, the Dec. 14 move by the U.S. Federal Communications Commission to repeal existing net neutrality rules is either a major blow to free communication or a storm in a teacup. Perhaps the truth lies somewhere between these polarizing viewpoints.

It appears that those who supported dismantling the rules put in place to ensure equal access to the Internet (a concept usually known as “net neutrality”) and those who wished them to remain want the same things. Both sides say they are opposed to Internet Service Providers putting discriminatory practices in place to slow down or block certain content, and neither wants ISPs to charge users more to see certain websites. The disagreement appears to center on how fair play on the Internet should be enforced and who exactly does the enforcing. Not surprisingly, President Trump’s appointee to the FCC, Chairman Ajit Pai, believes less government regulation will be more beneficial, and that broadband should not be regulated as if it were a utility. 

Most software companies disliked the FCC’s recent repeal of the Obama era regulations. Many small business owners and entrepreneurs also voiced their opposition to the repeal, fearing that the big ISPs will take advantage of their “gatekeeper” role. On the other hand, telecommunications companies were glad to see them repealed. The naysayers believe there are clear dangers in allowing market players to also be guardians of net neutrality. They argue that big telecom companies are already dabbling in preferential Internet usage practices to steer consumers to their sister companies and that Pai’s repeal opens the door for more ploys of this nature.

Here is some of the history behind the headlines and some of the key issues to ponder:

• Before 2015, Internet Service Providers were governed by general laws regarding anti-competitive policies and consumer protection. In 2015, under President Obama, ISPs were classified as utilities and so-called net neutrality rules were put in place to stop ISPs from slowing down service, blocking access or requiring payment to favor certain content providers.
• When Ajit Pai, who had voted against the 2015 reclassification in his role as an FCC Commissioner, was nominated by President Trump to take over the top job, industry observers knew a reversal was on the horizon. Pai contends that heavy-handed government regulation inhibits innovation and investment.¬†
• Net neutrality existed prior to launch of the 2015 regulations. It might be argued that now, in 2017, we are back to pre-2015 conditions and that there is no call for the alarmist clamor.
• On the other hand, Pai‚Äôs critics note that a neutral Internet is not guaranteed to last. Major companies already are deploying preferential usage patterns to boost sales‚Äîfor example, AT&T customers who access DIRECTV Now (which AT&T owns) are able to do so without that access counting as part of their data package. AT&T competitors like T-Mobile and Verizon also have similar setups. This practice‚Äîzero rating‚Äîwas scrutinized by the FCC under the Obama era regulations but, following Pai‚Äôs repeal, it isn‚Äôt any longer. Vertical integration by major ISPs is on the increase, and there could be a strong incentive for these industry leaders to favor their own content over all-comers.

Lawmakers have the power to overturn this recent decision, and to propose their own laws to provide some stability to the regulatory environment. Small business owners who want to see a fair and level playing field will want to continue to monitor this situation. 

Traditionally, retirement was short and peaceful. People worked jobs that were hard on the body—such as farming, manufacturing, trades work or railroad work. If you made it to retirement, you were relieved to have the chance to wind down your days in restful repose.

That all changed in the latter part of the 20^th century. Retirees began to take advantage of affordable travel opportunities enabled by cars that could drive great distances and highways that could accommodate them, as well as regional intracontinental airlines. In the 1980s, exercise became a popular pastime and retirees could be found at fitness clubs, aerobics classes and racquetball courts. There was a sweet spot in time when retirement was short enough not to outlive savings and retirees were healthy enough to enjoy an active leisure life.

But a lot of things have changed over the past 30 years. More jobs are automated and life expectancy rates, especially for people who reach age 65, are longer than ever. By middle age, it is common to have developed one or more chronic conditions, making a long retirement a less-than-healthy one. Furthermore, we experienced a pretty severe recession and slow economic recovery, when many pre-retirees had to dig into their savings just to stay above water.

Another area that has changed is the transition from employer-sponsored pensions to 401(k) plans. This has fostered a different way of looking at retirement. Back when many workers had pensions, all they had to do was accumulate enough credits and they could retire with a guaranteed stream of income for life. That gave people something to look forward to. Now, with self-directed retirement plans, workers know that the longer they work the more they can save and the longer their investments have time to grow—which actually creates an incentive to work longer. Another reason people tend to work until at least age 65 is so they don’t have to pay for their own healthcare insurance, for which premiums have grown exponentially over the past 15 years.

In addition, the longer we earn an income the longer we can delay drawing Social Security benefits. Once you start taking a benefit, that payout level remains permanent throughout your life. However, the longer you wait, the higher the payout. In fact, people who delay to age 70 can take advantage of Delayed Retirement Credits, which increase their level of payout 5.5 percent to 8 percent a year past full retirement age.

Now that people are living longer, many are healthy enough to continue working longer as well. Plenty of employees want to continue working not only for the money, but for social interaction and intellectual engagement. When retirement was 10 years or less, that seemed like enough time to wind down and relax. But with today’s workers facing 30 years or more in retirement, the prospect of not having a regular place to go, people to see, and work to do for a few decades isn’t quite as appealing.

However, what if you hate your job and can’t imagine staying on past traditional retirement age? A recent study found that people who changed jobs in their 50s were more likely to work longer. In some scenarios, using well-earned experience can translate into a more rewarding job opportunity. Consider that even if you don’t earn more money, a lateral move could still yield higher financial rewards if you enjoy the new job and want to continue working there indefinitely.

Some retirees decide to go back to work because they’ve had a bit of fun but find they miss the day-to-day routine of work and having a broader network of interpersonal relationships. In fact, they often find their experience and expertise was sorely missed, and in some situations, are more valued by their colleagues. This might not happen in all cases, but the lure of renewed friendships, professional appreciation and additional income offer compelling reasons to come out of retirement.z

Are You on Track with Your Estate Planning?
Estate planning is an ongoing process.  Everyday personal and family changes can make yesterday's well-devised estate plan wholly inadequate today.  Consequently, you should be aware of events that may signal the need for an estate plan review and possible revision. Our Estate Planning Guide is a great resource for familiarizing yourself with issues you should consider, and on Page 16 of the guide is a ten-point checklist to help you determine if your estate plan is up to date.  

Although estate planning has become simpler for many people thanks to the new “permanent” estate-tax exemption amount and relatively low top estate-tax rate, that doesn't mean that estate tax is no longer a concern, particularly for higher income individuals with larger estates.¬†

When there are births, deaths, marriages, divorces, moves out of state, changes in estate composition, business changes or tax law changes, please call us or your professional financial advisor to discuss an estate plan review.