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Announcer: It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives securities offered through Cambridge Investment Research Incorporated, a broker dealer member FINRA SIPC investment advisor representative Cambridge Investment Research Advisors Incorporated. A registered investment advisor Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s financial focus program.
Nate Kreinbrink: Soloing today. Bringing you today’s program middle of January. I think the last few weeks where we were talking as far as unseasonably warm temperatures for the end of December, early January. We can finally say winter is here. A little snow over the weekend. Cold temperatures, single digits, negatives, I’ve seen for this weekend. Again, back to normal here in the Midwest. It is the middle of January, so we have to expect it, as I say, everyday that we get through is one day closer to spring, so we can always optimistically look for that.
For today’s program, we talked the last couple weeks, as far as the last couple of weeks with James looking a little bit of 2019 outlook looking back on 2018 some things that occurred. We’ve had Andy Ferguson from our tax portion of our office and for a few times talking a little end of year tax planning, beginning of year tax planning.
For today, gonna just back it up just a little bit and focus on kind of our core concept of what we start with when we meet with clients and that’s just overall in general retirement planning. Now when we look at this through basically breaking down into two different phases: you have your accumulation phase, that’s when you’re still working, you’re putting money away and you’re saving money and then your de cumulation stage, that’s when you are in retirement and you’re taking distributions from it. Now each one of those phases you can break down even more as far as the different parts of when you’re just starting to work. The importance of just putting money away, understanding where you’re putting that money and the impacts you’re going to have. We’ve talked a lot as far as pre-tax portions in your 401Ks, your traditional IRAs. We’ve talked tax free, tax defer buckets, as far as your ROTH, your ROTH-401K. The impact that those have on you now versus the impact/benefits that those are gonna have benefits for you down the road. So again, understanding those and knowing where you’re gonna put in and how that’s gonna impact you.
When we transition into that de cumulation, that retirement phase, everyone always focus on, “Okay, where am I putting my money” the accumulation part of it. The most impactful part of a retirement is how are we going to beak this money down? What is the most effective way that I can utilize this entire money, no matter what bucket it is, whether it is pre-tax, post-tax, non-qualified, taxable accounts, things like that. What is the most effective way that I can pull from these buckets of money, knowing that each one is gonna have a different impact on me from a tax standpoint and an income standpoint.
So again, we spend a lot of time on that portion of it, as far as having people look at not just the year they’re in the next year or two, but 20 years down the road, 10 years down the road. There’s some magical dates that come into play as people get to that retirement age or are in retirement. The first one I ever see is 59 1/2. That’s when you can take money out of those IRA accounts without having that 10% penalty. The next one 65, obviously, when Medicare starts. In between there is age 62, the earliest that you can begin to draw your social security benefits. Your full retirement age for your social security benefits and that’s probably anywhere from age 66 and 66 and two months, four months, six months, eight months, ten months. And then obviously for those born after 1960, your full retirement age is 67.
Again, understanding what those dates mean, understanding that at age 70 is your max benefit. So whether your full retirement age was 66, your full retirement age was 67, you’re going to be able to earn that 8% increase in your social security benefit every year that you wait after your full retirement age up until age 70. That 8% return is extremely impactful when you look at how that is going to accumulate in basically over your lifetime and again knowing that your benefit is the larger benefit of a spouse, your benefit will continue for a surviving spouse.
For example, and again, understanding that social security benefits are gender neutral, but just for example, saying the husband’s benefit is the largest one, they wait until age 70. Actuarily tables say that men do not live as long as women do. Husband passes away, the wife would be able to switch over to that larger benefit that the husband was receiving. So again, that’s putting it in simpler terms that understanding how those decisions not only impact you, but potentially a surviving spouse.
And then 70 1/2. That’s when you have to start taking money out of those tax-deferred accounts. Those traditional IRAs, those traditional 401Ks that you had where you got the tax-deduction when you put money in, you have to start taking money out of those accounts at age 70 1/2. Now there’s a certain percentage that ramps up a little bit each year, but that money that comes out to you is taxable income. So again, if we have a pension, we have social security benefits, that goes on top of whatever other income that you have to come up with your overall income.
So again, we want to make sure that we understand that when these dates are gonna be happening, the impact that they have on you, and then how we can maximize those. And again, during that de cumulation stage, as far as pulling money, having options, having different buckets of money, we call it, could be able to pull from, could be able to control that tax liability that we have. We find a lot of times that it’s very common for people to have a very big chunk of their overall retirement savings in a tax-deferred account. So your traditional IRAs, again there’s a lot of things that go into it. A big part is ROTH-IRAs, ROTH-401Ks weren’t as common back when maybe they started putting money away into it. Maybe weren’t even available in their plan at that point in time.
Another reason is employer contributions have to go into the tax-deferred accounts. So that’s 3% the 3 1/2 – 4, 5, whatever percentage it is that your employer is matching any contributions that you’re putting in. Those contributions have to go into a tax-deferred account. Which again, so that’s why the tax-deferred portion of a lot of people’s 401Ks is obviously a lot larger than what their maybe ROTH portion of a 401K, if they have any, is.
But where that comes into an issue again is, as I mentioned, at age 70 1/2 they have to start taking money out of there. So we find a lot of times that people that are retiring, they have a pension coming in. Maybe the wife had a small pension, social security coming in, they hae a nice decent incom.e Well, now all of a sudden they have a portion of tax-deferred assets, they get to age 70 1/2 and now they have to start taking another big chunk of money out that’s increasing their income. They don’t necessarily need that income because they’ve been living off the income of that social security, they have little to no debt, they’ve just been able to control their expenses and what they’re spending during retirement. Now this big inflow is coming in and now they have a larger tax liability.
That even is magnified even more when you have one of the spouse passing away. A lot of the times those tax-deferred accounts the primary beneficiary is the other spouse. However you have it set up with your pension, if it’s a life only one, then that would stop. If it’s a joint life where 50% to survive or 75 or 100% to the survivor, that pension continues on. Well now all of a sudden that single, surviving spouse is filing taxes in a single tax bracket, rather than a married filing jointly. So what that happens is, they have roughly about the same amount of income coming in, obviously, one of the social security, the lower social security benefit goes away, the higher one continues, maybe a pension continues, but those RMDs are still coming in now and being taxed in a single tax bracket, rather than married filing jointly, meaning that they’re getting up into the higher tax brackets much quicker.
So more of that same income coming in isn’t staying in their pockets, it’s being paid off in taxes. So again, if we want to look ahead into that to see how we could potentially maybe avoid that, the very least minimize the amount of taxes that are potentially being pushed up into a higher tax bracket. And then some cases, that higher income is pushing them up high enough where they’re paying higher Medicare Part-B premiums. So again, they’re getting the same Medicare coverage except yesterday they were paying one price, today they’re paying a lot higher price. So again, we want to make sure that we avoid that.
Where’s some things that we kind of look at is that kind of window of opportunity that we sometimes see from when an individual retires to that 70 1/2 point. Now obviously during that time period they retired so their income has basically dropped considerably. They may have a pension to kind of, like I said, offset some of that income. But oftentimes, their income from what they were making yesterday, to they get into retirement drastically drops. What that’s doing is bringing them down into one of the lower, if not one of the lowest, tax brackets.
Now we know that we’ve had this bucket of money that we know that down the road at 70 1/2 or whenever we take money out of it, we’re gonna have to pay taxes on it, the question we always ask is would you rather pay less in taxes or would you rather pay more in taxes during that money, knowing that you’re gonna have to pay taxes on that portion of your assets at some point in time.
So again, we have this opportunity, we may willingly want to be able to take money out of that tax-deferred account and pay taxes on it at a lower basis. This also helps in coordination with their social security benefits. We’ve said many of times and you’ll hear me say it many more that when you retire and when you claim your social security benefits need to be two separate decisions. Having that window of opportunity in there also helps us bridge that gap to be able to delay our social security benefits. Our social security benefits are basically like a lifetime pension. That they’re not going to outlive us, so if we could have a lifetime pension ant a bigger amount, rather than at a smaller amount, I think the answer’s pretty clear which route everyone would rather choose.
The argument that goes with that as far as social security benefits aren’t gonna be there, I need to get my money back, if you have those questions, come see me and I’ll show you exactly how the amount that you are paying in the social security the amount that your employer is putting into social security, and what you will get back over a normal lifetime and then you tell me who’s breaking even and why the social security system has some of the issues that it does today and I think you’ll understand a little bit more as far as why we try to claim those concepts.
Again, a lot that I threw in here today, you get talking on some of these things, the time goes by really fast. If you are nearing retirement, you’re in retirement, you have questions as far as are you maximizing your income coming in in retirement, are you pulling from the right buckets, per se in retirement, come see us. It’s too important not to. Again, your assets, you’ve worked so hard to save, to accumulate over your lifetime, being able to keep more in your pocket, versus going to other places, taxes, things like that. We want to make sure that we are maximizing all of those things, so again, come see us. We’d be happy to sit down with us, go over a free financial planning overview. See where you’re at and if there’s anything we can change.
Again, I am out of time. Again, this is Nate Kreinbrink with NelsonCorp Wealth Management, bringing you this week’s financial focus. Thanks again for tuning in and have a great rest of your week.
Announcer: It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives securities offered through Cambridge Investment Research Incorporated, a broker dealer member FINRA SIPC investment advisor representative Cambridge Investment Research Advisors Incorporated. A registered investment advisor Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.
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