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Financial Planning for Retirement Social Security

Financial Planning for Retirement

Consider me for your financial advisor when switching from growing your retirement accounts to distributing them.

This transition usually means moving some money from stocks to bonds, and I am well-schooled in the economy, inflation, markets, interest rates, and the bond market.

Before coming to Cambridge Investment Research Advisors in 2010, I spent 20 years with MetLife, so I am also well-versed in guaranteed retirement products such as variable and fixed annuities.

1. Retiring When the Stock Market Is High, and Interest Rates Are Low

You just retired. Along with a great career, you have built up a substantial 401(k) balance. It took a while, but you got the hang of investing in equities, never comfortable with the ups and downs, but always focusing on long-term growth.

However, now you need income, not growth. Over the years, you owned some bonds with mixed success. Moreover, unlike your foray into equity investments, this time, you cannot afford on-the-job training. You need the income now. Plus, you have less time to recover from any mistakes.

Read More: Diversification and Rebalancing Your Portfolio

With interest rates low, where do you go for income?

The Department of Labor’s fiduciary rule might have resulted in more people keeping 401(k)s with former employers. However, on March 15, 2018, the Fifth Circuit Court of Appeals ruled that the Department of Labor overstepped its bounds in creating the so-called fiduciary rule, parts of which went into effect last year.

The 2019 retirement SECURE Act makes it easier for employers to offer annuities in their 401(k) plans. But with the economic recession brought on by the pandemic, most employers have probably yet to adjust their plans.

So, the question remains—can you get the income you need from your plan?

Many employers still steer their employees’ 401(k) choices toward stock funds to grow their accounts, rather than bond funds or annuities to distribute the accounts.

Even if your plan offers sufficient bond funds, today, with the ten-year U.S. Treasury Bond yielding just .5%, bonds hardly seem to be the place to go for income, even though government bonds have provided investors with an excellent total return so far this year.

For example, the Barclays Aggregate Bond Index is up 5.4% for the year. Total return combines the interest rate with the bond’s change in price: bonds go up in value when interest rates fall.

Diving Into the Stock Market

Many retirees frustrated by low rates have put money earmarked for bonds into stocks, hoping the dividends plus the growth will provide sufficient income.

Even with the coronavirus-induced recession, the stock market is still anywhere from 80–100% overvalued as measured by CAPE or the Q Ratio. This does not mean it cannot continue to increase; it can, and it has. (It was more overpriced during the late ’90s Internet boom and the Roaring ’20s than it is today.)

High stock prices can exacerbate the problem with a stock-centric retirement portfolio. If the market drops and you withdraw principal as income, that money is no longer in your portfolio if the market rebounds.

Read More: Are We In Another Financial Bubble?

The financial services industry has adapted to this low-interest-rate environment

It has done so by building products for it, some of which provide you with income guarantees. But, they come with restrictions on withdrawing your principal, as well as somewhat confusing terms and conditions.

Other products offer a higher yield but no guarantees of how much of your investment will be returned. Many of them also lack daily pricing, making it impossible to know the value of your account on any given day.

Read More: Wealth Management

Financial Planning for Retirees
Financial Planning for Retirement

In this turbulent and unfocused market, going it alone can be unnerving

Those with questions should be wary of talk-show advice, whether it be on television or the radio.

Understanding interest rates, bonds, and dividend stock investing along with other transition products can be challenging, if not confusing.

With an upcoming election, talk of a second wave of the coronavirus, and so much uncertainty worldwide, now may be the best time to take control of your financial future.

As with most things in life, the first step is often difficult, but securing sound financial advice shouldn’t be left until it’s too late.

Finding a licensed and knowledgeable resource: It’s the best financial advice you’ll ever receive.

An income-friendly financial advisor

  • has a keen understanding of interest rates and the bond market:
  • has the knowledge that is imperative when one talks about income;
  • has access to the products necessary to help you transition from growth to income;
  • will check your account and let you know if leaving it with your 401(k) is a good option;
  • will work to keep your costs low—because, in a low yield world, the less you pay to someone else, the more you keep for income.

2. Understanding Your Social Security and Medicare Options

Financial Planning for Retirement
Financial Planning for Retirement

Social Security and Medicare are the cornerstones of most retirement planning strategies. One provides an income stream that you cannot outlive. The other provides health insurance when you are most likely to need it.

How Your Social Security Payment Is Determined

Social Security takes your highest 35 years of reported income, adjusts them for inflation, adds them up, and divides by 35 to arrive at your average income. Then a sliding scale is used to determine what percentage of that average income you will receive. The higher your average, the less of a percentage Social Security will replace. The standard amount to be replaced is around 42% of your average income.

The year you were born determines the age (full retirement age, or FRA) that you can retire and start receiving your full Social Security. For people born before 1960, it is around age 66 plus some months. For anyone born after that, it is age 67.

Suppose you decide to start receiving your Social Security at the earliest time, age 62. In that case, you will receive somewhere around 70% of your full retirement benefit. (A percentage reduces your retirement benefit for every month that you receive your benefit before your FRA.) Anyone who delays receiving their Social Security past their full retirement age sees their payment increase 8% per year until age 70. After age 70, the 8% increases end.

The breakeven point for someone whose FRA is age 66 but takes Social Security at 62 is age 78. After that age, the total payments received would have been larger if they had waited until age 66 to start their payments. People who start taking their benefit when they reach their FRA of 66, instead of waiting until age 70 and getting the additional 8% a year, bump up breakeven to age 82 1/2.

Spousal Benefits

An individual claiming a benefit based on their spouse’s work record must be at least 62 years old. The maximum spousal benefit is 50% of their spouse’s FRA benefit. At age 62, it is 35%. For a citizen to receive Social Security based on their spouse’s work record, the spouse with the work record must also be taking Social Security payments. Many people are usually eligible for a more significant payment based on their employment history. Social Security pays the higher of the two.

Divorced Spouses

Individuals are eligible for a benefit on the worker’s record if they were married to the worker for ten years and have not remarried. However, because many people qualify today on their work history, the 50% maximum spousal/divorced spouse benefit is usually less than the amount that they are eligible for on their record.

One difference for divorced spouses is that the worker does not need to be receiving social security for the divorced spouse to qualify.

Widows and Widowers

Widows and widowers are eligible for their deceased spouse’s benefit. If their spouse started social security early, for example, at age 62, after they pass, the remaining party would qualify for that amount, or 82.5% of their spouse’s FRA benefit, whichever is more significant. However, if their spouse waited until age 70 to receive their maximum amount, that amount is compared to their work record to determine which amount they will receive.

Widows and widowers have the option to start receiving a widow’s benefit at age 60, two years earlier than anyone else. They can also take their widow’s payments and let their earned Social Security benefit increase up to age 70.

To receive a widow’s payment, the surviving spouse must be unmarried or married after age 60.

Divorced spouses are also eligible for a payment if they were married for over ten years. They, too, must be unmarried or have gotten married after age 60.

Read More: Inheriting an IRA Spouses and Non-Spouses

Receiving Social Security While Working

After you reach your FRA, you can make any amount without reducing your Social Security payment. However, if you are not at your FRA, then you could experience a significant drop in your Social Security payment.

In 2021, you can earn up to $18,960 without a reduction in Social Security. If you earn more than that, then you will have one dollar of Social Security withheld for every two dollars you earn. So, if you make an additional $40,000 for a total of $58,960, then $20,000 of Social Security payments will be withheld.

That money is not lost. Instead, social Security adds back what was withheld to your future payments, paid when you reach your FRA.

There is another rule for the year you retire. If the year you start drawing Social Security is before your FRA, then you can make as much as you want in the months before you get your first payment. In the subsequent months in that year, if you make less than $1,580 a month (less than $18,960 a year), then you can keep all your Social Security for that month. If you make more than that, then you will receive no Social Security in that month.

If you retire in the year when you reach your FRA, then Social Security only uses the months before you reach the FRA. You can make as much as $50,520 a year or $4,210 a month in those months without reducing Social Security. If you make more than that, then the reduction is $1 for every $3. Once you reach the FRA, you can make any amount without any reduction in Social Security.

Read More: Taxes Case Study

Taxes on Social Security Payments

Low earners do not pay taxes on their Social Security. High earners do but only on 85% of it. To determine if your Social Security is taxable, you take your gross income and any tax-free income and one-half of your Social Security.

If you are single and your added number is less than $25,000, you owe no taxes on your Social Security. If you are married and filing jointly and make less than $32,000, you owe no Social Security taxes.


Medicare consists of four components: Parts A, B, C, and D. Remember, you and your spouse will have your own plans. There are no family plans.

Part A covers hospitalization and has no cost to the participant. It pays for hospitalization for 60 days. After that, the participant must pick up part of the price. It has a reasonably good-sized deductible, which someone might end up paying more than once a year.

Part B is medical insurance. It is voluntary. It has a premium based on your income and a copayment of 20%. It covers doctors’ costs, testing, and other medical costs separate from hospitalization.

Part C replaces Parts A and B with a private plan that looks like the kinds of insurance you get from work. You still must pay the Part B premium and a premium to your Part C provider. Some Part C plans provide for prescription drugs.

Part D is the newest component. It pays for medical drugs, is voluntary, and has a premium. However, it does not pay all costs. As you might be aware, it has a famous doughnut-hole structure.

Most people become eligible for Medicare when they reach age 65. If they happen to be on Social Security already, then they are automatically enrolled in Medicare. If not enrolled in Social Security, it is highly recommended that an individual contact Social Security three months before age 65 to discuss their Medicare options.

If not automatically enrolled, an individual has three opportunities to sign up for Medicare. The initial enrollment period is at age 65. The special enrollment period is for individuals over 65 who are still working and who have health insurance from their work or their spouse’s work. They can sign up for Medicare without penalty when their employment or insurance ends. The third enrollment period is the one you want to avoid. It is the general enrollment period. General enrollees incur penalties, and coverage delays apply.

General enrollment penalties include a permanent 10% per year increase in your Part B premiums. In addition, the enrollment period is limited to the first three months of the year. Coverage does not begin until July of that year.

There is another type of plan called Medigap or Medicare supplement plans that fill in some of the Medicare gaps, such as the Part A limit on the number of days allowed in a hospital, the 20% copay in Part B, or the fact that Medicare does not pay for foreign care.

These plans are private. However, there is a six-month window starting when someone turns 65 or when someone still working past 65 who has health insurance through their work or their spouse’s work cannot be denied coverage for a preexisting condition or pay a higher premium because of that condition.

Some people might get confused and miss this enrollment period and subject themselves to Medicare’s general enrollment penalties if they have retiree health insurance, which might make them forget to sign up for Medicare Part B at age 65. Remember that the ability to sign up for Part B after age 65 and enroll in a Medigap plan without regard to preexisting conditions happens when you have health insurance from your work or your spouse’s work, not from having retiree health insurance.

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted on as individualized investment advice. Cambridge does not offer tax advice.

Works Cited

Landis, Andy, “Social Security the Inside Story”, An Expert Explains Your Rights and Benefits, CreateSpace Independent Publishing Platform, North Charleston, SC 2016 Edition,

How much can I earn in the year I reach full retirement age without losing Social Security benefits? AARP, Updated December 23, 2020,

Anspach, Dana, How to Avoid the Social Security Earnings Limit, Sensible Money, December 10, 2020,,in%202020%20it%20was%20%2448%2C600.)

Backman, Maurice, In 2021, you could earn up to $18,960 without having it impact your Social Security benefits, Motley Fool, Oct 25, 2020,

Retirement Benefits Securing today and tomorrow,, 2021,

When can I buy Medigap?,

Are social security benefits taxable? H&R Block,

Retirement Benefits Special Earnings Limit Rule, Social Security,,regardless%20of%20your%20yearly%20earnings.&text=Reach%20full%20retirement%20age%20in,substantial%20services%20in%20self%2Demployment.

Securing today and tomorrow, How Work Affects Your Benefits,, 2021,

Social Security When Should You Start Taking It?
Financial Planning for Retirement

3. Social Security When Should You Start Taking It?

To try to develop the most effective retirement income strategy for the middle class, Stanford University’s Center on Longevity analyzed and compared 292 scenarios.

Its conclusion is a two-prong strategy. First, delay taking social security until age 70 by working either full- or part-time. Second, withdraw annually from your IRAs or 401(k)s based on the IRS’s minimum requirement tables.

Prong 1

Every year you wait after age 66, your social security benefit goes up by 8%. For example, if you are eligible for $30,000 at 66 but are waiting until you reach age 70, that benefit increases by 32% to $39,600. (After age 70, there is no reason to wait because the 8% stops accruing.)

Future cost of living adjustments (COLAs) are then based on the higher amount, which is $39,600 in this example. If the Social Security Administration announces a 2% COLA, your amount next year will be $40,392.

The study recommends that married couples have the higher-earning spouse delay taking his or her social security until age 70 while having the lower-earning spouse begin taking social security when he or she hits the full benefit, which is usually age 66.

That way, if the higher-earning spouse dies, the lower-earning spouse’s social security jumps to the amount the higher-earning spouse was receiving.

Prong 2

The second prong is supplementing your social security by withdrawing from your IRAs or 401(k)s based on the IRS’s required minimum tables. For example, the table might require you to take out 4% of your account value at age 73. If your IRA is worth $100,000, you would withdraw $4,000.

The amount you withdraw each year will change as your account’s value changes and the percentage required to take out goes up.

They recommend keeping between 50 to 100% of your portfolio in stocks. In good years, your withdrawal amount will be higher than when the stock market is down.

The study is based on working until age 70. That way, you will not deplete your IRAs or 401(k)s as you wait. If someone fully retires at age 66, the benefits of waiting to take your social security get more complicated.

Financial Planner Michael Kites did a study that found it takes to age 80 to break even from having to use retirement assets between ages 66 to 70.

What About Public Employees?

The study focused on people working for companies that no longer offer traditional pensions, so there is a need for Social Security to replace it.

Most public employees still have traditional pensions. If they retire at age 66 or younger, pension might make it easier to wait for the more significant Social Security payout at age 70.

Other public employees work in one of the fifteen states where some or all their municipal employees do not contribute to Social Security. (Some may become eligible through other jobs.) For them, because of the Windfall Elimination Law, which reduces their Social Security payment by around 55%, why wait until age 70 to get a more significant number decreased by 55%?

Married public employees in those states should be wary of their spouse waiting until age 70 to start taking Social Security, especially if the spouse fully retires at 66.

Why deplete retirement resources, especially if the public employee pension provides a lifetime income guarantee to the spouse upon the death of the public employee? A second law, the Government Pension Offset, means the public employee gets little to none of the spouse’s Social Security after that spouse dies.

Financial Planning Process
Financial Planning for Retirement

4. The Financial Planning for Retirement Process

Your Financial Planning starts with gathering your financial information into one place, to generate thoughts, questions, and opinions about your personal financial goals and situation.


Financial Planning Process

You gather your data: financial questionnaire, tax forms, brokerage statements, retirement accounts statements, mutual fund, and annuity statements, insurance policies


Financial Planning Process

You establish goals: a comfortable retirement, retirement income needs, second home, travel, estate planning


Financial Planning Process

I analyze information: mutual fund and ETF due-diligence, retirement planning, asset allocation, and risk tolerance analysis


Financial Planning Process

Make recommendations: product solutions: stocks, bonds, mutual funds, ETFs, annuities, life insurance plans, tax reduction strategies


Financial Planning Process

I monitor and update: annual reviews, twice a year email updates, monthly brokerage statements, CIR statements online reporting of your accounts

Do You Have After-Tax Money in Your 401k?
Financial Planning for Retirement

5. Do You Have After-Tax Money in Your 401k?

Do you happen to have after-tax money in your 401k or 403b, assuming the fees and expenses in the IRAs are comparable to the 401k or 403b? Then, a rollover might be beneficial.

In Notice 2014-54, the IRS provided the option for an individual to roll over their pre-tax retirement money into an IRA while rolling over their after-tax money into a Roth IRA.

If left in the plan, future earnings from the after-tax investments are withdrawn as taxable distributions. However, if rolled into a Roth IRA, those earnings start growing tax-free.


The SECURE Act requires children, grandchildren, and any non-spouse beneficiary ten years younger than the IRA owner to withdraw the entire inherited IRA or retirement plan in ten years. They no longer have the option of stretching the withdrawals over their lifetime.

The SECURE Act, however, keeps the rules the same for spouses. They can still roll the plan over into their IRA, become the IRA owner, or remain an IRA beneficiary.

Beneficiary Planning

Depending on how much after-tax money is in the 401k, a potential planning strategy is to roll the after-tax to a Roth IRA, maybe leaving that for the kids. Then, you can reasonably invest in that account aggressively. The Roth grows tax-free, and the beneficiary can withdraw without incurring taxes. (The IRA owner also can withdraw tax-free.)

The one downside is that you must wait five years to make a total penalty-free withdrawal from the Roth account. After that, however, you can withdraw the after-tax rolled-over amount at any time without penalty, as only the gains are subject to a 10% penalty.

No Minimum Distribution

Most people with after-tax money in their 401k typically have a significant account balance.

One usually does not contribute after-tax until they have used up all their pre-tax contribution limit.

So, even if one does not intend on leaving money to someone ten years younger, there are still benefits. No minimum distribution is required from a Roth IRA, meaning the money can stay in the account longer and be invested more aggressively. All withdrawals are tax-free.

Federal Government Rules

The federal government has instituted a series of rules and laws to help participants with that decision. From the U.S. Department of Labor, the first law puts an increased requirement on financial advisors who recommend that participants roll their money over.

The other, from the Securities Exchange Commission, requires an advisor to work in the best interest of the retirement plan participant.

If you have after-tax money in your plan, the benefits of a rollover increase.

Please be sure to speak to your advisor to consider the differences between your company retirement account and investment in an IRA. These factors include, but are not limited to, changes to the availability of funds, withdrawals, fund expenses, fees, and IRA-required minimum distributions.

Should You Have a Trust as Beneficiary on Your Retirement Account?
Financial Planning for Retirement

6. Should You Have a Trust as Beneficiary on Your Retirement Account?

To allow non-spouse beneficiaries to withdraw over their lifetime while protecting the retirement account (401k, 403b, IRA) from creditors, many attorneys recommended people name a Trust as the primary or contingent beneficiary of a retirement plan.

That way, non-spouse beneficiaries could withdraw money from an inherited retirement plan based on their life expectancy. Doing this spread the tax liability over an extended period and protected them from creditors if the beneficiary was in a Trust.


Signed into law in December 2019, the SECURE Act calls into question the benefit of doing this, especially if the Trust provides income for children or grandchildren.

The SECURE Act does not impact spouses. They can still take money out based on their life expectancy, starting when their deceased spouse reaches their required beginning date, now at age 72. If they prefer, spouses can transfer the IRA, 403b, or 401k into their own IRA.

Non-spouse beneficiaries who are ten years younger than the IRA owner must now withdraw all the money within ten years. However, they are not required to withdraw each year (after they reach adulthood, minor children are required to withdraw in ten years).

Why a Trust Could Be a Problem

Some Trusts require that only the minimum amounts be distributed each year to the beneficiaries. However, from now on, for non-spouse beneficiaries, the only required distribution happens in year ten.

Sometimes, no distributions can be made until year ten, when everything is withdrawn and taxed. The Trust could end up paying higher trust tax rates on the income and dividends on the monies not distributed in years one through nine.

COVID-19 Complicates Things

The law went into effect in 2020. Because of COVID-19, some people have not met with their attorney to review the new law and change the Trust or the retirement plan’s beneficiaries. (For governmental retirement programs, 403b and 457, the law goes into effect in 2022.)

Trusts for retirement plan owners who died before 2020 can use the old law and remain useful planning tools. But unless the new law changes, there appears to be little benefit of naming a Trust as the beneficiary on a retirement account.

A simple solution is to replace the Trust as beneficiary and name new beneficiaries on the plan. You can usually download a form or get it from your financial advisor or plan administrator. If you are married, you could make your spouse the primary beneficiary and your children and grandchildren contingent beneficiaries.

Retirement Strategies – Net Unrealized Appreciation (NUA)

If you own employer stock in your employer’s retirement plan, and if that stock has appreciated when you retire or leave your company, you should be aware of NUA.

NUA allows individuals to withdraw their company stock holdings as a capital gain as opposed to income.

For example, say you own employer stock for which you paid $50,000, and today it is worth $250,000.

If you use NUA on the $50,000, you will pay income taxes, but on the $200,000, you will pay capital gain taxes, which are 15% to 20% below income tax rates for some people.

The $200,000 is your NUA. It will fluctuate as the stock moves up and down.

NUA is an important option. It can reduce taxes, but it may concentrate risk when diversification is needed.

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted on as individualized investment advice.

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