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Financial Planning for Retirement

Financial Advisor Tim Hayes CRPS®, AIF®, AWMA®, CFS™, CTS™, CES™, APMA®, CAS® 

You have retirement accounts in a few different places, and so does your spouse. Now that you are retired or thinking of retiring, you are closer to using the money. But you haven’t changed the allocation or risk level of any of those accounts. Moreover, you haven’t met with a financial advisor to discuss your retirement goals or accounts.

Switching from Growth to Income

Along with great careers, you’ve built up substantial 401k balances. 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.

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

Read More: Retiring When the Stock Market Is High, and Interest Rates Are Low

With Interest Rates Low, Where Do You Go for Income?

You’ve heard that the Department of Labor’s new Fiduciary Rule might have resulted in more people keeping their 401(k)s with their former employers. However, the 5th Circuit Court of Appeals ruled on March 15,2018 that the Department of Labor overstepped its bounds in creating the so-called fiduciary rule, parts of which went into effect last year.

You’re unsure now whether you can get the income you need from yours, as many employers never adapted to the new rule, and still steer their employees’ 401(k) choices toward stock funds to grow their accounts, rather than bonds funds to distribute the accounts.

Moreover, today, with the ten-year U.S. Treasury Bond yielding just 2.5%, bonds hardly seem to be the place to go for income, even though, so far this year, they have provided investors with decent total returns. (For example, the Barclays Aggregate Bond Index is up 2.7% for the year.) Total return combines the interest rate with the bond’s change in price: bonds go up in price when interest rates fall.

The Challenges:

  • Understanding interest rates, bonds, annuities, and dividend stock investing, along with other transition products, can be challenging and confusing.
  • As with most things in life, the first step is often difficult, but securing sound financial advice should not be left until it’s too late.
  • Finding a licensed and knowledgeable resource will help you get the best financial advice.

Read More: Are You Ready to Retire (PDF)

Tim Is a Financial Advisor…

  • with a keen understanding of interest rates and the bond market.
  • with the knowledge that is imperative when one talks about retirement income.
  • with access to the products necessary to help you transition from growth to income.
  • who will research your retirement accounts and let you know if leaving it with your 401k or 403b is a good option, or if you should roll it over.
  • who 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 yourself.

Read More: Are We In Another Financial Bubble?

Book a Zoom, Phone, or In-Person Financial Planning Appointment

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When the Seasons of Life Change, Your Financial Strategy Should Change Too

Tim Hayes is a financial advisor who knows how to adjust your financial strategy to adapt to life’s changes. Whether you’re an individual, small business, or company executive, he’ll help you stay on track to your financial goals despite the shifts in the landscape.

How Tim Will Help Your Financial Planning for Retirement?

  • Measure how well your investments match up with your risk tolerance and goals and income needs.
  • Design a strategy for minimizing your tax burden.
  • Recommend investments based on an explicit balance of growth vs. security.
  • Figure out whether you should keep your 401k or 403b with your previous employer or roll it into an IRA, where Tim will build you a new portfolio.
  • Build that portfolio using your risk tolerance to create enough retirement income, but so that you will not outlive your money.
  • Look over any pension options you may be eligible for and review any Social Security and Medicare questions you may have.
  • Examine any group life policies you may want to convert to an individual policy

Retirement Needs Fact Finder (PDF)

FAQ

I am an Investment Adviser Representative at Cambridge Investment Research Advisors, Inc., a $44B RIA based in Fairfield, IA. I am also registered with Cambridge Investment Research, Inc., an independent broker-dealer with over 3,000 registered representatives nationwide.

I've held an industry securities registration for 30+ years and am subject to SEC and FINRA oversight.

Most clients pay fee-only or an hourly rate. The size and complexity of the client's wealth management and financial and retirement planning determine that fee.

Some clients pay a commission, mainly those with smaller accounts, i.e., Roth IRAs, some public-school teachers with 403b retirement accounts, or parents or grandparents who set up a 529 college savings plan.

The first introductory and fact-finding appointment can be in-person or by phone. The next meeting where I provide my recommendations should be in-person. (For the time being, telephone, Zoom, and email are replacing in-person meetings.)

Subsequent meetings during which we monitor your progress and investments can be done in-person or by phone, email, Zoom, or Skype - or, more likely, a combination of thee meeting types.

Book an appointment phone or in-person

Understanding Your Social Security and Medicare Options

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 prior to 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.

Read More: Social Security When Should You Start Taking It?

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 FRA benefit, whichever is more significant. 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 must have been 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.

Receiving Social Security While Working

After you reach your FRA, you can make any amount without reducing your Social Security payment. 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. 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. 

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

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. Late enrollees incur penalties, and coverage delays apply.[WE1] 

General enrollment penalties include a permanent 10% per year increase in your Part B premiums. 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.

However, these plans are private. There is a six-month window starting when someone turns 65. If you are over 65 but are still working with health insurance through your work or your spouse’s work, you cannot be denied coverage for a preexisting condition or pay a higher premium because of that condition.

Some people might get tricked 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 Medicare 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.

Disclosure

Please be sure to speak to your advisor to carefully consider the differences between a company retirement account and IRA investment. These factors include changes to the availability of funds, withdrawals, fund expenses, fees, and IRA-required minimum distributions.

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