Good idea or bad idea? Well, it all depends…
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You don’t need that watch.
Driving in to this office today, I heard a Rolex commercial. It spoke of how wonderful the watch I and how happy you will make your loved one this holiday. The next line was how you can take 3 years to pay for the watch. Three years! If you have to make payments for a watch, you don’t need that watch. A Rolex, and every other item in that category are wants, not needs. Create a fund specifically for purchases of want items. When you have saved that cash, stop and ask yourself if you really want that item. If the answer is still yes, go buy it now that you can pay cash for it.
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This is one egg you don’t want to crack.
We love eggs. We go through about 18 eggs per week. If cooked properly, your hard boiled eggs will crack and peel easily. This is the type of egg you want to crack – not the retirement nest-egg. Here are a few things people fall short of when planning for retirement that can lead to a scrambled mess.
I like to use age 90 for life expectancy in my planning. Often, a client will state that there is no way they will live that long. Underestimating your life expectancy will wreak havoc on your plans. Most people retiring at age 65 will live 20 years or more beyond that age. I prefer to err on the side of longevity.
Most of us save to some type of retirement plan – many only save to the corporate match. Not knowing what to save can be another crack in the retirement nest egg. Fortunately, doing a budget can solve this problem. Knowing how much income is necessary to replace your earnings + emergencies is essential to a secure retirement.
While at a friend’s house, another guest stated that they want to retire at age 62 and start taking Social Security. I quickly explained that he would be taking a permanent 25% cut in those benefits during his lifetime, and relegating his wife to a reduced benefit when he passes. Waiting until full retirement age, or beyond, can be a great boost to your retirement income. In fact, delaying taking your benefit past age 65 until age 70 allows for an automatic 8% per year increase in your social security payment.
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3 Rules to live by.
3 Rules to live by.
Ok, so most of us don’t like rules, however, if you follow these 3 rules, you can get and keep you financial life under control.
Spend less than you earn.
It seems like an easy rule to follow but 71% of U.S. workers are in debt according to CareerBuilder. Make a budget and stick to it. Having positive cash flow gives you control of your financial life.
Wait 24 hours for that big purchase.
You’ve had your eyes and an expensive piece of jewelry, or a new car, or even a vacation. Do your homework, find your item and price, then sit on the decision for 24 hours. If you still feel that the expenditure is worthwhile and you have the cash, make your purchase.
Save for a rainy day.
I cannot say it enough or more clearly – YOU NEED AN EMERGENCY FUND. When establishing your emergency fund, look at replacing income vs. covering expenses. You will have to stash a bit more this way, but you will be better off in the long run.
I hope you agree that these rules are essential and not that hard to deal with.
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Happy Thanksgiving!
“I would maintain that thanks are the highest form of thought, and that gratitude is happiness doubled by wonder.” G.K. Chesterton
I extend both thanks and gratitude to you and your family over the holiday season, and throughout the coming year.
Sincerely,
Nancy Hecht, CFP
Do this now – 3 moves to make before the end of the year.
This year has gone by fast, take advantage of these three moves before the year is over.
Bunch your deductions.
Many of us are receiving our property tax bills now. Look at your projected income for next year, if you are expecting a raise or bonus, you may want to delay paying your 2017 property tax until January, then also pay your 2018 property tax next year. By bunching these two tax bills in one year, you will have a bigger deduction.
Harvest your gains.
If you currently are in a 10% or 15% tax bracket, you can take capital gains from investments and pay a 0% capital gains tax. You may also want to review your investments to see if you can match capital gains with capital losses, thus reducing the tax on the gains.
Hurricane Irma losses.
Most years, you can subtract $100 from your total hurricane losses, then subtract 10% of your adjusted gross income to get your deductible loss. In September, Congress approved legislation that waives the 10% AGI requirement. You will be able to write off losses over $500.
Don’t let these tax saving opportunities pass you by.
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Will the ‘tax torpedo’ blow up your retirement? My CNBC interview.
Social Security may be a long-awaited retirement perk, but it’s not without its headaches and complications. (It is, after all, a government program, so that shouldn’t come as a complete surprise.) Retirees must manage their Social Security and other retirement income well if they hope to avoid the “tax torpedo.”
The tax torpedo is a name given to the unexpected way that Social Security can get taxed, depending on how much other income you have.
“It sneaks up on people,” said Justus Morgan, a certified financial planner with Financial Service Group. “The majority of folks don’t understand if or how Social Security can be taxed.”
Because the income amounts that are subject to tax aren’t indexed for inflation, more and more retirees will be ensnared in the tax torpedo in coming years.
Retirement is a taxing time
About half of retirees don’t need to worry about the taxation of Social Security benefits because their income is too low, according to the Congressional Budget Office.
But those with more income could have a portion of their Social Security taxed as they pass certain thresholds. Social Security isn’t taxed when provisional income is less than $25,000 for individuals ($32,000 for married couples filing jointly). When income is between $25,000 to $34,000 ($32,000 and $44,000 for married filing jointly), 50 percent of Social Security income is taxable. When provisional income is above those amounts, 85 percent of Social Security is taxable.
Provisional income is calculated by taking your modified adjusted gross income and adding half of the Social Security benefits received.
“Another shocker is that it’s all your sources of income, even income from tax-free bonds,” said CFP Nancy Hecht of Certified Financial Group. The tax torpedo typically comes at age 70½ , when the required minimum distribution from tax-deferred 401(k) plans and individual retirement accounts kicks in.
“I’ve had many of my clients pushed into a whole different tax bracket by having to take the RMD,” said Hecht. “Many of my clients will pay the same or more in retirement as they were paying while they were working.”
Consider the example of a single taxpayer whose taxable income puts her in the 25 percent tax bracket. She may think that withdrawing an additional $100 of income would increase her taxes by $25. But if she has hit the provisional income threshold, it could increase her income much more. In that case, an extra $100 would actually make $185 of income taxable because now she must include her Social Security, as well.
Now withdrawing $100 results in a $46.25 tax bill ($185 x 20 percent), resulting in a marginal tax rate 46.25 percent.
“It’s much more common for taxpayers at the lower- and middle-income tax brackets to get caught off guard by this,” said Morgan at Financial Service Group. “In many cases, higher-income taxpayers are already thinking about the impact of taxes on retirement.”
Consider your total tax burden
And there’s more bad news when your taxable income climbs too high. How much you pay for Medicare, the health insurance program for those 65 and older, depends on how much taxable income you have.
“Your Medicare premiums for Part B are based on modified adjusted gross income,” said William Meyer, founder and CEO of IncomeStrategy.com, a website the helps people maximize their sources of retirement income. “So if you withdraw too much of your IRA, you could increase your MAGI and that will affect the amount that you pay for Medicare.”
For single filers, Medicare Part B (the part that pays for doctor’s visits and services) costs $134 a month if MAGI is below $85,000, but it could run as high as $428.60 if it exceeds $214,000.
“It all needs to be coordinated, but people aren’t thinking about all of this together,” said Meyer.
Keeping the torpedo at bay
There aren’t too many options to lessen the sting of the tax torpedo for retirees who are already collecting Social Security and taking RMDs. Action must be taken years in advance to set up your income stream for maximum tax efficiency.
At the root of the tax-saving strategy is turning the conventional wisdom around retirement account withdrawals on its head. For many years retirees were advised to start their withdrawals with their taxable accounts while they allowed their tax-deferred pools of money to continue to grow. That way, they would have a bigger balance to draw on when it came time for RMDs.
The problem is that this strategy can create more taxable income than you want. Structuring withdrawals in a different way can keep less of your Social Security benefit from being taxed, said Meyer.
Instead, it might be better to structure withdrawals this way: Use your tax-deferred accounts in the early years of retirement, hopefully providing you with enough income so they do not need to tap Social Security until age 70, when benefits max out.
“For some people there’s just no avoiding the tax torpedo. They have to draw down their money because that’s what they’re going to live on.”
-Justus Morgan, certified financial planner with Financial Service Group
“Most people will be in a lower bracket early in retirement and before RMDs start,” Meyer said.
The idea is to push your taxable income into a lower tax bracket early on. “Not only will you get the ridiculously high 8 percent bump in Social Security for each year you wait to collect beyond full retirement age but you also drawn down your qualified accounts,” said Hecht of Certified Financial Group.
Then, when you must take RMDs, starting in the year you turn 70½, your account balance will be smaller and, therefore, your RMDs will be smaller. “Then when RMDs start, flip to the taxable account,” said Meyer of IncomeStrategy.com.
But not everyone is able to take advantage of those strategies, especially people who don’t have a combination of tax-deferred, taxable and tax-free accounts.
“For some people there’s just no avoiding the tax torpedo,” said Morgan at Financial Service Group. “They have to draw down their money because that’s what they’re going to live on.”
— By Ilana Polyak, special to CNBC.com
disclosures:http://www.hechteffect.net/?page_id=31
3 “Must do’s” before the end of this year.
This time of year gets so busy preparing for all of the upcoming holidays. We spend hours on our guest lists, gift lists, and decorations. I have 3 financial things you must do before the end of the year.
1. Rebalance your portfolio. There have been a lot of investments that have grown this year, you need to rebalance to be able to keep those gains and stay in line with your risk tolerance.
2. Don’t forget to take your Required Minimum Distribution. If you miss this withdrawal, you will pay a 50% penalty.
3. Review and adjust your budget. I am assuming that you have a budget – if not – make one right now! Did you end up spending more in some areas vs. others? Did you pay off a debt? You need to review and adjust your budget annually to stay on track with your short and long term goals.
Set yourself up for a successful 2018 by attending to these “must do’s”
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It’s my first – what do I do?
Q: I turned 70 & 1/2 this year and have to take my first RMD (Required Minimum Distribution), I still work and contribute to my 401(k). Where do I have to take the withdrawals from?
A: This is a milestone birthday for taxes and retirement planning. Here is what you need to know:
If you have a Traditional IRA account you need to withdraw 3.65% of the 12/31/16 balance from the IRA and pay tax on the amount withdrawn. Congrats on still working, that gives you a bit of an RMD break. For those still working after 70 & 1/5 years of age and contributing to your 401(k) accounts, you need not withdraw from the 401(k).
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This is my report with News 6 /WKMG on Credit Cards
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