A newly passed bill known as Secure Act 2.0 will change how retirees withdraw from their retirement nest eggs. This fundamental change increases the age at which investors must take money from their retirement accounts, bringing about some impactful financial planning opportunities.

What is an RMD?

Once an investor reaches a specific age, they must withdraw a required minimum distribution (RMD) from their retirement account, such as an IRA or 401(k). The RMD amount is determined by the account holder's age and account balance at the end of the previous year. The Internal Revenue Service (IRS) requires RMDs to ensure account holders pay taxes on their retirement savings. RMDs, therefore, can be taxed on both federal and state taxes.

After reaching their RMD age, account holders must begin taking withdrawals from retirement accounts by April 1. Each subsequent year, RMDs must be taken by December 31st of that same year. The IRS may levy a sizable penalty for failure to take the mandatory distribution.

Good news, RMDs will be delayed by a year

A notable update from Secure Act 2.0 is the delay of RMDs. RMDs will start at age 73 instead of 72 for those born in 1951-1959. For those born in 1960 or later, RMDs will be delayed even further to age 75.

For those who turn 72 in 2023, you will not need to start your RMDs this year. Your first RMD can either be taken by December 31, 2024 or delayed until April 1, 2025.

There is no impact on a retiree if they have already started taking their RMDs or need their IRA to cover their cost of living. For others, who only take RMDs because they are required to, this significant modification to the RMD age provides additional retirement planning opportunities.

Retirement Planning opportunities

There will be more time for growth.

The new RMD regulation will give retirees a simple yet powerful benefit, more time for compounding growth. As the billionaire investor Charlie Munger states, “The first rule of compounding is to never interrupt it unnecessarily.”

This benefit must be highlighted, especially after a year of market losses.

An 8% return on a million-dollar IRA is $80,000. Additional returns undisturbed by an unnecessary RMD can have a snowball effect, providing an exponential lifetime benefit.

A longer window before RMDs can allow for additional planning and time, the essential ingredients in building wealth.  

QCDs can still be maximized.

Amidst the RMD age adjustment, the age at which account holders can use their IRAs to make Qualified Charitable Contributions (QCDs) was untouched. Thus, preserving one of the most powerful tax-saving strategies available to charitably inclined retirees 70.5 and older.

A QCD is a tax-free transfer of funds from an individual's IRA directly to an IRS-recognized charity. This charitable distribution allows taxpayers to avoid paying taxes on the withdrawn funds.

Retiree “Gap Years” are extended.

"Gap Years" are the years that occur between a person's retirement and the beginning of their RMDs. These Gap Years are often the years with the lowest taxable incomes in a person's adult life. As a result, they frequently serve as ideal years for accelerating income that would otherwise be taxable in a subsequent, higher-income year. The Secure Act 2.0's changes will give additional time for Tax Bracket optimization strategies such as Roth Conversions and Capital Gain Realization to reduce an investor's lifetime tax bill.

You may be pushed into a higher tax bracket in your later years.

Like all financial planning strategies, there is no one-size fits. The unanticipated pitfall of postponing RMDs can lead to more significant withdrawals in subsequent years when RMDs do start. An unexpected boost in income from RMDs might push you into a much higher tax bracket, phase you out of a tax credit, or trigger a surtax. Taking the time to understand the applicable tax implications are crucial when building a tax-sensitive retirement income plan.

This is a great time to reevaluate your retirement plan

The retirement system has undergone numerous changes due to Secure Act 2.0's policy reforms, adding to the difficulty of retirement planning. Recognizing the planning opportunities and risks that relate to you and your financial plan is essential.

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We help our clients organize and implement tax bracket optimization. In your early years of retirement, even if you do not have earned income, there are important tax considerations. I will illustrate two recurring tax planning strategies: Roth Conversions and Capital Gain Realization.

Consider a retired married couple (both age 65) living in Oregon this year.

In this example, this couple has $36,700 of taxable income. This places them in the 12% federal tax bracket and provides $52,750 more room inside the 12% bracket before moving into the 22% bracket.

Considering the wiggle room before the increased tax rate, this client could decide between the following options:

OPTION 1: Realize Capital Gains

Realize (sell and reinvest) up to $52,750 of long-term (held longer than 12 months) capital gains to take advantage of the 0% Federal Capital Gains rate within the 12% bracket. This couple living in Oregon would still pay 9% State. Ideally, they pay less taxes today to avoid realizing those gains at 15% Federal and 9% State later, likely during the required distribution timeframe starting at age 73. They would keep 15% more of the growth on their investments.

Option 2: Conduct Roth Conversions

If a client does not have any taxable accounts or unrealized capital gains, they could use the room in the 12% bracket to conduct Roth conversions. This would consist of transferring funds from a traditional IRA, paying the taxes now (12% Federal and 9% State), and putting the net amount into the Roth IRA to grow tax-free overtime. This strategy is helpful to maximize the 12% bracket, since the 12% bracket will revert to the 15% bracket in 2026, when the Tax Cuts and Jobs Act (TCJA) ends. Additionally, when a client turns 73 and is required to take distributions from IRAs, this required distribution amount cannot be converted to a Roth IRA but must be distributed.

Required distributions could also push income from IRAs into the 22% bracket. Another benefit of Roth conversion is that Roth IRAs are not subject to required distribution rules and therefore can continue to grow tax-free for the life of the married couple.

Option 3: Combination of realizing Capital Gains and Roth Conversions

This requires year-by-year income and deductions tracking from all sources to ensure the right amount of money is being realized or converted.

Tax bracket optimization is not an after-thought, but a pivotal component of holistic financial planning offered at Human Investing. If this kind of planning would be helpful to you, please schedule a time to review your situation.

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Medicare is an important part of your retirement plan. We hope this overview is a helpful resource to know when to apply and how much it may cost.

Before you turn 65…

Most people turning age 65 should sign up for Medicare during their Initial Enrollment Period (IEP). During your IEP, which starts 3 months prior to the month you turn 65 and lasts until 3 months after, you can enroll in Medicare Part A (Hospital coverage), and Medicare Part B (Doctor visits). Medicare Part B pays 80% of most medically necessary healthcare services and the beneficiary pays the remaining 20%. You may also join a Medicare Part D plan (Prescription Drugs) within 3 months of when Medicare coverage begins to avoid any late enrollment penalties.

What if I’m still working past age 65?

If you are still working and have employer-based health insurance at a company with 20 employees or more, you can delay enrollment in Medicare until retirement. If, however, you work for a company with less than 20 employees, you will likely need to sign up for Medicare at age 65.

When your employment health plan coverage ends, you will need to add Part B within eight months of either a) the end of your employment or b) then end of your group health coverage. COBRA can help bridge the gap between employment coverage and Medicare. COBRA will end once Medicare begins.

If you are still working past age 65 and want to continue contributing to a Health Savings Account (HSA) with a high deductible plan, you will need to delay your Medicare Part A coverage.

What does Medicare cost?

Most beneficiaries will only pay the standard premium amount for Part B ($158.50 in 2022). They may be required to pay a premium based on their income represented in the chart below. Medicare uses the modified adjusted income from the beneficiary’s IRS tax return two years prior.

Typical cost for Part B is shown below with income ranges that increase Medicare premiums:

If you do not enroll in Medicare Part B when you are first eligible:

• Your Part B monthly premium will increase 10% for each 12-month period that you are not enrolled.

• You will pay a higher premium for the remainder of your life.

What if I need additional coverage?

Your IEP is also when you can buy Medicare Supplemental Insurance (also known as Medigap) from insurance companies. This is an additional policy that Medicare beneficiaries can purchase to cover the gaps in their Part A and Part B Medicare coverage. You are guaranteed the right to purchase this insurance without going through medical underwriting (i. e. you can’t be denied). This is critical if you have one or more chronic health conditions. Cost for Supplemental Insurance can typically range from $200 to $300 per month.

How do I sign up?

• Online (at Social Security) — It’s the easiest and fastest way to sign up and get any financial help you may need. (You’ll need to create your secure my Social Security account to sign up for Medicare or apply for benefits).

• Call Social Security at 1-800-772-1213. TTY users can call 1-800-325-0778.

• Contact your local Social Security Office.

Sources: medicare.gov

Medicare can be a complicated concept, but the help of a professional can make all the difference. Please reach out to our team if you could use some guidance as you approach retirement.

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Social Security is something we contribute to all our working years, so why don’t we know much about it? What sets it apart from other retirement benefits? I want to briefly share some of the characteristics that make Social Security unique and helpful for retirement planning purposes.

Social Security Includes Spousal Benefits

Social Security spousal income is a benefit provided to married couples. If you have a working income that is less than 50% of your spouse’s normal retirement age benefit, a spousal benefit will be added to your Social Security income to make it equal to 50% of your spouse’s income. Even with no working income (homemaker), 50% of the spouse’s normal retirement age income will be received.

To receive this increase in income, the higher-earning spouse must start their benefits before the spousal payments begin. Check your eligibility for spousal benefits here.

Two more things to note:

• There is no benefit to delaying spousal income after normal retirement age as it does not continue to grow.

• If the spouse with the higher income predeceases the spouse with the lower income, the surviving spouse will receive the higher of the two incomes for the rest of their life. For example, let’s say Joe has a social security benefit of $2,800 per month, and his wife, Shirley, has a benefit of $1,400 monthly. At Joe’s death, Shirley will receive $2,800 per month rather than $1,400 per month.

Social Security income is not fully taxable

If you are Married Filing Jointly and have a combined income below $25,000 in 2021, you will not owe taxes on social security benefits. If your income is between $25,000 and $34,000 in 2021, 50% of benefits will be subject to taxation. With income over $44,000 in 2021, a maximum of 85% of benefits will be taxable. Social security income is not subject to Oregon state income tax.

Social Security Income varies based on retirement age

You can start taking social security retirement benefits at the age of 62, but if you are able, it is best to delay taking benefits until normal retirement age (typically age 66). Furthermore, delaying benefits until the age of 70 is even more advantageous, as your income will continue to increase by a certain percentage (based on birth year) until then.

Remember: If benefits are claimed before normal retirement age, half of the benefits will be withheld if income is over $18,960. Benefits will be recalculated at normal retirement age, but it is more beneficial to delay taking social security if someone is planning to work. After reaching normal retirement age, unlimited earned income will not reduce your social security income.

Social Security Income is protected from inflation

Each January the IRS/SSA increases benefits by the amount of inflation experienced over the previous year. These cost-of-living adjustments (COLA’s) are credited even when delaying benefits to a later age. The most recent cost of living adjustment was 1.3% in January 2021. The average estimates over a long period of time are 2.6% annually.

Things to note when applying for benefits:

• Ensure you have Federal withholdings taken from your benefits, often at 12%.

• Remember, your Medicare Part B premiums ($148.50 per check) will be deducted from your benefit if you are over age 65.

• Apply online at www.socialsecurity.gov, by phone at (800) 772-1213, or in person at a Social Security office using the office locator. If you have any questions about social security benefits, please schedule a time to chat.

References:

www.ssa.gov

The Baby Boomer’s Guide to Social Security, Elaine Floyd, CFP®

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Are you retiring from PERS soon? Provided below is a concise breakdown of the most common benefit options and what they mean.

Often it makes the most sense to receive a lesser monthly benefit while protecting your loved ones with a survivorship option. Comparatively, it is like paying insurance monthly to ensure there is income for your beneficiary if you should die prematurely.

There are many more factors to consider, but a written estimate and analysis in coordination with your financial plan will provide a platform for deciding the best option for you and your family.

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The more I work through financial planning scenarios with individuals and families the more I realize how important it is to have a clear understanding of your social security benefit. A study in 2014 showed that 55% of retirees defined social security as their main source of retirement income and 88% responded saying that social security would need to be a steady source of income in order to meet retirement goals. These numbers make perfect sense due to longer lifespans, increased healthcare costs, and corporations using 401k accounts rather than pension plans. Now more than ever, it is becoming necessary to have a steady stream of income that has the ability to last the rest of your life.

The goal of this post is simple; equip you with tools on how to best take advantage of your Social Security benefit. See below for three things to consider when looking to get the most out of a program you’ve been paying into your entire working career:

1. The Waiting Game

Generally speaking, you’re eligible to receive 100% of your Social Security benefit at your full retirement age (FRA) which is currently between the ages of 66 and 67. If you decide to claim before your FRA, the benefit amount will be reduced. For each month you delay claiming Social Security your benefit increases until you reach age 70. If you were born between 1943 and 1954 here’s an illustration that provides some context to your benefit percentage:

Notice that between your FRA and age 70 your benefit increases at a rate of 8% per year. This is risk free rate of return that you receive just for delaying your benefit. Note that investors in the stock market who have the potential to lose 10% of their money in a given week are very pleased with an 8% rate of return in a given year!

2. Finding Break Even Points

Once you have an understanding of why it might make sense to wait to take your benefit, combine that with a knowledge of your personal health and family history, and you're ready to make an educated guess regarding when to take your benefit. Below are a couple key numbers to keep in mind.

Between 77 and 78

Is the age where an individual who files at FRA today catches up and exceeds the age 62 filer in total money collected. Also remember that the FRA filer has higher monthly payments going forward so the gap is only going to increase.

Between 80 and 81

Is the age where an individual who files at age 70 catches up with and exceeds the age 62 filer in total money collected.

Between 82 and 83:

Is the age when the age 70 filer catches up with and exceeds the FRA filer in total money collected. Many variables can factor into these equations such as; taxes, employment status, and other financial considerations. While I encourage you to dig into these calculations on your own, make sure to consult a financial professional (like Human Investing) when making these decisions.

3. Additional Income and Social Security

While there are many things to consider when filing for Social Security don’t forget how other income affects your benefit. Many people that I've spoken with about this issue commonly confuse "keeping" your benefit at FRA vs. "being taxed on" your benefit at FRA. The short of it is once you reach FRA you can keep all of your benefits, but you can also be taxed on those benefits contrary to what some people think. See below for a summary on the differences between keeping your benefit and being taxed on your benefit when accounting for additional income:

• If you work, and are full retirement age or older, you may keep all of your benefit, no matter how much you earn. If you’re younger than full retirement age, there is a limit to how much you can earn and still receive full Social Security benefits. If you’re younger than full retirement age during all of 2015, the government must deduct $1 from your benefits for each $2 you earn above $15,720. If you reach full retirement age during 2015, the government must deduct $1 from your benefits for each $3 you earn above $41,880 until the month you reach full retirement age. This brochure provides some additional commentary on how working income factors into your benefit.

• Some people have to pay federal income taxes on their Social Security benefits. This usually happens only if you have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to your benefits. This link provides some more details on the taxes you pay on your social security when factoring in other income. Lastly, this web page gives the best example I've seen when factoring in taxes and Social Security.

By looking at the advantages of waiting to take your benefit, some break-even points, and tax strategies for social security hopefully you see that it takes time and effort to make the most of your benefit. It’s possible to literally leave tens of thousands, if not hundreds of thousands of dollars on the government's table if you’re not thoughtful in how you receive this benefit.

So, if you have questions on your Social Security benefit and how it affects your retirement timeline, feel free to email or call Human Investing at any point. We’d love to partner with you in making the most of this benefit.

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The diversity in the people we work with is one of the main reasons we enjoy going on site and meeting with participants or talking with them on the phone. For the purpose of this post, we want to focus on those of you asking about retirement and more specifically how to turn your retirement savings into retirement income. We often hear questions like: should I leave my 401(k) with my company? When should I start taking withdrawals? Or, now that I won’t have an income, how much should I live on?

“Do you have a checklist, or a how-to-guide for transitioning my current 401(k) into retirement income?”

Recently we had a conversation with a woman who asked us, “Do you have a checklist, or a how-to-guide for transitioning my current 401(k) into retirement income?” What a great question! This inspired us to assemble a list of steps that addresses her question and other common retirement transition inquiries. So without further ado, here are 5 steps for turning your retirement savings into retirement income!

Step 1: Consolidate your retirement savings into one location

Whether you’re part of a dual income family or have had multiple jobs with multiple 401(k)’s, chances are you have various retirement accounts at numerous investment companies. The truth is, from a planning perspective and from an investment diversification standpoint, having your assets at a single place can provide simplicity and create the foundation to build a financial plan. Often times, this looks like rolling multiple 401(k)’s into an IRA.

Step 2: Identify sources of income

Once your accounts are consolidated, plotting out your different amounts and sources of income is a key next step. Typically, this looks like aggregating social security income, pension income (if applicable), income from retirement accounts, and other income (a part time job, income from a rental property, etc.). Having this information can provide a good baseline of what you are able to live on per year.

Step 3: Identify lifestyle need (how much are you hoping to live on per year?)

Sometimes people have trouble when the word “budgeting” is introduced to the planning process. So rather than creating a budget, create a spending plan (that sounds much more fun right?). By creating a spending plan, this allows you to look at the money you have coming in vs. expenses going out. By finishing this step, you get to see if your inflows are at a surplus or shortage compared to your expenses.

Step 4: Develop appropriate asset allocation and investment strategy

Okay so you’re here. You’ve done the legwork and now it’s time to invest your retirement accounts in a way that can enhance your retirement lifestyle and help you achieve your goals. A few things to consider when developing your allocation:

• Account for market risk by having an appropriate dollar amount in short term investments (money market/CD’s). This will allow you the flexibility of being able to get through the inevitable down market cycles without having to realize losses of long-term investments.

• Account for inflationary risk by having an appropriate dollar amount of your portfolio in long-term growth oriented investments such as US and international stocks. This creates the ability for your accounts to grow above inflation and fund your retirement for the long haul.

• Address dividend and income strategies that can enhance cash flow. By looking at investing in dividend paying stocks, individual bonds, and other cash flow generating investments, you may reduce the burden that your account has to grow each year to meet your spending needs. Having a combination of dividends, interest, and capital appreciation may be an optimal way to generate return over time.

Step 5: Repeat steps 2-4

Has there ever been a 5 step process that doesn’t include the word “repeat”? By continuing to monitor your income and expenses and making sure your asset allocation lines up with your goals, you are ready to start utilizing your portfolio as an income tool.

These steps are a great start when looking at turning your retirement savings into a plan that can generate retirement income. However, there are many other variables when considering using your retirement savings as income (taxes, how it effects social security, required minimum withdrawals, etc.). Remember that we are here to help and support you through this process. If you have any questions or would simply like to have a conversation about retirement please feel free to email or call anytime.

Helpful Links

• Taxes on Social Security Income

• College Savings Options

Have Questions?

Call Us: 503-905-3100 Email Us: 401k@humaninvesting.com

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