Our advisors share their insights and experience on a wide range of financial topics.
With the passage of the Tax Cuts and Jobs Act of 2018, the tax planning landscape has changed significantly since last year – presenting new challenges and opportunities for our clients.
While your family’s circumstances are unique, most of the suggestions below are widely applicable for promoting year-end tax efficiency and keeping more money in your pocket as we enter the New Year.
Important: All of the following actions need to be completed before December 31, 2018, in order to achieve any tax benefit. Your CAS advisor can provide strategic direction on how to best apply our general recommendations to your specific financial plan.
#1 – Make the Most of the Annual Gift Tax Exclusion
The gift tax exemption has been increased to its highest level in history. In 2018, individual filers can gift up to $15,000 to each family member (joint filers can gift up to $30,000 per beneficiary).
Example: If you and your spouse have three children, you can give up to $30,000 to each child ($90,000 total) without paying any gift taxes.
Capitalizing on the annual gift tax exclusion is an effective way to reduce your taxable estate while providing your loved ones with a financial boost to end the year.
#2 – Take All Required Minimum Distributions (RMDs) for Individual Retirement Accounts (IRAs)
If you own one or more IRAs and are age 70½ or older, ensure that you have taken your required minimum distributions for each account. This includes RMDs for all inherited IRAs of which you are listed as the beneficiary.
Failure to take the annual RMDs can result in a penalty tax of 50% on the shortfall. For instance, if you were required to take distributions of $5,000 from an IRA in 2018 – but only withdrew $1,000 – you would owe the IRS $2,000 (half of the remaining RMD).
#3 – Maximize Retirement Plan Contributions
If you are under age 70½ and have been contributing to a retirement plan – a 401(k), traditional or Roth IRA, SEP IRA, etc. – you could benefit from making the maximum contribution to each plan.
In 2018, the limit on total combined contributions you can make to all of your traditional and Roth IRAs is $5,500 ($6,500 if you are above age 50). SEP IRAs and 401(k)s are also subject to annual contribution caps.
By reaching the limit each year, you will be taking full advantage of the tax-deferred benefits offered through these retirement accounts.
#4 – Evaluate Tax Loss Harvesting Opportunities
Especially with the recent downturn in many sectors of the domestic and international markets, you may want to consider selling some positions that have lost market value.
By “harvesting” this loss, you can leverage the decrease in value to offset taxes on both capital gains and income.
Tax loss harvesting can be an effective way to remove struggling stocks from your portfolio while also reducing your tax burden. Ask your advisor whether this strategy would be appropriate for your financial circumstances.
#5 – Be Smart with Charitable Giving
If you are age 70½ or older, you are eligible to make qualified charitable contributions (QCDs) directly from an IRA. You may transfer up to $100,000/year to the charity of your choice with no tax liability.
Important: Retain all of your receipts and written records of charitable gifts (including cash, property and appreciated assets) in the event that you are audited by the IRS.
Other tax-efficient strategies for your year-end charitable giving include donating to a private foundation, donor-advised fund (DAF), or charitable remainder trust.
Prior to the New Year, we will send you a more detailed breakdown of best practices for end-of-year charitable giving.
#6 – Utilize Health Savings Accounts (HSAs)
For those of you who are enrolled in a high-deductible health insurance plan, you may be eligible for a health savings account (HSA).
These savings accounts can be advantageous from a tax standpoint when you use your funds on qualified medical expenses. In addition, the funds can roll over and accumulate from year to year if they are not spent.
If you are eligible for an HSA, we recommend making a contribution each year (the appropriate amount is contingent on your anticipated medical expenses and other factors). The maximum annual contribution for an individual HSA is $3,450; for family HSAs, the limit is $6,900.
#7 – Establish and Contribute to 529 Plans
Another tax-advantaged account to consider is 529 plans. These education savings accounts can be established on behalf of your child or grandchild, and the earning accrued are completely tax-free if the distributions are spent on qualified education expenses.
In most cases, an individual may gift up to $15,000/year per beneficiary ($30,000 annually for married couples) to a 529 plan without gift tax consequences (see our previous article on 529 plans for more details).
#8 – Compare New Standard Deduction to Anticipated Itemized Deductions
The standard deduction for 2018 is significantly higher than in previous years (see table below). As a result, those of you who have typically itemized your tax deductions may find it more difficult to do so this year.
It may be in your best interest to shift (or “bundle”) some of your current-year deductions to 2019 if your itemized deductions for 2018 will be less than the standard deduction.
#9 – Check All Beneficiary Designations
Ensure that the desired beneficiaries are listed on all of your accounts, including (but not limited to) employer benefits, IRAs, life insurance policies, and annuities. Complete a new beneficiary form if your listings are inaccurate or out of date.
Also, adding “TOD” (transfer on death) to all taxable accounts is a great way to allow your beneficiaries to receive assets from your investment accounts after you pass without going through the probate process.
For more guidance on how to update your beneficiaries, see our article on the topic.
As we close out 2018, make sure that you are not missing out on any opportunities to reduce your tax burden for the year. As always, our team is happy to guide you through these action items to help preserve and enhance your family’s financial wellness.
For more details on how the new tax law could impact you, check out our comprehensive presentation.
Kim Ciccarelli Kantor and FSC Securities Corporation do not offer tax advice or tax services. Please consult your tax specialist for individual advice. We make no specific comments or recommendations on any tax-related details.
Reinforcing the Value of College Savings for Future Generations
The economic landscape of the U.S. has shifted considerably over the past 30 years. As the U.S. has steadily lost our comparative advantage as a manufacturing powerhouse (largely due to automation and inexpensive overseas labor), high-skilled service positions have emerged as the greatest opportunity for gainful employment in the 21st century.
Fortunately, the job market has been thriving for the past several years. The October 2018 BLS report found that the national unemployment rate is 3.7% – the lowest level since 1969. In October alone, 250,000 jobs were added. While strong job creation trends are encouraging, the new openings will increasingly demand that workers possess a strong educational background.
A Georgetown University report projected that there will be 55 million jobs created in the U.S. economy through 2020. Of these job opportunities, 24 million openings will be newly created, whereas 31 million openings will result from Baby Boomer retirements.
About two-thirds of these job openings will require higher education: 35% of the jobs will require prospective employees to earn a bachelor’s or graduate degree, and 30% will demand an associate’s degree or some college.
As a result of these employment trends, enrollment in American colleges and universities has reached an all-time high, with a projected student enrollment of 19.9 million students in fall 2018 (a 23% increase in enrollment since fall 2000).
Without question, the need for postsecondary education has never been more vital to achieving success in your career. To gain a competitive edge in today’s workplace, younger generations must embrace some form of training or education beyond a high school diploma.
Figures 1 and 2. As job openings for high-school-educated workers have sharply declined since the 1980s – and especially since the Great Recession – employees with Bachelor’s degree or other college experience have seen expanded job opportunities.
Demand for Higher Education Drives Skyrocketing Costs
As employers have continued to embrace a college-educated workforce over the past 30 years, the cost of college tuition and fees has risen dramatically. According to the College Board, the cost of a four-year degree from a public college or university has tripled since 1988 (when adjusting for inflation).
During the same timeframe, the inflation-adjusted cost of earning an associate’s degree or a four-year degree from a private college has doubled (see figure 3).
Even within the past 10 years, the expenses associated with college have steadily increased – not only for tuition and fees but also for room and board, books, supplies and other expenses (see figure 4).
An analysis by the College Board found that the average tuition and fees for public, in-state, four-year institutions have increased by 3.1% annually between 2008 and 2018 (adjusted for inflation).
The cost of attending a private college or university has followed a similar trend; in the past year alone, their average tuition and fees rose by 3.3% (before adjusting for inflation).
Contact your CAS advisor for a personalized estimate on future college expenses for your child or grandchild.
Figure 3. Tuition and fees for postsecondary education have skyrocketed since 1988, and the upward trajectory continues to hold steady.
Figure 4. The cost of attending a four-year college – including associated expenses like room/board and books – ranges from about $25,000 to $52,000 per year (before financial aid and scholarships are applied).
About 529 Plans – An Ideal Vehicle for Education Savings
While there are many ways to save for college, 529 plans are widely considered to be the “gold standard” for building financial preparedness throughout your child or grandchild’s college experience.
How does it work?
A 529 plan can be established with a principal as small as $250. Each 529 plan is controlled by an owner (usually a parent or grandparent) who has discretion over the investments and the beneficiary listed. The beneficiary on a 529 account may be changed at any time based on the needs of your family.
When the account is established, you may elect to make monthly, quarterly or annual contributions. You should also ensure that a contingent owner is named on the account, in the event that the main owner is no longer able to manage the 529 plan.
Best of all, the earnings within a 529 account are exempt from federal taxes. As long as the funds are used towards qualified educational expenses – tuition and fees, books and supplies, room and board, and computers or other equipment – you will never pay taxes on the gains.
In addition, while contributions to the 529 plan are not deductible at the federal level, many states do offer a tax credit or deduction on your state income taxes (see figure 5 for details).
New for 2018: Funds from a 529 plan can now be used to pay tuition at private K-12 schools as well (annual limit of $10,000 in distributions per child).
What are the limitations?
Once the account is established, anyone can contribute to the 529 plan. It is not restricted to contributions from the owner only. For instance, if you have multiple family members that want to provide financial support for a child’s educational pursuits, you can all deposit into the one account.
An individual may gift up to $15,000/year per beneficiary ($30,000 annually for married couples) without gift tax consequences.
Exception: The “five-year rule” for 529 plans allows you to make a one-time, lump-sum contribution while bundling five years’ worth of annual exclusions. In other words, an individual may provide an initial contribution of up to $75,000 to the 529 plan ($150,000 for married couples). If you elect to go this route, a gift tax return (709) does need to be filed for informational purposes only; no gift tax will be due.
The five-year rule allows you to start out with a larger principal and potentially build more gains over time. However, you may not contribute any additional funds to the account during the next five years.
Our team would be happy to discuss the optimal strategy for establishing and funding 529 plans based on your family’s unique situation.
Figure 5. Many states offer tax incentives for families who contribute to their child or grandchild’s 529 plan.
Make it Personal – Strategies for Gifting Education to Family
Each year around the holidays, my niece Victoria would receive an abundance of gifts from her parents, grandparents and great-grandparents. Like many families, we would spend every Christmas morning opening the gifts, and then spend the next week figuring out where to put them all!
When Victoria was five years old, I decided to take an unconventional approach to her holiday gifts. Instead of purchasing the latest tech gadget or a new outfit, I established a 529 plan and named her as the beneficiary (of course, I still have a small wrapped gift for her under the tree!).
I started making monthly contributions to the plan; and at the end of each year, we review the statement together and talk about her dreams for the future. As with most young children, her career aspirations are always changing over time – from a veterinarian, to a teacher, to her latest desire to be the next pop superstar!
Our annual discussions about her future are a fun and easy way to connect with her. These holiday meetings provide a great opportunity to help Victoria learn more about money, education and the importance of savings. Every year, she asks me more questions and builds on her foundation of practical knowledge.
Most importantly, I feel confident that whatever path she chooses after high school, my family and I will be there to support her dreams.
Our team has also created “529 gift certificates” on behalf of clients who have been funding an account for a family member. These certificates are a fun and visually appealing way to announce the educational savings to your child or grandchild and provide a tangible reminder of your commitment to their future success. Ask your advisor for more details about our certificates.
Given the importance of higher education in attaining a successful career – and the astronomical cost of today’s college experience – the need to start saving early and often has never been more crucial.
A 529 plan provides you with a tax-advantaged means of empowering your child or grandchild to pursue their educational aspirations, while also reducing their potential student loan debt burden. In addition, a 529 plan can serve as an excellent way to teach young people about the importance of consistent saving and the value of their future collegiate endeavors.
Simply put, 529 plans are the gift that keeps on giving!
As a whole, our budgeting and saving habits could use some serious improvement.
A 2017 study by the Federal Reserve found that only 44% of U.S. households could cover a $400 expense with their personal savings. Whether it’s a visit to the emergency room, a necessary car repair, or even a hefty speeding ticket, more than half of American households would need to pay for these predictable expenses by accruing more debt.
There are a number of factors that have led to this widespread financial unpreparedness. Real income for wage-earners has stagnated since the 1980s, while average household student loan debt and credit card debt have dramatically increased. However, perhaps the primary cause of our poor saving habits is the lack of education surrounding personal financial management.
When done properly and consistently, budgeting can be the single most effective way to build your financial security. While most people understand the importance of sticking with a budget, the concept of “proper” budgeting can be hard to pinpoint. How much should you be spending and saving? Where do you even start?
Here is a simple yet effective tool to help you get on the right track: the 50/30/20 plan. In order to get started, track all of your living expenses for the previous month so you can get a feel for your “natural” spending and saving habits (contact your CAS advisor for our Monthly Spending Tracker to simplify this process).
With this foundation, you can start to put the 50/30/20 plan into action going forward.
Step One: Calculate Your After-Tax Income
Knowing your after-tax income – or take-home pay – is essential for determining your monthly budget.
If you are an employee with a steady paycheck, your after-tax income should be fairly easy to determine. Assuming you claimed the proper withholdings on your W4, most of your federal income tax is automatically deducted. In most cases, state and local taxes – as well as Social Security and Medicare – are deducted as well.
Look at your paystubs to confirm which of these taxes are automatically withheld. If health insurance, retirement contributions, or any deductions other than taxes are taken out of your paycheck, add them back to calculate your after-tax income.
If you are self-employed, your after-tax income equals your gross income less your business expenses (i.e. the cost of your laptop or transportation costs) and less the amount you set aside for taxes. You are responsible for remitting your own quarterly estimated tax payments to the government.
Note: Being self-employed means that you must also pay the self-employment payroll tax of 15.3%, which is double what you would pay in Medicare and Social Security taxes in comparison to an employee.
Step Two: Limit Your Needs to 50 Percent of After-Tax Income
Take a look at your Monthly Spending Tracker. How much do you spend on “needs” each month?
The basic necessities are more restrictive than many people realize. When we say “needs”, we mean any payment for a good or service that would severely impact your quality of life, such as:
Student loan payments
The amount that you spend on these things should total no more than 50 percent of your after-tax pay.
In addition to the above list, some expenses can be considered needs to an extent. For instance, spending a bare minimum of clothing is necessary; but a $400 shopping spree is a want. Gas to travel to/from work is a need; the fuel used on a cross-country road trip is a want. The same is true of auto repairs: mechanical repairs are a need, but cosmetic fixes or enhancements are a want.
If you can’t forgo a payment such as a minimum payment on a credit card, it can be considered a “need as your credit score will be negatively impacted if you fail to pay. By the same token, if the minimum payment is $25 and you regularly pay $100 a month to keep a manageable balance, the $75 difference is not a need.
Step Three: Limit Your Wants to 30 Percent
Putting 30 percent of your money toward your wants sounds great on the surface. Say hello to beautiful shoes, a trip to Italy and swanky restaurants! Well, not quite.
The reality is that “wants” are not the same as luxuries. A want is considered to be any payment that you can forgo with minor inconvenience, including:
Home services (not utilities)
If you think you might be spending more than 30% of your income on wants, you are not alone. The 2017 Federal Reserve study also found that the average household spends nearly 50% of their annual income on goods and services that are beyond the basic necessities. Although there is a time and place for spending your “fun money” on the things you enjoy, the key is to keep it below that 30% threshold.
Step Four: Spend 20 Percent on Savings and Debt Repayments
You should spend at least 20 percent of your after-tax income repaying debts and saving money in your emergency fund and your retirement accounts.
If you carry a credit card balance, the minimum payment is a need and it counts toward the 50 percent. Anything extra is an additional debt repayment, which goes toward this 20 percent category. If you carry a mortgage or a car loan, the minimum payment is a need and any extra payments count toward savings and debt repayment.
Note: Find out if your employer offers a 401(k) plan. Most employers do, and some offer a substantial match for all of your contributions. This is a great way to build strong retirement savings, especially if you start early. Your CAS advisor would be happy to discuss the breakdown of where your assets are invested.
The 50/30/20 Plan in Action
As an example, say your total take-home pay for each month is $3,500.
Using the 50/30/20 rule, you can spend no more than $1,750 on your needs per month. You probably cannot afford a $1,500-a-month rent or mortgage payment – not unless your utilities, car payment, minimum credit card payments, insurance premiums, and other necessities of life combined are less $250 a month.
If you already own your home or you are locked into a lease, you’re pretty much stuck with that $1,500 payment. Consider relocating when your lease expires to make your budget more manageable or take a look at your other needs to see if there’s a way that you can reduce any of them.
How might you get back on needs costs? Consider shopping around for more affordable insurance, or transfer the balance on your credit card to a different card with a lower interest rate. Your goal is to be able to fit all these expenses into 50 percent of your take-home after-tax income.
Now you can spend up to 30% of your income – $1,050 per month – on your wants. You might consider doing without a few things and shifting some of this money to your needs column if you’re coming up short there. This would not necessarily be an indefinite shift, but a temporary means of getting your needs expenses down to a more manageable level.
After needs and wants are under control, you have $700 left (the last 20 percent). You know what to do with it. Save for an emergency, pay down debt, and plan for your future.
Special thanks to Harvard bankruptcy lawyer Elizabeth Warren and her daughter, Amelia Warren Tyagi, who coined the 50/30/20 plan in their 2005 book “All Your Worth: The Ultimate Lifetime Money Plan.”
Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.
Retirement is an exciting time of transition in your life! As you approach your golden years, one of the key decisions you may be contemplating is your living situation – not just for today, but with special consideration for future circumstances as well.
Class A continuing-care retirement communities can be an attractive lifestyle option for well-off retirees. Class A CCRCs offer a full range of services, from independent living to skilled nursing care. These communities offer plenty of amenities, events and other opportunities to remain social, active and healthy throughout your retirement.
In a sense, CCRCs are like college campuses for seniors – not to mention that if you were to stroll through some of these campuses, you might think you were at a country club!
In addition to the social benefits, continuing-care retirement communities can provide you with a more stable means of managing your long-term health care costs. When you buy into the community and pay the monthly maintenance fees, you are essentially paying up front for all of your lifetime health care services – from independent living to full care.
While most people who are considering buying into a Class A CCRC are aware of the aforementioned benefits, many people who move into a community are missing out on a little-known tax break that could significantly lower your costs.
The potential tax-saving benefits of moving into a CCRC are two-fold: (1) a one-time deduction of your entrance fee and (2) an ongoing deduction of your monthly fees.
When you file your taxes for the year, you are allowed to deduct the costs as prepaid medical expenses – even if you live independently at the CCRC and require little to no care. Since the CCRC fees can be quite steep, significant write-offs may be allowed when your out-of-pocket medical expenses surpass 7.5% of your adjusted gross income for 2018 (income floor increases to 10% in 2019 and beyond).
How Does It Work?
The idea of prepaid medical deductions might sound too good to be true, but it has been affirmed by the U.S. Tax Court ruling in D.L. Baker v. Commissioner [122 TC 143, Dec. 55, 548 (2004)].
The Bakers won big, and the precedent set by their case is good news for many seniors. According to CPAs, the 2004 decision allows your one-time entry fee and recurring monthly charges at Class A CCRCs to be classified as prepaid medical expenses.
Even better, the amount that can be treated as medical expenses is not dependent on the level of health care services you received during a given year. Rather, the deduction is determined based on the CCRC’s aggregate medical expenditures in relation to their overall expenses or revenue generated from resident fees. All Class A CCRCs should be able to provide tax information from previous years for you to evaluate.
Example – Entry Fee Deduction: Fred and Wilma Flintstone move to a Class A CCRC in 2018 and pay an entrance fee of $800,000 (non-equity plan). A large portion of the entrance fee would be deductible in the year of closing. Assuming the deduction is 45% of the entrance fee, they could be eligible for a medical expenses deduction of $360,000.
However, their adjusted gross income for 2018 was only $100,000. Without any additional planning, Fred and Wilma would end up with a negative taxable income. Although they would pay $0 in income taxes for the year (which is great), the IRS does not allow Fred and Wilma to “carry over” their negative taxable income to future tax years.
Thus, if you don’t have sufficient taxable income in the year of your closing, you are effectively wasting a significant amount of the available deduction.
Note: To fully benefit from the second tax break – the deduction of your monthly fees – you will also need to continuously plan to generate enough taxable income for each year after you buy into the CCRC.
How to Create Taxable Income
One of the most beneficial methods for “creating” additional taxable income is to convert some of the assets in your traditional IRA to a tax-free Roth IRA. Although a Roth conversion typically increases your tax burden significantly, the deductions from the CCRC medical expenses may be used to offset taxes on the conversion.
If done properly, you will likely not pay any taxes on the conversion. Best of all, once the conversion is complete, the assets in a Roth IRA remain tax-free for the rest of your lifetime and the lifetime of your spouse.
Converting traditional IRA assets to a Roth IRA is not only useful for creating the large amount of income needed to fully benefit from the entry fee deduction; conversions may also be used to generate the income needed to take advantage of the recurring annual medical expense deductions.
An added benefit of Roth IRA is the lack of required minimum distributions (RMDs). If the assets in your Roth IRA are not withdrawn during your lifetime (and perhaps even for the lifetime of your spouse), then your children or other beneficiaries will inherit those tax-free assets.
With an inherited Roth, your children/beneficiaries will never have to pay taxes on those assets, and there are few restrictions on how that money can be invested or used (with the notable exception that your beneficiaries will be required to take RMDs from the account based on their life expectancies).
Simply put, converting your assets to a Roth IRA not only helps you to create income in the short term; it is also a great way to compound your tax deductions for the duration of your lifetime and beyond.
Another popular option for creating taxable income is to take a large distribution from a traditional IRA or a tax-deferred annuity. In the earlier example, if Fred and Wilma withdrew $360,000 from an IRA or annuity (the amount needed to make full use of the one-time entry fee deduction), they would pay no additional income tax on that distribution.
Of course, the best approach for optimizing your tax savings will vary based on your personal financial circumstances. A detailed review of your full financial picture would allow you to devise a plan for leveraging the assets in your portfolio in the most advantageous way possible.
Last but certainly not least: The deductions for your initial entrance fee and the ongoing monthly fees are available on a “use it or lose it” basis! In other words, you will need to plan out your taxable income every year to ensure that you receive the maximum benefit from these substantial deductions.
Because of the significant but complex planning opportunities available to individuals moving into a Class A CCRC, we strongly recommend that you seek professional advice before you make the move.
A financial planner who is well-versed in the tax planning opportunities for CCRCs can help you to enhance your cash flow and financial positioning for the remainder of your lifetime.
To discover how our team can guide you towards financial wellness,
visit our website at www.CASMoneyMatters.com or call Paul at 239-262-6577.
Paul Ciccarelli and FSC Securities Corporation do not offer tax advice or tax services. Please consult your tax specialist for individual advice. We make no specific comments or recommendations on any tax-related details.
When we take a look at the landscape of our work histories over the years, we find that many working people in the 60s, 70s and 80s have worked for one company for most of their lives.
In many cases, they could count on a defined-benefit plan, a pension plan that provided a guaranteed income stream, or at least a lump-sum payment upon retirement. At that time, there was no concern about the solvency of Social Security as a dependable income source in retirement.
When we compare that situation to the current financial circumstances facing our children and grandchildren, what is the likelihood that the younger generations will work for the same company for 25 or 30 years? Almost zero!
If Social Security still exists, the benefits will most likely be reduced and insufficient for covering retirement income needs. The likelihood of having a defined-benefit plan through an employer is virtually non-existent today.
As parents and grandparents, it is vital for us to spend time with our children to help them recognize the value of saving from an early age. If they are not disciplined in making consistent contributions to their retirement savings plans, then their chances of achieving financial security in retirement are quite low.
Given the shifting retirement landscape, the need to make the most of 401(k) plans and other retirement accounts has never been more critical. While most younger people have access to a 401(k) plan through their employer, many providers spend little to no time explaining the benefits of the plan, how to participate in the plan, and how and where to invest the contributions.
When our children begin their careers, the top priority should be ensuring that they are fully participating in the company’s retirement plan (if one is offered).
If they do have the ability to make contributions to a 401(k) plan, help them to see the benefit of consistently saving at least 5% of their income into the program and investing their asset in a growth-oriented financial strategy. We suggest setting aside 5% of their annual income, as that amount typically will not significantly hamper their cash flow.
Since participating in a 401(k) plan will result in an automatic payroll deduction, your children and grandchildren will not feel as though they are missing out on money as they progress in their career. Additionally, some employers offer a 401(k) match based on a certain percentage of income (typically 2-5%). In these instances, someone who contributes to their 401(k) each pay period will effectively be earning more money than their colleagues who do not participate.
A good goal for progressively building a strong asset base for retirement is to increase contribution rates by 1% each year (especially if their income steadily increases throughout their career).
Retirement savings plans come in a variety of configurations depending on the type of employer. While most private businesses have embraced the traditional 401(k) plan as the gold standard for retirement savings, some public-sector jobs – especially education – offer different programs.
For example, teachers or administrators who are employed by the state may participate in a tax-sheltered annuity. In some cases, employees of colleges and universities have access to a 403(b) retirement plan.
Regardless of the specific details of these employer-sponsored plans, the key to building a comfortable nest egg for retirement is contributing early and frequently. Your goal as a parent and grandparent should be to work with the next generation to understand the benefits that are available to them and get them started in a steady accumulation account.
If no retirement savings plans are offered through their place of employment, you need to focus on the value of contributing to either a Roth IRA or traditional IRA account. Again, the most imperative steps to promote your children and grandchildren’s future success is to help establish the account for them and have them transfer funds from their checking account to the IRA each month. Our team of advisors is more than happy to evaluate which type of IRA would be most beneficial for them.
If we fail to teach our children and grandchildren the long-term benefits of putting away dollars on a regular basis, then they are unlikely to attain the financial freedom that can result from properly designing and executing a strategic retirement plan.
On the flip side, a well-thought-out savings plan that is implemented throughout the duration of their careers will position them to be even better off in retirement than we are.
How do you picture your retirement? Whether it’s more time with the grandkids, downsizing into a new home or buying into a continuing-care retirement community, or simply being free from debt and the demands of a full-time job, we all have our own unique vision of how to make the most of our golden years.
That being said, a dream without a plan is simply a wish; and the need for retirement planning has never been more critical than it is today.
The reality of retirement has undergone quite a radical transformation in recent times. As more and more Baby Boomers approach retirement age, they are finding that their circumstances are considerably different than those of their parents.
The tradition of lifelong commitment to one employer and earning your “gold watch retirement” is no longer the norm. Whereas long-time employees counted on a pension plan for the duration of their lifetime, today’s retirees depend on other sources of income. Concerns over the long-term viability of Medicare and Social Security have grown, and most retirees today understand that these services alone will not meet their needs in retirement.
Above all, Baby Boomers tend to pursue healthier, more active lifestyles and have access to more advanced medical technology than previous generations – empowering them to live longer than any other cohort in history.
Each of these factors requires careful consideration and detailed planning as you approach your retirement. With proper foresight and dedication, many of our clients have successfully adapted to the evolving landscape and are pursuing their dream retirement lifestyle on their own terms.
Here are three key areas where Baby Boomers are redefining retirement:
Baby Boomers are living longer than previous generations. While the U.S. population has doubled since 1950, the number of Americans aged 65 or older has quadrupled. The Census Bureau reported that 20% of U.S. residents are projected to be senior citizens by 2030, compared to 13% in 2010.
The time span for your retirement could be more than 20 years longer than that of your parents! Believe it or not, some people will spend as much time in retirement as they did in their careers. A 2018 report by Social Security Administration forecasts that 25% of Americans who reach age 65 will live until age 90.
Living longer is a beautiful thing, but it also presents new challenges. Most strikingly, Baby Boomers will have to stretch their personal assets much further to sustain their desired lifestyle. For this reason, creating and monitoring a detailed budget is essential.
Understanding the distinction between growth-oriented and income-generating investment strategies is also a key to successful cash flow planning during your retirement years.
Given the extended time horizon of retirement – and the desire for an active lifestyle – a growing number of Baby Boomers are taking up part-time jobs. Many retirees have found that a part-time job is a welcome addition to their retirement.
Whether out of boredom or necessity, millions of Baby Boomers are keeping their minds occupied, pursuing new fields that they find interesting and rewarding, and generating some extra income to preserve their financial stability.
Most Baby Boomers are no longer counting on pension plans, which have gradually become a thing of the past. Most private-sector retirees (and those who are self-employed) will not receive a monthly pension check to cover their living expenses; instead, they will rely on 401(k)s, IRAs and other personal assets they have amassed.
After employers started to move away from traditional pension plans in the 1970s, many employees have been diligent in contributing to other accounts; however, many workers have not contributed enough. Those who neglected to save adequate funds could run into dire financial straits during retirement. Seeking professional advice many years prior to retirement – during the accumulation phase – has become increasingly vital.
The restructuring of retirement income also requires a more advanced understanding of tax laws. As employees contributed to a traditional IRA or 401(k) plans, they received a deduction in taxable income; but when they start to withdraw income from retirement plans, the withdrawn amount becomes taxable as ordinary income for that year.
Planning for the impact of taxation on your nest egg has never been more integral to your financial success.
Retirees are grappling with the uncertain future of Medicare and Social Security, and many are realizing that these programs are not sufficient for a comfortable retirement.
The number one mistake we see with retired clients is failing to prepare for the skyrocketing cost of health care. Even though Medicare and Medicare supplements provide superior coverage, a Boston College study found that the average American household spends $197,000 in out-of-pocket health care costs during their retirement (not including services covered by Medicare or nursing home care).
The solvency of Medicare has also come into question over the past decade. The 2018 Medicare Trustees report indicates that the Medicare Part A trust fund is projected to be depleted by 2026. The shortfall could be corrected by a 0.82% increase in combined Medicare payroll taxes or an immediate 17% reduction in Medicare expenses – neither of which seem likely to occur in the foreseeable future.
To make matters worse, the long-term-care insurance market is not what it once was. Premiums have become unaffordable for many retired individuals and couples.
As a result, more seniors are realizing they may have to self-insure for long-term care costs with their own assets or buy into a continuing-care retirement community (where you are able to “lock in” your health care costs by purchasing an all-inclusive bundle that lasts a lifetime).
Social Security was designed to be supplemental income for retirement; however, many Americans are questioning whether this support system will remain effective and sustainable in the future.
The $2.89 trillion Social Security trust fund is being depleted for the first time since 1982, which is especially problematic when considering the rapidly increasing number of retired people. Today, there are 2.8 workers for every 1 Social Security beneficiary; the Social Security Trustees Report projects that there will be 2.2 workers for every beneficiary by 2035.
In addition, Social Security cost-of-living adjustments (COLAs) have failed to keep up with the true cost of living. According to The Senior Citizens League, Social Security benefits have lost 34% of their buying power between 2000 and 2018. During that timeframe, COLAs increased the average Social Security benefit by 46% (from $816 to $1,193), while average expenditures for retirees increased by 96%.
Long story short: it is a mistake to rely only on Medicare and Social Security to meet your health care and cash flow needs during retirement. Although the benefits will not dry up overnight, the long-term viability of the programs is questionable. Thus, creating a savings initiative that exclusively addresses your long-term care costs may be the best option for reducing risk and uncertainty in your future.
The changing paradigm of retirement is not only impacting Baby Boomers; it is also redefining how to plan for retirement and live life to the fullest for all generations – including Gen X and Millennials.
Creating the retirement of your dreams requires proper advance planning. That being said, it is never too late to seek advice and develop an organized, simplified plan for your future. We always welcome the opportunity to meet you and your family to help you through the process!
How to Properly Designate and Update Beneficiaries
By Kay Anderson, CFP®
Having an up-to-date will and legal documents is an essential part of your legacy plan; however, these documents alone may not be enough to ensure that your assets are transferred to future generations in a manner that is consistent with your wishes.
Whenever you open a new account, you should ask yourself, “What will happen to this account if I pass away?”. In some cases, you may find the default option to be surprising.
Name that Beneficiary!
For retirement accounts, insurance policies and annuities, you always have the ability to specifically designate who will receive these assets in the event of your death.
Most custodians allow you to elect multiple primary and contingent beneficiaries, and you can often select what percentage of the assets are to be passed on to each beneficiary. These elections will override the provisions of your will.
Failing to appoint beneficiaries can be a costly mistake. If no beneficiaries are named, the custodian that houses your assets will follow their default rules to determine how your money is handled upon your death. Some will default to a surviving spouse, while others may follow the instructions of the account holder’s will and estate plan or simply name your estate as beneficiary. Why leave it up to a custodian to determine how to handle your legacy?
Naming a single beneficiary on an account could also lead to unwelcome consequences. For instance, if your account lists only your spouse as the primary beneficiary but has no contingents, what would happen if you both were to die in an accident? The process will depend on how the death occurs and who is deemed to pass first.
As an example, if your spouse is deemed to die after you, then the assets will flow according to their will and probate. In cases where you are in a first marriage and both spouses have same beneficiary wishes, this could work out fine; but what if that is not the case? It is important to consider your family dynamics and to ensure that your legacy wishes are specifically detailed.
Once you have established an account and listed your desired beneficiaries, you must not “set it and forget it.” Rather, you should review your elections on all accounts every 2-3 years and immediately following any significant life event, whether it be family-related or financial.
Accounts with up-to-date beneficiary designations can also provide you with an added benefit: simplifying the probate process. Although probate is a necessary component of estate settlement, it can be an expensive and time-intensive ordeal.
By selecting beneficiaries for your accounts in advance, these assets can bypass the probate process. In contrast, any holdings that are settled through your will (or lack a specific designation) are subject to the probate process.
Two other key factors to contemplate for your financial accounts are (1) establishing POD/TOD provisions and (2) understanding the difference between per capita and per stirpes beneficiaries.
A payable-on-death (POD) designation can be added to a bank account or CD to allow the money in that account to be inherited by a beneficiary immediately upon your death. The appointed person does not have control over these assets during your lifetime.
Similar to a POD, a transfer-on-death (TOD) designation serves the same purpose for an individually owned brokerage account or other investment that you wish to pass directly to a beneficiary. In both cases, taking this simple step will allow the accounts to bypass probate court.
Finally, when designating beneficiaries, you can stipulate either per capita or per stirpes as the path of succession for your assets. The distinction here is essential.
Per capita means that equal weighting is given to each surviving beneficiary. For example, if you have three children and one predeceases, then the inheritance that was granted to the deceased beneficiary will be evenly split between your two surviving children. If your deceased child had any descendants, they would not receive a share of the inheritance.
Per stirpes continues your inheritance along the family line. In the previous example where you have three children and one predeceases, the deceased beneficiary’s portion – 1/3 of the total inheritance – would be passed along and evenly split among that deceased child’s descendants (i.e. not split between your two surviving children).
Family Dynamics – Questions to Ponder
Every family situation is unique and often involves constant change – divorce/second marriages, new children and grandchildren, and much more.
For this reason, it is critical to regularly review and update your accounts to ensure that your vision for the succession of your assets is executed as desired.
Here is a list of considerations that can easily be overlooked as your family dynamics shift over time:
If you are divorced, is your ex-spouse still listed as your primary beneficiary?
If your spouse is deceased, have you removed them as primary beneficiary? Have you designated a contingent beneficiary?
Considerations for Stepchildren and Adopted Children
Are you in a second marriage and have children from your prior marriage and/or new marriage?
Do you have stepchildren or adopted children?
What is your intent for the assets – keeping money within the blood line or including other family members?
Note: The legal nature of your relationship with a child/grandchild will drive how a beneficiary designation is viewed. Stating “my children, per stirpes” as your account beneficiaries, for example, would not include stepchildren unless this provision is formally adopted.
Do you have a child who is under 18, has a learning disability or other mental disorder, struggles with drug or alcohol issues, or simply cannot handle money?
What will they do with an influx of cash/assets without restrictions or guidance?
Have you considered establishing a special needs trust or guardianship to accommodate these circumstances?
Above all, it is essential to have proper documentation for all of your financial accounts and beneficiary designations. We recommend maintaining and organizing all of this information within one easy-to-access file, along with verified date stamps.
Our CAS team can facilitate this process on your behalf – compiling your account and beneficiary listings for your annual review and suggesting updates when appropriate. If it’s been a while since you have reviewed your accounts, we always welcome the opportunity to discuss your legacy plan.
Together, we can ensure that your beneficiary designations align with your current family circumstances and your vision for the future – empowering you to preserve wealth for generations to come.
By Carol Girvin
This weekend, the world will direct its collective gaze upon the United Kingdom to observe the joyous wedding of Prince Harry of Wales and Meghan Markle.
Notably, their wedding will mark the first time in British history that a U.S. citizen has married into the royal family.
Amidst the fanfare of their highly anticipated union, Ms. Markle will likely face some tax-related hassles behind the scenes. A recent article in the Wall Street Journal outlined some of the challenges that the princess-to-be could encounter as a result of her trans-Atlantic matrimony. Ms. Markel is not alone; many Americans who marry foreign nationals could experience a lifetime of harassment from the U.S. Internal Revenue Service.
The greatest impact on Ms. Markel will be the need to constantly report her financial activities to U.S. authorities. For example, suppose that Ms. Markel’s new grandmother-in-law, the Queen of England, lends her a tiara or diamond bracelet. She would be obligated to report this exchange to the IRS.
In addition, if she shares free rent for the residence at Kensington Palace, its value is reportable to the IRS. And if Harry and Meghan have a joint bank account or credit card with a balance that exceeds $10,000, the account has to be reported.
The penalties for improperly reporting her information to the IRS are severe, with the potential to consume as much as half of her account values.
That being said, it is possible that none of these regulations will significantly increase Ms. Markel’s tax bill. Assets that are held in trusts can be taxed at a rate of 37%, and many of the British royal family’s assets are organized in this fashion.
Photo Credit – The Wall Street Journal
The WSJ article also dives deeper into other odd provisions within the convoluted tangle of international financial requirements. For example, if a U.S. citizen works in Australia, Australian law requires that a person have a retirement account; however, U.S. tax law treats these accounts the same as offshore trusts, with very complex reporting rules.
Of course, Ms. Markle could simply opt out of U.S. citizenship, which thousands have done over the years. However, she would not receive U.K. citizenship for a potentially significant period of time (due to a long waiting period in England); so it appears she will have to adhere to U.S. tax rules for the foreseeable future.
As you watch the coverage of the wedding, keep your eyes peeled for the guys in plain dark suits and glasses. There’s a good chance they are the IRS agents – the unwelcome guests at the happy couples’ special day.
When we hear the term estate planning, most people consider the “nuts and bolts” of your plan:
Estate documents (wills, powers of attorney, health care proxies);
Financial vehicles that can support your family and your community for years to come (various types of trusts, donor-advised funds, etc.).
While the tangible aspects of your estate plan are absolutely necessary to your family’s long-term financial success, your legacy plan encompasses more than just your investments and assets. When properly prepared and executed, the plan should serve as a blueprint to prepare your children and grandchildren to become good stewards of your wealth.
Unfortunately, many personal fortunes have been squandered more quickly than they were amassed as a result of poor family communication and inadequate planning.
All too often, the intangible component of legacy planning is overlooked and future generations are left without a guiding framework for how to best sustain and enhance family wealth.
Key Considerations for Family Founders
As the family matriarch or patriarch, a well-thought-out legacy plan affords you with a unique opportunity to guide your children and grandchildren in achieving long-term personal and financial success.
At the very core of the legacy planning process should be your family’s mission and deeply held values. A mission or values statement serves as a succinct, powerful means for articulating financial priorities and creating mutual understanding about how to align your money with your principles and purpose.
In order for your legacy plan to achieve its full potential, you must consistently communicate your family mission and story – including the core values and key lessons that were instrumental during your lifelong journey of building and sustaining your wealth.
Perhaps the most important consideration as the family patriarch/matriarch is how to prepare your children and grandchildren to inherit wealth and embrace a healthy perspective about money.
In our experience, families realize the greatest benefit when they move beyond a simple explanation what is given to heirs. Rather, the heart of your family discussions should focus on (1) why the assets are being passed forward and (2) your intentions for how the wealth should be utilized.
If you have neglected to lay out clear expectations during your lifetime, your children and grandchildren could misinterpret your wishes and use their inheritance in a manner that is not consistent with your family mission and values statement.
While some of your descendants may indeed view their inheritance as a legacy to be preserved and passed on to future generations, others may see the windfall as a means for immediate gratification and short-term indulgence.
With these considerations in mind, the question remains: As the family founder, what is the most effective way to convey my wishes for how my legacy plan ought to be carried out?
Based on our extensive work with client families, we have identified five vital components of most successful plans – known as the “capital” in the business of family. By fostering strong development in each of these crucial areas, your family members will gain clarity and insight into your distinctive vision for the future.
Figure 1. The five types of capital serve as the building blocks of the business of family, with each component playing a critical role in constructing a legacy for future generations.
Financial capital consists of the tangible assets you have accumulated during your lifetime – investments, business interests and possessions – as well as the future growth potential of these assets.
Sustaining family capital is best accomplished when you have clear, realistic expectations and a strategic approach to long-term growth. Through the family financial and legacy plan, your children and grandchildren should gain a mechanism for investing appropriately, conserving values and appreciating the end use for the wealth.
Human capital is expressed through the personal character development of individual family members. In order to serve as good stewards of your wealth, your descendants must value responsibility and productivity, as well as a desire to continuously learn and expand their skill set.
To successfully cultivate these traits, you must talk about the meaning of money as a family unit – sharing your values about spending, saving, sharing and investing. Assisting your children and grandchildren in developing these traits will empower them to pursue worthwhile ambitions during their life – in essence, utilizing their human capital in an impactful way.
Family capital involves the process of creating and reinforcing mutual understanding so that you can strengthen your existing familial ties into positive, productive relationships. Families learn to respect and trust each other through the open exchange of ideas, by mitigating past misunderstandings, and by listening to and learning from each other.
Mastering the ability to compromise is necessary, as well as striving to achieve a win/win outcome for all parties involved.
Societal capital manifests through community action and your family’s involvement in service and philanthropy. To be effective, societal capital must be expressed both in individual and collective family choices.
Depending on your circumstances, family foundations, donor-advised funds and charitable trusts are useful vehicles for carrying out your philanthropic goals (as may be reflected in your family mission statement).
Structural capital serves as the foundation required to hold the legacy plan together, to bridge the gap between generations in a concrete way.
The framework of your legacy plan – the business of family – is demonstrated through the development of the family mission and value statement, regular communication between family members, and decision-making procedures that promote accountability and boundaries for managing your money.
Successful family governance is best achieved through clearly written, living agreements among family members, with an eye towards perpetuating the family’s mission and values for posterity.
Figure 2. By gathering multiple generations for a family meeting, you can promote open communication between all parties and reinforce the desired mission and goals of your legacy plan.
By facilitating intergenerational communication about your family mission, values and purpose of the plan, our CAS team aims to help you build mutual understanding and cohesiveness among family members and prepare your heirs to leverage all five types of capital to their fullest potential – today, tomorrow, and for generations to come.
Discover how our team of experienced advisors go above and beyond the traditional, tangible financial planning role to simplify the transfer of your intangible wealth and values to your children and grandchildren.
By Josh Espinosa, CFP®, CIMA®
Most of us are familiar with the analogy of the “three-legged stool” of retirement income: (1) Social Security; (2) savings and investments; and (3) pension plans.
As the saying goes, your level of stability during retirement depends upon the combined strength of each of these three legs; and a lack of planning in one of these areas could knock out a key structural component of your financial security.
As private pensions have steadily been phased out by most employers, the remaining two legs – investments and Social Security – have become even more critical for sustaining your desired lifestyle throughout retirement.
While the reality of today’s retirement income “stool” may be more wobbly than in years past, a strategic approach to maximizing your Social Security income can compensate for the lack of a private pension plan.
Changes to the Rules
As a result of the Bipartisan Budget Act of 2015, two Social Security loopholes for married couples were closed or restricted. The legislation could impact couples who are approaching retirement age with respect to their flexibility in claiming individual and spousal benefits.
Loophole #1 – File & Restrict
Under the previous law, if you are eligible for benefits both as a retired worker and as a spouse (or divorced spouse) and are not yet full retirement age (66 years), you must apply for both individual and spousal benefits. You will receive the higher of the two benefits.
The loophole allowed some married individuals to start receiving spousal benefits at full retirement age while letting their own retirement benefit grow by delaying it.
The new law is known as “deemed filing.” By applying for one benefit, you are “deemed” to have also applied for the other. Deemed filing has now been extended to apply to those at full retirement age and beyond.
Who’s Affected: If you were born after January 1, 1954, and will be eligible for Social Security benefits both as a retired worker and as a spouse (or divorced spouse), then the new law applies to you.
Note: File and restrict is still available if you were born before 1/1/1954 and your spouse is receiving benefits.
Loophole #2 – File & Suspend
The earlier law allowed a worker at full retirement age or older to apply for retirement benefits and then voluntarily suspend payment of those retirement benefits; which allowed a spousal benefit to be paid to his or her spouse while the worker was not collecting retirement benefits.
The worker would then restart his or her retirement benefits later (for example, at age 70), with an increase for every month retirement benefits were suspended.
Under the new law, you can still voluntarily suspend benefit payments at your full retirement age in order to earn higher benefits for delaying. But during a voluntary suspension, other benefits payable on your record – such as benefits to your spouse – are also suspended.
Also, if you have suspended your benefits, you cannot continue receiving other benefits (such as spousal benefits) on another person’s record.
Who’s Affected: The new law applies to individuals who request a suspension on or after April 30, 2016, which was 180 days after the new law was enacted. In short, the file and suspend loophole is no longer available unless already doing it.
Case Study – Maximizing Social Security Benefits
Despite the recent regulations surrounding Social Security, you and your spouse can still take steps to make the most of your benefits during retirement. Let’s explore a situation where we helped one of our client families maximize the value of their Social Security benefits.
George (age 66) and Doris (age 65) are a married couple who retired and moved to Naples in 2015. George served as the chairman of a large packaging and coatings company, and Doris was a small business owner.
Prior to becoming a CAS planning client, Doris started claiming Social Security benefits at age 63. The couple has sufficient cash flow to meet their retirement lifestyle needs before accounting for their Social Security income.
Based on their situation, we recommended that George delays his Social Security benefits until he reaches age 70. Because they do not need the extra income at this time, waiting until age 70 allows the benefits to grow at a rate of approximately 8% annually (increasing his annual benefits from $2,687/year to $3,538/year.
Since Doris is already taking Social Security benefits, George can also claim half of Doris’ spousal benefit until age 70 (based on her full retirement amount).
When George reaches age 70, Doris will also be able to activate her spousal benefits based on his increased benefit. Because she started claiming benefits before reaching full retirement age, she will get the difference of her income and half of George’s spousal benefit minus the early retirement reduction.
Doris also benefits from an increased benefit should George pass away before her. In this case, she would qualify for widow benefits at George’s full amount.
Overall, this strategy will maximize their total combined benefits based on both their life expectancies.
Note: There is no “one-size-fits-all” approach to managing your Social Security income flow. Your unique circumstances will serve as the foundation for developing an appropriate strategy for you and your family.
In some instance, delaying retirement income is not the most suitable option (especially if you are considering an assisted-living housing situation, in which case current income could be a more important criterion for admission than net worth).
Our CAS team has had the opportunity to help hundreds of client families determine the best approach for claiming their Social Security benefits. Before making any final decisions about your Social Security income, we recommend speaking with your advisor to establish a sustainable cash flow plan that fulfills your needs throughout retirement.