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Filing for Social Security Survivor Benefit alone, preserving Retirement for later

7cdfzmllwom-william-boutAfter all of the changes that have been put in place for Social Security benefits in the past year, there is still one situation that allows for some planning. Knowing about this situation can help if you happen to be in the right circumstances.

If your spouse has passed away and you are due a Survivor Benefit, there may be a strategy for you to maximize benefits. This is because, of all types of Social Security benefits, the Survivor Benefit may still be filed for separately from the Retirement benefit based on your own record.

Why would you want to do this? Well, if your own Retirement benefit either is or will be larger than the Survivor Benefit, it might make sense for you to delay receiving your Retirement Benefit until later. In the meantime, if you’re at least age 60 and not earning more than the income limits, you may want to take advantage of the Survivor Benefit while you delay your Retirement Benefit.

Restricting the Survivor Benefit

For example, Marie’s husband Jake recently passed away. Jake was 66 years old, and had been receiving his own Social Security retirement benefit for a couple of years. His current benefit was $1,500 per month.

Marie is 64, and her own benefit will be $1,500 when she reaches Full Retirement Age (FRA) of 66. Marie is ready to retire from work, and she has two options available at this point:

1) She could file for all available benefits, which would result in a monthly benefit of approximately $1,352. If Jane does nothing more, that would be her benefit (basis) for the rest of her life, except for COLAs.

2) On the other hand, Marie could file for Survivor Benefits only, which would provide her with the same benefit as above, $1,352. But by restricting her application to the Survivor Benefit only, Marie has the option to later file for her own retirement benefit. If she only waits until her Full Retirement Age, Marie could step up her benefit amount to $1,500 per month upon reaching age 66.

Further, Marie could delay filing for her own benefit as long as possible, to age 70, and thereby maximize her retirement benefit to $1,980.

How it works

In the example above, Marie’s own retirement benefit at her age 64 is reduced to $1,300. The Survivor Benefit based on Jake’s record is reduced as well, but only to $1,352. When Marie files for benefits, if she makes no action to restrict her application, she is filing for (effectively) the largest possible benefit, considering all benefits that are available to her.

If Marie doesn’t restrict her application specifically to the Survivor Benefit alone, she has effectively filed for her own Retirement Benefit at the same time. This is because an application for any Social Security benefit is considered to be an application for all available benefits unless the application’s scope is restricted.

However, if Marie does restrict her application to the Survivor Benefit only, she preserves the option to later file for her own retirement benefit. Having restricted her application only to the Survivor Benefit, her own retirement benefit can continue to grow in value since she has not filed for it. Then later she can file for her own benefit – at any time when her own benefit is larger than the Survivor Benefit.

Note: It doesn’t matter if Marie and Jack were divorced, as long as the marriage lasted at least 10 years. As a surviving divorced spouse, Marie would have the same options available to her as a widowed spouse.

How do you do this?

There are a couple of different ways to accomplish the restricted application for Survivor Benefits.

In the online application for benefits, there is a screen called Additional Benefits (ADDB), which has a question:

If claimant is filing as a surviving spouse, is the claimant filing for benefits on own record?

Answering “No” to this question will restrict your application to only the Survivor Benefit.

Another way to restrict the application is to include an unequivocal statement on your application such as:

I do not wish this application to be considered an application for retirement benefits on my own earning’s record.


I filed on <date> for all benefits for which I may be eligible except for retirement benefits on my own earnings record.


I wish to exclude retirement benefits on my own earnings record from the scope of this application.

If including a statement (instead of the online answer of “No”) it is important to NOT include qualifying phrases in your statement. Examples of such statements are “at this time” or any statement regarding planning to file for other benefits in the future. These qualifying statements will cause the statement to be rejected.

After-Tax Investment Considerations

Some individuals have the ability to contribute after-tax amounts to their employer-sponsored plans such as a tax-deferred 401k or a defined benefit pension. Generally, since these amounts are after-tax, the contributions start adding up to a sizable amount known as basis. Basis is simply the amount of after-tax money put into these accounts that is not taxed when it’s withdrawn. However, any earnings on the basis are taxable.

Individuals considering contributing after-tax amounts to the above plans may also consider if it makes sense to contribute to a non-qualified brokerage account. Like the aforementioned employer-sponsored plans, contributions to a non-qualified brokerage account are made with after-tax dollars, thus they can build a sizable basis – which is not taxed when withdrawn. Also, like the above employer-sponsored accounts, any earnings are subject to taxation. The major difference is in the way the earnings from the non-qualified account are taxed.

Earnings on after-tax contributions to employer-sponsored plans are taxed at the individual’s ordinary income tax rate. However, earnings on after-tax contributions to a non-qualified brokerage account are taxed more favorably as long-term capital gains (assuming they are held for longer than one year). Although the non-qualified account may seem like the way to go, there are a number of items to consider before choosing which account to place your after-tax money.

One area to explore is how retirement income is taxed in your state. Some states such as Illinois currently do not tax retirement income. Thus, the earnings from the after-tax 401k or pension contributions would not be taxed at the state level, only federally. Earnings from the non-qualified account would be taxed both at the state and federal level.

Additionally, consider the amount of risk the contributions are being exposed to in their plans. Most non-qualified brokerage account and employer-sponsored 401k risk is the responsibility of the individual or employee. However, some defined benefit pension plans bear all the investment risk while providing a nice crediting interest rate. Thus, if an employer-sponsored defined benefit pension allows after-tax contributions, credits interest at 7.5% (accurate as of this writing for some pensions) and bears all of the investment risk, an individual may find that they are willing to pay a higher percentage in tax for the corresponding interest rate credit and transfer of investment risk.

Other considerations include the individual’s goals for the money at retirement and at death. For example, a 401k will have required minimum distributions (RMDs) at age 70 ½. Non-qualified brokerage accounts do not. Furthermore, most beneficiaries that inherit a 401k account must take RMDs based on the life expectancy of the beneficiary. Taxation is still at the ordinary income tax rate on earnings, but the after-tax amount still constitute basis. Beneficiaries of non-qualified brokerage accounts experience a change in their tax basis. In other words, the account value on the date of the account owner’s death becomes the beneficiary’s new tax basis. Thus, any earnings above that amount are taxed as long-term capital gains rates.

For defined benefit pensions, the beneficiary would be the spouse. At the death of the account owner, the spousal beneficiary would receive whatever annuity payout was agreed upon when the pension was initiated. However, if the employee was single or the spousal beneficiary dies; these payments cease. There’s no account balance to inherit or additional beneficiary to receive the pension.

4 Things to Consider About Healthcare in Retirement

heres-health-by-robert-brookAs we all are painfully aware, the costs and complexity of healthcare are skyrocketing, and nothing seems to be slowing things down.  Granted, the incoming administration is making overtures to give attention to the problem, but… as we all know, paths to places we don’t want to go are often paved with good intentions.  At this point I would not hold my breath for the next great proposal on healthcare costs, the problem is enormous and not easily resolved.

Recent information from Fidelity suggests that a 65-year-old couple who retired in 2016 can expect lifetime healthcare costs to top $260,000 over their remaining lifetimes.  And that doesn’t include long-term care (nursing home or assisted-living) costs.

Four Things to Consider About Healthcare in Retirement

  1. It’s not solely Medicare. If you haven’t checked into it yet and you believe that Medicare could be your only insurance in retirement, you’re in for a surprise. With the co-payments, “holes” in coverage, and coinsurance payments, it’s almost a requirement that you have a supplemental healthcare policy to help out. Industry averages for a couple, aged 65 and in good health, start around $7,000 per year and go up from there.
  2. Retiring early increases the costs. If you’re planning to retire early (and therefore lose employer-provided health coverage) you’ve got to replace it somehow.  These policies are even more expensive than the Medicare supplement policies discussed above – and much more variable due to the complexities of coverage.  This portion of your early retirement deserves (requires!) quite a bit of planning ahead, as healthcare costs could be a significant portion of your monthly expenses in retirement.
  3. It doesn’t help to wait. Are you just starting to consider your options and are close to retirement?  If so, you’re quite a bit behind the curve – there are several things that could be done in the five to ten years prior to retirement that might help you with the costs.  For example, if you’re a little overweight, or a smoker, rectifying these things five or ten years before retirement can have a significant impact on your costs. Participating in a health savings account (HSA) coupled with a high-deductible health plan (HDHP) can position you well for a transition into retirement as well.
  4. Knowledge is helpful. Health insurers use a special report, called a Medical Information Bureau (MIB) report to help determine your eligibility for coverage.  Think of it like a credit report on your health.  You can order your own MIB report, in order to look things over to see if there are any red flags (much the same as reviewing your credit report).  If you have a denial of coverage on your report or any issues that could adversely impact your ability to get coverage, it’s best to know that up front and work with an agent or broker who specializes in your issues.

Although these things may seem like a lot of work, they’re excellent considerations to take into account as you plan for your healthcare in retirement.  And – most financial planners these days, myself included, can help you work through the decision-making process.  It’s not simple, and mistakes can be quite costly.

How to Make Your Saving Automatic

Sometimes it can be difficult to save for emergencies or for retirement. While physically not demanding, the mental strain can be a hump that is hard to get over. In other words, we experience a little bit of “pain” or mental anguish if we have to physically hand over money or write a check.

So how can we overcome this anguish? Automate.

First, determine how much you need for an emergency. This can either be to start the fund or to replenish amounts that have been used. Generally, it’s a good idea to have 3 to 6 months of non-discretionary expenses (expenses that don’t go away if you lose your job or become disabled) set aside in an FDIC insured bank account. Some individuals may find it more comforting to have 6 to 9 months or 9 to 12 months. It’s up to you.

For retirement, I recommend saving 15 to 25 percent of your gross income. If this amount seems too high, consider reading our numerous articles on paying yourself first. It’s not too high. Perhaps your spending is? Ok – back to the main topic.

Once you have these amounts established arrange to have your paycheck deducted for each fund. There are a couple of ways that this can be done. First, you can have your employer (if they allow it) take some of your check and deposit it into your checking account. Then, arrange to have your emergency fund contribution sent to a specific savings account. If your employer doesn’t allow this, simply arrange to have a certain amount transferred from your checking to emergency savings on a monthly basis – until it’s at your desired amount.

If you think you’ll be tempted to spend this money, consider having your emergency fund at another bank or credit union. This relates to the mental and physical strain of accessing the money. That is, if you really need it (for an emergency) then you can get it. Otherwise, you’re more likely to leave it alone.

For your retirement account you can arrange to have your retirement contributions automatically deducted into your employer sponsored plan (401k). If you’ve maxed out contributions or your employer doesn’t offer a plan arrange to have an automatic deduction taken from your checking account to your IRA. Many people contribute to the 401k and IRA directly from their paycheck. If your employer offers this, take advantage of it.

I would recommend having these deductions come out the day after you’re paid. That way, it’s not only automatic, but it reduces the temptation to spend first, and then save. Instead, you’re paying yourself first and living off of the rest – and you’ve made it automatic.

6 Year End Tips for a Financially Productive 2017

Maroon Bells – Photo courtesy of Jason Raskie

As 2016 comes to a close in a few weeks and we start into 2017, here are some good tips to consider to start 2017 off with some good strategies that will hopefully become habits.

  1. If you’re not doing so already, set up your payroll deductions to save the maximum to your 401k. There’s plenty of time to your payroll allocated so your deductions start coming out on the first paycheck in January. The 2017 maximum contributions are $18,000 for those under age 50 and $24,000 for those age 50 or older. To deduct the max, simply take the number of pay periods you have annually and divide it into your maximum contribution amount. This will allow you to save the maximum amount over 2017. Consider doing the same to maximize your IRA contribution. Those limits are $5,500 (under 50) and $6,500 (over 50) respectively.
  1. Check your allowances on your W4. If you’ve been paying in quite a bit of tax at tax time or receiving a huge refund it may be that you’re having too little or too much withheld from your paycheck. Consider adjusting these amounts in order to improve withholding efficiency. There are also paycheck calculators online to help identify what your check will look like after withholding and retirement contributions.
  1. Refresh or build your emergency fund. Generally, this is 3 to 6 months of living expenses if you lose your job, become disabled, etc. Some individuals prefer 9 or even 12 months set aside. Whichever amount you choose, make sure it’s funded. A simple savings account with FDIC insurance is a great place to keep this money.
  1. Have an old 401k or IRA sitting idle? Now is an excellent time to consolidate those funds into one IRA with one custodian. This makes life simpler regarding keeping an eye on the funds as well and sticking to your investment and asset allocation strategies.
  1. Review your annual spending/budget. Take a look at your spending over the previous 12 months. Are there any changes you’d like to make? Any room for improvement? Chances are you may identify some favorable and not-so-favorable spending patterns that occurred throughout the year. Could you reallocate some money to retirement saving or emergency fund money? If tracking seems daunting, consider an app or website that helps with this type of planning such as Quicken or These tools allow an individual to see how they’re spending money daily and allow the creation of customized budgets and spending goals. They’re also very efficient and time-saving.
  1. Be sure to remember your 2016 required minimum distribution (RMD) and start thinking about your 2017 RMD. The tax penalty is pretty harsh at 50% of the amount not withdrawn. Don’t need the RMD money? Consider reinvesting it into a non-qualified account or using it to build your emergency fund.

IRS’ 2017 Mileage Rates for Taxes

The Internal Revenue Servicmileagee today issued the 2017 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. These rates are for use on your 2017 income tax return, filed by April 2018.

Beginning on Jan. 1, 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 53.5 cents per mile for business miles driven, down from 54 cents for 2016
  • 17 cents per mile driven for medical or moving purposes, down from 19 cents for 2016
  • 14 cents per mile driven in service of charitable organizations

The business mileage rate decreased half a cent per mile and the medical and moving expense rates each dropped 2 cents per mile from 2016. The charitable rate is set by statute and remains unchanged.   The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements are described in Rev. Proc. 2010-51. Notice 2016-79, posted today on, contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

Many Happy Returns*

Al Capone Arrest Record

I was recently talking with an acquaintance who told me about a friend of his that had not filed a tax return for several years… Now, we all know that burying our head in the sand is no way to deal with *any* problem – but especially this one.

Right off the top of your head, I’m sure you can name a few folks who have been “taken down” by the IRS for tax evasion.  Let’s see… for starters, Wesley Snipes, Sophia Loren, Richard Hatch, Leona Helmsley, Richard Pryor, Pavaratti, Martha Stewart, Elton John, Nicholas Cage, Heidi Fleiss… the list goes on.

And then there is probably the most powerful, certainly the most influential, of all of these:  Al Capone.  The granddaddy of ’em all. Legend has it that the notorious gangster once remarked that tax laws were a joke because “the government can’t collect legal taxes on illegal money.”  The IRS charged the infamous Chicago mob boss with failure to pay four years’ worth of taxes. Capone was sentenced to 11 years in jail and an $80,000 fine in 1931.

My point in listing all these names is to show just how pervasive and powerful the IRS can be.  Even the likes of Al Capone (as well as, believe it or not, former Vice President Spiro Agnew, and even a former IRS commissioner, Joseph Nunan) couldn’t escape the long arm of the Treasury Department.

Now, if you happen to be in a position where you have not filed tax returns for some time, or if you are simply having difficulty paying the taxes that you owe, Uncle Sam has many options to help you work things out.  On the IRS’ website ( you’ll find information on how to work out a plan with the Treasury Department in order to get you back on track.

And if you need help in working with the IRS for any reason, don’t hesitate to contact me.

* My original tax preparation service was named MHR Income Tax Service – MHR stood for “Many Happy Returns”

Student Loans Are Not Carte Blanche

fist_full_of_money_clip_art_22967For many college bound and current college students, the arrival of the financial aid reward can seem like winning the lottery. For some students, this sum of money is more than they’ve seen (in one sitting) in their entire lifetime. The temptation to think of it as a “paycheck” rather than what it is – a liability – can often lead students to make less-than-optimal decisions when it comes to allocating those borrowed dollars.

When it comes to student debt it’s helpful to think of it as just that – debt. This is money that is supposed to go towards the costs of higher education. If and when you are in the position of getting your reward money, consider the consequences of using the money to finance unnecessary purchases. Remember, this is debt. It will have to be paid back someday and with interest.

When you get your financial aid reward check do a careful assessment of what your actual expenses for college are. These would be tuition, room and board and necessary food (meal plan) and expenses (books, lab fees). Your financial aid reward should not finance a car, dining out with friends, the bar, or your spring break trips. It should only be used to fund the necessary expenses you must pay in order to attend college.

If there’s a surplus of money left over, avoid the temptation to spend this money on unnecessary items. In fact, a very wise move would be to take any extra money and use it to pay off some of the student loan debt you’ve already incurred. This will accomplish quite a few things. It will help boost your credit, it will reduce the total amount you owe when you graduate, and it will reduce the interest expense on the loans since the interest will be applied to a smaller principal balance. Should you want extra income for the extras like dining out or spring break, consider getting a part-time job and use the money earned from the job to pay for those expenses. Or better yet, use that extra money to pay down your student loans.

College isn’t cheap, but it doesn’t have to leave you in enormous debt. Be smart with your financial aid reward and only use what is necessary to stay in school. Use the extra to reduce the amount you’ve borrowed.

New IRS Site for Taxpayer Information

toolsQuick, how do you find out what your balance is at the IRS? Call somebody? Wait for a paper notice? Who knows??

The bureaucracy that is the Internal Revenue Service just got a bit easier, and it’s bound to continue improving. The IRS recently launched a new online tool to assist taxpayers with basic account information, starting with balance inquiries. As part of the IRS vision to improve the taxpayer experience, more feature are expected to be added soon.

Below is the text of the actual announcement from the IRS, IR-2016-155:

IRS Launches New Online Tool to Assist Taxpayers with Basic Account Information

The Internal Revenue Service announced today the launch of an online application that will assist taxpayers with straightforward balance inquiries in a safe, easy and convenient way.

This new and secure tool, available on allows taxpayers to view their IRS account balance, which will include the amount they owe for tax, penalties and interest. Taxpayers may also continue to take advantage of the various online payment options available by accessing any of the payment features including: direct pay, pay by card and Online Payment Agreement. As part of the IRS vision for the future taxpayer experience, the IRS anticipates that other capabilities will continue to be added to this platform as they are developed and tested.

“This new tool is part of the IRS’s commitment to improve and expand taxpayer services by providing additional online taxpayer options,” said IRS Commissioner John Koskinen. “The new ‘balance due’ feature, paired with the existing online payment options, will increase the availability of self-service interactions with the IRS. This will give taxpayers another way to take care of their tax obligations in a fast and secure manner.”

Before accessing the tool, taxpayers must authenticate their identities through the rigorous Secure Access process. This is a two-step authentication process, which means returning users must have their credentials (username and password) plus a security code sent as a text to their mobile phones.

Taxpayers who have registered using Secure Access for Get Transcript Online or Get an IP PIN may use their same username and password. To register for the first time, taxpayers must have an email address, a text-enabled mobile phone in the user’s name and specific financial information, such as a credit card number or specific loan numbers. Taxpayers may review the Secure Access process prior to starting registration.

As part of the security process to authenticate taxpayers, the IRS will send verification, activation or security codes via email and text. The IRS warns taxpayers that it will not initiate contact via text or email asking for log-in information or personal data. The IRS texts and emails will only contain one-time codes.

In addition to this new functionality, the IRS continues to provide several self-service tools and helpful resources available on for individuals, businesses and tax professionals.

How to Save On Holiday Spending

wpid-Photo-Nov-22-2012-919-AM.jpgIt’s that time of year when Thanksgiving comes and goes and before we know it Christmas will be upon us. For many people, this time of year means the giving and exchanging of gifts to family, friends and loved ones. It also means that many people will be worried about their spending over the Holiday season; with concerns of how to budget, going over budget, or amassing unwanted amounts of credit card debit.

Here are some ideas to help keep your Holiday spending in check in order to stick to your budget and avoid the trap of credit card debt – the gift that keeps on giving.

  1. Create a spending plan and stick to it. Many individuals have a budget when it comes to what they will spend on gifts for the Holidays. However, it becomes tempting to spend in excess of this budget when we see additional gifts we’d like to give or we feel guilty that what we’ve purchased isn’t enough for the person the gift is intended for. Sticking to your budget reduces the temptation to spend money you don’t have.
  1. Consider shopping earlier in the year. Rather than wait until the last minute, consider doing your shopping throughout the year. Items can be purchased throughout the year when they’re on sale, and perhaps when emotions are less likely to influence last-minute spending.
  1. Consider saving for your Holiday gifts throughout the year. Many banks and credit unions offer a Christmas account where folks can save their money specifically for the Holidays. Then, when it’s time to purchase gifts, the money is already there, budgeted for and ready to be used for its intended purpose. Avoid department store credit card offers to finance your spending.
  1. Communicate expectations. If things are tight or your budget is small, consider explaining this to your family. In most cases, family and friends will be completely understanding of the situation and will often suggest not giving them anything at all. Conversely, they may feel relieved when you tell them the same thing – a gift isn’t necessary.
  1. Consider listening. If a friend or family member mentions that they would rather not get a gift, consider taking that comment seriously. Granted, this is difficult to do as the act of giving gifts is an expression of love and appreciation. However, consider respecting their request. Perhaps in lieu of a gift, you write a nice card or note of appreciation to them. Another idea is to make a donation in their name to a charity or organization they’re involved in or have interest.
  1. Consider combination gifting. Many times family members will pool their gift money to give a bigger gift to their loved ones. This allows family members to participate in giving, without feeling bad that they can’t give as much. Additionally, the folks pooling their money should agree on the amount each person will contribute. Those with higher incomes or who’ve done better planning should not be expected to contribute the most. It should remain equal. It also means that those with more money to give should stick to the agreed upon amount to avoid contention and ill-feelings from those who can’t give more.
  1. Giving is not quid pro quo. If you receive a gift, be thankful. If you didn’t plan on getting the person who gave a gift, consider not doing so, but perhaps send a quick note of thanks in a card or letter. This not only saves money, but also the stress of getting a gift you had no intention of giving.

Penalties for Changing SOSEPP

broken-bambooSo – you’ve begun your Series of Substantially Equal Periodic Payments (SOSEPP) from your IRA to satisfy your §72(t) requirement.  Allofasudden, something happens that causes you to make a change to your payment – either purposely or through unforeseen circumstances.  What happens? You were supposed to keep the same payment for the longer of 5 years or until age 59½. What do you do now?

.Well – first of all, we must understand the timeline associated with an SOSEPP:  once begun (notwithstanding the “one-time change” exception which you can read about here), you have to continue those periodic payments without change for the longer of five years or until you reach age 59½.

If you make a change to your periodic payments (other than the one-time change), §72(t)(4) indicates that ALL of your payments, beginning with your first payment under the SOSEPP, will be subject to 1) ordinary income tax (should have already been assessed); 2) the 10% non-qualified withdrawal penalty; and 3) interest on any unpaid tax or penalty, calculated from the date(s) of the disbursal(s) forward to the date you “broke” the SOSEPP.

This Code section should strike fear in the hearts of folks who are considering a SOSEPP.  If you think about it, the possibilities for error are numerous. Your brokerage can fail to execute a disbursement the way you directed; you forget to take your withdrawal; you mistakenly take more (or less) than your SOSEPP prescribes… And if it’s been in place for several years, you’ll owe penalties back to the beginning of the plan, plus interest.

It doesn’t take much imagination to envision a scenario where you could be in pretty deep with such an error on your plan.  The IRS has no sense of humor when dealing with these cases – not many are overturned.


What to Expect After the Election

womanprayingNow that the election has come and gone I wanted to send a note on what we should expect for the next four years and beyond. Really, these are no big predictions, but at times we may tend to forget our long-term goals in the hype and excitement of short term events.

  1. Expect volatility. Volatility is the norm, not the exception. Therefore, it should come as no surprise that markets will fluctuate, gyrate and generally have many ups and downs over the next four years and beyond. Think of it this way, would we expect any higher returns on our investments if markets were always calm and stable? No. Volatility is the price (risk) we pay for expected higher returns. We can diversify and maintain focus, but volatility will never go away.
  1. Expect change. As the saying goes, the only thing that is permanent is change. Do I know what that change is going to be? I don’t. And really, if anyone tells you that they can predict what change is going to happen, be very leery. Laws will change, processes will change and people will change. We have very little control over it.
  1. Expect to save, and save more. In a recent article I read the author cited a study in which retirees were asked their number one regret. No, it wasn’t that they didn’t travel enough or visit with family or friends. And no, it wasn’t spending more time recreationally. The number one regret was not saving for retirement early enough. We’ve spoken quite a bit about paying yourself first and living off of the rest. Try your best to maximize your contributions to your 401k and IRAs. For 2016 (and 2017) those maximums are $18,000 annually ($24,000 if over age 50) for the 401k and $5,500 annually ($6,500 if over age 50) for IRAs.
  1. Expect a bright outlook on your life. One of the few things we can control is our happiness and our attitude. Focus on the things that matter and worry less about the things that don’t. Life’s too short.

Earlier W2 Filing Requirement in 2017

One of the new wrinkles forearlier-w2-filing tax filing requirements for 2017 is that employers must adhere to an earlier W2 filing date than in years’ past. For 2017,all W2 and W3 (employer records) must be filed with the Social Security Administration by January 31.

The previous deadline was the last day of February if the W2 and W3 forms are filed on paper; by the end of March if filed electronically.

Many employers will be caught off-guard by the earlier W2 filing requirement. I wouldn’t think it would be a problem to meet this requirement. The deadline of January 31 for distribution of employee Form W2’s has been the rule for quite a while now. The primary problem is if there are any corrections necessary. This will just cause the employer to have to amend his forms W2/W3 filings with SSA after the fact.

This earlier W2 filing requirement should not have an impact either way for most employees. Tax preparers preparing employer payroll tax forms may be a bit overwhelmed in January. This portion of W2/W3 filing is often delayed until after the employee copies of Form W2 have been distributed. Filings must now be complete by the end of January. This compresses the timeline for distribution to employees and submission to Social Security.

The IRS recently published a Reminder about this change, which was passed into law in December 2015 as part of the Protecting Americans from Tax Hikes (PATH) Act. The reminder is IR-2016-143. As part of this Reminder, IRS also notes that these changes (from the PATH Act, specifically if claiming Earned Income Tax Credit or Additional Child Tax Credit) may delay some tax refunds until after February 15, 2017.

Should I Pay Off Debt or Save for Retirement?

debt-freeeeeeeeeeeeeeeeeeee-300x300Over the last few weeks I’ve gotten quite a few questions from individuals ready to graduate college and start embarking on their first job. As is often the case, many of these individuals have varying amounts of student debt but also understand the importance of saving for retirement. Naturally, a common question is should they pay off student loans or save for retirement. Here’s my take.

As I’ve mentioned in previous posts, there are few ways to receive guaranteed returns. One of those ways is by paying down debt. This is an example of a guaranteed rate of return that is also risk free. By paying off a loan early, the interest that would have normally gone to the lender ends up in your own pocket. The good news is that the debt is retired faster, and the individual experienced zero volatility exposure compared to investing in the market.

On the other hand, what opportunity cost is the individual giving up by not investing in the market and allowing gains, dividends and interest a chance to compound over time? It’s true that the earlier an individual starts to save the more chance he or she has to take advantage of time in the market and the miracle of compound interest. We’ve all seen the examples of the difference between an individual that started investing early versus an individual getting a late start. In most cases the early investor comes out ahead.

Here are some things to consider if you find yourself in a similar situation. The first thing to do is assess your risk tolerance. In other words, are you capable of tolerating the market volatility (risk) that comes with investing outside of a risk free return? If so, investing in the market may be something to consider. In addition, are you certain you can get a higher rate of return than the interest rate on your student loan? For example, if you have a student loan interest rate of 6.8% what are your chances of getting a return higher than 6.8% in the market? The odds may be in your favor in any given year and over longer time periods, but the odds of losing money also need to be considered (and you will lose money). Paying down this debt early guarantees you 6.8% return without risk. That’s hard to beat.

Additionally, where do you plan on investing? For example, will you be investing in your employer’s 401k? Does the 401k have a match? If you have access to a 401k and your employer provides matching contributions, I would recommend saving to your 401k to the point where you receive the full matching contribution. Consider the match free money – risk free money; another rarity when investing. Once you’ve committed to saving enough to take advantage of the full employer match, consider paying extra to your student loans.

After a while, your student loans will be paid off. Good for you! However, you will have a monthly loan payment that you’ve been budgeting for quite some time. Consider keeping this monthly amount as part of your budget, and still treat it like a bill that’s due every month. Only now, you’re going to pay yourself. The good news is that you’ve already budgeted for it, but now you’re simply allocating that money to your 401k or IRA.

If you don’t have an employer match, consider saving in your 401k anyway. Aim for 15-25% of your gross income and focus on putting any extra money to your student loans. In just a short period of time, you’ll find that you’re way ahead of the game when it comes to having little to no debt and quite a bit saved for retirement. It’s simply a matter of prioritizing your money. Pay yourself first and live off of the rest.

Delayed Retirement Credits – When are These Applied?

delayed retirement credits are like marching in the snowIf you delay filing for your Social Security benefit, for each month that you delay you will earn delayed retirement credits. The increase for each month of delayed retirement credit is 2/3% (0.667%) for every month. This equates to 8% in delayed retirement credits for every year of delay. But when are these credits applied to your benefit?

As with so many Social Security-related calculations, timing is everything. With delayed retirement credits, the key is exactly when you stop delaying and start collecting benefits.

Starting Benefits Before Age 70

When you’re delaying benefits past your full retirement age (FRA), you can start receiving benefits at any age after FRA up to age 70. So, for example, if you decided to start your benefits upon the month of your 67th birthday, you’d have 8% in credits earned if your FRA was age 66. For the sake of this example, let’s say your birthday is June 15.

When you file for benefits beginning in the month of your 67th birthday, you would receive a benefit calculated as:

PIA + (PIA * 4%) = Benefit for the remainder of the year

And then, in January of the following year, your benefit will be recalculated as follows:

PIA + (PIA * 8%) = Benefit for this year

(In each year, of course the PIA is assumed to have any COLA already applied before the calculation.)

You are credited with the delayed retirement credits only once a year, in January. So when you applied for your benefit, being mid-year, you had only been credited with 6 months’ worth of delayed retirement credits by that point. Then the following January, the remaining 6 months’ of delayed retirement credits are applied.

Simon, who has a PIA of $1,000 and a date of birth of September 15, 1950, is going to delay his benefit until his age 67 and 6 months (March, 2018). His benefit for the first year (2018) will be calculated as follows:

$1,000 + ($1,000 * 10%) = $1,100

This is because as of January, 2018, he has earned a total of 15 months’ worth of delayed retirement credits. The remaining 3 months are credited to him in January of 2019:

$1,000 + ($1,000 * 12%) = $1,120

Of course, there is an exception to this rule – when you start your benefits at or after age 70.

Starting Benefits at or After Age 70

The exception to the rule is when you start your benefits at or after age 70. In this case, Social Security tosses out this notion of waiting until January to apply delayed retirement credits and applies them immediately.

So, in the case of Simon (from earlier), if he waits until age 70 to file for his benefits (September, 2020), his benefit at that point would be calculated as:

$1,000 + ($1,000 * 32%) = $1,320

And no further increases need to be applied, since all delayed retirement credits are already applied to his record.

Foresight from Experience in Planning

marriage-with-foresightWe can make a difference in our own lives if we make a simple change in our outlook. If we changed from a hindsight to a foresight perspective, many things about our society could improve dramatically. This foresight can help with retirement planning, marriage, and any major event in our lives.

I don’t mean that we should disregard history – of course not. On the contrary, we need to use history to provide us with foresight into the potential outcomes of our choices. The experiences we’ve encountered (and our friends/families/acquaintances have experienced) can help us to predict the outcome of various choices and decisions that we make in the future.

Consider these factors:

  • The divorce rate in the U.S. has been high for a very long time, causing a great deal of heartache and expense, not only for the couple but for family and friends as well. And one of the primary factors that causes a rift for young married couples is money problems.
  • The average cost of a wedding nowadays (according to this article on The Knot) is $31,213. Of course, most weddings cost far less than that, but for many folks the cost of the wedding is a very significant figure nonetheless. Often, paying the cost of a wedding can cause a young couple to go into debt before the knot is even tied.
  • The average college graduate in 2016 could expect to owe around $37,172 in student loans (per Student Loan Hero). If you assume that both members of the newly-married couple are college graduates, that amounts to nearly $75,000 in debt.
  • A “starter home” used to mean a 1 to 2 bedroom, 1 bath home at a price something on the order of one times the take home pay of a young family. Nowadays, the “starter home” has morphed into a 3+ bedroom, 2+ bath home, and the price can be as much as 2.5x to 3x the income of the family. This occurred for two reasons: the size of the average home increased dramatically; and most importantly, the amount of money that could be borrowed (as a percentage of the value of the home) increased significantly over time. Payments on mortgage loan debt have increased to an average of more than 25% of pre-tax income for folks right out of college.
  • Most people have a hard time talking openly about money. Money is one of those “taboo” subjects for most folks; conversations about money are uncomfortable. Because of this, most young couples don’t have serious discussions about finances until they start seeing problems.

Is it any wonder that divorce rates are high? A significant factor in divorces is financial issues, and the average young couple is starting out far in the hole – no wonder there are problems! Most of these young couples facing issues in their marriages can readily point out certain things that they wish they’d done differently in hindsight.

So the outcomes we see are a reaction to the factors. But what if we start using the experience of others to give foresight, to improve our own outcome? What if a young couple used the factors that can be working against the success of their marriage to try to avoid what seems inevitable?

Using Experience as Foresight for Marriage

Below are a few items to consider with your foresight:

Consider whether the wedding must be as expensive as originally planned, or as expensive as your friends’ wedding (or whatever is your gauge). Many, many long-lasting marriages were simple affairs that took place all in one church (reception in the basement). Of course you want to make the event memorable – but it doesn’t have to cost a fortune to make memories.

Make sure that you each understand one another’s debts – including what kinds of debt and how much. Have a plan for dealing with these payments, eliminating them over time. Also have a plan in place for how to keep these current if one of you is unemployed.

Instead of keeping the finances separated and only discussing money when it becomes a problem, talk about money up-front. Probably not on the first date, that might be a bit of a buzzkill, but definitely before marriage.

The accounts can remain separated after marriage if that’s a personal preference, but the couple should share the information with each other. Using this information, the couple can produce a household net worth statement. Don’t get hung up on the terminology, it’s just a report showing your assets (savings and things) minus your debts (loans and credit balances). You’ll need to do this when it comes time to get a mortgage; might as well get a head start on it.

It’s not a one-time thing, either. On a regular basis the couple should share in decision-making. Talk over things such as starting a new subscription or a membership to a fitness club, for example.

Often one member of the couple is responsible for paying the bills. This can be a mistake if the other member doesn’t have knowledge of the state of the month-to-month finances. It often makes sense to either do this together or split the responsibility (every other month, for example). At the very least, each spouse needs to know the household’s position – positive or negative cash flow. More income than expenses is positive, vice versa is negative.

The wedding example above is but one of many that illustrates the benefit of foresight. Review any major purchase, job change, retirement, or change in family similarly. Look at the potential pitfalls and use that information as foresight to guide your decisions.

I know many folks already use past experience as a guide – and kudos to those that do. But many more of us can use this change in perspective to improve our financial futures.

2017 Retirement Plan Contribution Limits

even-turtle-riders-have-limitsThe IRS recently published the new contribution limits for various retirement plans for 2017.  These limits are indexed to inflation, and as such sometimes they do not increase much year over year, and sometimes they don’t increase at all. This year for the third year in a row we saw virtually no increases contribution amounts, and the income limits increased for slightly as they did for 2016.


The annual contribution limit for IRAs (both traditional and Roth) remains at $5,500 for 2017 (third year without an increase).  The “catch up” contribution amount, for folks age 50 or over, also remains at $1,000.

The income limits for traditional (deductible) IRAs increased slightly from last year: for singles covered by a retirement plan, your Modified Adjusted Gross Income (MAGI) must be less than $62,000 for a full deduction; phased deduction is allowed up to a MAGI of $72,000.  This is an increase of $1,000 over the limits for 2016.  For married folks filing jointly who are covered by a retirement plan by his or her employer, the MAGI limit is increased to $99,000, phased out at $119,000, also up $1,000 versus last year’s limits.  For married folks filing jointly who are not covered by a workplace retirement plan but are married to someone who is covered, the MAGI limit for deduction is $186,000, phased out at $196,000; this is an increase of $2,000 over 2016’s limits.

The income limits for Roth IRA contributions also increased: single folks with a MAGI less than $118,000 can make a full contribution, and this is phased out up to a MAGI of $133,000, an increase of $1,000 at each end of the range.  For married folks filing jointly, the MAGI limits are $186,000 to $196,000 for Roth contributions, up by $2,000 over 2016.

401(k), 403(b), 457 and SARSEP plans

For traditional employer-based retirement plans, the amount of deferred income allowed remains the same as the past two years. For 2016, employees are allowed to defer up to $18,000 with a catch up amount of $6,000 for those over age 50.  If you happen to work for a governmental agency that offers a 457 plan in addition to a 401(k) or 403(b) plan, you can double up and defer as much as $36,000 plus catch-ups, for a total of $48,000 deferred.

The limits for contributions to Roth 401(k) and Roth 403(b) are the same as traditional plans – the limit is for all plans of that type in total.  You are allowed to contribute up to the limit for either a Roth plan or a traditional plan, or a combination of the two.


Savings Incentive Match Plans for Employees (SIMPLE) deferral limit is also unchanged at $12,500 for 2017.  The catch up amount is unchanged as well at $3,000, for folks at or older than age 50.

Saver’s Credit

The income limits for receiving the Saver’s Credit for contributing to a retirement plan increased for 2017.  The MAGI limit for married filing jointly increased from $61,500 to $62,000; for singles the limit is unchanged at $30,750; and for heads of household, the MAGI limit is $46,500, an increase from $46,125.  The saver’s credit rewards low and moderate income taxpayers who are working hard and need more help saving for retirement.  The table below provides more details on how the saver’s credit works:

Filing Status/Adjusted Gross Income for 2017
Amount of Credit Married Filing Jointly Head of Household Single/Others
50% of first $2,000 deferred $0 to $37,000 $0 to $27,750 $0 to $18,500
20% of first $2,000 deferred $37,001 to $40,000 $27,751 to $30,000 $18,501 to $20,000
10% of first $2,000 deferred $40,001 to $62,000 $30,001 to $46,500 $20,001 to $30,750

Why Young People Need Estate Planning

2770132690_0b9558b429_m1Many young individuals and couples think that the time to start thinking about estate planning is when they’re older, or perhaps if they ever have “estates”. On other occasions, the impetus to plan may be due to a recent death of a friend or family member without an estate plan or as my friend Tom, an estate planning attorney says, “Right before they take a trip over water.”

However, many young individuals should start thinking and “doing” some estate planning right away. Before we get to specific recommendation, let us first understand what estate planning is – and, what your “estate” is.

Essentially, your estate is everything you own. This includes your home, personal property, life insurance policies, invested assets, etc. Deciding how these assets are controlled and divided in the event of your death is called estate planning. Additionally, estate planning includes who will care for your children if you die, and who may make decisions on your behalf should you become incapacitated. More complex estate planning may involve legal aspects of trusts, taxation, gifting, etc.

Dying without a will (intestate) leaves the decision of how your assets will be divided, and more importantly, the guardianship of your children in the hands of the laws of the state you’re domiciled. This can lead to individuals inheriting your assets and caring for your children that you’d rather not. To prevent this individuals and couples can take steps now in order to make sure their requests are followed.

The following documents should be considered by everyone concerning estate planning.*

  1. A Will. Executing a will ensures that your assets are distributed to those individuals you want to inherit or disinherit your assets. Additionally, a will establishes who will be guardian of your children should both parents pass away. A will also determines the executor of your estate and may establish a trust for assets in order to provide monetary support for your children.
  1. Power of Attorney for Health Care. This document names a specific individual to make health care decisions on your behalf should you become incapacitated and can no longer make those decisions on your own. Readers in the state of Illinois can find a great example of a health care POA here.
  1. Power of Attorney for Property. Similar to the health care POA, the POA for property enables an individual you appoint to make property decisions on your behalf. Such transactions include real estate, investments, banking and taxation. Again, Illinois readers can find a great example here.
  1. A Living Will. A living will states your desire to have or not to have death-delaying procedures implemented in the event of your diagnosis of a terminal condition by a health care professional (your attending physician). This document assures your wishes will be followed in the event you’re unable to actively make that decision. Another excellent example for IL readers can be found here.
  1. Beneficiary Designations. It’s important to make sure your beneficiary designations are up to date ion your life insurance policies, annuities, retirement accounts and other investment accounts.

It goes without saying that in addition to having these documents prepared and available, individuals should talk to their family or individuals they want to have these responsibilities about their wishes, requests and potential responsibilities. Personally, and as a planner, I’ve seen families argue, fight, and ultimately discontinue speaking due to lack of communication when estate planning.

*Note: We recommend consulting a competent estate planning attorney for all of the above. The documents listed are merely examples and should not be considered replacements for professional, legal advice.

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