Ken Earwood is a professional financial advisor with more than 20 years of experience serving clients in the financial service industry. CA Lic. #: OC44710. He can be reached at 16531 Bolsa Chica St. Ste. 304 HB, CA 92649.
E-mail: firstname.lastname@example.org or call (714) 840-9283, ext. Securities offered through Parkland Securities, LLC. Member FINRA/SIPC.
With the passage of the Bipartisan Budget Act of 2015, two strategies to potentially maximize Social Security benefit payments were eliminated.
Prior to the budget’s passage, married couples had two strategies to help maximize their Social Security benefits: “file-and-suspend” and “restricted applications.”¹
Under file-and-suspend, the higher-earning spouse filed for benefits and then suspended them, allowing the lower-earning spouse to claim a spousal benefit. This also let the higher-earning spouse accrue delayed retirement credits. Upon attaining age 70, the couple then could switch to each taking their own individual benefit to receive the highest possible amount.
A restricted application allowed an individual, upon attaining full retirement age, to file only for a spousal benefit, based on his or her spouse’s work record, delaying personal benefits until age 70. Upon reaching age 70, the individual would then convert to his or her own personal benefit.
Married couples also could combine the above strategies with one spouse filing and suspending a worker benefit, while the other spouse filed a restricted application to receive the spousal benefit only.
These strategies could be used by divorced recipients, too. A divorced spouse was permitted to file a restricted application for a spousal benefit at full retirement age, as long as the former spouse was 62 or older. At age 70, the divorced spouse then switched over to his or her own worker benefit, assuming it was a higher amount.
The Policy Behind the Elimination
The elimination of file-and-suspend claims became effective on May 1, 2016. It prohibited restricted applications for anyone who had not reached age 62 by the end of 2015. Since file-and-suspend was only available to those who had reached full retirement age, it remained available to individuals who were age 66 by April 30, 2016. (Couples who had already executed such claims are unaffected by the new law.)²
The reason that Congress acted, and the President signed into law this change, was to save money and close perceived loopholes in the Social Security program.
Overall savings will be small compared to the larger financial challenges that Social Security faces. These changes will save about 0.02 percent of the taxable wages and self-employment income subject to Social Security taxes over the next 75 years, according to the Social Security Administration — a fraction of the program’s long-term deficit of 2.65 percent of taxable payroll.3 ³
According to one study, these changes will impact just 0.1 percent of all Social Security participants.⁴
Strategy & Choices
There was one other change not yet widely discussed that may have implications for you.
For someone who exercised a file-and-suspend strategy, the rules provided the ability to receive a retroactive lump sum payment if an individual changed his or her mind and lifted the suspension. (They did lose any bump up in payment amount that came with delaying benefit payments, however.) This flexibility is also being eliminated under the budget act.
This ability to lift the suspension was a particularly important planning strategy because it allowed an individual who may have come down with a life-threatening illness or undergone a change in financial status to retroactively go back to their original filing date and receive a lump sum for the benefit amount not paid during the suspension period.
Keep in mind that Social Security has undergone a number of substantive changes since its inception. While the elimination of these strategies may be disappointing, these changes do not undercut the central promise of this critical social contract. In fact, they were implemented to strengthen it.
1. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Asset allocation and diversification are approaches to help manage investment risk. Asset allocation and diversification do not guarantee against investment loss. Past performance does not guarantee future results.
2. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
3. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss. Past performance does not guarantee future results.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2016 FMG Suite.
One of the most well-known investors of the 20th Century, Benjamin Graham, said that “the investor’s chief problem—and even his worst enemy—is likely to be himself.”
What Graham understood—and modern research is catching up to—is the idea that we all have emotions and biases that affect our decision-making. The innate wiring built to survive pre-modern times can be counterproductive in our modern world, especially when it comes to investing. (1)
Let’s take a quick look at a few of the human emotions and biases that can adversely impact sound investment decision-making.
These are the two most powerful emotions that move investors and investment markets. Each emotion clouds our capability for rational and dispassionate decision-making. They are the emotions that lead us to believe that prices may continue to rise (think the Tulip price bubble of 1636) or that everything has gone so wrong that prices may not recover (think Credit Crisis of 2008-2009).
Some investors have found a way to conquer these emotions and be brave when everyone else is fearful and resist the temptations of a too-exuberant market.
Peter Bernstein, a noted economic historian, argued that the riskiest moment may be when we feel that we are right.(2) It is at that precise moment that we tend to disregard all information that may conflict with our beliefs, setting ourselves up for investment surprise.
Human nature is such that we tend to recast history in the manner that emphasizes our successes and downplay our failures. As a result, we may not benefit from the valuable lessons failure can teach. Indeed, failure may be your most valuable investment.
Market history is littered with examples of “rules of thumb” that have worked, until they no longer worked.
Humans have an innate desire to recognize patterns and apply these patterns to predicting the future. We erroneously believe that because “A” occurred and “B” happened that if “A” happens again, we can profit by anticipating that “B” will repeat. Market history is littered with examples of “rules of thumb” that have worked, until they no longer worked.
Financial markets are complex and unpredictable. Our endeavors to tap their opportunities to pursue our financial goals are best realized when we don’t burden the enterprise by blindness to the inherent behavioral obstacles we all share.
Thanks to healthier lifestyles and advances in modern medicine, there are more Americans over the age of 65 than there have ever been.
The U.S. Census Bureau estimates that by 2030, more than 20 percent of U.S. residents will be aged 65 and over, compared with 13 percent in 2010 and 9.8 percent in 1970. As our nation ages, many Americans are turning their attention to caring for aging parents.
For many people, one of the most difficult conversations to have involves talking with an aging parent about extended medical care. The shifting of roles can be challenging, and emotions often prevent important information from being exchanged and critical decisions from being made.
When talking to a parent about future care, it’s best to have a strategy for structuring the conversation. Here are some key concepts to consider.
Knowing ahead of time what information you need to find out may help keep the conversation on track. Here is a checklist that can be a good starting point:
It is also important to know the location of medical and estate management paperwork, including:
Remember that if you can collect all the critical information, you may be able to save your family time and avoid future emotional discussions. While checklists and scripts may help prepare you, remember that this conversation could signal a major change in your parent’s life. The transitionfrom provider to dependent can be difficult for any parent and has the potential to unearth old issues. Be prepared for emotions and the unexpected. Be kind, but do your best to get all the information you need.
This conversation is probably not the only one you will have with your parent about their future healthcare needs. It may be the beginning of an ongoing dialogue. Consider involving other siblings in the discussions. Often one sibling takes a lead role when caring for parents, but all family members should be honest about their feelings, situations, and needs.
The earlier you can begin to communicate about important issues, the more likely you will be to have all the information you need when a crisis arises. How will you know when a parent needs your help? Look for indicators like fluctuations in weight, failure to take medication, new health concerns, and diminished social interaction. These can all be warning signs that additional care may soon become necessary. Don’t avoid the topic of care just because you are uncomfortable. Chances are that waiting will only make you more so.
Remember, whatever your relationship with your parent has been, this new phase of life will present challenges for both parties. By treating your parent with love and respect—and taking the necessary steps toward open communication—you will be able to provide the help needed during this new phase of life.
1. U.S. Census Bureau, 2014 2. Note: Power of attorney laws can vary from state to state. An estate strategy that includes trusts may involve a complex web of tax rules and regulations. Consider working with a knowledgeable estate management professional before implementing such strategies.
The Investment Company Institute reports that there is roughly $6.5 trillion in Individual Retirement Accounts (IRA). To help put that in perspective, that’s well over one-third the annual gross domestic product of the U.S.
If you have a traditional IRA, you may have the opportunity to stretch it out, meaning the account may be structured to extend its tax-deferred status across multiple generations.3
With a traditional IRA, the account holder must begin taking required minimum distributions (RMD) by April 1 of the year after he or she turns 70½. These payments are based on the IRS’ tables for life expectancy. To calculate an RMD, divide the account balance by the account holder’s anticipated lifespan.
Let’s assume, for example, a 73-year-old has an IRA with a balance of $250,000. According to the Internal Revenue Service's 2014 lifespan table, the person's life expectancy is 14.8 years, so the RMD is:
$250,000 ÷ 14.8 = $16,891.89
At that rate, it may take several years to deplete the account — in some cases, longer than the account owner is likely to be alive. So what are your options?
First, you can name your spouse as beneficiary of the traditional IRA, and he or she can roll the balance into a new account. If your spouse is over age 70½ when you die, he or she must begin taking RMDs based on his or her life expectancy. When your spouse dies, the second-generation beneficiary may transfer the balance into an inherited IRA. Then, the owner of the inherited IRA must begin taking RMDs based on his or her life expectancy. (See illustration.)
This gives the money in the inherited IRA a longer time to remain tax Fast Fact deferred. Keep in mind, however, that there is no guarantee that the person who inherited the IRA will continue the tax-deferred treatment of the account.
Stretching a Roth IRA follows similar rules to a traditional IRA. But remember, a Roth IRA does not require any RMDs. If you name your spouse as a beneficiary, he or she can roll the balance into a new Roth account. Since it remains a Roth IRA, your spouse is not required to take RMDs either. When your spouse passes, the beneficiary must begin taking distributions. The distributions will be tax-free since it’s a Roth IRA.
Stretching an IRA can be a powerful strategy. But it’s critical to understand the limitations and benefits before following the approach.
A single father, age 55, rolls over $250,000 from his employer’s retirement plan into a traditional IRA and names his son, age 25, as beneficiary. At age 70½, the account owner starts taking RMDs.
When he dies at age 80, his son moves the assets into an inherited IRA and starts taking RMDs based his life expectancy.
By the time it’s exhausted, the IRA will have lasted 85 years and paid out over $2 million in benefits — all from a $250,000 rollover.
This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments. Past performance does not guarantee future results. Actual results will vary.
Investment Company Institute, 2014; As of December 31, 2013
U.S. Bureau of Economic Analysis, 2014
Contributions to a traditional IRA may be fully or partially deductible, depending on your individual circumstance. Distributions from traditional IRA and most other employer–sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
To qualify for the tax-free and penalty–free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawal also can be taken under certain other circumstances, such as a result of the owner’s death.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by FMG, LLC, to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale.