Thrive Retirement Planning Podcast

By Carl WoolstonBusiness Education Investing How To

Thrive Retirement Planning Podcast episodes

March 12, 2021Is It Time to Retire?
Eventually, almost every person asks the question, “Is it time to retire?” The real question is, “Are you prepared?” It’s quite common for people to save for retirement but as it gets closer they begin to wonder if they are ready. They also realize it’s a lot more complicated than they originally thought. In this episode we’ll discuss 5 steps to prepare yourself your retirement day and my methodology to determine if you’re ready.
STEP #1: UNDERSTAND YOUR SOCIAL SECURITY BENEFIT
Get your statement and know your three numbers
Understand the spousal benefit
Understand what happens if you take early or delay
See other shows for more info:
Should you take Social Security at 62?
Social Security Spousal Benefits
Watch my free Social Security Masterclass
Don’t make your Social Security decisions in a bubble!
STEP #2: GET A TOTAL OF ALL YOUR RETIREMENT INCOME
Determine any other sources of regular income during retirement and when they will begin, such as a pension, annuity, rental income, etc. Make sure you make pension and annuity decisions based on both spouses if you are married.
Once you know your Social Security and other income sources you can add these up at different ages. For example, you could run a scenario at 62, 65, full retirement age, and 70. Because Social Security increases as you delay, the monthly benefit will increase as you wait.
Write down your total income at various ages.
STEP #3: KNOW YOUR RETIREMENT INCOME GAP
Your next step is to determine how much you need or want during retirement on a monthly basis. Make sure and take into account health care expenses if you’re going to retire early or a house being paid off early in retirement, for example.
The difference between what you want and how much income you’ll have is your income gap. In most cases this isn’t a linear projection meaning you may want a vacation in 5 years, a new car in 2, etc. Making a plan for this is important as well. After all, retirement is supposed to be fun!
STEP #4: DETERMINE OTHER ASSETS FOR RETIREMENT
Make a list of your 401(k)s, IRAs, or other retirement accounts and total them up.
Determine which accounts to pull from first.
Analyze the tax consequences of each of these accounts. For example, taking money out of a bank account vs an IRA, or a Roth IRA vs a 401(k).
Model different withdrawal rates to decrease your risk of running out of money.
Be aware of the sequence of return risk!
STEP #5: DEVELOP A STRATEGY
Do you have a strategy? Do you understand it? How confident are you about your strategy?
Up until now you’ve been accumulating assets. As you approach retirement you’ll most likely need to start spending those assets. You’ll also need to invest differently as retirement approaches and you’re in retirement.
Often people forget to preserve their assets (The 10-year rule)
Coordinate your Social Security with your other assets
The 3 buckets
Determine investment strategies that align with your income plan.
Not everything is a hammer!
IT DOESN’T HAVE TO BE ALL OR NOTHING
We often think of retirement as a thing we do once rather than it being a process.
For example, if you’re done with work at 62 but want to delay a little later to take Social Security, you don’t always have to work full-time in the job you dislike until you retire. It’s possible to retire and still work.
For example, if you know your Social Security benefit at 66 is going to be $2,500 per month and you’re going to also pull $2,500 from your investments to give you $5,000 per month at 66, you don’t necessarily have to work full-time until 66.
With the right income plan, you could potentially retire at 62 and find part-time work that brings in $2,500 per month until 66, which is the same as Social Security. If your assets are sufficient enough, you could also start withdrawing $2,500 per month from your investments.
IS IT TIME TO RETIRE?
This can be complicated
That’s why people like myself do this
Many advisors don’t know Social Security and many aren’t comprehensive
If you would like to sit down and discuss your Social Security benefits, your assets, and create a plan on when to retire, call us at 801-810-8434 or go to thriverp.com and click on get started to learn more.
Thrive Retirement Planning is a holistic fiduciary firm and we can meet with you either in person or virtually.

Do you have questions about when to take Social Security and how to maximize your benefit? Take our free online Social Security Masterclass by going to thriverp.com/ss.
31 min
March 04, 2021Knowing Your Retirement Tax Bracket
If you don’t know your current tax bracket and the basics of how tax brackets work, you could make major tax mistakes during retirement. Tax brackets can impact which retirement accounts to withdraw from for income. Strategies that can potentially reduce taxes during retirement like a Roth IRA conversion also utilize knowledge of your current tax bracket.
TAX BRACKET BASICS
The fundamentals of tax brackets
Brackets use a progressive tax
How your 401(k) and IRAs will be taxed during retirement
TAX RETURN BASICS
Gross income
Adjusted gross income, above the line deductions, and below the line deductions
Itemizing vs the standard deduction
Taxable income
APPLYING THE TAX BRACKET BASICS
Maxing out a tax bracket
The next dollar earned
Roth Conversion – An example of a married couple maxing out a 12% bracket
RMDS AND TAXES
RMD basics at 72
Opportunities to do Roth conversions
ACTION STEPS
If you’re within 10 years of retirement and looking to create strategies around replacing your paycheck, deciding when to take Social Security, and invest during retirement, I’d invite you to set up an appointment with us at Thrive Retirement Planning, either in person or virtually, where we can get to know each other. Simply call 801-810-8434 or go to thriverp.com and click on get started to learn more.
Do you have questions about when to take Social Security and how to maximize your benefit? Take our free online Social Security Masterclass by going to thriverp.com/ss.
23 min
February 26, 2021 5 Strategies to Avoid Probate
Probate can be expensive, time consuming, public, and frustrating for your heirs. Should you create a will? A trust? What is the difference? Is it worth the effort to avoid probate? In this episode I’m going to discuss 5 specific strategies to avoid probate. This is part of my ongoing commitment to assist you in getting educated about retirement and helping you making better decisions in all 8 areas of retirement planning.
I am not here as an attorney but rather am here to educate you on high level aspects of estate planning. I recommend working with competent legal professionals that can assist you in making estate planning decisions for your specific needs. My goal is to put these strategies on your radar so you can plan your retirement and estate effectively.
WHAT IS PROBATE
Probate is the legal way a person’s estate is handled after they pass away. It’s purpose is to make sure that assets and possessions are given to the correct people. It also ensures that any debts and taxes are paid.
A will does not help you avoid probate, but rather gives specific instructions upon your passing. The probate process then reviews a will and validates it. Then an executor is appointed to distribute your estate to the beneficiaries of your choosing.
If no will exists, your estate will be handled through the default intestate laws. Be aware that your assets may not be distributed as you would have designated.
As a side note, there may be small estate guidelines in your state that minimize the probate process. In Utah, this is for estates with less than $100,000 and no real property.
3 REASONS TO AVOID PROBATE?
Time - The probate process can last anywhere from approximately 4 months to 2 years, depending on the complexity of your estate. Many factors can influence the timeline of settling your estate.
Is there a will?
The number of beneficiaries
Is the will being disputed? Do the beneficiaries agree?
Does the estate have debt?
Is the estate taxable?
How complicated are the assets?
Expense - Probate can cost 3-7% of a person’s total assets. On a million dollar estate that could be $30,000 if at 3%, $70,000 at 7%. With proactive planning, these costs can often be reduced.
Lack of Privacy - The probate process is a public process, meaning that estate matters can be discovered by your neighbors or others. If someone showed up at the courthouse, they could view the entire record.
The probate process can be different across the United States, so researching your local laws and working with a competent attorney can help you make wise estate planning decisions.
5 STRATEGIES TO AVOID PROBATE
While every situation is unique, many retirees who have accumulated assets can benefit from minimizing the impact of probate. When you avoid probate, it can often be less expensive, less time-consuming, and private. Your neighbor won’t know the amount of your assets or to whom you gave them.
#1 - TOD DESIGNATION
A TOD designation stands for Transfer on Death. TODs are generally used for non-qualified bank and brokerage accounts. This designation transfers the ownership of an asset to a beneficiary.
For example, in the last year I worked with a new client who was single and had a large amount of money in her bank account. If she were to pass away without a TOD designation, that money would be included in the probate process. On the other hand, if she were to go to her bank and add a TOD designation, that money would go directly to the beneficiaries she selects. This same principle applies to a taxable brokerage account.
#2 - BENEFICIARY DESIGNATIONS
When you set up your 401(k), 403(b), or IRA, you’ll select beneficiaries. These accounts are a form of TOD and will simply pass to the beneficiaries you selected without going through probate.
One common mistake is not updating your beneficiaries as life events occur. It’s important to understand that the beneficiary designation is a contract that supersedes a will. For example, let’s say that a 401(k) was established when a husband and wife were married and then later divorce. If the beneficiary designation isn’t updated, this could create an estate nightmare.
#3 - HOLD PROPERTY JOINTLY
Various types of assets can be set up jointly with rights of survivorship by a husband and wife. When one spouse passes away, the assets automatically go the joint account owner. Let's say a married couple has a bank account set up jointly. If the husband were to pass away, the assets would be in his wife’s name. There are various types of joint accounts, depending on the state in which you live.
#4 - USE A LIVING TRUST
A living trust is a legal document that can be set to own your assets and then pass them to beneficiaries, often at your death. A trust can own assets such as your home, vehicles, and collectibles. Once a trust is set up and then funded, assets pass privately to beneficiaries, rather than publicly like probate.
There is a fee with an attorney to set up a trust but the costs can often be much less than navigating the probate process. In addition, the process is overseen by a trustee that you designate, which can be much quicker.
There are both revocable and irrevocable living trusts, with advantages and disadvantages for both. Generally, revocable trusts can be adjusted and adapted by the grantor (the person who sets up the trust) at any time and assets in the trust will be included in the estate at death. With the estate tax being so high right now at 11.7 Million, most retirees won’t be concerned with that. An irrevocable trust can be set up to move assets out of your estate but can’t be changed by the grantor.
There are a variety of trusts and strategies in estate planning. Please talk to an attorney about your specific estate.
#5 - TAKE ADVANTAGE OF THE ANNUAL GIFT EXCLUSION
No matter your net worth, a powerful strategy to move assets out of your estate and thus avoid probate is to give away assets while you are living. In 2021, individuals can give away up to $15,000 to one individual without having to pay a gift tax (The person receiving the gift doesn’t pay tax on the gift).
If you have 5 people you want to distribute money to, you could move $75,000 out of your estate in a given year. If you’re married, your spouse can give $75,000 as well. This can be a highly effective way to avoid probate.
As an additional note, you can also gift money for tuition and medical payments on behalf of other individuals, but this money must be given directly to the organization. For example, you could give a grandchild $15,000 and also pay their tuition of $20,000.
ACTION STEPS
If you’re within 10 years of retirement and looking to create strategies around replacing your paycheck, deciding when to take Social Security, and invest during retirement, I’d invite you to set up an appointment with us at Thrive Retirement Planning, either in person or virtually, where we can get to know each other. Simply call 801-810-8434 or go to thriverp.com and click on get started to learn more.
Do you have questions about when to take Social Security and how to maximize your benefit? Take our free online Social Security Masterclass by going to thriverp.com/ss.
23 min
February 18, 2021 Social Security Spousal Benefits
Many married couples find navigating Social Security daunting, especially as it relates to understanding Social Security spousal benefits. Not only can you make Social Security claiming mistakes, but your decisions can potentially cost you large amounts of retirement income. Today, we’ll tackle how the spousal benefit works, how to maximize your benefit, and even discuss end of life survivor scenarios. We’ll even touch on benefits for a divorced spouse.
THE BASICS OF SOCIAL SECURITY - 3 SPECIFIC TYPES OF BENEFITS
There are three distinct Social Security benefits:
Retired Worker Benefit - This is your benefit that can be claimed off of your own work record. I covered this topic in the podcast, Should You Take Social Security at 62.
Spousal Benefit - This is the topic we’re going to cover today. This is the benefit that becomes active once the primary worker’s benefit is activated. Not everyone will be eligible to receive this benefit (i.e. if your own working record is too high).
Widow(er) or Survivor Benefit - This the benefit that provides a surviving spouse with a benefit after the worker’s death.
While today’s podcast will cover this topic at a high level, I’d suggest watching our online on-demand Social Security class that we teach in person or you can even schedule a time to discuss your various options one-on-one with our office.
SO HOW DOES SOCIAL SECURITY WORK FOR SPOUSES?
A spousal benefit can add additional Social Security income to a household during retirement. It was created in a time when many women stayed home to raise children. It can be accessed even if a spouse never worked outside the home. To qualify, there are a few basic rules to understand.
You must be married for at least a year to claim the spousal benefit.
The primary worker must have filed for Social Security. This is much like a dam that lets water out of a reservoir. If the dam doesn’t let out water, there isn’t water in the river below the dam. It’s the same with Social Security spousal benefit. When the primary worker files his/her benefit the dam then releases water and the lower earning spouse can then access spousal benefits once they meet other criteria.
In most cases, to qualify for the spousal benefit, your own benefit that’s based on your own working record, can’t be greater than half of the primary worker’s PIA. PIA (primary insurance amount) is the amount that the primary worker will get when they claim Social Security at full/normal retirement age.
Another way of saying this is the spousal benefit can be up to 50% of your spouse's PIA (not benefit amount). Knowing that the spousal benefit is based on your spouse’s PIA and not the benefit amount is an important distinction. For example, if the primary spouse starts Social Security at 62 and has a permanent reduction in their monthly benefit, that doesn’t impact the spousal benefit as it is based on the PIA of the primary worker, not when the primary worker filed for their benefits (while the spousal benefit isn’t impacted by when the primary worker files for their benefit, it does impact the survivor benefit when the primary worker passes away).
To illustrate, let’s say John and Jane have been married for 15 years. if John was the primary worker and his PIA benefit was $2,000, Jane would be eligible for up to $1,000 at full retirement age. She would not be able to claim a spousal benefit if John had not yet filed.
When Jane files, she would first get her benefit based on her own working record and then the spousal benefit would provide a boost up to 50% of John’s PIA. Say, for example, that Jane’s Social Security benefit on her own working record was $600 per month at full retirement age. When she takes her spousal benefit at full retirement age it could add another $400. If she doesn’t have a Social Security benefit based on her own work record she could still get $1,000.
In the opposite direction, if Jane’s benefit based on her own work record was $1,200, she wouldn’t qualify for the spousal benefit as the amount she is eligible for is no greater than 50% of the higher earner’s PIA.
WHEN TO TAKE THE SOCIAL SECURITY SPOUSAL BENEFIT
As we’ve discussed, the spousal benefit has two moving parts. One is your own benefit based on your own work history, which you can see on your own Social Security statement. To see this benefit amount I’d encourage you to set up an account at ssa.gov or look at the most recent statement you’ve received in the mail. This benefit can be permanently reduced if you take it early or permanently higher if you take it later. Note, that you would never want to wait until past age 70.
The second moving part of the total spousal benefit is the boost you’ll receive if your own PIA is less than 50% of the higher earner. In the previous example, Jane had her own benefit at full retirement age of $600 and then a spousal boost of $400. If, instead of waiting until full retirement age she claimed at 62 and the higher earner had already filed, she would have her own benefit of $600 permanently reduced by at least 25% to around $450 (this is just an estimate if full retirement age is at 66 and your reduction may be different). The spousal benefit would be reduced by 30% and instead of $400 only get about $280. So, by taking early her benefit would be around $730 per month.
As an additional note, if you take Social Security early, your benefit may be reduced due to the earning test, which I talk about in an earlier podcast.
WHAT ABOUT DELAYED RETIREMENT CREDITS AND THE SPOUSAL BENEFIT
There is however, a major difference between your primary benefit maximum and the spousal benefit maximum. After your full retirement age, your own benefit will experience DRCs (delayed retirement credits) of 8% per year, whereas your spousal boost won’t increase after full retirement age. In other words, it doesn’t make sense to wait to claim Social Security if you’re trying to get the spousal benefit to grow after full retirement age.
SOCIAL SECURITY BENEFITS FOR A DIVORCED SPOUSE
Many divorced spouses who were the lower earning spouse due to raising children or other factors mistakenly believe they don’t have access to Social Security spousal benefits. If you were married at least 10 years before you divorced and are not currently married, the same benefit amounts and reductions apply for early claiming as a current spouse.
Your claiming Social Security benefits based on your spouse’s working record doesn’t affect the current spouse or other dependents. In addition, your ex is not notified by SSA that you are claiming benefits. If you've been divorced more than 2 years, your previous spouse does not have to file for benefits before you are eligible. If you’ve been divorced less than two years, you’ll need to wait to claim until your spouse has claimed.
SURVIVOR BENEFITS IF THE PRIMARY WORKER PASSES AWAY FIRST
As a general rule, at the death of the first spouse the surviving spouse can receive either his or her own benefit or the benefit of the deceased, whichever is greater. This is no longer based on PIA. In other words, if the primary worker takes their benefit early at 62 and passes away first, the surviving spouse will receive that benefit instead of their own, if it is higher. Be aware that based on your individual circumstances, these rules may vary.
Going back to our example of John and Jane, if John were to pass away, Jane could claim his $2,000 benefit but she would no longer receive her $1,000 benefit. The bottom line is that the claiming strategy of the primary earning spouse can have a significant impact on the surviving spouse.
Your claiming Social Security benefits based on your spouse’s working record doesn’t affect the current spouse or other dependents. In addition, your ex is not notified by SSA that you are claiming benefits. If you've been divorced more than 2 years, your previous spouse does not have to file for benefits before you are eligible. If you’ve been divorced less than two years, you’ll need to wait to claim until your spouse has claimed.
A LITTLE Q & A FOR CLARIFICATION
Can I potentially claim a Social Security spousal benefit if I never worked outside the home?
Yes.
Does the primary worker have to have filed in order to claim the spousal benefit?
Yes.
Should a spouse delay past full retirement age to claim Social Security to take advantage of DRCs (Delayed Retirement Credits)?
No. DRCs don’t apply to the spousal benefit. The spousal benefit will reach its maximum at full retirement age so the latest you would want to claim the spousal benefit would be when you reach full retirement age.
Can you claim a spousal benefit if you’re divorced?
Yes, if you were married for more than 10 years, are not currently married, and qualify for the spousal benefit.
ACTION STEPS
After individuals attend our Social Security events they often schedule a time for us to look at their entire situation and do a Social Security analysis. We can run a free Social Security optimization report, help them make decisions on when to retire, and also create income plans to replace their paycheck once they retire.
I’d invite you to act on what you’ve learned and get a free Social Security analysis with a fiduciary comprehensive planner like us at Thrive Retirement Planning.
You can set up an appointment with us at Thrive Retirement Planning, either in person or virtually, where we can get to know each other. Simply call 801-810-8434 or go to thriverp.com and click on get started to learn more. We can help you make Social Security decisions, create an income plan, create a plan for protecting your investments as you approach retirement, and also help you with your investments.
Do you have questions about when to take Social Security and how to maximize your benefit? Take our free online Social Security Masterclass by going to thriverp.com/ss.
27 min
February 10, 2021 The 3 Ways Retirement Assets are Taxed
Many investors and retirees can be surprised and shocked by taxes in retirement. One of the foundational pieces for minimizing taxes during retirement is knowing the 3 different ways retirement assets and investments are taxed. When you understand how your retirement assets are taxed it can help you make vital decisions about retirement income, pay less to Uncle Sam, and reduce retirement anxiety.
UNDERSTADING TAX BRACKETS
Depending on how you file your taxes (i.e. single, married filing jointly, etc.) and the amount of income you have, you’ll find yourself paying a percentage of that income in taxes. In the United States, we have a progressive tax system, meaning that every dollar you earn isn’t taxed at the same rate. If you're filing jointly, for 2021, for example, you’ll pay 10% in tax up to $19,750. Then from $19,751 to $80,250 you’ll pay 12%. Then from $80,251 to $171,050 you’ll pay 22% and $171,051 to $326,600 is 24%. The bottom line is that when you find yourself in a tax bracket, not all your income is taxed in that bracket. Make sense?
This is important because there are a number of strategies that can be employed during retirement to proactively address taxes. Not to make this too complex, but your taxable income (the amount that determines your tax bracket) is figured by taking your adjusted gross income and then subtracting deductions, including your itemized deductions or the standard deduction, whichever is greater. By understanding the basics of taxable income, you’ll be empowered to strategize about how your retirement income will be impacted by taxes.
3 WAYS RETIREMENT ASSETS ARE TAXED
#1 - Taxable Accounts and Investments
Examples: Bank, Taxable Brokerage
Tax Treatment: These are after-tax and tax-as-earned
As you earn interest in a bank account or CD, it will be taxed as interest income, which flows down to your taxable income and will impact your tax brackets.
Taxable brokerage accounts are more complex and have several ways they are taxed. If you earn interest, you’ll pay taxes. If your investments produce dividends, they will be characterized as either qualified or non-qualified. Qualified dividends, which are most common, are taxed at lower long-term capital gains rates and nonqualified dividends will be taxed as ordinary income.
If you own a single stock and it grows, you won’t pay tax until you sell that stock. When you sell the stock, if you own the stock for one year or less it will be taxed as ordinary income but if you hold it more than a year it will be taxed at long-term capital gains rates, which are generally much lower. Mutual funds may report gains or losses that you’ll pay as well as dividend income.
#2 - Tax Deferred Investments
Examples: 401(k)s and IRAs
Tax Treatment: Money is put in these accounts before tax, grows tax-deferred, and is taxed on withdrawal
Tax-deferred accounts don’t make you report gains, dividends, or interest inside an account each year, as long as the money stays inside the account. As you start withdrawing money out of your accounts to create retirement income, this money will be taxed as ordinary income. Even if you don’t need the money for retirement income, at the age of 72 you’ll be required to take RMDs (Required Minimum Distributions). If you don’t take at the least the required amounts each year, you’ll owe a 50% tax on the amount you should have withdrawn. Also, if you have several tax-deferred accounts, you can determine the RMD on each account and you may be able to take it all out of one account in some instances.
#3 - Tax-Free Assets
Examples: Roth 401(k), Roth IRA, Cash Value Insurance
Tax Treatment: Money is put into these accounts after tax, grows tax-deferred, and can often be taken out tax-free
In retirement planning, tax-free investments and financial vehicles are powerful tools. They can allow families to have income, yet pay no tax on the money. This in turn can reduce Social Security taxes, keep you in your current tax bracket, or even reduce your marginal tax rate. Tax-free financial vehicles can also be powerful tools to pass on assets to beneficiaries.
ACTION STEPS
As you better understand how your various investments and retirement plans will be taxed, you can create comprehensive strategies to minimize tax, create peace of mind, and withdraw your assets for income. Determining which accounts to pull from first can be a very important strategic part of your retirement plan.
I’d invite you to act on what you’ve learned and create a retirement income plan that takes into account the taxable, tax-deferred, and tax-free status of your investments and assets. You can do this solo or with a team that includes a fiduciary comprehensive planner like us at Thrive Retirement Planning and a tax professional.
I’d invite you to set up an appointment with us at Thrive Retirement Planning, either in person or virtually, where we can get to know each other. Simply call 801-810-8434 or go to thriverp.com and click on get started to learn more. We can help you make Social Security decisions, create an income plan, create a plan for protecting your investments as you approach retirement, and also help you with your investments.
Do you have questions about when to take Social Security and how to maximize your benefit? Take our free online Social Security Masterclass by going to thriverp.com/ss
20 min
February 04, 2021 Understanding Sequence of Return Risk
As you draw closer to retirement, one of the greatest retirement dangers is sequence of return risk. Sequence of return risk is the hazard of withdrawing money from your investments when the balance is down due to market volatility. Sequence risk can increase the likelihood that you can run out of money and also reduce your investment performance.
WHEN IS SEQUENCE OF RETURN RISK MOST IMPACTFUL?
Sequence of return risk rears its head in three common situations:
Income Needs - Drawing income from your retirement investments for living expenses
Emergency or Unanticipated Needs - Life happens, as we all know.
RMDs - Required Minimum Distributions will need to be taken starting at 72 from your tax-deferred investments such as a 401(k) or IRA.
Your overall portfolio can suffer, because you need your money and can’t wait.
INVESTMENT AND INCOME PLANS THAT ARE DESIGNED FOR UP AND DOWN MARKETS
Before we dive into an example, it’s important to understand that the stock market is very difficult to predict. If you’re trying to time the market with a majority of your assets, especially as you are close to or in retirement, you’re setting yourself up for failure.You need an investment and income plan that works in both up and down markets.
EXPLORING SEQUENCE OF RETURN RISK IN TWO INVESTMENT SITUATIONS
There are three primary phases of investment planning. The first is accumulation, the second is preservation, and the third is distribution.
Here is an example of a sequence of returns when you’re in the accumulation stage of planning.
Example 1: Accumulation with No Withdrawals (See pg. 19 in the Bucket Plan by Jason Smith)
From a mathematical perspective both started with $100,000 and averaged 6% over 10 years. Neither are taking any distributions and ended up with $154,764. Once again, they aren’t taking distributions and are in the accumulation stage.
In other words, the sequence of return risk does not impact the accumulation balance if no money is being added or taken out. The rate of return and market loss will impact the balance but whether the variations are at the beginning or the end does not.
Example 2: Accumulation with Withdrawals (See pg. 21 in the Bucket Plan by Jason Smith)
In this example both started with $100,000 and average 6% over 10 years but this time both are withdrawing $6,000 per year out for retirement income. Remember in these examples that they are the same average returns but one has the down years first and the other has the down years later.
Ms. Lucky, who had up years first, finished with $105,544, while Mr. Unlucky had only $38,898!
RATE OF RETURN CAN BE MISLEADING IN THE DISTRIBUTION PHASE
When in the accumulation phase, you often measured investment success by rate of return. I’d suggest that while rate of return is important during the preservation and distribution phase, it isn’t how you measure success. What is more important is avoiding the sequence of return risk.
A question Jason shares in his book is, “When does -30 + 43 = 0?” While you may simply think this is bad math, it is completely correct with investing. When you lose 30%, you need to have a 43% rate of return to make your money back. If your investments are down 50%, you need 100% return!
When in the distribution phase, your account balance is more important than rate of return. It may not seem realistic but lower rates of return mixed with downside protection can beat greater rates of return during the distribution phase.
A POWERFUL STRATEGY TO FIGHT SEQUENCE OF RETURN RISK
When you approach retirement (within ten years), in my opinion, it’s time to start shifting from the accumulation phase and begin to transition into the preservation phase, which works alongside the distribution phase during your retirement years.
When my team and I work with clients, we use a three-bucket income planning approach. We separate money needed now (in the next year), from money needed soon (in the next 10 years), from money needed 10 years or more in the future.
Practically speaking, money that will be needed in the next 10 years for income is positioned so it has little to no exposure to market risk, in relation to the stock market; interest rate risk as it applies to bonds; or sequence of return risk.
The last thing you want is to be in a position where you’re selling investments when they are substantially down due to market fluctuations.
A question Jason shares in his book is, “When does -30 + 43 = 0?” While you may simply think this is bad math, it is completely correct with investing. When you lose 30%, you need to have a 43% rate of return to make your money back. If your investments are down 50%, you need 100% return!
When in the distribution phase, your account balance is more important than rate of return. It may not seem realistic but lower rates of return mixed with downside protection can beat greater rates of return during the distribution phase.
ACTION STEPS
The bottom line is that when you lay your head down at night, I want you to be able to pass the pillow test. When you pass the pillow test, it means that you can sleep at night, no matter what the market is doing. In retirement, your plan shouldn’t chase high rates of return but rather have comprehensive strategies that weave together to create peace of mind and reduce sequence of return risk.
I’d invite you to reduce your sequence of return risk, either by yourself or with the assistance of a fiduciary comprehensive planner, who can help you be confident about your retirement transition and financial plans.
At Thrive Retirement Planning, we use a very specific three-bucket income planning process that helps you feel confident. I’d invite you to set up an appointment, either in person or virtually, where we can get to know each other. Simply call 801-810-8434 or go to thriverp.com and click on get started to learn more.
Do you have questions about when to take Social Security and how to maximize your benefit? Take our free online Social Security Masterclass by going to thriverp.com/ss.
18 min
January 29, 2021 How to Reduce Retirement Anxiety
Do you have retirement anxiety? If you worry about retirement you aren’t alone. It’s quite common to have anxiety about running out of money, what to do about health care expenses, when to take Social Security and retire, and even taxes. In this podcast episode we’ll address 8 reasons people worry about retirement and 5 strategies to reduce your anxiety.
ARE YOU MISSING UNKNOWN PIECES OF YOUR RETIREMENT PLAN?
Many have retirement anxiety because they are missing key pieces of a retirement plan. There are generally three questions I like to ask about retirement planning.
Do you have a plan?
Do you understand it?
How confident are you in that plan?
See, many investors have plans to grow their investments. After all, that’s how they’ve saved and prepared for retirement. But as you prepare to transition into retirement, growing your investments is only one part of the process. There are 8 critical areas of retirement planning and when you don’t have a plan for each of these areas, anxiety naturally occurs.
Here are the 8 areas of retirement planning:
Income Planning
Protection and Safe Money Planning
Asset Growth Planning
Tax Reduction Planning
Health Care Planning
Estate Planning
Legacy and Family Planning
Fulfillment and Mission Planning
UNANSWERED QUESTIONS CAN CAUSE RETIREMENT ANXIETY
Preparing to retire can be a lot more daunting than most people think, as investors often have questions but don’t know where to start or how to get them all answered. The sheer number of questions and the magnitude of the consequences can paralyze families, causing them to do nothing and avoid the conversation completely, which is definitely a mistake.
Here are unanswered questions that can lead to retirement anxiety:
When should I retire?
When should I take Social Security?
How do I get the most Social Security possible?
How do I not run out of money?
How do I pay for medical expenses?
Can I afford to take that dream vacation?
Should I keep or sell my real estate?
How do I protect myself from market loss?
Should I stay with my 401(k) or move to an IRA?
How do I reduce retirement taxes?
How much do I need monthly during retirement?
Like anything successful in life, preparing for retirement will take work and being willing to ask the questions and then find answers can give you confidence and clarity, the opposite of fear and anxiety. Surrounding yourself with a competent professional team can also help you coordinate these decisions and how they will impact your retirement goals.
NOT MAKING IMPORTANT DECISIONS CAN LEAD TO RETIREMENT ANXIETY
The root of the word decide is “cide,” which means to cut off or kill off. So when you decide something you kill off other choices. If you’re asking a lot of questions but not making decisions you can easily experience an increase in retirement anxiety. If you feel stuck, it’s most likely that you don’t have the right information so you can’t be confident in your decisions.
No matter your net worth and financial success, retirement anxiety can erode your retirement happiness and confidence. As I’ve sat across from accomplished individuals with more than a million dollars, they still experience worry and fear due to unanswered questions and indecision.
5 STRATEGIES THAT CAN REDUCE RETIREMENT ANXIETY
#1 - Create an Income Plan
As you retire, you’ll need to replace your paycheck with money from Social Security, pensions, and investments. Determining your monthly income needs during retirement and then creating a practical withdrawal strategy from your retirement assets is critical to reducing anxiety.
You’ll need to determine when and how much Social Security will be coming in monthly, then calculate the amount of your income gap, based on a realistic monthly budget. Then you will need to decide how much to withdraw from your investments to fill that gap, while at the same time taking taxes into account.
While there are many ways to create an income plan, creating a plan that inspires confidence, reduces taxes, and reduces worry about stock market volatility is essential to passing the “pillow test.” The pillow test is a plan that allows you to sleep at night, even when life throws you a curveball, such as stock market downturns.
#2 - Design a Retirement Investment Plan
While working, the main goal for most investors is accumulation and growth. The goal is to invest so that your assets grow to the largest amount possible. Then as you transition into retirement you’ll move into distribution and withdrawals. This stage is about drawing down your assets for income, vacations, and emergencies.
Critical and often overlooked by investors and financial planners alike is the preservation stage. Here is my general rule on the preservation stage; if you need money for cash flow and income needs in the next 10 years it should be protected and invested differently.
Withdrawals that fill your income gap are taken from preservation money, not growth money, which can protect investors from making rash decisions during market downturns. It can also protect investors from withdrawing money from depleted assets that are temporarily down due to market volatility.
Money not needed for more than 10 years can be invested with an emphasis on growth. When the market is growing, investors get to participate. When markets are down, investors have the peace of mind of knowing they don’t need access to those funds for a number of years and thus can pass the pillow test. Of course, please invest according to your risk tolerance. Having an investment and income plan in place that accounts for all types of market conditions can have a significant impact on retirement anxiety.
#3 - Create a Tax Reducing Strategy
The risk of taxes going up in the future and ever changing tax laws, especially with a new president in the White House, is a significant retirement risk. At the stroke of a pen, Uncle Sam can change the amount of money he’ll keep of your 401(k) or IRA in retirement. No matter how much you’ve saved, if you’re in tax-deferred accounts, the government has a lien on a portion of your nest egg and you will have a tax bill.
We’ve identified over 21 potential tax strategies during retirement and creating a plan around reducing retirement taxes proactively can give you large doses of Vitamin C (C stands for confidence).
#4 - Make Informed Decisions Around Health Care and Estate Planning
How will you pay for health care expenses during retirement? Inevitably, there is only one way to get into this world and one way to get out. Eventually, health will decline and medical bills will result. Beyond Medicare, how will you pay for these expenses, such as assisted living? Making decisions now, instead of later, can greatly reduce your retirement anxiety.
While the federal estate tax is set extremely high (11.7 Million as this podcast in 2021 for married couples) and most families won’t be impacted, being proactive about avoiding probate and reducing estate fees and concerns can still be an important way to reduce anxiety. Probate can often take 9 to 24 months and cost large amounts of money. You may want to consider a trust.
Another key estate planning tool is to have a medical directive in place around end of life health situations around medical treatments and interventions. Difficult decisions often need to be made and not being prepared can put undue stress and discord among those you leave behind.
#5 - Create a Plan Around Family and Fulfillment
After your big retirement day, people are often surprised about the need to reinvent themselves during their retirement years. Often, retirees see retirement as a destination instead of a new phase of life.
What kind of legacy do you want to leave behind? How do you create a retirement you absolutely love? Do you have plans on giving back to your community? How can you create both a financial and lifestyle plan? After all, retirement is more than about the money.
ACTION STEPS
Reduce your retirement anxiety by creating a retirement plan, either by yourself or with the assistance of a fiduciary comprehensive planner, who can help you be confident about your retirement transition and financial plans.
Create plans around all 8 areas of retirement and then get your questions answered and make critical decisions. After doing this, you’ll find that your worry and fear about your retirement years can be greatly reduced.
Are you looking for a firm committed to not only helping to achieve your goals financially but also with your family and fulfillment? You can set up an appointment by calling 801-810-8434. Do you have questions about when to take Social Security and how to maximize your benefit? Take our free online Social Security Masterclass.
26 min
January 21, 2021 Moving from a 401(k) to an IRA
When you leave an employer or transition into retirement, an important financial decision is whether to leave your money in your 401(k) or roll it over into an IRA. What is the difference between these types of accounts? Is an IRA a better option? The purpose of this podcast and article is to list 5 specific reasons you might consider moving from a 401(k) to an IRA. I’ll also mention some instances when it might not make sense.
THE RISE OF THE 401(K)
The percentage of Americans who have been covered by a defined benefit pension plan that is paid out as an annuity has been steadily declining the last 25 years. These plans were often characterized by a company paying a certain amount per month through retirement for a specific number of years worked, commonly based on a percentage of salary.
On the flip side, defined contribution plans (often a 401(k)) have been on the rise as employers transfer the risk of paying for retirement from their pocket to their employees.
Many employers offer 401(k)s to their employees, often matching a percentage of the employees contribution up to a certain amount. An added benefit is that these plans are tax-deferred or tax-advantaged, meaning that money put in a 401(k) is pre-tax money and will be taxed later when it is withdrawn. You’ll pay ordinary income tax, just like your salary, on your withdrawal. In most cases, accessing your 401(k) money prior to 59 ½ will add a 10% penalty.
For many reasons, there is a lot of wisdom in taking full advantage of your 401(k), especially up to the match. The employer's contribution can be viewed as “free money” or additional salary.
That being said, if you’re near retirement and have been a saver, you’ve probably accumulated a significant portion of your retirement nest egg in your 401(k). It’s not uncommon to work with clients that have between several hundred thousand to more than a million in their 401(k)s and tax-deferred accounts.
5 REASONS TO CONSIDER ROLLING OVER YOUR 401(K) TO AN IRA
While a 401(k) can be a great tax-deferred financial vehicle, especially for those getting an employer match, it’s my belief that a 401(k) simply doesn’t give my clients the necessary tools they should have access to during their retirement years.
An IRA is also a tax-deferred vehicle just like a 401(k) but with additional options during retirement. While this isn’t a comprehensive article or podcast on the difference between a 401(k) and IRA, I’m going to touch on 5 reasons to consider an IRA.
#1 - GREATER INVESTMENT CHOICE AND FLEXIBILITY
The investment options in your 401(k) are selected by the plan administrator and aren’t up for negotiation. If you aren’t ecstatic about the investments available, there really isn’t anything you can do about it. Also, the investment choices are built for the masses and aren’t generally customizable, meaning vanilla is all you’re going to get. There are a limited number of choices available.
An IRA, on the other hand, has thousands of investment options, depending on who you work with. The flexibility of an IRA gives experienced wealth managers and investors choice and control.
An example of this flexibility can occur when an investor reaches the age of 70 ½. If you want to give to charity (i.e. tithing to your church), you can donate directly to your charity from your IRA in the form of a QCD (Qualified Charitable Distribution). A QCD excludes the amount you donate from taxable income and counts for your RMD (Required Minimum Distributions) at 72 and beyond. A QCD is available in an IRA but not in a 401(k).
#2 - ACCESS TO COMPREHENSIVE PLANNING
In the earning years, most investors are primarily interested in growing their assets. As they approach retirement, a whole new set of challenges and opportunities present themselves. Decisions around Social Security, medical planning, estate planning, protecting assets from market volatility, and creating an income plan to replace your paycheck during retirement need to be made.
Many retirement specialists, who are comprehensive in nature, most often work with IRAs and don’t have access to your 401(k) assets. They can not only help you create retirement plans around growing and distributing your investments but also help you work through the many other planning areas, such as proactively minimizing taxes during retirement. I highly recommend using a fiduciary financing advisor. Many of these retirement specialists will charge a percentage of assets under management (i.e. 1%) and for that fee you’ll get access to comprehensive retirement advice and investment management, usually semi-annually or annually.
#3 - SIMPLIFICATION
It’s not uncommon for individuals to work for several different companies during their working years. Each of these companies will often have their own 401(k)s and benefit options. Once an employee leaves a company, you can generally transfer the funds to another 401(k) or IRA, no matter your age.
As an individual approaches retirement it’s very possible to have several 401(k)s with different institutions. Many investors can simplify their finances by rolling over their 401(k)s to a single IRA. It’s almost never a good idea to withdraw your money from a 401(k) before 59 ½, as you’ll pay ordinary tax rates and an extra 10% penalty (see the Rule of 55 below for the exception). If you, however, transfer your 401(k) directly to another 401(k) or IRA, you won’t incur that 10% penalty. You do need to make sure you do transfer the right way, however. Doing this incorrectly can create large tax consequences.
As an additional item of note, an IRA and 401(k) are in an individual’s name. That means that you can’t move a 401(k) in one person’s name to an IRA of the spouse. The IRA would also have to be in the same person’s name as the 401(k).
#4 - DIFFERENT TYPES OF IRA ACCOUNTS
A Roth IRA is one type of account that can be used if you choose to move from a 401(k), although there are many moving parts and potential tax consequences. A Roth IRA uses after-tax money that can grow tax-deferred and then can be withdrawn tax-free. It can also be passed on to heirs tax-free as long you follow IRS guidelines. Be aware, however, that money moved from a 401(k) to a Roth will be taxed at ordinary income tax rates. Please consult a financial advisor and tax professional before implementing tax-reducing strategies. While this strategy isn’t for everyone, it can be a powerful tax-reducing tool.
Another type of IRA account is an annuity from an insurance company. Annuities may be useful for some investors who want guaranteed monthly cash flow through retirement. Annuities can also be used for portfolio diversification, where investors are trying to minimize downside risk and also want to participate in market growth that may outpace inflation. Vanilla annuities used for asset protection can be very low cost. Run from anyone who believes annuities never work or always work, as almost all financial products have pros and cons.
#5 - INCOME PLANNING FLEXIBILITY
As you approach retirement and assess your income needs, generally the place to start is sitting down and making Social Security decisions. These decisions shouldn’t be made in a bubble, but rather should take into account all your assets, including your 401(k) and IRA assets. Firms like mine (Thrive Retirement Planning) can help you determine your Social Security claiming strategy that integrates all the moving parts of your retirement income plan. Fiduciary financial planners such as Thrive Retirement Planning can help you make some of these more critical retirement decisions.
Once you determine your Social Security income, you can then determine your income gap and make income plans around pulling from your other assets to create retirement cash flow that covers your retirement expenses and also minimizes your risk of running out of money.
As a reminder, one of the most important rules with a 401(k) or IRA is knowing that after 59 ½ withdrawals will be taxed at ordinary income tax rates. Uncle Sam is your partner during retirement and he can adjust the percentage he gets from your retirement pie. If you withdraw money before 59 ½, you’ll often pay a 10% penalty.
When investors start withdrawals from their 401(k)s or IRAs during retirement to fill in their income gap beyond Social Security, an IRA has additional features that aren’t available in a 401(k). To illustrate, in a 401(k) you can’t select individual investments to be sold to generate cash for your income. As a comparison, you can easily select the positions you want to sell to liquidate your investments in an IRA, especially if you’ve selected investments with income planning in mind. While this may seem like only a small difference, this can have a significant impact on the performance of a portfolio over time.
WHEN MOVING FROM A 401(K) TO AN IRA MIGHT NOT MAKE SENSE
As with all financial strategies and products, there are pros and cons. There are some instances when staying with your 401(k) may make sense. I’m not going to go in depth in any of these areas but want to make you aware so you can talk with your financial advisor or do more research about these.
High appreciated company stock - if you own highly appreciated company stock you may want to look at a NUA (Net Unrealized Appreciation) strategy that may provide tax savings. With a NUA you’ll use a brokerage account instead of an IRA for the company stock.
Legal protection - a 401(k) is protected against most types of creditor judgements. If you are worried about potential judgements, creditors, or collections, keeping your money in your 401(k) may be the best option.
The Rule of 55 - This rule allows an employee who has been laid off, quits, or is fired to access their 401(k) before 59 ½ without the 10% penalty. You will still have to pay ordinary income tax on the withdrawals of course. This waiver of the 10% penalty doesn’t apply with an IRA.
ACTION STEPS
...
34 min
January 13, 2021 How to Create Lasting Habits in 2021
Do you feel stuck? Have you set goals and failed repeatedly? Do you feel like goal setting doesn’t work? It doesn’t have to be this way. You can break free and make 2021 one of the greatest years of your life! The key to your breakthrough is learning how to create lasting habits. Yes, habits can be the fuel for your rocket. Speaking more broadly of retirement, habits will be an integral part of succeeding in all four phases of retirement: the prepare-to-go, go-go, slow-go, and no-go years. It’s going to be a great year!
HABITS VS GOALS
As you step into 2021, should you work on goals or habits? In my opinion, it isn’t choosing one or the other, but rather how they work together. For me, habits have allowed me to achieve my goals. For example, I used to weigh about 225 pounds. I used habits to reduce my weight to below 190 pounds, my high school weight, and have kept it off for almost a decade. When I cheat and gain some weight I know exactly the habits to implement to get me back into the weight range range I’m comfortable with.
For me, habits have helped me achieve goals with my family, my spiritual life, and my career. Before I mastered many of the principles of habits, I would have aspirations for change in my life; I would even write them down but would often fail. I struggled with how to keep them in front of me and maintain momentum. It’s completely different now.
It can be the same for you. The ability to have a brighter vision for your life and then make SMART (specific, measurable, attainable, relevant, and time-bound) goals from that vision is only the first step in the process. The next is to develop the habits and system to achieve the goal.
That being said, habits don’t have to be tied to a specific SMART goal. You could simply want to be healthier or lose weight so you put a new habit in place. No matter the future-self you envision, learning how to create lasting habits can be the key. One of the key reasons is that it gets you off the willpower treadmill.
WILLPOWER VS HABITS
According to research, willpower is like a muscle, that can become depleted and wear down the more you use it. It’s like a muscle that has been lifting weights. Eventually, performance declines and recovery is needed to rebuild the muscle.
Ironically, as we exhibit self-control, our ability to make choices becomes fatigued. Our willpower decreases over the course of a day, which means that we can often undermine our best intentions because we default to the level of the current programming of our mind and body. The reason we set our vision or goal in the first place was because we didn’t like the results we were getting in our life and the reason we are often stuck getting the results we are is the current software of our mind and body. It can really be a vicious cycle.
The way we break free from relying on willpower is to form habits that become automatic. Take for example, brushing your teeth. You probably don’t have to put that in your schedule. It just happens. Once you start brushing your teeth, you don’t have to think about how to brush your teeth either. Your mind can even wander off but you still brush your teeth.
THE MIND AND BODY WANT TO BE EFFICIENT AND CONSERVE ENERGY
The brain and body are built to optimize energy and run efficiently. You don’t have to think about your heart beating, digesting your food, or what to do when you’re sleeping. The body has systems and programming that automatically do these things. Your mind works similarly but is also more complex, as you’ve probably noticed. Our subconscious mind, or what I like to call the running mind, are those thoughts that occur automatically, for example daydreaming. Another example is driving to work on a familiar route. Often you can just arrive, while your running mind took over and very little mental exertion was needed.
What makes thinking different from the body is willpower or the conscious mind, or what I like to call the intentional mind. Put to use and we can consciously mold and shape our actions and thoughts, enough to change our circumstances. Think about or work at something long enough, and it will work its way into the subconscious (i.e. learning to play the piano or guitar). Learning where to put your fingers can be extremely difficult in the beginning and over time can become automatic.
So the key to achieving your goals and vision is thinking big about your future and then thinking small about the habits and systems that will help you get there. It’s about relying less on willpower and learning to program our mind and body for success. Habits and systems are like the rudder that can steer the big ship of your life. Benjamin Hardy wrote a great book on willpower, habits, and systems called Willpower Doesn’t Work that I highly recommend if you want to go more in depth.
As you become increasingly aware of your current habits and know how to form new ones, the game of growth and change becomes much more simple and easy. Transformation becomes a natural byproduct of your habits and systems. Goal achievement and growth can become much less of a struggle.
THE ANATOMY OF A NEW HABIT
According to James Clear, the author of Atomic Habits, every habit has four distinct phases. Understanding the anatomy of habit is how you create lasting habits. The first is the cue, the second phase is the craving, the third is response, and the fourth is reward.
Here are a couple of examples he shares:
Example: Text Message
Cue - your phone buzzes
Craving - you want to look and see what the message is
Response - you grab your phone and take a look
Reward - you satisfy your craving by looking at the message
Example: Light
Cue - you walk into a dark room
Craving - you want to be able to see
Response - you flip the light switch
Reward - you satisfy your craving to see
FORMING YOUR NEW HABIT
From my own experience I’ve found that the easiest way to form a new habit is to stack a new one on an old one. For example, if you’ve decided that taking two or three vitamins each day is an important part of your health goals, your cue or trigger could be eating breakfast.
A few years ago I decided to create a habit of study, prayer, and meditation in the morning. I structured an hour each day. Honestly, the things I’ve done in that hour have moved around but the goal is clarity and amazing positive feelings. This habit has become the foundation of huge benefits in my life on a number of levels. The reward has been the way I’ve felt. As time has gone on, I’ve added going to gym three days a week on top of that hour, which was already a habit. Now, I have a double whammy of feeling good. I’ve created a similar shorter routine before bed as well.
Let’s take the example of this podcast. I have a goal of creating 52 podcast episodes in 2021. In order to achieve this goal, I have to create a system that works. Because I have my personal hour in the morning, I’ve now stacked an hour of writing and podcast show creation each day immediately after that personal hour. Then, three days a week I go to the gym after writing. Now I’ve stacked three incredible habits on top of each other, two that are already very effective. What’s the chance of my new podcast habit sticking? Almost 100%!
One of the best cues or triggers I’ve found is choosing a time and place. That allows me to even put it on my schedule.
TRACK YOUR HABIT
Another way to ensure success in forming new habits is to track them. Whether you have a to-do list that you look at each day, take advantage of free apps, or use an accountability partner, tracking and holding yourself accountable will be important to your success.
On my Android phone I’ve used an app called Loop Habit Tracker (Android only) for several years. I have specific notifications that come up at 9 am and 9 pm that have all the habits I’m wanting to keep in front of me. I then mark if I’ve completed them and I’m able to track month by month how effective I’ve been. There are also a number of different apps for free that can do the job and I’d encourage you to try and see if this method works for you.
Here are some of the habits I track right now:
Morning mindset
Scriptures and spiritual time
My business story/offer
Exercise
Supplements
Writer/Teacher
Learning time
Gratitude journal
Treats only on Sunday
No food after 7 pm
HOW TO CREATE LASTING HABITS IN 2021
Instead of exclusively goal setting this year, I’m creating one or two habits or systems in key areas of my life. One question to ask is, “What is the most effective habit I could form in this area of my life?” Don’t feel like you have to choose a habit in each of the areas below. You could easily just start with one or two categories. Because I’ve trained myself to add habits it isn’t overwhelming to work on a few at a time, especially with Loop Habit Tracker as my tracking and accountability system.
Here are some examples:
Spiritual - morning routine
Marriage - fifteen minute meaningful time together with Christine every night at 9 pm
Family - dinner every night at 6 pm
Influence - produce 52 podcasts and emails
Health - small meals for dinner
Mindset - future-self journal before bed
ACTION STEPS
Choose a habit that would be pivotal to progress in your life. Then break down a time and place (trigger or cue). Then track your progress and be accountable. Let’s make 2021 an amazing year!
Retirement isn’t just about the money. My goal is to help you thrive during retirement! Do you have a plan to transition into retirement? Do you understand it? Are you confident in your plan? Learn more about how we help our clients replace their paycheck income, manage their investments, make Social Security decisions, and minimize retirement taxes.
Do you want to work with a firm committed to not only help to achieve your goals financially but also with your family and fulfillment? You can set up an appointment by calling 801-810-8434.
...
37 min
January 06, 2021 Should You Take Social Security at 62?
Should you take Social Security at 62? Or, should you wait until your Full Retirement Age or later? Taking Social Security early can be a mistake that costs some retirees $100,000 or more in retirement benefits. However, in some cases taking Social Security at 62 is just the right decision. In this episode we’ll dive into the pros and cons of taking Social Security at 62.
KNOW YOUR FULL RETIREMENT AGE
Before jumping into Social Security, it’s important to understand a couple of key terms. The first term is PIA or Primary Insurance Amount. This is the amount of your benefit when you reach Full Retirement Age (FRA) or Normal Retirement Age.
Your primary insurance amount is based on your highest 35 years of working history, indexed for inflation. If you have years where you have zero earnings and only have 15 years of working history, those zero years would be a part of the calculation.
Your Social Security benefit will be based on your Primary Insurance Amount. If you were born between 1943-1954 your FRA is 66. Then for every year between 1955 to 1959 they had two months to your FRA. If you were born in 1955 your FRA is 66 and 2 months, in 1956 it would be 66 and 4 months, in 1957 - 66 and 6 months, in 1958 - 66 and 8 months, and 1959 - 66 and 10 months. If you were born in 1960 or later your FRA is 67.
You can see your FRA on your Social Security statement and can register for an online account at ssa.gov.
REDUCTION IN BENEFITS AT 62
If you’re contemplating taking your benefits at 62, or anytime before your Normal Retirement Age, you’ll receive a reduced benefit. If a person’s FRA is 66 and they decide to take their Social Security benefit at 62, their benefit will be reduced by 25% of their Primary Insurance Amount each month. This 25% reduction is a permanent reduction, meaning it won’t increase later except for cost of living adjustments (COLA). Some people mistakenly believe that their FRA benefit will increase to 100% of PIA but that isn’t correct. This is a permanent reduction based on a reduced portion of your PIA.
UNDERSTANDING THE IMPACT OF THE EARNINGS TEST
If you decide to claim benefits early, it’s important to be aware that you’ll also become subject to the earnings test, if you continue to have earned income. Note that there’s a difference between earned income and ordinary income. Earned income looks at wages and doesn’t include other income sources such as pension, real estate, investments, and retirement accounts withdrawals.
Basically, $1 in benefits will be withheld for every $2 of earnings above the limit of $18,960 (for 2021). This means that your Social Security income can be reduced if you make above the threshold. As an example, say you made $40,000 in earned income. They would reduce your Social Security by $10,520 that year ($40,000 - $18,960/2 = $10,520). These thresholds change in the year you reach FRA.
It’s important to understand that though your Social Security benefit is reduced, it isn’t permanently lost. It will be added back to your benefit after FRA.
WHAT HAPPENS IF YOU TAKE SOCIAL SECURITY LATER
If you reach FRA and still haven’t claimed Social Security, your benefit will increase 8% per year until you reach age 70. It doesn’t ever make sense to wait after age 70 to take your benefit. (As a side note, while we haven’t addressed the spousal benefit in this article, it won’t experience any increase after FRA, so your best option is to take any spousal benefit no later than at your Full Retirement Age.)
Another way of looking at delaying Social Security benefits is that you’ll be getting 8% per year on your Social Security money. If you could get a guaranteed 8% per year on your other investments with no risk would that be a good investment? It certainly would! While Social Security isn’t an investment, when you compare it to your other retirement assets, it can make a lot of sense to delay claiming. In a free on-demand class I created I showed one case study where a family delayed Social Security but still retired early, and it made an estimated difference of $186,000 during retirement!
You can get access to this free one-hour Social Security Masterclass. Just go to thriverp.com/ss and you can gain instant access to the class. I go into a lot more depth than I can cover in a podcast article and episode.
Here are some reasons when delaying Social Security can make sense:
You want to maximize your retirement income
You’re still working and you like it
Your spouse's survivor benefit will be much larger (I cover this in the free Social Security Masterclass as well)
You’re healthy and expect to live a long time
COMPARISON BETWEEN TAKING SOCIAL SECURITY EARLY OR LATER
To make it real, I ran some numbers using our Social Security software. We utilize this software when we put income plans together for clients and it helps analyze a number of different scenarios.
This particular example is based on a 2% average annual cost of living adjustment and $750 per month of Social Security benefit at 62. I then ran a comparison of the claiming strategy, whether at 62 or 70.
If this person lived to 75:
Start at 62: $137,423 ----- $36,984 Higher
Start at 70: $100,439
If this person lived to 85:
Start at 62: $269,953
Start at 70: $333,697 ----- $63,744 Higher
If this person lived to 95:
Start at 62: $431,456
Start at 70: $617,941 ----- $186,485 Higher
WHEN SHOULD YOU TAKE YOUR SOCIAL SECURITY AT 62?
As we’ve discussed, one of the largest risks to taking Social Security early is longevity, or how long you live. If you were to start your benefit early, you’ll obviously get many more checks than if you waited but at some point the delayed credit has a crossover point, usually anywhere between ages 78-82.
In my mind, there are 4 primary reasons that you might want to take Social Security early:
You don’t think you’ll live a long life - based on your current health or your family history you don’t think it’s wise to delay claiming Social Security.
You hate your job - this last year I worked with a client who was simply done. He wanted to retire yesterday.
You don’t think Social Security will be around - you just want to get it while it's available
You’re willing to sacrifice retirement income for the start of retirement
DON’T MAKE YOUR SOCIAL SECURITY DECISIONS IN A BUBBLE
You’ve paid your whole life into Social Security and it will most likely be a cornerstone of your retirement income. Choosing whether to take your benefit early, at Full Retirement Age, or at 70 can make a significant difference in your retirement lifestyle. Don’t make your Social Security decisions in a bubble, meaning - you should take taxes and your other investments and income strategy into account to create a comprehensive income plan. By looking at how much income you need during retirement, assessing your investment accounts, and then looking at your Social Security benefits, powerful retirement decisions can be made.
ACTION STEPS
Do you have a plan to transition into retirement? Do you understand it? Are you confident in your plan? Learn more about how we help our clients replace their paycheck income, manage their investments, make Social Security decisions, and minimize retirement taxes. You can set up an appointment by calling 801-810-8434. Do you have questions about when to take Social Security and how to maximize your benefit? Take our free online Social Security Masterclass.
27 min

About Thrive Retirement Planning Podcast

From the publisher's feed

Create a retirement and life you love. Reduce your anxiety about retirement, get answers on Social Security, and design a plan to replace your income. Take steps to protect and grow your investments…