Month: June 2023

Paying the Bills: Potential Sources of Retirement Income

Posted on June 19, 2023 by - Retirement fears, Uncategorized

Piggy bank with stacks of coins beside it. Article title: Paying the Bills: Potential Sources of Retirement Income

Planning your retirement income is like putting together a puzzle with many different pieces. One of the first steps in the process is to identify all potential income sources and estimate how much you can expect each one to provide.

Social Security

The vast majority of people age 65 and older receive Social Security benefits. However, most retirees also rely on other sources of income.

For a rough estimate of the annual benefit to which you would be entitled at various retirement ages, you can use the calculator on the Social Security website, ssa.gov. Your Social Security retirement benefit is calculated using a formula that takes into account your 35 highest earnings years. How much you receive ultimately depends on a number of factors, including when you start taking benefits. You can begin doing so as early as age 62. However, your benefit may be approximately 25% to 30% less than if you waited until full retirement age (66 to 67, depending on the year you were born). Benefits increase each year that you delay taking benefits until you reach age 70.

As you’re planning, remember that the question of how Social Security will meet its long-term obligations to both baby boomers and later generations has become a hot topic of discussion. Concerns about the system’s solvency indicate that there are likely to be changes in how those benefits are funded, administered, and/or taxed over the next 20 or 30 years. That may introduce additional uncertainty about Social Security’s role as part of your overall long-term retirement income picture and put additional emphasis on other potential income sources.

Pensions

If you are entitled to receive a traditional pension, you’re lucky; fewer Americans are covered by them every year. Be aware that even if you expect pension payments, many companies are changing their plan provisions. Ask your employer if your pension will increase with inflation and, if so, how that increase is calculated.

Your pension will most likely be offered as either a single or a joint and survivor annuity. A single annuity provides benefits until the worker’s death; a joint and survivor annuity provides reduced benefits that last until the survivor’s death. The law requires married couples to take a joint and survivor annuity unless the spouse signs away those rights. Consider rejecting it only if the surviving spouse will have income that equals at least 75% of the current joint income. Be sure to fully plan your retirement budget before you make this decision.

Work or other income-producing activities

Many retirees plan to work for at least a while in their retirement years at part-time work, a fulfilling second career, or consulting or freelance assignments. Obviously, while you’re continuing to earn, you’ll rely less on your savings, leaving more to accumulate for the future. Work also may provide access to affordable health care.

Be aware that if you’re receiving Social Security benefits before you reach your full retirement age, earned income may affect the amount of your benefit payments until you do reach full retirement age.

If you’re covered by a pension plan, you may be able to retire and then seek work elsewhere. This way, you might be able to receive both your new salary and your pension benefit from your previous employer at the same time. Also, some employers have begun to offer phased retirement programs, which allow you to receive all or part of your pension benefit once you’ve reached retirement age while you continue to work part-time for the same employer.

Other possible resources include rental property income and royalties from existing assets, such as intellectual property.

Retirement savings/investments

Until now, you may have been saving through retirement accounts such as IRAs, 401(k)s, or other tax-advantaged plans, as well as in taxable accounts. Your challenge now is to convert your savings into ongoing income. There are many ways to do that, including periodic withdrawals, choosing an annuity if available, increasing your allocation to income-generating investments, or using some combination. Make sure you understand the tax consequences before you act.

Some of the factors to consider when planning how to tap your retirement savings include:

  • How much you can afford to withdraw each year without exhausting your nest egg. You’ll need to take into account not only your projected expenses and other income sources, but also your asset allocation, your life expectancy, and whether you expect to use both principal and income or income alone.
  • The order in which you will tap various accounts. Tax considerations can affect which account you should use first and which you should defer using.
  • How you’ll deal with required minimum distributions (RMDs) from certain tax-advantaged accounts. After age 72, if you withdraw less than your RMD, you’ll pay a penalty tax equal to 50% of the amount you failed to withdraw.

Some investments, such as certain types of annuities, are designed to provide a guaranteed monthly income (subject to the financial strength and claims-paying ability of the issuer). Others may pay an amount that varies periodically, depending on how your investments perform. You also can choose to balance your investment choices to provide some of both types of income.

All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.

Inheritance

An inheritance, whether anticipated or in hand, brings special challenges. If a potential inheritance has an impact on your anticipated retirement income, you might be able to help your parents investigate estate planning tools that can help reduce the impact of taxes on their estate. Your retirement income also may be affected by whether you hope to leave an inheritance for your loved ones. If you do, you may benefit from specialized financial guidance that can integrate your income needs with a future bequest.

Equity in your home or business

If you have built up substantial home equity, you may be able to tap it as a source of retirement income. Selling your home, then downsizing or buying in a lower-cost region and investing that freed-up cash to produce income or to be used as needed is one possibility. Another is a reverse mortgage, which allows you to continue to live in your home while borrowing against its value. That loan and any accumulated interest is eventually repaid by the last surviving borrower when he or she eventually sells the home, permanently vacates the property, or dies. (However, you need to carefully consider the risks and costs before borrowing.)

If you’re hoping to convert an existing business into retirement income, you may benefit from careful financial planning to help reduce the tax impact of a sale. Also, if you have partners, you’ll likely need to make sure you have a buy-sell agreement that specifies what will happen to the business when you retire and how you’ll be compensated for your interest.

With an expert to help you identify and analyze all your potential sources of retirement income, you may discover you have more options than you realize.

Thank you for taking the time to read this article. We hope it has given you some insight into Social Security and retirement.  If you have any questions or would like more information, please feel free to contact us. We would love to hear from you. Our newsletter is a great way to stay up-to-date with our latest offerings and get helpful retirement planning tips. Signing up is easy; click here.

Source

Broadridge Investor Communication Solutions, Inc. prepared this material for use by Social Security Benefit Planners, LLC.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Social Security Benefit Planners, LLC  provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Social Security Benefit Planners, LLC and its affiliates are in no way associated with or approved, endorsed, or authorized by the Social Security Administration.

Delayed Retirement Considerations

Posted on June 5, 2023 by - Retirement Planning

Delayed written over and over. Article title: Delayed Retirement Considerations

What is delayed retirement?

In general

If you cannot afford to retire or if you still enjoy working, you might want to consider delaying retirement. This could mean that you continue to work full-time or that you work part-time, for either the same or a different employer, to supplement your retirement income. It could also mean that you start up your own business venture. In any case, a delayed retirement involves continuing to generate at least some employment earnings as an alternative to full-time retirement leisure mode.

Why work during retirement?

Obviously, if you delay retirement, or work part-time during retirement, you’ll be earning money and relying less on your retirement savings — leaving more to grow for the future and making your savings last longer.

If you continue to work, you may also have access to affordable health care, as more and more employers begin offering this important benefit to part-time employees.

But there are also non-economic reasons for working during retirement. Many retirees work for personal fulfillment — to stay mentally and physically active, to enjoy the social benefits of working, and to try their hand at something new — the reasons are as varied as the number of retirees.

Social Security benefits

You can delay receiving Social Security benefits past your full retirement age. If you do so, your Social Security benefits may increase for two reasons. First, each additional year that you work adds another year of earnings to your Social Security record, potentially resulting in higher retirement benefits. Second, you’ll receive delayed retirement credits that will increase your benefit by a certain percentage for each month you delay retirement (up to age 70). The percentage increase varies, depending upon the year you were born. For those born in 1943 or later, the yearly rate of increase is 8%.

Hal works at the local nuclear power plant. He wants to work past the normal retirement age and delay his Social Security retirement benefits. Since Hal was born in 1944, he is eligible for a delayed retirement credit of 8% for each year that he works past the normal retirement age, up to age 70.

Although you can delay your Social Security retirement benefits, you still have to sign up for Medicare once you reach age 65.

If you work after you start receiving Social Security retirement benefits, your earnings may affect the amount of your benefit check. Your monthly benefit is based on your lifetime earnings. When you become entitled to retirement benefits at age 62, the Social Security Administration calculates your primary insurance amount (PIA), upon which your retirement benefit will be based. Your PIA is recalculated annually if you have any new earnings that might increase your benefit. So if you continue to work after you start receiving retirement benefits, these earnings may increase your PIA and thus your future Social Security retirement benefit.

But working may also cause a reduction in your current benefit. If you’ve reached full retirement age (65 to 67, depending on when you were born), you don’t need to worry about this — you can earn as much as you want without affecting your Social Security retirement benefit.

But if you haven’t yet reached full retirement age, $1 in benefits will be withheld for every $2 you earn over the annual earnings limit. A special rule applies in your first year of Social Security retirement — you’ll get your full benefit for any month you earn less than one-twelfth of the annual earnings limit, regardless of how much you earn during the entire year. A higher earnings limit applies in the year you reach full retirement age. If you earn more than this higher limit, $1 in benefits will be withheld for every $3 you earn over that amount, until the month you reach full retirement age — then you’ll get your full benefit no matter how much you earn. Visit the Social Security web site (ssa.gov) to review the earnings limits for the current year. (If your current benefit is reduced because of excess earnings, you may be entitled to an upward adjustment in your benefit once you reach full retirement age.)

Not all income reduces your Social Security benefit. In general, Social Security only takes into account wages you’ve earned as an employee, net earnings from self-employment and other types of work-related income, such as bonuses, commissions, and fees. Pensions, annuities, IRA distributions, and investment income won’t reduce your benefit.

Also, keep in mind that working may enable you to put off receiving your Social Security benefit until a later date. In general, the later you begin receiving benefit payments, the greater your benefit will be. Whether delaying the start of Social Security benefits is the right decision for you, however, depends on your personal circumstances.

One last important point to consider: In general, your Social Security benefit won’t be subject to federal income tax if that’s the only income you receive during the year. But if you work during retirement (or receive any other taxable income or tax-exempt interest), a portion of your benefit may become taxable. IRS Publication 915 has a worksheet that can help you determine whether any part of your Social Security benefit will be subject to federal income tax.

IRAs

The longer you delay retirement, the longer you can contribute to your IRAs. If you have a traditional IRA, you have to start taking required minimum distributions once you reach age 72. If you fail to take the minimum distribution, the IRS will assess a 50% penalty on the amount that should have been distributed. If you have money in your current employer’s retirement plan, as long as you are not a more than 5% owner, the required minimum distribution rules do not apply until you reach age 72 or retire, whichever occurs later. If you have a Roth IRA, you don’t have to take withdrawals at any age.

Employer-sponsored pension plans

If you continue to work past your normal retirement date for the same employer (or if you retire and then return to work for that employer), and you participate in a traditional (defined benefit) pension plan, you need to understand how your pension benefit will be impacted by your delayed retirement.

If you retire, and go to work for a new employer, your pension benefit won’t be impacted at all — you can work, receive a salary from your new employer, and also receive your pension benefit from your original employer.

In general, you’ll continue to accrue benefits during your delayed retirement. However, some plans have a limit on the number of years that count towards your pension. If you’ve reached that limit, continuing to work generally won’t increase your pension benefit unless your plan calculates benefits using your final average pay, and your pay continues to increase.

If your pension plan calculates benefits using final average pay, be sure to discuss with your plan administrator how your particular benefit might be affected if you decide to continue to work on a part-time basis. In some cases, reducing your hours at the end of your career could reduce your final average pay, resulting in a smaller benefit than you might otherwise have received. Also, note that some plans require that you work at least 1,000 hours in order to get credit for a year of service.

Some plans will allow you to start receiving your pension benefit once you reach the plan’s normal retirement age, even if you continue to work. Other plans will suspend your pension benefit if you work beyond your normal retirement date, but will actuarially increase your payment when benefits resume to account for the period of time benefits were suspended. Still other plans will suspend your benefit for any month you work more than 40 hours, and will not provide any actuarial increase — in effect, you’ll forfeit your benefit for any month you work more than 40 hours.

Some plans provide yet another option — “phased retirement.” This type of program allows you to continue to work on a part-time basis while accessing all or part of your pension benefit. Federal law encourages these phased retirement programs by allowing pension plans to start paying benefits once you reach age 62, even if you’re still working and haven’t yet reached the plan’s normal retirement age.

401(k) and other employer-sponsored retirement plans

If you participate in a 401(k), profit-sharing, ESOP, 403(b), 457(b) or similar plan sponsored by your employer, you’ll be able to continue to contribute to the plan, and receive any applicable employer contribution, if you continue to work beyond your plan’s normal retirement age.

Whether you’ll be able to access your funds while you’re employed depends on the terms of the plan. Some plans allow you to take distributions once you turn age 59½, or once you reach normal retirement age, or if you experience a hardship. Other plans require that you terminate employment before you’re eligible to receive a distribution. Check with your plan administrator to find out your plan’s distribution options if you think you may need to access your funds while you’re still employed. Your distribution options will also be spelled out in your plan’s summary plan description (SPD).

If you continue working past age 72, you won’t need to begin taking required minimum distributions (RMDs) from your plan until April 1 of the calendar year following the calendar year in which you retire (if the retirement plan allows this and you own 5% or less of the company).

Health benefits

Many individuals work during retirement to keep their medical coverage. If working during retirement for you means moving from full-time to part-time, it’s important that you fully understand how that decision will impact your medical benefits.

Some employers, especially those with phased retirement programs, offer medical coverage to part-time employees. But other employers don’t, or require that you work a minimum number of hours to be eligible for benefits. If your employer doesn’t offer medical benefits to part-time employees, you’ll need to look for coverage elsewhere. If you’re married, the obvious option is coverage under your spouse’s health plan, if your spouse works and has coverage available. If not, you may be eligible for COBRA coverage.

COBRA is a federal law that allows you to continue receiving medical benefits under your employer’s plan for some period of time, usually 18 months, after a qualifying event (including loss of coverage due to a reduction in hours). But it’s expensive — you typically have to pay the full premium yourself, plus a 2% administrative fee. (COBRA doesn’t apply to employers who have fewer than 20 employees.) Another option is private health insurance, but that will likely be very expensive. You also may shop for and purchase an individual health insurance policy through either a state-based or federal health insurance Exchange Marketplace.

Of course, once you turn 65, you’ll be eligible for Medicare. You’ll want to contact the Social Security Administration approximately three months before your 65th birthday to discuss your options. If you have private or employer-sponsored health insurance, talk to your benefits administrator or insurance representative before enrolling in Medicare to find out how your current health insurance fits in with Medicare.

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Source

Broadridge Investor Communication Solutions, Inc. prepared this material for use by Social Security Benefit Planners, LLC.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Social Security Benefit Planners, LLC  provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.