Freeman's Blog

Archive

January 16th, 2020 by

If you receive a distribution from a qualified retirement plan such as a 401(k), you need to consider whether to pay taxes now or to roll over the account to another tax-deferred plan. A correctly implemented rollover avoids current taxes and allows the funds to continue accumulating tax-deferred.

MOST TAX-EFFICIENT WAY TO TAKE A DISTRIBUTION FROM A RETIREMENT PLAN

PAYING CURRENT TAXES WITH A LUMP-SUM DISTRIBUTION

If you decide to take a lump-sum distribution, income taxes are due on the total amount of the distribution (except for any after-tax contributions you’ve made) and are due in the year in which you cash out. Employers are required to withhold 20% automatically from the check and apply it toward federal income taxes, so you will receive only 80% of your total vested value in the plan. (Special rules apply to Roth accounts.)

The advantage of a lump-sum distribution is that you can spend or invest the balance as you wish. The problem with this approach is parting with all those tax dollars. Income taxes on the total distribution are taxed at your marginal income tax rate. If the distribution is large, it could easily move you into a higher tax bracket. Distributions taken prior to age 59½ are subject to a 10% federal income tax penalty. (Special rules may apply if you were born before 1936.)

DEFERRING TAXES WITH A ROLLOVER

If you don’t qualify for the above options or don’t want to pay current taxes on your lump-sum distribution, you can roll the money into a traditional IRA.

If you choose a rollover from a tax-deferred plan to a Roth IRA, you must pay income taxes on the total amount converted in that tax year. However, future withdrawals of earnings from a Roth IRA are free of federal income tax after age 59½ as long as the five-tax year holding requirement has been met. Even if you are not 59½, your distribution may be tax-free if you are disabled or a first-time home purchaser ($10,000 lifetime maximum), as long as you satisfy the five-year holding period.

If you elect to use an IRA rollover, you can avoid potential tax and penalty problems by electing a direct trustee-to-trustee transfer; in other words, the money never passes through your hands. IRA rollovers must be completed within 60 days of the distribution to avoid current taxes and penalties.

An IRA rollover allows your retirement nest egg to continue compounding tax-deferred. Remember that you must generally begin taking annual required minimum distributions (RMDs) from tax-deferred retirement plans after you turn 70½ (the first distribution must be taken no later than April 1 of the year after the year in which you reach age 70½). Failure to take an RMD subjects the funds that should have been withdrawn to a 50% federal income tax penalty.

Of course, there is also the possibility that you may be able to keep the funds in your former employer’s plan or move it to your new employer’s plan if allowed by the plans. (Make sure you understand the pros and cons of rolling funds from an employer plan to an IRA before you take any action.)

Before you decide which method to take for distributions from a qualified retirement plan, it would be prudent to consult with a professional tax advisor.

Let me guide you through your retirement planning decisions. Contact me for a FREE retirement strategy consultation at my office in Upper Marlboro, MD. 

Contact me TEL: 1-833-313-7233.

Retirement Specialist Freeman Owen, Jr.
January 7th, 2020 by

Many Americans realize the importance of saving for retirement, but knowing exactly how much they need to save is another issue altogether. With all the information available about retirement, it is sometimes difficult to decipher what is appropriate for your specific situation.

One rule of thumb is that retirees will need approximately 80% of their pre-retirement salaries to maintain their lifestyles in retirement. However, depending on your own situation and the type of retirement you hope to have, that number may be higher or lower.

how much do I need to save for retirement?

Here are some factors to consider when determining a retirement savings goal.

1. RETIREMENT AGE

The first factor to consider is the age at which you expect to retire. In reality, many people anticipate that they will retire later than they actually do; unexpected issues, such as health problems or workplace changes (downsizing, etc.), tend to stand in their way. Of course, the earlier you retire, the more money you will need to last throughout retirement. It’s important to prepare for unanticipated occurrences that could force you into early retirement.

2. LIFE EXPECTANCY

Although you can’t know what the duration of your life will be, there are a few factors that may give you a hint.

You should take into account your family history — how long your relatives have lived and diseases that are common in your family — as well as your own past and present health issues. Also, consider that life spans are increasing with recent medical developments. More people will be living to age 100, or perhaps even longer. When calculating how much you need to save, you should factor in the number of years you expect to spend in retirement.

3. FUTURE HEALTH-CARE NEEDS

Another factor to consider is the cost of health care. Health-care costs have been rising much faster than general inflation, and fewer employers are offering health benefits to retirees. Long-term care is another consideration. These costs could severely dip into your savings and even result in your filing for bankruptcy if the need for care is prolonged.

4. LIFESTYLE

Another important consideration is your desired retirement lifestyle. Do you want to travel? Are you planning to be involved in philanthropic endeavors? Will you have an expensive country club membership? Are there any hobbies you would like to pursue? The answers to these questions can help you decide what additional costs your ideal retirement will require.

Many baby boomers expect that they will work part-time in retirement. However, if this is your intention and you find that working longer becomes impossible, you will still need the appropriate funds to support your retirement lifestyle.

5. INFLATION

If you think you have accounted for every possibility when constructing a savings goal but forget this vital component, your savings could be far from sufficient. Inflation has the potential to lower the value of your savings from year to year, significantly reducing your purchasing power over time. It is important for your savings to keep pace with or exceed inflation.

6. SOCIAL SECURITY

Many retirees believe that they can rely on their future Social Security benefits. However, this may not be true for you. The Social Security system is under increasing strain as more baby boomers are retiring and fewer workers are available to pay their benefits. And the reality is that Social Security currently provides about 40% of the total income of Americans aged 65 and older with at least $47,731 in annual household income.1 That leaves about 60% to be covered in other ways.

AND THE TOTAL IS…

After considering all these factors, you should have a much better idea of how much you need to save for retirement.

For example, let’s assume you will retire when you are 65 and spend a total of 20 years in retirement, living to age 85. Your annual income is currently $80,000, and you think that 75% of your pre-retirement income ($60,000) will be enough to cover the costs of your ideal retirement, including some travel you intend to do and potential health-care expenses. After factoring in the $18,000* annual Social Security benefit you expect to receive, a $10,000 annual pension from your employer, a 3% potential inflation, and a 5% real rate of return, you end up with a total retirement savings amount needed of about $720,000. (For your own situation, you can use a retirement savings calculator from your retirement plan provider or from a financial site on the Internet.) This hypothetical example is used for illustrative purposes only and does not represent the performance of any specific investment.

The estimated total for this hypothetical example may seem daunting. But after determining your retirement savings goal and factoring in how much you have saved already, you may be able to determine how much you need to save each year to reach your destination. The important thing is to come up with a goal and then develop a strategy to pursue it. You don’t want to spend your retirement years wishing you had planned ahead when you had the time. The sooner you start saving and investing to reach your goal, the closer you will be to realizing your retirement dreams.

* Social Security Fact Sheet, 2020, estimated average annual Social Security benefit payable in January 2020.

Source: 1) Social Security Administration, 2019

You need a little foresight and knowledge to make the most of your retirement plan. So, contact me for a FREE retirement strategy consultation at my office in Upper Marlboro, MD. 

Contact me TEL: 1-833-313-7233.

Retirement Specialist Freeman Owen, Jr.
December 18th, 2019 by
  • Are you saving for retirement?
  • For your children’s education?
  • For any other long-term goal?

Know how inflation can impact your savings.

Inflation is the increase in the price of products over time. Inflation rates have fluctuated over the years. Sometimes inflation runs high, and other times it is hardly noticeable. The short-term changes aren’t the real issue. The real issue is the effect of long-term inflation.

Inflation erodes the purchasing power of your income and wealth.

This means that even as you save and invest, your accumulated wealth buys less and less, just with the mere passage of time. And those who put off saving and investing impacted even more.

how does inflation affect you

How to fight inflation?

You should own at least some investments whose potential return exceeds the inflation rate. A portfolio that earns 2% when inflation is 3% actually loses purchasing power each year. Though past performance is no guarantee of future results, stocks historically have provided higher long-term total returns than cash alternatives or bonds. However, that potential for higher returns comes with, greater risk of volatility and potential for loss. You can lose part or all of the money you invest in a stock. Because of that volatility, stock investments may not be appropriate for money you count on to be available in the short term. You’ll need to think about whether you have the financial and emotional ability to ride out those ups and downs as you pursue higher returns.

Bonds can also help, but since 1926 their inflation-adjusted return has been less than that of stocks. Treasury Inflation Protected Securities (TIPS), which are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, are indexed so that your return should pace with inflation. The principal is automatically adjusted every six months to reflect increases or decreases in the Consumer Price Index; as long as you hold a TIPS to maturity, you will receive the greater of the original or inflation-adjusted principal. Unless you own TIPs in a tax-deferred account, you must pay federal income tax on the income plus any increase in principal, even though you won’t receive any accrued principal until the bond matures. When interest rates rise, the value of existing bonds will typically fall on the secondary market. However, changing rates and secondary-market values should not affect the principal of bonds held to maturity.

Diversify Your Portfolio!

Spending your assets across a variety of investments that may respond differently to market conditions is one way to help manage inflation risk. However, diversification does not guarantee a profit or protect against a loss; it is a method used to help manage investment risk.

All investing involves risk, including the potential loss of principal, and there is no guarantee that any investment will be worth what you paid for it when you sell.

Don’t allow inflation to catch you off guard. You need a little foresight and knowledge to make the most of your retirement plan. So, contact me for a FREE retirement strategy consultation at my office in Upper Marlboro, MD. 

Contact me TEL: 1-833-313-7233.

Retirement Specialist Freeman Owen, Jr.
May 23rd, 2018 by

social security benefits

When did you last review your social security benefits?

Your Social Security Statement provides important information about your Social Security record and future benefits, including a projection of your retirement benefits at age 62, full retirement age, and age 70; projections of disability and survivor benefits; a detailed record of your earnings; and other information about the Social Security program.

To save money, the Social Security Administration (SSA) has stopped mailing Social Security Statements to individuals under age 60. Workers age 60 and older who aren’t receiving Social Security benefits will still receive paper statements. However, you can opt to sign up for online statements instead. If you’re age 60 or older, you should receive your statement every year, about three months before your birthday.

Finding Out What You Have

social security

If you’re under age 60, you can request a paper statement in the mail. However, the quickest way to get a copy of your Social Security Statement is to sign up for a “My Social Security” account on the SSA website, ssa.gov. After signing up, you’ll have immediate access to your statement, which you can view, download, or print.

The SSA has recently started to use a two-step identification method to help protect “My Social Security” accounts from unauthorized use and potential identity fraud. You will be prompted to add either your cell phone number or email address as a second identification method. Every time you enter your account username and password, you will then be prompted to request a unique security code via the identification method you’ve chosen, and you will need to enter that code to complete the log-in process.

Get The Most From Your Social Security Benefits!

Social Security is a big part of your retirement planning. Let me show you how to get the most from it. Contact me for a FREE retirement strategy consultation at my office in Upper Marlboro, MD. Contact me 1-833-313-7233.

Freeman2017-blog2

 

March 28th, 2018 by

There are a number of good reasons why you may want to work part-time during retirement. Obviously, you would be earning money and relying less on your retirement savings. You may also have access to better health-care benefits. Finally, many retirees work for personal fulfillment. They enjoy staying mentally and physically active. Plus, they enjoy the social benefits of working in retirement. Some retirees just want to try their hand at something new & they aren’t ready to retire.

Others who are thinking about retirement aren’t’ ready to give up their day jobs just yet. In 2013, a phased retirement plan was introduced in some workplaces to help potential retirees ease into retirement more easily. It’s when a company allows an aging employee to “officially retire”, but keeps the employee on the payroll with the ability to scale back their number of work hours or become more selective on which projects they take on.

Earning a paycheck may enable you to postpone claiming Social Security until a later date. For each year you delay taking your Social Security benefits (from full retirement age to age 70), the annual benefit grows automatically by 8%.

Here are two more ways working in retirement could affect your Social Security benefits.

1. The Retirement Earnings Test

If you are working in retirement and receiving Social Security benefits prior to reaching full retirement age (FRA), $1 in benefits will be deducted for every $2 you earn above the annual limit ($17,040 in 2018). During the calendar year in which you reach FRA, $1 will be deducted for every $3 you earn above a higher annual limit ($45,360 in 2018), but only until the month you reach full retirement age. Fortunately, you won’t lose these benefits forever. Once you reach FRA, your lifetime benefit will increase to account for the loss amount.

2. Taxes on Benefits

If you have substantial income (such as wages or other taxable income), a portion of your Social Security benefits may be taxable. You may owe federal income tax on up to 50% of your benefits if your combined income exceeds a “base amount” of $25,000 ($32,000 for joint filers). And if your combined income exceeds a higher base amount of $34,000 ($44,000 for joint filers), you may owe tax on up to 85% of your Social Security benefits.

One size DOES NOT fit all.

Your retirement options should be in under your control. Let me show you how to get the most from your retirement planning. Contact me for a FREE retirement strategy consultation at my office in Upper Marlboro, MD. Contact me 1-833-313-7233.

Freeman2017-blog2

 

October 16th, 2017 by

In 2017, Americans born in 1955 become eligible to claim Social Security benefits at age 62.

Claiming benefits before reaching full retirement age results in a permanently reduced benefit, so it requires careful consideration. But for those born in 1955 or later, the math for claiming is different than for older age groups.

The shift dates back to the Social Security Amendments of 1983. This shift made changes to strengthen the program by gradually increasing the full retirement age (FRA) from 65 to 67. The first phase of this increase resulted in a FRA of 66 for those born in 1946 to 1954. For those born in 1955, FRA is 66 and two months. Each additional birth year adds two months. For those born in  1960 or later, 67 is the full retirement age (see chart).

Social Security Claiming Age 2017: early or late?

The minimum and maximum Social Security Claiming Age 2017 remain at 62 and 70, respectively. However, because Social Security benefit calculations are based on full retirement age, the change affects the benefits paid at all claiming ages before or after full retirement age.

For example, whereas someone born between 1946 and 1954 who filed at age 62 would have received 75% of the full benefit, someone born in 1955 would receive only 74.17% of the full benefit at age 62. This percentage will be reduced gradually until it reaches 70% for those born in 1960 or later.

Delayed retirement credits for working past full retirement age will remain the same, increasing the benefit by 8% each year. However, as FRA increases, the amount of time to earn credits will decrease. Someone with a full retirement age of 66 could earn four years of credits before claiming at age 70, and would potentially receive a benefit equivalent to 132% of the full benefit amount. However, someone born with a full retirement age of 67 would have only three years between FRA and age 70, so the maximum benefit would be 124% of the full benefit amount.

Social Security rules are complex, so be sure to research your options before making a decision on when to claim benefits. See https://www.ssa.gov for further information.

Your Social Security claiming age is important.

Let me show you how to get the most from your retirement planning. Contact me for a FREE retirement strategy consultation at my office in Upper Marlboro, MD. Contact me  1-833-313-7233.

Freeman2017-blog2

 

May 23rd, 2017 by

social security

Sixty-two percent of retirees report that Social Security is a major source of retirement income. By contrast, only 35% of workers expect the program to be a major source of income for them in retirement.1

Social Security was never intended to be a retiree’s sole source of retirement income, so lower expectations are realistic and could inspire you to save more in your retirement accounts. But low expectations also reflect concern about the future of the program. Only 10% of workers are “very confident” that Social Security will continue to provide benefits equal to those provided to current retirees.2

Many ideas have been suggested to address Social Security’s fiscal challenges. Here are some commonly cited solutions, with estimates of their impact from the Chief Actuary of the Social Security Administration.3

Eliminate or increase the earnings cap. Workers pay Social Security taxes on income up to an inflation-adjusted cap ($127,200 in 2017). Eliminating the cap in 2017 and later years would address 89% of the Social Security shortfall if benefits were not increased for high earners (72% if benefits were increased). Increasing rather than eliminating the cap would have a significant but smaller effect.

Increase the payroll tax. Workers currently pay 6.2% of earnings (up to the earnings cap) into the Social Security system, with employers matching that amount. Increasing the payroll tax to 7.6% for both workers and employers in 2017 and later years would completely eliminate the shortfall.

Raise the full retirement age. The current age to claim full Social Security retirement benefits is 66 for individuals born between 1943 and 1954; full retirement age increases gradually to 67 for those born in 1960 and later. Raising the full retirement age to 69 by 2034, with small increases thereafter, would eliminate 40% of the funding shortfall.

Sources
1–2) Employee Benefit Research Institute, 2016
3) Social Security Administration, 2016

Retirement Planning Adds To Social Security Benefits

You can become anxious when you have to deal with your retirement planning alone. So, let me help you figure out how much Social Security you can expect. Moreover, I can advise you on how to create a retirement where you don’t have to only rely on Social Security.
Let’s meet for a FREE retirement strategy consultation at my office.
Call  1-833-313-7233.

Freeman2017-blog2

 

September 17th, 2015 by

CNBC Sharon Epperson - Social Security Benefits

Sharon Epperson shares tips for women to take advantage of Social Security Benefits. CLICK THIS IMAGE to view the full video.

 

Women Can Boost Their Income Later in Life

A woman who holds off on collecting Social Security after her full retirement age will receive delayed retirement credits that will boost her benefit as much as 8 percent for every year she waits until age 70. In other words, a woman whose full retirement age is 66 would receive a benefit reduced by as much as 30 percent if she retired at 62, but if she waited until age 70, it could increase by as much as 32 percent.

 

In addition, women who have been divorced after at least 10 years of marriage may have another way to boost their Social Security benefit: by using their ex-spouse’s benefit. The Social Security office can even tell you what the amount is. You don’t even have to go to him. Women divorced after 10 or more years of marriage are eligible for a benefit equal to half of the ex-spouse’s. So, if the benefit of half of the ex-spouse’s amount exceeds what you (as a woman) stands to receive on your own, that option is available to you.

Read the full article for more Social Security Benefit tips for women.
Source:
Kelley Holland – NBC News – Aug 11, 2015
http://www.nbcnews.com/business/retirement/biggest-mistake-women-make-social-security-benefits-n407816

Freeman Owen, Jr - Host of "Safe Money Talk" on CBS Radio The Big Talker 1580AM

There is expert guidance available to you for your retirement planning goals.

Meet me for a FREE retirement strategy consultation at my office at 833-313-7233 | MD, VA & DC.