June 2019 | Peak Financial Freedom Group

Month: June 2019

Retirement the Machiavellian Way

When someone says “Machiavellian,” you might think of a lying schemer, a power-hungry politician, or ruthless individual who believes the ends justify the means. But this characterization isn’t quite fair to the political philosopher Niccolo Machiavelli. He gave practical advice to the prince of Florence about how to rule, and was concerned with him being successful, not evil. Possibly his most important piece of advice was to focus on what you can control, not on matters of chance.

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A Plan to Help Minimize Your Taxes in Retirement

Your steady source of income might disappear in retirement, but unfortunately your taxes probably won’t. Did you know that up to 85% of your Social Security benefit could be taxed? And, retirement account distributions are taxed differently than investment income. If you’ll have multiple income sources, you should know how each is taxed so that you can best plan to minimize your taxes in retirement.

Social Security benefits

The federal government only taxes Social Security benefits if your income exceeds $25,000 as a single filer, or $32,000 when married filing jointly. 50% of your benefit is then taxable, and 85% is taxable if your income exceeds $34,000 as a single filer or $44,000 when married filing jointly. Your income is calculated by adding up half of your Social Security benefit and all other taxable income, and some tax-free income like municipal bond interest. The state of California does not impose an additional state tax on Social Security benefits.

Retirement Account Distributions

Distributions from traditional 401(k)s, IRAs, 403(b)s, 457s, and thrift savings plans are taxed as ordinary income, and factor into whether your Social Security benefit will be taxed. This is why if you have a retirement account you should be prepared for RMDs. Required Minimum Distributions from your traditional retirement accounts may push you into a higher tax bracket and or over the limit for Social Security benefit taxes. Unlike distributions from traditional retirement accounts, distributions from Roth accounts are not taxed.

Investments

Just like before retirement, you’ll be taxed on your interest income, dividends, and capital gains. Most interest is taxed as ordinary income, except for government issued bonds. Investments held for under a year are taxed at regular tax rates, but investments held for over a year are taxed a preferential rates, and are not taxed if your income as a couple is under $78,750 or under $39,375 as single filer.

But, some sources of cash flow are not counted as taxable income: If your bank CD matures in the amount of $5,000, only the interest earned is taxed, not the whole $5,000. If you sell your home in retirement and lived there for at least two years, you likely won’t have to pay tax on gains from the sale less than $250,000 for single filers, or $500,000 for those married filing jointly.

Taxes can constitute our largest expense in retirement. That’s why we believe tax minimization strategies are an important part of a comprehensive retirement plan at Peak Financial Freedom Group. If you’re interested in learning how you could minimize taxes on all your sources of income in retirement, click here to schedule a complimentary review.

Covering Long-Term Care Costs

Some of the major expenses you’ll need to anticipate in retirement are your healthcare costs. There are many choices to make when it comes to choosing a Medicare plan, using an HSA, and qualifying for Medicaid. One healthcare cost that is easy, but possibly detrimental to overlook is long-term care. It’s estimated that 52% of people turning 65 will need some type of long-term care during their lifetimes. On average, women will need 2.5 years of long-term care, and men will need 1.5 years. Also, 14% of people need long-term care for longer than five years. When you consider that the average rate for a private room in a nursing home is $100,375 a year, covering long-term care costs is a major feat.

Retirees may be confused about what services Medicare covers, but don’t fall for these long-term care myths. Medicare can cover medical services needed in nursing homes, assisted living facilities, and one’s own home, but not the cost of staying in these facilities or in-home care costs for long periods of time. Under most circumstances, it covers short-term stays in skilled nursing facilities if you were formally admitted to a hospital for three days. If qualifications are met, Medicare will pay the full cost for the first 20 days, and a portion of the cost for the following 80. After 100 days you are responsible for covering costs. Even if you purchase a Medicare supplemental insurance policy, you’ll need to find another way to cover long-term care costs.

Since Medicare won’t necessarily cover these costs, some people may look to Medicaid. And while Medicaid will cover a large portion of long-term care costs, there are strict functional and financial requirements to qualify for Medicaid. To start with, applicants must be 65 or older, and have a permanent disability or be blind. A medical specialist will assess applicants to see what type of care they require, and the criteria varies from state to state. The income limit to qualify for Medicaid also varies according to the state you’re in, and can be up to $2,313 per month as of 2019.

Covering long-term care costs is just one aspect of creating a retirement plan, but it is a big one. Whether you’re looking to pay for long-term care through Medicaid, insurance, your savings, or some combination, the professionals at Peak Financial Freedom Group can assess your unique financial situation and help make long-term care planning a part of your retirement plan. Click here to schedule your free financial review today.

Are You Ready for Endless Summer?

It’s time to start planning your summer, and whether you’re going to laze around on the beach, visit friends, or take a trip, it’s important to also start thinking about your retirement plan. On average, we spend more time every year planning for vacations than planning for retirement – and retirement is much longer than any vacation you will take. Summer is definitely a time to relax, but it’s also the perfect time to think about what you want your future retirement, the endless summer, to look like.

Start off with the “What”

If you and your spouse are traveling together, use the hours on the plane or highway to start discussing what you want your retirement to look like, your goals, and general timeline. If you have time off, you can “practice” retirement by trying out new activities like volunteering, spending more time with friends and family, or picking up a new or forgotten hobby, it can be a good way to plan how you will fill your time and find happiness in retirement. Consider if you want to travel a lot when you first retire and if you will move. Once you have a vision for your retirement, you can move onto figuring out how much it will cost.

Move on to the “How”

Think about how you afford the vacations you currently take: Do you save for them, or have a specific vacation budget? Planning for how you will afford retirement is a much more detailed process, which is why it helps to have a professional at your side. Start thinking about how much your desired lifestyle in retirement will cost you, and then begin calculating how much you will need to withdraw from your retirement accounts. It’s also important to consider any income from your investments, and plan for when you should start taking Social Security.

Think of all the details that go into planning a vacation: There are the travel arrangements, the hotel, activities, and setting a budget. While it’s certainly important to enjoy both vacation and retirement, the stakes are much higher when it comes to retirement and there are even more elements that go into planning this 30-plus year vacation.

Here at Peak Financial Freedom Group, we can help you create a plan for the longest vacation of your life. We’ll take your unique retirement goals into account, and help you put all the pieces of the puzzle together. If you’re taking the time to plan a vacation this summer, consider also taking the time to come in for a no cost, no obligation financial review.

Social Security’s Decreased Buying Power

Some are worried about the state of Social Security since the latest report found that starting next year, the program’s annual cost will exceed its income. Some speculate that since the program’s trust fund is expected to be depleted by 2034, cuts are inevitable. But, there should be a more immediate worry facing beneficiaries than a theoretical future policy change: Social Security’s decreased buying power.

There are several reasons why you can’t rely solely on Social Security in retirement, and the fact that benefits have lost 33% of their buying power since 2000 is one of them. And, they will continue to lose buying power as long as the Cost of Living Adjustments (COLA) are below the inflation rate. Inflation rates have been around 2% which is relatively low, but still enough to eat away at retirees’ savings and value of a Social Security check: If you retire at age 65 and the inflation rate stays at 2% per year, $75,000 will have the same buying power as $50,000 when you are 85.

To make matters worse, the costs of some services that retirees spend more money on than the average American are rising faster than the overall inflation rate, such as healthcare, housing, and food. Since 2000, prescription drug prices have risen 352%, Medicare Part B premiums have risen almost 200%, along with home owners’ insurance and real estate taxes. The Senior Citizens League projects the cost-of-living adjustment for 2020 to be 1.7%. Since 2000, retirees’ expenses have increased twice as fast as the annual COLA adjustment to Social Security.

There are reasons why you should be worried about inflation, especially in retirement. This could especially be a problem if higher tariffs on Chinese goods raises the inflation rate in the third quarter, after the COLA adjustment is decided for the year. Inflation can erode the buying power of your Social Security benefit, as well as your personal savings.

There’s no telling what the inflation rate could be 15 years from now when you’re already retired and relying on Social Security and your savings – in the 1970’s the inflation rate was over 7%. And there’s no guarantee that COLA adjustments would keep up with an increased inflation rate.

If you need a plan to combat inflation and Social Security’s decreased buying power, contact the professionals at Peak Financial Freedom Group. They can help you create a plan for a long retirement. Click here to schedule your no cost, no obligation financial review today.

What is a Phased Retirement Program?

Some look forward to their last day of work, some are disappointed to leave coworkers and a purposeful career, and others are somewhere in between. There are many things to love about retirement, like the freedom to travel, spend time with family and friends, and just wake up whenever you want, but hopefully there are also things you love about your career. For people who experienced a sense of accomplishment from their work and like to be busy, suddenly having little mental stimulation can be less than ideal. One solution is to phase from full-time to part-time before retirement.

Transitioning to part-time employment can give you some of the freedom of retirement while keeping familiar routines and relationships in place. It can help you figure out a plan for what you will do with your time after retirement before you actually retire, since transitioning into retirement is no small task. Unfortunately, only 5% of companies offer a formal phased retirement program according to a recent Forbes article. So, if you want to officially transition to part-time before retiring, you’ll probably need to forge your own path.

If your company doesn’t have a formal phased retirement program, you can prepare a proposal for your part-time schedule. Plan which tasks you will still handle and how you will still do them with a reduced schedule, and how you will pass on your expertise, insights, and connections to younger coworkers. It’s important to emphasize how your skills and knowledge can still benefit your company even if you won’t be there full-time. Also articulate how stepping back from your role might give younger workers the opportunity to assume leadership roles while still benefiting from your mentorship.

Formal phased retirement programs are rare, but that doesn’t mean there’s not an interest both on the employee’s and employer’s sides. If you don’t think your company’s culture will be amenable to your request, you can see if any of your colleagues are also interested in transitioning to part-time. A group is likely to gain more traction and share ideas about the logistics of reducing hours and workload.

One crucial thing to consider if you will receive a pension is how working part-time will affect your benefits. Salary just prior to retirement is typically a factor in determining a pension benefit. And, benefits such as healthcare and paid vacation time could also be affected.

Here at Peak Financial Freedom Group, we can take your unique retirement goals into account when helping you create a comprehensive retirement plan. When and how you retire are important, and the decisions you make leading up to retirement can affect you for decades to come. If you’re ready to start planning for the future, click here to sign up for a free financial review. 

Higher HSA Contribution Limits

If you have an HSA or are planning on opening one, you’re in luck: The IRS has announced higher contribution limits for 2020. Starting next year, you can contribute up to $3,550 for individual coverage, or $7,100 for family coverage. And, if you’re 55 or older, you can contribute an additional $1,000 per year. You can contribute to an HSA if you have a health plan with a minimum annual deductible of $1,400 for individual coverage or $2,800 for family coverage.

You can reduce your taxable income by contributing to an HSA even if you don’t itemize your taxes. Since it’s a tax advantaged account, the higher your tax bracket, the bigger your savings. It can be a powerful retirement savings tool because you can let the funds grow tax-free for as long as you want, and then withdraw money tax free for qualified medical expenses. After you turn 65 you can withdraw funds for nonmedical uses and pay the same tax you would on withdrawals from a traditional retirement account.

While it’s helpful to contribute enough to cover your out-of-pocket medical expenses for the year, it can be better to contribute the maximum amount in order to benefit from the investment. You can create an investment strategy for your HSA just like you would with a 401(k) or IRA, and use it to help cover the rising cost of healthcare in retirement. You can shift to lower-risk investments as you get older, and rely on the account once you’ve retired and no longer receive healthcare coverage from your employer.

You’ll want to avoid using the account to pay for nonqualified expenses, as you’ll pay both a tax and a 20% penalty on withdrawals before age 65. Also keep in mind that passing on an HSA to anyone except your spouse will also pass on a tax burden: non-spouse beneficiaries will have to pay taxes on the balance the year they inherit it. So, it can be better to draw down your account balance in retirement instead of saving it for your heirs. Once you turn 65 you can’t contribute to on HSA, but you can use it to cover Medicare premiums, out-of-pocket expenses, and a portion of long-term care policy premiums.

An HSA is just one way to plan ahead for your healthcare expenses in retirement. Here at Peak Financial Freedom Group, we can help you create a comprehensive retirement plan that takes your future healthcare costs into account. Click here to schedule your no cost, no obligation financial review.

The State of Social Security

The annual report on Social Security’s financial condition was recently released, and many are worried about the program’s solvency. The annual cost of the program is expected to exceed its income for the next 75 years starting in 2020. And, the trust fund that covers retirement benefits is expected to be depleted by 2034. This seems grim, but it’s unlikely that the program will disappear. Here are 3 important things about Social Security to keep in mind.

This does not spell doomsday for Social Security

The current projections are based on estimated economic growth, tax collections, inflation, and other factors. If these exceed expectations, the trust fund will last longer. And, even when the reserves run out, the program will continue to receive funding from Social Security taxes indefinitely. It is estimated that taxes will be able to pay for 77% of Social Security benefits for the next 75 years.

Future changes to the program might not affect you

Those already receiving benefits are unlikely to be affected by future changes to Social Security. However, high-income retirees might see changes to their benefit in the future. It’s possible that taxpayers with incomes over $250,000 per year could see their benefits reduced, or taxed at a higher rate. Right now up to 85% of your benefit can be taxed. This could mean that it’s even more important for higher-income retirees to strategize when it comes to tax minimization and Social Security benefit maximization.

There are still strategies you can use to maximize your benefit

Even though there are reasons why you can’t rely solely on Social Security in retirement, it can still provide you with reliable income in retirement. This is especially valuable as lifespans increase. Since there may be changes to Social Security in the future, it’s important to have a strategy for maximizing your benefit. You can do this by working for at least 35 years, because your benefit is based on your average monthly earnings during your highest-earning 35 years.

There are good reasons to take Social Security benefits at any age, but don’t take them earlier than you planned just because you think the program is about to run out of money. If you start collecting Social Security at age 62, your benefit will be reduced. You will receive your full benefit between the ages of 65 and 67, depending on the year you were born, and you will receive 8% more than your full benefit for every year after that you delay. If you wait until you are 70, you will receive 132% of your full benefit, but no more than that if you delay longer.

It can be good to reassess your Social Security maximization strategy every few years, or when new laws are passed or reports come out. The professionals at Peak Financial Freedom Group can help you with Social Security maximization strategies based on your unique needs and financial situation. If you don’t have a plan for when to start taking Social Security benefits or have an outdated plan, click here to schedule your no cost, no obligation financial review today.

Peak Financial Freedom Group
2520 Douglas Boulevard, Suite 110
Roseville, CA 95661

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2019(1) and 2020(2) Five Star Professional Wealth Manager Award - Dan Ahmad and Jim Files have been nominated for and have won the 2019 and 2020 Five Star Wealth Manager awards. Wealth managers do not pay a fee to be considered or placed on the final list of Five Star Wealth Managers. Once awarded, wealth managers may purchase additional profile ad space or promotional products. Award does not evaluate quality of services provided to clients. The Five Star award is not indicative of the wealth manager’s future performance. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or this publication. Working with a Five Star Wealth Manager or any wealth manager is no guarantee as to future investment success, nor is there any guarantee that the selected wealth managers will be awarded this accomplishment by Five Star Professional in the future. Award winners represent an exclusive group of wealth managers who have demonstrated excellence in their field by satisfying 10 objective selection criteria. For additional information on the Five Star award, including a complete list of the 10 objective selection criteria and their research/selection methodology, go to https://fivestarprofessional.com.

Investment advisory services are offered through Fiduciary Solutions, LLC, a Registered Investment Advisor (CRD #148118). Insurance products and services are offered through PFFG Insurance Agency LLC, a licensed insurance agency (CA License #0N14103). Peak Financial Freedom Group, LLC is a financial planning and umbrella marketing organization, which enables the provision of multiple financial services under one brand. Peak Financial Freedom Group LLC, PFFG Insurance Agency LLC, and Fiduciary Solutions LLC are affiliated entities with common ownership and control. Jim Files is licensed as an investment adviser representative with Fiduciary Solutions LLC (CRD # 1620449) and is a licensed insurance producer with PFFG insurance Agency LLC (CA Insurance License #0F06511). Dan Ahmad is licensed as an investment adviser representative with Fiduciary Solutions LLC (CRD # 1491561) and is a licensed insurance producer with PFFG insurance Agency LLC (CA Insurance License #0732913).

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