Category Archives: Uncategorized

A New Year – A New Opportunity

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We’ve completed a second year in this pandemic that upended most of our habits and norms. Before we embrace a quasi-new normal and return to our old ways, we have an opportunity at the start of this year to pause, step back, and review what has and hasn’t worked in our lives.

It’s natural that we should want our financial life to be supportive and in concert with our values and life choices. I encourage you to identify and mobilize behaviors that add energy and positive feelings into your life. This year, prioritize those healthy behaviors and do your best to eliminate or minimize the negative ones.

The Milestones & Impressions notebook can help you create a personal record of what has added value and what makes you feel good each year. Over time, these notebooks will be a source of key events, patterns, and behaviors that mattered in your life. Possibly they will be a resource to help you identify what you wish to include in your ideal life.

Ultimately the process of taking time to reflect provides greater satisfaction and increases financial resiliency (readiness to handle unexpected financial issues in an efficient and streamlined manner). Financially resilient people focus on things they can control, such as meaningful spending, rather than the things that are beyond our control like market behavior. Recent studies suggest that acknowledging the events that bring joy to your life and recognizing from time to time just how fortunate we are will help to increase financial resiliency, and in-turn, well-being.

Be kind to yourself and take the New Year to reimagine yourself and your relationship with your finances.

Here is to a hopeful and happy 2022!

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

2022: Current Retirement Savings Limits

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In 2022, 401K plan employee contribution maximums have increased by $1K to $20,500 and the catch-up (at age 50) remains at $6,500 (or a maximum of $27K). Total employer and employee contributions for 401K plans has increased to $61K. On the other hand, pension plan contributions are limited to $260K but the amounts are determined early in 2022. IRA contributions remain at $6K and for those over age 50 at $7K but tax deductibility is dependent on earnings and whether you’ve contributed to a 401K/403b plan. A Roth IRA contribution can be made instead of the IRA contribution, and it also has earning limits. Long-Term Capital Gain federal tax rates this year are still at 0%, 15%, and 20% dependent on taxable income levels but these are expected to increase in the new tax plan. Gifts can be made tax free to the recipient up to $16K in 2022 and for non-US citizen spouses this tax-free gift rises to $164K without additional paperwork. Keep in mind that these annual gifting exclusion limits are in addition to the currently huge lifetime tax-free gifting limit of $12.06M per person. The child tax credit and after-tax Roth conversion are part of the new tax plan under consideration.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Potential Tax Changes & Their Implications

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Over the last six months, a good deal of our time has been spent studying the implications of the many tax proposals that were circulating. From the American Jobs Plan, the Made in America Plan, the 99.5% Tax Act, and others, it is still possible that some tax plan will be passed soon. The critical task for us is to better understand what the implications are and what, if anything, should be done ahead of their passage.

We must accept that funding at the level needed to get us through COVID and now infrastructure improvements will require tax increases. It would seem that Congress was looking to fund the proposed plans using sales tax (example, gasoline tax) but this would impact those earning less than what President Biden promised he would target. There seems to be some agreement on taxing businesses at 25% rather than the current 21% (though 29% is still being discussed). Close to 140 countries agreed in October on a global minimum corporate tax rate of 15% targeting the largest international firms, so that’s already baked in. Other items being considered have large implications for those who earn over $500K a year and who have a large taxable gain (home or portfolio). Those expecting to sell a business or a home with a large gain may need to prepare for alternative ways to lower their taxable income or accept the large one-time tax liability.

Current proposals include long-term capital gains taxed at 43.4% from the current maximum of 23.8% (plus state) for those in the higher tax brackets. A change in the step-up in basis on death is also likely since it makes sense with increased capital gains taxes. This is expected to apply to couples with income over $1M (singles are likely to be at $500K income). Keep in mind, if you sell your home or your business you may find yourself in these higher brackets and therefore pay taxes well over 50% of the gain in one year, making it very important to plan for single-year large capital gain realization (for the time being, there is no exception for single-year events).

These proposed changes encourage us all to annually consider the use of Roth conversions, 401K Roth contributions, charitable planning (Donor Advised funds) and estate planning strategies.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Social Security – Essential Tidbits on Early Benefits

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We normally estimate that we need the same pre-retirement spending budget plus taxes to meet minimum retirement cash flow. Since Social Security was created to be a safety net, it only covers at most 40% of needed retirement cash flow. It is for this reason that additional savings are required to support retirement lifestyle cash flow.

The most important aspect of Social Security is that it is a lifetime benefit that is inflation adjusted and therefore holds a very unique place in any retirement plan and yet I find that it is often undervalued. Misunderstandings and short-term thinking can result in poor use of this very powerful resource.

More than a third of American workers claim Social Security benefits at 62, which is the earliest entitlement age, and also when they will receive the least benefit. This is referred to as early filing. With early filing the new lower-than-expected benefits are locked in for the remainder of one’s life. To highlight the difference, consider a person who at full retirement age of 67 would receive a benefit of $2,291 per month for life. If instead they file at age 62, their monthly benefit would be reduced to $1,487. This amounts to $9,648 less annually for life (or $17,844 instead of $27,492 each year), a significant decrease in retirement cash flow.

Claiming early Social Security benefits can be further reduced if you continue to work between ages 62 and your full retirement age. Early Social Security benefits will be dramatically reduced — up to a dollar for every $2 in earned income if your earnings exceed annual limits (usually the limits are around $19K of earnings though it changes each year).

There is a breakeven point for those thinking to file early. If, for some reason, you expect to die early and without a dependent spouse, then considering early Social Security benefits should be part of your planning.
Finally, many early Social Security claimants assume that Social Security is not taxed. In fact, taxation of Social Security benefits isn’t determined by a person’s age, but instead by income level. For example, if a married couple files jointly, and their income is above $44,000, then they will pay taxes on 85% of their Social Security benefits. On the other hand, if they earn less than that amount, they only pay tax on 50% of their Social Security benefits.

Always consider each available resource fully (including social security) to create the best support for your ideal retirement.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Important Changes To Social Security That May Impact Your Retirement Plans

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As you may be aware, significant changes to the Social Security program were signed into law November 2nd by President Obama (see news items in November “Nibbles”). As your financial advisor, I believe it is important to keep you abreast of these changes as they are likely to impact your retirement plans. Some clients will be required to take appropriate action over the next 5 months.

To be clear, the two Social Security planning strategies that were eliminated on November 2nd are still available to those older or turning 66 by April 29th, 2016 for “file and suspend” and those who are at least age 62 by December of 2015 for “Restricted Application.” These individuals are not affected by the November 2nd changes. However, anyone else will no longer have these strategies available in retirement.

At Aikapa, we will give priority to those that need to act immediately to retain ending benefits and then methodically work our way through the retirement plans of our other clients.

DETAILS ON THE ELIMINATED SOCIAL SECURITY PLANNING STRATEGIES

Two widely-used Social Security planning strategies were eliminated by Congress without much discussion, notice, or fanfare, impacting the retirement plans of many Americans.  The two strategies were “File and Suspend” and “Restricted Application for spousal benefits”.  The two strategies usually operated hand-in-hand, but could be employed separately. There are always tradeoffs to retirement planning strategies, but these two strategies typically added 3 to 5 years of additional coverage in retirement.

“File and Suspend” involved one person filing for Social Security at full retirement age (currently, it is 66 years old) and then suspending this filing. The net effect was that they’d file to collect on their Social Security record and then decline to collect.  These two actions allowed other family members to file for benefits based on the that person’s Social Security record while they continued to let their own Social Security benefit grow, often until age 70. Four years at 8% per year would have increased the Social Security benefit substantially. For those that didn’t immediately need the benefit, the option was an obvious “no brainer.”  According to the new rules, the option to File and Suspend ends for anyone that is younger than 66 by April 29th, 2016 (in other word, anyone born after April 29, 1950).

“Restricted Application for spousal benefits” allowed one person to file (i.e., the “filer”) based on their spouse’s record, but only after their spouse’s record was activated.  The spousal benefit was always ½ of the benefit entitled by the person who paid for the Social Security benefit (at full retirement age). The spousal benefits would be collected based on the spouse’s record allowing the filer to grow their own Social Security benefits.  Though often useful, this strategy of collecting based on a spouse’s Social Security benefits while allowing their own to grow will end for anyone younger than 62 as of December 31, 2015 (or those born after 1953).  According to the new rules, if your spouse files and suspends prior to April 29th or is collecting Social Security then you will be able to file a restricted application IF you turn 62 by December of this year.

If you were born prior to 1954 and these two strategies are relevant to your retirement plan, don’t be surprised to find that we’ll be reaching out to you this month.  If we don’t reach out to you this month, do let us know if you or your loved ones need assistance capturing these ending social security benefits.

For all of us, this is a reminder that all benefits are bound by rules that have planning consequences and require ongoing attention.  For many, this change to the Social Security program will mean either an adjustment to spending during retirement, or more likely, require additional annual savings prior to pre-retirement (or other wealth creation strategies).

Always feel free to call or let me know if you have any question with this or other financial matters.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com