Social Security Benefits Primer

Social Security benefits were never intended to be the sole financial support during retirement but for 21% of retirees Social Security benefit is the only source of income. For most American workers, Social Security benefits are the only guaranteed retirement income that is also inflation adjusted each year.

All workers in America are entitled to pay into Social Security and based on their pay history, to receive a lifetime income each month starting from ages 62 to 70.

Ideally prior to retirement, you’ll also maximize other income sources that include taxable savings, IRAs, ROTH, Qualified plans (401K, 403b, 457b), annuities, deferred compensation, and employer pension plans.

Since your future Social Security benefit is calculated from your Social Security work history, you must ensure (and correct if necessary) that this history has been recorded correctly at OR the new

Social Security benefit calculation uses your top 35 highest earning years and projects your estimated benefit at your FULL RETIREMENT AGE (FRA).

Your FRA is based on your birth year and, as you can see on this table, it has been increasing. In fact, since 1983 when the FRA was 65, it has been increased gradually so that by 2025 (for those born in 1960 or later) the FRA will be 67. To understand Social Security, you must first determine your FRA.

When can you collect Social Security? At FRA, you can file and receive your full benefit (100%) based on the amount of Social Security tax paid to your Social Security number. The earliest you can collect Social Security benefits on your record is at age 62 (when your FRA amount is reduced ½% for each month or 6% less each year until FRA) and the latest at age 70. If you delay past your FRA, you earn Delayed Retirement Credits (DRC) and for each month it will grow two-third of a percent or 8% per year until age 70.

Example of how benefits are calculated: If you were born in 1960 and your FRA amount is $1K/month then collecting at age 62 will result in a lifetime amount of $700/month but delaying until age 70 would result in $1,240/month (plus annual COLA adjustment).

When creating your financial plan, we will consider different Social Security timing strategies based on your financial and longevity expectations. When deciding on your best timing we always request that you consider your health, your family’s longevity, and known increases in population longevity.

Compared to what you earned, what can you expect to receive?
As an example, an average earner ($58K) could receive $1,907 or $23K per year in benefits for life, starting at FRA. On the other hand, those who paid Social Security at maximum earnings for 35 years would receive $3,822/month or $45K per year if 2022 was their FRA.

What if you take early benefits while still working? It seldom makes sense to work and take Social Security benefits early because your benefits are reduced by $1 for each $2 earned above an annually set earning level (in 2024 you can only earn up to $22,320 per year ($1,860/month) before your benefits are reduced). Once you reach FRA your Social Security benefits are NOT reduced (regardless of earnings).

We encourage each of you to work with us to review your Social Security history and then use your financial plan to make the best Social Security timing decision for you.

Applying for Social Security should be started three to four months prior to your chosen Social Security benefit start date. You would apply online at or call (800-772-1213) or go to the local Social Security office.
One last and very important cyber security reminder: Protect your Social Security log in information (or credentials) – make certain that you are using a secure device when you log into your account.

Edi Alvarez, CFP®

Guidance on inherited IRA RMD – IRS Notice 2023-54

The original SECURE Act, signed into law in December 2019, changed many of the long-standing rules governing IRAs and other retirement accounts, and no single measure in the legislation had a more seismic impact on retirement planning. Specifically, the law stipulated that “Non-Eligible Designated Beneficiaries” (i.e., neither surviving spouses or disabled/minor beneficiary) would be required to empty the inherited retirement account by the end of the 10th year after the decedent’s death (and would no longer be able to ‘stretch’ the distributions over their own life expectancy).

While we expected that Non-Eligible Designated Beneficiaries would not be required to take annual distributions in addition to emptying their accounts in the 10-year period, the IRS in February 2022 issued Proposed Regulations that would make a subset of these beneficiaries subject to BOTH the 10-Year Rule and annual Required Minimum Distributions (RMDs). The caveat, however, was that these were merely proposed regulations.

In October 2022 we were informed that there wouldn’t be a penalty if beneficiaries didn’t take a 2022 RMD but by October most had already! Unfortunately, they failed to address the requirements for 2023 and onward.

Finally, this month the IRS released Notice 2023-54, which provides relief once again by eliminating any penalties for failing to take (potential) RMDs for 2023 for these specific beneficiaries. Once again, they punted the RMD decision another year (2024). Keep in mind that these beneficiaries MUST still empty the IRA account by the 10th year.

Although we monitor notices on RMD rules changes and discuss RMD requirements with each of you as needed each year, your engagement in this topic ensures that we understand the relevant regulations for your financial plan.

Edi Alvarez, CFP®

Last Friday’s message from Fed Chairman

Speaking from Jackson Hole, Fed Chairman Powell said, “Inflation is too high,” adding that they are prepared to raise interest rates further. The inflation rate in June/July has been around 3%.

The Feds effort to dampen inflation is working as the latest data shows a continued shrinkage of money supply.  The conundrum is that nominal GDP is up 6.3% from a year ago so somehow, the broader economy is growing despite less money circulating.

A side effect of all that additional money supply was a rise in stock prices. Excess money tends to end up with consumer spending or investing. However, the money supply is shrinking so this trend may reverse for a time unless we see good financials from companies this fall.

Edi Alvarez, CFP®

What we heard at the July Fed meeting

The latest Federal Reserve meeting (July 26th) increased the interest rate another 25 basis points to 5.375%. We have another three upcoming meetings (September 20th, November 1st, and December 13th) left in 2023.

The current focus is now on fall corporate financial reports and the impact of existing debt payments on corporate profits to see if additional interest rate hikes are needed. GDP numbers out by July 27th showed an economy that is growing and consumers who are still spending (particularly in services rather than material goods) indicating that we are not in a recession. The CORE inflation measure (which strips out food and energy) used by the Federal Reserve in their evaluation actually dropped from 4.6 to 4.1% from May to June.

The new increase resulted in mortgage rates that though high (around 7%), compared to recent extremely low mortgage rates, are not historically the highest. It may be surprising to see that in areas with low housing supply (most people don’t want to sell a house with a mortgage below 3%) we are expecting house prices to actually increase 5%-10%. In areas with excess supply the story is different, and prices are dropping in the short-term. Similarly, the increased mortgage rates and abundant supply appear to be negatively impacting the commercial property market.

What does all this mean? Though your home and real estate may be impacted by this rate increase, we are not seeing a similar impact on your portfolio. If you feel strongly that commercial real estate will recover significantly this would be a time to invest in commercial REITs. Though we see promise in undervalued commercial real estate, we have more confidence that residential (not commercial) will outperform in the long-term despite additional potential interest rate increases.

Edi Alvarez, CFP®

What to expect from the next Fed meeting

The Federal Reserve System’s US Federal Open Market Committee (FOMC) meets 8 times each year to decide on the short-term interest rate – the next meeting is July 26th. We’ve seen market volatility prior to and following each of these rate increases. The table below shows the last ten increases out of the last twelve meetings. Most pundits expect a small rate increase either in July or/and September and we expect market volatility.

Edi Alvarez, CFP®

Inherited IRA Beneficiary Rule – A brief overview

An inherited IRA from a loved one used to be a gift to beneficiaries that was easy to implement with little tax impact and a lifetime of reward. In the last four years, the rules have changed dramatically and now inheriting an IRA can result in a surprisingly large tax liability. It now requires detailed understanding of the rules to ensure the correct ones are applied without additional tax liability.

Below are the rules and the process that we follow with inherited IRAs. We first separate beneficiaries into three large categories: (1) eligible designated beneficiary, or (2) a non-eligible designated beneficiary or (3) a non-designated beneficiary.

Once we know the type of beneficiary we can drill down and verify by using decedent details (below is a chart for non-spousal beneficiaries).

Why is this important? Because the amount of tax liability is at much higher rates if the withdrawals are forced in 5 rather than in 10 years or over your lifetime. In addition, the custodian needs to be encouraged and educated on the nuances of the applicable rules to your situation so that they don’t choose to use the default 5-year worst case scenario. Sometimes we’ve needed to use legal advice to ensure that the correct beneficiary distribution is implemented by the custodian particularly when the beneficiary is a trust.

The take home message is to make sure beneficiaries are clearly delineated in the IRA account form and that inherited IRA transfers follow the correct inherited IRA beneficiary rules.

Edi Alvarez, CFP®

SECURE Act 2.0

The first “Setting Every Community Up for Retirement Enhancement” Act (SECURE Act) was passed December 2019 eliminating the ‘stretch IRA’ for non-spouse and changing the RMD (Required Minimum Distribution) age to 72. These were changes that impacted everyone across the board. With the Secure Act 2.0, congress appears to be reversing its prior leanings and instead allowing Roth conversions. The reversal towards ‘Rothification’ (encouraging ROTH savings/conversions) appears to be with the goal of increasing tax revenues today. It is fair to say that no single provision made by the SECURE Act 2.0 appears to have the same impact across so many as the elimination of the stretch, which now requires many inherited distributions to complete within 10 years, rather than spreading distributions over the entire beneficiary’s lifetime. Even so, 2.0 has so many more detailed provisions that it will impact most in some way. It is already evident that implementation will take more effort than the first SECURE Act.

Some of the new provisions included in SECURE Act 2.0 will be implemented over the next two years and require preparation in 2023. We will explore the provisions that may be relevant to your specific situation during our meetings this year. Let us know if you have any questions.

Edi Alvarez, CFP®

Fed Action and Your Portfolio

The last Jackson Hole meeting was hugely anticipated, and Federal Reserve Chairman Jerome Powell reiterated that he would stay true to the current approach to tame inflation. The market reacted with a sharp sell off. Why? Because some were expecting the Fed to return to a loose monetary policy at the slightest economic weakening. January 4th, we heard from the Feds that any pivot prediction is misguided.

It is important to recognize that there are more important factors that drive stock prices than Fed policy – corporate earnings and greed actually impact prices far more!

While I agree that the Fed policy can and does impact economic activity, it is company earnings, economic growth, geopolitics, sentiment, innovation, and global economic trends that will certainly play a bigger role in our economic future and support higher lasting market valuations.

It appears that the media and market participants are fixating on every Fed utterance. Do not follow their lead. We are expecting a cool market over the next months, but inflation appears to be responding. If we stay the course and not return to easy money, we may recover without stagflation and the economic downturn associated with it.

Edi Alvarez, CFP®

Stress Testing Your Retirement Plan for Social Security

Social Security is a unique guaranteed source of income in retirement and one of the essential components in everyone’s retirement plan. Findings from the Annual Social Security Trustees Report for 2022 shows that at the current rate, existing reserves will be depleted in 2034. It is also estimated that on depletion, continuing social security tax income will provide for 77% of guaranteed benefits.

Social Security is inflation adjusted (COL). The 2022 COL was 5.9% and increased to 8.7% for 2023. This increase will certainly accelerate the level of depletion. We don’t yet know if the trust reserve will be amended to last beyond 2034 so we need to consider how to stress test your retirement plan for this potential risk. How might we prevent depletion of the trust?

  1. Raise social security retirement age again?
    This is least likely since the benefits take a long period of time to be effective and the impact is highest on those with least savings. Can you imagine the reaction if the full retirement age was changed from age 67 to 70? This strategy would need to be implemented early enough to have an impact.
  2. Raise the income cap or eliminate it as we did with Medicare?
    This is more likely and, in a small way, is already taking place. For example, Social Security taxable earnings in 2022 were capped at $147K and increased 9% to $160K for 2023. This should provide additional assets for the Social Security benefit trust, BUT it will also reduce disposable income and impact economic growth.
  3. Follow an IRMAA-type of income/means testing of benefits?
    It has been suggested that Social Security benefits should be reduced like Medicare based on your retirement income (means tested). This appears to have traction since it is currently working for Medicare (which uses the IRMAA annual tables to increase Medicare premiums on those with higher retirement income).
  4. Target a % Reduction of Social Security benefit?
    This is possible and much easier. This approach will occur by default if congress doesn’t take some alternative accommodation before 2030. The estimates are that we are looking at a 21%-25% reduction in benefits.

    On a positive note, although the potential fixes outlined above are outside of our control, they nevertheless could push back the depletion date of this essential benefit or reduce the benefit reduction that will be required if the trust is depleted.

    Either way, we include social security stress testing once we have a functioning retirement plan and after we’ve considered all other risks (like long term care).

    Edi Alvarez, CFP®
    BS, BEd, MS

    Perspective on Inflation, Recession, Stagflation, Deflation

    To date, we’ve all seen price increases (inflation) and also shrinkflation (smaller content of a product for the same price) but so far no hyperinflation. As consumers and investors, we participate in this process but seldom acknowledge the interplay. For example, when we decide to spend freely at this point in the economic cycle, we are contributing to inflation but not spending at all can contribute towards deflation.

    To me, recessions are a natural cleansing mechanism for the economy. Over the course of economic expansions, companies become flush with excess. Meaning that their processes loosen, they hire too many people, they accumulate too much inventory. Recessions are a business cycle’s ‘diet plan’ for companies that need to shed excess but do so reluctantly – with negative growth. Recessions are never fun (the pain will certainly be felt more by those without adequate resources or with less certain employment), but historically they tend to be short-term interruptions between economic expansions. It is accepted that the greater long-term risk to the economy is not recession, but stagflation (slow growth, increased unemployment, and inflation) or even deflation (drop in demand for goods).

    Despite headlines to the contrary the ‘tightening’ of monetary policy by the Federal Reserve is essential to economic recovery, which means raising interest rates have to be tolerated to slow down inflation and hopefully without dramatic increase in unemployment.  With that, it is “quite likely” that the unemployment rate will rise “a fair bit” from  where it is now, at 3.6%. If it rises more than a ‘fair bit,’ we could see a period of stagflation.

    You’ll likely see headlines through the next months about the last time the US experienced stagflation. Briefly, in the 1970s the onset of stagflation was blamed on the US Federal Reserve’s unsustainable economic policy during the boom years of the late ‘50s and ‘60s. At the time, the Fed moved to keep unemployment low and to boost overall business demand. However, the unnaturally low unemployment during the decade triggered something called a wage-price spiral and hyperinflation. The impact of inflation on our economy will depend on the differential between the inflation rate and wage growth. This is what the Fed is trying to control as it maneuvers for a ‘soft landing’. The higher the unemployment, the greater potential for stagflation.

    Stagflation may happen if a recession sets in before inflation has gone down low enough. For example, if unemployment were to go up to about 5% and consumer price index inflation was also above 5%, then that would be a kind of stagflation, though nothing like the degree experienced in the ‘70s. In the near term, we expect the labor market will more likely just cool, resulting in fewer vacancies rather than unemployment. It is likely that we will enter a recession this year and/or in 2023 but hopefully not stagflation. Much depends on how the economy and businesses react to Fed rate hikes.

    Before focusing on the unknown future, we should remind ourselves that in the last 20 years, we’ve seen declining interest rates and low inflation, which in turn caused a seemingly never-ending increase in housing prices. This put extra money into our pockets and drove prices of all assets up, which in turn boosted consumer confidence, as people felt wealthier and were encouraged to spend. In addition, during the last 20-plus years every time the economy stumbled, the Fed worked to bail it out – by lowering interest rates, injecting the market with liquidity. This caused the economy and equity market to recover quickly and without much pain. The pain we were spared was stored, metaphorically speaking, in a pain jar (represented in part as increased debt, income discrepancies) awaiting the next crisis. Today, to prevent inflation turning into hyperinflation, the Fed has no choice but to raise interest rates. We expect that this process will take time and likely be cyclical since the Fed only controls a couple of components. Consumers, by their purchases, will play a role in which companies survive this market cycle. The larger goal is for the business cycle to trim inefficient businesses while avoiding hyperinflation, stagflation, and deflation.

    Though price drops are considered a good thing—at least when it comes to your favorite shopping destinations – price drops across the entire economy, however, is called deflation, and that’s a whole other ballgame. Large scale deflation can be really bad news.

    While inflation means your dollar doesn’t stretch as far, it also reduces the value of debt, so borrowers keep borrowing and debtors keep paying their bills and the economy continues to grow. Modest inflation is a normal part of the economic cycle—the economy typically experiences inflation of 1% to 3% per year—and a small amount is generally viewed as a sign of healthy economic growth. You might have heard that 2% is the Fed’s target inflation rate.

    Inflation is also something consumers with assets/resources can protect themselves against, to some extent. Investing in equity markets, for instance, grows your earnings faster than inflation, helping you retain and grow your purchasing power. Protecting yourself against deflation is trickier because debt becomes more expensive, leading people and businesses to avoid new debt. They instead payoff increasingly pricey variable rate debts from prior purchases and avoid new purchases, decreasing growth.

    During periods of deflation, the best place for people to hold money is generally in cash investments, which don’t earn much. Other types of investments, like stocks, corporate bonds, and real estate investments, become riskier when there’s deflation because businesses (even businesses with good market performance but with high debt) can face very difficult times or fail entirely.

    Overall, in the USA we’ve primarily experienced inflation, not deflation.

    As consumers and investors, we don’t control these market components, so what might we do? We focus on what we can control and work to feed the economy while trimming our excess spending.

    This is actually a really good time to revisit your financial fundamentals. Do you still have a reasonable emergency fund? Are you spending consciously and aligned with your values and budget? This is certainly a time to re-examine any adjustable-rate debt and determine how to best lock them in. It is also a great time to examine your career and ensure you are professionally valued and not likely in any potential layoff pool. Most importantly, this is a time to get comfortable with what you value and control.

    Do not let fear derail what you do. Instead prepare your finances to take advantage of whatever situation presents itself.

    Edi Alvarez, CFP®
    BS, BEd, MS