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Financial Journeys

SUMMER 2022

When retirement comes early

You’ve got options if your best-laid plans veer off course

When retirement comes early

On the road to retirement, having spent decades working, saving and planning for your desired lifestyle, imagine approaching the one sign you didn’t see coming: Detour ahead. Suddenly, your journey looks to be taking you out of the workforce years before you expected.

Thankfully, you’re not alone. According to the Employee Benefit Research Institute’s 2021 Retirement Confidence Survey, nearly half of American workers retire earlier than planned. The reasons include job loss, health issues and other circumstances. Being in the same boat as others may not exactly be comforting, but knowing there are steps to take and adjustments to be made could help.

What now?

The retirement transition can be stressful for those who feel unprepared. It’s important to pause and take stock before making rash decisions. Consider these steps:

Breathe. Don’t panic and do something you might regret, like immediately taking Social Security or putting everything on credit, if you can avoid it. Both could jeopardize your future financial security. It may even help to reframe your situation as a fresh start.

Get health insurance. If you’re under 65 when you leave your job, you’re likely not yet eligible for Medicare. You may be able to join COBRA or a spouse’s plan or find coverage through the healthcare exchange. Keep in mind, COBRA lasts for 18 months. So, if you’re still too young for Medicare after that time, you’ll need to fill the gap. If you’re in relatively good health, ask your advisor if a less expensive, high-deductible plan could make sense.

Evaluate your savings and income sources. Determine if those sources can cover your current living expenses. If there’s a gap, work to reduce your expenses and/or tap into alternative sources of income. Try to avoid using your 401(k). Depending on your age, there could be tax consequences and potential penalties that would outweigh short-term relief.

Tip: If you’re under 65, you may qualify for Medicare under certain circumstances, including if you have been receiving Social Security Disability Insurance for more than 24 months. Those battling certain conditions also qualify but don’t have to wait for the two-year period.

Think twice about Social Security. Deferring these benefits typically increases your payments, so it may make sense to spend from other savings accounts first. But if you really need Social Security benefits sooner rather than later, talk to your advisor to determine the best withdrawal and filing strategy. If you can’t work because of a health issue, then Social Security disability benefits may be the answer.

Capitalize on other government benefits. You may qualify for unemployment or other assistance at the state and local level.

Meeting the challenges

Embrace a new normal

If you can stick to a retirement plan for as long as you have, then you can likely handle the effort of correcting your course. Adjustments like these could help:

Revise your spending strategy. Look carefully at each essential and discretionary expense to determine what you can eliminate and create a new budget to match your income.

Coordinate. Meet with your financial and tax advisors to structure your retirement income in a way that maximizes expected cash flow while minimizing taxes.

Put it in writing. Consider drafting a spending policy statement (SPS) with the help of your advisor. Similar to an investment policy statement, an SPS documents long-term spending goals and reminds you to avoid actions that could thwart your plans.

Rethink your asset allocation. Talk to your advisor about alternative sources of secure income that meet your particular risk profile. Be careful not to invest more aggressively than you normally would to make up for perceived shortfalls.

Looking ahead

Once you’ve laid the groundwork for your new life in retirement, consider what’s next for you and your family. You could:

Job hunt. Despite being in the later stages of life, it’s not impossible to find a part-time or contractor position that can bridge income gaps. Even $10,000 a year can help significantly. That’s the same as a 4% annual withdrawal on a $250,000 portfolio.

Tip: If you have college-age kids, reapply for financial aid. A change in your financial situation could increase your child’s aid package.

Consider big changes. You may have to forgo the vacation home or new car, or even downsize. But moving to a less expensive locale, like one without an income tax, could allow you the freedom to live the retirement lifestyle you had originally planned.

Make updates. Once you’ve come to terms with your new life, revisit your financial plan to make sure it reflects your current needs and wants. And, as with any major life event, revisit your estate plan to see if adjustments need to be made in light of your earlier-than-expected retirement.

Looking ahead

Once you’ve laid the groundwork for your new life in retirement, consider what’s next for you and your family. You could:

Job hunt. Despite being in the later stages of life, it’s not impossible to find a part-time or contractor position that can bridge income gaps. Even $10,000 a year can help significantly. That’s the same as a 4% annual withdrawal on a $250,000 portfolio.

Tip: If you have college-age kids, reapply for financial aid. A change in your financial situation could increase your child’s aid package.

Consider big changes. You may have to forgo the vacation home or new car, or even downsize. But moving to a less expensive locale, like one without an income tax, could allow you the freedom to live the retirement lifestyle you had originally planned.

Make updates. Once you’ve come to terms with your new life, revisit your financial plan to make sure it reflects your current needs and wants. And, as with any major life event, revisit your estate plan to see if adjustments need to be made in light of your earlier-than-expected retirement.

Being proactive

Whether or not early retirement is in your cards, it can’t hurt to prepare for the possibility. Then if something unexpected does happen, it doesn’t have to derail your investment strategy. Who knows? The future could be brighter than you had envisioned.

Next steps

Ask your advisor about:

  • Running hypothetical scenarios to test how long your retirement savings will last
  • Reducing living expenses and debt
  • Revising your retirement income and spending strategy

Asset allocation does not guarantee a profit nor protect against loss.

Sources: genworth.com; marketwatch.com; fool.com; money.usnews.com; kiplinger.com

Privacy please

A practical guide to reclaiming your personal information

Retirement around the world

Just how much information is available online about you and your loved ones? The answer might shock you. Search your name on spokeo.com and you’ll likely see your cell phone number, address history and the names of your family members. It’s all a criminal needs to attempt to steal your credit or pull off an imposter scam, such as pretending to be a relative in need of cash.

Involving public records, the lengthy terms you signed for apps or services and the largely unregulated realm of data brokers, the multibillion-dollar industry of acquiring and selling private information online is as complex and shady as it gets.

Case in point: Data brokers can track and sell your race, religion, gender, sexual orientation, income level, how you vote, your purchases, what you search online, and where your kids and grandkids go to school. They also advertise mental health data on millions of Americans, which means criminals could buy data on seniors with Alzheimer’s and dementia to steal away their life savings.

Scrub your info, pronto

Why wait for stronger consumer protections to become law? In many cases, you can contact sites directly to request removal of your private information. While that can be time-consuming, it’s likely worth it. Here are some sites to help protect sensitive personal data or haveSE resources that help you exercise your rights.

spokeo.com whitepages.com
beenverified.com infotracer.com
truepeoplesearch.com peekyou.com
pipl.com acxiom.com
familytreenow.com fastpeoplesearch.com
instantcheckmate.com intelius.com
mylife.com protectseniorsonline.com
safetydetectives.com  


Additional resources

Yael Grauer of Consumer Reports has created a comprehensive guide. Search “how to delete your information from people-search sites” on Google to find it. “Extreme Privacy,” a book by former FBI cybercrime investigator Michael Bazzell, is also recommended among privacy experts.

Handling breaches

If there’s been a breach of your sensitive information, take swift action. Change your passwords on affected accounts, then notify financial institutions. You can also contact credit bureaus and have them put a fraud alert on your name. Talk to your advisor about these and other steps to mitigating breach impacts.

The right to shield yourself

Even if you consented to your data being collected, you have a legal right to protect your information. As more states enact consumer privacy laws and more members of Congress call for action, there is hope for stronger consumer safeguards on the horizon.  

Next steps

  • Talk to your advisor if you suspect your information has been compromised.
  • Ask what safeguards they have in place to protect data.
  • Establish trusted contacts in case you become vulnerable to scams.

Sources: Roll Call; Norton; Business Insider; CNBC; Consumer Reports

Are you ready for the 2025 sunset?

Things to know before estate tax laws sunset in 2025

Are you ready for the 2025 sunset

On January 1, 2018, the Tax Cuts and Jobs Act (TCJA) added provisions to the tax code to reduce income tax burdens. Many, however, weren’t permanent. That’s why December 31, 2025, will be an important day, with 23 provisions scheduled to sunset. Significant provisions scheduled to expire include the reduction of individual income rates, the increased alternative minimum tax exemption and phaseout threshold, and the increased standard deduction. Unless Congress acts, many people will see a tax hike.

But for high-net-worth families, nothing is drawing attention like the possible end of the TCJA’s favorable estate tax changes. Specifically, the provision that increased the estate and gift tax exemption from $5 million to $10 million (adjusted annually for inflation, it’s $12.06 million in 2022). If nothing happens on Capitol Hill, the exemption will return to pre-TCJA levels in 2026.

Temporary clarification

The estate and gift tax exemption is first used during your lifetime. The remaining amount, if any, is then used to reduce or eliminate federal estate tax. But what about gifts made between 2015 and 2018? Does their protection vanish in 2026? The IRS has proposed additional tax relief for families who could have a larger-than-expected tax consequence as a result of large lifetime gifts made during this time frame. The proposals clarify that individuals who leverage the increased exemption won’t be affected after 2025.

Under a special rule, an estate can compute its tax using the larger exemption amount for gifts made during your lifetime or the exemption amount corresponding with the date of death. So if you make large gifts before 2026, you won’t lose the larger exemption’s benefit after sunset. But, of course, it helps to consult your tax professionals for definitive guidance.

In the meantime …

If your estate is likely to exceed $6 million per spouse, you might ask your advisors about:

Below-market loans. These loans, to children or a trust, use minimum interest rates published by the IRS and can shift wealth gift-tax-free from parent to child. Hypothetically, a parent could create a five-year, interest-only loan at the current applicable federal rate (AFR) of only 1.87% with all principal due at the end. If the child then successfully invests the funds, earning a higher percentage in gains, they could then pocket the difference without gift-tax consequences.

Grantor retained annuity trusts. A trust to which the donor transfers assets and retains a right to a series of fixed annual payments over a set term. To the extent the trust assets grow beyond the IRS monthly “hurdle rate” (2.2% in April), there can
be an effective wealth shift to the beneficiaries. 

Sales to intentionally defective grantor trusts. The donor sets up a trust, gifts some assets and then sells other assets to that trust in exchange for a promissory note. Under current law, the grantor is deemed to own the trust’s assets and pays income taxes on trust income from the grantor’s personal assets. Transactions between a grantor and grantor trust are not recognized for income tax purposes, and the grantor’s income tax payments each year, in effect, become tax-free transfers to the trust beneficiaries. 

The best gifting plans are often executed over time, which there’s not much of between now and 2026. Still, the right strategy could help your family make the most of what they have. 

Next steps

Ask your advisors about:

  • Ways to leverage giving
  • Assuring your income stream
  • Remaining in control of some assets

Sources: aslcpa.com; investopedia.com; pe.com; taxfoundation.org; taxpolicycenter.org

 

Sources: Journal of Political Economy; Journal of Risk and Uncertainty; wikipedia.org; CNNMoney; Journal of Personal Finance

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