Wednesday, August 10, 2022

Financial Aspects of “Unretirement”

The year 2021 was noteworthy for the “Great Resignation” as about 47 million people quit jobs last year. The year 2022 is equally noteworthy for a “Great Unretirement” as millions of older workers who left jobs during the pandemic decided to come back into the labor force. One study found 1 in 5 retirees were likely to start working again soon.

Factors contributing to this trend include:

 1. a high demand for workers (sometimes coupled with increased pay, signing bonuses, and/or remote-work flexibility)

 2. vaccinations and booster shots reducing COVID infection fears

3. high inflation that increased living expenses 

4. a poorly performing stock market decreasing retirees’ savings account balances. 

Some “unretirees” may have also gotten bored with too much unstructured free time and simply want to stay productive. Others may no longer be caregivers for a spouse or aging parents, which is why they retired previously.


Benefits of unretirement (or remaining employed immediately following a primary career, as I have done) include:


¨    Additional Income- Money is available for living expenses, home maintenance, and/or “extras” such as travel

¨    Sense of Purpose- Work provides outlets for creativity, a way to help others, and a sense of meaning and purpose

¨    Socialization- Life after full-time work can be isolating and working helps keep older adults socially connected

¨    Longer Life Expectancy- Research has found that working past age 65 may lead to a longer life vs. retiring early

¨    Staying Current- Continued work keeps job skills (e.g., computers and technical expertise) and contacts up-to-date


Whatever a person’s reason for unretiring, re-entering the labor force after being away for a year or more requires some advance financial planning. Below are six factors to consider:


Social Security Earnings Limit- Before full retirement age or FRA (e.g., 67 for workers born in 1960 or later), Social Security deducts $1 from benefits for every $2 earned above the annual limit ($19,560 in 2022). While benefits are withheld during this time, they could be larger later as payment amounts are recalculated to account for a person’s longer work history. Above FRA, there is no earnings limit to obtain full Social Security benefits.


Tax on Social Security Benefits- Income from unretiring may push older taxpayers into the income range where tax is due on a portion of Social Security benefits. For individual taxpayers, if combined income (adjusted gross income or AGI + nontaxable interest + ½ of Social Security benefits) is between $25,000 and $34,000, up to 50% of benefits are taxable. For income more than $34,000, up to 85% of benefits may be taxable. For married couples filing jointly, the income ranges are between $32,000 and $44,000 (50%) and more than $44,000 (85%), respectively.


Tax Withholding Adjustments- Adding income from employment to what could be multiple streams of income in later life (e.g., pension, Social Security, annuities, required minimum distributions) may necessitate adjustments in tax withholding or quarterly estimated tax payments. The IRS Tax Withholding Estimator online tool can help make an accurate withholding projection and the IRS safe harbor rules can help taxpayers avoid underpayment penalties.


Higher Income Tax Payments- Again, adding employment income to several other income sources in later life can place taxpayers in a higher tax bracket. It could also trigger higher Medicare Part B and Part D premium surcharges known as IRMAA (income-related monthly adjustment amount) and/or the 3.8% net investment income tax (NIIT), which affects individuals with a modified AGI (MAGI) of $200,000+ and couples with a $250,000+ MAGI.


Medicare- Older adults age 65+ who are on Medicare, begin working again, and receive primary creditable employer-provided health insurance coverage (i.e., coverage that meets certain minimum requirements) can drop Medicare and re-enroll later when they stop working again. By doing this, they avoid having to make monthly premium payments for Medicare Parts B, C, and/or D while they are working. The coverage must be deemed creditable or late enrollment penalties will apply. A new job may also provide access to valuable employer term life and disability insurance.


Budget Adjustments- Additional income earned by unretiring should be factored into household spending and saving via an updated spending plan (budget). This money provides an opportunity to help keep pace with recent price increases (e.g., food, gas, utilities, housing, etc.) caused by high inflation and to beef up retirement savings in IRAs and employer retirement savings  accounts, if necessary.


Bottom Line: If you are considering “unretirement,” be sure to cover your financial bases, especially budgeting, taxes, and health insurance. Best wishes for a great encore career.


This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Wednesday, August 3, 2022

Basics of Tax-Efficient Investing

As I wrote in my book, Flipping a Switch, the investment firm Nuveen, many years ago, created the advertising slogan “It’s not what you earn, it’s what you keep.” This phrase was designed to encourage investors to buy tax-free municipal bonds that provide a higher after-tax return than higher-yielding taxable bonds.

In a more general way, the advertisement was also promoting the concept of tax-efficient investing. This is the process of (legally) structuring an investment portfolio so the least amount of tax is paid. Paying more taxes than necessary is a drag on investment returns, resulting in investors keeping less of what they earn.

The good news is that there are steps people can take to increase the tax efficiency of their investment portfolio. Below are six tax-saving ideas gleaned from recent webinars and research for my book:


Look Toward the Future- Absent new tax legislation, the Tax Cuts and Jobs Act is scheduled to sunset after 2025, tax rules will return to what they were in 2017, and tax rates will be higher than they are right now. Knowing this provides an incentive to take proactive action. For example, some people are converting traditional IRAs to Roth IRAs in one or more transactions through December 2025. Also consider potential income in later life. If you expect to be in a higher tax bracket, consider Roth (after-tax) investments.


Consider Municipal Bonds- Municipal bond earnings are tax-free, which means that they are exempt from federal income taxes. States and cities also waive taxes on investment earnings from their own securities (e.g., no tax for New Jersey residents on a New Jersey-issued bond). Investors in higher tax brackets can often benefit from this strategy. To compare returns on taxable and tax-free accounts, use this calculator. There is also a math formula: taxable equivalent rate = tax-free yield ÷ (100% -marginal tax bracket).


Consider Tax-Saving Gifts- Only about 10% of taxpayers today can itemize deductions and it generally requires a plan to aggregate sufficient deductible expenses that exceed the standard deduction amount ($12,950 for singles and $25,900 for married couples filing jointly). Specific tax-advantaged strategies include gifting appreciated securities, qualified charitable distributions, and funding a donor advised fund. People can also lower their account balances that get taxed by gifting up to $16,000 to individuals (2022).


Consider Asset Location- Consider selecting these securities for taxable accounts: stocks held for more than a year (to qualify for long-term capital gains), low-turnover stock and index funds, municipal bonds, and stocks/mutual funds paying qualified dividends. For tax-advantaged accounts (e.g., IRA, 401(k)/403(b) plans), suitable investments include stocks to be held a year or less, funds that generate significant short-term capital gains, and taxable bond funds. In other words, generally place investments likely to lose more return to taxes in tax-advantaged accounts and those poised to lose less return to taxes in taxable accounts.


Practice Tax Diversification- To hedge uncertainty about taxes, experts recommend selecting different types of investments that are taxed in different ways. Specifically, taxable investments (e.g., a regular bank or brokerage account) where earnings are taxed in the year they are received, tax-deferred investments (e.g., traditional IRAs and 401(k)/403(b) plans) where earnings are taxed at a future date, and tax-free investments where taxes are not due on earnings (e.g., municipal bonds and Roth IRAs for qualified distributions). When rebalancing a portfolio back to its target asset allocation weights, consider selling securities within tax-deferred accounts to avoid having to take taxable capital gains from taxable accounts.


Choose Tax-Efficient Investments- In addition to Roth and traditional IRAs, 401(k)/403(b) plans, and municipal bonds, all mentioned above, there are other investments that can help minimize income taxes. They include 529 college savings plans, flexible spending accounts (FSAs), tax-deferred annuities, and health savings accounts (HSAs) for people with high-deductible health insurance plans.

Bottom Line: tax-efficient investment strategies allow investors to retain more of their investment earnings. Again, what really matters is not what you earn, it is what you keep!

Thursday, July 28, 2022

How to Keep Personal Information Safe

Widespread data hackings are increasingly common, whether it is a credit bureau (Equifax in 2017), a hotel (Marriott in 2018), an online game producer (Zynga in 2019) a federal government agency (OPM in 2015), or an Internet media company (Yahoo! in 2016). Another common scam is phone calls and e-mails claiming to be from a bank...or Social Security...or the IRS. 

In each of these cases, customers’ personal data including e-mail addresses, log-in credentials, credit card numbers, birth dates, and Social Security numbers can be compromised. There may also be fraudulent requests to wire transfer money, reveal computer login credentials, or purchase gift cards and give fraudsters the numbers above the bar code.

What to do to avoid falling prey to scams? Below are seven suggestions to protect private information and reduce your chances of becoming a fraud victim:


Practice Cyber Hygiene- Successful fraudsters successfully reach victims through their “weakest link.” It might be something as simple as a weak password or someone revealing TMI (too much information) online. Consider your potential fraud exposures (e.g., reusing the same password/user name combination). While nobody is 100% immune from fraud, the objective is to make yourself a harder target so fraudsters find victims elsewhere.


Mix Up Your Log-In Credentials- Fraudsters know that most people use the same username and password in multiple places. When they obtain personal information from a data breach or the Dark Web, they try to exploit it in multiple places using automated scripts, a process known as “credential stuffing.” It will probably take several hours to create a multitude of unique passwords. Once you are done, be sure to record them in a digital assets inventory.


Click Cautiously- Some people are tricked into clicking on links, or even photos, that take them to a website that requests personal data or installs malware on their computer that can be executed later to obtain sensitive data. Often, this happens as a result of a phishing e-mail. A good cyber hygiene practice is to not click on any link if you do not know the sender and/or you receive a cryptic message (e.g., check this out!) and do not know what the link is for. Another hygiene practice is using strong passwords with a variety of types of characters.


Set Up Two-Factor Authentication- Every personal website of consequence (e.g., bank and investment accounts, pension, Social Security) should have a two-factor (a.k.a., two step) authentication process where a unique one-time password is sent via e-mail or a text message and is necessary to access an account. Some accounts also have challenge questions that must be answered for account access. Typically, two-factor access is a very simple process to set up through the “settings” and “privacy” functions on a website. Again, it’s all about not being an easy target.


Freeze Your Credit- A credit freeze blocks access to credit reports to prevent fraudsters from opening credit in a potential identity theft victim’s name. It, therefore, provides an extra layer of fraud prevention protection. Freezes must be done with each of the “big three” credit bureaus (Equifax, Experian, and TransUnion) individually. They do not affect a person’s credit score and there is no cost to freeze credit or to “thaw” (unfreeze) it for a short time to apply for a bank account, line of credit, or utility service. A PIN or password is typically provided for this purpose.


Update Your Computer- Another piece of cyber hygiene is keeping an operating system current by installing updates as they become available. Ditto for anti-virus and anti-malware programs. Some experts also advise using a password manager program with two-factor authentication as well as strict privacy settings for social media. Another common recommendation is text alerts or e-mails from financial institutions when changes are made to an account.


Stay Current- Many pundits are predicting a future without passwords. Instead, there will be new authentication protocols such as facial biometric scans and fingerprint swiping. Another promising protocol is behavioral monitoring of users’ typical spending patterns to identify “out of the ordinary” behavior. “Keeping current” also means paying attention to scams that feed off current events such as COVID-19, tax season, wars, and natural disasters.


For more information about keeping information safe, review this Consumer Financial Protection Bureau website.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.


Thursday, July 21, 2022

Inflation-Fighting Ideas: Round Two


Almost a year ago, in August 2021, I wrote a blog post for the OneOp Personal Finance team about inflation-fighting ideas for military families. At that time, many experts predicted that inflation would be “transitory” and subside quickly as supply chain “issues” related to the pandemic got resolved. The post included inflation-fighting ideas such as lower-cost product substitutions, time-shifting, and changing habits such as consolidating errands and turning down the thermostat.


In March 2022, after the then- highest inflation rate in 40 years, I wrote a Money Talk blog post about inflation and suggested additional inflation-fighting hacks including postponing purchases (e.g., a car) unless absolutely necessary, reviewing the rate of return on an investment portfolio (to see if it was staying ahead of taxes and inflation), buying “gently used” versus new items, and reviewing budgets to “claw back” the amount of money that inflation has “stolen.”

Sadly, historically high inflation is still with us. The latest annual CPI rate is 9.1% for the year ending in June 2022. Many supply issues remain unresolved and the impact of the war in Ukraine has had significant global economic impacts. Therefore, I am revisiting the topic of inflation once again to share additional information about inflation impacts and inflation-fighting ideas. Below are some thoughts to consider:


Inflation Time Comparisons


¨    Historical Perspective- To better understand the impact of inflation on prices in the past, check out the CPI Inflation Calculator from the U.S. Bureau of Labor Statistics. The calculator uses historical inflation rates as measured by a Consumer Price Index called the CPI-U. Users enter two dates to compare the relative buying power in each time period, For example, $7,978 in February 2022 has the same buying power as $5,000 twenty years earlier in February 2002. This is an almost $3,000 (and almost 60%) increase in prices and decrease in purchasing power.


¨    Future Perspective- The Inflation Calculator from Smart Asset also uses historical inflation rates (i.e., the CPI-U) and assumes an average inflation rate in its analysis. With this calculator, users can make projections to estimate the buying power of a dollar at a future date. For example, $100 in 2022 is projected to be worth $164 in 2042 using an average inflation rate of 2.5% and cumulative inflation of 63.86%. Calculator users can change the inflation rate in the calculator, however. If a 4% inflation rate is assumed from 2022 to 2042, $100 this year will be worth $219 in 2042.


Five Inflation-Fighting Hacks


¨    Increase Income- Most inflation-fighting ideas suggest ways to reduce expenses. That’s all well and good, but cash flow can also be improved with increased income. Like investment returns, if household income increases at a higher percentage than the official inflation rate (CPI-U), purchasing power increases. Conversely, if the inflation rate exceeds an increase in income, purchasing power decreases and people can afford fewer goods and services. Specific ways to increase income include a new job, a promotion, overtime, a second job, and a “side hustle” (freelancing).


¨    Brace Your Budget- Higher-than average inflation appears to be with us for a while due to increased costs for materials and labor. Therefore, it is smart to assume a reasonable inflation rate when preparing a household budget and build price increases into anticipated expenses. Examples include regularly budgeted amounts for heating and cooling (i.e., utilities such as electricity, oil, and natural gas), food, rent, gasoline, and auto insurance.


¨    Automated Payments Review- Payments for gym memberships, streaming services, cell phone service, and discretionary expenses that many people pay through automatic payments have been rising. Review each one and consider dropping payments for products or services that are not used regularly. Plan B is to check if there are cheaper plans or substitute products or services or special “deals” offered to stay with a particular company and not leave.


¨    Do Things Yourself- The more tasks you can do yourself, the less you’ll have to spend on inflated prices to pay others. This, of course, assumes you have the time and skills to do so. Examples noted in recent media reports include having a low-cost catered buffet event (e.g., wedding) versus a high-cost sit-down meal (lots of postponed weddings in 2022 are pushing up prices!), eating at home more often, and weatherizing your home to reduce energy costs.

¨    Negotiate Better Prices- Reach out to every company you pay regularly where there might be some “wiggle room” (e.g., cell phone provider, insurance company, credit card issuer). Ask if there are any discounts or “value plans” that you qualify for. Many consumers who ask for price concessions are successful. Bottom Line: It never hurts to ask!

    Additional inflation-fighting ideas can be found in my recent webinar:

 This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.



Wednesday, July 13, 2022

A Mid-Year Financial Check-Up for Older Adults

I recently wrote a blog post about doing a mid-year financial check-up in early July so you have six months to work on planned action steps. In this post, I continue the conversation with specific action steps for older adults.

Below are ten additional action steps, in addition to those shared previously, that specifically apply to people age 60+:

¨   RMD Withdrawals- Required minimum distributions (RMDs) are required starting at age 72. If you are “of age” and have not yet taken your 2022 RMD, consider doing so soon- in one or more “installments”- to avoid the year-end rush. Simply divide the December 31, 2021 balance in each of your tax-deferred accounts by the appropriate age divisor in the Uniform Lifetime Table to determine the minimum amount (which is taxable income) that must be withdrawn. 

   Some affluent taxpayers age 60 to 71 may decide to start taking withdrawals from their tax-deferred accounts before age 72 to avoid having to take larger taxable withdrawals from larger account balances later. 

¨   RMD Planning- As I wrote in my book, Flipping a Switch, there are three things that older adults can do with RMD withdrawals: spend the money, re-save or invest the money (minus income tax payments) in a taxable investment account or Roth IRA (if qualified), and make gifts to people and/or charities. Also be sure to adjust tax withholding for RMD withdrawals using quarterly estimated tax payments to the IRS or tax withholding by the retirement plan custodian. Before RMD money is withdrawn in 2022, develop a plan for what to do with it.

¨    Annual Cash Withdrawals- Many older adults use RMD calculations as a default metric to determine annual cash withdrawals from retirement savings accounts. Whatever the math calculation says is the amount that they withdraw. Other people have a specific “number” based on the 4% rule or household cash flow and budgeting projections. Whatever method is used to determine withdrawals, mid-year is a good time to make sure that everything is on track.


¨    Philanthropy Planning- According to Philanthropy Roundtable, “people are generally more philanthropic toward the end of their lives, when they tend to have more savings, time, and motivation to help others.” Giving peaks at ages 61 to 75. Mid-year is a good time to assess 2022 giving to date and remaining planned gifts for the year. Use the Charitable Giving Budget Worksheet to identify high, medium, and lower priority charities and planned gift amounts.


¨    Medicare Planning- Open enrollment for Medicare is October 15 to December 7 each year. Older adults who are unhappy with their insurance coverage should start the planning process now. While specific information about next year’s plans will not be available until October, the next three months can be spent learning more about Medicare coverage and perhaps consulting with a SHIP (a.k.a., SHINE in some states) representative to answer questions.


¨    Fraud Safeguards- It is an unfortunate fact of life that older adults are scam targets. On average, they have more accumulated wealth than younger generations. In addition, they are often more reachable and trusting and diminished capacity is a factor for some. Take the next six months to set up fraud safeguards such as two-factor authentication on all of your financial accounts, text notifications for account withdrawals, and a digital assets inventory.


¨    Deals and Discounts- In these inflationary times, everyone needs all the price breaks they can get on goods and services. Older adults may be leaving some money on the table by not taking advantage of deals and discounts that they qualify for and are unaware of. Take the time to review this list of “senior discounts.” Then, make a list of planned purchases for the remainder of 2022 and discounts available for each one.


¨    IRMAA Tax Avoidance- Project 2022 income now to see if it is- or could be- close to income ranges for income-related monthly adjusted amount (IRMAA) tax, a Medicare premium surcharge for higher-income older adults. There are five different tiers of IRMAA tax with a two-year look-back period (i.e., 2022 income will determine 2024 IRMAA). If you are close to one of the income range breakpoints, consider strategies to reduce adjusted gross income (e.g., Roth IRA conversions, postponed capital gains, and qualified charitable distributions).


¨    Downsizing and Simplification- If this has been on your financial “to do” list for a while, now is a good time to get started. While the summer and early fall weather is nice, hold a garage sale or two or sell items at a neighborhood flea market. Another option is to gather up items and donate them to a thrift shop. If financial records need some organization, pruning, or shredding, start now so they are good shape by year-end.


¨    Tax-Saving Strategies- Certain tax-saving moves require time and a series of process steps. Don’t wait until the end of the year when you, and the financial professionals who will assist you, are rushed and pressed for time. Start planning now at mid-year. Examples include qualified charitable distributions (QCDs), donor advised funds, Roth IRA conversions, and tax loss harvesting to mitigate capital gains on investments.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.



Financial Aspects of “Unretirement”

The year 2021 was noteworthy for the “Great Resignation” as about 47 million people quit jobs last year. The year 2022 is equally noteworth...