Tuesday, August 30, 2022

My Take-Aways from Retirement Planning Guidebook

I recently read Retirement Planning Guidebook, a 453-page tome by retirement researcher and American College professor Dr. Wade Pfau, cover to cover. As an age 60+ adult and a CFP® professional, I consider myself fairly well informed about retirement planning topics. Nevertheless, there was still many valuable insights. Whether you read this book completely, as I did, or use it as an “as-needed” desk reference, Dr. Pfau’s guidebook is a very valuable resource.

Below are some useful “nuggets” that I took away from each of the 13 chapters:

Chapter 1- Saving money for retirement and later withdrawing money from savings is like climbing a mountain. The goal of mountain climbing (i.e., retirement planning) is not just making it to the top of the mountain (i.e., saving enough money) but also getting back down safely (i.e., spending assets in a sustainable manner throughout a person’s lifetime).

Chapter 2- There are three major risks in later life: longevity risk (potential life spans are uncertain with a chance of outliving one’s assets), market and sequence-of-return risk (volatility and a downturn at the onset of retirement), and spending shocks (e.g., health care, long-term care, inflation, death of a spouse, family responsibilities, and divorce).

Chapter 3- Three tricky retirement expenses to project in advance are health care, housing, and taxes and the four Ls of spending in later life are Lifestyle, Longevity, Legacy, and Liquidity. Having a strong social support system may reduce the need for large expenses for health care, long-term care, and other shocks.

Chapter 4- There are four ways to mitigate the aforementioned risks associated with retirement spending: 1. spending less, 2. flexible (decreased) spending during market downturns, 3. Reducing the sensitivity of spending to portfolio volatility, and 4. strategically withdrawing money from buffer assets (e.g., a money market fund) during downturns.

Chapter 5- Cash refund and period-certain annuity provisions are popular in practice because, psychologically, many people feel it is unfair to receive little back from a life-only annuity if people die young. The amount of savings placed in an annuity should support longevity goals beyond other reliable income streams (e.g., a pension and Social Security).

Chapter 6- Social Security benefit claiming can be done independently from when someone decides to stop working. This decision should be made as part of an overall plan that can include a “delay bridge” coordinated with investments. Beneficiaries who continue to work may receive higher benefits if their earnings are higher than earlier low-earning years.

Chapter 7- Approximately 5% of Medicare recipients pay income-related monthly adjusted amount (IRMAA), an above- baseline level premium for high income earners. Later life spending often looks like a “smile” when plotted on a graph with high spending at the start of retirement, followed by reduced spending, and increased expenses at the end of life.

Chapter 8- Long-term care (LTC) is a big unknown. About half of retirees may not have any LTC expenses while a few outliers could spend over $1 million. Three triggers for LTC are accidents, chronic illnesses, and conditions such as Alzheimer’s disease. Four payment options are self-funding, Medicaid, traditional LTC insurance, and hybrid policies.

Chapter 9- Downsizing is not a “given” in later life. In fact, one study of older adults found that 30% upsized to a larger home. Decisions to move to a new location should not be taken lightly and require due diligence. For example, visiting or renting in an area during different seasons. This saves the expense of undoing a less than satisfactory relocation.

Chapter 10- Tax-efficient distributions, tax diversification, and tax bracket management can prolong the sustainability of retirement savings. Following a spouse’s death, the surviving spouse can receive a couple’s (up to $500,000) exclusion of long-term gains from the sale of a home for two years. Tax issues for affluent retirees with multiple income streams to beware of include IRMAA, required minimum distributions (RMDs), and the net investment income tax (NIIT).

Chapter 11- Asset titles and beneficiary designations always take precedence over property distribution language in a will. Agents named in legal documents (e.g., executor, power of attorney) should be consulted first. If someone does not have a trusted person to ask to serve, “it may be best to allow the guardianship process play out with court supervision.”

Chapter 12- Retirement is a time for people to do whatever they want, including working if this makes them happy. Besides financial security, other aspects of a happy retirement are a sense of purpose/passion, strong relationships, and a healthy lifestyle. If people stop working, key challenges are loss of work identity and an increase in unstructured time. A traditional retirement with a complete work stoppage may not be good “if what you do is who you are.”

Chapter 13- This chapter provides a summary of action steps from the previous twelve chapters and a list of “trigger” ages for major retirement planning decisions (e.g., 62 for early Social Security benefits and 72 for RMDs). It also notes the need for specialized planning by early retires such as those practicing Financial Independence, Retire Early (FIRE).

Again, I highly recommend this well-written book, especially for people in the second half of their financial life.

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, August 25, 2022

Are You Wealthy?

The words “wealth” and “wealth management” are used frequently in advertisements for financial products (e.g., exchange-traded funds or ETFs and cryptocurrency) and financial services (e.g., specific investment advisory firms). This begs the questions “what, exactly, is wealth?” and “how do people know when they, themselves, are wealthy?” 

One online dictionary defines wealth as “an abundance of valuable possessions or money.” Another states that wealth is “plentiful supplies of particular resources” and notes that wealth can be held by individuals, communities, and countries. 

Other sources describe different categories of wealth including financial wealth (income and assets), time wealth (freedom), social wealth (strong relationships and social capital), and physical wealth (good physical and mental health). 

The remainder of this post will focus on financial wealth, specifically three ways to measure it to provide an answer the second question, above. Specifically, three wealth-measurement metrics will be explored and explained.


Net Worth Calculation


A common way to measure wealth is with a net worth statement. Net worth is calculated by subtracting debts from assets.  For example, $200,000 of assets minus $100,000 of debt equals a net worth of $100,000.

Three categories of assets are cash assets (e.g., bank accounts, money market funds, and certificates of deposit), investment assets (e.g., stocks, bonds, mutual funds, and ETFs), and property assets (e.g., house, car, home furnishings, and electronics). Two categories of debt are current debts (e.g., medical bills, credit card balances, and other debts expected to be repaid within a year) and long-term debts (e.g., car loans, student loans, and mortgages).

A good financial goal to strive for is to increase net worth by at least 5% a year through increased savings and/or reduced debt. Use the Net Worth Calculation Spreadsheet (in Excel) or this “paper and pencil” print worksheet to keep track of your progress. Some people also set specific net worth attainment goals such as $1 million before retirement.


The “Wealth Test”


In the book The Millionaire Next Door by Thomas J. Stanley and William D. Danko, the authors outline a simple “How to Determine If You’re Wealthy” formula to determine the adequacy of a person’s net worth at any point in life. The formula works as follows: multiply your age times your realized pretax annual income from all sources, excluding inheritances, and divide it by 10.

For example, a couple, both age 50, with a combined annual income of $80,000 should have a net worth of $400,000, calculated as follows: 50 x $80,000 = $4,000,000 ÷ 10 = $400,000. 

The authors state that the figure derived from the formula is what the minimum net worth should be for a particular age and income combination. The more people exceed their formula-based figure, the better.


Online Calculators


A third metric for wealth considers, not only an individual’s or couple’s age and income, but where they live. After all, there is big difference in living costs between, say, Manhattan, Kansas and Manhattan, NYC.


The New York Times What Percent Are You? tool asks users to enter a household income. Then they click “Go” and results indicate where they place, income-wise, in percentile among U.S. residents. For example, household incomes of $30,000, $50,000, 100,000, and $200,000 are in the bottom 29%, bottom 49%, top 21%, and top 5% of incomes, respectively. Users can also hover over the U.S. map to get household income rankings for over 300 metro areas.


Another interesting calculator is Wealthometer, where users compare their estimate of the percentage of Americans with less wealth than they have. Users enter numbers for real assets, financial assets, and debt (ideally taken from a current net worth statement) and the number of household members. Results are presented in a bar graph showing the position of the user’s estimate of their comparative wealth with their actual position based on government wealth data.


What Not to Do

Some people judge their wealth in comparison to neighbors with expensive cars, clothes, and houses. This is a mistake. The neighbors could be in over their head in debt or, as Stanley and Danko describe in their book “ Big Hat, No Cattle.”

The best way to measure financial wealth is with objective metrics and to always remember that net worth ≠ self-worth.

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, August 18, 2022

Employee Benefits: A Key Part of Job Compensation

During this “Great Resignation” era when many workers are changing jobs or considering a job change, it is more important than ever to consider various types of employee benefits and their economic value.  

Also known as “fringe” (short for fringe benefits) or “perks.” employee benefits generally equal 25% to 50% of a worker’s gross pay. Thus, they are a key part of workers’ total compensation package.

Purposes of employee benefits include:

¨    recruit and retain talented employees (e.g., total benefits package)

¨    enhance workers’ financial security and health (e.g., health insurance)

¨    improve employee morale (e.g., paid vacation)

¨    increase productivity (e.g., profit sharing) and human capital (e.g., educational benefits and training)

¨    improve an employer’s reputation as a good place to work for and do business with (e.g., flexible work hours)


Below is a description of ten common employee benefits and benefit-like policies in the current labor market:

Paid Vacation- This is one of the most common employee benefits.  Workers receive their usual pay but are allowed a certain amount of time (e.g., one to four weeks) off from work.  Often, the number of paid vacation days is based on years of service and increases with seniority. Vacation pay is part of a worker’s income and is fully taxable on federal and state income tax returns.

Paid Sick Leave- With this benefit, workers are paid but allowed to stay home when they, or sometimes a family member, are sick.  Leave may be uniform for all employees (e.g., 10 days per year) or based on years of service. Some employers allow workers to accumulate sick leave. Others take a “use it or lose it” approach where sick leave cannot be carried forward to future years. Like vacation time. sick day pay is fully taxable.

Paid Personal Days- This is a third type of  fully taxable paid leave. Some employers provide a certain number of annual  personal days for family emergencies or time-consuming activities (e.g., moving, jury duty or other court-related business, doctor’s visits, attending a wedding or funeral, house closing, travel snafus, and a child’s or pet’s illness). Workers may also use personal days when they run out of vacation or sick leave and need extra time off.

Holidays- Many employers provide a fixed number of paid holidays. These days are generally for national celebrations (e.g., New Year’s Day, Memorial Day, July Fourth, Labor Day, Thanksgiving, and Christmas). Some employers also purposely shut down their operations for week or two (e.g., colleges and universities around the holidays and some factory production lines) and pay their workers during this time.

Family Leave- The Family and Medical Leave Act requires employers with 50 or more workers to provide up to 12 weeks of unpaid leave.  To qualify, employees must have worked at least one year. Family leave allows time off to care for a newborn, a new adopted or foster child, or a seriously ill family member. It also provides unpaid leave when employees, themselves, are too sick to work.

Unpaid Leave- Workers may be able to negotiate time off without pay for reasons unrelated to family and medical leave.  Unpaid leave requests are often handled on a case-by-case basis. An example might be an employee who wants to take an extended road trip with friends or another who needs an unknown amount of time off to care for a sick or dying relative.

Educational Benefits- Many employers encourage their workers to learn new skills and pay tuition for college courses or specialized training. Some, not only cover tuition, but even allow workers “release time” to attend classes during business hours. Workers typically have to submit documentation of a passing grade or attendance. Paid sabbaticals are also available through some employers where workers get time off for extended study, community service, or creative projects.

Telecommuting- In the wake of the pandemic, liberal telecommuting policies are now being viewed as a key employee benefit. Workers who save two hours of driving and a half a tank of gas per day will save hundreds of hours of unproductive time and hundreds of dollars. Increasingly, employers are shifting to hybrid models where employees work at home for two or three days and in an office for two or three days. Some even allow workers’ pets at the office!

Flexible Hours- According to a recent study, 95% of workers want flexible work hours; even more so than they want remote work locations. More employers are increasing workplace flexibility in an effort to recruit and retain workers.

Company-Specific Perks- Another type of employee benefit are those related to an employer’s product or service line. Think discounts at retail stores and car dealers, free travel for airline employees, free or reduced tuition for college and university employees, stock or stock options for corporate employees, and free or reduced-cost company swag.

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 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!

Loud Budgeting: A Financial Discipline Strategy

  Have you heard the term “loud budgeting?” It started gaining traction earlier this year on TikTok (where else?) and has been covered by fi...