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!

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...