Social Security: Legislation, Funding, and Future Predictions

I recently attended an interesting webinar for financial professionals about Social Security sponsored by The American College of Financial Services. Below are seven key take-aways:

Social Security Fairness Act- The number of SSFA affected individuals was about 3.2 million people (myself included). I previously heard 2.8 million and 3 million so this was a slight increase but still roughly 3.1% of all Social Security beneficiaries who had benefits reduced or eliminated as a result of the Windfall Elimination Provision (WEP) or Government Pension Offset (GPO).

Affected Individuals- The WEP affected people who worked for state/local governments in non-Social Security covered employment but who also qualified (40 quarters) to earn Social Security benefits. Think teachers, firefighters, and police (in some states) and others with jobs that did not pay into Social Security. The GPO primarily affected those receiving spousal or survivor benefits.

Loss Aversion Impact- The speakers noted that many Social Security recipients affected by the WEP and GPO felt wronged that their earned benefits were taken away, especially those who requested Social Security benefit estimates. They were anchored on full benefit amounts and felt the cuts from the WEP and GPO as a loss. The Social Security Administration had warned about WEP and GPO benefit cuts but did not say by how much, leading to very strong emotional responses.

New Fairness Issues- The speakers noted that a combination of covered and uncovered jobs may beat out (i.e., result in a higher payout than) having two covered jobs and, for married couples, uncovered and covered spouses may beat out two covered spouses. This math is currently not widely known, prompting a speaker to note “it will be interesting when the public recognizes this.”

Trust Fund Depletion- The SSFA moved up the timeline for trust fund depletion by six months. If proposed new laws eliminate taxes on Social Security benefits and/or taxes on tips, the trust fund depletion date will be even sooner. By law, Social Security can only pay out in benefits what it collects in revenue. It cannot borrow money. Current estimates are that Social Security benefits would need to be cut by almost 20% if Congress does nothing to shore up the program’s stability.

Consumer Concerns- Social Security beneficiaries are understandably concerned about cuts to Social Security’s almost 1,230 local field offices and 10 regional offices. Financial advisors on the webinar were advised to help their clients plan around delays. Staff reductions will lead to longer waits to get questions answered and benefit claims processed. 

Social Security Sustainability- Various potential “fixes” to shore up Social Security were discussed. They include mandatory Social Security participation by all workers, an increase in the Social Security tax (e.g., from 12.4% to 14.4% of gross income), decreased benefits for high earners, slowly raising retirement age (e.g., from 67 to 68 or 69), and increasing the wage cap ($176,100 in 2025).

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.

Annuities 101: The Basics

I recently taught a new class called Annuities 101: The Basics for a class of older adults. Below are nine key take-aways that I shared with my students:

What Are Annuities?- Annuities are a contract between an investor (annuitant) and an insurance company. The investor makes a lump sum payment or series of payments to the insurer and the insurer agrees to make periodic payments to the investor immediately or at a future date. 

Simple But Complicated- While the concept of exchanging payments to an insurance company in exchange for regular income is easy to understand, there are different types of annuity types and tax implications. Annuity features, such as surrender charges for early withdrawals, also vary widely.

Reasons to Buy Annuities- Common reasons that annuities are purchased are to create a “retirement paycheck” (i.e., regular income stream) in later life, for guaranteed lifetime income, and for tax-deferred growth until withdrawal. In addition, non-qualified annuities (annuities not held in a qualified retirement plan) do not have IRS maximum contribution limits like IRAs and 401(k)s.

Earnings Growth is Tax-Deferred- Earnings on non-qualified and qualified annuities are taxed as ordinary income- not long-term capital gains. Qualified annuities are subject to required minimum distributions (RMDs) and contributions + earnings are taxed. For non-qualified annuities funded with after-tax dollars, only earnings are taxed as income. The amount contributed is not taxed.

Payment Options- Depending on the annuity contract, payment period choices can include the life of the annuitant, the life of the annuitant and spouse, and for a fixed number of years. A beneficiary and contingent beneficiary should be named for any remaining payments or a death benefit.

Insurance Company Ratings- Potential annuitants must determine if an annuity issuer (insurance company) is in good financial health. Annuities are not backed by FDIC insurance, like CDs are, but protected through state guarantee associations. Guarantee coverage varies by state. It is wise to check insurance company ratings by companies such as A.M. Best, Standard & Poor’s, and Fitch.

Annuity Fees- Surrender period fees/penalties apply if annuitants withdraw money or cancel a contract early. However, many contracts offer a penalty-free withdrawal (typically 10%) during the surrender period, which provides some flexibility to access funds. Fees on annuities can range from about 0.50% of the annuity’s value to well over 2%. The industry fee average is 2.24%.

Three Key Elements- Annuities can be classified in three ways: 1. By type (fixed, variable, and indexed), 2. By payout date (immediate or deferred), and 3. By purchase method (single premium or payments over time). Fixed annuities are the most widely sold annuity type.

Specialized Annuity Products- Two annuities that are specifically designed for retirees in later life are Qualified Longevity Annuity Contracts (QLACs) and Medicaid Compliant Annuities. Assistance by a professional advisor is highly recommended.

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.

Retirement Planning: Answers to a Podcaster’s Questions

I periodically participate as a guest on podcasts to answer questions about personal finance topics. Below are five questions that I answered recently on a podcast about retirement planning:

Your book, Flipping a Switch, covers 35 key financial and lifestyle transitions in later life. What are some of the most overlooked transitions that impact financial security?

Many people underestimate the impact of income taxes in later life. Some may even have a higher income in retirement than when they were working due to multiple streams of income (e.g., Social Security, pensions, investments, and required minimum distributions (RMDs) from tax-deferred accounts). Another thing that is often overlooked is making specific plans for long-term care.

How can people ensure they have enough income to support a desired lifestyle in retirement?

Personalized calculations are best, with or without the assistance of a financial advisor. For “do-it-yourselfers,” I recommend using at least three different online calculators because their data inputs and assumptions vary. Some retirement calculators will tell users the amount of money they need to save to fund their desired lifestyle. Others, called Monte Carlo calculators, will project a probability of “success” (not outliving one’s assets) and how much more savings is needed to avoid this.

What are some common financial mistakes retirees make, and how can they be avoided?

Spending errors are a common mistake. Some people spend too much or too little of their accumulated savings, resulting in a large surplus upon their death or running out of money. Other errors are lack of estate planning, lack of long-term care planning, and lack of communication about legal documents and the location of financial records, including access to digital assets.

What are the biggest financial shifts impacting retirees today?

One big shift, compared to previous generations, is “do it yourself” retirement planning. Baby boomers were “guinea pigs” for both IRAs and 401(k)s and needed to make three key decisions: whether to contribute, how much money to contribute, and how to contribute (i.e., asset allocation decisions about the percentage of contributions to different types of investments). Subsequent generations have had to do the same. Another big shift is decumulation from retirement plans.

What are the biggest financial challenges for baby boomers in retirement?

One big challenge is not outliving assets. Not surprisingly, running out of money is the top fear of older adults. Another challenge is the potential for costly long-term care expenses. Nobody knows how much care they will need but they need a plan “just in case.” A third challenge, for retirees who have been super savers, is the impact of taxes and determining ways to mitigate this expense.

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.

 

IRA Insights: Take-Aways From a Recent Webinar

 I recently attended a webinar about individual retirement accounts (IRAs) and income taxes that was sponsored by the Financial Planning Association (FPA). The speaker was Ed Slott, a leading national authority on IRAs who is widely quoted in financial publications for professionals and consumers. Ed and two of his staffers answered dozens of questions live and via the online chat.

Below are six key take-aways:

Tax Season Never Ends- Most people think they are done with taxes on April 15. That may be true for tax return preparation, but not for tax planning. Tax planning is an ongoing process throughout a taxpayer’s lifetime and beyond (i.e., tax-deferred accounts inherited by beneficiaries).

Many People Have a “Tax Problem”- There is more than $40 trillion invested in tax-deferred retirement savings accounts. Once account owners reach age 73, they must start taking required minimum distributions (RMDs). These withdrawals are taxed as ordinary income, which can push them into a higher marginal tax bracket.

The 10-Year Rule- This rule applies to most non-eligible designated beneficiaries (e.g., adult children, grandchildren, and non-spouse individuals) who inherit a tax-deferred retirement account, such as a traditional IRA or 401(k), when the original account owner passed away after 2019. This rule took effect as a result of the SECURE Act. The entire inherited account must be fully distributed by December 31 of the 10th year following the year of the original owner’s death.

The “At Least As Rapidly” Rule- This is an additional guideline for inherited tax-deferred accounts that applies when account owners of a tax-deferred retirement account, such as a traditional IRA, pass away after beginning their RMDs. If the original account owner had already started RMDs before passing, the beneficiary must continue withdrawing RMDs each year during the 10-year period, thereby making withdrawals at least as rapidly as the original owner was required to.

No Extension on the 10-Year Rule- There was a five-year delay in IRS clarification about exactly how withdrawals under the 10-Year Rule must be taken by non-eligible designated beneficiaries. This did not, however, extend the ten-year window to deplete an inherited account. For example, if an account owner died in 2022, the ten-year period is 2023 to 2032, and the account must be fully withdrawn by December 31, 2032. RMD penalties for non-spouse beneficiaries are now in effect. The penalty is 25% of the amount that should have been withdrawn but was not.

Tax Laws Are Transitory- Mr. Slott noted that tax laws “are always written in pencil” and are subject to change. A big unknown right now is the future of the Tax Cuts and Jobs Act (TCJA), which is set to expire at year-end. If the TCJA is left to expire, marginal tax rates will revert to higher rates that were in effect in 2017. Slott advised the audience to “always pay taxes when rates are the lowest” and to take a long view and consider, not only current year taxes, but taxes in the future.

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.

Losing a Cell Phone: Lessons Learned

 You never think it can happen to you…until it does. After years of uneventful cell phone ownership (e.g., no lost phones, no broken screens, no water damage), I lost my cell phone, thankfully for less than 24 hours. I was on a bus trip, the driver made a sharp turn, the bag that I was carrying toppled over, and- unbeknownst to me at the time- my cell phone fell out onto the floor under my seat.

I realized this soon after I got home and couldn’t find my phone. My husband called the number and the phone rang- but not in our home or vehicle. I soon put the pieces together and called the bus company. They found the phone where it had fallen and I quickly retrieved it. Thankfully, the bus we were on was not in service the next day. I shudder to think of what could have happened otherwise.

This incident got me thinking about lost phones, what I did right, and what I could have done better.

What I Did Right

• Retracing My Steps- I worked the problem, thinking through all possible places my phone could have been and ruling out different options (e.g., by the mailbox when we stopped to get mail).

• Password Protection- My phone is password protected and locks down quickly using auto-locks when it is not actively being used. This gave me peace of mind that it could not easily be tampered with if it got into the wrong hands.

• No Financial Data- I do not- and will never- have any personal financial information on my cell phone. For example, apps for financial institutions that I have accounts with. I also do not use phone wallets such as Apple Pay or Google Pay. Less sensitive data that could be stolen.

• Cell Phone Pocket- The back of my phone has an adhesive “pocket” that contains some of my business cards as well as contact information for my husband in case I am unreachable.

What I Could Do Better

• Use Phone Finder Apps- I could have found the phone sooner with an app like “Find My Device” (Android) or “Find My” (IOS). I have since installed one on my phone.

• Use Different Authentication Methods- I am seriously considering different two-factor authentication (2FA) methods, such as biometrics and third party apps, after realizing how vulnerable I was with all my 2FA being done via text messages sent to my phone.

• Double Check for My Phone- I have a new decision rule for the rest of my life. Never leave a venue or a mode of transportation (bus, plane, etc.) without checking for my phone.

So much of our lives are tied to our phones: our contacts, photos, social media, and more. I hope you are never in a similar situation and lose your phone and that my insights, above, are helpful. 

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.