What Happens to my Social Security Benefit If I Retire Early?

Contributed by: Kali Hassinger, CFP®, CSRIC™

Did you know that the benefit shown on your Social Security estimate statement is not just based on your work history? Your estimated benefit actually assumes that you will work from now until your full retirement age, and on top of that, it assumes that your income will remain about the same that entire time. For some of our younger, working, and successful clients, early retirement is becoming a frequent discussion topic. What happens, however, if you retire early and do not pay into Social Security for several years? In a world where pensions have become a thing of the past for most people, Social Security will be the largest, if not the only, fixed income source in retirement. 

Your Social Security benefit is based on your highest 35 earning years, with the current full retirement age at 67. So, what happens to your benefit if you retire at age 50? That is a full 17 years earlier than your statement assumes you will work, effectively cutting out half of what could be your highest earning years.

We recently had a client ask about this exact scenario, and the results were pretty surprising! This client has been earning an excellent salary for the last ten years and has maxed out the Social Security tax income cap every year. Her Social Security statement, of course, assumes that she would continue to pay in the maximum amount (which is 6.2% of $147,000 for an employee in 2022 - or $9,114 - with the employer paying the additional 6.2%) until her full retirement age of 67. By completely stopping her income, and therefore, her contributions to Social Security tax at age 50, she wanted to be sure that her retirement plan was still on track.

We were able to analyze her Social Security earning history and then project her future earnings based on her current income and future retirement age of 50. Her current statement showed a future annual benefit of $36,000. When we reduced her income to $0 at age 50, her estimated Social Security benefit actually dropped by 13% or, in dollars, $4,680 per year. That is still a $31,320 per year fixed income source that would last our client throughout retirement. Given that she is working 17 years less than the statement assumes, a 13% decrease is not too bad. This is just one example, of course, but it is indicative of what we have seen for many of our early retirees. 

If you are considering an early retirement, Social Security is not the only topic you will want to check on before making any final decisions. There are other issues to consider, such as health insurance, having enough savings in non-retirement accounts that are not subject to an early withdrawal penalty, and, of course, making sure you have saved enough to reach your goals! If you would like to chat about Social Security and your overall retirement plan, we are always happy to help!

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Kali Hassinger, CFP®, CSRIC™ and not necessarily those of Raymond James.

Is My Pension Subject to Michigan Income Tax?

Contributed by: Nick Defenthaler, CFP®, RICP®

It is hard to believe, but it has been ten years since former Michigan Governor Rick Snyder signed his budget balancing plan into law, which became effective in 2012. As a result, Michigan joined the majority of states in the country in taxing pension and retirement account income (401k, 403b, IRA, distributions) at the state income tax rate of 4.25%. 

As a refresher, here are the different age categories that will determine the taxability of your pension:

1) IF YOU WERE BORN BEFORE 1946:

• Benefits are exempt from Michigan state tax up to $54,404 if filing single, or $108,808 if married filing jointly.

2) IF YOU WERE BORN BETWEEN 1946 AND 1952:

• Benefits are exempt from Michigan state tax up to $20,000 if filing single, or $40,000 if married filing jointly.

3) IF YOU WERE BORN AFTER 1952:

• Benefits are fully taxable in Michigan.

What happens when spouses have birth years in different age categories? Great question! The state has offered favorable treatment in this situation and uses the oldest spouse’s birthdate to determine the applicable age category. For example, if Mark (age 69, born in 1953) and Tina (age 74, born in 1948) have combined pension and IRA income of $60,000, only $20,000 of it will be subject to Michigan state income tax ($60,000 – $40,000). Tina’s birth year of 1948 is used to determine the applicable exemption amount – in this case, $40,000 because they file their taxes jointly. 

Taxing retirement benefits has been a controversial topic in Michigan. As we sit here today, Governor Whitmer is advocating for a repeal of taxing retirees – however, no formal proposal has been released at this time. The following states are the only ones that do not tax retirement income (most of which do not carry any state tax at all) – Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, Illinois, Mississippi, Pennsylvania, and Wyoming. Also, Michigan is one of 37 states that still does not tax Social Security benefits.

Here is a neat look at how the various states across the country match up against one another when it comes to the various forms of taxation:

Source: www.michigan.gov/taxes

Taxes, both federal and state, play a major role in one’s overall retirement income planning strategy. In many cases, there are strategies that could potentially reduce your overall tax bill by being strategic on which accounts you draw from in retirement or how you choose to turn on various forms of fixed retirement income. If you would like to dig into your situation to see if there are planning opportunities you should be taking advantage of, please reach out to us for guidance or a second opinion.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Tips to Help You Achieve Your Financial Goals

Contributed by: Kelsey Arvai, MBA

We hope your 2022 is off to a great start! As we all know, the New Year is an opportune time to reset and reevaluate your goals. With this in mind, we have come up with some simple yet effective strategies to position yourself for a prosperous year ahead.

Automate Savings and Debt Reduction

Establishing and maintaining a positive cash flow is a top-tier priority for your financial health. Automation is key to being efficient and effective while working toward your financial goals. Prioritizing your savings contribution through automation helps hedge against the temptation to spend the funds elsewhere. Additionally, utilizing automatic payments for your credit card could help your credit score if the time the payment happens is before your due date. After establishing an emergency fund through your automated savings, you might consider directing excess cash to your retirement and health savings plans.

Max Out Your 401(k) and Health Savings Account (HSA)

The beginning of the year is a great time to review your 401(k) and HSA contributions. In doing so, you can ensure that you are maximizing your benefits and taking advantage of increased deferral limits for 2022. 401(k), 403(b), and most 457 plan contribution limits have been bumped up to $20,500 for elective employee deferral.

HSA contribution limits have also been increased to a maximum of $3,650 for individuals and $7,300 for family coverage. It is estimated that couples retiring today will face $200,000-$300,000 of out-of-pocket medical expenses over the course of their retirement years. HSA balances can build and grow over time, and these accounts can be used to offset healthcare costs in retirement.

Plan for Charitable Giving

The beginning of the year is also a great time to determine your charitable goals and budget for the year ahead. We have written extensively on how to best pick a charity, so if you are unsure of which causes or organizations you would like to support, these blogs may be helpful!

How to Pick a Charity…During a Pandemic Part 1: Important Documents

How to Pick a Charity…During a Pandemic Part 2: Commitment to the Mission

How to Pick a Charity…During a Pandemic Part 3: Resources

Invest in Your Emotional and Physical Well-Being

As you take stock of your financial health this year, carving out time for your physical health is equally paramount. There is a connection between health and wealth, and each should be reviewed by a professional, at least annually.

Reach Out to Your Financial Advisor 

Working with your advisor on an ongoing basis can provide you support to keep you on track while you are determining and working towards financial goals. If you ever have any questions, please reach out to us. We are always happy to help!

Kelsey Arvai, MBA is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Kelsey Arvai, MBA and not necessarily those of Raymond James.

Retirement Plan Contribution and Eligibility Limits for 2022

Contributed by: Kelsey Arvai, MBA

Contributed by: Robert Ingram, CFP®

The IRS has released its updated figures for retirement account contribution and income eligibility limits. Here are the adjustments for 2022:

Employer retirement plan contribution limits including 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan:

• Employee elective deferral contribution limit is increased to $20,500 (up from $19,500).

• IRA catch-up contribution limit for individuals over 50 remains unchanged at $1,000.

• The total amount that can be contributed to a defined contribution plan including all contribution types (e.g., employee deferrals, employer matching, and profit-sharing) is $61,000 or $67,500 if over the age of 50 (increased from $58,000 or $64,500 for age 50+ in 2021).

􀁸 Traditional, Roth, SIMPLE, and SEP IRA contribution limits:

• Individuals can contribute $14,000 to their SIMPLE retirement accounts (up from $13,500).

• SIMPLE IRA catch-up contributions for individuals over 50 is $3,000.

• Limit on annual IRA contributions remains unchanged at $6,000.

• IRA catch-up contribution limit for individuals over 50 remains unchanged at $1,000.

The income ranges for determining eligibility to make deductible contributions to Traditional IRAs and contributions to Roth IRAs increased for 2022.

Traditional IRA deductibility income limits:

• For single taxpayers covered by a workplace retirement plan, the phase-out range increased to $68,000 to $78,000 (up from $66,000 to $76,000).

• Married filing jointly taxpayers:

  • If the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range increased to $109,000 to $129,000 (up from $105,000 to $125,000).

  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range increased to $204,000 to $214,000 (up from $198,000 to $208,000).

• For married filing separately taxpayers who are covered by a workplace retirement plan, the phase-out range remains the same, $0 to $10,000.

Roth IRA contribution income limits:

• For single taxpayers and Head of Household, the income phase-out range is increased to $129,000 to $144,000 (up from $125,000 to $140,000).

• For married filing jointly, the income phase-out range is increased to $204,000 to $214,000 (up from $198,000 to $208,000).

• For married filing separately, the income phase-out range remains unchanged at $0 to $10,000.

One strategy that has been used to accumulate dollars in a Roth IRA, even if your income level prohibits you from making regular contributions, is to accumulate non-deductible Traditional IRA contributions and then use Roth IRA conversions to move funds to the Roth IRA. This is known as the so-called “backdoor Roth IRA.” For individuals with an employer retirement savings plan, like a 401k or 403(b), that allows after-tax contributions in addition to the typical pre-tax or Roth contributions, there may be an opportunity to convert those after-tax contributions to a Roth IRA as well.

We continue to follow the proposed Build Back Better legislation going through Congress, and it’s probably not a big surprise that this continues, and will continue, to evolve. It still may be too early to tell, but it’s possible that these types of “back-door Roth IRA” strategies will go away starting in 2022.

These strategies would no longer be allowed under the proposed tax law changes in the Build Back Better plan. This year may be your last chance to use these strategies, so keep them on your radar. You can check out our blogs on “Back-Door Roth IRA” HERE and on the “Build Back Better plan” HERE.

Health Savings Account (HSA) contribution limits for 2022:

• For those with an individual high deductible health plan, HSA annual deductible contribution limit is $3,650.

• For those with a family HDHP, HSA annual deductible contribution limit is $7,300.

With increased retirement savings opportunities in 2022, we encourage you to keep these figures in mind when reviewing and updating your financial plan. If you have any questions, please feel free to reach out; we love to help! We hope you have a happy and healthy holiday season!

Kelsey Arvai, MBA, is a Client Service Associate at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Non-Qualified Deferred Compensation Plans Explained

Contributed by: Kali Hassinger, CFP®, CDFA®

Contributed by: Angela Palacios, CFP®, AIF®

Deferred Compensation plans can be a powerful tool to control income tax burden in a corporate executive’s highest-earning years. However, there are many trip hazards to be aware of when starting to contribute.

What is a deferred compensation plan, and who is it appropriate for?

A Non-Qualified Deferred Compensation Plan (NQDC) is a benefit plan offered by some employers to their higher-earning or ranking employees. It is exactly what it sounds like, a plan to defer compensation today to a future date.

This is advantageous to an employee who:

• Is expecting to be in a high tax bracket now.

• Is already fully funding their retirement savings plan(s).

• Has a surplus in cash flow.

• May foresee a time when their taxable income will be reduced.

What has to be decided upon ahead of time?

The employee and employer agree upon a salary amount or bonus to set aside. They will also select a date in the future to pay the employee their earned income. Both parties agree to when the funds will be received in the future, and it isn’t taxable income until the employee actually receives it.

Most employers require you to select your payout schedule (i.e., lump sum or spread out over 15 years) when you choose to defer a portion of your income. This can be a daunting choice because you may not know exactly when you will retire, what tax rates will be, or where you will live (impacting state taxes paid on the income) at the time you retire. Often, the employer allows you time when you can change this (usually about a year before you retire), but sometimes there are rules around this change. It is important to talk to your plan administrator or HR department to understand this more fully.

One large company provides an excellent example of a complicated change policy for their corporate plan. In this instance, you may change the number of years you spread payments of your deferred income, but you must do this 12 months before you start taking the payments (12 months before retiring). Additionally, you can only extend the payment terms, which delays the start of your payments by five years! See what we mean by potentially complicated?

What are the benefits of participating in a deferred compensation plan?

• Deferring potential tax liability to a time when you may be in a lower tax bracket can provide tax savings.

• Balance can be invested in a diversified portfolio to potentially grow tax-deferred compensation over many years.

• It can provide a paycheck during a portion of your retirement.

• The company may choose to match your contributions for an added benefit.

• You may choose to retire in a state with lower or even no income taxes.

What are the potential drawbacks of participating in a deferred compensation plan?

• Usually, no access to the funds before agreed-upon terms.

• If you lose your job earlier than anticipated, you may be forced to take the total amount in a lump sum all at once, causing it to be possibly taxed in the highest tax bracket possible.

• It cannot be rolled into an IRA.

• Risk of forfeiture if the company goes bankrupt as the money isn’t explicitly set aside for the employee in most cases.

• You may not have an option to change the payout schedule before retiring, and you may get the money either faster or slower than desired in retirement.

It is helpful to have a financial plan during the years when you are eligible to contribute to one. Mapping out possible retirement dates and planning appropriate payout timelines will be important for years leading into retirement, as your options may be limited if you wait until closer to retirement to start planning. This is where a financial planning professional can help! Don’t hesitate to reach out for more information!

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

How the Build Back Better Bill Could Affect You

Contributed by: Kali Hassinger, CFP®, CDFA®

While the House just passed along the $1.2 Trillion infrastructure bill to President Biden, the final version of the Build Back Better bill is still in question. The Center has been actively monitoring this bill and how it could affect our clients’ financial lives for the last several months. Throughout that time, the contents of the bill have significantly evolved. Initially, the proposed bill seemed to include many changes that would meaningfully impact tax and income planning for many clients. Then, it seemed as though all of the individual tax consequences were off the table. Now, some of those tax features are back with, perhaps, a middle ground. Some of the highlights are outlined below, but keep in mind that this version is still up for debate and revision until this bill becomes a law!

Changes to Retirement Account Rules

- Back-door Roth IRA contributions would no longer be available. This strategy used to fund a Roth IRA, even if your income phases an individual out of the ability to make a direct Roth IRA contribution. This would no longer be available with the Build Back Better bill, but it could only affect those considered “high-income,” or defined as income above $400,000. If this is included in the final bill, great clarity can be expected on who this will impact.

- Eliminating the ability to convert after-tax 401(k) and employer retirement plan contributions to a Roth IRA.

- New contribution limits for IRA and defined contribution retirement accounts based on the account balance.  

• Right now, the ability to make an IRA, Roth IRA, or employer retirement plan contribution is not associated with the size of the account. Under the Build Back Better bill, account holders with retirement account balances exceeding $10 million (as of the end of the prior year) would not be able to contribute. If contributions are made, or a contribution causes the account to breach that $10 million level, a 6% excise tax would be imposed. In order to assist in tracking this kind of requirement, employers would be required to report participants with account balances above $2.5 million.

- Increase in required minimum distributions for “high-income” taxpayers whose accounts surpass that $10 million limit.

• It seems as if 50% of the account balance above the $10 million thresholds would need to be withdrawn. So, if you have an $11 million IRA, you would be forced to take a $500,000 withdrawal as a required minimum distribution. Failure to complete the required minimum distribution would result in a 50% excise tax on any amount not taken.

State and Local Income Tax Deduction Cap

- The current State and Local Income tax deduction is limited to $10,000 per year. The Build Back Better bill would increase this limit to $80,000 per year.

Surcharge on High-Income Individuals, Trusts, and Estate

- For individuals, a 5% surcharge would be imposed on those with modified adjusted gross income in excess of $10 million, with an additional 3% surcharge on income above $25 million.

- For trusts and estates, the 5% surcharge would be imposed on modified adjusted gross income above $200,000, with an additional 3% surcharge on income above the $500,000 level.

The Build Back Better bill would also continue the expanded Child Tax Credit into 2022 and provide additional tax credits for those who purchase electric vehicles. Although these items are still up for debate and could change drastically before being implemented, we are staying on top of these revisions as they occur.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.

Reviewing your Social Security Benefit Statement

Contributed by: Nick Defenthaler, CFP®, RICP®

According to the Social Security Administration, on average, Social Security will replace about 40% of one’s pre‐retirement earnings. Given the diligent savings and consistently wise financial decisions many of our clients at The Center have made over the years, this percentage might not be quite as high. However, in our experience, Social Security is still a vital component of one’s retirement plan. Let’s review some of the important aspects of benefit statements to ensure you’re feeling confident about your future retirement income.

History of Mailed Statements

In 1999, the Social Security Administration (SSA) began mailing paper copies of Social Security statements to most American workers. Since that time, through several budget reduction initiatives, this process has dramatically changed. As we stand here today, no worker under the age of 60 receives a projected benefit statement by mail. Only those who receive statements by mail are both 60 and older and have not yet registered for an online SSA account.

Online Access – The “my Social Security” Platform

I have to hand it to Social Security – they’ve done a fantastic job, in my opinion, by creating a very user-friendly and easy‐to‐follow online platform to view benefit statements and projections. To create a user account or to sign in to your existing account, click here. If you have not set your account up and wish to do so, you’ll be prompted to provide some basic personal identifiable information such as your name, Social Security number, date of birth, address, e‐mail address, etc. The SSA has also made several great cyber security improvements, including dual‐factor authentication and a photo of a state‐issued photo ID, such as a driver’s license, to verify identification. This is similar to a mobile check deposit that many banks now offer on a smartphone.

Interpreting your Projected Future Income

Benefit projections at various ages can be found on page 2 of your Social Security statement. As you’ve likely heard your advisor share in the past, each year you delay benefits, you’ll see close to an 8% permanent increase on your income stream. Considering our low‐interest‐rate environment and historically high cost of retirement income, this guaranteed increase is highly attractive. It’s important to note that estimated benefits are shown on your statement in today’s dollars and do not take inflation into account. That said, the latest 2020 annual reports from SSA and Medicare Boards of Trustees use 2.4% as an expected future annual inflation amount. Click here to learn more about the sizeable cost of living adjustment in 2022 for those currently receiving Social Security. You should also be aware that Social Security assumes your current earnings continue until “retirement age,” which is not necessarily the same as “full retirement age.” This can potentially be a significant issue for those retiring earlier (i.e., before age 60 in most cases). Click here to learn more about how your income benefits are determined.

Earnings History and Fixing Errors

Page 3 of your Social Security statement details the earnings that the SSA has on file for each year since an individual began working. Believe it or not, SSA does make mistakes! Our team makes it a best practice to review a client’s earnings history on the statement to see if there are any significant outlier years. In most cases, there’s a good reason for an outlier year with income, but it’s simply an error in others. If you do notice an error with your earnings that needs to be fixed to ensure it does not negatively impact your future Social Security benefit, you have a few options. Once supporting documentation is gathered (i.e., old tax returns, W2s, etc.), you can contact the SSA by phone (800‐722‐1213), visit a local SSA office, or complete Form SSA-7008.

Believe it or not, in some circumstances depending on filing strategies, one can generate as much as $1M in total lifetime benefits from Social Security! If you have yet to file, however, there’s a good chance it’s been a bit since you’ve reviewed your benefit statement. If our team can help interpret your benefit statements, please feel free to reach out. The stakes are too high with Social Security, and we are here to help you in any way we can!

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional. The information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Defenthaler, CFP®, RICP®, and not necessarily those of Raymond James. Every Investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment, Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Social Security Cost of Living Adjustment & Wage Base for 2021

Contributed by: Kali Hassinger, CFP®, CDFA®

It has recently been announced that Social Security benefits for millions of Americans will increase by 5.9% beginning January 2022. This is the largest cost of living adjustment in 40 years! The increase is calculated based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, from October 1st, 2020 through September 30th, 2021. Inflation has been a point of concern and received a great deal of media attention this year, so this increase comes as welcome news for Social Security recipients who have received minimal or no benefit increase in recent years.

The Social Security taxable wage base will also increase in 2022 from $142,800 to $147,000. This means that employees will pay 6.2% of Social Security tax on the first $147,000 earned, which translates to $9,114 of Social Security tax. Employers match the employee amount with an equal contribution. The Medicare tax remains at 1.45% on all income, with an additional .9% surtax for individuals earning over $200,000 and married couples filing jointly who earn over $250,000.

For many, Social Security is one of the only forms of guaranteed fixed income that will rise over the course of retirement. However, the Senior Citizens League estimates that Social Security benefits have lost approximately 33% of their buying power since the year 2000. This is why, when working to run retirement spending and safety projections, we factor an erosion of Social Security’s purchasing power into our clients’ financial plans.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

How to Reduce the Risks of Dementia and Diminished Capacity to Your Retirement Plan

Contributed by: Sandra Adams, CFP®

Senility is what they used to call it and it only happened to the very elderly like our great grandparents.  Surely, not us. We are healthy, educated, and financially well off, so we don’t need to talk about senility or plan for it. THINK AGAIN!

Senility is now known as Alzheimer’s, a disease that accounts for 60-80% of dementia. The statistics are alarming! According to the Alzheimer’s Association, more than 1 in 9 people over age 65 have Alzheimer’s disease. The chances of an Alzheimer’s diagnosis doubles every five years after age 65 (beginning at approximately 5.3% at age 65 and going from there).   If the disease runs in your family, a head injury, hypertension, diabetes, stress, excess weight, depression, and many other conditions increase your risk of diagnosis.

Risks of Not Planning

I don’t need to tell you that losing your memory is a scary proposition. The fact that you could live for years (if you are otherwise healthy) without knowing who you are, where you are, who any of your loved ones are, and not recall your short nor most of your long-term past is frightening.  Even more disturbing is that you also forget how to care for yourself, and your body begins to forget how to function.  Family may be able to assist you at first, but as time goes on professional care is usually needed.  A few thousand per month for at-home caregivers is not out of the question.  As more care is required, the few thousand dollars per month can quickly become five thousand to ten or twelve thousand dollars a month, depending on the level of care needed and where you live. The impact on your financials, if you haven’t planned, can be detrimental.

In addition to the care risks, there are capacity risks.  Those who develop Alzheimer’s or related dementia go through a period (sometimes before their diagnosis or possibly early in their diagnosis) when their capacity is considered “diminished.”  They are not yet considered fully incapable of making their own decisions. In other words, the right to make decisions has not yet been taken from them, but their ability to make decisions is compromised.  In this stage of the game, we are generally watching for behavioral changes in clients:

• Missing Appointments

• Getting confused about instructions/having difficulty following instructions

• Making more frequent calls to the office to ask the same questions

• Trouble handling paperwork

• Difficulty recalling decisions or actions

• Changes to mood or personality

• Poor judgment

• Memory Loss (generally)

• Difficulty with basic financial concepts

Concerns that are more significant can be financial fraud and exploitation. Clients with diminished capacity are incredibly vulnerable to others who try to take advantage of their inability to understand what is or is not real. Unfortunately, 1 in 10 seniors over age 65 are victims of financial exploitation, according to the Government Accountability Office, with losses totaling over $3 billion annually. While most of this exploitation is at the hands of strangers, sometimes family, friends, and caregivers exploit the vulnerable.

Proactive Solutions

Now that I have completely frightened you about dementia and diminished capacity, let’s take a step back and look at what we can and should be doing to plan and protect your plan proactively against these risks.

From a personal health perspective, the Alzheimer’s Association suggests:

• Combined physical and mental exercise

• Continuous Learning

• Social Engagement

• Get good sleep

• Eat a healthy diet (Mediterranean Diet recommended)

From a financial planning perspective, it makes sense to put together a proactive aging strategy as part of your retirement planning to address the potential risks of dementia/Alzheimer’s/diminished capacity on your comprehensive financial plan.  What should this aging strategy address?

•  Legal Documents

• Care

• Finances

• Legacy

Dementia and diminished capacity are scary.  We don’t want to think about a time when we might not remember our names, remember our loved ones, or even recognize our reflections in the mirror. Dementia and diminished capacity can wreak havoc on our families and our financial security if we don’t plan. Take steps today to put together an aging strategy so that you and your loved ones are prepared. Preparation is the best defense!  If you or anyone you know need assistance with this topic, please let us know.  We are always happy to help!

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

Biden’s “American Families Tax Plan” Proposal and How It Could Affect You

Contributed by: Josh Bitel, CFP®

Ever since President Joe Biden has taken office, there has been much talk about how the tax landscape may change. On September 13th, Democrats on the House Ways and Means Committee released their new tax proposals. While the outcome may differ from the proposals listed below, we always want to keep you informed on proposed changes. Highlights are summarized below.

 New Top Ordinary Income Tax and Capital Gains Rate

Perhaps the most talked about piece of the proposal is the return of the 39.6% income tax bracket. This rate was previously in place from 2013-2017 but reduced to 37% with the Tax Cuts And Jobs Act of 2017. However, this new proposal does not simply replace the 37% bracket with the 39.6%. Instead, it reduces the amount of income a taxpayer can have before being placed in that top bracket. Single taxpayers making over $400,000 or married couples making over $450,000 will be in the new top bracket under this proposal.

 Along with ordinary income tax brackets, top capital gains tax brackets may also change. The major difference between this change and the ordinary income tax change is that (if approved) this will go into effect immediately and impact all capital gains from that point forward. In contrast, the ordinary income tax brackets won’t change until 2022. See the chart below for proposed capital gains tax changes.

Proposed Capital Gains Tax Changes

Changes to Roth IRA Strategies

 This one may hurt more for advisors. If enacted, this part of the proposal prohibits converting after-tax dollars held in retirement accounts to Roth IRAs. In other words, the “backdoor Roth IRA” and the “Mega backdoor Roth IRA” would be left in the dust.

 Another proposed change would go a bit further. In 2032, Roth CONVERSIONS for high-income earners would be prohibited. Any single person earning over $400,000, or married couples earning over $450,000, would be impacted by this rule.

These are just a few of the many changes proposed by Democrats on the House Ways and Means Committee. Of course, the actual bill may look drastically different than the proposals listed in this blog. Planners here at The Center will be sure to stay on top of any changes and keep you informed as they come out.

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.