After-Tax 401(k) – An Often Forgotten Strategy

Contributed by: Josh Bitel, CFP®

Roughly half of 401(k) plans today allow participants to make after-tax contributions. These accounts can be a vehicle for both setting aside more assets that have the ability to grow on a tax-deferred basis and as a way to accumulate assets that may be more tax-advantaged when distributed in retirement.

As you discuss after-tax contributions with your financial advisor, you might consider the idea of setting aside a portion of your salary over and above your pre-tax contributions ($19,500 for people under age 50 and $26,000 for those over 50). By making after-tax contributions to your 401(k) plan now, you could build a source of assets for a potentially tax-efficient Roth conversion.

What to consider:

Does your plan allow for after-tax contributions?

Not all plans do. If an after-tax contribution option is available, details of the option should be included in the summary plan description (SPD) for your plan. If you don’t have a copy of your plan’s SPD, ask your human resources department for a copy or find it on your company’s benefits website. You can also talk to your financial advisor about other ways to obtain plan information, such as by requesting a copy of the complete plan document.

What does “after-tax” mean?

After-tax means you instruct your employer to take a portion of your pay — without lowering your taxable wages for federal income tax purposes — and deposit the amount to a separate after-tax account within your 401(k) plan. The money then has the ability to grow tax-deferred. This process differs from your pre-tax option in which your employer takes a portion of your pay and reduces your reported federal taxable wages by the number of your salary deferrals and deposits the funds to your pre-tax deferral account within the plan.

Are there restrictions?

Even if your plan has an after-tax contribution option, there are limits to the amount of your salary that you can set aside on an after-tax basis. Your after-tax contributions combined with your employee salary deferrals and employer contributions for the year 2021, in total, cannot exceed $58,000 (or $64,500 if you are age 50 or over and making catch-up contributions). Your after-tax contributions could be further limited by the plan document and/or meet certain nondiscrimination testing requirements.

Okay, but how does this help me build Roth assets?

When you are eligible to withdraw your 401(k) after-tax account — which could even be while you are still employed — you can rollover or “convert” it to a Roth IRA or a qualified Roth account in your plan, if available. The contributions you made after-tax may be able to be rolled into a Roth IRA each year, even while you are still employed!

If your plan allows for after-tax contributions and you think they may be right for you, it may be time to chat with your financial advisor.

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.

This material is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Q1 2021 Investment Commentary

Contributed by: Center Investment Department

April 2021 - The Center Investment Team provides market feedback for the first quarter.

Rotation. The transformation that turns a figure around a fixed point in mathematics.  So far 2021 has been a story of rotation for markets.  Two of the worst sectors in 2020, energy and financials, have become the best performing sectors so far in 2021.  If you looked at your December 31st statement and made changes based on return only – you would have missed significant gains…an old but good lesson that past performance isn’t necessarily indicative of future returns.

Last year technology benefited the most from the pandemic as people shopped from home, worked from home and looked for entertainment at home.  This year markets have been influenced heavily by the deployment of vaccinations and the hope that we can return to normal soon.

Google trends show increased interest in searches for flights and hotels which is an early sign of pent-up demand for travel that will follow in coming months.

Year to date, through 4/1/2021, a diversified portfolio made up of 40% S&P 500 Index, 20% MSCI EAFE Index and 40% Barclays US Aggregate Bond index is up about 2.4% showing a nice start to the year.  The Federal Reserve has reiterated they are “not even thinking about raising interest rates” according to Chair Jerome Powell.  Despite that, the market has pushed long-term rates higher, pricing in several rate increases before the end of 2023 despite the Fed chair’s messaging.  This has created a challenging return environment to longer dated bonds but results in more attractive interest rates today than we have witnessed in a while.

Economy

Inflation remains muted although we are seeing small pockets due to supply chain disruptions.  Between bottlenecks on the west coast and the blockage of the Suez Canal, it takes goods longer and longer to reach our shores.  A lack of velocity of money continues to be a headwind to higher inflation and the main reason why we haven’t seen it pick up substantially even though the supply of money has grown drastically with monetary and fiscal stimulus. As long as banks don’t have a large incentive to loan money (via higher interest rates) inflation may continue to be muted. 

Initial jobless claims, an early indicator for the direction of unemployment, have dropped to the lowest level recently since the pandemic began.  This should support a continued decline in the unemployment rate.

Government and Stimulus

The American Rescue Plan Act of 2021 was signed in law this past quarter.  This resulted in stimulus checks to the public.  Check out our recent blog for more details. These checks are anticipated to be spent rather than saved.  Check out the graph below showing the spending spike in January after the $600 check was received.  The additional $1,400 checks started getting delivered the week of March 17th.  I expect we will see another spike in consumer spending for March and April.

President Biden hasn’t wasted any time turning attention to the next stimulus plan in the form of the infrastructure bill.  It is likely this bill will not get passed unless mostly “paid for” by other means than deficit financing.  Bargaining on tax hikes has already started in Washington, at least behind the scenes.  It’s going to be a long process, but we can say with high conviction that taxes will likely increase at the corporate and individual levels.  We continue to watch how this will affect markets and you, our clients.  

Impact of Tax Reform on the Stock Market

In wait of details around the Biden administration’s tax reform, which is speculated to increase the corporate tax rate from 21% to 28% and increase GILTI tax rate (foreign tax rate) from 11% to 21%, many are pondering the implications of change on the stock market.  Portfolio strategists believe growth stocks will be most impacted by tax reform.  Some economists estimate that a 28% tax rate could decrease corporate earnings by 9% in 2022.  However, we have to do a bit of perspective-taking before jumping to conclusions about what this means for investors.

1)   Tax reform must go through Congress.  Economists don’t believe a 28% tax rate will pass through congress.  In fact, Goldman Sachs and UBS Financial Services assume a 25% tax rate will pass.  Goldman believes that may look more like a 3% corporate earnings clip, while UBS believes it may be 4%.  Either way, that is much more modest than the 9% some are considering with a 28% tax rate. 

2)   Keep in mind, many forecasters are tempering market expectations already for S&P 500 company profits in 2022.  If the tax hike is less than expected or delayed from the expected timeline there could still be a catalyst for robust market returns in 2022 even with corporate tax rate increases.

3)   Tax reform may not thwart economic growth.  Based on what Biden has proposed in the past, some of the proceeds of tax increases will probably go towards infrastructure spending.  Note: that could help balance the impact of increased tax rates because infrastructure spending usually expands the economy.

4)   Investors are agile.  If growth positions are suspected to be impacted most by tax reform, investors can adjust their strategies to include companies best equipped to handle tax changes.  Not to mention, some companies may even issue special dividends during this time.  When Barack Obama was re-elected in 2012, companies suspected tax hikes (which never came to fruition).  Subsequently, 20 of them issued special dividends. All that to say, there may be some opportunity for investors to pick up investment income.

5)   The last and most important thing to understand when considering the implications of tax reform on the stock market is that historically, there isn’t much correlation between stock market returns and tax reform.  As demonstrated by the chart below, the S&P 500 has been up when taxes both increase and decrease.  Clearly, there is opportunity to meet investment goals no matter the tax policy, so investors should not stray from investment discipline.

Other Headlines: SPACs

More SPACs (Special Purpose Acquisition Company) were created last year than the previous TEN years, and interest in these “blank-check companies” continued to climb in the first quarter of this year. In fact, more money has already been raised in one quarter this year than all of last year’s record year. Here’s a quick look at what they are and why they are taking off. 

First, what is a SPAC? It is a public shell company that raises money to buy a private company. The basic steps look like this:

1. Manager creates a SPAC

2. Investor puts $10 into it

3. Manager buys part of a private company for $10

4. The private company merges with my public SPAC, and boom – you own $10 worth of a company that is now public (OR you think I picked a bad company, and you take your $10 back).

On the surface it seems like a sweet deal; you either get a piece of a hot new company, or you take your $10 back. There are some unique risks to SPACs, though. The big one is obviously that after the merger you are typically left with a small, unproven company. Smaller, private companies are typically quite risky. The company’s stock price might not go up after it becomes public. It might even fall 50, 60, 70%. Ouch! Also, if you don’t like the deal after it is announced, you just missed out on whatever returns you would’ve had elsewhere. Last year, the S&P 500 returned almost 18% (almost 70% from the market bottom on March 23rd)...many investors sat in a SPAC all year only to reject the deal and missed out on huge potential gains.

There’s no definitive reason why SPACs are taking off, but it does show that there are investors willing to take on a high-risk investment. Maybe there is excess cash in the markets, investor exuberance, something to do with low-interest rates, high valuations or low return expectations elsewhere, or confidence in big name SPAC managers; but whatever it is, it has been a lucrative undertaking for those creating the SPACs as the costs paid to the managers/sponsors are not cheap.

Portal Updates

Just a reminder that we have a Center for Financial Planning Inc. app available in the app store for your investment portal!  If you don’t have access to the portal yet, please reach out and we can set this up for you!  Also, we now have the capability to allow you to aggregate your other accounts in this portal for a complete view of you assets in one place!  If you want to learn more, check out our tutorial videos here.

As always, if you have questions please don’t hesitate to reach out to us!  Thank you for the continued trust you place in The Center!

Any opinions are those of the author and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Dividends are not guaranteed and must be authorized by the company's board of directors. Special Purpose Acquisition Companies may not be suitable for all investors. Investors should be familiar with the unique characteristics, risks and return potential of SPACs, including the risk that the acquisition may not occur or that the customer's investment may decline in value even if the acquisition is completed. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Not All ESG Funds Are Created Equal

Contributed by: Kali Hassinger, CFP®, CDFA®

 

If you’ve read last week’s ESG blog, you should be familiar with the basic ideas driving ESG investing and aware of the recent investor rush to ESG investment funds.  Although 2020 was full of unforeseen circumstances, the trend to Sustainable and Responsible Investing has been building over many years. 

In the past, ESG was often used interchangeably with SRI, or Sustainable and Responsible Investing.  In reality, they are not exactly one in the same.  ESG analysis creates a set of standards used to screen investments through Environmental, Social, and Governance criteria.  Almost all Sustainable and Responsible strategies use at least one of the E, S, or G factors within their analysis, which is perhaps why the ESG abbreviation seems to have taken hold in recent years.  However, there are four prominent Sustainable and Responsible Investment approaches that are most often used to develop a portfolio or mutual fund.

Best-In-Class (Positive) Screening

This strategy involves investing in companies or sectors that have the best, or most positive, ESG performance relative to their peers.  The hope is that the investments selected in a best-in-class process will be able to handle unexpected changes regardless of the industry.  However, one criticism is that this includes all industries and sectors, often incorporating gas, oil, and mining companies, as long as they are handling ESG factors better than their peers.  Some refer to this as the “least bad” approach, as opposed to the best.  This is a good option for those who are afraid to miss out on returns by removing investments due to ESG factors.

Exclusionary Integration

Negative screening is what many so often associate with ESG investing.  This is most likely because it one of the oldest screening approaches and was often guided by religious beliefs with the investments eliminated through this process often referred to as “sin” stocks.  This approach, however, has evolved over the years to be less explicitly aligned with religions.  Now, exclusionary screens work to avoid companies based on more ESG related factors, such as fossil fuels, animal cruelty, and weapons production.  This approach is appropriate for investors who have specific ethical or religious motivations and want to be sure that their money is invested in a way that aligns with their beliefs.

ESG Integration

The ESG Integration approach involves using environmental, social, and governance factors to make decisions within a traditional financial analysis process. This approach does not prohibit investments in any particular sector or industry, and it searches to find value and opportunities by combining ESG information with conventional financial information. This method can include companies who have historically performed poorly in relation to ESG factors but who are working to improve on an environmental, social, or governance issue.  Notice the usage of OR in the last sentence.  This means that companies do not need to score or screen well in all three factors to be included or considered within an ESG integration fund.  This flexibility provides a vast investment universe and can be more palatable for investors who are still skeptical of ESG investing.

Sustainability-Themed Investing

Sustainability-themed investing often develops a portfolio aimed at solving a specific environmental or sustainable issue.  Within the selected theme, such as clean technology, climate change, animal welfare, or green energy, analysts will work to determine the strongest companies who positively represent this issue.  This allows investors to focus their resources on specific trends and to invest in companies who reflect those same beliefs in their business practices.

Although we have discussed these approaches as four separate methodologies, in reality, most ESG mutual funds use a combination of several or all of these tactics to build their portfolio.  This combination, which less frequently excludes specific industries or companies than it has the past, allows for more flexibility, which can translate to more opportunity for investors.  Many believe that companies who are focusing energy and time on ESG factors will be more poised for future success.  Are you interested to know how The Center develops and manages our ESG strategies?  Jaclyn Jackson, CAP® our firm Portfolio Manager will provide some insight next week!

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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.

Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Sustainable/Socially Responsible Investing (SRI) considers qualitative environmental, social and corporate governance, also known as ESG criteria, which may be subjective in nature. There are additional risks associated with Sustainable/Socially Responsible Investing (SRI), including limited diversification and the potential for increased volatility. There is no guarantee that SRI products or strategies will produce returns similar to traditional investments. Because SRI criteria exclude certain securities/products for non-financial reasons, utilizing an SRI investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations. Investors should consult their investment professional prior to making an investment decision.

ESG Investing: Why Everybody Is Talking About It

Contributed by: Jaclyn Jackson, CAP®

According to CNBC, almost 1 in 4 dollars is going into Environmental, Social, and Governance (ESG) funds this year.  Even before 2021, the combination of ethical provisions and competitive performance turned many heads towards ESG investments.  I aim to explain what the big fuss is about and why ESG investments are gaining traction.

Investors Are Talking About It

To be clear, the March 2020 downturn was no picnic (for anyone).  However, investors who had stake in environmental, social, and governance (ESG) investments managed the economic downturn with greater resilience.  Leading research firm, Morningstar, reported that during March 2020, “sustainable funds dominated the top quartiles and top halves of their peer groups.  Sixty-six percent of sustainable equity funds ranked in the top halves of their respective categories and more than a third (39%) ranked in their category's best quartile.”  Compared to peers, ESG funds pulled top rankings.

Not only did peer to peer comparisons look good, but index comparisons proved more robust too.  In the same study, Morningstar compared 12 passive ESG funds in the large-blend category to a traditionally passive fund. They reported, “For the year through March 12, all 12 ESG index funds outperformed”. What’s more is that fees were included in this study.  While the ESG passive funds compared were more expensive than the traditional passive fund, they still managed to outperform.  Impressively, the trend held with international and emerging market index comparisons…and everybody is talking about it! 

Including the world’s largest investor/asset manager, BlackRock, who’s CEO challenged corporations to consider the impact of climate change on business models.  In 2020, CEO Larry Fink announced BlackRock would incorporate ESG metrics into 100% of their portfolios.  The asset manager also pledged to produce data and analytics to punctuate why considering climate change should be an investment value. 

Yellen And Powell Are Talking About It

Investors are not the only people concerned.  In wake of recent natural disasters, Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell are working to assess the risks climate change poses to the health and resilience of the financial system.  Their consensus implied a concentrated effort to monitor financial institutions and their exposure to extreme weather events.  Leading the charge, Fed Governor Lael Brainard, recently announced the Financial Supervision Climate Committee (FSCC).  Brainard is a proponent of using scenario testing to understand banks’ ability to survive hypothetical climate catastrophes.  The FSCC will focus on developing evaluation processes for climate risks to the financial system.

Why Everybody Is Talking About It

While many people acknowledge the ethical appeal of ESG methodologies, they may not fully appreciate the businesses appeal that underpins stock performance.  Business litigation risk provides a clear example.  The Financial Analyst Journal featured a study that explored the relationship between ESG performance and company litigation risks.  Analyzing US class action lawsuits, researchers found, “a 1 standard deviation improvement in the ESG controversies of an average company in the sample reduced litigation risk from 3.1% to 2.4%”.  The study also asserted that companies with low ESG performance experienced market value losses ($1.14 billion) twice the size of companies with high ESG performance.  Further, the study integrated their findings with a trading strategy and concluded investors benefitted from lower litigation risk.

It doesn’t stop with litigation risk.  There are also links between healthy corporate governance and market returns.  As You Sow, a nonprofit promoting corporate responsibility, has been tracking S&P 500 companies with excessively compensated CEOs since 2015.  They collaborated with R. Paul Herman, CEO of HIP Investor Inc., to do performance analysis based on their tracking. Herman determined, “…shareholders could have avoided lagging returns by excluding companies that keep making the list for excessive CEO pay”.  Companies without excessively paid CEOs significantly outperformed companies with excessively paid CEOs.  The former generated 5.6% in annualized returns compared to the latter at 1.5%.  What’s astonishing is that the report noted, “The performance gap due to excessive compensation equates to approximately $223 billion in shareholder value lost.”  How are companies without overpaid CEOs edging out competitors?  Instead of overpaying CEOs, more resources can be dedicated to research and development projects, dividends to shareholders, or equitable pay for employees; things that advantage company profits and support positive investor outcomes.

Are You Talking About It?

There is definitely a case for the merits of ESG investing.  It is no wonder folks are talking about it.  Are you interested in the conversation?  If you’ve followed trends in ESG investing and are considering adapting ESG strategies into your portfolio, The Center is here to help.  Ask your advisor about the Center Social Strategy; they would be happy to talk about it with you.

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Jaclyn Jackson, CAP® is a Portfolio Manager at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

This material is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Utilizing an ESG investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.

Am I Spending Enough Or Saving Too Much?

Contributed by: Kali Hassinger, CFP®, CDFA®

No you didn’t read that title incorrectly.  After decades of consistent and focused saving, how do you change your mentality to feel comfortable spending what you’ve worked so hard to accumulate?  Good savers spend decades developing the discipline to save, plan, and minimize debt, all for the ultimate goal of reaching financial independence and freedom.  However, when it comes time to use those hard-earned funds to support your retirement lifestyle, it can be a difficult transition.

The Center defines financial planning as a coordinated and comprehensive approach to reaching your financial goals.  It necessitates an appropriate balance between spending now and investing for the future.  That is a difficult balance to maintain, and without truly understanding your current resources and future needs, it is easy to miss the mark.  Without professional analysis and review, many either spend too much now and jeopardize future goals or have save too aggressively and end up unnecessarily sacrificing current quality of life. 

In planning, we can quantify what it takes to meet future financial goals, and make sure that we are doing what is needed to help reach those objectives.  In some cases, that knowledge can provide the freedom to actually reduce savings.  Beyond just allowing increased spending, this can also provide the opportunity to pursue passions as opposed to income.

When finally reaching that retirement finish line, however, turning your savings into income can be a daunting task.  Pulling from a balance that you’ve worked years to accumulate and build up can be uncomfortable, especially if you don’t know how much you can safely withdrawal without jeopardizing your long term financial security.  If you’re like many of our clients, it isn’t uncommon to react to this discomfort by under-spending and unintentionally accumulating money throughout retirement. 

Life is all about balance.  In this example, it’s about protecting your financial future while also enjoying life now.  If you’re in the enviable position of having more than you need for retirement, making a meaningful plan for the excess can help to ease the reluctance to spend.  Whether it is gifting, creating a financial legacy, or granting yourself permission to indulge a bit, if it brings you joy, it is worth considering.  Of course we would not recommend spending money frivolously, but, the ultimate goal is to pursue areas of interest because they are meaningful and important to you - unconstrained by financial concerns.  Isn’t that true financial freedom?  

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.

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Opinions expressed are not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss.

The Benefits Of Working With An ‘Ensemble Practice’

Contributed by: Josh Bitel, CFP®

Financial planning practices come in all shapes and sizes, but perhaps the two most common arrangements are solo practices and ensemble practices. Solo practices are normally led by a single advisor who calls the shots, while ensemble practices are team-oriented firms, all working toward a common goal. The Center identifies with the latter.

An ensemble practice is structured with multiple advisors under the same roof. This allows for constant sharing of ideas, best practices, strategies, and even sharing of resources. The Center has a 2 hour meeting every Monday for just this purpose. Our planners at The Center, all with unique expertise, get together to eat lunch and share client cases, tough questions, interesting reading pieces, and maybe a few jokes here and there. This is all possible because we are all working collaboratively toward a shared vision, as outlined in the Vision 2030 document our entire team had a hand in creating.

The Center, as with many ensemble practices, leverages the power of teams. We have team members who are specialists in such areas as insurance, divorce planning, tax planning, retirement planning, and many more. So if an advisor is met with a tough client case involving long-term care, for example, he or she can seek out help from a team member with expertise in this area instantly.

An often overlooked advantage for clients choosing to work with an ensemble practice such as The Center is the foundation for internal succession planning. It is often said that as an advisor ages, so do their clients. This begs the questions who will take care of me when my advisor retires? And from the advisors end, who will take care of my legacy once I’ve moved on? With a practice like ours, there is an internal succession plan in place for many years before a planner decides to retire. Often, clients are transitioned to an advisor who has been working under the tutelage of the retiring advisor.

As with anything, you must weigh the pros and cons of working with an advisor under their practice’s arrangement. In the end, it is all about finding the right person to help you reach your goals and feel comfortable along the way. At The Center, we have found that working in a team-based environment toward a shared vision helps us serve our clients the best way we can.

5 Social Security Rules to Know for Maximizing Your Benefits

Contributed by: Robert Ingram, CFP®

Social Security is still a key source of income for most retirees.  At the same time with the program’s many nuanced rules and options, just understanding your available benefits can be confusing enough, let alone figuring out how to make the most of those benefits throughout retirement.  Additionally, there are some strategies not as widely publicized and they can easily fly under the radar.

Here are five Social Security rules to keep in mind as you plan your Social Security filing strategy. 

1. Delaying Social Security Can Increase Your Benefit Amount

Under the Social Security retirement program, you can collect your full retirement benefit at the designated Full Retirement Age (FRA), determined by your birth year.  Individuals born from 1943 to 1954 reached FRA at age 66.  In each year from 1955 to 1959 the FRA increases by 2 months (e.g. 1955 = age 66 and 2 months, 1956 = age 66 and 4 months, and so on). Those born in 1960 or later reach their FRA at age 67.

Think of your full retirement age benefit as your baseline benefit.  You can begin collecting benefits as early as age 62.  However, your benefit amount would be reduced by a small percentage for each month that you collected early.  This can add up to a sizable reduction. For example, if your full retirement age is 67 and you begin collecting as early as possible at 62, you could see your benefit reduced by 30%.

Now, the opposite is also true if you begin collecting your benefits after your full retirement age.  For each month that you delay taking your benefits beyond your full retirement age until age 70, your benefit amount increases by 2/3 of 1%.  (Are you thinking that doesn’t sound like much?)  These delayed retirement credits would yield an 8% increase over 12 months.  For clients that are concerned about longevity in retirement (a.ka. living a long time needing retirement income), this can be an effective way to help protect themselves.

2. Delaying Social Security Can Impact Benefits To A Surviving Spouse

For married couples that are receiving their Social Security retirement benefits, when one spouse passes away, the surviving spouse will receive only one benefit going forward.  It is the larger of his or her benefit or the deceased spouse’s benefit. 

By delaying Social Security to increase your benefit amount while you are living, you are also locking in a higher benefit amount that could be available to your surviving spouse.   Conversely, taking benefits early at a reduced amount may leave a smaller benefit available to your surviving spouse.  These different possible scenarios present both unique challenges and planning opportunities for maximizing the value of your benefits over both spouses’ lifetimes.

3. Withdrawal of Social Security Application (The “Do-Over”)

Suppose you have started collecting your benefits and then you changed your mind.  Perhaps you had collected early at a reduced benefit.  Can you go back and reverse the decision to claim benefits?  Well, if you are within the first 12 months of claiming, you can.

You can withdraw your application for benefits and then reapply later.  This resets things as if you had never started benefit.  Keep in mind there are also some important requirements.

• You must repay all of the benefits you and your family received from your original retirement application, including:

  • Benefit amounts your spouse collected based on your earnings record or benefits dependent children received

  • Any amounts withheld for Medicare premiums

  • Voluntary tax withholding

• Anyone who receives benefits based on your application must provide written consent

• You can only withdraw your application once in your lifetime.

4. Voluntary Suspension

Ok, you may be wondering if it has been longer than 12 months since you claimed your benefits and you change your mind, are you completely stuck?  Well, not exactly.  There is another way to increase your benefit amount.

Once you reach full retirement age, you can request a suspension of your benefit payments (regardless of when you started them).  By doing so, the benefit you were receiving earns those delayed retirement credits of 2/3 of 1% for each month that your benefits are suspended.  This results in a higher amount when you resume your benefits, no later than age 70.

This strategy of suspending benefits can be an effective tax planning tool for years in which you anticipate other outside income, like a pension that recently started or a lump sum from the sale of a business.

5. Benefits Based On An Ex-Spouse’s Earnings

If you are divorced, you may be able to collect benefits based on your ex-spouse’s Social Security record.  Similar to the benefits for married couples, you can receive up to one-half of your ex-spouse’s full retirement amount by waiting until your full retirement age to apply.  Collecting earlier than your full retirement age still results in a reduced benefit.

You can collect based on your ex-spouse’s record if you meet the following criteria:

• You were married at least 10 years and you have been divorced for at least 2 years

• You are unmarried

• You are age 62 or older

• The benefit you are entitled to on your Social Security earnings record is less than the benefit you would receive based on your ex-spouse’s record

If the amount you could receive based on your ex-spouse’s record is larger than the amount from your record, you have the opportunity to receive the higher benefit.

Decisions around when and how to collect Social Security benefits can be complicated and depend so heavily on your unique circumstances.  Your health, your retirement spending needs, your income sources, and financial assets are just a few that come to mind.  If you have questions about how Social Security fits within your overall retirement income plan, or if we can be a resource for you, please reach out to us!

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.

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This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Prior to making a decision, please consult with your financial advisor about your individual situation.

How Risky Was It To Invest In Gamestop?

Contributed by: Nicholas Boguth

A quick Google search tells us that the odds of winning the Powerball Jackpot is roughly .000000003%. The odds of getting struck by lightning is roughly .0002%. What are the odds of getting rich by investing in a stock that grows by 100x in a year like Gamestop? Also slim.

It is hard not to envy those individuals posting screenshots of their LIFE-CHANGING gains like we saw last month with some of the lucky winners of the GME hysteria. The only problem is that it is far more likely that style of investing ends with life-changing LOSSES.

How often does a stock return 100x?

Christopher Mayer explored that question in his book, “100 Baggers”. His research found that 110 stocks returned 100x between 1976-2014.

Pair that with research from Credit Suisse and you soon realize that if your goal is to get rich quick, the odds are stacked against you. The number of listed securities has fluctuated from 3,000+ to 7,000+ over the past 50 years, and there have been OVER 15,000 new stocks listed in that time frame alone.

Some “back of the napkin” calculations would suggest that there is a ~0.5% chance you pick the stock that returns 100x, and that is assuming you hold through all the turbulence and sell at the correct time as well.

Back to the major problem – while 110 stocks returned 100x, there were THOUSANDS of stocks that failed. Some go bankrupt or get delisted because they never trade above $1/share, or lose 90% of their value and plateau. There’s a good chance a lot of those companies shared the financial position of Gamestop as well (Gamestop lost almost $500M in 2020).

So when we see a Reddit user celebrating their life-changing journey from $50k to $5M, know that there are DOZENS of individuals who tried the same thing – but are sulking in a less fortunate journey from $50k to $0.

At The Center, we believe in a more sustainable, long-term approach to gaining (and preserving) wealth. If you have questions about how that applies to you and your financial plan, please don’t hesitate to call or email anyone on our team.

Nicholas Boguth is a Portfolio Administrator at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

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Any opinions are those of Nick Boguth and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

How Much Guaranteed Income Should You Have In Retirement?

Contributed by: Nick Defenthaler, CFP®, RICP®

How much guaranteed income (we’re talking Social Security, pension, and annuity income) should you have in retirement? I am frequently asked this by clients who are nearing or entering retirement AND are seeking our guidance on how to create not only a tax-efficient but well-diversified retirement paycheck. 

“The 50% Rule”

Although every situation is unique, in most cases, we want to see roughly 50% or more of a retiree’s spending need satisfied by fixed income. For example, if your goal is to spend $140,000 before-tax (gross) in retirement, ideally, we’d want to see roughly $70,000 or more come from a combination of Social Security, pension, or an annuity income stream. Reason being, this generally means less reliance on the portfolio for your spending needs. Of course, the withdrawal rate on your portfolio will also come into play when determining if your spending goal would be sustainable throughout retirement. To learn more about our thoughts on the “4% rule” and sequence of return risk, click here.  

Below is an illustration we use frequently with clients to help show where their retirement paycheck will be coming from. The chart also displays the portfolio withdrawal rate to give clients an idea if their desired spending level is realistic or not over the long-term.

Cash Targets

Once we have an idea of what is required to come from your actual portfolio to supplement your spending goal, we’ll typically leave 6 – 12 months (or more depending of course on someone’s risk tolerance) of cash on the “sidelines” to ensure the safety of your short-term cash needs. Believe it or not, since 1980, the average intra-year market decline for the S&P 500 has been 13.8%. Over those 40 years, however, 30 (75% of the time) have ended the year in positive territory:

Market declines are imminent and we want to plan ahead to help mitigate their potential impact. By having cash available at all times for your spending needs, it allows you to still receive income from your portfolio while giving it time to “heal” and recover – something that typically occurs within a 12-month time frame.

A real-world example of this is a client situation that occurred in late March 2020 when the market was going through its bottoming process due to COVID. I received a phone call from a couple who had an unforeseen long-term care event occur which required a one-time distribution that was close to 8% of their entire portfolio. At the time, the stock portion of their accounts was down north of 30% but thankfully, due to their 50% weighting in bonds, their total portfolio was down roughly 17% (still very painful considering the conservative allocation, however). We collectively decided to draw the income need entirely from several of the bond funds that were actually in positive territory at the time. While this did skew their overall allocation a bit and positioned them closer to 58% stock, 42% bond, we did not want to sell any of the equity funds that had been beaten up so badly. This proved to be a winning strategy as the equity funds we held off on selling ended the year up over 15%.  

As you begin the home stretch of your working career, it’s very important to begin dialing in on what you’re actually spending now, compared to what you’d like to spend in retirement.  Sometimes the numbers are very close and oftentimes, they are quite different.  As clients approach retirement, we work together to help determine this magic number and provide analysis on whether or not the spending goal is sustainable over the long-term.  From there, it’s our job to help re-create a retirement paycheck for you that meets your own unique goals.  Don’t hesitate to reach out if we can ever offer a first or second opinion on the best way to create your own retirement paycheck.

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.

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Opinions expressed are those of the author but not necessarily those of Raymond James, and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Charts in this article are for illustration purposes only.

Important Information for Tax Season 2020

Contributed by: Lauren Adams, CFA®, CFP®

As we prepare for tax season, we want to keep you apprised of when you can expect to receive your tax documentation from Raymond James.

2020 Form 1099 mailing schedule

• January 31 – Mailing of Form 1099-Q and Retirement Tax Packages

• February 15 – Mailing of original Form 1099s

• February 28 – Begin mailing delayed and amended Form 1099s

• March 15 – Final mailing of any remaining delayed original Form 1099s

Additional important information

Delayed Form 1099s

In an effort to capture delayed data on original Form 1099s, the IRS allows custodians (including Raymond James) to extend the mailing date until March 15, 2021, for clients who hold particular investments or who have had specific taxable events occur. Examples of delayed information include:

• Income reallocation related to mutual funds, real estate investment, unit investment, grantor and royalty trusts, as well as holding company depositary receipts

• Processing of original issue discount and mortgage-backed bonds

• Expected cost basis adjustments including, but not limited to, accounts holding certain types of fixed income securities and options

If you do have a delayed Form 1099, we may be able to generate a preliminary statement for you for informational purposes only, as the form is subject to change.

Amended Form 1099s

Even after delaying your Form 1099, please be aware that adjustments to your Form 1099 are still possible. Raymond James is required by the IRS to produce an amended Form 1099 if notice of such an adjustment is received after the original Form 1099 has been produced. There is no cutoff or deadline for amended Form 1099 statements. The following are some examples of reasons for amended Form 1099s:

• Income reallocation

• Adjustments to cost basis (due to the Economic Stabilization Act of 2008)

• Changes made by mutual fund companies related to foreign withholding

• Tax-exempt payments subject to alternative minimum tax

• Any portion of distributions derived from U.S. Treasury obligations

What can you do?

You should consider talking to your tax professional about whether it makes sense to file an extension with the IRS to give you additional time to file your tax return, particularly if you held any of the aforementioned securities during 2020.

If you receive an amended Form 1099 after you have already filed your tax return, you should consult with your tax professional about the requirements to re-file based on your individual tax circumstances.

You can find additional information here.

As you complete your taxes for this year, a copy of your tax return is one of the most powerful financial planning information tools we have. Whenever possible, we request that you send a copy of your return to your financial planner, associate financial planner, or client service associate upon filing. Thank you for your assistance in providing this information, which enhances our services to you.

We hope you find this additional information helpful. Please call us if you have any questions or concerns about the upcoming tax season.

Lauren Adams, CFA®, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals and also leads the client service, marketing, finance, and human resources departments.

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Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.