Social Security Planning

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5 Steps for When You're in the Retirement Home Stretch

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It’s the home stretch! Important retirement decisions during the five to ten years before you leave the workforce can easily create more questions than answers. Dropping to the bottom line, one way to describe retirement readiness is getting in step with financial and lifestyle matters before you stop working. 

What to do? Start with the big picture and think about what the ideal retirement looks like for you. Maybe you have already dropped to the bottom line and have a preferred timeframe in your sights. Either way, below are five steps to help.

Five Fundamental Steps to Help Guide Decisions Leading Up to Your Retirement Day:

  1. See When You Can Realistically Retire
    It’s not a simple decision. Start with getting a general idea about out how much money you’re likely to spend each year. Some expenses drop off like payroll taxes, retirement savings, and potentially mortgage debt. Additional expenses may surface like extended travel, bucket list items, or higher than average health care costs.

  2. Make a Plan to Pay Off Your Debt
    While you are still working, review all outstanding debt. Personal loans, student loans, and credit cards tend to have higher interest rates. Make a plan to pay these off before you retire. Now is also the time to find the balance between putting “extra” on the mortgage and funding retirement accounts. Your financial planner and CPA can help with these decisions.

  3. Run the Numbers to Understand Where You Stand Today
    This is your opportunity to see how close you are to your potential retirement goal and what changes you might need to make. An annual review with your financial planner will help chart progress, identify gaps, and create solutions.

  4. See How Retirement Age Affects Social Security Benefits
    Some people are inclined to begin receiving Social Security as soon as possible, even if it means reduced payouts. For planning purposes the best decision depends on many variables including health, wealth, tax situation, and life expectancy. Understanding the impact to your retirement plan is a big part of making the decision when to draw those benefits.

  5. Keep Your Plan on Track
    Now that you are hitting the final stretch it is time to give your retirement savings all that you can.  Ramping up for the next ten years will make a big difference. 

You are almost there! Candidly thinking through your options and taking your plan to the next level is sure to help you hit your retirement mark in good stride. But if you need help along the way, please reach out to us or your Financial Planner for guidance.

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc.® In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie is a member of the Leadership Oakland Alumni Association and is a frequent contributor to Money Centered.

Opinions expressed are those of Laurie Renchik and are not necessarily those of RJFS or Raymond James. Every individual's situation is unique; please consult with a financial professional before making any investment decision.

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Preparing for Aging: Baby Boomers vs. Generation X

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In our day-to-day work with clients, Baby Boomer and Generation X clients, assist their parents and sometimes grandparents (those in the “Silent Generation,” born in the mid-1920s to early 1940s) plan for their aging years. But are those “children” planning for their own aging years? Are they learning any lessons from watching family members age? Who is planning better at preparing for aging – Baby Boomers or Generation X?

As it turns out, neither generation is as prepared as they should be, but Generation X is actually LESS prepared for aging than the Baby Boom generation. Why is that?

  • Generation X has more debt (student loan debt, credit card debt, etc.), which caused them to start saving later.

  • Generation X has less access to pensions and feels less secure in their promised future Social Security benefits.

  • Generation X is even more of a “sandwich generation” than the Baby Boomers. Call it a club sandwich with multi layers: Generation Xers can be stuck in the middle of supporting grandparents, parents, children, and grandchildren all at the same time all while trying to hold down a job and going back to school to get additional education or credentials. Wonder why we can’t pay attention to our own health and well-being? (Yes, I am a Generation Xer!!)

  • In addition to having no time to visit physicians and do the routine self-care that should be done due to the multi-levels of our responsibilities, recent studies by MDVIP, Inc. (WHSV 2014) indicate that this generation is also afraid of receiving bad news, which also deters them from visiting the doctor (which of course, may prevent getting information on conditions early, when they could be treated).

With each generation, we anticipate that life expectancy assumptions get a little bit longer if only for improvements in health care and technology. Therefore, each generation needs to be even more prepared, financially, physically, psychologically and otherwise for a longer life that may occur. Both the Boomers and the Generation Xers have a lot of work cut out for them if they want to be prepared!

If you feel that you are behind in your plan for aging and need some assistance, we can help! If you’re in Generation X, take the time to view our webinar dedicated to planning for your retirement. If you have any questions, free to reach out to me at Sandy.Adams@centerfinplan.com.

Sandra Adams, CFP® , CeFT™ is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

This information has been obtained from sources considered to be reliable, but we do not guarantee that this material is accurate or complete. Opinions expressed are those of Sandy Adams and are not necessarily those of RJFS or Raymond James.

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Why Approaching Difficult Topics Now Could Help Avoid a Mess with Parents’ Finances

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As I write this, we are a couple of weeks into 2017, and already I have been involved with two client family meetings – adult children meeting with their parents about their parents estate planning and finances. I am sure this is just the tip of the iceberg for this type of meeting – and I am so thankful. Why? Because these families are planning ahead! Approaching these sometimes very difficult topics now can be the key to avoiding a very big mess later.

You might think “So, what’s the big deal? Mom and Dad seem to have things under control. They can pay their bills just fine, they seem to be financially comfortable, and I don’t want to invade their privacy and ask them too many questions about their money, so let’s leave well enough alone until we really need to get involved.”

Here are just a few of the “big deals” that could occur for those who wait until mom and dad can’t handle things (i.e. in this case, parents now are unable to handle financial affairs due to incapacity):

  • Parents may not remember where they hold accounts, what their account numbers are, passwords, etc.

  • Parents may not remember all income sources, amounts, etc. (pensions, Social Security, etc.) and may not have been reconciling checkbooks.

  • Parents may not have been paying bills and may not remember what bills need to be paid (you are lucky if they have bills set up for auto bill pay, as many of this generation have been uncomfortable setting this up).

  • Parents may or may not have a filing system and/or record keeping system that you can understand; depending on the stage of their incapacity, they may or may not be able to explain it to you.

  • If your parents have existing Durable Powers of Attorney (General/Financial and Medical) that give you authority to act on your behalf, you can hope that they are up to date and written broad enough instructions to be used with most financial and medical institutions.

  • You can hope that there aren’t too many other surprises that you didn’t expect!

My advice is always to follow the proactive planning of some of my clients, and start talking to your parents in advance of a crisis (or in advance of “that time” when parents can no longer do things themselves). Sure, it is not always the most comfortable conversation to start, but you might be surprised to find that many older adult parents find comfort in knowing that their children (1) want to be involved, (2) are interested in their well-being, and (3) know that there is a plan in place once the family meeting has taken place. Start the process of planning for your parents today! Don’t hesitate to contact me if I can be of assistance (Sandy.Adams@CenterFinPlan.com).

Sandra Adams, CFP® , CeFT™ is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Sandy Adams and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

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Medicare Changes in 2017

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Contributed by: James Smiertka James Smiertka

We all know Medicare can be complicated, and the cost of benefits change each year. In recent years, you may have heard that you should expect rising premiums and higher out-of-pocket deductibles. These Medicare costs are tied to the COLA (cost-of-living adjustment) that increases the benefit of Social Security recipients each year. The Social Security Administration decides the year’s COLA based on the inflation rate from the prior year.

Most recipients of Medicare pay premiums for Part B coverage whether they pay for Part A coverage. Generally, Medicare recipients with 40 quarters of Medicare-covered employment receive Part A coverage while not paying a premium. Part A covers hospital stays, skilled nursing facilities, and home health and hospice care. Part B covers other things like doctor visits, outpatient procedures, and medical equipment. Premiums are also required for Part D prescription drug coverage.

So how exactly does this year’s 0.3% Social Security COLA tie in with Medicare costs?

In 2016, there was no COLA for Social Security, and with the increase in Medicare Part B premiums about 70% of Social Security recipients did not have to pay the higher premiums do to the “hold harmless” provision which prevents them from having their Social Security incomes drained by the rising Medicare premiums. With this year’s 0.3% Social Security COLA recipients can expect to pay just a few dollars more per month. The average increase will be about 4%.

Medicare announced increases of about 10% for 2017 part B premiums & deductibles. There are modest increases for Part A premiums, and Part D plans have already been set and are not affected by the Part A or Part B changes. This year’s 0.3% Social Security COLA will be too small to fully fund higher Part B premiums so many recipients will once again be saved from increases by the “hold harmless” provision.

Here are Medicare numbers for 2017 from Raymond James.

  • Premiums are higher for those with higher taxable incomes ($85,000 for individuals and $170,000 for couples filing jointly).

  • The average Medicare Part B premium in 2017 will be about $109 (compared to $104.90 for the past 4 years).

  • Standard premium is increasing from $121.90 in 2016 to $134 in 2017.

  • The Medicare Part B deductible is increasing from $106 in 2016 to $183 in 2017.

  • The monthly Medicare Part A premium for those needing to buy coverage is increasing from $411 in 2016 to $413 in 2017.

  • The Medicare Part A deductible for inpatient hospitalization is increasing from $1,288 in 2016 to $1,316 in 2017, with additional increases to daily co-insurance amounts for stays that exceed 61 days.

  • The co-insurance cost for beneficiaries in skilled nursing facilities will increase from $161 in 2016 to $164.50 in 2017 for days 21 through 100.

For the 5 to 6 percent of enrollees that earn enough to trigger the high-income surcharges, here are the numbers:

  

If you’re not enrolled in Medicare, remember to enroll in the 7-month period around your 65th birthday, and contact your financial planner with any questions.

Additional Links

James Smiertka is a Client Service Associate at Center for Financial Planning, Inc.®

Any opinions are those of James Smiertka and not necessarily those of RJFS or 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."
Sources: http://www.hhs.gov/about/budget/fy2017/budget-in-brief/cms/medicare/index.html
https://www.thestreet.com/story/13747734/1/how-to-prepare-your-finances-for-medicare-changes-coming-in-2017.html
https://www.medicare.gov/pubs/pdf/10050-Medicare-and-You.pdf
http://www.pbs.org/newshour/making-sense/2017-medicare-premiums-and-deductibles/
https://www.medicare.gov/pubs/pdf/10050-Medicare-and-You.pdf
http://www.raymondjames.com/pointofview/medicare-updates-for-2017

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Social Security Changes You Need to Know

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Contributed by: Kali Hassinger, CFP® Kali Hassinger

The Social Security Administration announced on October 18th that the Cost of Living Adjustment for 2017 will be 0.3 percent. This announcement comes after 2016, when Social Security provided no COLA benefit. For many Social Security recipients, however, this minimal increase will be negated by the expected rise in Medicare Part B premiums, which are usually deducted directly from Social Security payments. For those subject to the “hold harmless” provision, the Medicare Part B premiums cannot increase by more than the COLA. Those not covered by that provision, however, could be subject to a larger premium increase. The specific Medicare changes will be announced later this year.

The Social Security Administration will also increase the wage ceiling subject to payroll taxes to $127,200 in 2017 (previously capped at $118,500). This means that the first $127,200 earned by any taxpayer will be taxed at 12.4% (6.2% is paid by the Employee and 6.2% is paid by the Employer). Any earnings above $127,200 won’t be subject to the OASDI (Old Age, Survivor and Disability Insurance) tax. The Retirement Earnings Test (concerning any wages earned while collecting Social Security prior to Full Retirement Age), also received a slight boost. Those receiving benefits prior to Full Retirement Age can now earn up to $16,920/year before Social Security will start to withhold benefits. If you have any questions about how these changes affect you and your family, please feel free to give us a call!

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

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Will Social Security be Around When I Retire?

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Contributed by: Matt Trujillo, CFP® Matt Trujillo

If you're retired or close to retiring, then you've probably got nothing to worry about—your Social Security benefits will likely be paid to you in the amount you've planned on (at least that's what most of the politicians say). But what about the rest of us?

Watching the news, listening to the radio, or reading the newspaper, you've probably come across story after story on the health of Social Security. Depending on the actuarial assumptions used and the political slant, Social Security has been described as everything from a program in need of some adjustments to one in crisis requiring immediate and drastic reform.

Obviously, the underlying assumptions used can affect one's perception of the solvency of Social Security, but it's clear some action needs to be taken. Even experts disagree, however, on the best remedy. So let's take a look at what we do know.

According to the Social Security Administration (SSA), over 64 million Americans currently collect some sort of Social Security retirement, disability, or death benefit. Social Security is a pay-as-you-go system, with today's workers paying the benefits for today's retirees.

How much do today's workers’ pay? Well, the first $118,500 (in 2016) of an individual's annual wages is subject to a Social Security payroll tax, with half being paid by the employee and half by the employer (self-employed individuals pay all of it). Payroll taxes collected are put into the Social Security trust funds and invested in securities guaranteed by the federal government. The funds are then used to pay out current benefits.

The amount of your retirement benefit is based on your average earnings over your working career. Higher lifetime earnings result in higher benefits, so if you have some years of no earnings or low earnings, your benefit amount may be lower than if you had worked steadily.

Your age at the time you start receiving benefits also affects your benefit amount. Currently, the full retirement age is in the process of rising to 67 in two-month increments, as shown in the following chart:

What Is Your Full Retirement Age?

You can begin receiving Social Security benefits before your full retirement age, as early as age 62. If you retire early, however, your Social Security benefit will be less than if you had waited until your full retirement age to begin receiving benefits. For example, if your full retirement age is 67, you'll receive about 30% less if you retire at age 62 than if you wait until age 67 to retire. This reduction is permanent—you won't be eligible for a benefit increase once you reach full retirement age.

Even those on opposite sides of the political spectrum can agree that demographic factors are exacerbating Social Security's problems—namely, life expectancy is increasing and the birth rate is decreasing. This means that over time, fewer workers will have to support more retirees.

According to the SSA, Social Security is already paying out more money than it takes in. By drawing on the Social Security trust fund, however, the SSA estimates that Social Security should be able to pay 100% of scheduled benefits until fund reserves are depleted in 2034. Once the trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 77% of scheduled benefits. This means that in 2034, if no changes are made, beneficiaries may receive a benefit that is about 21% less than expected.

So the question still remains, with trouble looming on the horizon, how do we fix the system?  While no one can say for sure what will happen (and the political process is sure to be contentious), here are some solutions that have been proposed to help keep Social Security solvent for many years to come:

  • Allow individuals to invest some of their current Social Security taxes in "personal retirement accounts"

  • Raise the current payroll tax

  • Raise the current ceiling on wages currently subject to the payroll tax

  • Raise the full retirement age beyond age 67

  • Reduce future benefits, especially for wealthy retirees

  • Change the benefit formula that is used to calculate benefits

  • Change how the annual cost-of-living adjustment for benefits is calculated

The financial outlook for Social Security depends on a number of demographic and economic assumptions that can change over time, so any action that might be taken and who might be affected are still unclear. No matter what the future holds for Social Security, your financial future is still in your hands. Focus on saving as much for retirement as possible, and consider various income scenarios when planning for retirement.

It's also important to understand your benefits, and what you can expect to receive from Social Security based on current law. You can find this information on your Social Security Statement, which you can access online at the Social Security website, socialsecurity.gov by signing up for a “my Social Security” account. Your statement contains a detailed record of your earnings and includes retirement, disability, and survivor's benefit estimates that are based on your actual earnings and projections of future earnings. For more details on how to sign up for an online account see our previous blog post for step by step instructions.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

(Source: Fast Facts & Figures about Social Security, 2015)

(Source: 2015 OASDI Trustees Report)

This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Matthew Trujillo and are not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor the third party website listed or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

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Social Security Survivor’s Benefits

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Contributed by: James Smiertka James Smiertka

We’d all like to think that we can all count on receiving Social Security benefits during our lifetimes if we work and reach retirement. But in the case that the unforeseen happens, it is important to know how Social Security benefits can affect our survivors. When someone dies who has worked and paid Social Security taxes over their lifetime, certain family members may be eligible for survivor benefits.

Per the Social Security Administration, there are approximately 5 million widows/widowers receiving Social Security benefits based on their deceased spouse’s earnings record. This can be a very important part of a survivor’s overall income.  

What are the benefits that a deceased’s surviving family members might be eligible for?

  • A widow/widower can receive a reduced benefit as early as age 60 or full benefits at their full retirement age (FRA). At FRA, they would receive their full benefit, but if they applied between age 60 and FRA they would receive an amount that equals between 71.5% and 99% of their benefit. Divorced surviving spouses are also eligible if the marriage lasted 10 or more years and they did not remarry before age 60 (age 50 if disabled).

  • A widow/widower can begin be benefits as early as age 50 if he/she is disabled with the disability starting before or within seven years of the deceased spouse’s death. In addition, if the widow/widower gets remarried after age 60 it will not affect their eligibility (again, age 50 if disabled).

  • Surviving spouses and ex-spouses caring for a child, or children, of the deceased spouse (with the child being under age 16 or disabled) are eligible to receive 75% of the deceased spouse’s benefit at any age.  Note:  A survivor benefit is treated the same in regards to the earnings test with the benefit being reduced based on any earnings if the recipient is under FRA. Check out the blog I wrote previously on the earnings test for more information.

  • Surviving unmarried children & dependent parents can also receive survivor benefits depending on the circumstances. Keep in mind that the aggregate amount that a family receives in survivor benefits is limited to around 150% to 180% of the deceased worker’s benefit. Here is a breakdown of the amount of benefits survivors may receive:

    • Widow or widower, FRA or older: 100 percent of the deceased worker's benefit amount

    • Widow or widower, age 60 to FRA: 71½ to 99 percent of the deceased worker's basic amount

    • Disabled widow or widower aged 50 through 59: 71½ percent

    • Widow or widower, any age, caring for a child under age 16: 75 percent.

    •  A child under age 18 (19 if still in elementary or secondary school) or disabled:  75 percent.

    • Dependent parent(s) of the deceased worker, age 62 or older:

    • One surviving parent: 82½ percent.

    • Two surviving parents: 75 percent to each parent.

How this information could affect you: If your survivor’s benefit is more than your own benefit, it may make sense to receive this benefit at age 60, as the Social Security Administration states that “survivor benefits based on age will be about the same total amount over a lifetime.” If your own benefit will be greater you are able to switch to your own benefit at age 62 to 70. Additionally, in some cases it can make sense for the spouse with the higher benefit to suspend/grow their benefit until age 70 (depending on age & life expectancy of both spouses) in order to provide a larger survivor benefit to the potential surviving spouse. Even after many lost the ability to file & suspend with the recent Social Security law change, there are still strategies & items to be aware of that can help you be most efficient with your plan. As always, contact your financial planner with any questions or concerns.

James Smiertka is a Client Service Associate at Center for Financial Planning, Inc.

https://www.ssa.gov/ 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. The information has been obtained from sources considered to be reliable, but we do 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. Any opinions are those of James Smiertka and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

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Continuing to Work after Filing for Social Security

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Contributed by: James Smiertka James Smiertka

If there’s a chance you will earn income while you are collecting Social Security, you will want to know about an extremely important rule put in place by the Social Security Administration called the “Earnings Test.” There are a variety of reasons why someone may earn income while receiving Social Security.  Whether it’s simply pursuing a passion after retirement or the financial need to pick up a part-time job, it’s important to fully understand the implications of earning income and collecting Social Security benefits prior to reaching your full retirement age (FRA). (Click here to see what your FRA is.) Once you reach full retirement age, however, you are not subject to any reduction of benefits from the “earnings test” on your earned income. Let’s take a look at two different examples in detail:

If you are under full retirement age (FRA) for the entire year:

  • Earnings limit: $15,720

  • Reduction of benefits: $1 for every $2 you earn above the earnings limit

  • Example: John is currently 63 and his FRA is 66. John retires, immediately turns on Social Security benefits ($20,000/yr) but decides he wants to pursue his passion as a tutor and plans on earning $35,720 for the year. Since his earnings would be $20,000 over the Earnings Test limit ($35,720 – $15,720), one half ($1 of every $2 earned), or $10,000, would be withheld from his annual Social Security benefit, therefore, reducing John’s Social Security benefit to $10,000 for the year. 

In the year you reach full retirement age (FRA):

  • Earnings limit: $41,880

  • Reduction of benefits: $1 for every $3 you earn above the earnings limit

  • Example: Sue is currently 65 but is reaching her FRA of 66 in a matter of months. She recently started collecting Social Security, which provides her $30,000/yr. Sue is still working, earning $161,880 annually and was not aware of the Social Security Earnings Test. Her earnings would be $120,000 over the earnings test limit ($161,880 – $41,880), one third ($1 of every $3 earned), or $40,000 would be withheld from her annual Social Security benefit. Since this amount is greater than her Social Security benefit, her entire benefit for this year would be withheld.

It’s important to note that if you have had Social Security benefits withheld because of your earnings, they are not lost forever. Once you reach full retirement age, your benefit will increase to compensate for the benefits that were withheld. It does, however, on average, take nearly 2 decades to essentially recover the benefits that were withheld. The bottom line is that there are very few instances where it would make sense to start collecting benefits if there is a strong likelihood that you will continue working. Instead of collecting Social Security early and more than likely having the majority (if not all) of your benefits withheld, you could simply delay benefits which permanently increases your Social Security benefit up to age 70 (More information on that here).

As you can see, there are many moving parts with Social Security, especially for clients who still plan to work prior to reaching full retirement age. Before turning your benefits on, we always recommend that you reach out to your financial planner to discuss your situation in detail to ensure the strategy you’re selecting is in line with your own personal goals and objectives. If you’d like to chat about your benefits and discuss different filing strategies, give us a call, we are happy to help! 

James Smiertka is a Client Service Associate at Center for Financial Planning, Inc.

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 Jim Smiertka and not necessarily those of Raymond James. 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. Examples provided in this material are hypothetical and for illustrative purposes only.

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Everyone’s Favorite Topics: Social Security and Taxes

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Contributed by: Kali Hassinger Kali Hassinger

Throughout our entire working lives, our hard-earned cash is taken out of each paycheck and paid into a seemingly abstract Social Security Trust fund. As we see these funds disappear week after week, the pain of being taxed is hopefully somewhat alleviated by the possibility that, one day, we can finally collect benefits from the money that has been alluding us for so long. (Maybe you’re also comforted by the fact that you’re paying toward economic security for the elderly and disabled – or maybe not, but I’m an idealist). 

When the time to file for benefits finally arises, however, it may not be clear how this new source of income will affect your tax situation. Although no one pays tax on 100% of their Social Security benefits, the amount that is taxable is determined by the IRS based on your “provisional” or “combined” income. Provisional and combined income are terms that can be use interchangeably, so we will just use provisional from this point forward. Many of you may not be familiar with either term, but I’ll bet it’s no surprise that the beloved IRS uses a system that can be slightly confusing! No need to worry, though, because I’m going to provide you with the basics of Social Security taxation.

Determining your provisional (aka combined) income requires the following formula: 

Adjusted Gross income (AGI) includes almost all forms of income (salaries, pensions, IRA distributions, ordinary dividends, etc.), and it can be found on the 1st page of your Form 1040. AGI does not, however, include tax exempt interest – such as dividends paid from a municipal bond or excluded foreign interest. These can be powerful tax tools in individual situations, but they won’t help when it comes to Social Security taxation. The IRS requires that you add any tax-exempt interest received into your Adjusted Gross Income for this calculation. On top of that, you have to add ½ of your annual social security benefits. The sum of these 3 items will reveal your provisional income for Social Security taxation purposes.

After determining the provisional income amount, the IRS taxes your Social Security benefits using 3 thresholds: 0%, 50%, or 85%. This means that the maximum portion of your Social Security Benefits that can be considered taxable income is 85%, while some people may not be taxed at all. The provisional income dollar amount in relation to the taxation percentage is illustrated in the chart below: 

As you can see, it isn’t difficult to reach the 50% and 85% thresholds, which can ultimately affect your marginal tax bracket.  These thresholds were established in 1984 and 1993, and they have never been adjusted for inflation. The taxable portion of your benefit is the taxed at your normal marginal tax rate. 

Social Security, in general, can be a very confusing and intimidating topic, but it is also a valuable income resource for all who collect benefits. Everyone’s circumstance is different, and it’s important to understand how the benefits are affecting your tax situation. I encourage you to speak to your CPA or Financial Planner with any questions.

Kali Hassinger, CFP® is a Registered Client Service Associate at Center for Financial Planning, Inc.

This material is being provided for information 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. Any opinions are those of Kali Hassinger and not necessarily those of Raymond James.

Webinar in Review: Social Security Filing Changes

Contributed by: Clare Lilek Clare Lilek

Social Security is probably top of mind for a lot of you reading. Either you’ve heard about the changes being made to filing tactics regarding social security, or you’re getting ready to file and want to know the best strategy to use, or even how it works. We understand it can be complicated, and that’s why we’re here; to make sure you’re getting the most out of your social security benefit. Matt Trujillo, CFP®, held a webinar on the recent changes made to social security and how they could impact you and your spouse. He also went through a few scenarios of spousal benefits in order to clarify how the social security math equation works. He also explained a couple filing strategies that you and your spouse can take advantage of.

Calculating Your Benefits

First of all, Matt stressed that when you file for social security, your benefits statement is a snap shot in time. A predetermined formula uses the Full Retirement Age of 66 as the filing age and your previous work history for determining benefits. Your actual benefits you will receive might not correspond with this statement since it’s a picture of your benefits using your current situation as the determining factors, not your future situation. This is helpful to keep in mind as you’re going through the filing process.

Matt goes through three different examples of spouses filing for benefits in order for you to better understand how filing for social security works, and how that math formula benefits you and your spouse. He also provides a few things to keep in mind when deciding when to file, who should file, and the possibility of increasing surviving spouse benefits.

Recent Changes to Social Security

Finally, Matt discussed the two major changes occurring in social security and whom they affect: the end of Restricted Application and the end of the File & Suspend strategy. If you were thinking of utilizing either of these methods, for the Restricted Application if you turned 62 years on or before 12/31/2015, then you are grandfathered in to this advanced filing strategy. In order to File & Suspend, you have to have currently reached Full Retirement Age, and then you have until April 30th, 2016 to take advantage of this strategy. Please contact your planner if you believe you qualify for either of these tactics. For more information on the changes, please check out this blog.

Overall, this is just a quick teaser of the information you’ll find in the webinar recording below. Watch the video and if you have further questions on what this information means for you, please contact us. We’re here to help you navigate!

Clare Lilek is a Challenge Detroit Fellow / Client Service Associate at Center for Financial Planning, Inc.

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