How Can I Estimate Retirement Income Needs?

Contributed by: Josh Bitel, CFP®

Planning for retirement is on everyone's mind at some point in their career. But figuring out where to begin to project how much income will be needed can be a tall task. Sure, there are rules of thumb to follow, but cookie-cutter approaches may only work for some. When estimating your retirement needs, here is a quick guide to get you started.

Use Your Current Income as a Starting Point

One popular approach is to use a percentage of your current working income. Industry professionals disagree on what percentage to use; it could be anywhere from 60% to 90% or even more. The appeal of this approach lies in its simplicity and the fact that there is a fairly common-sense analysis underlying it. Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect that there will be certain expenses you will no longer have is a good way to sustain a comfortable retirement.

The problem with this approach is that it does not account for your unique situation. For example, if you intend to travel more in retirement, you might need 100% (or more) of your current income to accomplish your goals. 

Estimate Retirement Expenses

Another challenging piece of the equation is figuring out what your retirement expenses may look like. After all, a plan will only be successful if it accounts for the basic minimum needs. Remember that the cost of living will go up over time. And keep in mind that your retirement expenses may change from year to year. For example, paying off a mortgage would decrease your expenses, while healthcare costs as we age will have the opposite effect on your budget.

Understand How Retirement Age Can Change the Calculation

In a nutshell, the earlier you retire, the more money you will need to rely on to support your lifestyle. I recently wrote a blog simplifying this topic: click here to see more.

Account For Your Life Expectancy

Of course, when you stop working is only one piece of the pie to determine how long of a retirement you will experience. The other, harder to estimate, piece is your life expectancy. It is important to understand that the average life expectancy of your peers can play into the equation. Many factors play into this, such as location, race, income level, etc., so getting a handle on your specific situation is key. There are many tables that can be found online to assist with this; however, I always encourage people to err on the side of caution and assume a longer-than-average life expectancy to reduce the possibility of running out of money.

Identify Your Sources of Retirement Income

So you have an idea of how much you spend to support your lifestyle and how long your retirement may last, next is understanding where the money comes from. A good place to start for most Americans is Social Security. Check out http://www.ssa.gov to see your current benefit estimate. Other fixed income sources may include a pension or annuity. Beyond that, we normally rely on investments such as a 401k plan at work or other retirement plans.

Address Any Income Shortfalls

In a perfect world, we have added up our retirement lifestyle and compared it with our sources of retirement income, and found that we have plenty set aside to support a comfortable retirement. However, this is not always the case. If you have gone through this exercise and come to the conclusion of an income shortfall, here are a few ideas to help bridge that gap:

• Consider delaying your retirement for a few years

• Try to cut current expenses so you will have more money to save for retirement

• Work part-time during retirement for extra income

As always, an advisor can help with this calculation and inspire confidence in your path to financial independence. Reach out to us today if you are thinking about that light at the end of the tunnel!

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 being provided for information purposes only and is not a complete description, nor is it a recommendation. 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. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72.

The Challenges of Living Alone in Retirement

Contributed by: Sandra Adams, CFP®

Recently, an article in The New York Times titled "As Gen X and Boomers Age, They Confront Living Alone" has gained widespread attention. As a financial adviser, I have noticed a trend of more clients entering and living in retirement alone over the past five to ten years. This is a topic worth considering, as the number of people living alone in retirement is increasing.

The statistics speak for themselves. According to the U.S. Census Bureau, 36% of American households are currently occupied by single individuals aged 50 and older, a total of nearly 26 million people. This group has traditionally been more likely to live alone, and now that age group, including baby boomers and Gen Xers, makes up a larger share of the population than ever before. Additionally, changing attitudes towards gender and marriage have caused individuals aged 50 and older to be more likely to be divorced, separated, or never married. One in six Americans aged 55 and older do not have children, and because women tend to live longer than men, over 60% of older adults living alone are female.

The challenges of living alone in retirement are real. Here are the top 5 challenges and how to plan for them:

1. Living alone can lead to social isolation

According to the Census Bureau, a higher proportion of older women live alone in retirement. However, men are more vulnerable to the negative effects of solitary living, such as social isolation, which can increase the risk of health issues and a higher mortality rate. Those living alone and not engaging socially may be at risk for general, mental, and cognitive health problems. 

To combat the challenges of social isolation that come with living alone, it is important to make intentional plans. This is especially crucial for those who may not have children or many family members. Finding social groups to be a part of, whether in the community, through hobbies or volunteering, or with current or former colleagues, can keep you connected and engaged with the outside world.

2. Managing the home can become a challenge over time

According to a 2021 AARP study, over 90% of older adults want to continue living in their own homes during retirement. While this desire for comfort and privacy is entirely understandable, managing a home can be financially and physically overwhelming for single individuals as they age. If the home is not designed for "aging in place," it may become difficult to manage if the individual experiences health or mobility issues. To address these challenges, many single individuals may choose to:·

• Pay off their home before retirement. 

• Make home modifications in advance to accommodate future needs. 

• Build flexibility into their financial plan to pay for help with managing their home once they are unable to do so themselves.

3. Single retirees living alone have no built-in partner to be their advocate for estate planning purposes

Deciding on a power of attorney for financial affairs, patient advocate, successor trustee for a trust, and executor for a will can be difficult for single older adults, especially those with no children or family. Those with no family or close friends to ask for these roles may struggle with the decision. 

There are now professional advocates who can fill these roles, such as attorneys for financial power of attorney and successor trustee (or third-party financial and bank Trust departments that can serve as successor trustees), attorneys or geriatric care managers/social workers as patient advocates, and attorneys as executors. However, it is important to note that hiring professionals to serve in these roles requires advanced planning and incurs a cost.

4. Single retirees living alone have no built-in partner to care for them

According to the Department of Health and Human Services, someone turning 65 today has nearly a 70% chance of needing such long-term care in their remaining years. On average, women need care longer (3.7 years) than men (2.2 years). 

For those older adults who are part of a couple, they can avoid paying for professional care longer by caring for each other for some time. Single individuals living alone will likely need to pay for care needs from day one of their needs. One way to address this challenge is to prepare well in advance for this potential need by planning for long-term care needs. 

While you are still working, make sure that you have long-term disability insurance that covers the expense of potential care needs. For the costs that may occur in your retirement years, consider long-term care insurance and/or carve out a portion of your retirement savings earmarked for long-term care expenses. Have a plan for what you will do if you ever have a long-term care event, and have your plan in written form for your advocates. If you aren't able to live in your own home due to your future health, have a plan for where you might consider going and how that will be paid for.

5. From a financial aspect, single retirees rely only on one set of resources and assets

Single individuals living alone are in a unique financial situation. They have only themselves to rely on for the remainder of their lives. There is no spousal Social Security or pension to be a backstop on the income side. It is only their savings and assets that they have to rely on — no one else has anything to leave them. 

Financial planning needs to be very intentional to ensure they can support themselves for the remainder of their lives first and foremost. Planning for the goals of what they want to do and accomplish during their retirement years and for their potential long-term care needs is crucial.

Living single and alone in retirement is a choice, not without challenges. It is especially important for single individuals approaching retirement to work with the appropriate professionals to plan for their second stage in life. With proper planning, living alone and single and alone in retirement can be done successfully.

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A rising number of senior citizens live alone. Sandra Adams, CFP® offers ways to cope with the social and financial aspects of solo living. Watch the video version of the blog HERE!

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.

Raymond James is not affiliated with and does not endorse the opinions or services of Karen Kurson or Retirement Daily.

The foregoing 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. Any opinions are those of Sandra D. Adams and not necessarily those of Raymond James.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services. 24800 Denso Drive, Ste 300 // Southfield, MI 48033 // (248) 948-7900

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

State Pension Tax Relief for All Coming Soon!

Contributed by: Kali Hassinger, CFP®, CSRIC™

In early March of 2022, Michigan’s Gov. Gretchen Whitmer signed the Lowering MI Costs plan into law. This legislative change includes an update that will phase out state tax on pensions (both public and private) and other retirement income for many Michigan residents! Like past rules, the amount that can be deducted depends on when you were born and is adjusted incrementally over the next four years. 

For those born in 1945 and before, there is no change. The maximum allowed deduction can still be claimed each year. In 2023, that amount is $56,961 for single filers and $113,822 for joint filers. This maximum deduction amount is adjusted for inflation each year.  

2023

• For those born between 1946 and 1952:  Taxpayers will choose between claiming the current exemption of $20,000 for single filers or $40,000 for joint filers, or, under the new law, can deduct up to 25% of the max 2023 deduction amount (Single Filers: $56,961 x .25 = $14,240.25; Joint Filers: $113,922 x .25 = $28,480)

• For those born between 1953 and 1958: Single filers can deduct up to 25% of the 2023 amount of $56,961 ($14,240.25), Joint Filers can deduct up to 25% of the 2023 amount of $113,922 (28,480). Under previous law, there was no deduction allowed. 

• For those born in 1959 and after:  No deduction allowed 

2024  

• For those born between 1946 and 1952:  Taxpayers will choose between claiming the current exemption of $20,000 for single filers or $40,000 for joint filers, or under the new law, Single and Joint filers can deduct up to 50% of the 2024 maximum deduction amount

• For those born between 1953 and 1962:  Can deduct up to 50% of the maximum deduction allowed in 2024

• For those born in 1963 and after: No Deduction allowed

2025

• For those born between 1946 and 1952:  Taxpayers will get to choose between claiming the current exemption of $20,000 for single filers or $40,000 for joint filers, or under the new law, Single and Joint filers can deduct up to 75% of the 2025 maximum deduction amount

• For those born between 1953 and 1966:  Can deduct up to 75% of the maximum deduction allowed in 2025

• For those born in 1967 and after: No Deduction allowed

2026 

• For all taxpayers: Full Deduction allowed

This change is estimated to reduce state tax paid by an average of $1,000 for each household affected.

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.

The information contained in this letter 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 opinions are those of Kali Hassinger, CFP®, CSRIC™, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, 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, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. 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.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Raymond James does not provide tax advice. Please discuss these matters with the appropriate professional. This document is a summary only and not meant to represent all provisions within the Lowering MI Cost plan.

How to Make the Federal Funds Rate Work for You

Contributed by: Kelsey Arvai, CFP®, MBA

It is worth reviewing how interest rates work and how you might consider adjusting your saving, spending, and investing strategies. Please always consult your CFP® professional regarding your specific situation and what is right for you. The Federal Reserve interest rate (also known as the federal funds rate) is the interest rate at which banks and credit unions borrow from and lend to each other. It is determined by the Federal Reserve System (also known as the Federal Reserve or simply the Fed). The Fed is the central banking system of the United States, and the federal funds rate is one of the key tools for guiding US monetary policy. The federal funds rate impacts everything from annual percentage yields (APYs) you earn on your savings to the rate you pay on credit card balances.

The Fed was first created in 1913 with the enactment of the Federal Reserve Act. A series of financial panics, specifically a severe one in 1907, led to the desire for central control of the monetary system to alleviate financial crises. The Fed is composed of several layers governed by the presidentially-appointed board of governors (known as the Federal Reserve Board or FRB). Historical events such as the Great Depression and the Great Recession have led to the expansion of the roles and responsibilities of the Fed. One of the functions of the Fed is to manage the nation’s money supply through monetary policy. Three key objectives have been established by Congress for monetary policy in the Federal Reserve Act – maximizing employment, stabilizing prices (prevention of inflation or deflation), and moderating long-term rates. The Fed largely implements monetary policy by targeting the federal funds rate – typically by adjusting the rate by 0.25% or 0.5%. The way it works is when you deposit money at a bank or credit union, those deposits provide banks with the capital needed to extend loans and other forms of credit to clients. Banks are required to keep a certain percentage of their total capital in reserve to help guarantee their stability and solvency.

The current federal funds rate is between 4.50% and 4.75% as of early February (part of the effort by the central bank to control inflation and maintain a stable economy). When interest rates are rising, make sure you look for high-yield savings opportunities, pay down credit card debt, and, if you’re looking for a car or home, make sure your interest rate reflects the current rate.

If you have a credit card, the most important strategy to focus on right now is prioritizing paying it off. While changes to interest rates will not affect your current fixed-rate loans, such as your car loan or mortgage, if you carry a balance on a credit card, the rate you owe on that money will continue to rise alongside short-term rates set by the Fed. If you cannot pay down your debt quickly, consider moving your debt over to a balance transfer credit card that could ensure you will pay no interest on your balance for a number of months.

On a positive note, rising interest rates create savings opportunities. Even though interest rates on deposits tend to correlate with the rise of the fed funds rate – you will likely earn next to nothing on your regular savings account, which typically is around 0.01%. If you have accumulated a large amount of cash in the bank above your current cash needs and emergency savings (three to six months of expenses), you might consider looking to a high-yield savings account, a money-market fund, or a one year Treasury bill (T-bill). Rates have increased quite a bit lately; the one year bill is now at 5.07%, and the two year is around 4.65%. Interest on T-bills is not taxable at the state level. Not a significant impact for Michigan residents, but if you live in a high-income state such as California, these become even more attractive. Our team has identified several money markets funds offering yields of around 4.5% (more than you would typically see at the bank).

The Federal Funds Rate is important to understand as the rate changes can impact your wallet. Ultimately, it is your own habits that are the main factor in determining your financial situation. As always, if you have any questions, feel free to contact our Team at The Center; we would be happy to help!

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

The foregoing 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. Any opinions are those of the author and not necessarily those of Raymond James. 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.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

An investment in a money market fund is neither insured nor guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

Investors should consider the investment objective, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other important information, is available from your Financial Advisor and should be read carefully before investing.

How Much Does It Actually Take to Retire Early?

Contributed by: Josh Bitel, CFP®

Like most people, you have probably thought of the possibility of an early retirement, enjoying your remaining years doing whatever brings you joy and being financially independent. Whether you have your eyes set on traveling, lowering your golf score, spending more time with your family, or any other hobbies to take up your time, you may wonder… How much money does it actually take to retire at age 55?

If you have thought about retirement, you are likely familiar with the famous “4% rule”. This rule of thumb states that if you withdraw 4% of your investment portfolio or less each year, you will more than likely experience a ‘safe’ retirement, sheltered from the ebbs and flows of the stock market as best you can. However, some may not know that this rule assumes a 30-year retirement, which is typical for most retirees. If we want to stretch that number to 40 years, the withdrawal rate is slightly lower. For this blog, we will assume a 3.5% withdrawal rate; some professionals have argued that 3% is the better number, but I will split the difference.

A key component of a retiree’s paycheck is Social Security. The average working family has a household Social Security benefit of just under $3,000/month. For our calculations, we will assume $35,424/year for a married couple retiring at age 65. For a couple retiring ten years sooner, however, this benefit will be reduced to compensate for the lost wages. The 55-year-old couple will collect $27,420/year starting as soon as they are able to collect (age 62).

For simplicity’s sake, we will assume a retirement ‘need’ of $10,000/month in retirement from all sources. A $120,000/year budget is fairly typical for an affluent family in retirement nowadays, especially for those with the means to retire early. Of course, we get to deduct our Social Security benefit from our budget to determine how much is needed from our portfolio to support our lifestyle in retirement. (Note that we are assuming no additional income sources like pensions or annuities for this example). As the 4% (or 3.5%) safe withdrawal rule already accounts for future inflation, we can apply this rule to determine an approximate retirement fund ‘need.’ See the following table for the results:

As you can see, over $500,000 in additional assets would be needed to retire ten years earlier. These rules can be applied to larger or smaller retirement budgets as well. While this exercise was heavily predicated on a rule of thumb, it is worth noting that no rule is perfect. Your experience could differ considerably from the assumptions listed above.

This exercise was your author’s best attempt to simplify an otherwise exceptionally complex life transition. This is merely scratching the surface on what it takes to retire comfortably. To increase your financial plan’s success rate, many other factors must be considered, such as tax treatment of distributions, asset allocation of your investments, life expectancy, etc. If you are interested in fine-tuning your own plan to try to retire earlier, it is best to consult an expert.

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.

The foregoing 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. Any opinions are those of the author and not necessarily those of Raymond James. 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. Examples used are for illustrative purposes only.

Understanding your Tax Return: Why Adjusted Gross Income Matters

Contributed by: Robert Ingram, CFP®

Tax Filing season is officially underway for the 2022 tax year returns. If you find yourself feeling a little extra stress or anxiety during this time, you are not alone. The U.S. tax code is undoubtedly complicated (that may be the understatement of the year), and your main focus is simply trying to get to the bottom line: how much do I owe, or how much am I getting back as a refund? Sound familiar?

As you are completing and reviewing your tax return, some other line items on your return (in addition to the bottom line) are worth looking at a bit more closely. In particular, your Adjusted Gross Income (AGI) may seem like just a number on the way to calculating your taxable income, which then determines your tax bill. And while that is true, your AGI is also used to determine eligibility for a number of different tax deductions, tax credits, and even retirement plans. It is also used to determine things like Medicare premiums, the amount of taxable Social Security benefits, and whether you may be subject to an additional tax on investment income.  

What is Adjusted Gross Income?

Simply stated, your Adjusted Gross Income is your total income minus certain types of…well, adjustments.  

This total income would be your gross income that combines a wide range of items, including things like W2 wage income and certain types of employer benefits, business income, Social Security benefits, pension and retirement plan distributions, investment income, capital gains, and other applicable income.

Once your Total Income is determined you would still make other potential adjustments for items that can include self-employment SEP IRA, SIMPLE IRA, or other qualified plan contributions, eligible Traditional IRA contributions, Health Savings Account contributions, eligible student loan interest, self-employed health insurance, alimony paid, and other adjustments. 

Why Adjusted Gross Income (AGI) Matters

As mentioned, the AGI is a number on the way to determining your Taxable Income.  Potential deductions such as the standard deduction or the itemized deductions, for example, are applied to the Adjusted Gross Income amount.

The applicable tax rates are applied to the Taxable Income to determine your Tax amount (almost), after factoring in additional deductions and/or credits you may be eligible to include.

The result after subtracting and adding any of those items is the amount of your Total Tax.  

(A key point to remember here is that while tax deductions lower your income used to calculate your tax amount, tax credits reduce the actual tax amount itself dollar for dollar.)

Based on your total amount of tax withholding and tax payments you’ve made, plus any additional eligible tax credits (e.g. Additional child tax credit, American Opportunity credit, Earned income credit), you may have paid more than the calculated Total Tax amount or less than the Total Tax amount.  If you have overpaid, then you would expect a refund.  If you have paid less than the Total Tax, then you would owe additional tax.

AGI Determines Eligibility for Some Tax Deductions and Credits

Several tax deductions and tax credits you may be able to take advantage of are subject to different AGI limitations.

• If you itemize deductions, medical expenses above 7.5% of your AGI are deductible. Therefore, the lower your AGI, the easier it is for more of your medical expenses to clear that 7.5% hurdle to be deductible.

• Itemized charitable donations you can deduct in a tax year are capped at a percentage of AGI. For example, you can deduct cash gifts made to qualified public charities up to 60% of your AGI. Non-cash gifts to public charities, such as stocks, bonds, and mutual funds owned for more than one year, are up to 30% of AGI.  

If you have a year with large charitable gifts, in some cases it could actually benefit you to have a higher AGI so that the deductible ceiling is a larger dollar amount.  Now, any portion of charitable gifts exceeding the percentage of AGI limit is therefore not deductible for that tax year, but the potential tax benefit is not completely lost. 

The amount in excess of the AGI limit can carry forward for use in future tax years (for up to 5 years).  But remember, you would still need to itemize your deductions to take advantage of the amount carried over into those years.  This is something to factor in to your charitable giving and tax planning, particularly if you expect to take only the standard deduction in the future.

Part of the eligibility criteria for some tax credits is that Adjusted Gross Income cannot exceed certain amounts, depending on your filing status (i.e., single, married filing jointly, head of household, married filing separately). Some credits where this applies include:

• The Child and Dependent Care credit

• Elderly and Disabled Senior tax credit

• The Earned Income tax credit

Modified Adjusted Gross Income (MAGI)

Along with Adjusted Gross Income (AGI), another related term to get to know is your Modified Adjusted Gross Income (a.k.a. MAGI). Your MAGI is essentially your AGI with certain income and deductions added back into that figure. The IRS uses MAGI to determine if you qualify for a range of tax benefits and programs, separate from the deductions and credits using AGI mentioned earlier.   

For example, MAGI is used as a criteria to determine

• If Traditional IRA contributions are deductible

• If you are eligible to contribute to a Roth IRA

• If you are eligible for the Child Tax Credit

• If you qualify for the American Opportunity or Lifetime Learning education tax credits

• If you are eligible for Premium Tax Credits and savings applied to marketplace health insurance plans under the Affordable Care Act

• If you pay higher Medicare premiums due to having income above certain thresholds

What makes the MAGI complicated (and often confusing) is that it is not a separate line item shown on Form 1040 of the tax return. Instead, it is calculated and used where applicable when completing your tax return or by external programs using tax return information. Also, the specific calculation for MAGI can be different, depending on how it is used. Different eligibility items add back different deductions or types of exempt incomes in each of their definitions of MAGI. To illustrate this point, let’s look at a couple of specific examples.

In the case of determining if contributions to a Traditional IRA are deductible, MAGI is calculated by adding AGI plus the following items (as applicable):

• student loan interest deduction

• foreign earned income and housing exclusions

• foreign housing deduction,

• excluded savings bond interest used for higher education,

• excluded employer adoption benefits

On the other hand, for the purpose of determining any Medicare premium adjustments, the Social Security Administration uses MAGI calculated as AGI plus any tax-exempt interest earned. 

When determining your eligibility for these types of tax benefits or projecting your Medicare premium, it is important to know the Modified Adjusted Gross Income that applies to each one. For many people without a lot of the unique deductions or exempt income to add back, their MAGI will be very close to their AGI. However, being aware of both AGI and MAGI and how each is applicable can be very beneficial when doing proactive tax planning throughout the year, not only during tax filing season.  

The tax code is complex, and determining how tax-related items apply to your unique situation depends on many factors. These are important conversations to have with your financial planner and tax professional, so please don’t hesitate to reach out to us if you have questions. 

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.

The foregoing 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. Any opinions are those of the author and not necessarily those of Raymond James. 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. Examples used are for illustrative purposes only.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Maximizing your 401k Contributions: Nuances to Save you Money

Contributed by: Nick Defenthaler, CFP®, RICP®

When starting a career, we are always told to contribute at least the minimum needed to get the full company match in our 401k (typically between 4% and 8%, depending on how your plan is structured). “Never throw away free money!” is a phrase we use quite often with children of clients who are starting that first job out of college.

But what about those who are well established in their career and fully maximizing 401k contributions ($22,500 for 2023, $29,000 if you are over the age of 50)? They should not have to worry about not receiving their full employer match, right? Well, depending on how your 401k plan is structured at work, the answer is yes! 

Let me provide an example to explain what I am referring to:
Let’s say Heather (age 54) earns a salary of $325,000 and elects to contribute 18% of her salary to her 401k. Because Heather has elected to contribute a percentage of her salary to her 401k instead of a set dollar figure, she will max out her contributions ($29,000) by the end of June each year. Let us also assume that Heather receives a 5% employer match on her 401k – this translates into $16,250/yr ($325,000 x 5%). If Heather does not have what is known as a “true up” feature within her plan, her employer will stop making matching contributions on her behalf halfway through the year – the point at which she maxed out for the year and contributions stopped. In this hypothetical example, not having the “true up” feature would cost Heather over $8,000 in matching dollars for the year!

So, how can you ensure you receive the matching dollars you are fully entitled to within your 401k? 
The first step I recommend is reaching out to your benefits director or 401k plan provider and asking them if your plan offers the “true up” feature. If it does, you are in the clear – regardless of when you max out for the year with your contributions, you will be receiving the full company match you are entitled to. 

If your plan does not offer the “true up” feature and you plan on maximizing your 401k contributions for the year, I would strongly suggest electing to defer a dollar amount instead of a percentage of your salary. For example, if you are over 50, plan on contributing $29,000 to your 401k this year, and if you are paid bi-weekly, elect to defer $1,115.38 every pay period ($1,115.38 x 26 pay periods = $29,000). Doing so will ensure you maximize your benefit by the end of December and not end up like Heather, who maxes out by the end of June and potentially loses out on significant matching dollars.  

Subtle nuances such as the “true up” 401k feature exist all around us in financial planning, and they can potentially have a large impact on the long-term success of your overall financial game plan. If you have questions on how to best utilize your employer’s 401k or retirement savings vehicle, please don’t hesitate to reach out to us for guidance. 

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.

Examples are hypothetical and are not representative of every employer's retirement plan. Not all employers offer matching 401(k) contributions. Please contact your employer's benefits department or retirement plan provider for terms on potential matching contributions.

Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

How Doing Your Retirement Planning Can Put You in the Driver’s Seat

Contributed by: Sandra Adams, CFP®

I have had some fascinating conversations in meetings with prospective clients over the last several months. Most of these clients have never previously worked with a financial planner, choosing the DIY (“Do It Yourself”) route until now. And for most, now that they are within a few years of retirement, knowing if they truly have the assets and income resources to be able to retire and support themselves throughout their life expectancies is something they do not want to leave to chance.

Going through the in-depth retirement planning process with the assistance of a financial planning professional can help answer the many questions that so many clients have trouble answering on their own or can only guess without accurate analysis. Things like:

• When should I take Social Security (or when should each of us take Social Security if we are a married couple)?;

• When is the best time to draw pensions and/or should I take the lifetime income benefit (if I choose this option, do I take a straight life payout vs. a payout with a spousal benefit if I am married) vs. the lump sum payout from my pension benefit?;

• If I have an annuity(ies), should I use them for income during retirement, and when?;

• What accounts do I draw from, and when do I draw from them to pay the least amount of taxes during retirement?

• How will I pay for Long Term Care if I do not have Long Term Care insurance?

• And most importantly, will I be able to financially support the lifestyle I desire for as long as I may live without running out of money?

Many potential clients I have met recently have come in assuming they will need to work until they are at least 70 (the age of their maximum Social Security age). While they may value their work, in many cases, it has seemed apparent that there was a fair amount of stress involved with the work they are doing. Knowing whether the client could retire earlier than 70 and giving them the CHOICE about when they could retire would undoubtedly put them in the driver’s seat. Knowledge is power!

Doing your retirement planning earlier than later allows you to make the choices you want to make when you want to make them. Knowing where you stand financially, now and into the future, allows you to decide what you want to do and when you want to do it — you are the driver, and you choose the route to your retirement destination!

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.

Opinions expressed in the attached article are those of Sandra D. Adams, CFP® and are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

Roth vs. Traditional IRA – How Do I Decide?

Contributed by: Kali Hassinger, CFP®, CSRIC™

As April 18th approaches, many are focused on the deadline to gather information and file taxes. However, April 18th is also the deadline to make a 2022 IRA contribution! How will you decide between making a Roth or traditional IRA contribution? There are pros and cons to each type of retirement account, but there is often a better option depending on your current and future circumstances. The IRS, however, has rules to dictate who and when you can make contributions. 

For 2022 Roth IRA contribution rules/limits:

• For single filers, the modified adjusted gross income (MAGI) limit is phased out between $129,000 and $144,000 (unsure what MAGI is? Click here).

• For married filing jointly, the MAGI limit is phased out between $204,000 and $214,000.

• Please keep in mind that for making contributions to this type of account, it makes no difference if you are covered by a qualified plan at work (such as a 401k or 403b); you have to be under the income thresholds.

• The maximum contribution amount is $6,000 if you’re under the age of 50. For those who are 50 & older (and have earned income for the year), you can contribute an additional $1,000 each year.

For 2022 Traditional IRA contributions:

• For single filers who are covered by a company retirement plan (401k, 403b, etc.), in 2022, the deduction is phased out between $68,000 and $78,000 of modified adjusted gross income (MAGI).

• For married filers, if you are covered by a company retirement plan in 2022, the deduction is phased out between $109,000 and $129,000 of MAGI.

• For married filers not covered by a company plan but with a spouse who is, the deduction for your IRA contribution is phased out between $204,000 and $214,000 of MAGI.

• The maximum contribution amount is $6,000 if you’re under the age of 50. For those who are 50 & older (and have earned income for the year), you can contribute an additional $1,000 each year.

If you are eligible, you may wonder which makes more sense for you. Well, like many financial questions…it depends! 

Roth IRA Advantage

The benefit of a Roth IRA is that the money grows tax-deferred, and someday when you are over age 59 and a half, if certain conditions are met, you can take the money out tax-free. However, in exchange for the ability to take the money out tax-free, you do not get an upfront tax deduction when investing the money in the Roth. You are paying your tax bill today rather than in the future. 

Traditional IRA Advantage

With a Traditional IRA, you get a tax deduction the year you contribute money to the IRA. For example, if a married couple filing jointly had a MAGI of $200,000 (just below the phase-out threshold when one spouse has access to a qualified plan), they would likely be in a 24% marginal tax bracket. If they made a full $6,000 Traditional IRA contribution, they would save $1,440 in taxes. To make that same $6,000 contribution to a ROTH, they would need to earn $7,895, pay 24% in taxes, and then make the $6,000 contribution. The drawback of the traditional IRA is that you will be taxed on it someday when you begin making withdrawals in retirement. 

Pay Now or Pay Later?

The challenging part about choosing which account is suitable for you is that nobody has any idea what tax rates will be in the future. If you choose to pay your tax bill now (Roth IRA), and in retirement, you find yourself in a lower tax bracket, then you may have been better off going the Traditional IRA route. However, if you decide to make a Traditional IRA contribution for the tax break now, and in retirement, you find yourself in a higher tax bracket, then you may have been better off going with a Roth. 

How Do You Decide?

A lot of it depends on your situation. We typically recommend that those who believe they will have higher income in future years make ROTH contributions. However, a traditional contribution may make more sense if you need tax savings now. If your income is stable and you are in a higher tax bracket, a Traditional IRA may be the best choice. However, you could be disqualified from making contributions based on access to other retirement plans. As always, before making any final decisions, it is always a good idea to work with a qualified financial professional to help you understand what makes the most sense for you. 

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.

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. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. 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.

Finding the Right Asset Allocation

Contributed by: Jaclyn Jackson, CAP®

**Register for our LIVE investment event or our investment WEBINAR on Feb. 23!

Most delicious meals start with a great recipe. A recipe tells you what ingredients are needed to make the meal and, importantly, how much of each ingredient is needed to make the meal taste good. Just like we need to know the right mix of ingredients for a tasty meal, we also need to know the asset allocation mix that makes our investment journey palatable.

Determining the Right Mix

Asset allocation is considered one of the most impactful factors in meeting investment goals. It is the foundational mix of asset classes (stocks, bonds, cash, and cash alternatives) used to structure your investment plan; your investment recipe. There are many ways to determine your asset allocation. Asking the following questions will help:

• What are my financial goals?

• When do I need to achieve my financial goals?

• How much money will I be investing now or over time to facilitate my financial goals?

Seasoning to Taste

Now, suppose equity markets were down 20%, and your portfolio was suffering. Would you be tempted to sell your stock positions and purchase bonds instead? Figuring out an asset allocation based on goals, time horizons, and resources is essential but means nothing if you can’t stick with it. A recipe may instruct us to “season to taste” for certain ingredients. In other words, some things are subjective, and our feelings greatly influence whether we have a negative or positive experience. For asset allocation, understanding your risk tolerance helps uncover personal attitudes about your investment strategy during challenging market scenarios. It gives insight into your ability or willingness to lose some or all of your investment in exchange for greater potential returns. When deciding our risks tolerances, we must understand the following: 

• The risks and rewards associated with the investment tools we use.

• How we deal with stress, loss, or unforeseen outcomes

• The risks associated with investing

Following the Recipe

When we follow a recipe closely, our meal usually turns out how we expected. In the same way, committing to your asset allocation increases the likelihood of meeting your investment goals. Understanding your risk tolerances can reveal tendencies to undermine your asset allocation (i.e., selling or buying asset classes when we should not). Fortunately, there are a few strategies you can employ to help stay on track. 

• If you are risk-averse, diversifying your investments between and among asset categories can help improve your returns for the levels of risks taken.

• If you find yourself buying or selling assets at the wrong time, routinely (annually, quarterly, or semi-annually) rebalancing your portfolio will force you to trim from the asset classes that have performed well in the past and purchase investments that have the potential to perform well in the future.

• If you find yourself chasing performance or buying investments when they are expensive, buying investments at a fixed dollar amount over a scheduled time frame, dollar cost averaging, can help you to purchase more shares of an investment when it is down relative to other assets (prices are low) and less shares when it is up relative to other assets (more expensive). Ultimately, this can lower your average share cost over time.

Finding the right asset allocation for you is one of the most important aspects of developing your investment plan. Luckily, understanding investment goals, time horizons, resources, and risk tolerances can help you mix the best recipe of asset categories to make your investment journey deliciously successful.

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

This 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 Center for Financial Planning, Inc., and are not necessarily those of RJFS or Raymond James. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment or investment decision. Investing involves risk, investors may incur a profit or loss regardless of strategy or strategies employed. Asset allocation and diversification do not ensure a profit or guarantee against a loss. Dollar-cost averaging does not ensure a profit or protect against loss, investors should consider their financial ability to continue purchases through periods of low price levels.