You’ve worked your whole life for this moment, retirement, it’s now the time for you to enjoy the fruits of your labor. This new phase of your life allows you to spend more time with loved ones, travelling, and developing passions outside of your business and career. As you prioritize your needs and wants in retirement, a move to a new state may be an option that you explore. If a move to a new state is in your future, there are many variables to consider beyond the basic costs of living.

Often times, one of the first financial considerations that comes to mind when moving to a new state is income tax rates.  This can have a varying degree of impact based on the individual’s income and wealth profile. Other factors such as sales tax, property tax, and insurance costs may outweigh the benefits of lower income tax.  Additionally, retirement income such as social security, pensions and deferred compensation may be exempt or taxed differently from other income sources and should be reviewed with a tax professional regarding your specific situation.  While these factors will have both short and long-term implications, it is an ideal time to make sure that your financial plan explores these scenarios for long-term success.

Data Sourced from the Tax Foundation & Rocket Mortgage 

Maintaining a Residence

Moving to a new state may also involve a home sale and/or purchase. It is important to be aware of the various tax implications  and costs that may come with the sale. The closing costs can vary greatly from state-to-state and may range from about 1% in Hawaii, to over 5% in Delaware, in addition to the agent commission that ranges from 5-6%. These expenses can add up and erode your net proceeds of the sale and should be properly accounted for if you plan to use this for a down payment or retirement planning.

Data Sourced from Bankrate & Insurance.com 

While property taxes differ from state to state they may also be subject to change due to a move intra-state.  These rates can vary greatly across the US with effective rates ranging from   0.3-2.2%.    Another important factor that can have material impacts to costs over time is whether the state has property tax caps or not.  These caps can apply to assessment, rate or levy limits.  States with assessment caps will limit how much your property value can increase from one year to the next.  For example, an assessment limit might not allow your home’s assessment to increase say over 2% even if the market value increases by 10%.  Rate caps will help limit your tax bill from increasing if there hasn’t been any change in your property’s assessment. States like California also have legislation that may allow you to transfer your property tax base from one property to another. Lastly, levy limits cap how much property tax revenue a government can collect and usually refers to all revenue and not just revenue from one property.

As the true costs of moving continue to materialize, insuring your home can be one of the largest challenges. States like Florida, Nebraska, and Louisiana experience increased costs as well as insurance scarcity due to the frequency of natural disasters. We have seen a recent increase in insurance carriers cancelling coverage in California and Florida, driving up costs for consumers.

Maintaining two residences is an additional option that comes with some nuances. If maintaining two residences, it must be clear what state you are a resident of. While residing in California for 183 days of the year will qualify you as a resident, Oregon and Hawaii use 200 days. When leaving one state for another, you may be the target for an audit. Historically, the state of California has audited utility and credit card bills to determine the standing of your residence. Additionally, two residences may also require you to file a non-resident state tax return.

Estate, Asset Protection and Business Planning

After a move to a new state is complete, it’s important to acknowledge the potential changes in estate planning laws. States such as Washington and Hawaii impose estate taxes up to 20% and exemptions that are significantly lower than the federal exemption of $13.99 million per individual or $27.98 million per married couple. A move from a common law state to a community property state can also change the characterization of your assets, earnings, and contributions.  A move to a new state should also invite a review of your will, trust, and any healthcare directives. Healthcare POAs and Durable POAs should be updated to ensure legal validity and no lapse in care.

For individuals or families who own a business, there are a variety of other considerations that should be explored before a move.  From a legal perspective, registering your business in a new state, licenses or permits may need to be required depending on the location and industry, and employment laws will need to be addressed with your legal professional.  Financial considerations such as taxation, insurance, utilities, along with operational costs surrounding customer base, supply chains and availability of employees are other factors that may need to be explored. A move or sale to a new state may cause the business to experience revenue clawback, especially for business owners leaving the state of California. These could include enterprise or opportunity zone credits, forgivable loans that may become payable, or capital investment credits, to name a few.

Healthcare Costs & Accessibility

Moving to a new area also comes with an adjustment to the lifestyle, culture, and resources. A move to a quieter, less populated area can come with a decrease in medical resources and care for aging individuals. Medical care can become one of the largest expenses for individuals as they age, understanding where the care is coming from and the potential cost is crucial to peace of mind during retirement. Individuals may also choose to purchase health insurance from the marketplace in addition to Medicare coverage. While more expensive, marketplace insurance can provide flexibility and specificity to your healthcare needs. Aging individuals may choose to pay for a healthcare concierge. The service allows for a more personalized approach to your medical care and offers a direct line of communication between you and the doctor.

Data sourced from CareScout and KFF.org

Conclusion

You’ve worked hard for your retirement and prioritizing your health, family and comfort in this next phase of your life is crucial. Moving to a new state may help bring you closer to loved ones or enhance your way of life but is an important decision that should be fully vetted ahead of time.  Weatherly alongside your other trusted professionals should be leaned on to help you answer the financial considerations that we have explored in this blog leaving you to live a life that you’ve always dreamed of.

Additional Reading:

https://taxfoundation.org/data/all/state/state-income-tax-rates/https://taxfoundation.org/data/all/state/property-taxes-by-state-county/https://www.kiplinger.com/retirement/601819/states-that-wont-tax-your-pensionhttps://www.kiplinger.com/taxes/property-tax-cap-by-state

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.

For those in or approaching retirement, cash flow and healthcare planning remain a top priority, and understanding the resources available is essential to developing a successful financial plan.  Social Security (SS) benefits help retirees supplement cash flows and in turn, the withdrawal rate on their portfolio. Social Security can also provide benefits for individuals that cannot work due to disability or injury. Individuals become eligible for SS benefits by having 10 years of work history in which payroll taxes are collected and may draw on their retirement benefits beginning at age 62. While this is the most common way to meet SS eligibility requirements, there are a few alternatives to obtain benefits that we’ll expand on later.

Medicare is another program offered by the federal government, providing healthcare coverage for those aged 65 or older and individuals with disabilities. The Medicare program features four parts, Part A-D, each providing a different aspect of coverage. Eligibility for Medicare coverage is determined by one’s eligibility for Social Security and enrolling in Medicare can begin three months prior to an individual turning 65 and will be automatically enrolled in Medicare Part A & B.

Social Security

Social Security benefits are primarily based upon the age at which benefits begin and the individual’s historical wages. Taxation of SS benefits can range between 0%- 85% and is based upon the individual/couple’s income each year.  For those not yet receiving benefits you can look up projected benefits on SSA website here.  Individuals that do not qualify for their own retirement benefit or have minimal earnings history may still be entitled to receive benefits.

Access to Benefits

• A non-working spouse may be eligible for spousal benefits up to 50% of their partner’s full retirement age (FRA) if age requirements are met.
• Divorced individuals may be entitled to 50% of their former partner’s benefit if married for at least 10 years, divorced for more than 2 years, and are unmarried.
• Surviving spouses may receive reduced benefits beginning at age 60 while retaining the ability to claim their own benefit at a later date, if eligible. Surviving spouses are also entitled to receive their former spouses benefit if higher than their own.
• Minor children may be entitled to a percentage of their parent’s benefits in certain circumstances.
• Individuals may be eligible for Disability and Supplemental Social Security benefits depending on needs, income and resources.

Before filing for Social Security benefits, it’s important to take inventory of your cash flow and needs to supplement income. According to the Social Security Administration, Social Security makes up 33% of an individual’s post-retirement monthly income. One of the biggest questions with Social Security is when to take it, however, there is no one-size-fits-all answer and ultimately depends on each individual/couple’s financial situation. This highlights the need for proper planning that incorporates a cost-benefit analysis on the timing to collect benefits. Individuals are entitled to an 8% simple increase in benefits for each year benefits are delayed past their FRA up to age 70. Weatherly can help highlight the pros and cons as to whether claiming benefits prior to or after obtaining their FRA is beneficial.

SS benefits are funded through the Social Security Trust that is overseen by the federal government. The future of Social Security has been a contested topic as recent projections have the fund being depleted in 2033. To help address this shortfall it is likely that changes will need to be made with regards to taxation of earnings, extending the FRA or reduction in benefits.  Weatherly understands the importance of Social Security, and our ultimate goal is to maximize benefits for you.

Medicare

Healthcare expenses during retirement can become one of the largest costs and highlights the need for proper planning.  Medicare provides healthcare coverage for individuals starting at age 65 along with additional coverage for those with extenuating health circumstances.  Medicare covers a variety of care needs such as prescription drugs, in-patient treatment, out-patient treatment, and various types of hospital care.

While employed an individuals’ healthcare coverage is often provided through their employer and retiring before age 65 can create a lapse in coverage if COBRA or alternative insurance is unavailable. Certain life events may qualify an individual for a Special Enrollment Period (SEP) such as losing health coverage, having a child and getting married to name a few. A lapse in healthcare coverage can be supplemented by public marketplace insurance, private insurance, COBRA, or spousal coverage.

Medicare coverage is broken up into four parts, A-D. Parts A & B cover hospital visits, routine check-ups, and medical equipment, among other things. You are not automatically enrolled in parts C & D which provide different types of coverage. Part D provides prescription drug coverage in addition to what is already provided. Part C, known as Medicare Advantage, is an additional option that can enhance your Medicare coverage. Medicare Advantage allows you to utilize a private company for health coverage and these plans usually come bundled with parts A, B and D.

Source: HiOscar.com

Premiums for the different parts of Medicare are based upon your taxable income and subject to a 2-year lookback.

Important Considerations

Social Security and Medicare can be a confusing process to navigate. Weatherly is here to help guide you through your unique situation and we’ve outlined a few common considerations to be aware of.

Spousal Benefits: It is not uncommon to see spouses, especially ex-spouses, not realize the full benefit they are entitled to. As a spouse, you can claim a Social Security benefit based on your own earnings record or collect a spousal benefit in the amount up to 50% of your spouse’s Social Security benefit, but not both. You are automatically entitled to receive whichever amount is higher.

Windfall Elimination Period: The Windall Elimination Period can reduce Social Security benefits for individuals participating in pension that did not pay SS taxes. WEP can reduce benefits by up to 50%.

Registration Window: The registration window for Medicare begins three months leading up to your 65^th birthday and three months following. It is important to register in the window to avoid late penalties.

IRMAA Premiums: Single filers with income above $97,000 and joint filers with income above $194,000 are subject to increased premiums for Part B & D.

Returning to Work: A decision to return to work may not always be financially motivated. It is key to understand the implications of how returning to work can affect your Social Security benefits that are currently being received. For those individuals, they may experience a withholding of benefits prior to their FRA but will be recaptured once FRA is reached.  Before returning to work, we recommend reaching out to SSA to understand the implications for your benefits.

Wrap Up

Social Security and Medicare are essential aspects of post-retirement income and healthcare coverage. Weatherly can help analyze the options available to you and ultimately what is most beneficial for your unique situation. This analysis expands beyond a breakeven analysis of total benefits received to include, but not limited to, cash flow needs, health history, family longevity, and type of portfolio assets available.  Roth conversions during gap years may provide an opportunity to help reduce taxes over time and enhance legacy planning for those beneficiaries. Your trusted Weatherly advisors are here to educate and guide you through these complexities to help achieve the goals for you and your family.

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.

During times of slowing growth and economic uncertainty the thought of one’s own employment can come into question. Whether you have another job lined up, are transitioning to retirement or planning to take a break between careers, there are several emotional and financial items to carefully consider. For some it’s an opportunity and others an obstacle to overcome. In either event, being prepared and having a plan of action will set you on a road to success. Once the decision is made, the next step is to take inventory of your financial life, including benefits offered by your employer.  

What is the financial impact of this change? 

If you have already sought out employment, is the move lateral or are you receiving a bump in salary and other benefits? If you are retiring or considering gap years before re-entering the workforce, do you have the assets and income to support your living expenses?  

The answers to these questions will impact your financial plan, which is a dynamic way to review multiple outcomes in your savings/spending equation.  

It’s also prudent to review your personal balance sheet and review opportunities to improve your debt-to-equity ratio. For example, if you were considering a financing home or car purchase, refinancing or obtaining a home equity line of credit (HELOC), you may want to take steps to secure a loan prior to making a change.  

If you were laid off from your employer, you may also be able to collect unemployment benefits.  

Take an inventory of the benefits provided by your current employer.  

Benefits include more than salary, retirement plans and health care coverage. Many companies also offer compensation in the form of stock options, bonuses, pension plans and deferred compensation. It critical to review the following: 

☐   Salary and bonus structure – are you able to receive severance pay or a partial bonus if the transition occurs mid-year?  

• • • Many employers also compensate for unused vacation and PTO days.  

☐   Retirement plans – did you max out your retirement plan contribution for the year? The current year contribution limits can be found on our website here.  

• • •  If you have an employer match, are the matches fully vested?  

☐   Stock options – vesting schedules also apply to stock options. There are numerous types of options and some of the more common types can be found here. Complexity and planning opportunities can vary per individual so it’s an opportunity to work with your advisor to help navigate. 

☐   Other executive compensation packages – incentive packages can also include things like pensions and deferred compensation. Depending on if you are retiring or leaving a job involuntarily, these benefits may be accelerated (paid out early) or eliminated. If benefits are paid out immediately upon retirement or resignation, this may create a tax liability for the departing employee.  

☐   Health care – if you are covered by your employers’ heath care plan and not moving immediately to a new company, you may be able to continue benefits under COBRA. 

☐   Parental and family leave – if you are considering growing your family or may need time off to care for dependents, it’s important to know what options your company supports for paid leave.  

There are also intangible considerations when moving to a new company.  

Tangible benefits, like those listed above, provide financial security. Intangible benefits offer personal fulfillment. It’s important to weigh the pros and cons of both benefit types when considering a change.  

Examples of intangible benefits include: 

• Company culture – do the company’s values align with your own values and ethics?  
  • Aside from strong values, many companies have well-being programs that are supportive of healthy living. 
• Opportunities for education and collaboration – many employers reimburse for higher education expenses and offer growth trajectories to advance careers.  
• Flexible work hours and/or hybrid work set up – after the abrupt shift to remote work at the start of 2020, many workplaces retained a hybrid work set up or offered flexible work hours so employees can maintain control their schedules. 
  • If you are required to work on site, and the company is located somewhere other than where you currently reside, what is the difference in cost of living?  
• Work/life balance – do the new company’s expectations and work place policies allow for a work/life balance? 

Be prepared for your current employer to counter your new opportunity if you are continuing in the workforce. Employers want to retain good talent, and they may be able to increase salaries or offer more benefits in order to do so.  

What to account for when transitioning from your prior employer 

Whether you’re transitioning to another employment opportunity or heading into the golden years there are various items to be aware of from a professional and personal standpoint that should be reviewed, including: 

☐    Open communication with your employer and manager.  

• • • Set time with HR  
    • Employers will often need to backfill your position which takes time and resources to train or hire your replacement and providing sufficient notice allows them to plan accordingly.  
    • This will also help ensure that you leave on good terms with the company and avoid burning bridges on your way out. 

☐    Archiving any personal or permissible resources. 

• • • Whether by design or accident people often commingle their personal life and work devices so it is important to review that you have transferred or saved these items elsewhere. 
    • Additionally, there may be useful company resources that may be allowed for you to take with you. Be sure to run these by HR to avoid any legal issues. 

☐    Employer sponsored plans and benefits to review with HR.  

• • • If you have a retirement plan or other benefits with the employer such as a 401(k), profit sharing or stock options for example it is important to review what options are available to you.   
    • In general, you can either keep retirement accounts within the company plan, roll it into an IRA, or transfer it to your new employer. 

☐    Stock options: Reviewing whether they are transferable or if they would need to be exercised prior to leaving. It’s likely unvested shares will be forfeited and should be accounted for in the pros and cons list we spoke to earlier. 

☐    Health Care: Life happens and it’s critical to ensure there is no gap in your health care coverage. 

• • • If you are leaving the workforce or have a gap in employment, be sure to review your coverage options. Common options available are COBRA, purchasing a plan through a private marketplace, or enrolling in Medicare if 65 or older. 
      • Premiums will vary between these options so it’s important to review based on your situation and level of coverage. 
    • If you have life insurance through your employer, it may be portable and allow you to continue coverage and take over premium payments. Check with HR if this option is available to you. 

☐    Review your final paycheck to verify that any accrued PTO or sick days have accounted for and that any pro-rated compensation is accurate.  

Considerations if you are Starting your own Business 

As small business owners ourselves, Weatherly works closely with entrepreneurs and business owners on their own planning.  

For solo practitioners, self-employed 401ks can be an attractive way to continue to build on retirement assets. Many expenses may also be deductible on your tax return, including home office square footage, utilities, and some health insurance premiums.  

Sailing off into the Sunset  

You’ve worked hard throughout your career and with retirement on the horizon there is much to look forward to. Many of the items we’ve touched on in this blog apply to retirees from running a Financial Plan, taking inventory of your assets, cash flow planning, and securing health care coverage post-employment.  

Social Security plays a critical role in the transition to part-time work or retirement. Be sure to review your retirement benefits and cash flows for planning opportunities such as claiming benefits at your Full Retirement Age or potentially delaying. You can review your eligibility and benefits at different ages here. 

Whether you’re retiring partially through the year or the end we often recommend individuals max out their employer sponsored retirement plans reducing taxable earnings and continue to build savings. You may need to change your contribution rate in order to max out the plan if you’re not working the full year. We also recommend checking in with your tax professional to confirm if any withholding adjustments are needed. 

An equally important aspect of transitioning to retirement and often overlooked is aligning the portfolio’s asset allocation based on the time horizon and risk tolerance. Many individuals will rely on the portfolio to fund their goals and expenses over their lifetime so it’s essential to ensure the asset allocation is appropriate for the needs of the investor.   

How Weatherly can help 

As we’ve outlined in this blog there is much to consider when transitioning either to a new employer or into retirement. While these are some of the more common topics to review, the dynamics of each individual’s professional and personal life will differ in some way. Weatherly is here to help bridge the gap and work with you to identify the impact of your options over the short and long-term.  

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.

For those approaching retirement, it can be an exciting time as they look forward to the next chapter in their life, whether it’s spending more time with family and/or focusing on the causes closest to them.  We often see individuals ease into retirement by continuing on a part-time basis with their employer or through consulting work within their related field.  This transition may bring a level of uncertainty as they shift focus to a different set of priorities such as income and spending, asset preservation, and estate planning to name a few. Many of these priorities will carry through to those already in retirement along with additional planning opportunities that will be discussed later. In this blog post, we will explore a variety of topics to help individuals prepare for retirement and build confidence as they enter and live out their golden years. 

SAVE: 

As you close in on retirement, it is an essential time to take inventory of your financial picture and prioritize based on importance. A quick win is to ensure that you are saving as much as possible. Individuals are often in their prime earning years as they approach retirement and should focus on maxing out employer retirement plans or contributing enough to take advantage of a full employer match, if available. The 2021 maximum contribution an employee can put into an employer retirement plan is $19,500 for those under 50 and $26,000 for 50 and over. Additional savings can be allocated to taxable or Trust accounts that do not have carry contribution limits. If self-employed, there are additional opportunities to fund a Profit-Sharing or Defined Benefit plan that can go beyond the traditional limits above. For additional contribution limits please see Weatherly’s Key Data Chart.  

SPENDING/BUDGET: 

After ensuring you are saving as much as possible, we recommend tracking how much you are spending on a monthly basis on both discretionary and non-discretionary items. Non-discretionary items can include bills such as utilities, mortgage payments, insurance etc. while discretionary items fall into areas such as going out to eat, vacations, and hobby related expenses. We suggest reviewing the past three months of your bank transactions to get a sense of your average monthly expenses. Alternatively, there are various budgeting websites that can track your expenses such as Mint.com that can be a helpful resource and found here. 

ACCOUNTS: 

Now that you have an idea of how much you are saving and spending, it is time to review where each of your accounts is held and the balances thereof. It is quite common for people to change jobs throughout their careers and leave their accounts within a prior employer’s plan. It is important to make sure you are able to access these accounts and Weatherly can help you consolidate them, if appropriate. While going through this process can be time consuming it is important to also look at the allocation of each of these accounts to ensure your entire portfolio is aligned with your risk tolerance and time horizon.  

ESTATE REVIEW: 

As you work through locating and accessing each of your accounts, it is a great opportunity to review the titling and beneficiaries of the accounts to verify they reflect your current estate planning objectives. While estate planning can vary widely between families depending on their unique situation and desires, we recommend all individuals have the following four documents in place.  

• First, is a Will and Testament which is a key instrument used to outline how an estate is to be settled in a manner desired by the deceased. They typically include an executor of the estate, named beneficiaries, instructions for how and when the beneficiaries will receive assets, and guardians for any minor children.  
• Secondly, a Revocable Trust that each of the assets are registered under excluding those with beneficiary designations. Assets in the trust will pass outside of probate, saving time, court fees, and potentially reducing estate taxes. You can also specify the terms of the trust precisely, controlling when and to whom distributions may be made.  
• Third, a Power of Attorney document that provides legal authorization to a designated person to make decisions on your behalf regarding property, finances, investments, or medical care. Power of Attorney is most frequently used in the event an individual has a temporary or permanent illness or disability, or when they are unable to be present to sign necessary documents.  
• Lastly, a Health Care Directive or commonly referred to as an Advance Directive which is a legal document that lets your loved ones and health care team know what kind of care you want, or who you want to make decisions when you are unable to do so.  

FINANCIAL PLAN: 

Before we move into our next section covering additional planning opportunities for those within retirement, let us first explore the importance of running a financial plan. When Weatherly works with clients to develop a plan, we take a holistic approach to ensure every aspect of the client’s financial profile is accounted for. While not limited to, we will generally request the following information: 

• Overview of investable and real assets 
• Annual expenses – both discretionary and non-discretionary 
• Annual income sources and target retirement dates 
• Liabilities  
• One-time liquidation events such as business or real estate sales 
• Family and business priorities and values 
• Goals such as paying for education, real estate, retirement, or philanthropy 

Once these items have been compiled, we will run a year-over-year cash flow-based projection using conservative assumptions that highlight the outcome of the base case scenario. The base case scenario will illustrate if the client is on track for a successful financial plan or if adjustments will need to be made. We will include a few different alternative scenarios to explore items that are in the client’s control such as different spending levels or retirement dates along with areas outside of the client’s control such as bear market events or longer life expectancy to name a few. These plans serve as a benchmark for future updates as we can look back and compare how your plan has evolved over the years. If you would like to learn more about how Weatherly works with clients in developing financial plans, we have included an earlier blog post here.  

For those that are already in their retirement years, there are several different strategies and planning opportunities that are useful to ensure your assets not only cover your day to day living expenses but also the increased costs in the form of medical expenses. Individuals may no longer be covered by their employer’s insurance plan and will therefore need to purchase private insurance until they are eligible for Medicare coverage. Planning for this large and unpredictable expense is an important aspect of retirement planning. To learn more about how to prepare for healthcare costs in retirement, please follow the link here.  

With a continued focus on spending and asset preservation it is important to align retirement income sources with goals and expenses. Spending will continue to have the largest impact on a successful retirement and will therefore be important to have a comprehensive withdrawal strategy. Not only are withdrawal amounts important, but the buckets that these funds come from are equally important to successfully funding goals for a long and prosperous retirement.  

The main sources of retirement income outside of an investment portfolio typically come in the form of social security, pension, or rental income. However, these funds may not adequately cover living expenses in retirement and withdrawals from an investment portfolio must be made. Let’s explore the different account types and which buckets we recommend pulling from first to fund retirement living expenses.  

Taxable Accounts: Draw from 1st 

• Include Trust, Individual and Joint Accounts.  
• Withdrawals may be subject to capital gains  
• Holding period of 1 year or greater = favorable Long Term capital gains rates (currently 0%-20% depending on income level) 

Pre-Tax/Tax-Deferred: Draw from 2nd 

• Include 401(k), IRA, 403(b), Pension (DB/PSP) 
• Withdrawals are taxed at ordinary income rates (currently 10%-39% depending on income level) 
• 59 ½ – no penalty for withdrawal  
• RMDs required by 72 

Post-Tax/Tax-Advantaged: Draw from last 

• Include Roth IRA, Roth 401(k) 
• Tax Free withdrawals for owners and their heirs 

Due to the preferential capital gains rates associated with taxable accounts, this would be the preferred bucket to draw upon first allowing for funds within the tax deferred bucket to continue to grow. Roth accounts are the most advantageous from a tax standpoint, which is why it is recommended to allow these accounts to grow for as long as possible with the added benefit to their heirs also being able to withdraw funds tax-free.  

There is no one size fits all strategy, which is why regularly revisiting your financial plan to make sure you are on track to meet your goals is so important. Clients with a higher retirement income may not need to rely as much on their portfolio for living expenses allowing for a different asset allocation than those with lower income levels focusing on asset preservation and income in the form of dividends and interest.  

Planning opportunities  

Social Security Analysis  

• As part of a comprehensive retirement plan, it is important to consider your retirement income when deciding on when to take social security. Timing of when to begin social security can have a significant impact on retirement income, as seen in the chart below.  
• By running a social security breakeven analysis, we can help determine the most appropriate time to begin payments. 

Chart Sourced from: https://www.ssa.gov/pubs/EN-05-10147.pdf  

• Please use the following link to different social security calculators offered by the social security administration website.  

Roth Conversions – GAP Years 

During the years between beginning retirement and taking your Required Minimum Distribution (RMD) at 72, many individuals experience a steep drop in income. These gap years provide for an ideal time to review claiming Social Security benefits and potential Roth conversion strategies. If you would like to learn more about the benefits of Roth conversions, we have included a link to a previous blog highlighting this strategy here.  

Chart Sourced from: https://www.abovethecanopy.us/how-to-take-advantage-of-your-retirement-gap-years/ 

QCDs – Giving Strategies  

After turning 72 the IRS requires individuals to take Required Minimum Distributions (RMDs) from their tax deferred accounts such as an IRA. If the RMDs are not needed for living expenses and individuals are charitably inclined a Qualified Charitable Distribution (QCD) is a strategy to reduce taxable income while achieving their philanthropic goals during retirement. Individuals can take advantage of this strategy beginning at age 70 ½. For more information on charitable giving, please reference our previous blog on the topic.  

As we have covered, retirement planning is a very dynamic phase of life that requires proper preparation and ongoing focus across various aspects. Weatherly is here to help provide clarity and guide you into a successful retirement allowing you to focus on what matters most. We welcome you to reach out to your trusted advisor for any questions you may have on this topic or your managed accounts. 

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.

As our client’s approach retirement, one of the most common questions that’s asked is “How will I replace my income?” While the question is common, the answer is a nuanced one that spurs a further dialogue surrounding many of the more important questions which ultimately dictate its answer:
When will you retire? Will your lifestyle in retirement differ from lifestyle while employed? What sort of longevity, or lack thereof, is in your family? What sources of retirement income are available to you? What type of assets do you have? Will your risk profile change when you are retired and begin distributing, as opposed to accumulating, assets?
By working through these questions, our team at Weatherly can help to provide context around the retirement income equation, implement appropriate strategies and best position our clients for a positive outcome.

Defined Benefits
Pension plans are becoming less and less common, but nearly all retirees have at least one source of defined benefits. Whether you are only eligible for Social Security or have various defined benefit sources, a critical decision point is when and which benefit to claim. The norms of old were to claim defined benefits as soon as eligible or upon retirement to maintain a wage-like stream of income that becomes familiar over decades of employment. However, as the existence of these types of plans have lessened and life expectancies have increased drastically, delaying benefits has become that much more attractive to maximize the dwindling sources of, in theory, guaranteed income.
While factors that are not within your control weigh heavily on what the “correct” strategy is, such as the solvency of the funding source or how long you live, Weatherly can help provide context around these types of decisions through our benefit analysis process. By incorporating the control variables of the defined benefit amounts, with reasoned assumptions such as life expectancies and cost-of-living adjustments, all while accounting for the quantitative and qualitative investment factors such as a client’s asset level and risk profiles, educated decisions can be made to provide the most appropriate defined benefit decision for your specific situation, needs and goals. These benefit decisions that our team helps to solve include, but are not limited to:
• Monthly pension vs. lump sum payout
• Single-life vs. Life Certain vs. Survivor benefit options
• Break-even analysis of cumulative benefits
• Break-even annual rate of return for benefit options
• Social Security break-even analysis

Investment Assets
As it becomes clear when and how much retirement income will be generated from defined sources, the decision turns to how to fund the gap between the need. This may seem like a straightforward decision, especially if you only have one type of account, but the sustainability of those existing assets can be greatly influenced by the cohesiveness of the withdrawal strategy.

Tax Flexibility
For most retirees, the majority of their investment assets are held in tax-deferred accounts like Traditional IRAs or employer sponsored plans such as a 401(k). While these accounts are certainly attractive during the accumulation stage, there is a lack of flexibility during the distribution stage when withdrawals are fully taxable and become required once you turn 70½. To help combat this lack of tax flexibility and when excess income exists, it can be quite impactful to supplement your retirement contributions with contributions to non-qualified, taxable accounts as well.
Conversely, if you have a low-income year either prior to or in retirement, completing a Roth Conversion can create additional tax and withdrawal flexibility down the road by establishing a bucket of tax-free money that you are not required to withdraw at any point in your lifetime.

Asset Location
Much like how the asset allocation between stocks, bonds and cash is dictated by the time horizon and extent of the need from the account, the asset location within accounts is dictated by these same factors. Once tax flexibility is increased with multiple types of accounts, the placement of where certain types of assets are held can be an important next step in creating further sustainability and efficiency of assets.
Stocks and Bonds that produce higher income are better suited in tax-deferred accounts whereas securities like Municipal Bonds or qualified dividend-paying stocks are better suited in non-qualified accounts like joint and trust accounts, where tax rates are more favorable.
Balancing the asset allocation and location of various investment accounts helps to increase the sustainability of those assets and the income they seek to provide.

Behavioral Assets
Perhaps one of the most impactful yet underappreciated aspects of the retirement income equation are the behaviors involved in accumulating, distributing and maintaining the assets that produce the output of the equation. These behaviors can range from the risk tolerance of investor, to their discipline in deferring gratification of their earnings, to the mental accounting of their retirement income streams.
Each behavior that makes a person unique does the same to their respective retirement income strategy. Regardless of how well thought out or reasoned a retirement income strategy is, the ability to adjust to the unpredictable nature of the markets, the uncertainty of life or even potential changes in the tax laws can have just as much of an impact on the long-term success of that strategy as the underlying levers of the equation.

What is Your Retirement Income Equation?
For some, a successful retirement means covering all basic living expenses without running out of money. For others, it can be checking off the retirement bucket list, traveling the world or leaving behind a financial legacy for loved ones or philanthropic causes. And some simply want to squeeze all they can out of the prime retirement years until their money’s gone and then make due from there.
By defining what the destination in retirement is, the best vehicle(s) to arrive there become more apparent. Our crew at Weatherly is here to help with your retirement income decisions and to guide you the most appropriate strategies to best solve your retirement income equation.

More Resources:
A Golden Opportunity 
Strategies for uncovering hidden value in retirement income planning
Potential 2019 Tax Changes Your Wealthy Client Need to Know About

Checklist for Career Transitions

Whether it be retirement, starting a business, being recruited to a new job or changing industries, nearly all working individuals experience a transition at some point in their careers. While new roles, responsibilities and workplace dynamics are major adjustments, career transitions also bring upon many financial considerations that deserve attention.

To help ensure that you stay on track with your long-term plan, we’ve created a checklist for career transitions to help you navigate through these times:

• Insurance

  • Health Insurance
    According the United States Census, over half (55.7%) of the total population of United States have employer-based health insurance coverage. While you always have the option to get a private policy, the Consolidated Budget Reconciliation Act (COBRA) allows those in transition, as well as their spouses and beneficiaries, the provisional continuation of current health insurance if they meet qualifying events. These qualifying events each include their own maximum period of continuation that ranges from 18 to 36 months.
    It should be noted that in most all cases, the insured pays for the full COBRA health insurance premiums and the (former) employer does not split any of the cost.
  • Life/Disability Insurance
    Employers may also offer term life and/or disability policies that can help to supplement a major portion of your family’s coverage needs. Although employers will not continue to share the costs upon leaving employment, former employees may be able to maintain their current policies directly with the insurer of the policies.
    Changing jobs is a great time to not only assess the potential gap that has been created in your coverage but also reassess your total insurance needs as you explore new policies.

• Retirement Plans (401k, 403b, 457, etc.)

  • Contributions
    Depending on the type of plan, the IRS specifies the maximum that can be contributed to your retirement plans every calendar year. If you will be retiring, moving to an employer without a retirement plan or expect no/lower income for the remainder of the year, maxing out your retirement plan contributions prior to leaving your current company takes advantage of the waning opportunity for a tax deduction and tax-deferred growth. Even if portfolio funds or savings are needed to meet expenses, deferring all, or at least enough of your paycheck to get the employer match, can be an effective strategy as you approach the end of your tenure with your current employer.
    It is important to note that the IRS contribution limit applies to aggregate calendar year contributions, not contributions per plan. If you do max out contributions before leaving an employer, be sure to not overcontribute if you participate in another plan in the same calendar year.
  • Rollovers
    In general, employer-sponsored retirement plans have been trending in the right direction in terms of fees, services and investment options but still commonly lack transparency and overall scope that can prevent participants from maximizing the growth of their retirement savings.
    Weatherly uses the service FeeX to review our client’s retirement plans to help illuminate the key factors in the plan centering around total fees, services and investment options. Completing this analysis not only provides greater transparency of those factors but to also help with the decision of whether to rollover old employer-sponsored retirement plans out of the plan and into an IRA.
  • Required Minimum Distributions (RMDs)
    If you continue to work past the age of 70 ½ and your plan allows for it, the assets in your retirement plan are most likely excluded in the calculation of your required minimum distribution under the working exception. Should you leave your employer, this exception goes away and these assets will now be included in that RMD calculation.
    This inclusion will increase the amount that the IRS requires you to withdraw from your IRA the next year which can lead to additional tax consequences. If you are working past 70 ½, it is important to understand this change so that proper tax planning can be considered.

• Stock Plans/Deferred Compensation

  • Stock Plans
    Various types of stock plans such as Stock Options to Restricted Stock and Employee Stock Purchase Plans are common benefits that allow employees to purchase their company’s stock at a discounted rate. While this is an attractive benefit for current employees, it can create a difficult decision for those in transition.
    Traditionally, former employees have up to 90 days from termination to exercise any vested incentive or stock purchase While the specific number of days may vary, this time limit puts former employees in the situation where they are forced to decide whether to let vested shares expire worthless or realize potentially significant tax consequences. This decision will be unique to each individual’s situation but if your departure can be expected or planned, strategically exercising vested shares opportunistically in advance of this forced decision may allow you to mitigate your tax consequences without leaving money on the table.
  • Deferred Compensation
    Much of the same considerations relate to Deferred Compensation but the flexibility for these plans is commonly far less. Because Deferred Compensation Plans are essentially an agreement between you and your employer to pay income that you have earned at a later date, you are not able to disclaim these payments. This earned income must be paid out to you even if you prefer to rather not have to realize those as tax income.
    Depending on the specific plan, you may still have the flexibility to spread out these deferred compensation payments or in less common situations, be forced to take your full balance as a lump sum payment in a single tax year. Weatherly can strategically plan for these various scenarios to be most useful for our client’s respective situations.

• Severance

  • Severances packages are commonly associated as an incentive for wrongfully dismissed employees to not bring suit against their former employer. However, those nearing voluntary transition may be able to leverage their situation into severance pay that can help to bridge the gap months during that transition.
    Employers may provide severance packages to long-time employees who are retiring as benefit to “reward” and recognize their loyalty and hard work. Alternatively, if you are aware that your company may be restructuring, your voluntary departure may be able to be arranged as a layoff that could command a severance package.

Career Transitions, regardless of their impetus, can bring challenges and complications. With this checklist and by leveraging Weatherly’s expertise, we seek to steady the waters and continue to create a Ripple Effect that can absorb your times of transition and maximize your specific situation.

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.

Strategies for Retirement – What retirement plans and trending industry topics you need to be aware of to achieve your personal retirement goals. An adviser at Weatherly can assist with selecting an optimal retirement plan, providing strategic investment strategies, and addressing retirement concerns or topics.

Defined Benefit to Defined Contribution Plans

Saving for retirement has not always been a cause of anxiety for employees. In the past, individuals would begin working for a company in early adulthood, continue working with that same company for decades, and retire with a sponsored defined benefit (DB) pension plan that provides the employee with sufficient retirement assets through pension payments. The major risk employers face is that the returns generated from investing employer monthly contributions to the general fund will not satisfy the pension premiums owed to retirees in the future due to lower interest rates, uneasy markets, and increase in life expectancy. If returns are not sufficient, the business will have to pay out of pocket to negate the accumulated liabilities. This extra cost has led most employers to switch to offering company sponsored defined contribution (DC) plans, in which the employee is responsible for all payouts during retirement, rather than the employer. This elimination of risk to the employer and freedom of investing for the employee are reasons these plans are popular for both parties, although employees are now on the hook to save for retirement through their own investment strategy and prowess and hope to receive a company match to their contributions.

Choosing the Right Plan – Plan options will depend on compensation:

• W-2 Employees
  • Company Sponsored Retirement Plan – 401(k), 403(b), Roth 401(k), or Employee Stock Ownership Plan
    • Contribution Limits –Employees can contribute up to $18,000 of deferred income for 2016 and if the employer offers a contribution match, the employer can contribute up to 25 percent of annual compensation. Total contributions between the employee and employer may not exceed $53,000. If the individual is at least 50 years old, the employee may utilize a catch up provision of $6,000 for a total allowable value of $59,000.
    • Benefits – Deduction on employee tax return and deferred taxes on capital gains, dividends, and interest income.
    • Administration – N/A
    • Action Items – Auto-enroll in company sponsored plans and contribute to at least the employer matching maximum percentage.
• Self-Employed/Business Consultants
  • Self-Employed 401(k) – available for individuals with no other employees, excluding a spouse
    • Contribution Limits –Total contributions between the employee and employer may not exceed $53,000. If the individual is at least 50 years old, the employee may utilize a catch up provision of $6,000 for a total allowable value of $59,000.
    • Benefits – Can contribute as both the employee and employer with generous contribution limits without being subject to complex ERISA rules and regulations. Large universe of investment options to choose from such as stocks, bonds, mutual funds, and exchange-traded funds.
    • Administration – Annual Form 5500 filing if assets grow to greater than $250,000.
    • Action Items – Establish plan before calendar year-end for employee deferral and tax filing deadline for employer deferral.
  • Simplified Employee Pension Plan (SEP IRA) – any business can establish this type of plan
    • Contribution Limits – Total contributions by the employer may not exceed $53,000. If the individual is at least 50 years old, the employee may utilize a catch up provision of $6,000 for a total allowable value of $59,000. The business must contribute the same percentage of income to employee accounts that the business owner contributes to his or her own account.
    • Benefits – Easy to establish and no annual fees. Large universe of investment options to choose from such as stocks, bonds, mutual funds, and exchange-traded funds.
    • Administration – No required annual Form 5500 filing and must establish SEP IRA for every employee.
    • Action Items – Must establish and fund by business tax filing deadline.
• Small Business Owners–
  • Saving Incentive Match Plan for Employees (SIMPLE IRA) – available for companies with less than 100 employees
    • Contribution Limits – Employees may contribute 100% of income up to $12,500. If the individual is at least 50 years old, the employee may utilize a catch up provision of $3,000 for a total allowable value of $15,500. The employer is required to match up to 3% of employee contributions.
    • Benefits – Easy maintenance and no required identical percentage match to employees. Large universe of investment options to choose from such as stocks, bonds, mutual funds, and exchange-traded funds.
    • Administration – No required annual Form 5500 filing. If the employer is not matching 3% of contributions, then the employee must be notified before the 60 day election period for the calendar year.
    • Action Items – The plan must be established between January 1^st and October 1^st.
  • Safe-Harbor 401(k)
    • Contribution Limits – Employers can contribute up to 25 percent of annual compensation and employees can contribute up to $18,000 of deferred income. Total contributions between the employee and employer may not exceed $53,000. If the individual is at least 50 years old, the employee may utilize the catch up provision of $6,000 for a total allowable value of $59,000.
    • Benefits – High-earning employees can maximize contributions to retirement plans without the complex Internal Revenue Service non-discrimination test.
    • Administration – Employers are required to give employees annual notice of rights and obligations regarding the plan.
    • Action Items – Establish the plan with a third party administrator and financial advisor. The plan must be established within 3 months of the end of the plan year.

Topics for Retirement Investing

1. Investment Strategies – Most retirement plans will feature mutual funds or exchange-traded funds available for investors to select for investment in retirement portfolios. The availability of these of these funds can be a blessing or a curse as they provide novice investors with greater diversification and professional, active management, but can also charge high fees without guaranteed returns. Selecting a fund with a low expense ratio, a target date close to projected retirement date, or an investment style appropriate for risk tolerance are imperative for successful retirement planning and peace of mind. In order to maintain the appropriate amount of risk to generate ample returns, investors should seek their retirement plan’s investment adviser or personal wealth manager for advice.
2. Robo Advisers –Although robo-advisers are relatively new to the investing landscape, they are taking the industry by storm, and some retirement plans will opt to use a robo-adviser rather than a human adviser. These computer programs offer investors professional advice and management, at a discounted rate. The online platforms utilize a complex algorithm to recommend asset allocation and securities for investors based on a variety of factors, including client information and current market trends. The recent Department of Labor final ruling, which requires all financial agents advising retirement plans to follow the fiduciary standard, rather than the suitability standard, may have an effect on the legality of robo-advisers advising for retirement plans, although executives in the industry believe these platforms will be unaffected by ruling. Regardless, robo-advisers offering advice to IRA’s and ERISA plans discussed previously in this post will be under the same scrutiny that human financial advisors currently are and may potentially need to alter the programs algorithm or charge higher fees.

How to Utilize an Advisor

A financial advisor that maintains a fiduciary responsibility at your disposal is crucial for retirement planning and execution. The many retirement plans and topics discussed in this article should be common knowledge for advisors, as they collaborate with clients to maximize client tax efficiency and achieve client goals. Individuals, regardless of employment backgrounds, will rely on a financial advisor to provide education on ever-changing plan rules and contribution limits, update financial evaluations to reflect growing retirement savings, and pinpoint optimal times to begin withdrawals from retirement accounts or access social security benefits. Some advisors, such as Weatherly, will offer their services as financial advisors for company sponsored 401(k) plans to assist in meeting strict ERISA compliance rules and answering participant investment related inquires.

Other Considerations in Retirement

1. Minimum Required Distributions – Minimum required distributions (MRD’s) are IRS imposed withdrawals from a tax-deferred account after the participant turns 70 ½ years old. Investors that efficiently save for retirement may encounter a minimum required distribution that bumps income up so high in retirement years, that his or her tax bill may be higher in retirement than the bill was in income earning years. Well-informed investors will strategically contribute to and draw strategically from a multitude of accounts with different registrations, including Roth IRA, Trust accounts, or Individual Accounts to help balance tax implications.
2. Medicare Premiums – Higher income earning beneficiaries of Medicare will face higher premiums for Medicare Part B and prescription drug coverage. Married couples with a modified adjusted gross income (MAGI) of greater than $170,000 and single individuals with a MAGI of greater than $85,000 will be subject to the higher premiums. Retirees that draw income from a pension, self-directed retirement plan, or an advisor-managed retirement plan will need to keep track of tax-deferred withdrawals to ensure that MAGI is kept below the threshold for higher premium payments for cost savings.
3. Social Security Benefits – Many Americans are familiar with Social Security, the monthly deduction from paychecks, but how to utilize Social Security benefits strategically is not as straightforward. A recent study by the Government Accountability Office detailed that delaying claims could possibly allow for tens of thousands of dollars more in benefits to retirees, depending on how long the individual and spouse live. Individuals taking Social Security benefits should also note that up to 85 percent of these benefits are taxable, depending on the individuals overall earned income level. For more information on the taxation of Social Security benefits, please utilize this article from the Congressional Budget Office.

Please contact Weatherly to discuss your retirement options and how to best maximize savings, income, and tax-deferrals.

More resources:

http://www.ivdgl.org/social-security/self-employed.htm

www.ssa.gov/pubs/EN-05-10536.pdf

https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview

https://www.fidelity.com/viewpoints/retirement-plan-small-business

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.

The Bipartisan Budget act was passed in and signed into law at the end of 2015, with several key changes:

File & Suspend:  This is a well-publicized strategy where a person (usually the higher earner) files for benefits at full retirement age (usually age 66), and immediately suspends receiving those benefits until a later date (usually age 70).  This allows their spouse to begin collecting spousal benefits on their record while the higher earning worker’s benefit increases at 8% per year.

• What has changed?
  • They are eliminating this strategy beginning April 30^th 2016.
    • Those who have already filed will not be affected.
• Who is eligible?
  • The person who will suspend must have been born on or before May 2^nd, 1950
  • The spouse who will claim on their spouse’s record must be at least age 62.
• What should I do if I’m eligible?
  • Contact your advisor to see if this strategy makes sense prior to the April 29^th deadline
• Additional information here:
  • https://www.fidelity.com/viewpoints/retirement/social-security-rules
  • https://www.ssa.gov/planners/retire/suspend.html

Restricted Application:  This allows a person, who has reached full retirement age, to file benefits restricted to their spouse’s record, while their own benefit increases at 8% per year.  The person could then switch to their own record at age 70 when the maximum benefit has accrued.  This is also important for divorcees who would be eligible for benefits on their ex-spouse’s record.

• What has changed?
  • They are eliminating this strategy for anyone born on or after January 2^nd, 1954
    • Those who have already filed for this benefit are unaffected.
  • If the spouse suspends their benefits, their spouse will not be able to receive any benefits during that suspension.
• Who is eligible?
  • Any spouse married for at least one year and at full retirement age.
  • Any ex-spouse married for at least 10 years and hasn’t remarried (the wage-earning spouse can remarry)
• What should I do if I’m eligible?
  • Check with your advisor to see if this affects your retirement planning.  You may need to consider the risk of a spouse filing, and then deciding they made a mistake, and suspend.  Their suspension may also suspend the benefits you are receiving on their record.  Other implications like Medicare payments may also come into play.
    • There is an exception for ex-spouses; if your ex-spouse suspends benefits, it will not affect the benefits you are receiving or your ability to file on their record.
• Additional information here:
  • http://www.dewittross.com/news-education/posts/2016/03/22/new-social-security-law-regarding-file-and-suspend-will-not-adversely-impact-right-of-divorced-spouses
  • https://www.irahelp.com/slottreport/latest-update-forthcoming-social-security-changes

If you are younger than 62 and were expecting to use one or both of these strategies in your retirement, there are other strategies worth considering as you approach retirement.  Consider discussing this topic with your advisor in light of these changes.

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.