Admin, Author at Strivus Wealth Partners

This week, in our continuing Social Security series, we are discussing the “do-over” available to qualified Social Security participants. Many people have heard or read that Congress took away this interesting and helpful tool, but they are not completely correct. The “do-over” is now very limited, but it is not gone.

The original “do-over” referred to the ability of a participant who was collecting benefits to repay all benefits previously received (or since any prior “do-over” repayment), and to restart increased benefit payments, either immediately or in the future. In some circumstances, this could become very beneficial, due to the automatic increase in monthly benefits that occurs when filing is delayed or repaid.

Waiting to collect Social Security benefits past Early Retirement Age (62) is financially rewarding, as the System increases your monthly benefit for every month you delay filing. The annualized increase is about 8%, which constitutes an excellent guaranteed annual benefit increase. The (now defunct) unlimited “do-over” provision took advantage of this by increasing the benefit as if no benefits had been collected.

It sounds too good to be true, and perhaps it was. For years, Congress has been faced with the reality that Social Security is running out of money. Without exploring the reasons (we have covered that problem in earlier blogs), Social Security funding needs to be fixed in order to prevent recipients from suffering broken promises.

Let’s go back to the “do-over.” We mentioned that it was not entirely eliminated, Instead, every recipient has exactly one “do-over,” and it has a lifespan of exactly one year. Any time within one year of original benefits filing, a Social Security recipient can repay all benefits received, and re-file at any future time. The benefit level will increase by the same formula for delayed filing, as if no benefits had ever been paid.

One interesting feature of the “do-over” is that Social Security requires repayment of every benefit received, but does not require any interest or penalty payments. Knowing that one “do-over” is still available allows new and future Social Security recipients to have a change of mind as to working, relationships, or other life changes. In life, we don’t always get a second chance. In Social Security, we have retained one.

In the next few weeks, we will be covering more and more details about Social Security. Our efforts are aimed at teaching people about options existing within the System, and how to plan for their own personal best ways to collect.

Van Wie Financial is fee-only. For a reason.

Last week we wrote about Social Security Full Retirement Age (FRA), and today we are expanding on that topic. Full Retirement Age (FRA) is a moving target, depending on your year of birth. FRA currently ranges from age 65 to age 67, and is easily found by going to the Social Security website (ssga.gov). As we pointed out last week, people born before 1938 reached FRA upon their 65^th birthdays. For later birth years, the FRA scale moves up in increments until birth years 1960 and later, where it reaches the maximum FRA of 67.

For generations, FRA was 65, and for “good” reason; most people didn’t live long. As strange as that may sound, the Social Security System was not designed to be a retirement income system. Rather, it was a “safety net” for those who defied the odds and lived well past average life expectancy. Since Social Security is an insurance-based system, and not a classic welfare system, it has been accepted as an integral part of the fabric of American society.

Many times you have heard and read from me that the design of the Social Security System is brilliant. Mostly. It has one major design flaw – it is running out of money. The original designers failed to foresee a few important societal changes:

A steady increase in life expectancy resulted in people receiving benefits longer than expected
Following the end of the Baby Boom, people began to have fewer children, so incoming funds were less than anticipated
For decades, payments into the system exceeded outflow of benefits, so a Trust Fund was building to help the first 2 problems, but along the way, Congress spent the money and replaced it with IOUs

Politicians have repeatedly failed to address the problem, and in fact made it worse by tapping the Fund. Adding insult to injury, Social Security added many more benefit recipients, with no adequate additional funding mechanism. Disability recipients and dependents of deceased parents now take a toll on the System.

After spending the Trust Fund, the System became a “pay-as-you-go” Plan. In the private sector this is generally called a “Ponzi Scheme.” In government, it is called a self-financing system. It is not. Ponzi is much closer to the truth.

Like all large-scale social systems, Social Security was designed to accommodate our society through a steadily-growing population of workers. These people pay into Social Security on a daily basis, and the money they contribute is paid to people receiving benefits. Unfortunately, the new money does not fully cover the outflow, rendering the System on a collision course with bankruptcy.

In a nutshell, changes are coming to Social Security, like it or not. Prepare for them, and you will be fine. Ignore the inevitable, and you will be unhappy and dependent. Later retirement ages, higher withholding tax rates, and even reduced benefits are inevitable. No Congress and President since the Reagan years has had the courage to address the situation. They must do so, and soon.

Van Wie Financial is fee-only. For a reason.

In this Blog series, we are covering a range of topics designed to educate Americans on important details of Social Security. Today’s topics is Full Retirement Age (FRA), which is not the same thing as Qualification Date. Those terms do not apply the same way for all Americans who are already qualified for benefits, or who may qualify in the future.

Last week we discussed the importance of qualifying for eventual benefits during your working life through attaining your Qualification Date. This happens when you have paid in to the System for 40 calendar quarters, regardless of age. Full Retirement Age (FRA) ranges from age 65 to age 67, depending on your year of birth. People born before 1938 reach FRA upon their 65^th birthdays. For later birth years, the FRA scale moves up in increments until birth years 1960 and later, where it reaches the maximum FRA of 67.

FRA may be amended from time to time by Congress, with Presidential approval. The last major change to FRA happened in 1983, when the Reagan Administration implemented changes designed to postpone bankruptcy of the entire Social Security System for another generation or two. Whether and when it might change again is a topic for a later discussion.

As much as it may sound strange, your “Full Benefit” is not the maximum you may receive. It is simply the amount you would receive monthly should you start claiming benefits upon attaining your FRA. Social Security rewards people for filing later than their FRA, up to age 70. The rewards are significant, as benefits increase 8% for every year of delay past FRA. Interesting fact: Increases in benefit level due to delayed filing are not computed annually, but rather monthly. Every month of delay is rewarded with an increase of 1/12 of 8% of Full Benefit.

Conversely, Social Security allows for Early Benefits, meaning filing before FRA. The earliest age to claim benefits is 62, and the claimant receives a reduced benefit of 8% for each year prior to FRA. Again, this reduction is pro-rated by month, rather than by year.

Most people understand that Social Security will reduce your monthly benefit if you are taking early benefits and earning money at the same time (“still working” reduction). Many people are unaware, however, that no reduction will take place upon attainment of FRA. Further, no benefit is ever lost, as reduced benefits are actuarially “pushed forward” into your future benefit calculation. Some people believe that delayed benefits are lost, and that is simply not true. (Note that it can take up to 15 years to regain the entirety of your reduced benefits.)

Since it is not an automatic function to receive Social Security benefits at Full Retirement Age, and since benefits are not a fixed number, Social Security claiming strategy is an integral part of Personal Financial Planning. If your financial advisor is not able to competently discuss your options, you can call the Van Wie Financial Hour on Saturday mornings starting at 10:00 a.m., or send us an email through our website, strivuswealth.com.

Van Wie Financial is fee-only. For a reason.

In this Blog series, we are covering a range of topics designed to educate Americans on the details of Social Security. The System is designed for Americans, and is rightfully theirs, assuming they qualify under the rules. Earning that right is the focus of today’s blog. It is not a rite of passage for a U.S. citizen to receive a Social Security benefits; it must be earned. There are no Participation Trophies.

Last week we covered the forty (40) “Quarters of Coverage” qualification period. Current recipients have already qualified, and future claimants must qualify under the 40-Quarter Rule, unless they are granted one of a few exceptions. The primary exception is for non-working spouses who have been married to a qualified participant for a requisite period of time (a critical provision for an orderly society).

We have previously written about the hundreds of thousands of Americans who have not qualified for Social Security benefits. These are largely workers who apply their skills and perform work as independent contractors. Whether paid in cash or by check, their wages are difficult for the government to track. Therefore, many of these workers simply ignore the reporting and tax-paying demands of the Internal Revenue Service and, by inference, Social Security and Medicare. They will not qualify for benefits unless they start paying taxes.

Citizens who are currently receiving Social Security benefits every month know many of the ins and outs of the System. We understand how some other people have let time slip away; it happens in the blink of an eye. Most of us, at least in our more contemplative moments, have compassion for these people. Most of them did not know what a future without Medicare and Social Security would bring. Society should be better at educating people about their financial futures and the rules to get there.

Modern American society has transformed from a pension-driven retirement system to a retirement system based mostly on individual responsibility (401(k), 403(b), etc.). Social Security, which was never designed to provide a stand-alone retirement income annuity, is an extra cushion or safety net. Without Social Security benefits, most older Americans would have trouble retiring at all, or at least would not be as comfortable. That is why qualifying is so important.

Given the high priority placed on qualifying for Social Security benefits, Americans should also understand how benefits are calculated. Unlike generic annuities, every person’s Social Security benefit is customized exactly to that person’s circumstances. The system rewards hard work and success, and so does not create disincentives to work.

Starting with the individual’s 41^st quarter of paying into the system, benefits are calculated using the top 40 quarters of earnings. If a recent quarter’s earnings exceed any previous reported quarterly income, the new quarter replaces the smallest old quarter. This means that benefits increase as people work and pay more into the system. As I frequently point out to listeners and readers, Social Security is one of the best-designed systems I have ever studied. It is, however, extremely complex, and we all benefit as our understanding grows.

Van Wie Financial is fee-only. For a reason.

Americans are reaching Social Security age at an alarming pace. We are the massive Baby Boomer Generation, and we are straining the finances of the Social Security System. For most of us, our Social Security benefits constitute an important part of our retirement income needs. Social Security is fundamentally a lifetime annuity system, and like all annuities, it is very complex. Maximizing lifetime benefits is our own responsibility, yet many Americans are woefully unaware of the myriad possibilities for collecting.

In this blog series, we are covering a range of topics designed to educate Americans on what is rightfully theirs, assuming they earned the right to participate. Once you are employed and paying into the system, the government does a credible job of letting you know that you are earning your way to future benefits. They are not so adroit at helping you maximize your own lifetime Social Security benefits, but we are here to help.

First, consider the term benefits, a commonly-misunderstood term used in the insurance industry. Benefits are payments made to owners of insurance or annuity products. You are entitled to those benefits, once all qualification requirements have been met. That simple definition is why Social Security benefits are actually an entitlement, which means that benefits will be paid to you once you have qualified. It is unfortunate that Americans have been misled by Congress to view the word entitled as meaning you get a handout for simply “showing up”. Those payments are actually Entitlements, wherein the capital letter “E” denotes programs that provide other-than-earned payments.

Qualifying for Social Security benefits is accomplished throughout your working lifetime by completing a minimum of forty (40) “Quarters of Coverage.” A qualified quarter is one in which you earn $1,360 or more, the current limit, which may be changed in the future. Upon completion of your 40^th quarter (they do not have to be consecutive), you are qualified to receive a benefit upon reaching age 62. Your filing choices range from ages 62 to 70.

People who continue to work and accrue Quarters of Coverage above their initial 40 are rewarded so long as they earn more in the current quarter than in some prior quarter. In other words, the system includes, for calculation of benefits, the 40 highest-earning quarters in your lifetime of work.

Conversely, people who fail to complete 40 Quarters of Coverage are not entitled to a benefit. Exceptions to the 40-quarter rule are granted to non-working spouses of covered workers, a necessary part of any comprehensive social system. There are other exceptions, such as dependent children of deceased workers. Those are topic for future blogs.

Personally, my biggest surprise as I began to study the Social Security System came when I began to realize how brilliantly the system was designed. (Insert snarky comment about government-designed programs here.) If every person were to go to work, earn their Quarters of Coverage, and later collect lifetime benefits, designing the system would be easy. But life is far more complicated and unpredictable than that. Life’s complexities demand that a fair and honest social system accommodate hundreds of situations. The system does that, and does it well.

Are Americans more charitable when they receive an income tax deduction for charitable contributions? That question has been argued ad nauseum since tax cuts in the Reagan Administration. Conclusions have been drawn on both sides, and there doesn’t seem to be a single answer. (Perhaps it is just too personal?)

The U.S. Tax Code has long provided an incentive for charitable givers, in the form of an itemized tax deduction for contributions to eligible charities. For taxpayers who itemize deductions on their returns, this directly decreased their tax bill. Was that tax deduction the reason these people supported their charities? Would they continue to give if that deduction were eliminated?

In the 1980s, many people objected to Reagan’s proposed dramatic tax rate cuts. Whether representing reasoning or rhetoric, the claim was that charitable contributions would be less financially rewarding, and therefore would shrink.

Did that happen? Actually, no it did not. Charitable contributions rose following the tax cuts. Presumably, this was the result of the “wealth effect,” meaning that good people found themselves with more disposable income. They continued to be willing to give, and apparently many were also feeling more able to part with their “extra” cash.

In the Tax Cuts and Jobs Act of 2017, a larger Standard Deduction was designed to eliminate itemizing deductions for many taxpayers. The effort was successful, in that only about 13% of taxpayers are expected to itemize on their 2018 returns, down from 30% the prior year. What will happen to charitable deductions remains to be seen when the 2018 statistics become available.

What if contributions do fall, as I expect that they will? (It is not the 80s any more.) Apparently, we are not alone, as two Members of Congress have addressed that very possibility by introducing the Charitable Giving Tax Deduction Act. The proposed Act would allow all taxpayers to take an itemized deduction, essentially adding all charitable deductions to the Standard Deduction amount. Chris Smith (R-NJ) and Henry Cuellar (D-TX) co-sponsored the bill.

For better or worse, Congress has long used tax policy to promote desired taxpayer behavior. As the old adage goes, if you want less of something, tax it, and if you want more of something, un-tax it. Smith and Cuellar appear to want a more charitable citizenry. We applaud them.

Van Wie Financial is fee-only. For a reason.

Above-the-line tax deduction – how many people understand that term? All tax deductions are expenses that reduce your taxable income, but there are two distinct categories; above-the-line and below-the-line. What is “the line?” The line item in question is on Form 1040, labeled Adjusted Gross Income, or AGI. Until Tax Years beginning in 2018, AGI wasthe last line on Page 1 of Form 1040. Beginning in 2018, it will be in an as-yet-to-be-determined location, once IRS finishes the redesign of all 2018 tax forms. Portions of your annual tax calculation depend on AGI for computations and limitations, so AGI is important to you as a taxpayer.

Reducing your AGI directly reduces your tax bill (less income = less tax). For tax purposes, a lower AGI is equivalent to not making as much money, except that you actually did. Above-the-line deductions reduce your AGI, and so are the most valuable subtractions. Everyone should understand how these subtractions apply, and how they affect your ultimate tax bill.

Only a few types of expenses reduce AGI. Contributions to Individual Retirement Accounts, or IRAs, are among the most flexible tax planning tools available. Contributions to (non-Roth) IRAs can be deducted on 2018 tax returns, but don’t have to be deposited until April 15^th of 2019. That creates a long planning period for determining the tax-reducing value of actual contributions. It also provides extra time to generate the cash needed for those contributions.

IRS can divert some or all of your 2018 refund into an IRA of your choice. Doing so preserves your 2018 IRA deductibility, potentially even enlarging your contribution. For small business owners, other types of IRAs are even more flexible. Small businesses can still open a 2018 SEP IRA or a Personal(k) Plan in 2019, as well, and both have larger contribution limits than Traditional IRAs.

Tax deductibility is only the beginning of IRA benefits. Saving tax-deferred funds for retirement is an absolute necessity for people desiring eventual Financial Independence. Congress has long encouraged taxpayers to save for retirement through tax deductions and investment income tax deferrals. Don’t rely on Social Security as a complete retirement income plan.

While there are not many ways to reduce 2018 taxes after December 31, 2018, if you can save a few hundred dollars in 2018, why not do so?

Van Wie Financial is fee-only. For a reason.

This is an excerpt from a letter we sent out to our mailing list last week, and since then the market has continued to be tumultuous. Check out what we had to say, and if you like it, you can sign up for our mailing list at this link:

Politics and Economics. Both drive the market; one short-term and often irrational, and the other long-term and fundamentally accurate. Right now, politics is “trumping” economics. We are probably smarter to ignore politics, but that is difficult in tumultuous times like these. Nonetheless, cooler heads will always prevail, but when that will start is anyone’s guess.

Let’s look at today’s politics, which include:

Partial government shutdown
Impending re-implementation of divided government
Troops apparently leaving Syria
Ongoing “Trump Derangement Syndrome”

What about our economics?

Record low unemployment rate
Wages and Personal Income rising at fastest pace in over a decade
Fastest GDP growth in a decade or more
The USMCA replacement for NAFTA
Corporate profits at record highs
Unsold home inventories at historic lows
Record Holiday travel and spending
Gold prices low and steady (no panic buying)
Leading Economic Indicators strongly positive
Business and individual Confidence Levels near record highs

We continually ask ourselves the operative question, “What changed?” One thing we know for certain is that this market will reverse, and most likely when we least expect it to happen. Every day brings us closer to that recovery. Will it start today, this week, next week, or sometime in the near future? We are forced to wait and see. Selling equities in a period such as this will guarantee that paper losses become real. Further, human nature renders us timid to re-enter a rising market. Leaving a couple thousand DOW points “on the table” is never profitable.

We continually ask ourselves the operative question, “What changed?” The simple answer for these past few days is a resounding, “Nothing.” In response, our suggestion is to respond logically by doing no harm (the Investor’s Hippocratic Oath?). It isn’t easy, and it isn’t fun, but it is logical. Economics will emerge triumphant; it always does.

Better news is on the way. Meanwhile, enjoy the Holidays with family and friends. This, too, will pass.

Steve and Adam

Last week we discussed Required Minimum Distributions, or RMDs, which pertain to tax-deferred retirement accounts. This week we shift to Harvesting Tax Losses, a topic for investors owning non-retirement (taxable) investment accounts. The concept is simple – sell assets that have lost value since their purchase, declare the loss on your tax return, and pay less taxes. Like most tax topics, there is complexity, and taxpayers need to know the rules.

The past decade has been strong in the financial markets, and most investors have entered the year with little or no carried-forward (prior-year) tax-deductible losses. That makes December of 2018 Tax Loss Harvestinga potentially valuable process. In order to understand Tax Loss Harvesting, there are two terms you will need to understand; Realized Gains (and Losses) and Unrealized Gains (and Losses). The difference is simple, but important. Realized Gains and Losses have been incurred through a sale of assets. Unrealized Gains and Losses pertain to assets that are still owned, and exist only on paper. For tax purposes, only Realized Gains actually affect your current-year’s returns (and therefore your tax bill).

Here’s the process we use to identify and harvest tax losses:

Pull out last year’s tax returns to see if you have any remaining “carried-forward” losses, just to be sure
Check your taxable investment account statements to see if you have realized gains or losses for the current year
Check those same taxable accounts online, as the information is contemporaneous, to see if you have unrealized gains or losses
Compare the numbers to see if there is a way to reduce your capital gains for the year to zero or below using offsetting transactions

Many misconceptions exist about the U.S. Tax Code provisions for claiming capital gains and capital losses. In our Financial Planning practice, we encounter many people who do not understand that any and all capital gains are able to be negated with capital losses, if incurred in the same calendar year. Should losses exceed gains, an additional $3,000 of losses can be deducted from taxable income in the year realized, and the balance is carried forward to subsequent years’ returns until fully used.

Knowing the rules will help reduce your tax bill. Should you need help with tax planning, Van Wie Financial can help, whether on the radio or in the office. Be sure to note that we are tax planners, but do not offer tax advice or prepare tax returns.

Van Wie Financial is fee-only. For a reason.

Last week the stock market took a sizeable dive, only 1 week after experiencing a large up week. Two major problems were reported as being the catalysts for the recent drop; Chinese Trade Talks and the “Inverted Yield Curve.” Both were, to some degree at least, “Fake News.” Could this simply be a media attempt to blame the Administration, or are these genuine worries?

A U.S./China “handshake agreement” resulted from the recent Buenos Aires G20 meeting, creating the framework for a few immediate actions. It also provided another 3-month trade negotiating extension. Several of the immediately agreed-upon actions have been started already, but there was no positive market reaction to this news, so we conclude that the China issue was, at best, secondary.

That leaves the much-publicized “Inverted Yield Curve,” but that did not happen. Media reporters latched onto the inversion curve story en masse, but they were wrong. The Yield Curve (a graph illustrating the relationship between bond interest rates and corresponding maturities) never actually inverted. There was a “dip” in the curve in the 5-year maturity range, but an actual inversion would have shown 30-year rates to be less than short-term rates. Long-term interest rates are currently above 3%, and short-term rates are under 3%. That represents a Normal Yield Curve.

Investors and other market watchers should be very frustrated by poor media reporting. Mass hysteria can be provoked by false reporting. Remember the 1938 Orson Welles radio broadcast, War of the Worlds? I don’t, but some people alive today can remember the incident, which caused a significant panic by proclaiming a Martian landing on Earth. This is considered by many to be the original “Fake News.”

Herd Instinct (or, Herd Mentality) is a market phenomenon, described by Investopedia.com as follows:

Herd instinct is a mentality that is distinguished by a lack of individual decision-making or introspection, causing people to think and behave in similar fashion to those around them. In finance, a herd instinct relates to instances in which investors gravitate toward the same or similar investments based almost solely on the fact that many others are buying the securities. The fear of missing out on a profitable investment idea is often the driving force behind herd instinct.

Far too often, market reactions represent Herd Mentality, and make little or no sense. Don’t become a victim of the “herd.”

Van Wie Financial is fee-only. For a reason.

Social Security – How Much Do You Really Know (Part 5)?