Claiming Social Security at Full Retirement Age and Beyond

Summer 2023 is over for most people, and year-end is looming for Financial Planners. Topics we address during the final months of each year include Required Minimum Distributions (RMDs) from Retirement Plans, establishing new Retirement Plans for individuals and small companies, Roth Conversion Planning, and (non-CPA) tax planning.

Less likely to be on the Planning radar screen is filing for Social Security benefits. There are some Social Security provisions that most people, and indeed many Financial Advisors, do not adequately address. Claiming Social Security benefits is very complicated. Assuming goals of maximizing lifetime benefits, reducing taxes, and minimizing the cost of Medicare, good timing decisions are critical. These goals are affected by the claiming decision, which is too often allotted only cursory attention.

Claiming at Full Retirement Age (FRA). Most Americans prefer waiting to file for Social Security monthly benefits until (at least) their FRA, which is determined by date of birth (67 maximum). From the earliest allowable claiming age of 62, monthly benefits increase 8% annually until filing. Cost of Living Adjustments (COLAs) are applied annually as well. Many beneficiaries believe that they must be receiving benefits in order to participate in COLAs, but that is incorrect, as the only requirement is having attained age 62.

Delaying filing past FRA. Waiting to file until after FRA (but not later than age 70) increases monthly benefits by 8% annually, plus the COLAs mentioned above. Depending on recipients’ longevity, waiting may increase lifetime benefits, and furnish a more significant retirement income.

Upon initial filing any time after FRA, retroactive benefits are available for up to 6 months, including the FRA month. Many people claim benefits as they retire. Those whose birthday falls in the last half of the year can delay filing until the next January. At the same time, the claimant can claim up to 6 months in arrears. Consider that “back pay,” accrued into the next calendar year, when income is likely to be lower. Deferring benefits collection until January of the next year will reduce retirement year income (hence the income tax due), and possibly avoid or reduce Income-Related Monthly Adjustment Amounts (IRMAA charges) for Medicare, as they are based on income.

Age 70+ filing. Everything so far is pretty much common sense, but there is an additional twist. Anyone waiting to file until age 70 is advised to file for the birthday month, because no further benefit increase is accrued after that birthday. However, those with birthdays after June 30 can defer benefits until January to file, including the “back pay.” Again, for these people, income and taxes may be lowered, and Medicare costs may avoid IRMAA, or at least reduce the IRMAA bracket. Planning is the key, and we can help.

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

 

For Americans, the likely most familiar reference to Malta is from the 1941 movie, the Maltese Falcon. This fictitious tale of a stolen bejeweled statue was custom made for a classic mystery thriller in black and white. The story, from the imagination of Dashiell Hammett, featured his famous gumshoe character, Sam Spade. Today, Malta is a vacation destination for people around the world, and some choose to retire in the independent island nation.

A member of the European Union (EU), Malta is a cluster of 5 islands off the coast of Sicily in the Mediterranean Sea. Unknown to most Americans, Malta is the home of some of the world’s most ancient and best-preserved ruins.

While Malta welcomes tourism, it also caters to potential retirees, but with many strings attached. Residency is only open to self-sufficient foreign expats. For those who qualify, the Maltese Government has established guidelines for potential retirees, depending on their country of origin. People from other EU countries abide by one set of rules, while those from non-EU countries have different sets of rules.

Malta has a Tax Treaty with the U.S., strictly defining U.S. taxation for permanent residents in Malta. When there are Treaties and Tax Agreements, scammers follow. Scams attract IRS interest, and Malta poses no exception. In fact, Maltese Retirement Scams made the 2023 IRS “Dirty Dozen” Scams list.

The general nature of the Maltese Retirement Scam is to promise Americans they can donate appreciated assets to certain Maltese pension funds, and when the pension plan sells the assets, proceeds are distributed to the American donor, all tax-free. That sounds too good to be true; because it is.

Full disclosure – I have not been to Malta, and have no plans to visit. I checked with friends who have spent time there, and they do not feel the need to return. For those of you who do, prepare to experience beautiful scenery, mild weather, and many friendly expats. That information comes from Maltese officials, but appears to be fairly accurate. In addition to native Maltese, English is the accepted language on the islands. Anyone interest in a possible Maltese retirement should seek advice from other Americans, the Tourism Bureau in Malta, and qualified tax counsel here in the U.S.

This Blog is not intended as a travel tip bonanza. Our purpose here is to alert Americans about potential tax scams that can prove expensive if undetected. Go if you wish, but don’t believe that our IRS has a benevolent heart where Malta is concerned. IRS will always get their due. Right now, IRS is investigating taxpayers who fell for this, but they are truly only interested in catching the scammers. Help if you can.

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

See the link to check out the CBS News article on “Tips for Maximizing You Savings“! Our very own Adam Van Wie is quoted in the article.

Comprehensive personal financial planning begins with just plain getting organized. The best way to start is to prepare a Personal Net Worth Statement. Conceptually, that is as simple as listing all your assets, and subtracting from that total all your liabilities (debts). This produces a snapshot of your financial position at one point in time, called your Net Worth, or your wealth. In corporate accounting, the equivalent process produces a Balance Sheet.

In financial media and politics, wealth is often mis-defined using income. A millionaire has a Net Worth of $1,000,000+, but too often the term is applied to someone with a Million Dollar annual income. Many wealthy Americans have low incomes, because they own assets that do not provide income, preferring assets with a good chance of increasing in value (growth assets). Conversely, many high-income Americans have a low (or even negative) Net Worth, because their assets are burdened with mortgages or other liabilities. Wealth refers to Net Worth, whether individual or corporate.

A reasonable goal when entering into a Comprehensive Financial Plan is to establish a Net Worth target. Whether working with a competent financial advisor, or simply playing the home game, deciding on a target is vital to beginning a plan to achieve the goal of Financial Independence.

Problematic for many people is identifying and valuing all assets. Home values change over time, bank accounts and brokerage accounts fluctuate, and many forget to count items such as life insurance and annuity contracts. Others have old 401(k) accounts they left behind and rarely think to include those values as assets. Competent financial planners will remind clients to dig through everything to find forgotten assets. Old insurance policies, annuity contracts, and 401(k) Plans may be valuable, and must be included.

Thanks to various pension reform legislation, accounts can generally be rolled over into self-directed IRAs, to be invested in a manner consistent with reaching defined goals. In our “day jobs” as Certified Financial PlannersÒ, we have assisted many clients in finding and regaining control of forgotten (or even ignored) assets. Annuities are classic examples, as most underperform market-based portfolios over time. Depending on the individual annuity and the nature of the ownership, most can be incorporated into a comprehensive investment plan.

Every retiree needs a level of lifetime income, which can include Social Security, pensions (public or private), and annuities. Loads of annuities have been sold over many decades to unsuspecting Americans who do not need them. Many of those can be converted to more productive uses. We can help.

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

Adam was recently featured on Stan The Annuity Man’s podcast!

Click the link above to check it out!

In 2019, on the Van Wie Financial Hour radio program, we reported on a spreading phenomenon known as “FIRE,” for “Financial Independence Retire Early.” In cultlike-like instructional guides, FIRE proponents attempt to entice people into a utopian world of carefree decades of cushy retired life, beginning in early or middle-age. To me, this is a component of the “Big Lie” Americans are being fed on a daily basis by money-grubbing gurus, most of whom probably retired too early.

The FIRE movement tells people they can retire at age 40, 50, or even 60. Studying the literature on FIRE from the zealots (who claim to have all the answers) reveals that a successful FIRE candidate must go to WORK! We’re not talking about volunteering, but a real paid endeavor; even a “side hustle.” Apparently, when doing something you enjoy, it is not considered by FIRE to constitute work, much less a new career. Instead, it is supposed to provide some kind of self-fulfillment, justifying the cut in pay. Think of it as a paid hobby.

I have a better idea. My concept is called “DREC,” for “Delay Retirement Extend Careers.” DREC offers a path toward the real financial goal of most people – true Financial Independence.

Under DREC, a young worker who enjoys his or her occupation and career path should set a retirement goal of Financial Independence. Physical age is only relevant for insurance planning and Social Security claiming purposes.

Don’t enjoy your current job? Change now and work until you are financially prepared.

Wasting years in a “going nowhere” situation, and meanwhile skimping and saving pennies toward an unrealistic FIRE goal, makes for unhappy and unsuccessful lives. People will always require food, clothing, shelter, and a wide variety of expensive non-luxuries (including taxes). Financial Independence requires our nest eggs to be sufficient to cover a lifetime of expenses.

DREC (Delay Retirement Extend Careers) will yield a significant improvement in your probability of achieving true financial independence. If your only goal is early retirement, chances are you’ll be working forever, only not by choice. FIRE may be trendy, but DREC is practical.

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

Last week we chronicled the evolution of investment portfolio diversification, from individual stock buying to Mutual Funds, and more recently, into Exchange-Traded Funds, or ETFs. Conceptualized in 1989, by 2003 there were 276 publicly-available ETF offerings. As investor acceptance broadened, new funds were launched by both existing and startup financial services companies. As of February, 2022, statista.com identified 8,754 worldwide ETF offerings, spanning about 70 categories.

Early ETFs emulated Market Indices, such as the S&P500 Index. From humble beginnings arose Sector Funds, created to represent market sectors for investors favoring Modern Portfolio Theory-style Sector diversification. Success breeds imitation, as the saying goes, and soon ETF companies of all types were branching into bonds and other arenas. Fixed-income, commodities, foreign equities and bonds, real estate, and eventually leveraged ETFs emerged and became mainstream investment offerings.

Growing popularity of ETF investing was due to several factors, including instant diversification, low ownership cost, flexible trading (during market hours), and tax efficiency. A single ETF share represents ownership of every asset in the fund, in proportion to the fund’s holdings. The very name Exchange-Traded Fund signifies that shares are bought and sold among individual investors at lightning speed during trading hours. But perhaps the most desirable feature of the ETF is tax efficiency.

One common complaint regarding traditional mutual funds is a legal requirement that the fund must distribute to shareholders (at least annually) all dividends and capital gains realized by the fund during the year. For fund shares not held in tax-deferred or tax-exempt accounts, these distributions are taxable when received. Many mutual fund investors prefer to reinvest their distributions into new shares, which the fund company will do automatically, and at no cost. For those owners, income taxes must be paid outside the fund.

Understanding tax features of the mutual fund industry, pioneers in ETF development received from IRS a requested exemption from the annual distribution requirement, eliminating the annual taxation on unsold shares. That is not to say that no ETFs pay dividends, as many choose to do so. The voluntary nature of dividend and capital gain distributions allows potential shareholders to evaluate their own tax strategies, and to choose ETFs that match their goals.

No short Blog Post could describe all the complexity of any investment vehicle, but an understanding of the workings of ETFs is instrumental in creating long-term portfolios with specific features for the investor.

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

Defining success in saving and investing is challenging; setting realistic goals is critical. Aiming too high requires excessive risk, increasing chances of failure. Seeking low, but stable, returns results in sure and steady loss of real value, as inflation and taxes punish already meager growth and income.

Beating inflation over time should be a primary goal for investors. Realistically, this requires at least some exposure to the stock market – the best reliable track to long-term positive real returns. For generations, investors and advisors have argued details of stock market investing. Market Indexes (or Indices, both acceptable) were developed as yardsticks for investors to measure their own success (or lack of same) against the market itself.

From early, high-commission stockbrokers plying their trade for the wealthy, emerged the Mutual Fund industry, which offered investments at reduced costs with increased diversification. Finally, an average investor could emulate a Market Index of choice, using a Mutual Fund designed to do exactly that. Investors were able to evaluate their own results by comparing them to Indexes. New investors eagerly jumped in, and the mutual fund industry flourished.

Nothing shouts success louder than imitation. Innovative people soon realized the positives and negatives of mutual funds, and began to conjure up a “better way.” Mutual funds are not truly free market tools. By law, trading activity only takes place between the buyer or seller and the fund company itself, not on an Exchange.

Evolving from mutual funds, beginning in the 1990s, emerged the Exchange-Traded Fund (ETF) industry, which offered similar diversification, but with added benefits of lower costs and flexible trading. From humble beginnings, the ETF industry has grown to over $7 Trillion in assets.

Investors have concluded that, claims to the contrary, “beating the market” over time is likely a pipe dream. Instead, observing the growth in various Market Indexes, matching that growth with personal results is a laudable and lofty goal. With the advent of extremely low cost Indexed ETFs, it became achievable. “Owning the Index” is impossible, because an Index is a number, derived from the value of the assets represented. Owning the Index Share, however, is readily accomplished, and provides nearly equal results, with only extremely low internal costs in most cases.

Many young investors use exclusively Index ETFs, until their portfolios grow enough to seek further diversification. Most wealthier investors retain Index shares as “core” holdings, and diversify further over time..

Next week we will further examine the ETF Industry’s offerings.

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

Achieving eventual Financial Independence requires more than diligent saving habits. Once contributed, retirement dollars must be deployed into investments that are likely to grow over time while experiencing a level of volatility acceptable to the investor.

On the low-risk extreme of investments are Money Market Funds and CDs, which earn interest at a rate that loses every year to inflation and taxes. Banks and credit unions, looking to control a larger percentage of their customers’ cash assets, offer only fixed-income products, robbing customers of the opportunity for their assets to grow with the entire financial market. Many banks offer (and fiercely solicit) fixed annuities, a topic for another Blog.

At the high-risk end of the investment, scale is extremely volatile individual stocks, which provide returns ranging from negative to outsized. Many savers hire stockbrokers, who too often claim that they can outperform the market with well-researched stock picks. While some brokers may achieve this result occasionally, over time they are much more likely to underperform the market, as trading costs continually erode account values.

Neither is acceptable for most savers and investors.

Savers who become investors understand (or will learn) that the key to long-term success lies in diversification among Asset Classes, as well as assets within those Asset Classes. Basic Asset Classes include Domestic Stocks, Domestic Bonds, Foreign Stocks, Foreign Bonds, Real Estate, Cash and Equivalents, and Alternatives, such as Commodities. Successful portfolios will include significant numbers of assets from many of the basic Asset Classes.

In the course of our day jobs as Certified Financial Plannersâ, we field questions from a wide variety of savers. From the range of questions we field, we know that Americans have long been burdened with a lack of financial education from our public education system. Thankfully, that is changing, led by Florida public schools.

When investing in equities, how much diversification is enough to protect an investor, while accumulating a reasonable rate of compound growth? This question has been studied for generations, with no specific conclusion. One recent study concluded that 30 stocks was sufficient, while the same study showed that an individual could only reasonably track 15 at once. Sounds to me like they were drumming up business for stockbrokers.

In today’s investment world, it is possible to hold very large numbers of stocks, using Exchange-Traded Funds, or ETFs, which we will discuss in next week’s Blog Post.

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

My first “real” job was exciting and challenging, with a steady paycheck previously unknown to this student. Fringe benefits presented another entirely new, and decidedly welcome, concept. However, mandatory and optional payroll deductions depleted an otherwise impressive gross earnings amount to an underwhelming “take-home” remainder. From there, monthly obligations further challenged those limited resources. Fear of running out of money before running out of month suddenly became a very real concern. The resultant deflated ego stimulated my financial learning experience, which continues several decades later.

Last week we discussed the difficulty of getting started as savers and investors. Despite challenges during early years in the workforce, time is the best friend of the investors we hope to become. Only once a savings regimen is established, can it become a habit. Over time, routine saving, along with investing carefully, will lead to the true goal – financial independence.

Young savers typically favor Roth IRA Accounts, to which current contributions are not tax deductible. Generally subjected to low tax rates in early careers, people are drawn to the promises of future tax-free retirement income Roths provide. Roth IRAs also provide flexibility for young savers, as funds may be withdrawn tax-free for certain qualified expenses, including purchase of a first home.

Traditional IRA contributions are usually tax deductible. As incomes rise over time, workers are subjected to higher marginal tax rates, increasing the appeal of deductible contributions. Young families often find themselves conflicted, and many decide to split the difference. One spouse contributes to a Traditional (deductible) IRA, while the other funds a Roth (after-tax) IRA. This combination provides flexible tax planning in retirement years.

Roth IRAs are darlings of giant media and financial industry insiders. But that does not make them right for everybody. Learning the mechanics of the Tax Code enables planning budgets, taxes, and cash flows. Fortunately, Florida is leading the way for young people by re-introducing requirements for personal financial education prior to graduation. The more you know and understand, the better your decisions will serve you over time.

Trading dollars between retirement savings and taxes (now vs. later), is among the first major financial decisions facing young families. There will be many more to follow. Choosing Roth and/or Traditional IRAs is important.

Next week we will discuss the need to diversify retirement assets, while at the same time keeping expenses as low as possible.

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