August, 2020 | Live a Life By Design

Social Security Funding Challenges

Posted on August 28, 2020August 28, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

Social Security benefits are considered sacred territory by elected officials due to the large number of voting beneficiaries. This important “third rail” of untouchable programs started with a mission and purpose that was admirable. However, the projection of beneficiaries compared to those taxpayers funding the program has been dealt a significant blow lately.

To provide working families a larger paycheck, the president has recently ordered that all employer withholding for FICA and Medicare contributions from employees be deferred until January 1, 2021. Can you imagine the furor this caused? Although the intent is beneficial for those working, it is not an elimination of the tax from the pay but merely a deferral. This means that you, the employee, will be required to pay the deferral back to the system at some point.

The IRS has not issued guidance on this process for repayment but the deferral will begin September 1, 2020 and continue through December 31, 2020. Let’s look at an example of the additional funds an employee will retain through this deferral period. Assume the weekly salary is $500. An employee’s share of SSA benefits withheld, notwithstanding the Medicare portion of 1.45%, is 6.2% of the gross salary or $31.00 ($500 x 6.2%). As of the date this article was authored, seventeen weeks remain in 2020. This provides the employee with an additional $527 of cash flow for her living needs.

How will this seventeen-week deferral impact the reserves for Social Security benefit payments? The SSA Board of Trustees analyzes the economic projections of the program when issuing their report to the public. Below is a graph reflecting the solvency of the program through 2035 under current funding projections.

Old-Age & Survivors Insurance & Disability Insurance Combined Trust Funds Reserves

By reducing the contributions of working individuals to the program for the short period, officials estimate the solvency would be impaired much sooner. Change creates confusion and chaos soon ensues. This is the current state of the changes to the Social Security Program funding for the remainder of 2020.

What does it mean “the program will be insolvent” in 2035? The SSA Board of Trustees has projected the program can continue to fund existing beneficiaries from current income received by the fund. However, the level of funding will only allow beneficiaries to receive approximately 79% of scheduled benefits. What will this mean for future beneficiaries? An obvious answer I inform younger clients is that the program will be available for them but we are not certain of the benefit structure.

One caveat I would offer is that current beneficiaries will not be impacted by this short-term change. However, future changes of a more sustainable nature should be addressed to continue the functions of the current program. The funding source (employed citizens below the retirement age for program benefits) is shrinking in comparison to the beneficiaries receiving benefits.

It is critical that one does not solely rely on SSA benefits for your retirement income. By becoming self-sufficient for your needs, you will be confident and enjoy your retirement years much more. If you are concerned how the changes to the Social Security Program will impact your retirement decisions, seek out a Certified Financial Planner® professional that specializes in retirement planning. It never hurts to get a complimentary second opinion. See you on the golf course!

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Retirement Planning and Tree Planting: Common Traits

Posted on August 21, 2020August 21, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

An ancient Chinese proverb states, “The best time to plant a tree was 20 years ago. The second best time is now.” What do tree planting and retirement planning have in common? Both reward you by starting early and expecting the harvest much later in your future.

One of the “seeds” we plant in the lives of younger professionals is that the future arrives much sooner than most anticipate. I don’t mean that time speeds up but rather that life has a way of causing you to focus on many other tasks that will rob you of your future savings goals. For example, when you were graduating high school and received all of those beautiful congratulatory cards filled with checks and cash, you thought the future was so distant that you were immortal.

However, in just a short period of time, you go to your mailbox and find the ornate envelopes addressed to you. Opening the envelope, you quickly realize it is a graduation announcement from a friend’s child! “How can this be?” you say out loud. Time has a way of moving consistently forward in our lives and, if we aren’t careful to notice, passes us by without our comprehending the importance of events and people around us.

What does this have to do with retirement, you ask? Everything! We provide financial planning and counseling services to younger professionals. When we inform them of the balance needed in their lives to meet all of their lifetime goals, they are quick to point out that the amount of funds allocated to their retirement seems excessive since they are so young. I love it when this statement is said so boldly by the young person! This recognition of time being so far away from their current reality allows us to demonstrate the difference between a little invested today and the required larger amount to invest if she starts 20 years later to save for retirement.

After the calculations and graphs are reviewed with the person, you can literally see the look in their eyes as to how fast time truly passes. The key to planting the money tree needed for retirement enjoyment is today. Too often people come to our office to discuss retirement planning and leave with less confidence in reaching their goals because of the lack of time to accumulate assets properly.

To help you start today, we have produced our “Top Ten Tips for Saving Today”:

Tip #1: Elect to participate in your employer’s retirement plan. Even if the amount is small, the plan will typically match a certain percentage of your contributions which will help you grow your funds more quickly.

Tip #2: Forgo the cup of latte, double shot, no foam every other day and place these funds in your savings. You will be surprised how much you can save in a year!

Tip #3: Pay yourself first. This is our mantra when clients ask us how to save for the future. You must take advantage of the tax laws to plan for all applicable deductions possible. Invest in your future, not the government.

Tip #4: Find an accountability partner. Saving is like exercise; you must perform both on a consistent basis to see the results. When I started exercising (again) regularly, I didn’t notice results for a month or so. Then the magic came alive one day when I was putting my suit pants on – they were too big! Your saving for the future will work the same way. Find someone to hold you accountable for exercising and saving.

Tip #5: Do what wealthy people do. Budget each year and consider your savings goal as the first disbursement for your monthly funds. The key difference between the behavior of wealthy people and ordinary people is their approach to saving for their future. Wealthy people will save their desired portion of income first and spend the rest. Ordinary people will pay their bills first then save what’s left.

Tip #6: Don’t stop investing your savings in difficult market cycles. Emotions rule a lot of people. However, to be successful in saving for the future, you must be consistent in your investing. Think about the process as if you were shopping. Look for bargains that have fundamental characteristics of a good investment. These are typically found when the markets are in recession or downturns.

Tip #7: The stock market is an auction use it to your advantage. In its simplest terms, the stock market is based on someone selling something and someone else buying it. Don’t be confused with the technicalities of the market. Consider a well-balanced portfolio and consistently fund it through good and bad markets. You may find that you are well rewarded in the long run.

Tip #8: Rent don’t buy. Before you think you know what I am referring to allow me to explain further. Don’t buy assets that are low utilization but require significant investment of time and money. One primary example is a boat or recreational vehicle for most people. Besides maintenance, insurance, storage, taxes and other costs are borne with these assets that could be alleviated by renting one when you need it. Recently, we rented a house boat for a weekend on the lake. The gas tank was full and the maintenance, as well as all the required safety equipment, was completed by the leasing company. All we did was enjoy the weekend and turn the craft back in after we were through.

Tip #9: Invest your raise in salary. Instead of increasing your monthly living expenses by the same amount of funds you received in your recent raise, consider allocating the raise to your future savings. If you have been living comfortably, why should you change your lifestyle simply because you make more money?

Tip #10: Recite often the nine tips above so that you are not easily distracted by the “bright shiny objects” that appear before you while living your dream life. One word that I have used, on purpose, throughout this article is “consistently”. Without reviewing your actions periodically, it is easy to find yourself off course and in treacherous waters.

Seek out a professional to help you establish a plan and work the plan like your life depends on it – because it truly does! See you on the golf course.

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Eliminating the Top Three Fears of Pre-Retirees

Posted on August 14, 2020August 17, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

Retiring is a big step in life for most people. Along with this new lifestyle comes the fear of the unknown. You do not have to be subject to these fears if you simply follow the process outlined in this article.

Let’s identify three fears causing the greatest concern for pre-retirees. First, most people have enjoyed a career where they receive consistent paychecks and benefits. At retirement, there is a sudden realization that the ever-flowing money and benefits immediately stop! You don’t have to feel this way if proper planning has been performed. For example, if you have saved properly in your employer retirement plan, a series of consistent payments can be established to provide you a lifestyle you desire. Proper assumptions must be considered when establishing this stream of cashflow to confidently assuage the underlying fear of “running out of money”.

Why would you work so hard all of your life to simply exist in retirement? I am pretty certain that no one listed “barely survive” as a retirement goal! Start saving for retirement early and you will reap the benefits of living a life you desire.

The second fear of pre-retirees is the unknown cash needs of other family members while the retiree is enjoying life. When planning and analyzing the needs of the potential retiree, it is critical that you consider the needs of other family members you have supported during your career. What I am referring to is the “sandwich” generation. Some individuals are not only caring for their retirement needs but the needs of their parents and/or children (hence the name, “sandwich” generation). Challenges to the traditional family structure have been monumental in the past two decades. In years prior, the retiree had only their existing household to care for during the period after employment. Now, the retiree may be called upon to assist in college funding, caring for an elderly parent, etc. The world is a different place today and these considerations should be given some thought during the planning process.

To alleviate this fear, consider allocating a certain amount of funds to be invested in a manner that provides for these needs. Are there assets of your parents that may have considerable value but no cash flow capabilities? If so, perhaps selling the property would provide sufficient support for your parents’ futures. If not, this special fund would give you confidence that your retirement is secure while also meeting your obligations you desire to undertake for your family members.

The third and final fear of pre-retirees is the rising cost of medical care and its negative impact on their retirement assets. This is a tough one for most people. Proper medical care is necessary to allow you to enjoy the highest quality of life in retirement. However, with medical care rising approximately 6% per year for pharmaceutical and physician visits, a significant ailment could wreck your well-planned future. Consider utilizing Medicare Programs to your advantage. For example, it is critical that you consider a supplemental plan to your Medicare Parts A and B coverages. The remaining 20% of inpatient costs would be a material burden on your assets and cashflow if you were required to pay it out-of-pocket. There are many types of supplemental plans that cover various levels of support. Analyze them and consult an expert for guidance to select the proper plan for your needs.

If you are concerned about the rising cost of prescription drugs, and are enrolled in Medicare, consider the Medicare Part D Program. You may find sufficient coverage for your needs for a small premium each month. One caveat to this plan is that you will be penalized for enrolling in a period after you are initially qualified at age 65. For example, after your 65^th birthday, you are eligible to enroll in Medicare Part D.

However, your health is great and you don’t expect a costly amount of prescriptions. Then the unimaginable happens – at age 68 you experience a significant health event that requires expensive medication each month. You quickly enroll in Medicare Part D at the next enrollment period and realize that your monthly premium seems higher than you remembered at age 65. The difference in rates is the late enrollment penalty calculated at 1% of the national base beneficiary premium assessed each month from your originally qualified enrollment date to the month you enrolled in the program. In our example above, 36 months had lapsed from the date of the originally qualified enrollment date for the individual which means the monthly premium penalty would be 36%. As a result, your monthly premium for Medicare Part D coverage would be 36% higher than the national premium. As you can see, this penalty can become material rather quickly.

There are many factors to consider prior to retiring. We have a saying we use with our clients, “You retire for the first time only once. Don’t make a lifetime mistake when you do so.” Retirement planning is a process that should be addressed in advance and, to provide the greatest probability for success, consult a professional that specializes in retirement planning. Life is meant to be lived, not feared.

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Time — Your Most Powerful Savings Weapon

Posted on August 10, 2020August 10, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

The most powerful factor to assist in the planning for your future is time. However, time is also the one factor of investing that you can’t control. What do you do?

To properly unleash the power of time in the calculation of compounding interest, you must start early to invest. You have more control over your future than you know. For example, if you saved only $100 each month from the time you graduate college at age 22 until you reach 30 and invest it prudently, say at an annual return of 6%, you would accumulate $12,344.27. Not quite ready to retire at age 30, right?

What happens when you continue saving each month but the amount is increased to $250 from age 30 until age 67, which is the age full retirement age for Social Security Benefits and assume the same annual rate of return? Of course, the amount in your savings account would be much higher if all assumptions were realized. How much would you realize in your savings account at age 67? You would have accumulated $522,896.95! Now, can you retire and live the life you choose? It depends.

The key financial principles to learn from this illustration is that time and compounding of interest have helped you grow your account by $402,296.95 and you only invested $120,600. What if you had invested a little more each month, say $500 per month from the age of 30? You would realize a total of $932,763.11! To illustrate the power of these two financial principles, you have saved only $231,600 from your earnings and the account grew $701,163.11.

What if we looked at this from another angle? Let’s assume that you enjoy coffee. Instead of the latte with extra espresso that costs $3.50 per day, you save this amount in your savings account each week for a total of and invest the funds to earn 6% annually. How much would you have accumulated in 45 years? $294,561.07! Now, that is a lot of coffee money.

The overall lesson to learn from these illustrative calculations is that you can save a significant amount of money for retirement if you start early in life. Time is the most powerful of element when growing money for the future. Of course, no one earns an exact 6% each year for forty-five consecutive years. However, the calculations provide you some motivation to start saving at the earliest point in your life.

One of the best methods of accumulating money is to fund your employer retirement plan with as much as you can defer from your salary. Most plans feature a matching contribution from the employer, when coupled with your potential for growth, would help you reach your savings goals faster.

These simple concepts can work for you if you maintain discipline in the process. Too many people believe they have plenty of time to save for retirement and create a lifestyle that is too costly to allow them to save. Here is the trick to this process: do what wealthy people do. Save first and spend the rest! See you on the golf course.