April, 2023 | Live a Life By Design

Failing to Prepare Does Cost More

Posted on April 27, 2023April 27, 2023 by Jimmy J. Williams, CPA/PFS, CFP®

The old adage of “failing to plan is planning to fail” is particularly true when it comes to your future. It is most difficult to hit a goal in life that you do not set. I am a big believer in goals for all aspects of life. When I began my professional career in accounting in 1987, I wrote down my goals and some of them were long-term that took me thirty-five years to accomplish. These are called “marathon goals.”

To illustrate the importance of goals, think about the times in your life that you had thoughtfully planned for an event – buying your first home, birth of your first child, buying your new car, etc. Each of these events required you to define what you desired in the outcome and establish a plan of action to achieve the steps that led to the goal. For example, you wanted a new home while in your 20’s. You realized a down payment of 20% of the cost of the home may be necessary to achieve the level of funding and the interest rate you preferred.

While you were working hard in your early career, you set the goal down on paper and placed it in an area of your apartment where you would see the goal daily. This simple act of visualizing the day you walk into your new home served as a motivator for you to save for the down payment. Finally, the day of closing on your new home has arrived! You are excited and overwhelmed by the process.

After moving your small amount of furniture in your new home, you realize that more furnishings are needed. You identify another goal and set it to paper. Within twelve months you have reached this new goal of purchasing your furniture throughout the new home. This process continues throughout life.

Consequently, many individuals work extremely hard in accumulating their wealth only to fail to carefully plan for the distribution of their net worth when they expire. Over my thirty-five-year career as a CPA and Certified Financial Planner^® professional, I have witnessed more individuals fail to carefully plan for the transition of their estates and cause their heirs significant hardship and avoidable costs.

Two areas of primary challenge during retirement are healthcare and income. To rigorously evaluate each of these areas it is critical that you understand the application of your resources to resolve these challenges. First, healthcare costs continue to rise more than 8% per year. According to www.plansponsor.com, retirees will spend $315,000 on healthcare costs during retirement after age 65. These costs include co-pays, prescriptions, mobility aids, etc. Due to the size of this cost in comparison to your total budget, it is critical that you maintain a healthy lifestyle if you wish for your retirement assets to last you longer.

The second area of challenge is income. Many of us estimate we will spend fewer dollars during retirement than we did during our working years. This assumption is invalid. Our clients spend an equal amount of funds during retirement as they did while working because they have more time to travel and enjoy the activities, they were unable to do while employed. A plan for cash flow is critical to your facing retirement with all the costs that may arise in life. I often tell clients that one of the worst outcomes would be that you lived longer than your assets lasted.

Retiring for the first time is unnerving for many people. It is possible to feel confident about the process and increase your probability for success by collaborating with a Certified Financial Planner™ professional to create a plan. Make informed decisions and do not guess your future.

Related Podcasts

Social Security Program Solvency

Posted on April 21, 2023April 21, 2023 by Jimmy J. Williams, CPA/PFS, CFP®

Since its signing into law by President Franklin Roosevelt on August 14, 1935, the Social Security Administration has helped millions maintain a monthly benefit to support their families. Initially established as a program to keep families out of poverty, the benefits from social security have taken a more substantive role in the finances of families.

With fewer corporations providing workers a pension plan for lifetime benefits, social security benefits have taken the role as a primary income item for most families. Failing to save for retirement is a terrible and tragic mistake. Longevity has improved for Americans due to the improvement of medicines, treatments, and advancements of surgeries. If we are going to live longer, shouldn’t we consider it may take more assets to support our lifestyle?

The original law included benefits for individuals aged 65 and older that participated in paying their share of the premiums for the benefits through their employment. Your employer pays half of the obligation. The initial purpose of the law was to address the period after a person finished working (i.e., retirement).

Over the decades, the Social Security Act has been amended for other purposes. It does make sense that the loss of a family member who is responsible for a substantial portion of the financial support would need their income replaced. Of course, life insurance is a simple manner of replacing lost income for the family, but many companies do not provide life insurance to their employees. To solve the problem, and to keep families from facing poverty, the Social Security Administration was authorized to assist families with survivor benefits. To qualify, the surviving spouse must be the caregiver for a disabled child or a child under the age of 16. Some other qualifications are required as well.

The logic behind this process of granting survivor benefits is that the deceased participant would not be receiving the benefits they may have been entitled to now or in the future. Payments do not last forever, and the child will eventually lose the monthly payments due to age unless disabled.

If a person became disabled before reaching their Full Retirement Age (defined as either age 66 or 67 depending on your year of birth), she may qualify for disability benefits from the program. Additional qualifications are expected before granting the benefits.

These amendments and granting of benefits for other reasons than retirement have caused concern that the Social Security Program will become incapable of funding benefits at their current levels by 2032. Today, there are two people paying into the trust fund for benefits for every beneficiary. This is unsustainable.

Congress should review the current funding and obligations of the program to make reasonable changes. For one, the amount contributed could be changed by 1% and would extend the funding for the program for many years. The program could increase the age for full retirement benefits to 68 which would save the plan’s longevity for many years.

Lastly, it would be a start to allow a privatized portion of the social security premium contributed by each worker. Start with a smaller percentage such as 15% and allow the individual to direct the investment strategy to meet their personalized needs.

No matter what the approach to resolve the problem with funding, something should be done soon. There is no concern for current beneficiaries being affected. However, individuals ages 25 – 40 may see a far different benefit program when they are retirement age.

It is important to be proactive when planning for retirement. Think about your goals for the future and seek out a Certified Financial Planner™ professional to create a plan for achieving them. The future is predictable if you work toward the goals you wish to accomplish. Warren Buffett offers us some good advice about saving for the future when he said, “If you spend money on things you don’t need, soon you’ll have to sell the things you do need.”

Related Podcasts

Developing a Tax-Efficient Lifestyle

Posted on April 13, 2023April 13, 2023 by Jimmy J. Williams, CPA/PFS, CFP®

Your taxes are filed (or extended). You may feel relieved. Now one of the most important periods of the year begins. No, I am not speaking of baseball in full swing. I am referring to the planning process to reduce your 2023 income tax burden based on your knowledge gained from the past year’s tax implications.

By using a proactive planning strategy, you may find that you are more confident and comfortable with the tax filing season. It is much less stressful when you have an idea of the amount of tax owed. The reason for such trepidation during tax time is that most individuals spend no time in the planning process and simply hope for the best outcome. As we say in our business, hope is not a strategy for success.

Let us put a game plan together that will help you gain confidence that your assets are working for you and not against you. First, one of the largest assets of most families is their residence. What can be done with a home that is tax efficient? Consider the full payment of your property taxes every other year so that you can “bunch” up the deduction to increase your itemized deductions. Of course, one caveat would be the limitation placed on taxes within your Form 1040 Schedule A, but most people may find room for additional deductions in this area.

In the most recent tax law passed by Congress, an individual may make certain energy efficiency improvements to his residence and take a tax credit – not deduction – for the expenditure. Instead of bunching the improvements into one year, the tax credit may benefit you over multiple years by performing some of the improvements each year. This approach will help you manage your cash flow and obtain valuable credits against your current and future years tax liabilities.

The second largest asset of a family may be their investment portfolio. By taking advantage of contributions to an employer plan or, if a plan is not offered to you, by contributing to a self-employed plan or IRA, you may uncover significant tax savings each year. When planning your operating budget for the year, consider a line item that isolates the contributions to tax-deferred plans so that you may capture efficiency with your tax liabilities.

If you have not filed your tax return for 2022, you may have opportunities to reduce your liability after the close of the filing season. Consider a SEP (Self-Employed Pension Plan) for a strategy of tax reduction. This plan will allow a contribution of up to $61,000, or 25% of net earned income, whichever is lesser, and you have until the filing of your return or the extended due date to fund the account. This is a potential windfall for many self-employed individuals!

Another overlooked asset for most families is the investment in a qualified electric vehicle. In 2023, the IRS allows an income tax credit of $7,500 to qualified individuals who purchase a vehicle that meets the criteria for the credit. The credit for electric vehicles is quite an incentive to consider one of these automobiles.

Do not plan your entire life around the impact taxes play in our world. Rather, take opportunities to gain tax benefits in the transactions and assets you are going purchase to meet your family’s needs. It becomes a win-win scenario!

By taking a few minutes each year to set and define goals that help your family lower their tax burden, you will begin to experience greater cash flow and confidence in your abilities to control your future. If you wish to start a plan that helps you gain more net worth and lower your tax burden each year, seek out a Certified Financial Planner™ professional. Take leadership in the tax planning process and reap a tremendous benefit for your family. As Peter Drucker so eloquently stated, “Management is doing things right; leadership is doing the right things.”