Front Street Wealth Management

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Making a Lag Putt for Your Retirement

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I’m not much of a golfer. Perhaps that’s explained by the fact that I get out on the links maybe two or three times a year! They say practice makes perfect, but for some reason, I don’t think that applies to me and the game of golf.

Last weekend’s exciting Masters victory by Tiger Woods triggered, for me, the similarity between retirement planning and the idea of the lag putt. For readers who don’t know golf’s lingo, a lag putt is one that isn’t really meant to go in the hole. Instead, it is a putt that’s supposed to just make the next one a “gimme.”

Getting to a financially secure retirement is similar. It feels like one lag putt after another until the ball finds the bottom of the cup. It’s a gamble to base your retirement on a lucky stroke.

After analyzing and creating retirement plans for many years and many clients, I’ve found there are really only three variables to consider. It’s not rocket science. It’s more like a little math.

The first thing to consider is time. Creating a retirement plan projection for a 35-year old is vastly different than one designed for a 60-year old. In my financial planning work, I often imagine a person’s remaining “economic value” while they are still working. When you’ve only got about 5 years of active work left out of what’s likely to be a 50-year work history, about 90% of your economic story has already been told. Your ability to build up financial resources through additional savings is limited by time.

The next input is your accumulated financial resources that will provide the cash flow needed to sustain your retired lifestyle. These include your various investment accounts, that small business you hope to sell, your rental properties or the real estate equity you’ll free up when you decide to downsize. This also includes any pension benefits you’ll get and, of course, your projected Social Security benefit. It’s really just a comprehensive tally of what’s been built to date.

The final variable – the most important of all – rests on the cost of your desired retirement lifestyle. And, outside of your mortgage or other debts you plan to pay down before retiring, your core retirement lifestyle will probably mimic your current one. Any sound retirement plan requires you to reasonably define your life’s costs. While most financial planners work to avoid the dreaded word, a comprehensive retirement plan does require you to have a handle on your household budget.

Just like any round of golf, the course of a lifetime of retirement preparation is littered with hazards and obstacles. The occasional sand trap or tree limb or awkward swing closely mirrors that untimely lost job, unfortunate divorce, or unexpected repair, not to mention recessions and bear markets. It’s all par for the course.

Eventually, through sound planning, deferred pleasure, and emotional flexibility, the final stage of your own retirement journey can look like Tiger’s masterful round where all that remained was his boring, lag putt followed by a short gimme!

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Social Security’s Shocking Statistics

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Some statistics are meant to shock. Others do it without even trying. According to a recent population survey, half of all retirees rely on Social Security for more than 50% of their income. And, more shocking still, one in four retirees depend on Social Security for over 90% of their income. These stats are truly mind-blowing!

To see how this can be, let’s begin by imagining Lily, a typical 17-year old just starting her first job. Her early years of work won’t likely be her most lucrative. But, by the time she reaches her full retirement age of 67, she’ll have successfully recorded five decades of work. (Psst, don’t ever frame the future like this to an actual teenager; realizing that a half-century of work is still ahead of you isn’t a great motivator!)

Social Security won’t care about each and every one of Lily’s 50 years of work. They will kindly give her a free pass for some of them. In fact, she’ll get to throw out 15 of her lowest earning years. Social Security will officially only care about her best 35 years.

Once her highest earning years are logged, Social Security will then adjust each one for inflation. It’s only right. After all, even a modest 2% inflation rate will silently eat away about half of the purchasing power of one dollar after 35 years!

Of course, it’s important to note that Social Security will completely ignore any of Lily’s earnings that exceed a set annual maximum income of $132,900. This income level is also where Social Security will stop requiring Lily to contribute into the system. Think of this threshold as the start of the “no contributions/no benefits” zone. This threshold is adjusted for inflation. For example, it was only about $38,000 in 1984.

Let’s now fast forward to Lily as a 67-year old. With her 35 years of work adjusted for inflation, Social Security’s formula figures out her average monthly earnings. This monthly average is the basis for Lily’s Social Security benefit.

To show just how easily explainable those shocking statistics are, let’s say Lily’s lifetime average earnings turned out to be $4,000 per month. What portion of her earnings will Social Security replace?

Using some rounded figures, Lily will get 90% replacement of the first $1,000 per month of her historical work record. On her next $3,000 per month of earnings history, she’ll get 32% replaced. Taken together, Lily’s Social Security benefit will be about $1,800 per month; successfully replacing a bit less than half of her average monthly earnings.

From the looks of it, Lily’s reliance on Social Security is typical and the program’s importance is beyond obvious.

To learn more about Social Security, attend our next Money Series presentation on Wednesday, April 10 at 6:30pm in the McGuire Room of the Traverse Area District Library. To register, please visit MoneySeries.org or simply call (231) 668-6894. Front Street Foundation, through its commercial-free Money Series, is a non-profit committed to providing open-access to financial education, for all.

Social Security and Surviving Spouses

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After almost two decades counseling clients on many financial topics, I certainly run into recurring themes. I suppose this is why 88-year old Warren Buffett claims, like wine, he gets better with age!

For example, there is an ongoing lack of understanding, even among Social Security’s own employees, regarding the options that widows and widowers have following the death of their spouse. The result? Thousands of widows and widowers are being shortchanged. I’ve seen it happen, multiple times.

When your spouse passes, you are entitled to receive what’s known as survivor’s benefits from Social Security. This benefit is based on the earnings record of your deceased spouse. You can file to receive reduced survivor’s benefits as early as age 60.

But, there’s another factor to consider in your Social Security filing decision. You are also entitled to receive a Social Security benefit based on your own work history. As a surviving spouse, you get whichever benefit amount is larger.

At first glance, it appears your filing decision comes down to a simple comparison of these two benefits. This oversimplification explains how widows and widowers are missing out on benefits.

Imagine a husband who earned a Social Security benefit of $2,000 per month. After collecting for just a year, he passed away at age 66. His wife was age 60 at the time of his death. She decides to keep working for a while longer. Her own Social Security benefit at her full retirement age of 66 is projected to be $1,800 per month.

If she chooses to file early for survivor’s benefits at age 60, she’d receive 71.5% of her deceased husband’s Social Security former benefit and only get about $1,400 per month. By delaying all the way up to age 66, she’d get the full $2,000 per month her husband once received. Patience appears to be a virtue, once again.

After some complex calculations related to her decision to file a bit early, she’s told she’ll be getting about $1,800 per month. Her highest benefit is the result of being a surviving spouse. Her own benefit just didn’t make the cut as it was reduced down to about $1,500 due to her decision to file early. So, she’ll start getting $1,800 per month for the rest of her life.

However, a wrinkle in the rules allows her, as a surviving spouse, to split her filing into two separate decisions. Widows and widowers get to choose to file for either their own benefit or the survivor’s benefit. Their choice can make a big difference.

As a widow, the splitting of her filing is accomplished through the use of a “restricted application” to receive just her survivor’s benefit. With this restricted application in place, she’ll get her $1,800 per month survivor’s benefit and still watch her own benefit grow and grow over the years. By the time she hits age 70, she’ll officially make the switch and see her Social Security benefit pop up to almost $2,400 per month!

Without the use of this filing strategy, widows and widowers filing for benefits are “deemed” to be simultaneously filing for both their own and their survivor’s benefit. By default, they get the biggest one and forever lose out on literally thousands of dollars over their retirement years. According to the Office of Inspector General of Social Security, the shortchanging of retirees now exceeds $130 million and counting!

To learn more about Social Security, attend our next Money Series presentation on Wednesday, April 10 at 6:30pm in the McGuire Room of the Traverse Area District Library. To register, please visit MoneySeries.org or simply call (231) 668-6894. Front Street Foundation, through its commercial-free Money Series, is a non-profit committed to providing open-access to financial education, for all.

Ready for a Retirement Review?

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Watch Jason P. Tank, CFA, contributing speaker for the Front Street Foundation’s Money Series, to learn about the factors that affect your withdrawal strategy in retirement.

Many readers have spent decades socking away money for retirement. Naturally, the accumulation phase is very familiar ground. However, it is during the second phase, better known as the distribution phase, where the process becomes a bit unfamiliar.

Based on my experience, there are three primary concerns most people have as they near the transition from accumulation to distribution.

First, people want to know how much is safe to spend annually from their nest egg.

The number of rules of thumb promoted out there most certainly outnumber the number of thumbs at my disposal! The most famous guide is known simply as the 4% rule.

Based on the level of today’s stock market – high – and the level of interest rates – low – I tend to err on the side of conservatism. For those who know me best, that’s not a big surprise! Given today’s market setup, my comfort zone is to limit your annual draw to around 3% to 4%.

Yet, we all know life is never as simple as a rule of thumb. Overall objectives and personal circumstances will definitely influence the level of spending in retirement that is both sustainable and safe.

For example, if a retiree is determined to die broke, it leads to advice that differs greatly from the advice given to a retiree who is committed to leaving behind a big inheritance to their children. Another factor that influences the sustainable draw rate is simply time. For those facing the possibility of a 25 to 30 year retirement period, expecting the unexpected is wise.

Once the level of sustainable spending is set, the next concern often centers on taxes.

For many, there are three pots of money with differing levels of tax obligations attached. There are yet-to-be taxed IRAs an 401(k)s. There are never-to-be taxed Roth IRAs. And, finally, there are always-taxed pots of money such as investment and savings accounts.

Tax minimization is a complex and important part of the retirement income game, for sure. Take Social Security, long-term capital gains and dividend income as examples. Depending on the size of your other sources of income, either some or none of this income is taxed.

Related to tax planning, the last concern is deciding which of the above-mentioned pots of money should be tapped and in what order.

For those who have most of their savings in yet-to-be taxed retirement vehicles, like IRAs and 401(k)s, there is not really much choice. But, for those who have spread their retirement resources among the three tax-buckets above, the planning options open up. This is especially the case before you reach the magical age of 70 ½!

We’ll be discussing in more detail the considerations and process of creating your own withdrawal strategy in retirement at the next Money Series on Wed., April 18 in the McGuire Rm. at the Traverse Area District Library. Front Street Foundation is a local non-profit whose mission is to provide open-access to financial education, for all. To register, visit www.FrontStreetFoundation.org or call (231) 714-6459.

Your Advisor Checklist

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The turn of a new calendar year holds a special appeal. It’s a natural time to reflect. It’s also a moment to set a new course for your personal finances.

For some, seeking the help of a financial pro feels unnecessary. I know people who run circles around some financial advisors! But, most people aren’t comfortable going it alone and do want support.

As I get ready to celebrate my twentieth year in the industry, I’d like to offer up some guidelines to help ensure you find a good fit with a financial advisor.

Find a good communicator. Like a good marriage or friendship, communication is number one.

Perhaps using overly-technical terms makes some advisors feel smart or we simply become a bit tone-deaf over the years. The fact is, industry-centric terms hold little meaning for regular people. Help us by asking us to use plain English!

Beyond actually understanding the advice you’re paying for, you should expect to always be kept informed along the way about your money.

Find a seasoned advisor. Like money, knowledge is accumulated over time.

Essentially, a financial advisor’s experience comes from two sources; education and years on the job. The first centers on credentials. And, on behalf of my entire industry, I deeply apologize for the alphabet of letters behind everyone’s names! Even I’ve lost track. To focus you, first look for the letters CFP (financial planning) or CFA (investment management.)

However, a professional designation doesn’t mean much if it’s not backed by years of relevant experience. I used to joke that investment advisors who cut their teeth during the long bull market in the ‘80s and ‘90s accumulated just a few good years of experience – over and over, again. Some stretches are like the movie, Groundhog’s Day. My suggestion is to seek someone who has operated through some market cycles and some volatility.

Find a financially- and ethically-aligned advisor. As the saying goes, form follows function.

Over the years, there’s been a clear movement away from advisors who sell financial products for a commission and toward advisors who provide investment management and planning on a recurring or one-time fee-basis. I feel strongly that a strictly fee-only arrangement ensures advisors will uphold their legal fiduciary duty to place your interests ahead of their own. But, these principles haven’t completely sunk in as evidenced by annuity salespeople still offering free dinners just to hear their pitch!

Over the years, I’ve come to recognize that choosing a professional advisor is a daunting task. If the last few months of market turmoil is any indication, ensuring a good fit with your chosen financial advisor may become increasingly important.

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm, and the founder of the Money Series, a program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com