Q: I’m nearing retirement, but I’m worried about Social Security’s financial health. How likely is it that I won’t receive my full benefits? What should I be doing now to protect myself from potential benefit cuts?

A: Your concern is all-too-common, especially as the health of the Social Security system is increasingly viewed through a political lens. That really is a shame.

In May, the trustees of the Social Security system published their 2024 annual report. Each year, their report only shows subtle changes in the financial picture. Given the inherent, long-range set of assumptions used in their analysis, it’s a system that isn’t designed for abrupt changes over time.

Now, it’s true the Social Security “trust fund” is projected to be “depleted” in 2033. That’s the headline that gets the most attention each year. However, the term “depleted” is too strong. This simply means that, with no changes, the excess revenue that the Social Security system has accumulated over past decades will officially be used up. If there are no changes made to the level of benefits paid or the payroll taxes collected, in 2033 Social Security payroll taxes will only be sufficient to pay about 80% of the promised benefits.

On the surface, an immediate 20% in benefits is not a comforting thought. But, of course, the supposition that absolutely no changes will be made is wildly unrealistic. It’s just not going to happen. Too much is at stake and the solutions are too obvious.

Changes to Social Security will undoubtedly be made to both the long-term funding model and the benefit side of the equation. Fortunately, the changes that will be made will only need to be relatively minor. “Fixing” Social Security is akin to navigating a ship across the ocean. Small course corrections can lead to a vastly different destination. Long-range financial projections for Social Security are highly impacted by very small tweaks.

According to the most recent report, if the only dial to turn was Social Security’s funding model, all it would take to reset its course is to boost the dedicated payroll tax rate from the current 12.4% of wages (combined employer and employee contributions) to a level closer to 15.7% of wages.

Naturally, there is another dial to turn besides raising payroll taxes. Small changes to the benefit formula could take multiple forms. For example, making a change in how the annual cost-of-living adjustments are calculated is a particularly gentle way to alter the system’s long-run trajectory.

If I had to guess, I expect our elected officials to form a non-partisan “blue-ribbon commission.” That seems just like the kind of politically easy route they love to take when decisions simply must be made. But, don’t hold your breath quite yet. We still have a few election cycles ahead of us! 

Q: I’ve been having trouble managing every password in my life. Is there a service you can recommend that will help me keep track of them all and also keep me safe online?  

A: There are multiple ways people deal with the nuisance of passwords, ranging from unsafe to cumbersome. I believe the best solution is to use an online password manager like LastPass. The worst solution is to use the same password for every website or service. 

An online password manager can be used across all your devices and it will allow you to easily create complex passwords to ensure enhanced security. With one master password to remember, along with a second layer of added security known as two-factor authentication, it effectively lifts the burden of password management. 

Q: Unfortunately, I fell for an online “phishing” scam. I’m now worried that someone could open a credit card or take out a loan in my name. What should I do to limit the damage?

A: You should create accounts with each of the three credit bureaus and place a credit freeze on each of them. This will block all future credit inquiries, effectively making it impossible for fraudsters to open a card or borrow money in your name. 

Transunion, Equifax and Experian have now made this process much easier to set up and free. The old process was too complex and carried a cost. Today, it’s free. If you haven’t frozen your credit files, you should do it now.

Q: My father died last year at 70 and I inherited his IRA. I’ve read some confusing advice on how much I need to distribute from my Inherited IRA each year. Can you clear it up for me and explain the tax implications of my inheritance?

A: In 2020, Inherited IRA required minimum distribution rules changed. Essentially, there are now two sets of rules: one for non-spousal beneficiaries who inherited an IRA from someone already required to take minimum distributions (RMDs) and another for those who inherited from someone too young to start their RMDs.

Since you inherited an IRA from your father, and he was under the starting RMD age of 73, you don’t have to distribute money from your Inherited IRA until the end of the 10th calendar year following the year of his death. By the end of the 10th year, you must fully distribute the entire account balance and pay any tax due. 

Timing those distributions for the lowest tax obligation is the ultimate goal. You should seek expert tax advice on how to best manage the tax implications of your Inherited IRA distributions. Waiting until that final 10th year is likely a bad plan as it may cause much higher taxes. 

Most memories of the Great Financial Crisis have faded. Except the lingering effects of zero interest rates. For 13 years, savers received no interest on their cash savings. Then, in a blink, we experienced a surge in post-Covid inflation and the Fed raised rates. Suddenly, cash feels really good. Does it feel too good?

Today, it’s easy to get over 5% interest on your cash savings. Checking accounts pay far less. That portion won’t earn much. After all, banks have to make money, too. For your excess cash, most banks have finally stepped up to the plate to keep your money.

If you have excess cash sitting around that is earmarked for some relatively near-term purchase, the advice to follow is not for this money. But this part is definitely for you. For your near-term money, take a quick look at what you’re earning on your excess cash in your bank accounts. If you aren’t earning close to 5% interest on it, you’re essentially donating money to your bank. That’s never a good plan.

For your cash without a near-term purpose, it may be time to develop a plan to invest it for the longer-term. Why? Because the days of earning over 5% in cash are probably approaching an end. The Fed is expected to lower rates as their fight with inflation is reaching the endgame.

To start 2024, when inflation was falling quickly, investors had thought we’d have already seen some rate cuts in the late-winter, early-spring. But, the Fed hit the pause button as the decline in inflation hit a temporary speed bump. Now, the current expectation for the first interest rate cut is at the Fed’s September meeting. A second and possible third rate cut is expected in November and December. Fast forward to summer 2025, investors are now betting that rates will be about 1% lower than today.

While this might not seem like much of a cut in rates, these expectations aren’t really factoring in the possibility of a recession. In that event, the Fed will very likely speed things up. With that, today’s comfy 5% cash savings rates will be in the rear view mirror and the question of what to do with excess cash will become more urgent.

Naturally, the time for the sense of urgency is before interest rates get cut or a possible recession is underway. Shifting some cash into medium-term, high-quality bonds might help you to “lock in” today’s interest rates. Certainly, this transition isn’t easy to consider while making 5% without any real risk. That sense of uneasiness is, perhaps, a subtle sign to begin moving outside of your comfort zone.

You collected all those confusing tax forms. You dumped your pile of papers on your tax preparer’s lap. You even signed your tax returns. You’re done, right? Not quite yet.

Now that the chaotic rush has come and gone, it’s time for you to make sure you didn’t inadvertently leave Uncle Sam a tip he didn’t deserve. Here are three things to review that might result in some money back.

Qualified Charitable Donations (QCD): Using your IRA as a charitable donation tool is a tax-smart strategy. After you reach age 70 ½, you can donate to charity directly from your IRA without owing any taxes on the distribution. Remember, your IRA balance has not yet been taxed and Uncle Sam is waiting in the wings to get a piece of the action. However, when you donate some of your IRA to a qualified charity, it’s tax-free!

Unfortunately, it’s common for IRA donations to end up being taxed anyway. How is this possible? Because the tax form that summarizes your IRA distributions – Form 1099-R – doesn’t automatically subtract out your donations. You have to manually subtract them. If you donated some of your IRA last year, review Box 4a and Box 4b on your federal Form 1040 to see if you actually got credit for making those IRA donations.

Homestead Property Tax Credit: Some homeowners qualify for a special Michigan income tax credit that effectively rebates back some of their property taxes. If your home’s taxable value is less than $154,400 and your total household income was below $67,300, you are eligible for the Michigan Homestead Property Tax Credit of up to $1,700. Your very first step is to check your property tax bill to see if the “taxable value” of your home is below the threshold. If it is, you can then move onto step two to see if your household income is low enough to receive this tax credit.

Tax Loss Carryovers: If you switched your tax preparation software or even hired a new tax preparer last year, be sure to check that your unused tax losses were successfully carried over to your 2023 tax return. Missing your tax loss “carryovers” is especially easy to do.

To ease your mind, review your 2022 federal tax return and check for a negative figure on Line 16 on the top of the second page of your Schedule D. If you showed a loss that’s larger than $3,000, you should pull out your 2023 federal tax return. See if that negative figure was carried over onto either Line 6 and/or Line 14 on this year’s Schedule D. If your tax loss carryovers are missing, an amended federal and state tax return just might be in your future!