26 ways to combat inflation in your own life

After my last blog, where I described the reasons we are experiencing high inflation this year, you might be asking “What can I do to combat inflation in my own life?” As I consulted with my team members, financial professionals that work with retirees all day every day, we came up with twenty-six inflation-fighting ideas that will help the retiree, or those nearing retirement. Some of these ideas will have a huge impact, other ideas are less significant but are things that you may not have thought of previously. 

I found it interesting that as we compiled our list, it morphed from being merely an inflation-fighting list into a commonsense checklist of things that every retiree should consider going through as a matter of just being financially responsible. Obviously, not every one of the money-saving ideas on our list will apply to your specific situation, but some will. We are confident that every one of you will benefit from going through this list in your own situation and that you will end up saving money by implementing the applicable ideas. These savings will be helpful for you to maintain your lifestyle as you are squeezed by inflation. 

Investing: 

Investment mistakes early in retirement can be devastating and there are no do-overs. So, I first wanted to remind you of the inflation-fighting capabilities of your investments before we talk about any other inflation-fighting/money-saving ideas.  

1. Remember, the price we pay for inflation-beating investments is having to endure temporary periods of volatility. Volatility is not risk, the synonym for volatility is unpredictability and in the short-term, equities are certainly unpredictable. You wouldn’t be human if this year’s stock market hasn’t caused you concern, but you need to stay the course and not let yourself be frightened out of owning a piece of some of the most profitable corporations the world has ever known. Compound interest has helped you accumulate the nest egg that you now have. Keep the miracle of compound interest alive during retirement by owning equities. Hold on to your equities if keeping up with inflation is your objective.

2. Have a plan. We follow our proprietary Perennial Income Model™ to create an income plan that protects our retirees’ short-term income from stock market downturns while protecting their long-term income from the ravages of inflation. The Perennial Income Model helps to strike the right balance between owning less-volatile types of investments and owning the more-volatile inflation-fighting equities in a portfolio. It matches your current investment allocation with your future income needs. Do yourself a favor and learn how the Perennial Income Model can help you create your retirement income plan. To learn more about the Perennial Income Model, order a free copy of my book, Plan on Living, here.

3. Have faith in the future and follow your plan. We are not facing an investment apocalypse. Market conditions are cyclical, and we will continue to experience good as well as bad economic cycles. A well-thought-out investment and retirement income plan should have built within itself a contingency plan to deal with economic downturns and periods of market turbulence. In fact, your plan should not just help you to navigate volatile markets it should assist you in taking advantage of them. Don’t allow yourself to get derailed from your plan.

Income:

4. If you haven’t started Social Security yet, consider delaying applying for your own benefit until age 70. Beyond the built-in annual cost of living adjustments of Social Security, your benefit will increase by 8% each year that you delay from your full retirement age until age 70 by simply waiting. Your full retirement age is somewhere between age 66 to 67 depending on your year of birth. Receiving 24%-32% more each month in Social Security benefits for the rest of your life can be a handsome inflation-fighting boost.

5. Go back to work. Statistics show that almost half of all retirees go back to work after two or three years of retirement and they go back to work for reasons beyond satisfying income needs. In other words, they get bored, and work satisfies their need for social interaction and the need to be part of something bigger than themselves. Find a part-time job that is interesting to you for a day or two a week. With a nationwide worker shortage, there are endless opportunities for retirees to find the kind of job they would enjoy with the flexible schedule that they desire. Being engaged in something that interests you, while picking up a couple of bucks to help with inflation can be realized…have fun!

Energy: 

6. Replace light bulbs and fixtures with LED. LED bulbs last longer and use 25% less electricity than outdated light bulbs that you still might be using in your home.

7. If you are regularly away from your house during the day,  program your thermostat. Don’t heat or cool an empty house. You can drop your electric and gas bills by as much as 10% by adjusting your home temperature by a few degrees. Open a window in the summer or wear a sweater in the winter to offset the mild changes in temperature.

8. Take advantage of the energy-saving programs offered by your power and gas companies. Utility companies provide valuable energy-saving tips and even will send representatives to your home to help you recognize where you could substantially save on your energy bill. They will also keep you up to date with rebates and tax credits that are available to you as you update your home. This service is free or available at minimal costs.

9. Save gas by better organizing your errands. Knock out all your errands in one trip versus three or four separate trips.

10. Don’t run your appliances until they are full, specifically your washer, dryer, and dishwasher.

Shopping/Spending: 

11. Don’t be shy about asking for senior discounts. We found a website, www. seniorliving.org, that keeps a list of discounts available to seniors or those approaching retirement. It provides dozens of discounts and covers everything from grocery shopping to cruises. We found that many of these discounts are not well known, nor are they advertised by the companies offering the discounts. You will have to know about these discounts in advance and you will have to specifically ask for many of these discounts.

12. Life has become so much easier since we have evolved into online shoppers. Online shopping has also made it easy to comparison shop and find the best deals. Take a couple of extra minutes to compare items as you make your online purchases. We found two websites, Honey and RetailMeNot, that assist you in online shopping. Both websites show you some of the best available coupons on the internet to help you get the best deal possible.

13. Shop your pantry or freezer first. How many times have you run to the grocery store to buy an item, only to later find that same item sitting on a shelf or in your freezer at home. All of us are guilty of wasting food and money as we throw out food that has exceeded its expiration date. According to Feeding America, “Each year, 108 billion tons of food is wasted in the United States. That equates to 130 billion meals and more than $408 billion in food thrown away annually. Shockingly, nearly 40% of all food in America is wasted.” The key to avoiding waste is to take the time to better organize your pantry and food storage.

14. Try using store brands over name brands.

15. Barter – I’m not suggesting that you haggle over everything but, look for opportunities to get a better deal. You will be shocked at the discounts you will receive as you ask one simple question as you book hotel rooms, rent cars, and hire services. Try asking, “is that the best you can do?” That question has saved me thousands of dollars over my lifetime.

16. Audit your own credit card statement. Are there subscriptions that you can eliminate that you no longer use? Gym memberships, multiple streaming services that you don’t use, and magazines that are never read are the most likely culprits.

17. Make an extra effort to pay off debt, especially adjustable-rate loans. Specifically, be mindful to not carry a balance on your credit cards month to month.

18. Consider a lower-cost cellphone plan. With WIFI being so prevalent, maybe that unlimited data plan might not be necessary.

19. Load up on nonperishable items when they go on sale.

20. Work off a budget. It may have been years since you followed a budget but following a budget can be useful to help limit impulse purchases.

21. Do your kids a favor and sell the stuff you don’t use anymore. All who have had to clean out a deceased parents’ home know what I’m talking about. Learn how to sell your unwanted items on eBay, Craigslist, Facebook Marketplace, and more. You will be shocked what people will buy, and who knows, that collectors’ edition Barbie doll that has been hiding in your basement for decades might be worth thousands.

22. Be strategic as you consider making major purchases such as houses. Interest rates will have to rise to cool down the economy. As rates rise, people will be forced out of the housing market and house prices will necessarily drop. Be patient and thoughtful as you consider your next big purchase.

Travel: 

23. Investigate cash back rewards and frequent flier discounts offered by your credit cards and learn to use them.

24. Consider vacationing closer to home during inflationary times. People come from all over the world to visit the national parks and vacation destinations that are often within driving distance of our homes. Make a bucket list of regional getaways that you would like to see.  Your next “thrifty” vacation may end up being one of your most enjoyable.

Insurance: 

25. Shop for lower auto and car insurance rates. It’s amazing the money that you will save as you shop around. You may also consider raising your deductibles for additional savings. As long as you are talking to your insurance agent, check out how much your house is insured for. The recent inflation has raised the value of your home. Is your home adequately insured?

26. Don’t lapse or cancel that old life insurance policy that you no longer need…sell it. There are viatical companies that will sometimes pay top dollar for life insurance policies that no longer fit your needs. You get paid for your policy and you free yourself from having to pay future insurance premiums.

Before I end, I want to mention some developments regarding inflation that have occurred since our last blog was published. Last week our elected officials announced a student loan forgiveness program that promised to forgive the loan obligation for billions of dollars’ worth of loans. Essentially, the government will be going further in debt to pump billions of dollars into an already overheated economy. During the same week, Jerome Powell, the Federal Reserve Chairman announced a plan to aggressively raise interest rates to quell inflation. 

So, our politicians are stepping on the gas pedal while the Federal Reserve is stomping on the brakes. I wish to point this out to you to help you understand that until policies in Washington D.C. are changed, higher inflation rates will be with us. So, in the short term, we are going to have to learn how to live with higher inflation rates than what we have been accustomed to. I hope the ideas I shared with you will offer a little relief. 

Hang in there, this too shall pass! 

If you have questions, or concerns, or would like to review your personal retirement situation, please click here to schedule a complimentary consultation. You can also click here to learn more about the Perennial Income Model mentioned above in the second fighting inflation idea.

Social Security

10 Social Security Questions Retirees Should Ask

 

1. How much can I expect to receive?

Social Security accounts for 42% of the average American retiree’s income. While it is certainly not, in and of itself, sufficient income to live comfortably on during retirement, it does provide a foundation upon which a retirement income plan can be built.

If you have a work history of at least ten years (forty-quarters), you are eligible for Social Security benefits.

The amount of the Social Security retirement benefit you are entitled to is based on two criteria: your inflation-adjusted, thirty-five highest-earning years and the age you started Social Security retirement benefits.

Find out your benefit amount by going here: www.ssa.gov/retire/estimator.html

Before we discuss how benefits are calculated, you should familiarize yourself with two basic terms. These are used as starting points for calculation reductions or increases in benefits. Knowing these terms will help you understand the information in this chapter.

Full Retirement Age (FRA): 

This is the age at which a person may first become eligible for full (unreduced) Social Security benefits. It is based on your year of birth. You can find your FRA using the table below:

AGE WHEN YOU ARE ELIGIBLE TO RECEIVE FULL SOCIAL SECURITY BENEFITS
YEAR OF BIRTH FULL RETIREMENT AGE (FRA)
1943 – 1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 67

 

Primary Insurance Amount (PIA): This is a calculation by the Social Security Administration based on your highest thirty-five years’ worth of earnings. It represents the amount you would receive monthly if you began collecting benefits at FRA. You can find this number by referencing your annual Social Security statement online.

Retirees who wait until their full retirement ages (FRA) will receive 100% of their primary insurance amount (PIA).

2. What if I apply for benefits between the ages of 62 and FRA?

You are allowed to claim benefits as early as the first full month after you turn age sixty-two. Doing so will result in a permanent reduction in your monthly benefit (PIA). You can claim benefits anytime between age sixty-two and FRA. Your benefits will be reduced according to how many months remain until your FRA at the time you file. As you can see from the chart below, if your FRA is age sixty-six and you file at age sixty-two, you will receive only seventy-five percent of your PIA. So, if Boomer Bob applies for Social Security at age sixty-two, he will only receive $1,650 monthly, versus the $2,200 that would be available if he waits until his FRA. This benefit amount is what he would receive for the rest of his life, increased only by cost-of-living adjustments (COLAs).

AMOUNT OF SOCIAL SECURITY BENEFIT RECEIVED AT DIFFERENT AGES
AGE BENEFITS ARE CLAIMED PERCENT OF BENEFIT RECEIVED BENEFIT IN TODAY’S DOLLARS IF BENEFIT AT FULL RETIREMENT AGE IS $2,200
62 (earliest) 75% $1,650.00
63 80% $1,760.00
64 87% $1,907.00
65 93% $2,025.00
66 100% $2,200.00
67 108% $2,376.00
68 116% $2,552.00
69 124% $2,728.00
70 (maximum 132% $2,904.00

 

3. What if I apply for benefits after my FRA?

If at age sixty-six, you attain your FRA, you can now start receiving your full, unreduced primary insurance amount, or PIA. If you delay the onset of benefits past age sixty-six, you will earn delayed credits. For each year you delay the start of benefits, your benefit will increase by 8% until age seventy. After age seventy, no further credits can be earned for delaying benefits. So, if Boomer Bob decides to wait until age seventy to apply for benefits, his $2,200 PIA he would have received at age sixty-six (FRA) increased by 32% to $2,904 (not including COLAs).

4. How do cost-of-living adjustments (COLAs) affect Social Security benefits?

Every October, the Social Security Administration announces the amount Social Security benefits will be increased starting the following January. These cost-of-living adjustments are based on the previous year’s inflation rate, as measured by the consumer price index.

COLAs are also applied to benefits that haven’t yet been paid. If Boomer Bob waits until age sixty-six to begin receiving benefits, his PIA will be increased each year he waits by the COLA amount announced by the Social Security Administration. When he finally applies for benefits, they will be higher than the PIA that was calculated for him at age sixty-two.

There is no way of knowing what COLAs will be in the future. The Social Security trustees estimate annual inflation adjustments of 2.6% in their calculations and projections. You may want to use this estimate in your own planning.

TOTAL LIFE-TIME BENEFIT RECEIVED FOR A RETIREE LIVING TO AGE 92
Age you begin Benefits 62 66 70
Without COLA $673,200 $792,000 $906,000
With COLA $1,061,106 $1,305,018 $1,562,031

 

5. When should I apply for Social Security?

In a rare act of bipartisan cooperation, the Republican Congress and President Obama came together in 2015 to close some perceived loopholes in the Social Security rules. These rule changes took away some of the claiming strategies that couples had used for decades that allowed savvy married couples to claim more Social Security benefits than what Congress and the President apparently thought was fair. The unique claiming strategies couples used in the past to maximize Social Security benefits disappeared.

So, the big question remains, when should retirees apply for their Social Security benefit? New retirees are sometimes told, and unfortunately sometimes follow, uninformed “financial professionals” and even Social Security employees that suggest they apply for benefits as early as possible, or at age sixty-two “in order to get the most out of the system.” “Apply as soon as possible” is the default answer of the ignorant and the uninformed. Taking Social Security early is rarely the best answer when trying to maximize lifetime benefits. The general rule is that the longer benefits are put off, the larger the monthly check will be; and with a larger check, eventually, the Social Security recipient will receive more benefits than they would have received had benefits been taken early.

However, there is no one-size-fits-all answer to this question. Some retirees should absolutely wait until age seventy to apply for benefits because they are still working or simply don’t currently need the money. There are others who either need the money at age sixty-two or are in poor health who would benefit from taking benefits early despite the drawbacks of applying early. No matter what category a retiree falls into, a well-thought-out, individualized Social Security maximization plan is a major asset during retirement.

It is highly recommended that Social Security payments be part of a comprehensive retirement income plan. In other words, don’t just follow the herd and elect to start Social Security at age sixty-two because it’s the youngest age you can file and because that’s what everybody else is doing. The decision of when to file for Social Security benefits is, for the most part, irreversible and can result in many thousands of dollars’ less in benefits paid during a retirement. Do your homework. Don’t take this decision lightly!

6. Is my spouse eligible for a Social Security check based on my own work history?

The goal with spousal planning is to maximize the amount of benefits a couple will receive for as long as at least one of them is living. When I talk of spousal benefits, I am speaking of the non-working spouse receiving an income based on the working spouse’s work history. Keep in mind that Social Security is gender neutral, so either spouse can collect a spousal benefit on their spouse’s work record. For ease of explanation, I will refer to the husband as the higher earner and the wife as a lower earner. I realize this stereotype is no longer accurate in many cases, but it will aid in making explanations easier to understand.

As long as the working spouse qualifies for Social Security and has filed for his Social Security benefit, the non-working spouse is entitled to receive a Social Security check of her own, based on her working spouse’s employment history. A spousal benefit is equal to half of the working spouse’s PIA. For example, a wife who had little to no earnings record could collect half of her husband’s PIA if she waits until her FRA to apply for the benefit. If Brent’s PIA is $2,000, Mary could collect a separate benefit of $1,000. If Mary had worked enough to be eligible for her own benefit, she would receive whichever was greater: her own benefit or her spousal benefit. For example, if Mary’s own benefit (PIA) from her personal work history is $675, she would still receive the spousal benefit of $1,000 because it is greater than her own PIA.

It is important to note that spousal benefits are based on the worker’s PIA and not the worker’s actual monthly payment. Remember the worker’s actual benefit is determined by when the worker applies for his benefit as well as his PIA.

While Brent could receive a greater benefit by waiting until age seventy to apply for Social Security, Mary’s spousal benefit would not increase. Spousal benefits do not accrue delayed credits, so waiting past full retirement age for Mary to apply for the spousal benefit will not increase her benefit. Although spousal benefits do not receive delayed credits for waiting beyond FRA, they will be reduced if applied for prior to FRA, so waiting until full retirement age to apply for spousal benefits is generally the best option. If Mary applied for her spousal benefit prior to full retirement age, her spousal benefit is permanently reduced.

The rules for spousal benefits are diverse and complicated. I have tried to simplify them, to give the reader a general idea of what spousal benefits are and how they can be enhanced. It is best to schedule an appointment with a retirement income planner so various maximization scenarios can be investigated. A customized analysis needs to be run for every couple in order to maximize Social Security benefits.

7. How do divorced spouse benefits work?

Like spousal benefits for married couples, you can claim a spousal benefit on a former spouse’s earning record if the benefit would be higher than your own benefit. In order to qualify, an ex-spouse claiming the benefit must meet general eligibility requirements and have been married to the ex-spouse for at least ten years. If there are multiple exes, the divorced spouse will receive the highest benefit from among those spouses as long as the marriages lasted ten years. By the same token, a spouse with multiple ex-spouses may end up with all of them claiming benefits on his record; however, this will not affect his own benefit. The ex-husband is not notified that a former spouse has requested a benefit based on his earnings record, nor does it affect his own benefit. Unlike with spousal benefits, the divorced husband does not need to have applied for his own benefit before an ex-wife can claim a divorced spouse benefit, but he does need to meet general eligibility requirements for Social Security.

Let’s look at an example. Gloria is a single retiree who was married to her ex-husband for over 20 years. She did not spend a full 35 years in the workforce; therefore, she didn’t have a full earnings record upon which to base her Social Security benefit. At age sixty-six she filed for her own Social Security benefits, receiving only $955 per month. Her ex-husband had been a well paid professional and had a very respectable earnings history, earning well over $100,000 annually. It turned out that her divorced spouse benefit, 50% of his benefit, amounted to $1,345 monthly. Gloria is now receiving this higher benefit and her retirement is more comfortable.

To qualify to receive a divorced spouse benefit, the applying ex-spouse must either be currently unmarried or has waited until after age sixty to re-marry. If remarried prior to age sixty, divorced spouse benefits are not an option. Only a spousal benefit on the current husband’s record is available. If an individual remarried after age sixty and already receives divorced spouse benefits, that benefit will not be affected. She can switch to a spousal benefit on her current husband’s record if it is higher, or she can continue receiving her divorced spouse benefit.

8. What happens to Social Security benefits when the working spouse dies?

When deciding the best time to apply for Social Security, the idea of making decisions based on maximizing survivor benefits is usually overlooked. Many people don’t realize that survivor benefits are built into the Social Security system. Even though survivor benefits are not widely known about, they are becoming an increasingly important benefit as medical advances extend life expectancies. The majority of the time, husbands die first, due to shorter life expectancies. Women tend to live five to six years longer than men.

Survivor benefits, unlike spousal benefits, are not based on the worker’s PIA, but rather the survivor benefit ends up being whatever the deceased spouse’s retirement benefit was prior to their death, provided that it is larger than the survivor’s Social Security benefit. Another way of saying this is the surviving spouse ends up only getting one payment from Social Security versus the two payments the family received prior to the death. But the survivor benefit is the larger of the two payments received when both spouses were alive. Meaning that, if the husband receives $2,100 each month and his wife receives $1,250 each month, when he dies, his wife will start receiving the higher $2,100 in place of her previous $1,250 monthly benefit.

One of the main reasons the highest-earning spouse should delay receiving Social Security until age seventy is that the survivor benefit is based on the actual benefit being paid to the retiree, not the PIA. Remember, the only way to create a larger benefit than your PIA is to earn delayed credits by deferring the application for Social a Security past FRA. So, if the husband’s PIA at full retirement age (sixty-six) is $2,100, his benefit would grow to $2,772 if he deferred applying for his retirement benefit until age seventy. As long as he waits to apply until age seventy, his wife will be left with a $2,772 survivor benefit at his death for the rest of her life.

Let’s look at an example, Mark and Judy were a wealthy couple who earned their wealth by turning their orchards into subdivisions. Despite this wealth, Mark started taking his Social Security at age sixty-two with the thought to “get as much back from the system as possible” besides, he had declining health. The extra monthly Social Security income of $1,828 was not necessary for Mark and Judy at age sixty-two, but it would be important for Judy when Mark dies. Judy was six years younger than Mark and in excellent health.

I explained to them that Mark’s Social Security survivor benefit at age sixty-two would be the $1,828 monthly benefit that Mark was currently receiving. But if Mark had waited to take his Social Security at age seventy, his monthly retirement benefit and Judy’s survivor benefit would be $3,795.

After recognizing the mistake they had made filing for benefits at age sixty-two, Mark was able to unwind the decision he had made at the Social Security office. Unfortunately, Mark died when he was 72. Judy’s survivor benefit is $3,217 versus the $1,828 it would have been had Mark not reversed his decision to apply for Social Security retirement benefits at age sixty-two.

If Judy were to live to be ninety, Mark’s decision to delay taking Social Security means an additional $274,760 in survivorship income over Judy’s lifetime (not including COLAs). Assuming just a 2.6% COLA, the difference in lifetime income would be $594,705. This story represents a significant sum of money saved/earned, simply by knowing the rules of Social Security and making prudent choices.

Survivor benefits are also subject to the reduced monthly benefit rule if collected before full retirement age by the survivor, but unlike spousal benefits, that reduction does not affect the survivor’s own earned benefit. This means that the wife could collect her survivor benefit as early as age sixty, but she wouldn’t receive the full benefit because she elected to start the benefit prior to her FRA. She could, however, receive a survivor benefit and, if she had a work history of her own, allow her own benefit to accrue deferred credits, and then switch to her own benefit at age seventy if it were higher than the survivor benefit. The reverse is also true. Margaret can take her own benefit early and switch to her survivor benefit at 66. Just as with spousal benefits, survivor benefits do not grow beyond age sixty-six, so there is no point in delaying them.

It is important to note that survivor benefits can also be claimed on a deceased ex-husband’s or ex-wife’s earnings record. The rules are the same for divorced survivor benefits as they are for survivor benefits of claimants married to the working spouse at the time of death, as long as the divorced person’s benefit is being paid based on the working history of the deceased.

Furthermore, the highest-earning spouse should almost always delay collecting benefits until age seventy, regardless of health status, because the highest benefit is the one that will prevail as the survivor benefit, regardless of which spouse passes away first.

9. Can I receive Social Security benefits while I am employed?

Prior to a retiree’s full retirement age, Social Security income is subject to an earnings test. The point of an earnings test is to keep the pre-FRA retiree from collecting a Social Security benefit at the same time they are receiving wages from their employment. For every $2 earned, $1 is withheld in Social Security benefits to make up for the fact that benefits are being taken when 1) they aren’t necessarily needed, and 2) credits are still being accrued through working and therefore are being added to future Social Security benefit payments. If wages are high enough, all Social Security benefits will be withheld. Pre-FRA employees can earn up to around $16,920 annually before the earnings test kicks in. The exact amount of earnings test exemption changes from year to year because it is indexed to inflation. But there really is no point in collecting Social Security benefits if you are employed and younger than FRA.  Social Security benefits are reduced due to the earnings test and benefits are further reduced because the recipient elected to start receiving payments prior to FRA.

Of course, there is an exception to every rule, and the exception, in this case, is that in the year the recipient attains FRA, they can earn up to $44,880 before withholdings begin at the rate of $1 for every $3 until the month they reach their full retirement age. Once their full retirement age is reached, no more Social Security will be withheld, regardless of earnings.

Because of these earning maximums, anyone who plans to continue working in a high-paying position should delay collecting benefits until at least age sixty-six to avoid having benefits withheld. These benefits will eventually be paid back when the worker reaches FRA when benefits will be increased to account for the period of time those benefits were withheld. However, it is important to remember that despite getting the withheld benefits back, the reduction in benefits from applying for benefits early can never be recovered; therefore, it is best to wait to apply for Social Security until after working years are over, especially if working in a job that will add earnings credits and boost future Social Security benefits.

10. How are Social Security benefits taxed?

If you have sources of income other than Social Security such as income from investments, real estate, pensions, or retirement account distributions, it is possible that a portion of your Social Security benefits will be included in your taxable income. Social Security benefits are taxed on a sliding scale depending on your level of income. The Social Security Administration uses a unique definition of income called provisional income to determine how much of your benefits will be subject to taxation.

To calculate your provisional income, first take your adjusted gross income (line 7 on your tax form 1040). From this, subtract any Social Security that was included in this figure if you are already receiving benefits. Next, add in any tax-free interest you received (interest from municipal bonds). And finally, add in 50% of your Social Security benefit. This will give you your provisional income. You can use the table below to quickly see, based on your provisional income and tax filing status, how much of your benefit will be subject to taxation.

TAX ON SOCIAL SECURITY BENEFITS
Filing Status Provisional Income* Amount of Social Security subject to tax
Married Filing jointly Under $32,000 0
$32,000 – $44,000 up to 50%
Over $44,000 up to 85%
Single, head of household, qualifying widow(er), married filing separately and living apart from spouse Under $25,000 0
$25,000 – $34,000 up to 50%
Over $34,000 up to 85%
Married filing separately and living with spouse Over 0 up to 85%
*Provisional income = adjusted gross income (not including Social Security) + tax-exempt interest + 50% of Social Security benefit

It is important to note that under no circumstances will more than 85% of your Social Security benefit be subject to taxation. In other words, even for higher income retirees, 15% of your Social Security benefit will always be tax free! As a side note, taxes that are collected from Social Security income are paid back into the Social Security Trust Fund to help strengthen the long-term solvency of the program.

 

BYU Education Week 2022

Scott Peterson’s BYU Education Week Class Offerings

Scott will teach his series ‘The Retirement Income Plan: A Guide to Managing Your Money to Last Throughout Retirement,’ four classes to help people who are nearing or already enjoying retirement.

Recognizing retirement risks and investment fallacies so you can focus on what ‘really matters’ during retirement.

  • Tuesday, August 16th
  • 9:50-10:45 a.m
  • 222 Martin Building (MARB)

Today’s retirees face unique challenges such as longevity, inflation, and investment management. However, the media portrays investments in a very different way than what academic research proves to be the best way to manage retirement funds. This false information leads us to what we call the ‘grand illusions’ of the investment world. On Tuesday Scott will debunk certain investment ‘grand illusions’ using academic research.

Commonsense investing: what actually determines investment performance.

  • Wednesday, August 17th
  • 9:50-10:45 a.m
  • 222 Martin Building (MARB)

In Wednesday’s Education Week class, Scott will discuss the three true determinants of investment growth: Asset Allocation(Time Horizon, Diversification, Propensity for Risk), Fees, and Investor Behavior.

The retirement income plan: creating a perpetual stream of income to last through retirement.

  • Thursday, August 18th
  • 9:50-10:45 a.m
  • 222 Martin Building (MARB)

The goal for managing your investments throughout retirement is to provide an inflation adjusted stream of income that will last throughout retirement with the least amount of risk. To support this goal of making a retirement income plan, Scott will discuss the specific elements of creating a retirement income plan.

As the architect of the Perennial Income Model(™), Scott will also go over a time segmented retirement plan that will additionally help coordinate all income sources, works as a “bad luck” insurance policy, protects you from your older self, and will leave the surviving spouse with a plan to follow at death.

Maximizing social security benefits and minimizing taxes during retirement.

  • Friday, August 19th
  • 9:50-10:45 a.m
  • 222 Martin Building (MARB)

In Scott’s final class at BYU Education Week, he will discuss taxes and Social Security when it comes to retirement.

Scott will also go over the best time to apply for Social Security benefits, how benefits are taxed, and how to potentially reduce the taxation of your Social Security benefits through charitable giving strategies.

 

For a complete schedule of classes offered at BYU’s Education Week 2022, visit their website at https://educationweek.byu.edu/schedule

Scott M. Peterson is the founder and principal investment advisor of Peterson Wealth Advisors. Scott has specialized in financial management for retirees for over 30 years. Scott is a regular presenter at BYU’s Education Week and speaks often at other seminars regarding financial decision making at retirement. He also wrote the book on retirement income: Plan on Living: The Retiree’s Guide to Lasting Income & Enduring Wealth.

The Perennial Income Model™

A proprietary process for investing

Our unique and proprietary process, “The Perennial Income Model,” is an investment plan that protects retirees’ current income from stock market volatility while at the same time protects future income from the subtle yet devastating effects of inflation.

Since the Perennial Income Model’s beginning in 2007, we have experienced some wonderful as well as some pretty difficult market conditions. The Perennial Income Model has helped hundreds of retired families successfully navigate all the market volatility that we have experienced, and will continue to experience.

How does The Perennial Income Model work?

Simply put, the Perennial Income Model matches the retiree’s investments with their future income needs. Retirees can’t afford to lose money because they are forced to sell stocks at a loss to provide monthly income during the early years of retirement. On the other hand, retirees can’t afford to not keep up with inflation by avoiding stocks altogether during the later stages of retirement. 

Short- and long-term investments have different risks, and different objectives. Therefore, the Perennial Income Model segments a retiree’s investable assets into six separate investment portfolios. Each portfolio is dedicated to provide income for a five year segment of retirement.

Segment One

For example, Segment One is dedicated to provide income for the first five years of retirement, Segment Two is to provide income for years six through ten of retirement, Segment Three for years eleven through fifteen of retirement, and so on until thirty years of retirement are covered. By segmenting retirement assets this way, we can manage the six investment portfolios to specifically align with the time periods in which they are responsible to provide income.

Segment One is where the retiree would draw income from for the first five years of retirement. Stock market volatility is the greatest threat to the early income producing requirements of this segment. Therefore safety of principal is the primary investment objective of Segment One. 

Segment Two 

Segment Two will not need to be tapped for income until year six. So while Segment One is providing income for the first five years of retirement, Segment Two is growing in a conservative portfolio. 

Segment Three 

Because Segment Three won’t be needed until year ten, it can be invested in a slightly more aggressively managed portfolio than Segment Two. 

Other Segments

Segments Four, Five, and Six are invested in incrementally more aggressive portfolios because they will not be responsible to provide income for another fifteen, twenty, and twenty-five years. The greatest threat to the later years of retirement is inflation and even though stocks at times cause anxiety because of short-term volatility, stocks do provide a hedge against inflation in the long-run. Short-term volatility is inconsequential for investment portfolios that will not be needed for fifteen, twenty, or even twenty-five years in the future.

Harvesting to protect retirement income

The Perennial Income Model is a goal-driven investment program. Once the investment objective is reached for a specific segment then it is recommended that the investments associated with that segment be invested more conservatively, we refer to this as harvesting.

For example, let’s say that we have money invested in an account that is dedicated to provide income for Segment Five of retirement (years twenty-one to twenty-five). Let’s assume that we know that we will need $300,000 to be accumulated in Segment Five by the time year twenty-one arrives. We initially estimated that the money invested in Segment Five would receive a 7% return in the investment portfolio for the first twenty years of retirement growing to the goal of $300,000 while Segments One, Two, Three, and Four are being distributed.

If we were to have a good run in the markets and we were to average 9% versus the projected 7%, Segment Five would meet its goal of $300,000 in year sixteen versus year twenty-one.

We recommend ‘harvesting’ or locking-in gains upon completion of the investment goal for the specific segments. This is done by transferring the funds in that segment to a conservative portfolio. Critics of this method of investing would argue that by transferring investments from aggressive to conservative portfolios prematurely we would limit those segment’s potential for future gains. We confidently reply to the critics that the Perennial Income Model’s top priority is not to ignore risk and maximize investment returns, rather it’s primary purpose is to provide a predictable inflation-adjusted stream of income to the retiree with the least amount of risk.

Why the Perennial Income Model?

Time-segmented investing is appealing because it is logical, it is goal-based, and its success is not contingent upon guessing the short-term direction of the economy or the stock market. With the Perennial Income Model, retirees are able to understand why they are invested, when they will need a specific portion of their investments to provide income, and how their dollars will need to be invested to accomplish each five-year segment’s goals. 

The Perennial Income Mode is a commonsense approach to managing your investments during retirement and provides retirees with peace of mind knowing that they have a consistent flow of inflation-adjusted income throughout retirement with the least possible risk. 

Because we have the PIM, we are able to look at the big-picture of your retirement and successfully coordinate your investments, social security benefits, pensions, other income, and your healthcare costs, all while creating income in the most tax-efficient way. 

In a world where few retirees have any formal retirement income plan at all, we are grateful and pleased to be able to share the Perennial Income Model with you.  

Want to learn how the PIM can work for your retirement?  Find out more in our WHAT WE DO section. 

Qualified Charitable Distributions (QCDs)

Why Don’t I Get a Charitable Deduction Anymore?

Some retirees have paid hundreds, sometimes thousands, of dollars unnecessarily to the IRS in the past year because they didn’t know the tax exclusion I am about to introduce to you. If you are over age 70.5, have an IRA, and donate to charities, you are likely overpaying taxes if you aren’t aware of the changes that occurred at the beginning of 2018 and how those changes impact your tax liability.

The information I’m sharing is not some type of untested or questionable item from the IRS code that the IRS has yet to rule on. Rather, the methodology I am about to describe has been around for years. The new tax law has only made the use of it more impactful. Now, there are large tax savings to be had or no tax savings at all when it comes to charitable giving. The tax savings depends not just on how much is donated to charity but how the donation to charity is done.

The Standard Deduction Problem

Stated as simplistically as possible, when we do our taxes, we add up our income then we subtract our deductions, and we all have deductions. We either itemize our deductions or, if we don’t have enough itemized deductions to add up to be more than the standard deduction, we automatically take the standard deduction. The standard deduction is an amount that all tax filers use to deduct against their income if their itemized deductions don’t add up to more than the standard deduction.

Prior to the tax law change, the standard deduction for a single person age sixty-five was $6,500 and for a married couple age sixty-five it was $13,000. The new tax law essentially doubled the standard deduction. Now the sixty-five-year-old single person has a standard deduction of $12,950 and a couple age sixty-five has a $25,900 standard deduction. Along with doubling the standard deduction, items that were once eligible to deduct have been taken away. To list a few, state and local taxes are now deductible only up to a maximum of $10,000 annually. Mortgage interest on certain types of home equity loans are no longer deductible. Miscellaneous deductions for professional services such as tax preparation fees and investment management fees are no longer deductible.

The bottom line, with larger standard deductions and fewer items that are eligible to be deducted, most of us will forgo itemizing our deductions and we will end up taking the standard deduction. Previously, about 30% of us itemized. It is now estimated that only 10% of Americans will itemize their deductions in the future.

So, how does this impact those that give to charity? Although gifts to qualified charities are still available as an itemized deduction, most charitable givers will not receive any tax benefit for their donations. Why? Because few will donate enough to charity and have enough other itemized tax deductions to exceed the standard deduction. Therefore, there will be no tax benefits for donating to charity for the 90% of Americans that don’t end up itemizing deductions. Fortunately, there is still a provision in the new tax law that can provide a huge tax relief to retirees who give to charity. A little bit of knowledge can save you thousands.

Tax-free Charitable Contributions through a Qualified Charitable Distribution (QCD)

A qualified charitable distribution (QCD) is a provision of the tax code that allows a withdrawal from an IRA to be tax free as long as that withdrawal is paid directly to a qualified charity.

Think about the tax advantages of doing a QCD:

  • You didn’t have to pay income tax when you earned the money you put into an IRA or 401K.
  • You didn’t pay taxes on the compound interest your IRA has earned over the years it has been accumulating in the IRA.
  • Any money paid directly to a charity using a QCD from your IRA will not be taxed.
  • And, QCDs qualify toward satisfying required minimum distribution (RMD) requirements.

The best way to understand the tax savings realized by the use of QCDs is by comparing a couple’s tax liability if they contribute to charity the traditional way, by writing a check to their charity, versus donating to their charity through the use of a QCD.

Example of QCD using a Standard Deduction

Since retiring, Michael and Megan’s income and expenses are fairly predictable. Their annual income consists of $35,000 in social security and $20,000 in pension income. Additionally, because they are over age 70.5, they are required to take $10,000 out of Michael’s IRA as a required minimum distribution (RMD). Therefore, their total gross income is $65,000. They make charitable contributions to their church and to other charities within their community of $7,000 annually.

Because their itemized deductions don’t add up to more than the standard deduction, they take the standard deduction. Notice, they will not get a tax benefit for making the $7,000 contribution to their charities. Their tax bill for the year is $1,637.

Alternatively, if Michael and Megan were to do a QCD and make a tax-free transfer of $7,000 directly to their charities, versus writing a check to their charities, their tax liability would be reduced by $1,612. This $1,612 tax savings resulted not in how much they donated to charity but how they donated to charity.

Table of taxes owed when making Charitable Donation paid by check compared to Charitable donation paid using a QCD and standard deduction

Before those of you that itemize your taxes become too comfortable and think QCDs are only for those that take the standard deduction, let’s do another example of Jim and Lisa, who plan to itemize their taxes.

Example of QCD using Itemized Deductions

Jim and Lisa’s annual income consists of $35,000 in Social Security, and $40,000 in pension income. Additionally, because they are over age 70.5, they are required to take $60,000 out of Jim’s IRA as a required minimum distribution (RMD). Therefore, their total gross income is $135,000. Contributions to their church and to other charities within their community amount to $25,000 annually.

The payment of $25,000 to charity and a $10,000 payment for state and local taxes are allowable itemized deductions. Because their $35,000 of itemized deductions are more than the standard deduction of $27,000, they plan to itemize. After itemizing, their tax bill ends up being $18,795.

Alternatively, if Jim and Lisa were to do a QCD and make a tax-free transfer of $25,000 directly to their charities versus writing a check to their charities, their tax liability would be reduced significantly. If they were to do a QCD, they would end up taking the standard deduction, but their tax liability would still be reduced by $5,303. Again, this $5,303 tax savings resulted not in how much they donated to charity but how they donated to charity.

 

Table of taxes owed when making Charitable Donation paid by check compared to Charitable donation paid using a QCD and itemized deductions

Restrictions and Reporting

As beneficial as QCDs are, they unfortunately are not available to all taxpayers and the rules governing these transactions must be followed with exactness or the QCD transaction will be considered a taxable IRA distribution.

Here are the restrictions:

  • QCDs are available only to people that are age 70.5 or older.
  • QCDs are allowed only from IRA accounts. Distributions from 401Ks and various other types of retirement accounts are not QCD eligible.
  • To qualify as a QCD, the distribution must be a direct transfer from the IRA to a qualified charity.
  • A maximum of $100,000 annually is allowed to be transferred to charity using a QCD.
  • You cannot make a qualified charitable contribution by transferring to a Donor Advised Fund.

One final note of great importance: the IRS and the investment industry have yet to figure how to code QCD so as to maintain the tax-free transfer. Until the IRS comes up with a code to delineate QCD distributions from normal taxable IRA distributions, QCD distributions will be coded as normal taxable distributions. However, the IRS has provided special instructions on how QCDs should be reported on our Form 1040s.

In running projections with our clients, we discovered that in almost every instance, those who give to charity and simultaneously make distributions from an IRA can benefit from doing a Qualified Charitable Donation. I believe that every person over age 70.5, who has an IRA, and who gives to charity should investigate making charitable contributions via QCDs. You or your tax professional can run tax comparisons by paying charitable contributions with cash versus doing a tax-free transfer from your IRA to your charity using an QCD. Many of you will find the tax savings to be significant.

ABOUT THE AUTHOR

Scott M. Peterson is the founder and principal investment advisor of Peterson Wealth Advisors. Scott has specialized in financial management for retirees for over 30 years. Scott is a regular presenter at BYU’s Education Week and speaks often at other seminars regarding financial decision making at retirement. He also literally wrote the book on retirement income, Plan on Living: The Retiree’s Guide to Lasting Income & Enduring Wealth.

If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!

Inflation 101: Understanding the ‘why’ behind today’s inflation

The Bureau of Labor Statistics just reported a whopping 9.1% year-over-year increase in the inflation rate – This is the highest in forty years and many economists suggest that inflation will get worse before it starts to get better. To put a 9.1% inflation rate in perspective, one million dollars today has only $909,000 worth of purchasing power compared to just one year ago.

Americans are facing higher prices for food, fuel, and housing and are grasping for answers about what is causing inflation, how long it will last, and what they should personally be doing to combat its effects.

There are no easy answers or painless solutions when it comes to the inflation problem. Before we jump into how long it will last and what can be done to resolve it, we need to define what is causing inflation in the first place.

What is Inflation?

Stated in its simplest terms, “inflation happens when too many dollars are chasing after too few goods and services”. So, inflation is really a supply and demand problem. When there is an equilibrium between the supply of goods and services and demand (money available to spend), inflation is in check. When the demand outpaces the supply of goods and services, inflation accelerates. Once this concept is understood, we can dissect what is limiting the supply of goods and services and what is driving demand.

The Supply Issues Impacting Inflation

A couple of events have contributed to the limited supply of goods and services:

First: The COVID pandemic in early 2020 led to lockdowns and numerous restrictive measures by governments around the globe to stop the spread of the virus. These government-imposed lockdowns disrupted the global supply chain as factories were shut down and maritime ports were closed. Currently, COVID continues to affect worldwide supplies as China, the world’s largest manufacturer, is still troubled by shutdowns as they try to get on top of the COVID pandemic still plaguing their nation.

Second, The United States went from being energy independent just a couple of years ago to once again being forced to purchase oil in the world markets. U.S. production has decreased while our consumption has increased. The inevitable result of this supply/demand imbalance is inflated oil prices. Higher oil prices serve as a catalyst to higher prices in all other parts of the economy as higher energy prices increase the cost to produce and ship goods.

The Demand Issues Impacting Inflation

Consumers are spending big. When the pandemic started, the personal saving rate in the United States was sitting at an all-time high. With large amounts of savings on hand, the federal government sending out relief checks to individuals and businesses, and employees sitting at home with shopping at their fingertips, the U.S. consumer spent a lot of money. And the spending spree isn’t over, with unemployment numbers sitting at all-time lows, employees are either finding better paying jobs or are requiring higher wages from existing employers. These higher wages continue to encourage high demand for the limited goods and services available.

Additionally, with the pandemic mostly behind us, there is a pent-up demand from people looking to travel and vacation once again. If you have traveled recently, you would have noticed the inflated prices of airline tickets, rental cars, hotel rooms, restaurants, and more.

So, how long will high inflation rates be with us?

There are thousands of economists attempting to answer this question, all with different opinions. So, how long this recent inflation acceleration might last is anybody’s guess. However, there is a consensus on how the inflation supply/demand equilibrium will be brought into balance. The inflation rate will decrease as consumer spending slows down, or in other words, when the demand for goods and services is reduced. Two of the main ways demand is reduced is either by raising interest rates, by the economy suffering a recession, or both.

Raising Interest Rates

The Federal Reserve has the responsibility to monitor the economy and implement policy to maintain the equilibrium between supply and demand, in other words, keep inflation in check. The Federal Reserve is raising interest rates to slow consumer demand and subsequent price growth. This policy response means that the economy will surely head for a slowdown. We have already seen how higher interest rates and higher borrowing costs have begun to cool off the housing market. The question — and big uncertainty — is just how much federal action will be needed to bring inflation under control.

Having A Recession

A recession is when the economy shrinks. This is a more painful and less desirable way to slow consumer demand, but it can work towards taming inflation. During a recession, the overall economy struggles, corporations make fewer sales and become less profitable. Workers are laid off and unemployment surges.

The hope is that the Federal Reserve can raise interest rates just enough to slow consumer demand without throwing the country into a recession. This optimistic scenario, often called a soft landing, is difficult to orchestrate and despite the best efforts by the Federal Reserve board, can still end up throwing the economy into a recession.

In our current environment, the so-called soft landing is especially challenging. As the Federal Reserve tries to reign in demand with higher interest rates, they have zero control on the supply side of the equilibrium. If supply chain shortages persist, the Federal Reserve will be required to raise interest rates more drastically to slow the demand enough to bring higher prices under control. It’s an economic tightrope, we will see if the Federal Reserve can walk it.

What will not help inflation?

Currently, there is talk on Capitol Hill of sending out additional stimulus checks to help the U.S. consumers pay for high gas prices and other goods. This is indeed a noble thought, but terribly misguided. The demand side of the equilibrium is already out of balance. In other words, there is already too much money chasing too few goods and services. Going into more debt, to throw more money at a problem caused by too much money pursuing too few goods and services is not the answer. We cannot spend our way out of inflation and any attempt to do so, will only result in higher inflation.

Conclusion

We have addressed the causes of inflation and talked about how the rate of inflation will be reduced. In our next blog we want to get personal. We will be going over the personal dos and don’ts of managing higher interest rates and making good decisions concerning your investments during recessionary times.

If you have questions, concerns, or would like to review your personal retirement situation, please click here to schedule a complimentary consultation.

Preparing for, and Dealing with, Market Turbulence

At Peterson Wealth Advisors, we manage the retirements of several retired commercial pilots. As I have discussed these pilots’ careers with them, one of the retired pilots explained that being a pilot can be described as, “hours and hours of boredom punctuated by moments of sheer terror.” Although these moments of sheer terror are rare, pilots will spend countless hours of training throughout their careers preparing for that moment when their flight plan might not go according to plan.

Just as pilots have a plan, investors also need to have a plan to follow when their investments are not going according to plan. The last couple of years have provided investors ample unplanned and unforeseen investment turbulence. A pandemic, a supply chain crisis, the highest inflation rate in our lifetimes, and the prospects of another world war in Europe have certainly rocked the investment world and caused even the best-made investment plans to not go according to plan.

Investors should always be asking, “what is my plan when things temporarily aren’t going according to plan?” Let me share with you the Peterson Wealth Advisors’ perspective and what we are doing for our clients when it appears that things aren’t going according to plan due to ‘investment turbulence’.

Embrace the Volatility

First, temporary downturns are not a deviation from the plan. Rather, they are an expected part of the plan. Stock and bond market downturns are always temporary, and historically the duration of almost every major decline is measured in months, not years. The media would have you think that market corrections, “are unexpected events that are shocking in both their occurrence as well as their impact.” As investors with longer-term perspectives, we understand that the price you pay for inflation beating investment returns consist of enduring occasional periods of market volatility. Few of us would pass up a Hawaiian vacation because there will surely be some turbulence in our flight to and from Hawaii. We likewise need to keep temporary market downturns in perspective and remember that turbulence is a planned for event.

Even though the exact timing of a correction is difficult, we should expect and even embrace market volatility. Investors should seize the opportunity to make wise tax moves during declining markets by doing Roth conversions, rebalancing portfolios, tax-loss harvesting, and then be opportunistic by purchasing depreciated equities while they are being sold on discount.

Protect Gains

We believe that investors should never be in a position where they need to liquidate depleted investments due to a temporary market downturn. This is difficult to do if an investor is not preparing for the downturns before they happen. With the Perennial Income Model™, we proactively attempt to protect our clients from selling investments at a loss by following a rigid, goal-centric, approach to harvesting investment gains once the goal of an investment has been reached. Harvesting is the process of transferring aggressive investments to more conservative investments as goals are achieved.

Navigating retirement with a plan that establishes investment goals and appropriately harvests gains can bring order, discipline, peace of mind, and added security to the retiree.

Maintain Flexibility

If you have the flexibility, you can wait out market downturns and wait for good investment opportunities. The best way to add flexibility, and tip the investment odds in your favor, is by simply increasing your time horizon. The longer you are invested, the better opportunity you have to endure a range of market outcomes. This endurance flexibility lets you stick around long enough to let the odds of benefiting from a positive outcome fall in your favor.

Additionally, flexibility within an investment portfolio allows Peterson Wealth Advisors to select only positive performing investments within a portfolio to be drawn upon for income. This allows investments within that same portfolio, that may have temporarily dropped in value, to rebound.

Flexibility gives you room for error and giving yourself a margin of error is the only way to safely navigate the world of investing, which is governed by probabilities, not certainties.

Create a Plan that has Conservative Projections

In other words,  plan for the worst and hope for the best. As the creators of the Perennial Income Model™ we project retirement income streams over decades. This process is unique to our firm. We have concluded that it is in everybody’s best interest to project low. We assume future investment returns 30% less than historical averages in all of our planning and projections. If an acceptable retirement income stream can be created from the conservative assumptions that we use, an actual income stream that spins off more income than originally projected will certainly be welcomed.

Conclusion

Market turbulence has and will continue to afflict investors with regularity. This is why we choose to create retirement income streams by following the goal-based, time-segmented processes of the Perennial Income Model.

A retirement income plan is only successful if it can survive reality, and a future filled with unknowns is everybody’s reality. That is why we feel it is important that retirees understand and embrace volatility, follow a goal-based plan to protect investment gains, maintain investment flexibility, and use conservative estimates as retirement income streams are projected. If retirees understand and embrace these points, they will be prepared to answer the question, “what is my plan when things temporarily aren’t going according to plan?”

Schedule an free introductory meeting with an advisor.

The Perennial Income Model™ – Retirement Income “bad luck insurance policy”

The Perennial Income Model™ was created and launched in 2007. Through all the ups and downs of the stock market, it has withstood the test of time. The initial goal of the model was to provide a logical format for investing and for generating inflation-adjusted income from investments during retirement. In the beginning, we did not fully anticipate all the accompanying benefits that would result from projecting a retiree’s income over such a long timeframe. However, our eyes have been opened to a number of benefits, one of them being how the Perennial Income Model acts as a ‘bad luck insurance policy’.

The Perennial Income Model can help protect your retirement income during a bad market

The Perennial Income Model can protect you if you are unlucky and happen to retire about the same time as a stock market crash. Every stock market correction is temporary, but that knowledge isn’t helpful if you are ill-prepared and are having to liquidate equities in down markets to support yourself.

Let me share with you an example, Mike had been carefully planning for his retirement for years and it was finally his turn. He wanted to be conservative as he selected investments for his retirement years, but he knew enough about investing to realize that a good part of his investment portfolio had to be invested into equities if he was going to keep ahead of inflation.

So, he reluctantly invested more than half of his portfolio in stock-related investments. Mike retired, and almost immediately his worst fears were realized, as the stock market dropped by 50%. His money was invested in a balanced mutual fund that was composed of 60% stock and 40% bonds. Unlike the working years, Mike couldn’t just wait for the stock market to recover, he had to withdraw a portion of his money every month from his mutual fund just to pay the bills. As Mike withdrew his monthly stipend, he realized that he was liquidating a proportional amount of stocks and bonds each month from his balanced mutual fund. This meant, he was systematically selling stocks at a loss every month that the stock market was down, and it could take months, or even a couple of years before the stock market recovered.

Mike was frustrated, and even a little angry. He thought to himself, “why did this happen to me? I anticipated, and planned for, every contingency of my retirement in detail, then the one thing that I have no control over trips me up. I must be the unluckiest person on the planet!”

Mike is not alone; this exact scenario happens and will continue to happen to millions of new retirees every time there is a market correction. It’s true when we are no longer contributing and we begin taking withdrawals from our accounts, the temporary ups and downs of the market can have a much bigger impact on our investments than when we were working and had time to wait out market corrections.

To be clear, Mike’s mistake wasn’t in being too aggressively invested because a 60% stock, 40% bond portfolio is a very reasonable allocation for a new retiree. His mistake was failing to have a plan that allowed him to only liquidate the least impacted, non-stock portion of his portfolio to provide immediate income during a market downturn.

To illustrate this point, let’s take the example of two investors, Mr. Green and Mr. Red. Both have decided to retire at age 65 and both have saved up a $1,000,000 nest egg. Each of them plan to withdraw 5% of their initial balance each year to have an annual income of $50,000. As you can see from the table, both average the same 6% return during their 25-year retirements, but Mr. Green ends up with more than $2,500,000 to pass on to his heirs at death, while Mr. Red runs out of money halfway through his retirement. How can this be?

Every aspect of their retirement experience is identical except for one thing: the sequence of their investment returns.

retirement income planning chart comparing two possible outcomes

As you can see from the chart, Mr. Green experiences overall positive returns at the beginning of his retirement and a string of negative returns towards the end. Mr. Red experiences the same returns only in reverse. He goes through a series of negative returns at the beginning of retirement and the more positive returns come at the end. Again, both investors average the same 6% return over their 25 years of retirement. The sequence of those returns is the only difference. We can see from the table just how much of a difference the order of returns makes.

Set yourself up for retirement success

The good news is that it’s possible to set ourselves up to be successful no matter what the markets happen to do year by year. The Perennial Income Model is the bad luck insurance policy that can protect you from the pitfalls that Mr. Red experienced.

I’m not suggesting that following the Perennial Income Model will guarantee that your account balance will never go down, or suffer temporarily because it will. What I am saying is, that by following the Perennial Income Model, you shouldn’t find yourself having to sell stocks at a loss during a stock market correction.

Mr. Red’s losses are realized as he liquidates equities in down years at a loss to cover his expenses. If Mr. Red were to have his portfolio organized according to the investment regimen provided by the Perennial Income Model, he would not be in a position where he would have to liquidate stocks in down years to provide income. He would have a buffer of conservative investments to draw income from while giving the more aggressive part of his portfolio a chance to rebound when the stock market temporarily experiences periods of turbulence.

The Perennial Income Model’s design is intended to give immediate income from safe, low-volatility types of investments. At the same time, it furnishes you with long-term, inflation-fighting equities in your portfolio, equities that won’t be called upon to provide income for years down the road. Market corrections typically last for months, not years. So, even if you are the unluckiest person on the planet and your retirement coincides with a market crash, your long-term retirement plans won’t be derailed as long as you are following the investment guidelines found within the Perennial Income Model.

Ready to talk? Schedule your complimentary consultation here.

Are you ready for a 30-year retirement?

Warren Buffet once called the babies born today “the luckiest crop in history” because they are expected to live longer and enjoy greater prosperity than any previous generation. I believe it would be a fair assumption to add that the baby-boomer generation is the “luckiest crop” of retirees to have ever lived. Today’s retirees are healthier, wealthier, happier, safer, freer, more educated, more equal, more charitable, and more technologically advanced than any previous generation.

4 Common Threats to Retirement Savings

Ironically, the wonderful advancements that current retirees are blessed with are also the root of the problems that retirees will face.  Longevity, inflation, and the retiree’s individual responsibility to manage their own investments will be the challenges that this generation of retirees will have to grapple with.

1. Longevity

Not only are we living better, we are also living longer. Therein lies the challenge: We are living too long. Life expectancies are steadily climbing. According to the Social Security Administration, a couple who is currently 65 years old have a 48% chance that one of them will live to be the age of 90.

Life Expectancy table for Age 65

Because of long life expectancies, many retirees face the very real risk that they will outlive their money if they don’t plan for a lengthy retirement. Planning on living to the average life expectancy is not enough. It is best to plan on living longer than your life expectancy, because life expectancy estimates the average time a person will live. To be certain, some people will die before their life expectancy, but some will live beyond, sometimes many years beyond, their projected life expectancy.

2. Inflation

Longevity is the catalyst for today’s retirees’ second challenge: their dollars are shrinking.

Every day, the purchasing power of the retiree is eroding as goods and services are getting more expensive. Although inflation has always existed, no previous generation has had to deal with it to the extent that today’s retiree does. Our parents and grandparents lived ten or fifteen years past retirement, inflation never had time to develop into a problem for them.

A retirement lasting thirty years or more is a game-changer. Inflation isn’t something that may happen, it will happen. In our opinion, inflation has confiscated more wealth, destroyed more retirements, and crushed more dreams than the combined effects of all stock market crashes. Historically the average inflation rate has been more than 3% annually. To put that into perspective, at a 3% inflation rate, a dollar’s worth of purchasing power today will only purchase forty-one cents worth of goods and services in thirty years from now.

Inflation poses a “stealth” threat to investors as it chips away at real savings and investment returns. The goal of every investor is to increase their long-term purchasing power. Inflation puts this goal at risk, because investment returns must match the rate of inflation just to break even. An investment that returns 2% before inflation in an environment of 3% inflation will actually lose 1% of its purchasing power. This erosion of purchasing power might seem incidental, but this type of loss, compounded over the duration of a retirement, is life-changing.

Dollars invested into money market accounts, certificates of deposits, fixed annuities, and bonds, never have, and never will, keep up with inflation. Uninformed, anxious, stock market-leery investors that depend on these types of investments for long-term growth may be insulating themselves from stock market volatility, but they are committing financial suicide, slowly but surely. To make matters worse, the paltry gains associated with these products must be taxed, which makes it that much more unlikely that they will be able to preserve purchasing power.

In the current environment of huge government budget deficits and spending, it is likely that inflation will continue to rise at least at the same pace as its historical average. Given the one-two punch of longevity and inflation, it is imperative that retirees are mindful of inflation as they invest and plan for the future.

3. Investment Management Risk

A third challenge for retirees to be aware of is the personal responsibility they now have to manage their own investments.

During the last couple of decades, a subtle transfer happened. The responsibility to provide retirement income shifted from the employers to the employees. The popular pension plans of the past, which guaranteed a lifetime of monthly income to retired employees and their spouses, are disappearing. Pensions have been replaced by 401(k)s and other similar plans that all place the burden of funding, managing, and properly distributing investments to last a lifetime, squarely on the backs of the unprepared employee. Like it or not… you, not your employer, hold the keys to your financial future.

An annual study done by DALBAR, Inc. shows that the average stock fund investor managed to capture only 60% of the return of the stock market over twenty years. Ouch! The largest contributing factor that explains this blatant underperformance was the investor’s own behavior. It appears that the typical investor followed the herd mentality, buying when stocks were high and selling in a panic when stocks were low. Seldom was the investor guided by a comprehensive investment plan. Consequently, little or no discipline was demonstrated. What is most concerning, is that for the most part, the investor failed at the easy part of investment management: the accumulation phase.

4. Retirement Income Distribution Risk

When people enter retirement, they also enter the distribution phase of investment management. In other words, they start withdrawing their investments. The distribution phase is much more difficult to manage than the accumulation phase. In the distribution phase, it is still crucial to know how to properly allocate and invest a portfolio, but additional complexity is added to the mix. Therefore, income-hungry retirees need to know how to create a distribution plan that will provide a stream of income that will last until the end of their lives. They need to create and then follow a Retirement Income Plan.

Retirees need to be kept informed in order to make the best financial decisions. It is also important to work with a financial professional that specializes in retirement issues and that is a fiduciary who puts the retiree’s best interest ahead of their own.

Are you ready to start planning your 30-year retirement? Click here to schedule a complimentary planning session to start creating your own ‘Retirement Income Plan’.

The SECURE ACT: Tax Law Changes for IRA’s that Impact Retirees

As 2019 came to a close, the president signed into law a sweeping series of changes that will affect how we save for retirement as well as the distribution of IRA proceeds. The new law is officially entitled the Setting Every Community Up for Retirement Enhancement Act, but it is more commonly known as the SECURE Act. This new law includes both welcome changes as well as some controversial elements. As I said, the changes brought about by the SECURE Act were sweeping, but I am only going to highlight those changes that impact the retiree.

First, let’s address the more controversial parts of the law. There is a change to the rules that govern inherited IRAs, or so-called stretch IRAs.

Stretch IRAs

Previously, if you inherited an IRA, you were allowed to take distributions from the retirement account over your life expectancy. That is to say, a healthy 40-year-old person who inherited an IRA from their parents or grandparents could withdraw the funds over several decades.

While there are exceptions for spouses, minor children (until they reach the age of majority), disabled individuals, the chronically ill, and those within 10 years of age of the decedent, the new law requires that you withdraw the assets from an inherited IRA account within 10 years if the decedent passed away after December 31, 2019. There are no changes to inherited IRA accounts for those who died prior to 2020.

In the past, we have commonly recommended that an IRA participant’s spouse be listed as the primary beneficiary and the children be listed as secondary beneficiaries (not the family trust). This, most likely, may still be your best option, but the new law makes listing the children individually as beneficiaries less tax advantageous than before the new tax law went into effect. We look forward to discussing alternatives with you to make sure your family has the right beneficiary designation going forward.

Long Overdue Changes:

While the law governing stretch IRAs is creating challenges, there are also big, positive changes that we believe are long overdue.

  1. If you turned 70½ after January 1, 2020, the initial required minimum distribution (RMD) for a traditional IRA is being raised from 70½ to 72. Those who turned 70½ prior to January 1, 2020, are still required to take RMDs based on the old rules.
  2. You may now contribute to a traditional IRA past the age of 70½, if you are working and have earned income. Previously you were unable to make IRA contributions past age 70½.
  3. Many of you donate to charity directly from an IRA by making a Qualified Charitable Contribution (QCD). Now, even though some of you will not have RMDs until age 72, you are still able to donate to your charities using a QCD starting at age 70½.

Hopefully, this sheds some light on the parts of the SECURE Act that most likely apply to your situation. We appreciate the trust you have placed in us and we look forward to answering any additional questions that you might have.

Peterson Wealth Advisors has taken the academically brilliant idea of time segmentation and transformed it into a practical model of investment management that we call “The Perennial Income Model™”. To get a better understanding of the Perennial Income Model™ you can request our book “Plan on Living, a Retirees Guide to Lasting Income and Enduring Wealth”. For specifics on how the Perennial income Model™ could be applied to your retirement income plan, schedule a complimentary consultation with one of our Certified Financial Planner™ professionals

Scott M. Peterson is the founder and principal investment advisor of Peterson Wealth Advisors. Scott has specialized in financial management for retirees for over 30 years. Scott is a regular presenter at BYU’s Education Week and speaks often at other seminars regarding financial decision making at retirement. He also literally wrote the book on retirement income, Plan on Living: The Retiree’s Guide to Lasting Income & Enduring Wealth.