For the past couple of weeks we’ve looked at important year-end questions. Another timely one might be, “Have I taken my RMD yet?”. We’ll get into that but first let’s put things into perspective.

Saving and investing for retirement is all about the tradeoffs that come with delayed gratification. Money accumulated for the future needs to be saved today, years or even decades before spending it. Then you have to put your hard-earned money at risk to reap the rewards of time in the markets and compound interest. Neither are much fun in the present, but we balance this with the knowledge, and perhaps faith, that we’ll come out ahead later by doing so.

The government helps with this, too. Decades ago the IRS started allowing taxpayers to fund Individual Retirement Accounts (IRAs). At the time the novel idea was to let savers contribute money that could then be deducted from their taxable income. This was a great motivator to get people saving.

But, as they say, there’s no free lunch. The tax break was the carrot, and the stick was that the government would eventually come to collect. And they wouldn’t wait forever. Savers had to start withdrawing and paying tax on a Required Minimum Distribution (RMD) from the account by age 70 ½, whether they needed the money or not. The starting age was recently bumped to 72, but the concept is the same.

Then the stick was sharpened by another tradeoff. Not only would the government collect tax on the original contributions, but on every dollar of growth as well. The government would forgo tax on, say, the $1,500 saved in 1975 (the max amount in the first year for contributions) and wait to tax perhaps $55,000 of value in the future. Talk about delayed gratification!

RMDs aren’t that relevant for many retirees because they’re already withdrawing more than the required minimum for living expenses. But a good many others don’t necessarily need the money to live on, or at least not right now, and get annoyed by feeling forced to withdraw money just to pay tax on it.

Let’s discuss some of the RMD particulars at a high level.

As I mentioned a moment ago, the starting age for RMDs is now 72. This means the account owner must take a distribution from their IRA (not a Roth IRA, just a “Traditional” or “Rollover IRA”) by the end of the calendar year in which they attain that age. Then the process is repeated each following year.

Fortunately, your brokerage firm calculates your RMD, so you don’t need to worry about the math. That said, the mechanics aren’t especially complicated. The value of your account at the end of the prior year is divided by a life expectancy factor found on a table published by the IRS. The result is your RMD for the current year.

The government doesn’t care if you take your RMD all at once, on the first or last day of the year, or once a week for that matter. All the tax folks care about is that you’ve at least withdrawn your RMD by December 31^st.

There’s a special pass for the first year’s distribution that allows you to take it by April 1^st of the year following, but then that year you’d need to take two, one for the prior year and one for the current and pay tax on both. You’d only want to do this if 1) you forgot during the calendar year and have to play catch up, or 2) you’re expecting lower taxable income during the year you turn 73. Otherwise, keep it simple and focus on year-end as your deadline.

And there’s no way to get out of paying tax on the distributions. That is unless you’re willing to give the money away. There’s a rule allowing folks who are at least 70.5 (that’s still at the prior age – don’t ask me why) to give their RMD, up to $100,000 per year, to charity. It can be one big gift that year or lots of little ones, the government doesn’t really care. What they focus on is that the money goes directly to charity. It can’t even get within a mile of your checking account.

There are some other things to remember, such as you can combine all of your IRAs and take the total RMD from just one account, but you can’t combine with your spouse. And the rules are a little different if your spouse is more than ten years younger. Also, your brokerage firm can withhold taxes from your RMD, but it’s not required. If you do withhold, which is probably the simplest thing to do, it could take the place of making estimated tax payments.

And you’ll want to make sure not to forget about taking your RMD. The penalty is 50% plus you’ll have to add the one you missed to the then current year’s RMD and pay tax on both in the same year.

Beyond that, we haven’t discussed IRAs that you might have inherited. Spouses get to treat IRAs they’ve inherited as their own, but others have a different set of rules to conform to. Oh, the never-ending joys of the tax code!

Have questions? Ask me. I can help.

As we march headlong toward the end of another eventful year, let’s look at some important calendar-based financial considerations. Now is a great time to do so because it’s late enough in the year to hear the clock ticking, but not so late that you don’t have time to act.

We’ll look at generating cash in a non-retirement account, maximizing retirement savings, RMDs and gifting, and a few more. I’m going to break this list up over the next few weeks.

Before we get into the first installment, here are some questions to ponder about your financial life so far in 2021. Any “yes” answers are topics to drill down on because there could be planning, investing, or tax issues to consider.

• Have you had any big income changes this year? Maybe you switched jobs, downshifted to part-time, or even retired? Have you started or closed a business?
• Any large expenses on the horizon?
• Have you sold investments or other assets for what you consider to be a large gain or loss?
• Have you inherited any money or other assets?
• What’s your financial outlook for next year? Does it include any of the above?

Okay, let’s look at generating cash in your non-retirement account. This question comes up throughout the year but takes on added significance as we edge closer to year-end. The reason has to do with our tax code and the calendar. Some things carry over until tax time, such as IRA contributions made for the year prior, but most tax issues have a distinct deadline as the year turns over.

We’re now in the best season (November, December, and January) performance-wise for stocks, so you can look at trimming them back for spending cash during a strong market. Or, depending on the makeup of your portfolio, you could also trim back bonds a bit. Or both!

Ideally you have a structure in place that allows you to monitor how much your investments have grown relative to others. It’s counterintuitive, but your best candidates for trimming are likely your best performers. Maybe you have some energy-related or real estate investments that have done well, or perhaps a broad stock market index fund that you could trim. The latter is likely up around 24% this year and energy and real estate could be up 40+%.

As I’ve mentioned before, this trimming, or rebalancing, is important to the long-term health of your portfolio. Combining this with generating spending cash makes all the sense in the world.

But as you’re likely aware, you’ll pay taxes to the Feds and probably the state too, on your net realized capital gains when you sell investments in a non-retirement account. That’s kind of a mouthful, but you can make this work for you if you understand the basics.

The cool part about capital gains taxes, if I could even think such a thing, is that you’re just taxed on what you gain – hence the name. The amount you invested and certain expenses associated with it is known as your cost basis and isn’t taxed.

Here’s a simplified example of how this works.

Let’s say you need $10,000 and have the following investments:

$50,000 of Total Stock Market Index Fund that you bought for $20,000

$50,000 of Total Bond Market Index Fund that you bought for $52,000

Since your cost basis isn’t taxable, only $6,000 of the $10,000 you get from selling some of the stock fund would be taxed as a capital gain. This assumes that you only made one purchase at least a year ago. Maybe you’ve made multiple buys over the years? Each buy has its own cost basis, and you can be choosy when deciding which to sell. Try to avoid selling shares owned for less than a year because these short-term gains are taxed as ordinary income, likely higher than the federal capital gains rate of 15%.

But what about the losses in the bond fund? The same concept applies, just in reverse. If you also sell shares of the bond fund you can subtract those losses from the stock fund gains, lowering your net gain to $4,000. Or you could simply sell shares of the bond fund, generate the cash you need with no taxable gain, and let the stocks ride. Not to overcomplicate things, but you have a number of options, especially if you also have retirement accounts to rebalance in.

Gains and losses are calculated per share, so you’ll need to sell all of the bond fund to take advantage of the $2,000 loss. This isn’t a dealbreaker because you can swap your remaining sale proceeds from selling the bond fund for something similar, maybe another bond index fund or a low cost actively managed fund. In other words, you can’t simply sell your fund at a loss and then immediately buy it back. That would be too easy. You have to wait at least a month or risk invalidating the loss by triggering a so-called wash sale. Avoid this like the plague.

Fortunately cost basis data is mostly kept track of by your brokerage firm. Regulations on this changed around 2010 and your firm may not have data for what you owned prior – you can log in and check or call and ask about it. This is important because you’ll want nice clean data documenting your buying and selling come tax time.

Assuming these are the only transactions you make all year, the $4,000 of net gain goes onto your tax return where it can impact your tax bracket, your Medicare premiums, and other areas that could lead to higher taxes than anticipated. Now, taxes on $4,000 might not break the bank but start adding zeroes and taxes can get crazy awful fast. It might also be possible to pay no federal capital gains taxes if your income is low enough. Best do some basic planning on your own with the tax tables online or, ideally, work with your tax advisor (or even your humble financial planner) to get a better gauge on all this.

Have questions? Ask me. I can help.

There’s a couple top-of-mind items as I sit down to write this morning so I’m going to break this post into two parts. The first is an update on Social Security and the second has to do with bitcoin. Let’s jump right in, shall we?

It’s always nice to get a pay raise. Often you have to ask (or beg) for one but sometimes it just happens. Fortunately for Social Security beneficiaries the latter is the case starting in 2022.

We’ve known about the expected bump coming for Social Security beneficiaries given how much inflation there’s been lately, we just didn’t know how big the bump would be. Last week the benevolent folks at the Social Security Administration announced a 5.9% increase in benefit checks beginning this January. That increase is huge and hasn’t been seen since 1982 when payments rose by 7.4% (and the two prior years had double digit increases – lots of inflation back then, of course)! The closest since then was 5.8% for payments in 2009. While one could argue that an almost 6% raise still isn’t enough these days, it’s much better than the 1’s and 2’s, even 0’s, we’ve seen during the last decade.

How did the SSA come up with 5.9%? We’ve discussed this previously, but as a reminder the Bureau of Labor Statistics calculates a variety of inflation metrics and the SSA looks at one called CPI-W, as mandated by Congress. They do this every third quarter each year and compare to the same period the year prior. If there’s inflation they round the number to the nearest tenth and that sets the benefit increase for the next year beginning in January (but the first payment is actually made at the end of December).

The bottom line is that this should be welcome news to anyone living on a fixed income. The typical monthly bump should be around $92 based on the average benefit payment of about $1,559 per month. That’s taxable for some folks, of course, but even after adjusting for taxes the increase might cover a utility bill, help pay for Medicare, or otherwise be more meaningful than last year’s $20 average.

Bumps like this are a double-edged sword, of course, and we’ll have to see how 2022 plays out, how inflation behaves, and what the next raise from the SSA might look like.

Here’s a link to some general information about this from the SSA’s website.

https://www.ssa.gov/oact/cola/latestCOLA.html

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Before we begin this morning, I want to take a moment to congratulate my assistant, Brayden, who passed the CFP Board exam yesterday. We’ve been working together for over three years, and I’m proud of him for accomplishing this goal. Congratulations Brayden!

Today let’s look at maximizing retirement savings. Saving all you can toward retirement might sound like a no-brainer, but the mechanics can catch folks off guard. Next week we’ll discuss RMDs and gifting strategies.

Before we get to this week’s installment, here are some questions to ponder about your financial life so far in 2021. Any “yes” answers are topics to drill down on because there could be planning, investing, or tax issues to consider.

• Have you had any big income changes this year? Maybe you switched jobs, downshifted to part-time, or even retired? Have you started or closed a business?
• Any large expenses on the horizon?
• Have you sold investments or other assets for what you consider to be a large gain or loss?
• Have you inherited money or other assets?
• What’s your financial outlook for next year? Does it include any of the above?

Another question might be, “Have I saved all I can this year toward my retirement?” While trying to do so might seem obvious, actually getting it done can be challenging, and not just financially. The challenges are structural. 401(k) plans weren’t created to be what they are today. The new plan type was latched onto by large employers in the late-1970’s and 80’s who wanted to offload much of the risk associated with running a traditional pension plan. Or at least that’s my take on the history. 401(k) plans have evolved since to become the dominant retirement account type in the country, so we’ll focus on them in today’s post.

Government regulations try to set the stage for employee success by requiring a certain amount of transparency and plan quality, but the reality is far from ideal. The result is that employees have to shoulder much of the burden in terms of figuring out how much they can afford to contribute to the plan, how to invest the money once it’s there, how to manage the account over time, and myriad other rules and regs along the way. This is part of why there’s such a disparity between the long-term performance of more highly educated workers compared with their blue-collared brethren.

Okay, on that note, let’s look at a common structural issue for 401(k) savers – underfunding. I’ve found that it’s not often a lack of affordability at issue, it’s a lack of time. People are busy, they’re stressed, and it can be difficult to get into the nitty gritty of one’s 401(k) plan, especially if it’s one of the many subpar plans out there.

It’s pretty typical for workers to save all year only to find they hadn’t been contributing as much as they thought, or that they could have easily saved more. This is problematic for lots of reasons but approaching year-end the biggest issue is taxes.

As you’re aware, dollars saved into a 401(k) are considered pre-tax, so they come right off the top of an employee’s W-2 income and aren’t taxed by the Feds or the state. These savings won’t be taxed as they grow either and, if you play your cards right, won’t start being taxed until age 72 (or older – some proposals in D.C. would see the minimum age to start mandatory taxable distributions go to 75). These years, or even decades, of tax deferral are huge when it comes to accumulating money for retirement.

Some fuzzy math as I’m writing shows that if you maxed out your 401(k) contributions each year, the additional amount invested from tax deferral could add over $130,000 to your bottom line over 20 years! So, in a real sense, time lost from not maximizing this benefit is time and money you’ll never get back.

The government sets limits on how much you can save into your 401(k) each year. This cap gets adjusted for inflation and is currently $19,500 while those 50 and older can save $26,000 through Dec 31^st. Or you might be part of a SIMPLE 401(k), a less common type, with maximums of $13,500 and $16,500, respectively. Again, this is a cap on what the individual employee can save each year. It doesn’t count money the employer adds as matching contributions. This is also true if you’re self-employed except that you function as the employee and employer, matching your own contributions. I can’t tell you how many people misunderstand this employee/employer dynamic and save less because they were worried about overfunding. Most plans have a mechanism to ensure you don’t overfund your account anyway, so that’s less of a concern. Don’t overthink it, it’s hard enough already!

So, as we get closer to year-end, have you saved all you can into your 401(k)? Maybe you’re trying to hit the annual maximum and are coming up short, even with remaining pay periods. Or you realize you’re sitting on extra cash in your bank account and can afford to contribute more for the rest of the year. A lot of people contribute only a few percent of their pay while they save cash at the bank. Emergency funds are great, but don’t let inertia keep you from retiring better.

I suggest logging into your plan to confirm what you’ve saved so far this year and then try to fill in any gaps.

Good quality plans might only take a pay period to make these changes, so it’s possible to still get several paychecks into your plan if you’re coming up short. Usually you can do this sort of thing yourself. But if your plan is one of the many with a horrible website, you may need to pick up the phone. Something good to remember is that most plans allow you to contribute up to 50% or even 100% of your paycheck to your 401(k). That’s often the only way to get extra money into your plan at year-end since unfortunately they won’t let you simply mail in a check.

However you do it, try to fill up your 401(k) as much as possible this year. It will save on you taxes, add money to your bottom line over time, and get you one (or many) steps closer to being ready for retirement.

Have questions? Ask me. I can help.

Last week I provided updates on a couple of timely developments in Social Security and bitcoin. This week I’m following up on the same topics.

Social Security COLAs –

We learned recently how the Social Security Administration is bumping payment amounts in 2021 by 5.9%, an increase not seen in decades. The SSA is doing so in response to a spike in inflation that’s becoming more apparent every day.

But this raises an obvious question that I should have included in my post last week.

If you’re planning to wait on starting Social Security until 67, or even 70, should you start drawing your benefits early to take advantage of the big cost-of-living adjustment, or COLA?

This is a good question with a short answer. No, you shouldn’t file early to take advantage of the 5.9% bump because you’re effectively getting an 8% bump per year by waiting.

Of course, if you need the money to live on you might want to start early, ideally after doing some planning work to review your options. Instead, waiting grows your benefit base and this base receives future COLAs, so you want it to be as large as possible. And waiting is the simplest way to grow your base, short of working longer and paying more and higher taxes into the system. This waiting zone currently maxes out at age 70.

If you draw your benefits before your Full Retirement Age, often 66 and some months or an even age 67, your base shrinks by a fraction of a percentage point for each month you’re early. That’s a dramatic reduction if you started your benefits at the earliest possible age of 62. The bottom line for retirees is that since the filing decision can be made any time after you turn 62, try to wait as long as possible. If you can hold out long enough, each month you wait beyond your FRA incrementally adds to your base at the rate of 8% per year.

How do you get by in the meantime? Ideally you’d tap into cash savings, or even sell investments in a non-retirement account. Doing either usually saves you on taxes and could even create some planning opportunities like doing Roth Conversions or realizing additional capital gains for “free” if you’re in a low enough tax bracket.

Deciding when to start taking Social Security benefits can be difficult and definitely goes beyond the straightforward financial stuff. Many folks are concerned that the program will run out of money and won’t be around for them when the time comes. This is a rational fear given the hyperbolic headlines we see from major news outlets. The reality is more complicated, however, and hopefully not as dire as it often seems. Try not to let fear drive a decision like this.

Here’s an article from Investment News with more information on this topic.

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Home ownership has long been seen as a critical component to success in America. This has so impacted our psychology that many renters feel inadequate for not taking part in what has been called the ownership society. So it’s fair to ask how far will (or should) you go to be a homeowner. It seems declining affordability is causing some buyers to get creative.

GW Bush wasn’t the only president to aim for growing home ownership, of course. FDR’s New Deal and the post-WWII economic and baby boom helped grow our home ownership rate from 44% in 1940 to about 62% by 1960. Growth continued before peaking at 68% in 2007 and obviously took a hit during the Great Recession. We’ve been in the mid-60% range ever since.

While average on the world stage, our current home ownership rate of about 64% seems poised for more growth. There’s so much demand chasing not enough supply. Even amid what many term an affordability crisis, the drive to own a home is so strong that some are looking for alternatives to traditional home ownership.

For example, there’s a growing number of people buying homes in partnership with each other, something known as co-buying. We’ve all heard of this in terms of buying a vacation property with a friend or even with strangers as part of an investment scheme, but more buyers are using co-buying to buy a primary residence. They live together, share expenses, and potential home equity growth as well. They also share risk, which can work out badly if not planned for and if, unfortunately, they’re unlucky.

Honestly, I didn’t know co-buying was that big of a thing, but I’ve been reading about it and wanted to share some information. Ultimately, it’s an interesting development in the ongoing saga of rising real estate prices and what’s sustainable longer-term.

First, let’s review some charts and commentary from my research partners at Bespoke Investment Group. They conduct a monthly survey of 1,500 consumers based on Census data and often come up with interesting analysis. This time it’s about the rise of Millennials and Gen Z as homeowners. This data confirms the anecdotes about younger folks being eager to buy and also excited to fix up their space.

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