Just the thought of setting a budget can be enough to send us running for the hills. The other day, I had lunch with a friend who is a fellow career mom. We often swap stories about our busy lives and commiserate about how hard it can sometimes be to balance work and motherhood. Her career has taken off over the last year, but she looked more relaxed than ever. She shared that she and her partner had decided to outsource many of the household responsibilities they had historically struggled to keep on top of and often bickered over. After telling me what an amazing gamechanger this had been for her mental health and her family, her expression quickly changed to one of guilt as she admitted that the services were costing them quite a bit. Despite her increase in income, she felt embarrassed and irresponsible about how they much they were spending on services some would consider unnecessary. To her it sometimes felt as if they had traded their weekly arguments over household tasks with monthly disagreements over money.
I could relate to her experience on both a personal level and a professional one. After assuring her this was a common struggle, I shared tips with her that have helped many of my clients over the years. The traditional guidance for people grappling with feelings of guilt, self-reproach, or insecurity over their finances is to create a strict budget and stick to it. Some people enjoy a disciplined approach to things, but for many of us, avoiding the need for strict budgets can be a primary driver for saving and working hard. Tracking every small expense, feeling guilty about how much you spent last month, questioning partners on their expenditures, and generally feeling restricted—what’s to like? It’s right up there with counting calories, so I understand why people avoid it altogether.
If you’re like many high-income earners and people who have saved well, you might feel that avoiding the need to budget is a right you have earned. After all, you’ve worked hard so you don’t have to count every penny, right? The trouble is that it puts you at risk for not meeting larger goals such as a comfortable retirement, paying down debt, college funding, or making a large purchase; and it can also leave you feeling out of control and dissatisfied. Whether you are a busy professional struggling to figure out why you don’t have more money at the end of every month or you are already retired and unsure how to balance your personal spending with other goals, there is a strategy that can help you feel more in control of your money without having to budget.
Pre-Retirement Reverse Budgeting Process:
By taking these steps, you ensure your savings goals are met first, and anything that remains can be spent on whatever you desire, without guilt!
Identify your goals.
Determine how much you need to save on a periodic basis to meet these goals—the easiest way to do this is to work with your financial advisor to create a financial plan.
Set up an automatic savings plan with a combination of payroll deductions and automatic monthly transfers.
Enjoy the freedom to spend what is left as you choose and the peace of mind that comes with knowing you are able to meet your goals!
To make this process work for you, it’s important to start with a cushion in your checking account and to review your checking account at least monthly and before making large purchases to ensure you are maintaining a sufficient balance. If you find yourself running short, you can pull back slightly on small discretionary purchases and build that cushion back up so you aren’t forced to dip into your savings for something other than the goals you have set. We all tend to spend more when we are feeling flush, so checking your bank balance periodically should allow you to reign in non-essential expenses for short periods and return to guilt-free spending in no time. If you find a significant gap, you may need to examine recurring expenses for areas to cut back or reassess your savings goals.
Retirement Goal Funding Process:
You worked hard, you saved, and now you are living the retirement dream, but that doesn’t mean you’ve accomplished all your financial goals. Many people in retirement want to leave a certain amount to charity, help their children buy a home or start a business, help their grandkids with college, save for a large purchase such as a second home, or plan ahead for long-term care expenses. When you have a set amount of assets that need to provide for a lifetime of expenses and several other large goals, it can be hard to determine whether you have enough and what you can afford.
It’s also common for retired people to struggle with the transition from saving to spending. If you have been a disciplined saver and enjoyed watching your nest egg grow, the idea of diminishing it can be incredibly stressful. This process has helped many of my clients discover a new sense of financial comfort and freedom.
Identify your goals. What do you anticipate for recurring annual spending? Do you have any legacy goals, plans for long-term care, or larger purchases, gifts, and donations to consider?
Work with your financial advisor to run financial projections that account for investment returns, market volatility, inflation, taxes, etc.
If the projections show you are not able to attain every goal, work through prioritizing and adjusting your goals until your projections show results you are confident in.
The end result should provide you with an annual amount you can confidently spend while giving you peace of mind that you are able to meet your other goals as well!
One final, crucial step in the financial planning process is to meet with your advisor periodically to make sure you stay on track to meet your goals and discuss how goals may change for you over time. A great advisor will review your entire financial picture to make your money work its hardest for you and not only maximize your potential for meeting those goals but also encourage you to reach for the stars and live fully along the way. If you’re not already working with an advisor or are looking for someone who can provide this type of comprehensive support, we’re happy to help—schedule a consultation now!
Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.
Boeing employees nearing retirement age are facing a financial decision that will need to be made by November 30—one that could have a significant impact on their lifestyle in retirement.
Higher Interest Rates and the Lump Sum Pension Benefit
Boeing offers many employees the option at retirement to either receive a pension, providing monthly income for life, or to have a single lump sum deposited into a retirement account that can be invested and withdrawn as desired.
The amount of the pension benefit is based on several factors, including years of service with Boeing and average salary while employed.
When determining the lump sum benefit, the underlying interest rates are an additional factor to take into consideration. Higher interest rates will create a lower lump sum benefit, and lower interest rates will create a higher lump sum benefit. Boeing resets the interest rate used in the calculation once per year in November.
With the significantly higher interest rates we’ve seen in 2022, an engineer who may currently qualify to choose either a $5,000 monthly pension or a $1 million lump sum benefit may be looking at only $800,000 in lump sum benefit if they retire after November 30, 2022. The exact numbers will vary for each employee.
That $200,000 reduced benefit can be a significant incentive for employees who are planning to retire in the next few years to adjust their plans and retire early.
To Whom Does This Apply?
Not all Boeing employees have a pension as part of their benefits. Also, some employees are covered by unions that only offer the monthly pension and do not have a lump sum option.
Boeing engineers who are members of the SPEEA (Society of Professional Engineering Employees in Aerospace) union usually have a generous lump sum benefit compared with the monthly pension and may benefit significantly from comparing their options.
Financial Planning to Compare Options
The decision to take either the lump sum in retirement or the monthly pension is a significant one, and both contain risks.
With the lump sum, the employee is accepting the risk of the market and managing the money.
With the monthly pension, the guaranteed income provided to the employee will not increase with inflation. This year has been a good reminder that inflation can significantly reduce the purchasing power of that income.
Also, does it make sense for an employee who originally planned to retire in two years to give up on the years of additional earnings and savings? Can the employee afford to do so?
We help employees compare how a monthly pension or lump sum benefit will interact with other resources (Social Security, retirement accounts, real estate) to determine the ability to meet goals in retirement. We can also compare retiring in 2022 with delaying retirement and possibly receiving a reduced benefit in the future.
Deadline and Next Steps
Boeing employees wanting to claim the lump sum before rising interest rates potentially reduce benefits will have to retire and submit the request for a lump sum benefit by November 30, 2022.
Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.
Every retiree’s needs are different, which means that every person who retires will have to make their own decisions about whether they want to own a house or rent one.
Some seniors have already paid off their homes and wish to keep living there; others are prepared to invest in a property where they can enjoy their golden years; still others would prefer to live in a place where they don’t have to control the long-term maintenance of the property.
When it comes to retirement living, what makes more sense: renting or homeownership? There are pros and cons to both sides of this story. Let’s take a closer look.
Homeownership: Home Equity Has Value
When thinking about homeownership, it’s essential to consider the various ways that home equity has value for you.
Home equity could turn into extra income as you enter retirement, or it could simply act as enough of an investment to float you through your future years. Using home equity as part of your retirement beyond just living in the house, however, requires that you are comfortable making changes to your income strategy.
Selling your home, renting out your home, or taking a reverse mortgage are all ways that some seniors choose to use their home equity to their advantage in retirement. Just as there are both pros and cons to homeownership in retirement, there are also pros and cons to making these changes to your home.
Homeownership: When Keeping a House Makes Sense
Many retirees would be comfortable staying in their house in retirement, but they aren’t sure if that would make sense for them.
If you have a low mortgage, or your mortgage is completely paid off, and you have taxes you can handle, staying in your house is an option.
This may not be possible for those who bought their house more recently. Consider how much the house will continue to cost each month when you have less income in future years; this could help you determine if staying in your house will work for you. Selling may be the best option if you don’t have enough saved for retirement.
It is also vital that you consider how it will be to live in your house in your older years. If you live in a storied house, things like stairs or inaccessible bathrooms could prove to be a big issue to deal with. It’s okay to want to keep your home, but you will also need to be realistic about changes that may be required as you age.
Renting: A Reduction in Responsibility
One of the reasons that many seniors choose to rent is that they can reduce their number of house-related responsibilities as they age. Keeping up with all the needs of a house can be difficult for people of any age, and it can get even more tiring when you are older.
From mowing the lawn to shoveling snow, certain upkeep tasks are nice to hand off to someone else by renting. Additionally, you are no longer responsible for property taxes or similar large financial responsibilities beyond rent and utilities. This can make sense for many people’s retirement plans.
Renting: Flexibility and Accessibility
Another benefit of renting for seniors is that you have more flexibility in choosing where you live and how you live.
The rental property managers at Buttonwood explain that apartment units, condo units, and one-story rentals are often great choices for those who want to have a more accessible living environment. They go on to say, “When renting, it is also possible to change where you are living without significant cost. Unlike buying and selling houses, you can simply end a lease, start a new one, and move to your new location. This gives flexibility that a lot of seniors like to have in retirement.”
Moving as you please in order to be closer to family or friends is a big benefit of renting over buying for many people in retirement.
Homeownership vs. Renting: The Advantages
Choosing between homeownership and renting is going to be a difficult decision no matter what. However, you can start to narrow down your choice by thinking about what you need most in a home. What types of advantages are going to be most beneficial for your lifestyle? Consider those needs and then compare them to this list of advantages for each living situation:
Staying Situated Many people like to continue to live in a home that they feel has long-term stability and doesn’t rely on another person (i.e., a landlord) to be involved. This provides both physical and emotional stability for many.
Tax and Financial Benefits There are several tax perks for owning a home that do not apply to renters. Additionally, homeowners who have paid off their homes may find it significantly more affordable to live in said home. Plus, equity is something that you can keep growing or pass down your line.
A Home of Your Own A lot of retirees have worked their entire lives to be able to call their home theirs, and they want to keep living there. This allows you to personalize as you please without needing to follow any landlord rules for alterations.
Flexible Living Situation You can move as your needs or desires change, and you can do so without dealing with the stress of selling and buying homes.
Accessible Options Find homes that will allow you to avoid home maintenance or live without climbing stairs; these things become important in later life.
Balance Expenses Renting is often less expensive from month to month since property taxes, mortgage payments, house maintenance costs, and HOA fees may be eliminated.
Free Up Finances Selling a house and moving to rent instead gives you more money that you can use to invest or enjoy your golden years.
Whether you are delaying retirement to increase your savings before you stop working or you’re ready to move into this stage of your life, consider the pros and cons of homeownership versus renting before you take the next steps. You’ll be better situated if you ensure that you know what you are getting into in advance.
Written Exclusively for Merriman.com by Madison Smith
Madison Smith is a personal and home finance expert at BestCompany.com. She works to help others make positive financial stride in their lives by providing expert insight on anything from credit card debt to home-buying tips.
Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.
Do you have a federal or local government pension? Don’t let the WEP or GPO surprise you. The Windfall Elimination Provision and Government Pension Offset, often called the WEP and GPO, are two rules that can leave you scratching your head. Not only do many people find these rules confusing, but they are also often completely overlooked, which may result in a big surprise when filing for Social Security benefits. Unfortunately, this is not one of those good surprises.
What are the WEP and GPO?
The WEP reduces a worker’s own Social Security benefit while the GPO reduces spousal and survivor benefits received from another’s work record, such as a spouse.
Who is affected?
The WEP and GPO affect individuals who qualify for a pension from non-covered (did not pay Social Security tax) employment. These are typically your federal and local government workers, such as teachers, police officers, and firefighters. Whether these jobs are non-covered will depend on the state/employer. Overseas employees may also fit under this category.
For the WEP to apply, the individual must have an additional job with covered earnings (did pay Social Security tax) that qualifies them for Social Security benefits. Thus, the WEP applies to those who have a mix of covered and non-covered employment. Specifically, they qualify for Social Security benefits and receive a non-covered pension. The GPO applies when an individual with a non-covered pension receives a spousal or survivor benefit. Are you scratching your head yet?
Dan works as a public school teacher in California, one of 15 states where teachers do not pay Social Security tax. He qualifies for a pension through the California State Teachers’ Retirement System (CalSTRS). To make extra money for his household, Dan works an additional job during the summer, where he does pay Social Security tax. By the end of his career, he has worked enough summers to qualify for a Social Security benefit. The WEP will reduce Dan’s benefit since he has both a non-covered pension from his career as a teacher and qualifies for Social Security benefits from his summer job.
How will the WEP affect my benefit?
Understanding the details of the WEP is quite complicated. To simplify, the WEP tweaks the Social Security benefit formula, resulting in a reduction of the worker’s Primary Insurance Amount (PIA). The PIA is the benefit amount one would receive at full retirement age. The amount reduced depends on the number of years with “substantial earnings” in covered employment. The Social Security Administration provides the WEP Chart as a reference to understand the potential benefit reductions based on the number of years of substantial earnings. The maximum monthly reduction is capped at $480 in 2020. The amount reduced stays constant for the first 20 years of substantial earnings before decreasing incrementally per year until it is completely eliminated upon reaching 30 years of substantial earnings.
This offers an incredible planning opportunity for those who have already accumulated a number of years of substantial earnings. If you are thinking of retiring and have accumulated 20 years of covered work, it could make a lot of sense to work for ten more years to eliminate the WEP completely. Remember, you only need to have substantial earnings, so part-time work would count as long as you make what is deemed “substantial” in that year. For someone subject to the full WEP reduction and assuming a 20-year retirement, it could be worth more than $100,000.
It is important to note that the reduction is limited to one-half of an individual’s non-covered pension. This primarily comes into play when the majority of an individual’s earnings are in covered employment but have a small non-covered pension. For example, if you had a pension of $600 per month and your Social Security benefit was $1,200 per month, your benefit will not be reduced by more than $300 (half of your pension income).
How will the GPO affect my benefit?
This rule is more straightforward to understand than the WEP. The GPO will reduce an individual’s spousal or survivor benefit by two-thirds of their non-covered pension benefit.
Sarah qualified for a pension of $2,100 per month from a government job. Her husband, Drew, worked as an engineer for a large corporation. Drew applied for his Social Security benefit at his full retirement age and receives $2,600 per month. Sarah applies for a spousal benefit once she reaches full retirement age. This benefit would generally be $1,300 (50% of her spouse’s); however, the benefit is reduced by two-thirds of her non-covered pension. In this case, she would not receive anything since two-thirds of her pension ($1,400) is greater than what her spousal benefit would be.
Let’s say Drew passed away unexpectedly. Sarah would normally qualify for a survivor benefit equal to Drew’s entire benefit of $2,600. Because of the GPO, she will only receive $1,200 since the benefit would first be reduced by two-thirds of her pension ($2,600 – $1,400).
Keep in mind the GPO only applies to the individual’s own non-covered work. If a surviving spouse is a beneficiary of a non-covered pension, their Social Security benefits will not be reduced.
These rules are tricky to navigate and important to understand for those affected. What makes it worse is that your Social Security statement will not reflect the reduction in benefits from the WEP and GPO. This means it requires work and effort on your part to figure out! The Social Security Administration has provided an online WEP and GPO calculator to help with this. It will ask for a birthdate, non-covered pension benefit amounts, and other relevant information to calculate your new benefit factoring in the rule. If you have a family member or friend with a non-covered pension, they may be subject to these two rules. Please forward this on to them or anyone else who may find it useful.
The IRS announced on Tuesday, June 23, 2020, via Notice 2020-51 (PDF), additional relief relating to Required Minimum Distributions (RMD), allowing you to return RMD funds withdrawn after January 1, 2020.
As it sits now, the CARES Act RMD waiver for 2020 is still in place, meaning that you are not required to take an RMD for 2020. This applies to defined-contribution plans such as 401(k) or 403(b) plans and IRA accounts. Those who have previously taken RMDs are likely familiar with the process; but for those who turned 70 ½ in 2019, this all may be brand new, and it’s important to understand the timeframes. This can easily be confused with the SECURE Act which passed toward the end of 2019, changing the RMD age to 72 going forward. Tuesday’s announcement extends relief to anyone who has previously taken an RMD in 2020 by extending the opportunity to return the funds up through August 31st, 2020. In addition, if you return funds under this new announcement, the notice states that the repayment is not subject to the one rollover per 12-month period or the rollover restrictions with inherited IRAs. This is particularly important because the SECURE Act changed the timeframe in which beneficiaries are required to withdraw inherited IRA funds. To find information about the SECURE Act changes, Paige Lee, CFA, wrote a great article which can be found here. There is a lot going on here, and the overall message is that you have more flexibility than ever on how you treat a 2020 RMD.
What was the original relief for RMDs?
The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) was signed into law on March 27th, 2020, providing relief amidst the COVID-19 pandemic for many American taxpayers and businesses. We posted a blog that summarizes these changes which can be found here. In respect to RMDs, the CARES Act originally allowed individuals to forego taking a 2020 RMD and allowed you to return any RMD taken within the previous 60 days. Despite being a fantastic planning opportunity, anyone who took an RMD earlier that the previous 60 days was left out in the cold. Later in April, the IRS issued a follow-up notice that extended the time period to include those who took an RMD between February 1 and May 15 where the funds could be returned by July 15th. This is no longer the case with the most recent announcement, and now anyone who has taken an RMD from January 1st, 2020, can make the decision to return the funds.
How can you take advantage of this?
This offers a tremendous planning opportunity by providing households with the ability to shift income and take advantage of market conditions. Returning an RMD can lead to a host of strategic financial moves including the following:
Continued growth of tax-deferred assets
Opening room to make Roth IRA conversions
A chance to look at taxable accounts to see if it makes sense to withdraw funds at capital gain rates as opposed to marginal tax rates
Rebalancing—as the funds are returned, holdings can be adjusted to shore up your overall allocation
We help our clients make the best choices with the information available, and now that this new extension has been issued, we view this as an opportunity to review your circumstances, discuss the various options, and decide on whether or not to take action.
Connect with Merriman to discuss.
Here at Merriman, we are very excited about this announcement and strongly encourage you to contact us if you have already taken an RMD from your IRA or Inherited IRA this year. We’ll help you understand and explore your options and determine if taking advantage of this extended RMD relief makes sense for you.
Our team at Merriman has been diligently following COVID-19 pandemic updates across the world and in our own communities.
We have also been hearing lots of questions from clients, prospects, friends, and family.
Can I still retire or stay retired? Am I still able to relocate as I had planned? Should I sell all of my stocks now? Should I go to cash? Should I use all the cash I have to buy in? Should I file for Social Security earlier than planned? How will I pay for a hospital stay if I need one?
If you are worried about some of these things too, I have good news.
We have partnered with America’s Retirement Forum (a nationwide non-profit dedicated to providing financial education to adults) to organize a webinar that can help.
Why trust me?
I am the Director of Advisory Services at Merriman Wealth Management and an instructor through America’s Retirement Forum. I have been helping people transition into and navigate retirement for over 20 years, and Merriman has been in the business of educating investors since our founding by Paul Merriman in 1983.
The short and long-term impacts of the COVID-19 pandemic on the economy
Why this recession may be different from what you have lived through before
5 specific steps designed to protect and maximize your retirement income in the middle of a pandemic (yes, you can implement them yourself)
6 strategies and issues to discuss with your advisor
In this time of worry, false information, and uncertainty, make the choice to spend some of your time learning about what you can do to retire well. And the best part is that you don’t have to put your health at risk or leave the house. All you need is 30 minutes and an internet connection to watch this free webinar.
Don’t delay: Some of the strategies discussed in the webinar are time-sensitive. I would hate for you to miss an opportunity or to take action without having all the facts. We want to help you avoid mistakes and take the proper steps toward securing your financial future.
Stay home, be well, and use this unprecedented time to get informed. Feel free to reach out with any questions.