Required Homework Before Visiting One Of The Social Security Locations

Do not drive to your local Social Security office until you have educated yourself. That is the best advice I can give to all you baby boomers heading towards retirement. There is a large crater between what most Americans think they know about Social Security and the real rules governing this entitlement program. Multiple surveys and an untold number of stores reveals this fact.

As a result of this lack of knowledge and people not getting professional guidance, the typical retiree will walk right past up to $100,000 in lifetime retirement benefits.

For a married couple, the difference between a smart Social Security claiming strategy and the urge to “take the money and run” could be $250,000 or more over their combined lifetimes. Social Security is the cornerstone of retirement income for most Americans. So why are so many people not doing their homework before going to the social security office?

Last year Financial Engines conducted a survey of more than 1,000 people who are retired or close to retirement . The repsondents were asked eight basic questions about claiming Social Security benefits. Of those people who had not yet claimed their benefits, 74% scored a grade of C or lower. Only 5% were able to answer all eight questions correctly. This survey shows that this retirement decision is more complex than most Americans think. As a financial professional, I can assure you that this decision will have a dramatic impact on the standard of living most people enjoy in this new chapter of life.

The Financial Engines survey found that 70% of people who hadn’t yet claimed Social Security said they would be at least somewhat interested in a professional service to help hem develop a claiming strategy. And, 39% said they would be extremely or very interested in this type of Social Security-claiming help. Who is going to provide that assistance, the Social Security Administration? A financial advisor is best suited to help you understand how to put the pieces of a retirement income plan together. Those pieces should include Social Security, retirement savings, pensions (if you are one of the fortunate few) and for some people continued work in retirement. In the current economic environment, some may be better off by tapping their retirement accounts in order to delay Social Security as long as possible. That is probably not what most Wall Street brokers would like to see happen to that IRA.

A financial advisor may be able to improve a client’s investment return by 1-2% with good asset allocation and diversification, but guiding clients to a better claiming decision as it relates to Social Security could increase their lifetime income by 25% or more. Although we can claim benefits as early as 62, your payment will be reduced forever and you will be subject to earnings caps if you continue to work and you will forfeit the ability to engage in creative claiming strategies that could boost your lifetime income.

Many retirees do not understand what a file and suspend, or restricted application could do for them. Nor do they understand the spousal benefit strategies and how they work.

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Markets Shake Off Global Gloom

Stocks shook off their global worries and advanced on some upbeat data that suggests the economy may be picking up steam as the weather warms. Despite losing some ground on Friday in pre-weekend jitters, the major averages all closed out the week on a positive note. For the week, the S&P 500 gained 1.38%, the Dow grew 1.48%, and the Nasdaq advanced 0.74%.[i]

The cold winter may be losing its hold on the economy. New unemployment claims rose less than expected, and the four-week moving average fell to a four-month low, giving analysts hope that the job market is gaining momentum after a slow winter.[ii] Industrial production also appears to be emerging from its winter blues; U.S. manufacturing output rebounded in February and notched its highest growth in six months.[iii]

The Federal Reserve’s Open Market Committee (FOMC) met last week and voted to continue tapering, reducing its monthly bond purchases by another $10 billion. The Fed also clarified its forward guidance, stating that it had dropped its 6.5% unemployment rate target in favor of “ongoing improvement in labor market conditions” and stable long-term inflation.[iv]

The situation in Ukraine continued to occupy headlines last week as Crimeans voted to secede from Ukraine to join the Russian Federation, and Moscow moved to formally annex its newest member. The U.S. and Europe responded by denouncing the validity of the vote and instituting sanctions against major Russian oligarchs. Although these sanctions may prove uncomfortable for Russian leaders, they aren’t the harsh sanctions investors feared might interfere with economic growth in Europe.[v]

Although the threat of a regional military conflagration seems to have passed, investors are still worried about how a standoff between Russia on one side and Ukraine, Europe, and the U.S. on the other side might play out. Geopolitically, Ukraine is important because of its capacity for food production, position as a transit route for Russian natural gas into Europe, and possession of strategic Black Sea ports (some of which are now in Russian hands). In the broadest terms, Russia wants Ukraine in order to extend its influence westward. Western nations want to keep Ukraine out of Russia’s hands and keep it from disintegrating into squabbling factions. However things work out, the resolution of the Ukrainian crisis could set the stage for East-West relations for years to come.[vi]

Looking at the week ahead: With the last FOMC meeting behind us, investors will be turning their attention to a raft of new economic data due to be released this week. Analysts are particularly interested in manufacturing data and consumer spending and will be looking for hints that cold-weather-related slowdowns are in the past.


Monday: PMI Manufacturing Index Flash

Tuesday: S&P Case-Shiller HPI, New Home Sales, Consumer Confidence

Wednesday: Durable Goods Orders, EIA Petroleum Status Report

Thursday: GDP, Jobless Claims, Pending Home Sales Index

Friday: Personal Income and Outlays, Consumer Sentiment

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.


House Republicans want balanced budget vote in April. Republicans in the House of Representatives plan to vote on a budget plan that retains 2015 spending levels but reaches balanced spending levels in 10 years. An early memo suggests the plan would include deep cuts to social programs while retaining defense spending.[vii]

Fitch Removes Negative Ratings Watch on U.S. Fitch Ratings took the U.S. off its negative ratings watch list and reaffirmed the country’s AAA credit rating. The agency cited improved economic and demographic trends in its decision.[viii]

Stress tests show 29 of 30 banks could withstand major recession. The Federal Reserve’s annual bank stress tests found that most U.S. banks could withstand a deep economic slump and still meet all of their financial commitments. The Fed runs an annual two-part test to ensure that banks don’t fall prey to the mismanagement that led to the need for bailouts in 2008.[ix]

Housing starts fall in February. Groundbreaking on new houses fell for the third month in a row in the latest sign that the harsh winter may be undermining the housing recovery. However, housing permit applications grew 7.7% in February, indicating that homebuilders may be optimistic about spring demand.[x]

How Does Obama Want to Change Your Retirement Accounts?

President Obama’s 2015 budget includes a number of proposed changes aimed at retirement accounts. Six out of the seven provisions (or similar versions of them) are detailed below and unveiled Monday of this week.

It’s important to know the key retirement account provisions included in the President’s budget this year, because they certainly could happen and, at the very least, they are an indication as to where the administration wants to head. Here are the key changes you should know about:


This is major deal and when people catch on to it, it’s bound to make some major waves. Under the premise of simplifying the tax rules for retirement accounts, President Obama’s 2015 budget calls for a provision that would require Roth IRAs to follow the same required minimum distribution (RMD) rules as other retirement accounts.

In other words, you would have to begin taking RMDs from your Roth IRA when you turn 70 ½, the same way you do with your traditional IRA and other retirement accounts. If this were to come to pass, it would be a major game-changer when it comes to retirement planning.

The fact that Roth IRAs have no RMDs is one of the key reasons many people decide to contribute or convert to Roth IRAs in the first place. The distribution would be a tax-fee withdrawal, however, once the money is out of the tax-free haven, where would it go. Either, the money would be spent or re-invested in a less tax advantaged location.

If this proposal were to become law, conversions would make sense for far fewer people. Not only that, this proposal gives all those who haven’t made Roth conversions over the years because they “don’t trust the government to keep their word” more ammunition.


The maximum tax benefit (deduction) for making contributions to defined contribution retirement plans, such as IRAs and 401(k)s, would be limited to 28%. As a result, certain high-income taxpayers making contributions to retirement accounts would not receive a full tax deduction for amounts contributed or deferred.

Example: Currently, if an individual with $500,000 of taxable income defers $10,000 into a 401(k), they will not pay any federal income tax on that $10,000. Without that salary deferral, that income would be taxed at 39.6% (currently the highest federal income tax rate).

However, if this proposal were to become effective, that $10,000 would effectively be taxed at 11.6% (39.6%-28% = 11.6%), since the maximum tax benefit that a client could receive would be limited to 28%. That equates to an additional tax bill of more than $1,000.


Most IRA (and other retirement plan) non-spouse beneficiaries would be required to empty inherited retirement accounts by the end of the fifth year after the year of the IRA owner’s death (known as the 5-year-rule). The proposal does call for certain exceptions to this rule, such as for disabled beneficiaries and a child who has not yet reached the age of majority.

While this proposal might simplify the required minimum distribution (RMD) rules for most beneficiaries, it would mark the death of the “stretch IRA.” Most non-spouse beneficiaries would face more severe tax consequences upon inheriting retirement accounts and as such, the value of these accounts as potential estate planning vehicles would be diminished.


New contributions to tax-favored retirement accounts, such as IRAs and 401(k)s, would be prohibited once you’ve exceeded an established “cap.” This cap would be determined by calculating the lump-sum payment that would be required to produce a joint and 100% survivor annuity of $210,000 starting when your turn 62.

At the present time, this formula produces a cap of $3.2 million. If you ended up with more than this total in cumulative retirement accounts at the end of a year, you would be prohibited from contributing new dollars to any retirement accounts in the following year. The cap would be increased for inflation.


This one’s simple. If you have $100,000 or less – across all of your retirement plans combined – you would be exempt from required minimum distributions. Currently, if you fail to take the proper RMD amount comes with one of the stiffest retirement account penalties there is, a 50% penalty on any shortfall.

This proposal would eliminate that possibility if you have $100,000 or less in retirement accounts and would allow you to take as much, or as little, as you want without a penalty.


Non-spouse beneficiaries would be allowed to move inherited retirement savings from one inherited retirement account to another inherited retirement account via a 60-day rollover (in a manner similar to which they can currently move their own retirement savings).

Unifying the rollover rules for retirement account owners and beneficiaries would greatly simplify this aspect of retirement accounts and reduce the number of irrevocable and costly mistakes that are often made by beneficiaries under the current rules.


Employers in business for at least two years that have more than 10 employees and don’t offer another retirement plan already would be required to offer auto-enrollment IRAs to their employees. Contributions to employees’ IRAs would be made on a payroll-deduction basis.

Employees would be able to elect how much of their salary they wish to contribute to their IRA (up to the annual IRA contribution limit), including opting out entirely. In the absence of any election, 3% of an employee’s salary would be contributed to their IRA. Employees would be able to choose whether to contribute to an IRA or Roth IRA, with the Roth being the default option.

The provision would also enhance incentives, in the form of a tax credit for small businesses, to adopt a company-sponsored retirement plan.

If you have questions on how this may affect your specific situation, give our office a call. If you are not our client and feel like it is time to get a second opinion or professional guidance give our office a call.

This originally appeared on Information and examples by Jeffrey Levine, CPA.