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Aug 20
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Breaking Down the One Big Beautiful Bill Act

By Retirement Planning, Tax Planning

The “One Big Beautiful Bill Act” (OBBBA), often called the “Big Beautiful Bill,” is a sweeping piece of legislation that touches nearly every aspect of American life. Spanning over 800 pages, it introduces changes across the tax code, retirement savings, estate planning, border security, ICE, and government operations. The IRS is expected to issue further clarifications on many provisions, but what’s clear is that this bill brings a wide range of reforms that can impact nearly every household.

Here are just a few of the biggest changes as we understand them:

  1. Lower Tax Rates Made Permanent and a Higher Standard Deduction

The bill makes permanent the individual tax rate percentages first introduced by the 2017 Tax Cuts and Jobs Act (TCJA) for the tax year 2025 and beyond; thereafter income brackets will be indexed for inflation annually. The tax rates, as well as brackets for 2025, are as follows:

  • The top tax rate remains 37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly).
  • 35% for incomes over $250,525 ($501,050 for married couples filing jointly).
  • 32% for incomes over $197,300 ($394,600 for married couples filing jointly).
  • 24% for incomes over $103,350 ($206,700 for married couples filing jointly).
  • 22% for incomes over $48,475 ($96,950 for married couples filing jointly).
  • 12% for incomes over $11,925 ($23,850 for married couples filing jointly).
  • 10% for incomes $11,925 or less ($23,850 or less for married couples filing jointly).

Along with this, the standard deduction has been increased slightly to $31,500 for joint filers, $23,625 for heads of household, and $15,750 for single filers for 2025—adjusted annually for inflation going forward.

  1. Temporary Deductions (For Tax Years 2025–2028 Only)
  • Up to $25,000 of tips may be deducted from federal taxable income for those who work in industries where tips are customary. The deduction amount phases out by $100 for each $1000 when adjusted gross income exceeds $150,000 for single filers and $300,000 for joint filers. While the deduction applies to “cash” tips only, the OBBBA broadly defines “cash” tips to include tips paid in cash or charged.
  • Overtime Pay Deduction: Up to $25,000 of overtime compensation for married filers and $12,500 for single filers may be deducted from federal taxable income. The deduction phases out when adjusted gross income exceeds $150,000 for single filers and $300,000 for joint filers.
  • Senior Deduction: Mistakenly referred to as a Social Security tax cut, the OBBBA established a temporary income tax deduction of $6,000 per eligible filer for people age 65 or older—provided their modified adjusted gross income does not exceed $75,000 for single filers, or $150,000 for those married filing jointly.
  • Auto Loan Interest: Auto loan interest is made income tax deductible for new autos with final assembly in the United States. The deduction is limited to $10,000 and phases out when income exceeds $100,000 for single filers and $200,000 for joint filers.

These deductions can help reduce taxable income to support some middle-income earners but will sunset after 2028 unless renewed.

  1. Child and Family Benefits
  • The child tax credit was permanently raised by another $200 to $2,200 per qualifying child for 2025. Beginning in 2026, this will be indexed for inflation. (Earned income must be at least $2,500 in order to claim any child credit.) The OBBBA also makes permanent the $500 nonrefundable credit for other dependents who do not qualify for the child tax credit, including those over the age of 16, and makes permanent a requirement that the child and at least one parent have a Social Security number.
  • New Trump Accounts: A tax-deferred savings account is meant for American children born between 2025 and 2028. There is a one-time government deposit of $1,000 and families can contribute up to $5,000 per year with investment growth tax-deferred. Employers can also contribute $2,500 to the employee’s eligible dependent child.
  1. Permanently Higher Estate and Lifetime Gift Tax Exemption Amounts

The higher federal Estate and Lifetime Gift Tax exemption amounts will no longer sunset in 2026. Instead of reverting to pre-TCJA levels, the OBBB permanently increases the exemption to $15 million per person, or $30 million for joint filers starting in 2026, with the new exemption amount indexed for inflation going forward. The Generation-Skipping Transfer (GST) exemption will match this amount. (For the 2025 tax year, the exemption amount is $13.99 million or $28.98 million per couple.)

  1. SALT Deduction Expands Until 2030 and Current Mortgage Interest Deduction Amount Made Permanent
  • The deduction cap for State and Local Taxes (SALT) has been increased to $40,000 starting in 2025 and will then climb by 1% annually through 2029 before reverting back to $10,000 in 2030 (phases out for taxpayers with an income over $500,000).
  • Qualified residence interest deduction: Originally set to increase to $1 million, the OBBBA modified the limit on the deduction for qualified residence interest to a maximum of $750,000 of home acquisition debt permanently. The disallowance of interest on home equity loans has been made permanent unless loan proceeds are used to buy, build, or substantially improve the home securing the loan.
  1. Charitable Deduction Increase for Nonitemizers

The OBBB expands the ability of nonitemizers to take a bigger charitable deduction permanently. The preexisting limit of $300 ($600 for married individuals filing jointly) is increased to $1,000 ($2,000 for joint returns). This above-the-line deduction is available only for cash gifts made to public charities.

  1. What’s Ending

While some incentives were expanded or made permanent, others are being phased out. For instance, tax credits for electric vehicles (EVs) end September 30, 2025. Other homeowner tax credits for home energy improvements, such as solar panels, doors and windows, and heat pumps, will end December 31, 2025.

While we’ve only highlighted a few key changes, this bill spans over 800 pages, making it important to stay informed and regularly review your plan. Planning ahead remains foundational, as future shifts or challenges could bring additional changes. More guidance is expected from the IRS in the months ahead, but in the meantime, contact us with any questions or concerns.  You can reach BayTrust Financial in Tampa at 813.820.0069.

 

This overview is compiled from information believed to be true. This article should not be relied upon for tax or financial advice. Please check with your tax and financial professionals before making any changes to your plan.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

Sources:

https://www.whitehouse.gov/articles/2025/06/capitol-hill-touts-benefits-of-the-one-big-beautiful-bill/

https://waysandmeans.house.gov/2025/05/22/passed-the-one-big-beautiful-bill-moves-one-step-closer-to-president-trumps-desk/

https://www.forbes.com/sites/martinshenkman/2025/07/05/big-beautiful-estate-plan-impact-of-the-big-beautiful-bill-obbba/

https://www.fedsmith.com/2025/07/10/what-the-one-big-beautiful-bill-act-means-for-federal-employees/

https://www.whitehouse.gov/articles/2025/07/president-trumps-one-big-beautiful-bill-is-now-the-law/

https://www.cnbc.com/2025/07/11/when-provisions-from-trumps-big-beautiful-bill-go-into-effect.html

https://www.npr.org/2025/07/11/nx-s1-5459955/social-security-megabill-trump-tax-cuts

https://www.calt.iastate.edu/blogpost/one-big-beautiful-bill-act-implements-significant-tax-package

 

Jul 17
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The Pursuit of Financial Freedom In Retirement

By Financial Planning, Retirement Planning

Financial freedom in retirement means more than just having enough money, it means having choices. Putting a comprehensive retirement plan in place can not only help you take control of your finances, but also address how you will spend your time by defining your desired lifestyle and delineating strategies for your future as you get older. With confidence as your goal, the true reward of financial independence may not be found in an account balance, but in the ability to shape your days around what matters most to you in retirement.

Unfortunately, many retirees find themselves feeling “stuck” because of poor planning. Whether it’s running short on savings, carrying lingering debt, or facing unexpected healthcare costs, take a look at these steps designed to help reduce uncertainty and guide you towards financial freedom.

Set Your Foundation

Financial freedom in retirement starts with a clear vision. That begins with defining what freedom looks like to you and getting specific about the goals that will get you there.

For some, financial independence may mean early retirement or a debt-free lifestyle. For others, it’s the ability to travel or support family. Maybe it’s all the above. Start by outlining both your short- and long-term goals. What does your ideal lifestyle look like at different stages of retirement? Use measurable benchmarks such as savings targets, debt reduction timelines, and milestone ages, to create a structure you can track.

Build a Budget

Now that you’ve defined your ideal retirement lifestyle, the next step is understanding how much income you’ll need to support it. Creating a realistic budget can give you the framework to manage your money with purpose.

Start by tracking your income, expenses, debts, and investments. Work with a financial advisor to map out your income sources—such as Social Security, pensions, and retirement investments—and to plan for required minimum distributions (RMDs). Your budget should prioritize your essential living expenses while also making space for the things that bring fulfillment. Whether it’s a weekend getaway or a new set of golf clubs, a budget can give you the freedom to spend without guilt. The goal of budgeting isn’t to restrict your lifestyle—it’s to make sure your spending aligns with your priorities.

Ditch the Debt

Even in retirement, financial freedom can be compromised by lingering debt. While many retirees enter this chapter debt-free, others may still be carrying balances. If that’s you, it’s never too late to take control.

Start by focusing on high-interest debt first, as it tends to be the most damaging to your financial stability. Consider strategies like the snowball method (tackling the smallest debts first for quick wins) or the avalanche method (prioritizing the highest interest rates to help save money over time).

Downsize the Stress

Not everyone will need to consider this step—after all, everyone’s definition of financial freedom is based on their own goals. But for some, learning to live below your means can be a move toward greater freedom in retirement. This doesn’t mean sacrificing the things that matter most, but more so being intentional with your resources so you can align your lifestyle with your financial reality.

Start by evaluating whether your current home, spending habits, or overall lifestyle still make sense for this stage of life. Could downsizing your home reduce your expenses and free up cash flow? Could simplifying your lifestyle reduce stress and create more time for the things you love? Downsizing doesn’t mean downgrading. In fact, it can often create more freedom. Fewer expenses, less maintenance, and a smaller footprint can translate into more time and flexibility.

Prioritize Your Health

You can’t plan for everything, but you can prepare for a lot. Taking care of your health in advance is an important step in protecting your financial freedom in retirement. Planning for medical needs before they become urgent can help you avoid major financial setbacks down the road.

Start by building healthcare and potential long-term care costs into your retirement budget. From prescriptions, dental work, and even assisted living or in-home care, these expenses can add up quickly if you’re unprepared. But don’t just budget—prioritize your wellness. Regular checkups, preventive screenings, and healthy habits can help catch issues early. Think of it as protecting your most valuable asset: you. You’ve worked hard to reach financial freedom—now, make sure you’re able to enjoy it.

 

Whether you’re reviewing your current retirement plan, speaking with a trusted advisor, or simply taking time to define what financial freedom truly looks like for you, the most important step is to start. The goal isn’t just to stop working, it’s to build a life you don’t want to retire from. Are you ready to take that next step? Let’s do it together! Contact us today to explore how we can help you in your pursuit to financial freedom. You can reach BayTrust Financial in Tampa at 813.820.0069.

 

Sources

https://www.investopedia.com/articles/personal-finance/112015/these-10-habits-will-help-you-reach-financial-freedom.asp

https://www.tfnbtx.com/7-steps-to-take-to-achieve-financial-freedom-for-2025/

https://finance.yahoo.com/personal-finance/banking/article/what-is-financial-independence-130044125.html

https://www.forbes.com/sites/enochomololu/2024/01/20/7-steps-to-achieve-financial-freedom-and-retire-early/

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

Jun 20
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Annuities Don’t Have to be Confusing

By Annuities, Retirement Planning

Annuities Don’t Have to be Confusing

 

In the past, annuities have been a topic avoided by many, but lately interest levels have risen—a lot. In fact, online searches for terms like “annuities” and “pensions” are up by 160% while “are annuities good or bad” are up by 200%, according to ThinkAdvisor.

With retirement lasting longer and retirees worried about recent market volatility, tariff uncertainty, potential Social Security cuts, and continued inflation, now may be a good time to learn more about annuities and the role they can play in the retirement portfolio. And since June is Annuity Awareness Month, we decided to open up the conversation and provide some clarity.

To start, whether you’re planning for retirement, getting close, or already in it, it’s important to have a retirement plan in place, and review it regularly. Having an account like a 401(k) doesn’t mean you have a retirement plan. Too often, people put away money in a tax-deferred 401(k) or similar plan and don’t think about how they will create a stream of income from it once they are no longer getting a paycheck.

As you get closer to retirement, it’s important to reconsider how much of your savings are exposed to the ups and downs of a volatile stock market. This is especially true because of “sequence of returns risk.” Breaking this risk down, if you retire during a stock market downturn and begin withdrawing money from your 401(k) for income, your savings can shrink much faster over time compared to someone who retires and withdraws income when the market is doing well. And since no one can actually predict the future, it’s best to leverage several strategies in your retirement plan.

An annuity is a contract between an individual and an insurance company designed to provide a monthly stipend or income during retirement. There are many different types of annuities, and some have different fee structures and contract terms which may, or may not, be better in your case. That’s why it is best to work with an independent financial advisor who has access to many different types of annuities from multiple highly-rated insurance companies to compare between.

Some annuities, like lifetime fixed indexed annuities, even provide retirement income that won’t run out no matter how long you live, guaranteed by the financial strength and claims-paying ability of your insurance company providing the annuity policy. And some even have contract provisions to address inflation.

Annuities can be appealing because they allow you to take part of your retirement nest egg and purchase monthly retirement income in the form of an annuity, so you don’t have to worry about managing withdrawals aside from required minimum distributions (RMDs).

With your income accounted for, the rest of your portfolio can be accessed or left in the market, depending on future need and economic conditions.

A recent study by David Blanchett and Michael Finke found that many retirees prefer the security of guaranteed lifetime income rather than dipping into their savings or 401(k), even when they could afford to. It can be hard to think of your savings as a source of retirement income, which is why working with a retirement advisor to create a real retirement plan can help give you confidence in your financial future.

Every day, about 10,000 people turn 65 in America, and annuities may be indicated for a portion of the fixed part of their portfolios depending on their situation. Times have changed, and it’s no longer just about the ratio of stocks to bonds. Research done by academic heavyweights in economics and finance in the last 10 years indicates that annuities can help. Roger Ibbotson, Robert Shiller, and Wade D. Pfau have shown that fixed indexed annuities, when used correctly, can improve retirement outcomes compared to using bonds, with annuities helping to address longevity and market risk in the fixed portion of the typical retirement portfolio.

In today’s interest rate environment, some fixed indexed annuities even offer bonuses that can help boost your annuity’s value. Additional features such as optional coverage for long-term care, terminal illness, or spousal income can also be included, making annuities customizable.

With so many choices, it’s important to remember that every person’s situation is unique, meaning annuities may or may not be indicated depending on your specific needs and goals. That’s why we’re here to help you explore your options, explain how different annuities work, and create a long-term retirement plan. If you’d like to discuss how annuities might fit into your retirement strategy, give us a call! You can reach BayTrust Financial in Tampa at 813.820.0069.

 

Sources:

https://www.thinkadvisor.com/2025/04/15/6-reasons-annuity-is-no-longer-a-dirty-word/

https://www.thinkadvisor.com/2025/04/23/for-most-americans-going-broke-in-retirement-is-a-bigger-fear-than-death-survey/

https://www.thinkadvisor.com/2025/04/15/7-things-retirement-savers-are-asking-google-about-annuities-now/

https://401kspecialistmag.com/retirees-prefer-spending-lifetime-income-over-savings/

https://www.kiplinger.com/retirement/annuities-what-you-dont-know-can-hurt-you

https://www.limra.com/en/newsroom/news-releases/2025/limra-2024-retail-annuity-sales-power-to-a-record-%24432.4-billion/

https://www.protectedincome.org/wp-content/uploads/2023/06/RP-20_Pfau_final.pdf

https://thequantum.com/a-closer-look-at-bonds-versus-fixed-indexed-annuities/

https://markets.businessinsider.com/news/stocks/insurmark-announces-barclays-bank-and-yale-economist-robert-shiller-research-showing-fixed-indexed-annuity-with-cape-index-would-have-outperformed-bonds-1028505495

https://safemoney.com/blog/annuity/shaquille-oneals-strategy-why-annuities-are-essential/

 

These are the views of the author, not the named representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information. Annuity guarantees rely on financial strength and claims-paying ability of issuing insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by carrier. Annuities are not FDIC insured.

 

 

May 15
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Will Your Nest Egg Withstand Inflation and Market Volatility?

By Financial Planning, Investing, Retirement Planning

It’s no secret that inflation is on the rise, impacting millions of Americans. Mix that in with on-again off-again tariffs, and it’s a good time to assess if your accumulated wealth is being managed in a way that will outlast inflation and a volatile market. It’s important to note that a financial plan is never supposed to be stagnant, it’s supposed to change as your situation and world economic conditions shift. But anxiety around the market and inflation is still very real, so how can we get ahead of it?

Remember, Nothing Stays the Same Forever

In early April, we saw massive swings in market sentiment as Trump teetered back and forth about tariffs. While we all hope to avoid increased inflation or, worse, a recession, we have to be strategic in how we face challenges in the market. This is a good time to remember that the markets are similar to us in the sense that nothing stays the same. The challenges you faced in your early 20s are not the same ones you have today. How long they took to resolve may vary, but they never stayed forever. Imagine if you followed your initial knee-jerk, emotional reaction to those challenges you faced when you were younger. Making decisions based on emotion, especially fear, rarely helps you reach your goals, and frankly, they can sabotage you from ever getting close to them.

So, going back to our current market situation, what can investors do right now? Well, depending on their specific situation, the answers vary.

If You’re Young, or You Have More Than 10-15 Years to Retirement

If you have a long time-horizon to retirement, it may be best to wait it out, and continue to invest. A financial principle called “dollar cost averaging” might apply to you, as you may come out ahead in the long-term by continuing to “buy” during both market lows as well as highs through the years.

See the chart below:

This chart shows that those who exit the market the day after every -2% market move or worse over a 25-year time period usually underperform those who remain fully invested. When you leave the market, you don’t just avoid future bad days, you also miss out on the future good days. Ultimately, missing even just a few of the market’s best days, or getting back into the market only after the market is already up, can significantly impact long-term returns. Because, remember, just like in life, nothing stays bad forever; good days will come again. The market is no different.

If You’re Older and Getting Close to Retirement

As you get closer to retirement, continuing to stay in volatile stock markets exposing all of your savings to stock market risk probably doesn’t make sense due to a financial principle called “sequence of returns risk.” With all things being equal, someone who retires during a down market can see their retirement savings drop precipitously for the long-term if they start withdrawing funds, versus someone who retires when markets are going up. This is a very important consideration at the very beginning of your retirement when your account balance is at its highest, but unfortunately, no one has a crystal ball. You probably need to rebalance in order to reduce portfolio risk.

Consider Rebalancing Your Portfolio

First, you’ll want to ensure your portfolio’s ratios of international stocks, large-cap and mid-cap, bonds, cash, and fixed options make sense in the current economic environment. Different asset classes have varying cycles of performance, which can help address inflation headwinds. But keep in mind that there are other ways you can de-risk your portfolio, especially as you head toward retirement.

Sometimes considered a separate asset class, in the last few years, annuity sales have risen as 10,000 people per day turn 65 in America. An annuity is a contract between an individual and an insurance company designed to provide a monthly stipend during retirement. Some annuities even provide retirement income that won’t run out no matter how long you live, guaranteed by the financial strength of the insurance company providing the annuity policy. There are many different types of annuities, contracts can be complex, they are illiquid, and there should always be other cash and investments to balance out your retirement plan even if you have an annuity or annuities. Furthermore, annuities are not right for everyone. It’s advisable to work with a financial professional to look at your overall plan, compare your options, and closely examine contract terms.

Other Personal Actions You Can Take To Manage Inflation

Additionally, to help make your dollar in your day-to-day life last longer, do a thorough review of your spending. This is the time to evaluate essential vs. discretionary expenses, for example, a mortgage versus a new car. This gives you a chance to identify unnecessary spending that you can cut back on. Most people are shocked by how much they were spending on things they did not need!

Some common expenses that are good to look at critically during this audit:

  • Takeout & Dining – Frequent restaurant visits, coffee runs, food delivery, and takeout orders.
  • Subscription Services – Streaming (Netflix, Hulu, HBO Max), music, gaming, news, and fitness apps.
  • Retail & Impulse Shopping – Clothing, accessories, home décor, and non-essential purchases.
  • Unused Memberships – Gym memberships, fitness classes, warehouse clubs, and subscription boxes.
  • Premium TV Packages – Expensive cable or satellite plans with unnecessary channels.
  • Frequent Travel – Weekend getaways, flights, hotels, and vacation entertainment costs.
  • Luxury & Self-Care – Salon visits, spa treatments, manicures, and pedicures.
  • High-End Brands – Designer clothing, accessories, and premium tech gadgets.
  • Hobby Expenses – Collectibles, gaming, crafting supplies, and other leisure-related purchases.
  • Tech Upgrades – Constantly replacing smartphones, tablets, and accessories with the latest models.
  • Costly Entertainment – Concerts, sporting events, amusement parks, and other high-ticket experiences.

Also, see if you can negotiate on those essential bills. While many essential bills are a fixed amount, some can be adjusted or reduced. You may be able to lower expenses for service contracts like internet or insurance. You may also be able to lower your credit card rates. While there’s no guarantee, it never hurts to call a service representative and see if you can get a better price for the things you have to pay for.

While dealing with inflation and market volatility is no one’s ideal situation, it doesn’t have to be a nightmare either. With a strategic approach, you can get through this stressful time and on to the other side! Do you need help getting your accumulated assets inflation-ready and putting a plan together to hedge against market risk? Call us today! You can reach Bay Trust Financial in Tampa at 813.820.0069.

 

Sources

https://www.kitces.com/blog/clearnomics-10-charts-recession-fears-tariff-risk-market-volatility-economy-investor-anxiety/

https://www.limra.com/en/newsroom/news-releases/2025/limra-2024-retail-annuity-sales-power-to-a-record-%24432.4-billion/

https://www.aarpinternational.org/initiatives/aging-readiness-competitiveness-arc/united-states

 

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

Rebalancing investing involves risk including loss of principal. No investment strategy, such as rebalancing, can guarantee a profit or protect against loss. Rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability.

Apr 16
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It’s Financial Literacy Month. How Much Do You Know About Retirement Accounts?

By Retirement Planning

April is often known for spring cleaning, Easter, and Passover, but it’s also Financial Literacy Month. At its core, financial literacy refers to understanding and effectively being able to use various financial tools and strategies. So, in honor of the month, we’re offering a basic financial primer, with some quick definitions and simple breakdowns of common retirement accounts.

Background: The Decline of Pensions

During the rise of the industrial age, as workers migrated and began working for factories and other enterprises, they shifted away from farming and self-sufficiency and began relying on pensions to fund their retirement. Because these pension plans were managed by their employers who tended to take care of and provide for their loyal employees, workers were little involved in strategies or decision-making when it came to planning for their own retirements.

But times have changed. The first implementation of the 401(k) plan was in 1978, and since then, has gradually supplanted the pension for most American workers. According to a congressional report, between 1975 and 2019, the number of people actively participating in private-sector pension plans dwindled from 27 million to fewer than 13 million, although public employees sometimes still have them.

Today, most workers are responsible for funding their own retirement, which makes understanding and participating in retirement accounts vital.

401(k) Plans

A 401(k) is an employer-sponsored retirement savings plan. With the traditional 401(k), employees can contribute pre-tax income into their own account, selecting among the plan’s list of options which funds they want their money invested in. Many employers will even match employee contributions up to a certain percentage.

(NOTE: In the public sector, there are 403(b)s, 457s, the TSPs (Thrift Savings Plan), and many other retirement plans which work similarly to the 401(k), but may have slightly different rules.)

With a traditional pre-tax 401(k), the employee’s contributions can reduce their taxable income for the year, since the money is deducted from their paycheck. Once an employee reaches age 59-1/2, per the IRS they can start taking withdrawals without incurring penalties, depending on their employer’s 401(k) plan rules. In retirement, they must begin taking withdrawals every year beginning at age 73, and pay taxes on the money withdrawn. (These are called required minimum distributions, or RMDs.)

Some employers also offer a Roth 401(k) option, which uses after-tax dollars. Although you must pay income taxes on the money you put into a Roth 401(k), including any employer Roth account matching amounts, a Roth option offers tax-free withdrawals in retirement as long as the account has been in place for five years or longer, no RMDs, and no taxes to your beneficiaries or heirs.

While the 401(k) can be a great way to save, it’s important to be mindful of how much you’re contributing, how your funds are invested, and what the tax ramifications of your decisions are.

Social Security

Social Security is a part of many Americans’ retirement planning. It was created as a national old-age pension system funded by employer and employee contributions, although later it was expanded to cover minor children, widows, and people with disabilities.

Established in 1935, Social Security payments started for workers when they reached age 65—but keep in mind at that time, the average longevity for Americans was age 60 for men and age 64 for women. With people living much longer, sometimes spending as long as 20 or 30 years in retirement, today Social Security must be supplemented with your own personal savings and other retirement accounts.

IRAs

Individual Retirement Accounts (IRAs) were created in the 1980s as a way for those without pensions or workplace retirement plans to save money for themselves for retirement in a tax-advantaged manner. While the tax treatment and contribution limits vary, the goal is to provide you with the means to build a retirement nest egg that can grow over time.

Types of IRAs:

  • Traditional IRA: Allows for tax deductible contributions for some people, depending on their income level and whether they have a plan through their workplace. Any growth in a traditional IRA is tax-deferred, and you’ll pay taxes when you withdraw the money in retirement. Contributions are subject to annual limits, and penalties apply if funds are withdrawn before age 59 ½, with some exceptions. RMDs must be taken annually beginning at age 73 and ordinary income taxes are due on withdrawals.
  • Roth IRA: Contributions to a Roth IRA are made with after tax income, meaning you don’t receive a tax deduction when you contribute. However, withdrawals in retirement are tax free if certain conditions are met. This account may be ideal for individuals who expect to be in a higher tax bracket in retirement. Roth IRAs are also tax free to those who inherit them if all IRS rules are followed.
  • SEP IRA (Simplified Employee Pension) and SIMPLE IRA (Savings Incentive Match PLan for Employees): For self-employed individuals and small business owners, a SEP IRA or SIMPLE IRA plan can allow for higher contribution limits for both themselves and/or their employees. And since the SECURE 2.0 Act, they can be set up as either traditional or Roth IRAs.

Annuities

Annuities are financial products designed to convert your savings into a monthly income stream, particularly during retirement. When you purchase an annuity, you exchange a sum of money for guaranteed monthly payments over a set period, or for the rest of your life, much like a pension. (Guarantees are provided by the financial strength of the insurance company providing your annuity contract.)

Annuities can be purchased using pre-tax or after-tax dollars, and they can be purchased with deferred payments over time, or with a lump sum—for example, many people roll over funds from a 401(k) into an annuity. While annuities can provide retirement income, they are not suitable for everyone.

Types of Annuities:

  • Fixed Annuity: A contract offering a fixed interest rate for a set period of time.
  • Fixed Indexed Annuity (FIA): A contract offering guarantees and policy crediting benchmarked to a stock market index, providing potential for growth along with the protection of principal from market downturns. Not actual market investments, instead, with FIAs there is the chance for crediting based on contract terms and index performance. (Guarantees are provided by the financial strength of the insurance company providing your annuity contract.)
  • Variable Annuity: A contract where the value and income payments fluctuate based on the performance of investments chosen within the annuity. The choice of investment subaccounts, like mutual funds, can increase or lose value based on market performance.
  • Registered Index-Linked Annuity (RILA): Like a variable annuity, except there is often a certain level of contractual protection from market downturns.

Life Insurance

Life insurance can provide financial protection for your loved ones by offering a death benefit paid to a beneficiary upon your passing. Policies vary widely, but they generally aim to replace lost income, cover debts, or fund future expenses. Some policies, like permanent life insurance, can also build cash value over time, which can be borrowed for various needs, including retirement income.

It’s important to work with your financial advisor to find the right policy for your needs, and remember, medical underwriting may be required.

Types of Life Insurance

  • Term Insurance: Provides a death benefit if the insured passes away within a specified term (e.g., 1, 2, 10, 15, or 30 years). Premiums are typically level for a certain period but may increase with age. Once the term expires, the policy ends.
  • Whole Life: A permanent policy with fixed premiums and guaranteed cash value accumulation.
  • Universal Life: Offers flexibility in premium payments, death benefit amounts, and the policy’s cash value. It allows policyholders to adjust the death benefit and premiums based on changing needs, and in some cases, premiums can be paid using the cash value. Indexed Universal Life (IUL) policies are benchmarked to a market index like the S&P 500 (but not actually invested in the market) and policies may be credited based on performance, while offering protection from market downturns.
  • Variable Life: Comes in two forms—variable and variable universal life. Both variable life insurance (VL) and variable universal life (VUL) insurance are permanent coverage that allocate cash value to market investment subaccounts which can lose value, but with variable life, there is a fixed death benefit, while with VUL, there is a flexible death benefit and adjustable premium payment amounts.

 

Whether you’re just starting to think about retirement or are near retirement age, it’s never too late to learn more, or take action to create your own personal retirement plan. If you’re unsure about your retirement options or would like assistance planning for your financial future, please reach out to us! You can reach Bay Trust Financial at 813.820.0069.

 

Sources:

https://en.wikipedia.org/wiki/401(k)#

https://www.usatoday.com/story/money/2024/03/19/pensions-are-popular-why-dont-more-americans-have-them/72968970007/

https://www.schwab.com/ira/traditional-ira/withdrawal-rule

https://u.demog.berkeley.edu/~andrew/1918/figure2.html

https://home.treasury.gov/system/files/131/WP-91.pdf

https://www.indeed.com/career-advice/career-development/financial-litteracy

https://www.investopedia.com/guide-to-financial-literacy-4800530

 

 

 

 

Jul 22
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Personal Finance: The Importance of Starting Early

By Financial Planning, Retirement, Retirement Planning, Social Security, Tax Planning

Whether you’re just starting out in your career, you are a Gen-X-er sandwiched between your kids’ college expenses and aging parents’ needs, or you are a Baby Boomer eyeing retirement, starting early can help when it comes to your finances. Here are some reasons why.

When You’re Young—In Your 20s

We’ve all heard the famous quote by Albert Einstein, the one where he said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” And it’s true. In many cases, if you start out early—perhaps in your teens or 20s—saving just a small amount each month, you can amass more money through time than if you start saving at a later age, even if you save a larger amount each month. Of course, it depends on what you invest in. Be sure to check with a trusted financial advisor about how this works.

Investopedia uses this example:

Let’s say you start investing in the market at $100 a month, and you average a positive return of 1% a month or 12% a year, compounded monthly over 40 years. Your friend, who is the same age, doesn’t begin investing until 30 years later, and invests $1,000 a month for 10 years, also averaging 1% a month or 12% a year, compounded monthly.

Who will have more money saved up in the end? Your friend will have saved up around $230,000. Your retirement account will be a little over $1.17 million. Even though your friend was investing over 10 times as much as you toward the end, the power of compound interest makes your portfolio significantly bigger.

When You’re Older—In Your 40s, 50s or Early 60s

As you head into retirement, starting early to map and plan out your retirement—well before you retire—can help you for many reasons, because there are a lot of moving pieces to consider. Plus, everyone’s situation is completely different and what might work for someone else might not be right for you at all. For instance, one person’s desired retirement lifestyle could be drastically different than another person’s, requiring different budget amounts. (Consider whether you want to stay home and become a painter, or travel the world with your entire extended family. That’s what we mean by drastically different budgets.)

Once you have your required retirement budget amount settled, timing then becomes very important. A financial advisor with a special focus on retirement can really make the difference by laying out a retirement roadmap just for you. Here are some of the things you should know and think about:

1) Medicare Filing – Age 65

You are required to file for Medicare health insurance by age 65 or pay a penalty for life. To avoid this penalty, be sure to sign up for Medicare within the period three months before and three months after the month you turn age 65. If you are still working or otherwise qualify for a special enrollment period, you can sign up for Part A which is free for most people, and then sign up for Part B after you retire. Visit https://www.medicare.gov/basics/costs/medicare-costs/avoid-penalties to learn more about penalties and how you can avoid them.
You are required to have Medicare coverage if you are not working or covered by a spouse with a qualified health insurance plan, and Medicare (other than Part A) is not free. In fact, it costs more if your income is higher. Your Medicare premium is often deducted right out of your Social Security check, and premiums generally go up every year.

When you sign up for original Medicare Part B or a replacement Medicare Advantage plan, the least amount you will pay for 2024 is $174.70 per month per person. For those with higher incomes, the Medicare premiums you pay are based on your income from two years prior—those with higher incomes pay more. For couples filing jointly, the highest amount you might pay for Part B coverage if your MAGI (modified adjusted gross income) is greater than or equal to $750,000 is $594.00 per month per person for 2024.

So, depending on your income for the tax year two years prior to filing for Medicare, your premium could be from $174.70 to $594.00 in 2024, or somewhere in between.
If you plan ahead, your advisor might help you plan to take a smaller income in the years prior to turning age 65 in order to keep your Medicare premium smaller. For instance, some people might want to retire at age 62 or 63 and live on taxable income withdrawn from their traditional 401(k) or IRA account/s before they even file for Medicare or Social Security. Each person’s situation is completely unique, but advance retirement planning may help you come out ahead in the long run.

2) Social Security Filing – Age 62, 66-67, 70 or sometime in between

Another moving piece in the retirement puzzle is Social Security. The youngest age you can file for Social Security is age 62, but a mistake some people can make is thinking that their benefit will automatically go up later when they reach their full retirement age—between age 66 to 67 depending on their month and year of birth. This is not the case. If you file early, that’s your permanently reduced benefit amount, other than small annual COLAs (cost of living adjustments) you might or might not receive based on that year’s inflation numbers.
Filing early at age 62 can reduce your benefit by as much as 30% according to Fidelity. Conversely, waiting from your full retirement age up to age 70 can garner you an extra 8% per year. (At age 70, there are no more benefit increases.)

Planning ahead for when and how you will file for Social Security can make a big difference in the total amount of benefits you receive over your lifetime. And married couples, widows or widowers, and divorced single people who were married for at least 10 years in the past have even more options and ways to file that should be considered to optimize their retirement income.

3) Taxes In Retirement

Thinking that your taxes will automatically be lower during retirement may not prove true in your case, and it’s important to find out early if there is a way to mitigate taxes through early planning. Don’t forget that all that money you have saved up in your traditional 401(k) will be subject to income taxes—and even your Social Security benefit can be taxed up to 85% based on your annual combined or provisional income calculation.

And the IRS requires withdrawals. Remember that by law RMDs (required minimum distributions) must be taken every year beginning at age 73 and strict rules apply. You must withdraw money from the right accounts in the right amounts by the deadlines or pay a penalty in addition to the income tax you will owe on the mandated distributions.
Planning ahead to do a series of Roth conversions—shifting money in taxable accounts to tax-free* Roth accounts—might be indicated to help lower taxes for the long-term in your case, but these must be planned carefully and are not reversible.

Let’s talk about your financial and retirement goals and create a plan to help you achieve them. Don’t put it off—give us a call! You can reach Drew Capital Group in Tampa at 813.820.0069.

*In order for Roth accounts to be tax-free, all conditions must be met, including owning the account for at least five years.
This article is for general information only and should not be considered as financial, tax or legal advice. It is strongly recommended that you seek out the advice of a financial professional, tax professional and/or legal professional before making any financial or retirement decisions.

Sources:

https://www.investopedia.com/articles/personal-finance/040315/why-save-retirement-your-20s.asp
https://www.medicare.gov/basics/costs/medicare-costs/avoid-penalties
https://www.cms.gov/newsroom/fact-sheets/2024-medicare-parts-b-premiums-and-deductibles
https://www.ssa.gov/benefits/retirement/planner/agereduction.html
https://www.fidelity.com/viewpoints/retirement/social-security-at-62
https://content.schwab.com/web/retail/public/book/excerpt-single-4.html
https://www-origin.ssa.gov/benefits/retirement/planner/taxes.html
https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

Jun 12
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Annuity Sales Are Surging. Do You Know What They Are?

By Retirement Planning

We’re here to help clear up some of the confusion about annuities during Annuity Awareness Month, which happens each June!

In the first quarter of 2024, U.S. annuity sales were $106.7 billion, the highest first quarter total since the 1980s, when LIMRA first started tracking annuity sales. Despite these high sales numbers, research indicates that many people don’t really know what annuities are.

One recent study revealed that only 9% of consumers say they feel very knowledgeable about annuities, while other studies confirm this lack of understanding. Research by the American College of Financial Services gave older Americans a score of 12% out of a possible 100% for their knowledge of annuities based on their performance on a short quiz. And a TIAA Institute and Stanford University study showed that the annuity ranks dead last—respondents know more about Medicare, life insurance and long-term care than annuities.

During Annuity Awareness Month, we wanted to cover some facts we hope will help you understand annuities better.

Annuities Are Ancient

The concept of the annuity goes back centuries. In fact, during the Roman Empire, soldiers and their families would receive annual payments for life known as “annuas” in return for their military service; this is the origin of the word “annuity.” In the Middle Ages, annuities were available in France during the 17th century, when lifetime annuities (called “tontines”) could be purchased from feudal lords in exchange for an initial upfront payment.

In other words, for millennia, annuities have been around to provide regular income during retirement. Fast forward to today.

Annuities Are Contracts

When you invest in something, typically you assume all the risk. Since annuities are not investments, but instead are contracts between you and an insurance carrier, one of the main risks you assume with annuities is that the payouts will be made per the terms in your contract. Certain contractual guarantees* are made by any insurance company which issues an annuity, and these guarantees are subject to that company’s financial strength and claims-paying ability.

It is very important that you have a trusted financial professional, tax professional and/or legal professional by your side to examine the terms and language of your annuity contract as well as provide information about the insurance company’s financial rating before you make any decision.

In fact, this is good advice when making any decision that involves investing or entering into any kind of a contract. Some financial industry experts and academic leaders in the financial field, like Dr. Wade Pfau and Dr. Roger Ibbotson, have found that annuities belong in the fixed portion of some people’s retirement portfolios (depending on their individual situation) because of insurance company guarantees, and because some annuities may perform better than stock market investments for retirees.

But there are many different types of annuity contracts.

Today’s Annuities Are Complex

Despite their simple structure in the beginning, annuities have become increasingly sophisticated over time. In addition to providing retirement income, insurance companies have added more features to provide retirees with coverage for spouses, long-term care, death benefit for heirs, etc., either as part of the basic annuity or added on as a rider for an additional cost.

While not a comprehensive list, below is basic information about how some annuities work. We recommend that you work with a financial professional to help you compare and choose between the hundreds of annuity contracts available from dozens of different insurance companies. As with any contract, it’s important to read and understand the fine print before you sign, and you should compare policies from multiple insurance companies to find the best value. That’s where a good independent financial advisor can help.

Fixed Annuities

Fixed annuities are probably the easiest type of annuity to understand because they work similarly to the way a bank CD (certificate of deposit) works. An insurance company will pay a fixed interest rate on your fixed annuity contract for a selected term, usually from one to 15 years.

Variable Annuities

Variable annuities were developed in the 1950s, and unlike most other types of annuities, before purchase they require that you be issued a prospectus, since part of your money will actually be invested in the stock market. This means that there is market risk involved with variable annuities—you can either make money on the amount invested in what’s called “sub-accounts,” or you can lose it depending on market performance.

Variable annuities can’t be sold by an investment advisor, they have to be through a Series 6 or Series 7 licensed, registered representative who is affiliated with a broker/dealer. (NOTE: A registered representative might sometimes be a dual-licensed broker/dealer.) There are a few companies who are now offering annuities that are fee based and do not pay commissions; however, the list is very small.

Variable annuities are considered highest risk because growth is based on market performance and the annual fees tend to be very high, especially if the client purchases a rider as one of the annuity features.

Variable annuities are usually purchased with the expectation that at some point the contract owner will annuitize or begin taking periodic payments. But depending on contract terms, your annuity payments may fluctuate based on stock market performance, and it’s possible that some variable annuity policies can lose principal due to stock market losses.

Fixed Indexed Annuities

Fixed indexed annuities (FIAs) were first designed in 1995. The biggest difference between FIAs and variable annuities is that fixed indexed annuities are not actually invested in the stock market so they are not subject to market risk. Instead, a selected index (such as the S&P 500) is used as a benchmark for policy credits at periodic intervals, such as annually.

Many FIA contracts offer a minimum amount which gets credited, and nearly all FIA contracts will not credit less than 0%, which means even that if the benchmark index loses money, your FIA contract value will not go down. With fixed indexed annuities, after you have owned the policy for a specified number of years (called the “surrender period”) your principal is guaranteed* and credits, therefore any policy gains, are locked in.

In other words, with fixed indexed annuity contracts, you have the potential to participate in market gains but are protected from market downturns. And most FIAs offer the option of lifetime income no matter how long you live either as part of the main annuity contract, or available as a rider for an additional charge.

Other Things to Know About Annuities

*The guarantees provided by annuities rely on the claims-paying ability and financial strength of the issuing insurance company.

Some annuities can be purchased on a deferred basis, and some on an immediate basis, and you can use pre-tax or after-tax funds. It’s important to get professional help to understand the implications for your particular situation.

Annuities must be considered carefully based on your particular situation because they are not liquid. Almost all annuities are subject to early withdrawal penalties. Make sure you understand the contract terms and the type of annuity you are purchasing. Your financial advisor and tax and legal professionals can help you compare and analyze policies.

Are You Prepared for Retirement?

With people living much longer and pensions quickly becoming a thing of the past, annuities can help provide income throughout retirement and help quell the fear of running out of money. If you are considering the purchase of an annuity, it’s important to speak with a financial professional who understands them, and can explain the fine print of an annuity contract.

 

Contact us to explore your options! You can reach Drew Capital Group in Tampa at 813.820.0069.

 

This article is provided for general information purposes only and is accurate to the best of our knowledge. This article is not to be relied on or considered as investment or tax advice.

Sources:

https://www.limra.com/en/newsroom/news-releases/2024/limra-first-quarter-u.s.-annuity-sales-mark-14th-consecutive-quarter-of-growth/

https://insurancenewsnet.com/oarticle/consumer-knowledge-gap-persists-despite-booming-annuity-sales

https://www.usatoday.com/story/money/2024/04/30/annuities-are-good-retirement-investment/73437135007/

https://www.nber.org/system/files/working_papers/w6001/w6001.pdf

 

NOTE: Annual fees can be high with any type of annuity. Please check with your financial professional to examine fees before purchasing.

Fixed Annuity: A fixed annuity is for retirement or other long-term financial needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed annuity is not a registered security or stock market investment and does not participate in any stock or equity investment or index. Guarantees are based on the claims paying ability of the issuing company.

Indexed Annuity: An indexed annuity is for retirement or other long-term financial needs.  It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. Guarantees provided by annuities are subject to the financial strength of the issuing company and not guaranteed by any bank or the FDIC.

Indexed annuities do not directly participate in any stock or equity investment.  Clients who purchase indexed annuities are not directly investing in the financial market. Market indices may not include dividends paid on the underlying stocks and therefore may not reflect the total return of the underlying stocks; neither a market index nor any indexed annuity is comparable to a direct investment in the financial markets.

Variable Annuity: Variable annuities are offered only by prospectus. Carefully consider the investment objectives, risks, charges, and expenses of variable annuities before investing. This and other information is contained in each fund’s prospectus, which can be obtained from your investment professional and should be read carefully before investing. Guarantees are based upon the claims paying ability of the issuer.

If a registered representative (IAR, investment adviser representative) is dual-licensed and is also a registered rep with a broker/dealer, variable annuity advertising may need to be filed with FINRA through their broker/dealer.

Variable annuities are long-term, tax-deferred investments designed for retirement, involve investment risks, and may lose value. Earnings are taxable as ordinary income when distributed. Individuals may be subject to a 10% additional tax for withdrawals before age 59† unless an exception to the tax is met.

May 30
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What is Sequence of Returns Risk?

By Retirement Planning

Sequence of returns risk can put your retirement portfolio in jeopardy, but what is it, and how do you fight it?

We get it. Retirement can be scary. We know this because it’s our job to help our clients plan for and seamlessly transition into what should be one of the most rewarding times of their lives. What we often find, however, is that most are worried about retirement because of the risks that come with it. But what are some of the risks that strike fear in the hearts of retirement hopefuls? Well, the first is related to longevity—it’s the possibility of running out of money as you get older, and being unable to go back to work in order to support yourself. We also find that people getting ready to retire are concerned about inflation, the cost of health care, the possibility of needing long-term care and more.

There’s one risk, however, that hides in the shadows, waiting to rear its ugly head and throw turbulence into the lives of new retirees and those right on the edge of retirement. It’s called market risk, or the possibility that you could lose your retirement money during market crashes or downturns. How might this look? Specifically, something called sequence of returns risk can be the most dangerous aspect of market risk. And while it might sound complicated, it’s a simple concept with the potential to have major implications on your retirement dreams. Let’s go over what sequence of returns risk is, as well as a few ways you may be able to fight it!

What is Sequence of Returns Risk?

Simply put, sequence of returns risk is the risk of negative market returns occurring right before you retire and/or very early in your retirement. During this time, market downturns can have a much more significant impact on your portfolio.

Again, it might sound like some buzzword the financial industry throws around to scare consumers, but sequence of returns risk is exactly what it sounds like. It’s the sequence, or the order, in which your portfolio provides market returns. It’s key to remember that sequence of returns risk is specifically associated with money directly invested in the market. That means it could apply to vehicles like employer-sponsored retirement accounts, traditional and Roth IRAs, mutual funds, brokerage accounts, variable annuities and any other assets that can lose value during market downturns.

Now, let’s think about your goals for your retirement. If you’re just starting your career, or you’re right in the middle of your working years, you may contribute to your various saving and investing vehicles with the goal of having a large pool of funds when you finally retire at, say, 65 years old. You’d hope that diligent saving and favorable returns would bring your assets to their highest total right at that point, giving you ample funds to draw from once you retire.

Sequence of returns risk is the potential of the market dipping near the end of your career, or in the first few years of your retirement, meaning those drops affect your account balances at their peak. You would then take losses on greater amounts of money, creating greater losses. While you never want to experience dips, it makes sense why you’d hope those periods of market volatility that you will likely encounter at some point during retirement occur farther down the road, especially when you’re concurrently withdrawing money to support your lifestyle.

An Example Where Both Retirees Have $1 Million Saved

Just as an example, let’s consider two retirees, and what happens during their first 10 years of retirement. Both have $1 million saved, and they both determine they need to withdraw $50,000 per year from their accounts to fund their lifestyles.

Our first retiree is lucky. They retire and then experience eight years of a bull market, growing their portfolio by 5% each year. In the next two years, however, they experience declines of 5%, bringing their balance back down.

The other retiree sees the exact opposite sequence. They immediately encounter a bear market upon entering retirement, which drops their accounts by 5% in each of the first two years. Then the market rebounds and goes up 5% each year for the next eight years.

Both retirees continued to withdraw $50,000 per year from their accounts. So, what was the result?

Even though both retirees had the same initial balance, withdrew the same amounts, experienced eight years of bull markets and two years of bear markets, the order or “sequence of returns” made a big difference.

The first retiree didn’t experience market dips at the beginning when their account balances were highest. At the end of the 10-year period, they still had $788,329 left in their account.

The other retiree, on the other hand, wasn’t so lucky. They took losses during the first two years of their retirement, on their highest balances, and by the end of the 10-year period, they only had $695,226.

Please remember this example is purely hypothetical and not reflective of real scenarios or real people. We simply used a starting balance of $1 million for each person, then subtracted $50,000 in income at the beginning of each year, then multiplied the accounts’ balances by the annual positive or negative effect on the market we imagined for this example. Actual market returns are unpredictable and tend to vary far more than in the case study shown. This is strictly to display the potential effects of the aforementioned risk.

What are Some Ways to Mitigate Sequence of Returns Risk?

You can see how the sequence of your returns can affect your portfolio. The market is unpredictable and bottomless, so it’s important to try to shield yourself from, or at least mitigate the possibility of, taking those losses at the starting gate. But how can you do that when the market is completely out of your control? Well, you have a few options.

First and foremost, you can work with a financial professional to diversify your portfolio. While diversification can never guarantee any level of protection or growth, it may give you the ability to withstand dips in certain sectors of the market. It also spreads risk across different asset classes, or even different categories within the market itself. That can potentially help you avoid taking losses in your entire portfolio, even if one sector experiences headwinds.

For instance, non-correlated asset classes, which could include annuities or life insurance policies, might be a retirement diversification option for some people. Modern policy designs like fixed-indexed annuities and indexed universal life insurance policies are typically linked to a market index, while not actually participating in the market. These products can provide the upside of market gains while still protecting the principal, or the money used to fund the policy, in addition to locking in the gains.

These solutions may not match every consumer’s situation or financial objectives, however, so it’s important to speak to your advisor to explore policies and see if they make sense for your portfolio. For some people, annuities can provide a stream of retirement income that can cover lifestyle expenses, allowing retirees to leave their assets in the market during downturns rather than being forced to make withdrawals.

Be sure to speak with a financial professional who understands your circumstances, goals and tolerance for risk. The right partner can help you develop a custom withdrawal strategy and a plan to generate a reliable stream of income with your accumulated retirement assets. Your plan may include portfolio diversification, the establishment of a liquid emergency fund, the inclusion of alternative strategies and more, all with the intention of making your money last your entire life.

If you have any questions about how you can fight sequence of returns risk, give us a call today!

 

This article is not to be construed as financial advice. It is provided for informational purposes only and it should not be relied upon. It is recommended that you check with your financial advisor, tax professional and legal professionals when making any investment decisions, or any changes to your retirement or estate plans. Your investments, insurance and savings vehicles should match your risk tolerance and be suitable as well as what’s best for your personal financial situation.

 

Jan 29
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5 Things You Should Know if You’re Retiring in 2024

By Retirement, Retirement Planning

Heads up! If you plan to retire this year, you should know these five things.

Are you planning to enter the most exciting phase of your life in 2024? A phase where you get to do what you want to do, not what you have to do? With the right planning and preparation, it’s possible, but you should be aware of the year-over-year changes that occur for retirees, especially if this is your first year. Here are five changes you should know about if you plan on entering retirement in 2024.

  1. Higher Income Tax Brackets [1,2]

Traditionally, tax brackets rise with inflation on an annual basis, and 2024 is no different. For instance, the top end of the 0% capital gains bracket is up from $44,625 to $47,025 for single filers and from $89,250 to $94,050 for those who are married and filing jointly. Retirees who expect to withdraw from accounts subject to income tax—like traditional 401(k)s—may also expect to see a bit more relief this year in their income. See below for 2024’s ordinary income tax brackets.

Rate (%) Filing Single Married Filing Jointly Married Filing Separately Head of Household
10% $0 to

$11,600

 $0 to

$23,200

 $0 to

$11,600

 $0 to

$16,550
12% $11,601 to $47150 $23,201 to $94,300 $11,601 to $47,150 $16,551 to $63,100
22% $47,151 to $100,525 $94,301 to $201,050 $47,151 to $100,525 $63,101 to $100,500
24% $100,526 to $191,950 $201,051 to $383,900 $100,526 to $191,950 $100,501 to $191,950
32% $191,951 to $243,725 $383,901 to $487,450 $191,951 to $243,725 $191,951 to $243,700
35% $243,726 to $609,350 $487,451 to $731,200 $243,726 to $365,600 $243,701 to $609,350
37% $609,351 or

more

 $731,201 or

more

 $365,601 or

more

 $609,351 or

more

 

  1. Higher RMD Ages [3]

As of Jan. 1, 2023, retirees must begin taking required minimum distributions at age 73 unless they’ve already started. This was part of a gradual change made by SECURE Act 2.0 that will again raise the RMD age to 75 in 2033. This change can offer more flexibility to retirees who don’t need the money from their qualified accounts and otherwise would have incurred unnecessary income taxes. It also gives them an extra year to find other sources of income or to convert those funds to tax-free money. If you are turning 73 in 2024, your first year required minimum distribution from your qualifying accounts must be withdrawn by Apr. 1, 2025. In subsequent years, they must be withdrawn by the end of the year, or you may incur a 25% excise tax, which may be dropped to 10% if corrected in a timely manner.

  1. Elimination of RMDs for Roth 401(k)s [4]

One of the perks of the Roth IRA is that it does not come with required minimum distributions because you purchase them with already-taxed money. Roth 401(k) accounts through your employer were the same—except for the employer matching part. Before the passage of the SECURE 2.0 legislation, if your employer offered matching contributions and you chose a Roth 401(k) instead of a traditional 401(k) account, employer matching funds had to be placed into an entirely separate pre-tax traditional account which was taxable. Then, upon reaching RMD age, withdrawals were mandated for both accounts, even though taxes were only due on the matching portion.

Now, as of the passage of the SECURE 2.0 legislation, employers at their discretion can offer their matching amounts on an after-tax basis into Roth 401(k)s or Roth 403(b)s. If your employer offers this option and you choose it, you will owe income taxes on the employer match portion in the year you receive the money, but RMDs will no longer be due.

  1. Preparation for 2026 Tax Cut Sunsets [5]

Though tax cuts sunsetting at the end of 2025 won’t immediately impact 2024 retirees now, it may be crucial to begin preparing for the 2026 tax year. While the federal estate and gift tax exemption amount is currently $13.61 million per individual, it’s expected to drop back down to below $7 million in 2026. For those with larger estates, that could slice the amount of tax-free money going to beneficiaries in half. Income tax rates could also revert to what they were prior to 2018, meaning that it may be helpful to convert taxable income to tax-free income—for instance, by using Roth conversions—in the next two years. Additionally, those impacted by this change could also look to work with a financial professional to implement long-term tax strategies that give them the opportunity to pass their wealth to their beneficiaries as efficiently as possible.

  1. Higher Medicare Costs but Increased Social Security Payments [6,7]

Medicare costs are also up in 2024. Though Part A is free to beneficiaries, it does come with an annual deductible, which is up $32 from $1,600 to $1,632. Medicare Part B premiums are also up in 2024 from $164.90 to $174.40, an increase of roughly 6%. It’s important to know that those premiums are traditionally deducted from Social Security payments, which typically also rises with a cost-of-living adjustment determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W. In 2024, that increase is 3.2%, so while the adjusted checks won’t be entirely proportionate to the higher Part B premiums, the COLA may help to offset the extra costs.

If you think you’re ready to retire in 2024, we can help! Give us a call today to work with a professional and start the transition into the most exciting time of your life. You can reach Drew Capital Group in Tampa at 813.820.0069.

 

Sources:

  1. https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets
  2. https://www.bankrate.com/investing/long-term-capital-gains-tax/
  3. https://www.milliman.com/en/insight/required-minimum-distributions-secure-2
  4. https://smartasset.com/retirement/how-roth-401k-matching-works-with-your-employer
  5. https://www.thinkadvisor.com/2022/12/07/the-estate-and-gift-tax-exclusion-shrinks-in-2026-whats-an-advisor-to-do/
  6. https://www.cms.gov/newsroom/fact-sheets/2024-medicare-parts-b-premiums-and-deductibles
  7. https://www.ssa.gov/cola/
Jul 27
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7 Signs You May be Ready for Retirement

By Retirement, Retirement Planning

It can be difficult to know when you’re ready to retire, but checking these seven boxes may be a sign that the time is coming.

 

Preparing yourself for retirement can be scary, as so many variables and questions leave timing up in the air and offer little to no confidence when it comes to selecting the perfect moment to quit your job and spend your time doing what you want to do instead of what you have to do. There are, however, strong indicators that may help you realize that you’re ready to retire. While many savers and pre-retirees set concrete milestones and timetables, only a few of the important signs that you can retire comfortably have to do with your age. Here are some ways to know that you might be ready to leave the workforce.

  1. You Have Adequate Savings to Cover Your Projected Lifestyle Expenses

One of the first and most certain indicators that you’re ready to retire is having adequate savings to cover your projected lifestyle expenses throughout retirement. Granted, this will be different for everyone based on desired lifestyle and expected costs, which is why it can be helpful to consult your financial professional as you make your way toward retirement. They can help you determine a retirement budget that suits your spending habits and desired lifestyle, as well as the longevity of your savings in relation to that estimate. It can also be important to consider that your expenses may rise in retirement, as you might work to check off bucket list items you’ve had for years. It’s all part of the planning process that will be unique to you and your goals.

  1. You Are Debt-Free

It’s not typically a good idea to take on a pile of debt while living on a fixed income. With that in mind, ensuring that you have little to no debt when you enter retirement can be paramount to your ability to live your desired lifestyle and have a safe, secure post-career life. This could mean paying off credit card debt you’ve accrued while raising children, but it could also mean tackling home loan bills that never quite seemed to stop arriving in your mailbox. The problem with bringing your debt with you into retirement is that you stop working for your money and you start asking your money to work for you. While that’s the best-case scenario, it doesn’t always work perfectly in, for instance, periods of market downturns, which may force you to drain your savings to pay for necessities.

  1. You Have Secured Multiple Income Streams

Oftentimes, retirement isn’t as much about total savings as it is about income. That income is what you’ll use to cover your projected expenses, meaning it’s integral to your ability to provide yourself with the lifestyle you both want and deserve. In the modern retirement landscape, it can be helpful to secure multiple income streams that can provide different levels of growth and protection, thereby helping you fund your dreams with different sources of funds. Additionally, one retirement account may not suffice. Rather than relying solely on your 401(k), it can be helpful to add other retirement investment accounts or insurance products that match your goals, thereby allowing you to collect income based on which source is the most advantageous at a given moment, something your financial professional should be able to help with. Additionally, those extra income streams can be helpful if you decide to delay claiming Social Security. Simply by waiting past your retirement age, your benefit can be permanently increased by up to two-thirds of a percent each month—a total of 8% for each year you wait—offering an opportunity to enhance your benefit forever.

  1. Those Income Streams are Diversified Between Tax-Free and Tax-Deferred

Diversification of your retirement portfolio and tax-advantaged accounts may not guarantee success in retirement, but it could position you to offset certain tax obligations depending on future circumstances and legislation. On one hand, tax-free saving and investing vehicles, like Roth 401(k)s, Roth IRAs and permanent life insurance policies, can present a more secure option through offering tax-free growth and withdrawals. Additionally, later tax legislation probably won’t affect your withdrawals, and you may avoid required minimum distributions. Tax-deferred accounts, like traditional 401(k)s and traditional IRAs, are funded with pre-tax dollars then taxed as ordinary income upon withdrawal. While this can present an opportunity for greater growth, the tax landscape is ever-changing, potentially causing less certainty in how much you’ll have when you retire.

  1. You Have Liquid Savings

One of the first components of a healthy financial plan, no matter your age, is an emergency fund. The traditional recommendation for an emergency fund is somewhere between three- and six-months’ worth of living expenses, giving you the opportunity to cover necessary costs should you face an unexpected financial hurdle. In retirement, that liquid savings could prove even more important, as you may incur costs you don’t expect while living on a fixed income and drain funds meant to support your lifestyle for decades. As we mentioned above, it’s a good idea to clear most if not all of your debt prior to entering retirement, but having an emergency fund could help you protect yourself from car or home repairs, medical emergencies, part-time job loss and more. This is important even if you’ve shored up your savings and created multiple income streams.

  1. You Have Hobbies

While this isn’t necessarily financial advice, having hobbies you really want to pursue can be another sign that you’re ready to retire. Your free time is set to skyrocket, and you’ll need a few ways to spend it to avoid immediately becoming bored. If you don’t currently have hobbies, or ideas of how you’ll spend your free time, it may be a good idea to remain in the workforce a little while longer while you try a few different pastimes. Some ideas include traveling, collecting, learning a new skill, picking up a part-time job, starting a business, golfing, volunteering and more. The possibilities are nearly endless, as long as you’re doing something you love and something that drives you to get out of bed in the morning long after the alarm means that it’s time to get ready for work.

  1. You Have a Plan

Finally, having a written plan that is easy to follow and remain dedicated to is key to a successful retirement, and it’s important to create your plan long before you choose to leave the workforce. A successful plan isn’t just for decumulation and distribution of your various retirement accounts. It’s also a comprehensive map and strategy that outlines ways you will cover your many expenses, including those that simply bring pleasure. Furthermore, though you’ll certainly want your plan to be flexible and malleable, it can be helpful to have an idea of how you’ll use your funds, giving you a better grasp of how much you’ll spend on a monthly or annual basis and how much you’ll want to save prior to entering retirement.

The perfect time to retire will vary based on your unique circumstances, but we’re here to provide you with the education, tools and preparation you need. Give us a call today to explore your options and plan for the retirement of your dreams! You can reach Drew Capital Management in Tampa, Florida at (813) 820-0069.

 

This article is not to be construed as financial advice. It is provided for informational purposes only and it should not be relied upon. It is recommended that you check with your financial advisor, tax professional and legal professionals when making any investment or any change to your retirement plan. Your investments, insurance and savings vehicles should match your risk tolerance and be suitable as well as what’s best for your personal financial situation.

Advisory Services Network, LLC does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.

 

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