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Announcer: It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only, and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research Incorporated, a broker dealer, member of FINRA, SIPC. Investment advisor representative, Cambridge Investment Research Advisors, Incorporated. A registered investment advisor, Cambridge and NelsonCorp Wealth Management, are not affiliated. Cambridge does not offer tax advice. Now, here’s today’s Financial Focus Program.
Nate Kreinbrink: Good morning and welcome to this week’s Financial Focus, brought to you each and every Wednesday morning right here on KROS. This is Nate and James. Joining me today, finally got some rain out there today.
James Nelson: Yeah. Yeah. Finally. More rain, right?
Nate Kreinbrink: Yeah.
James Nelson: Just what the river needs.
Nate Kreinbrink: Looking at the forecast, yesterday was supposed to be a wet one all day. And fortunately, it all kind of went around us or broke up before it got here, got soccer games in last night and it was a little cool, but as far as rain, I know that any day that we can go out without it for right now I think is a blessing for everybody.
James Nelson: Yeah. Exactly. That river needs to go down over the next couple weeks, and then we can get a little more of it, but yeah. We got a little rain today, hopefully, it’s not too much.
Nate Kreinbrink: Not too much. As we go, I guess this time of year, it’ll pop up anytime, but again, we always look back to five months ago when we were buried in snow, so I guess a little rain is a good thing, I guess, but [inaudible 00:01:40] in controllable amounts, I guess, this time.
James Nelson: Yeah. We can’t complain too much.
Nate Kreinbrink: So, getting into today’s show, I know James and I always talk as far as where we want to go and there’s always 20 different topics that we’re like, “Well, we could do this, we could do this, we could do this.” But it all seems to center around the whole planning process and the comprehensiveness of it and how all these different parts to transitioning into retirement need to be coordinated together. I know one of the big things that, when I sit down with individuals for the first time or current clients as far as, as they transition into retirement, is just the overwhelmingness that they feel as they get to this stage and as they move on to this stage. As far as the accounts that they have it in, the asset allocation that they have in, the tax planning that they have in, and then you transition into social security benefits and Medicare. Those seem to be the two issues that continue to come up that just seem to put people over the top as far as they just throw their hands in the air and they’re just like, “I don’t know what to do. There’s so many options. I don’t know which way to go. Which one’s the best one for me? When should I claim my benefits? Well, my friend did it here. My neighbor did it here. What is best for me?”
And so, they go into this and they just look at all these options and they come to us and say, “Please help.” And when we start to try to break it down for people and understand that when you make these decisions for your social security, we want to try to maximize that as far as income but also maybe with a little bit of tax planning. I know we did a workshop yesterday down at Saint Ambrose during the noon hour for some of their staff and employees down there as far as tax planning. Understanding that our taxes are going to be one of the biggest expenses that we have in retirement. So, if it’s coming, and most people that are transitioning into retirement it is, that the bulk of their assets that they have saved are going to be in tax-deferred accounts, meaning that they’ve got the tax deduction in the year that they’ve put it in, they’ve got the tax deferral through all the years of their working. When they take that money out, it is going to be taxable to them.
So, when that money comes out, whatever their income is between social security, between pensions, that income at age 70 1/2 because they have to start taking a little bit out at that age, is going to just be added on top of their current income that they already have. Whether they need that money or not, it’s going to be added on to that.
So again, what happens is, it usually pushes people up into a higher tax bracket. So, we look at social security, for instance, as far as when to start claiming that. Yes, it’s very easy to retire at 62, the next day, flip on your social security benefits, and you’ve got this benefit coming in. However, we may want to look at this from a planning process and say, “Hey. We may want to delay this a little bit. That benefit is going to continue to grow for as long as we delay that. And we may want to look at some tax planning opportunities where we have this pile of money that we know is going to be taxed on us, we’re in a lower tax bracket right now with the new tax laws, it may make sense for us to pay less in taxes on that money, get it out of that taxable or that tax account, and pay taxes at a lower rate so we’re paying less in taxes and we’re locking in the larger social security benefit.” So again, this all comes into play again. It’s not a one size fits all type of thing, but again, this is where the planning comes into play.
And again, where we always say, “Well, it depends” when people ask us question. Well, it truly does because every one of these decisions is an individual decision and needs to be looked at accordingly.
James Nelson: Absolutely. And when we talk about social security and Medicare, it does impact. Everything ties together: taxable income like you just talked about, Nate, has a huge impact on whether your social security’s going to be taxable, what tier you’re going to fall into as far as your Medicare premium, so they have to be looked at as a whole or people can run into issues. And we see it all the time, and you know, a little planning goes a long way. And that’s what so great about our software when we sit down with clients and we can show them all these different social security claiming strategies, where they’re going to be at as far as their Medicare premium through retirement. And when people get a visual and can actually see those different tiers and see those different break points is where they bump up maybe in the next tax bracket, I think it really starts to sink in a little bit and make a lot of sense as to what we’ve been talking about.
Because it is significant. I mean, the taxes will chew away at investment returns, it will chew away at social security benefits, it could bump you up and pay additional in Medicare premium, so it is important. You can’t just look at each one of them as a stand alone; you have to look at it as a whole. So, it’s important planning. We do it all the time, but unfortunately, like you mentioned early on Nate, a lot of people make these decisions. You know, “My neighbor drew her social security at 62, so I’m going to do the same thing.” Or, “Guys at work drew social security as soon as they retired, so I’m going to do the same thing”, without really looking at the overall picture. And you know, the important thing too is to, with the social security decision, is most of the time, if it’s a married couple, we’re looking at two lives. So, it’s not just your decision, it also impacts the spouse’s benefit later on probably and it has to be looked at in that fashion. It’s not a stand alone issue and something you can just kind of take lightly.
Nate Kreinbrink: Right. And I think, I mean, when you break it down to the simplest of terms, I mean, when we look at retirement planning, it’s basically, okay. What assets do we have, whether it’s your 401Ks, IRAs, pensions, social security, versus what expenses are we going to have? I mean, that’s simply what it is: what we have versus what we’re going to need. When people get into retirement, they kind of get into their own normal routine. They know roughly, “Well, I’m going to have X amount of dollars on the 15th of every month coming in from social security. I know I’m taking $1000 a month out of my IRA. I know that I’m going to have this in income.” Their expenses don’t really vary very much, so they start getting into this routine and they get comfortable with it. Well, where the issues usually play is when we project that out and we can look at it on a graph and we can look at it as a visual from the software is that magical age of 70 1/2 when all of a sudden, their tax liability goes from very minimal and then it drastically jumps because they have to start taking out.
When we have unexpected expenses in retirement, that’s scary for people as far as because it’s out of their norm, it’s out of that routine as far as what they normally do. And again, if there was things that we could have did leading up to that to try to smooth out that tax liability, it’s a more comfortable ride for everybody in retirement and we want to try to take out some of those unexpected items that are going to occur because again, once we transition into retirement, we don’t have the earned income coming from a job that’s going to continue to replenish our things every time. We’re trying to make what we have saved up, the options that we’ve elected on pensions, on social security, make that last for our entire lifetime.
And those issues that we’ve talked about before as far as people living longer, people outliving their assets, those are truly starting to going to come into play. As people continue to live longer, we’re going to have to make sure that we choose wisely with some of these things. And I always say as far as when people look at their social security benefits is, as treat it as a pension that is going to outlive you. That social security benefit is going to be there until the day you die. And then, especially if we’re married, if your benefit is the larger benefit, if you would happen to pass away, that larger benefit is going to be there as long as your surviving spouse is going to be there.
So again, when we start looking at it as longevity insurance instead of just, “Hey. I need to get my money back.” Which I can go into all the arguments as far as you are definitely going to get your money back and then some with social security benefits, but we start looking at it as longevity insurance, it’s a more powerful thing and I think it helps people make that decision, and hopefully, it’s the right one.
James Nelson: Well, and those unexpected expenses that you just mentioned can be enough to knock the train off the tracks.
Nate Kreinbrink: Right.
James Nelson: I mean, there’s not a ton of people that just have all this extra money and can retire. If you’re borderline being able to make it or not, or things are pretty tight in retirement, you can’t have that big unexpected tax expense or unexpected long term care expense or whatever the case may be. That might be enough to really hurt the overall plan. So yes, you have to look at this and we have to go through the planning process to see how things look and where we can have a little wiggle room and where things kind of fall. So, it’s very important. Again, we think people overlook this too much. The planning process that we go through with clients is very important and it just creates a better product and a smoother ride in retirement.
Nate Kreinbrink: Right. And I think again, just the coordination is the key to this whole thing, understanding… having your right hand know what the left hand is doing, know what a decision today is going to impact my taxes later on, my Medicare premiums later on, all that needs to come into play as far as when you make these decisions. And again, understanding that you don’t need to be overwhelmed. Again, we help people with this every day. Come to somebody that knows and that has done it in the past to help answer some of those questions. And again, that piece of mind that you get as far as feeling strongly as far as the decisions that you make that they are the correct ones for you, and just have that understanding as to why you are making those decisions and the impact that it’s going to have is a powerful thing for people.
James Nelson: Yeah. Yeah. Give us a call if there’s any questions. We’d love to sit down with you and work through things.
Nate Kreinbrink: Again, wanted to mention real quick that every Friday, NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of May will be donated to the Miss Clinton County Scholarship Program. Again, this is Nate and James with NelsonCorp Wealth Management bringing you this week’s Financial Focus. Thanks for tuning in and have a great rest of your week.
Announcer: Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research, Incorporated, a broker dealer, member of FINRA, SIPC. Investment advisor representative, Cambridge Investment Research Advisors, Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.NelsonCorp.com.
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