Category: Retirement Planning

When to begin receiving your Social Security benefits is one of the most important decisions you will make in retirement. Many factors such as your health, financial position and desire to continue working will come into play when making this decision.

The amount of your monthly benefit is determined by the age at which benefits begin. To put it simply, the earlier you start benefits, the less you will receive each month and, conversely, the longer you wait to start benefits, the more you will receive each month.

You must first determine your Full Retirement Age which varies depending on your year of birth. For those born in 1943 or later, the FRA is between ages 66-67.  If you start your payments at your FRA, then you will receive 100% of your calculated benefit known as your Primary Insurance Amount (PIA).  You are eligible to begin your benefits as early as age 62 but your monthly benefit would be reduced by a formula depending on the number of months before your FRA.  If you were to delay your payments until after your FRA, you would receive an 8% increase in your payment for each year of delayed filing, up to age 70.  So for each month of delay, you would receive an increase of 2/3% (1/12 of 8%).

If your FRA was 66, then the percentage of your full benefit or PIA would fall within the following parameters:

Age 62                  75% of your full benefit

Age 66                  100% of your full benefit

Age 70                  132% of your full benefit

In a nutshell, this is the formula used to calculate your monthly retirement benefit. Again, the decision of when to file will depend on many factors including your life expectancy and relative financial position at retirement.

 

*The information in this blog post is general in nature and not intended as specific advice.  Please consult a tax advisor to see how this information applies to your specific situation. 

In many cases, the answer to this question is a resounding YES. Eliminating debt is a worthy goal and a key factor in building wealth. Removing that monthly obligation will free up funds that can be used to build up your retirement nest egg.  There is also an emotional side to this decision.  The fear of running out of money in retirement is very real for many retirees and having your mortgage out of the way would no doubt help to alleviate this fear.  The peace of mind that comes from owning your house mortgage-free cannot be quantified.

Tax reform has also changed the dynamics of this financial decision. As you approach retirement and continue to whittle down your mortgage balance, more of your payment is applied to principal and less to interest.  Starting in 2018, the standard deduction allowed against your taxable income has increased significantly.  For a married couple filing jointly, the standard deduction is $ 24,000 with an additional $1,300 per person if over age 65.  This combination of factors means that for many retirees, there will be no tax benefit from keeping a mortgage.

However, everyone needs to consider their own personal circumstances before making this decision. Obviously, if you have other higher interest debt, you would want to pay that off first.  Also, one would want to have a sufficient amount of cash reserves in the bank so that the payoff of your mortgage balance would not drain your cash position.

There is no doubt that a paid off mortgage will enhance your retirement. With tax incentives off the table, it just makes sense to put this obligation to bed.

 

 

*The information in this blog post is general in nature and not intended as specific advice.  Please consult a tax advisor to see how this information applies to your specific situation. 

A monumental transfer of funds totaling hundreds of billions of dollars is now underway

according to a recent article in the Wall Street Journal (Jan. 17, 2017 by Vipal Monga and Sarah Krouse).  The IRS requires that taxpayers must begin withdrawing funds from IRA and other tax sheltered accounts when they reach age 70 ½.  The first wave of Boomers, generally defined as those born between 1946 and 1964, turned 70 ½ last summer and must therefore begin required minimum distributions (RMD) starting in 2017.

The article states that “Boomers hold roughly $ 10 trillion in tax-deferred savings accounts, according to an estimate by Edward Shane, a managing director at Bank of New York Mellon Corp.”  These funds will be taxable in the year withdrawn resulting in billions of dollars of tax revenue to the U.S. Treasury for the next several years.

The first distribution must take place by April 1 of the year following the year the taxpayer reaches age 70 ½.  They must be taken by December 31 each year thereafter.  The RMD is calculated based on the individual’s life expectancy determined from IRS tables.   The penalty for not taking RMDs is 50% of the funds required to be taken out so be sure that this is not missed.  A special rule allows someone to contribute up to $ 100,000 of IRA funds to charity.  These funds are not included in taxable income or allowed as a charitable deduction and they would count towards your RMD for that year.

As this huge shift of resources takes place, it is important for baby boomers to include an allowance for future tax liabilities when calculating their net worth and planning for retirement.  Otherwise, the tax bill will come as an unwelcome surprise.

 

David K. Raye, CPA, P.C.

704-887-5298

www.davidrayecpa.com

 

*The information in this blog post is general in nature and not intended as specific advice.  Please consult a tax advisor to see how this information applies to your specific situation. 

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