Retirement is all about taking the key risks off the table. Taxes are one risk that with proper education and homework, can be minimized dramatically. Lifetime income annuities are great products for your clients to decrease their risk of overpaying Uncle Sam and can provide guaranteed lifetime income for the entirety of their retirement. While tax season is in full swing, connect with your clients by discussing their retirement taxation plan and you will be amazed at where the conversation will go.
Social Security and Taxes
Optimizing their Social Security benefit is more essential now than ever before for your clients. What can surprise many people is that a portion of their benefit is susceptible to taxation. For a majority of Americans, it is necessary for them to work and earn wages in retirement. Before your clients start working full, or part-time, it’s important to note a few things. There are 2 major ways that your social security benefit is affected. The first is the Social Security earnings test:
- If an individual is under his or her full retirement age (FRA) for the entire calendar year, than $1 in Social Security benefits will be deducted for every $2 that is earned above the income of $15,720.
- If an individual reaches his or her full retirement age during the calendar year, then $1 in Social Security benefits will be deducted from every $3 that is earned above the annual limit of $41,880.
- There is no earnings limit that exists beginning with the month in which an individual reaches his or her full retirement age.
In addition to the Social Security earnings test, people may also be subject to taxation of their social security benefits. In fact, up to 85% of your social security benefits may be taxed! The government looks at your provisional income. Provisional income could be considered half of your Social Security benefit, plus all other taxable income which would include dividends, realized interest, capital gains, and municipal bond interest. Many people have no idea that their tax free bond interest counts! When I was an advisor, I was able to help many middle income seniors reduce or eliminate the taxation of their social security benefits simply by moving tax free bond money or CD money into annuities.
While there are strategies that have changed, some things have remained the same when receiving benefits. If this is the only article that you have read about Social Security and how the program prepares you and your clients for retirement, then make sure you look at this chart twice:
Notice the age 70 amount ($1,320) compared to the age 62 amount ($750). It is nearly double! Where else can you nearly double your income in eight years in this current interest rate environment? According to the Society of Actuaries RP-2014 Mortality Tables, average life expectancy for a 65-year-old male is 86.6. For a female age 65, average life expectancy is 88.8 years old. The current life expectancy evidence would indicate that delaying benefits is very beneficial.
Many people will say that they don’t WANT to delay. They want to take their benefits now. I understand that sentiment, however, if they have other assets, encourage them to build an income bridge from Age 62 to age 70 with some of these other assets. See, they can still RETIRE at age 62 but they take income from their IRA or 401k or Money Market fund until age 70, thereby maximizing their social security benefit which will cover both lives (for the breadwinner’s check) and is inflation protected!
The Social Security program was never intended to replace 100% of a person’s pre-retirement earnings. Income from Social Security was intended as a safety net that could help keep individuals or families from falling into poverty when regular wages cease. The Social Security Administration pays out billions of dollars in benefits every year to its recipients. Regardless of your income, it is likely that Social Security will play a key role in your retirement. Knowing how to maximize benefits and minimize taxes is very important. To take full advantage of the benefits that Social Security offers, it’s critical to have a good understanding of the Social Security program, how it works, and who is eligible for benefits
Tom has been a popular industry speaker for many years and is THE retirement income expert. As a former Fortune 100 senior executive, Tom has dedicated his entire career to helping retirees obtain a happily ever after retirement. He has been featured on FoxBusiness, American College Wealth Channel Magazine, Round the Table, Advisor Today and GAMA Magazine.
Tom currently lives in Arizona with his wife and children.
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