Social Security Retirement Benefits Funding: Time to Fix the Problem?

In the world of retirement planning, Social Security retirement benefits, referred to as Old Age and Survivors Insurance by the Social Security Administration (OASI), are still included as a source of income in retirement, but should it be?

For those Americans that will retire after 2035, the future of receiving their projected full retirement monthly benefit looks bleak – OASI estimates the ability to pay 77% of promised benefits at that time. OASI and Disability Insurance (DI) benefits pay from the Social Security Trust Funds, which released its 2019 Annual Report to Congress in April 2019.

Without a plan to provide additional funding into the OASI program, promised future benefits are in jeopardy. The time to fix the problem is now, while SSI taxes are being collected to invest in the OASI trust fund for the benefit of todays and future retirees. Why are we experiencing a benefits funding issue? Highlights from the report include:

• The total annual cost of the program is projected to exceed total annual income, for the first time since 1982, in 2020 and remain higher throughout the 75-year projection period. As a result, asset reserves are expected to decline during 2020. Social Security’s cost has exceeded its non-interest income since 2010.
• The year when the combined trust fund reserves are projected to become depleted if Congress does not act is 2035 – gaining one year from last year’s projection. At that time, there would be sufficient income coming in to pay 80 percent of scheduled benefits.

Social Security retirement benefits (OASI) collect from today’s worker and employer payroll taxes to pay current retirees. The collected revenue is used to pay current recipients and the additional revenue invests into the trust fund.

Currently, employers and employees each pay 6.20% of payroll taxes on the first $128,400 of earnings to fund Social Security and an additional 1.45% (evenly split) to support Medicare for a total of 15.3%. Self-employed individuals pay the full 15.3% themselves.

The payout in Social Security retirement benefits is close to exceeding what is currently brought in for 2020 but will continue to operate on the projected plan’s payouts by accessing reserves in the trust fund. However, the 75-year projection of payouts indicates a depleting reserve in the trust fund if SSI taxes stay at the current rate for both the employer and employee contribution.

With a growing aging population and fewer workers paying into OASI due to a declining birth rate, the U.S. has an increasing problem on its hands to continue supporting the social security retirement benefits system.  To date, lawmakers haven’t stepped up to fix the problem, but have pushed it further out in time to amend. The only real way to circumvent the shortage is by increasing the SSI tax collection from payroll taxes.

If you would like to have Social Security removed as a source of income in your financial plan, please let me know. Without that income source, we will determine together ways for you to make up the difference.

Can Your Retirement Plan Pass a 'Stress Test?'

In our working years, we work and save toward retiring someday, creating our retirement story. Our story may include daily golfing, living somewhere different, or participating in activities we enjoy each day that help to fill our minds with a picture of our retirement. But the plan of relocation and nonstop action should be stress tested to ensure they are possible, primarily if a recession occurs early in retirement.

Stress Testing Living and Leisure Costs

If you plan to relocate, visit the area one to three years before moving at least three times. Plan to stay for up to two weeks and participate in the activities you plan on when you move there. Dine out, contact a realtor or attend open houses, grocery shop, and behave like you’re a permanent resident, even in the off-season of your desired location.

You may be surprised at the high cost of living or be comfortable you can afford the lifestyle you anticipate. Those destinations that you find favorable for vacation may not suit you permanently. Researching medical care, access to family members, and affordability requires research on your part to give you detailed information before you make a life-changing (and portfolio impacting) decision.

Often, retirees want to live in an area with other retirees but must be aware of how the neighborhood may change over the next decade when homes change ownership, becoming different demographically. State and local government taxes (SALT) are not always favorable in high retirement destination states and will impact your portfolio as much as your daily living expenses.

Stress Testing Your Portfolio

Test your retirement assets well ahead of retiring by having scenarios run based on your current portfolio allocations in a downward market. Have you determined which investments to liquidate that will allow the minimal impact to those with low valuations? If not, a new financial plan is needed to help establish how to customize your asset allocations based on your expected spending during a depreciated stock market. A simple way to think of this is, which bucket do you intend to draw from to cover your expenses with minimal impact to your portfolio if a financial crisis were to happen during your retirement?

If you want to stress test your retirement plan, and need help to guide your decisions, feel free to contact our office to get started. Pre-planning for challenging events now and in retirement is a crucial part of the financial planning process.

2018 Was a Great Year for Fraud?

2018 was a record year for fraud in the U.S. and twenty-one other countries, according to Experian’s 2019 Global Identity and Fraud Report https://www.experian.com/decision-analytics/global-fraud-report.html released earlier this year (February 2019). As the digital world advances, so does fraud.

Today, digitization of services from banking to online shopping has made us more vulnerable to fraud, and more reluctant to building trust online. Online fraud doesn’t just happen through your computer, laptop, or tablet, but often occurs through smartphone access, a trend that continues to grow. People prefer to access their financial information through their phones and are willing to provide their account information for purchases through mobile devices daily.

Online services that appear to be trustworthy, or mirror known businesses, are doing a better job of disguising themselves, opening a ‘path of trust’ for fraud to quickly occur to unsuspecting victims. When customers trust a business, they are more likely to do business with them; fraudsters know that disguising themselves is an easy way to target. According to the Experian report, the U.S. is experiencing the highest incidence of fraud in the world as online fraud increased by 80% over 2017. Online fraud remains a concern of businesses when their brand tarnishes, and customers are impacted by fraud.

It’s not only online fraud that is continuing to advance, but fraud through phone calls, and mail and package delivery services. Some surprising 2018 statistics compiled from U.S. consumers reporting fraud to The Federal Trade Commission’s Consumer Sentinel Database:

• U.S. Citizens reported losing $1.48 Billion to fraud in 2018, an increase of 38% over 2017.
• The top scams reported were imposter scams, debt collection, and identity theft
• 43% of people in their 20’s reported a loss to fraud, whereas 15% of people in their 70’s reported fraud.
• When people in their 70’s reported losing money, the amount tended to be higher, and their median loss was $751, compared to $400 for people in their 20’s.
• Scammers like having money wired to them- $423 million was wired last year from unsuspecting U.S. citizens.
• Credit card fraud on new accounts with someone else’s personal information was up 24% in 2018.

Some tips to help you stay safe online, on the phone, or through the mail:

• Close your smartphone or computer browser after you access an app or website to view your financial information.
• Don’t download smartphone apps from companies to order products; go directly to their website to order.
• Type in the website address for the financial company each time you want to access your account (not through saved links) and refresh your browser each time you log out
• Avoid clicking on links sent to you through email messages unless you can validate they are legitimate from a trusted source you do business.
• Never give personal information over the phone or by text message; contact the intended institution to validate.
• Don’t respond to letters asking for money for overdue bill payments unless you legitimately owe or can confirm the bill. Fraudsters are mimicking the IRS, and utility company logos, demanding money on fake accounts.
• Use electronic bill notification and payments to avoid your check and account number being opened by a thief for their benefit.
• Destroy old statements or use online statement services from your financial institution, broker, or credit card provider to eliminate a paper trail that could be compromised.

Tax Planning and Your Investments

‘Tax advice’ is left to federally authorized tax practitioners who prepare tax returns and defend clients pursuing relief from federal agencies for their own tax payments or to dispute tax payment errors. Financial advisors don’t provide tax advice, but provide information on the tax consequences of specific investments they sell or recommend to clients. This type of advice is within the scope of financial planning. Some financial advisors are CPAs (Certified Public Accountants) or have the CFP (Certified Financial Planner) designation and can prepare tax returns for their clients.

Financial advisors without these certifications can provide advice on a number of financial situations and the tax consequences to the client. Financial advisors provide advice on pension and retirement savings contributions and distributions, purchasing life insurance or annuities and other investments and relevant tax information for each. Additionally, financial advisors can provide advice on work-related income and pre-tax and tax-deferred savings options and the affects on personal income now and at the time of distribution. Advisors are able to provide tax information on the financial products they sell to their clients when it is within the scope of their professional licensing and the client’s financial planning.

It is common for financial advisors to request copies of a client’s tax returns even if they don’t prepare the tax return. What do advisors look for in their client’s tax information?

Income and Capital Gains Taxes- Advisors look for income in your portfolio, whether it is from qualified dividends, ordinary dividends or tax-free income. Your tax bracket helps determine what types of investments are best suited for your portfolio, both for growth and from a tax savings perspective. You may have carry-forward losses from a bad year which will off-set growth from another investment. A lot can be determined by reviewing your tax return.

Missed Deductions and Opportunities- It’s common for clients to miss out on deductions they could be taking or maybe their accountant wasn’t aware they could take. These could be as common as payroll deduction for W-2s being filled out incorrectly, missed deductions for college savings plans, long-term care premiums (if they exceed 7.5% of your adjusted gross income) and health insurance if you’re self-employed.

When people retire, they are in a lower tax-bracket their first and possibly second year of tax filing. There may be an opportunity to convert taxable investments to tax-free investments with lower tax consequence than if they liquidate and may higher taxes later. It may benefit clients to invest in a donor-advised fund to harvest the deduction on a tax-return, but only if the opportunity isn’t missed.

Working with tax practitioners pertaining to your investments and how they affect your tax situation is highly recommended. If you have any questions on what tax-planning advice financial advisors can provide in regards to investing, please feel free to contact our office anytime.

SAI June 2019 Newsletter Approval 2556250.1