Planning Continues Upon Retirement for Business Owners

As a business owner, you have invested a great deal of time and effort into building your company over the years. You know the amount of planning needed to maintain daily operations and grow your business. Now, you may be ready for retirement. But, the planning does not end. What you do next, and how you navigate potential tax issues and regulatory pitfalls, can make a big difference in the long-term success of your retirement.

Here are some of the more “taxing” concerns you may face associated with retirement:

Early retirement and early withdrawals.

If you take withdrawals from your qualified retirement plan before age 59½, you may be subject to a 10% Federal income tax penalty. There are certain instances in which early withdrawals may be taken without penalty, such as death, disability, or substantially equal periodic payments. Otherwise, at 10%, the penalty tax can be significant, so it is important to plan accordingly.

Waiting too long. You must begin taking required minimum distributions (RMDs) from your traditional Individual Retirement Account (IRA) by April 1 of the year after you reach age 70½. If you fail to do so or do not withdraw enough, you will be subject to a 50% penalty tax, which will be incurred on the difference between your RMD and the actual withdrawal amount. Your RMD amount is based on the previous December 31 balance, divided by your life expectancy (or the joint life expectancy of you and your spouse, if applicable).

Working while receiving Social Security.
If you receive Social Security and also continue to work, a portion of your benefits may be taxable. For more information, refer to Internal Revenue Service (IRS) Publication 915, Social Security and Equivalent Railroad Retirement Benefits, or consult with your tax professional.

You may be subject to the “give-back” if you are under full retirement age (based on the year of your birth), receive Social Security benefits, and earn income. The law requires a give-back of $1 for every $2 earned in excess of $17,040 in 2018 for those individuals between the ages of 62 and full retirement age who are receiving a reduced Social Security benefit.

For the year in which an individual attains full retirement age, the give-back is $1 for every $3 in excess of $45,360 for 2018. Starting in the month in which the individual attains full retirement age, the give-back is eliminated. If you are under full retirement age and thinking about taking Social Security benefits while still working, it is important to understand the potential tax consequences of doing so.

Where you live in retirement matters.
Each state has its own rules on income, estate, sales, and property taxation. Your tax and legal advisors can help you assess the potential tax advantages and disadvantages of your retirement destination.

Planning Continues through Retirement

Your personal retirement plan probably involved building a nest egg with regular savings over decades. Now that you are preparing for retirement, continue with your planning.

College Cost Counsel

Preparing a child for college may be a rewarding, but worrisome, time for you and your family. Although you know that an education is “priceless” you cannot help but notice how large the price tag actually is. This may leave you with many questions regarding college financing for your child. The U.S. government has established an Internet resource for such a need. The website, https://www.ed.gov/college , gives information on college costs, and you can even apply for financial aid online.

Tax Planning for Retirement – Roth Benefits

After years of saving and planning for their golden years, many people nearing retirement fail to consider the tax burden they may face on income they receive after they stop working. While you may see a reduction in the amount of taxes you owe after the age of 65, you still need to plan ahead if you want to minimize your tax bill from the IRS.  

Social Security Benefits

Depending upon your total income and marital status, a portion of your Social Security benefits may be taxable. For a rough estimate of your potential tax liability, add half of your Social Security benefits to your projected income from all other sources. This figure is your adjusted gross income (AGI), plus any tax-free interest income from municipal bonds or foreign-earned income. Up to half of Social Security benefits are taxable if this sum, which is called your provisional income, exceeds $25,000 for singles or $32,000 for married couples filing jointly. However, up to 85% of Social Security benefits are taxable if your provisional income is above $34,000 for single filers or $44,000 for married couples filing jointly.

Use the Social Security Benefits Worksheet in the instructions for IRS Form 1040 to calculate the exact amount of taxes owed. Rather than writing a large check once a year, you can arrange to have taxes withheld from your Social Security benefits checks by completing Form W-4V and filing it with the Social Security Administration.

Other Income Sources

In addition to collecting Social Security benefits, most retirees receive their income from a variety of sources, including distributions from 401(k) accounts and individual retirement accounts (IRAs); payouts from company pensions and annuities; and earnings from investments.

Contributions and earnings growth are tax deferred on 401(k)s and traditional IRAs; however, distributions from these accounts are fully taxable, but have no penalties if withdrawals are made after age 59½. If you have savings in 401(k) accounts or traditional IRAs, you must begin making withdrawals from these accounts—and paying taxes on the distributions—by April 1 of the year following the year in which you reach age 70½. If you are at least 59½ years old and have owned a Roth IRA or Roth 401(k) for at least five years, withdrawals are completely tax free. There are no minimum distribution requirements for Roth accounts.

Strategies to Minimize Taxes

Most retirees with nest eggs or pension income of any size will pay at least some taxes on their retirement income, but there are strategies to reduce the amount owed. While it usually makes sense to delay taking taxable distributions from retirement accounts until the funds are needed, or until distributions are required, you may want to withdraw more funds in tax years when claiming a large number of deductions temporarily lowers your tax rate. You may, for example, choose to take advantage of itemized deductions, such as the breaks for medical expenses or charitable gifts, in certain years, while taking the standard deduction in other years.

A desire to leave a portion of your assets to your family may also influence how you handle withdrawals from tax-deferred accounts. Keep in mind that, if you leave behind funds in a traditional IRA, the rules for inheritance can be complex. To avoid these issues and make it easier to pass on your estate to family members, consider converting traditional IRAs to Roth IRAs. While you will have to pay taxes on the funds converted, moving to a Roth IRA eliminates future tax liabilities, regardless of whether you use the funds in retirement or pass the money on to your heirs.

Time IN the Market > TimING the Market

The belief that you, or a particularly talented financial manager, can foresee the direction of the stock market is a seductive one. Some investors are confident that, with proper research, they can make money by snapping up equities when prices are low, and shifting their investments into cash or bonds when the market hits its peak. Even worse, they believe they can pay someone else can do it for them. But longitudinal studies have shown time and time again that no one can consistently predict the direction of the market in the short run.

However, many armchair investors persist in the belief that, by carefully following business news and trusting their “gut” instincts, they will be able to beat the market. Some study the stock tips in personal finance magazines, others hope to glean additional insight from analysts’ reports and specialized investment newsletters, and still others attempt to mine all the available data, crafting complex simulations of how the market is likely to behave in the future.

But if financial professionals struggle to keep ahead of trends, private investors are even less likely to outfox the indexes. As soon as a piece of business or economic news hits the airwaves and the Internet, analysts and brokers react immediately to the information. Because these financial professionals act so rapidly, the stock market almost always reflects all the known information at any given moment in time. And even if an individual investor were able to develop an analytic model with some real predictive value, unexpected events—such as a terrorist attack or a natural disaster, or even a political scandal—could lead to sudden and dramatic market fluctuations that no model based on historical data could have anticipated.

It is only natural that investors would want to find some way to sit out bear markets and get back just in time for the next bull run. It is useful to keep in mind, however, that even the slowest equity markets have some bright spots. A diversified portfolio will help you protect against loss and capture whatever gains might occur in a market downturn.

Investors run a big risk by selling when they believe stocks have reached their peak. They may turn a profit when cashing in their equity holdings, but they could also miss out on some of the market’s best cycles. Being absent from the market for only a few of the days or weeks with the highest percentage gains can decimate a portfolio’s returns over time. Market timers who sell frequently also lose money to transaction costs and taxes, and miss out to a large extent on the compounding effect that benefits investors who remain in the market consistently. Instead of trying to time the market, investing in a properly allocated diversified portfolio driven by a goals-based financial plan is a much better strategy.

Trying to pinpoint the right time to invest in the stock market is an exercise in futility. If you have a longer period to save, owning equities provides the most effective hedge against inflation and taxation available. Since it is impossible to know where the market might go from here, it makes sense to start investing now and continue investing on a regular basis, regardless of market conditions. Remember: long-term investment success is achieved not by timing the market, but by time in the market.

Why Should You Diversify?

As 2019 approaches, and with US stocks outperforming non-US stocks in recent years, some investors have again turned their attention towards the role that global diversification plays in their portfolios. For the five-year period ending October 31, 2018, the S&P 500 Index had an annualized return of 11.34% while the MSCI World ex USA Index returned 1.86%, and the MSCI Emerging Markets Index returned 0.78%. As US stocks have outperformed international and emerging markets stocks over the last several years, some investors might be reconsidering the benefits of investing outside the US.

While there are many reasons why a US-based investor may prefer a degree of home bias in their equity allocation, using return differences over a relatively short period as the sole input into this decision may result in missing opportunities that the global markets offer. While international and emerging markets stocks have delivered disappointing returns relative to the US over the last few years, it is important to remember that:

1.  Non-US stocks help provide valuable diversification benefits.

2.  Recent performance is not a reliable indicator of future returns.

Over long periods, investors may benefit from consistent exposure to both US and non‑US equities.

THE LOST DECADE

We can examine the potential opportunity cost associated with failing to diversify globally by reflecting on the period in global markets from 2000–2009. During this period, often called the “lost decade” by US investors, the S&P 500 Index recorded its worst ever 10-year performance with a total cumulative return of –9.1%. However, looking beyond US large cap equities, conditions were more favorable for global equity investors as most equity asset classes outside the US generated positive returns over the course of the decade. (See Exhibit 2.) Expanding beyond this period and looking at performance for each of the 11 decades starting in 1900 and ending in 2010, the US market outperformed the world market in five decades and underperformed in the other six.[2] This further reinforces why an investor pursuing the equity premium should consider a global allocation. By holding a globally diversified portfolio, investors are positioned to capture returns wherever they occur.

[2]. Source: Annual country index return data from the Dimson-Marsh-Staunton (DMS) Global Returns Data, provided by Morningstar, Inc.

PICK A COUNTRY?

Are there systematic ways to identify which countries will outperform others in advance? Exhibit 3 illustrates the randomness in country equity market rankings (from highest to lowest) for 22 different developed market countries over the past 20 years. This graphic conveys how difficult it would be to execute a strategy that relies on picking the best country and the resulting importance of diversification.

In addition, concentrating a portfolio in any one country can expose investors to large variations in returns. The difference between the best- and worst‑performing countries can be significant. For example, since 1998, the average return of the best‑performing developed market country was approximately 44%, while the average return of the worst-performing country was approximately –16%. Diversification means an investor’s portfolio is unlikely to be the best or worst performing relative to any individual country, but diversification also provides a means to achieve a more consistent outcome and more importantly helps reduce and manage catastrophic losses that can be associated with investing in just a small number of stocks or a single country.

A DIVERSIFIED APPROACH

Over long periods of time, investors may benefit from consistent exposure in their portfolios to both US and non‑US equities. While both asset classes offer the potential to earn positive expected returns in the long run, they may perform quite differently over short periods. While the performance of different countries and asset classes will vary over time, there is no reliable evidence that this performance can be predicted in advance. An approach to equity investing that uses the global opportunity set available to investors can provide diversification benefits as well as potentially higher expected returns

Study Shows Delaying Retirement May Increase Longevity, Especially for Men

In October, the Center for Retirement Research at Boston College published a research paper showing how policies in the Netherlands that delay retirement can increase longevity, especially for men. The working paper, “How Does Delayed Retirement Affect Mortality and Health?” was written by research economists Alice Zulkarnain and Matthew S. Rutledge. The authors observed that older Americans have been retiring later for a number of reasons, including because work is becoming less physically demanding, employers have shifted from defined benefit to defined contribution pensions, and Social Security’s incentives are changing. The researchers cautioned, however, that understanding the implications of working longer for mortality and health is complicated, because people who are healthier tend to work longer than people who are less healthy.

Taking advantage of a natural experiment in which a policy was implemented in the Netherlands that incentivized a broad cohort of early baby boomers in their sixties to delay retirement, the study used Dutch administrative data to explore the links between work and health outcomes related to depression and diabetes, applying an instrumental variable approach that took into account the joint relationship between work and mortality.

The findings showed that delayed retirement reduced the five-year mortality rate for men ages 62-65 by 2.4 percentage points, which represents a 32% reduction relative to the five-year mortality rate for non-working men of the same age. For women, the results were inconclusive.

Moreover, the study found no significant relationship between delayed retirement and health conditions like diabetes or depression, which suggests that these conditions were not responsible for the mortality reduction. The researchers speculated that this could be because depression and diabetes are not as acutely life-threatening as some other conditions, adding that further research is needed to identify the conditions through which the positive effect of working on mortality manifests itself. They also pointed out that the relationship between working and mortality could manifest itself through a variety of conditions, which may make it difficult to find a significant result for any one condition.

In some ways, the U.S. already has a delayed retirement incentive with the Social Security benefits program. That’s because every year someone delays taking their Social Security benefit beyond their stated full retirement age, they get an 8% annual increase every year until age 70.

From a financial planning standpoint, working longer is one of the main ways someone can exercise control over whether or not they outlive their money. One takeaway I offer, is set yourself up to do work you enjoy. It’s much more likely that you will work longer if you have a sense of fulfillment or enjoyment in the work you do. And, if you begin putting steps in place to transition to work you enjoy now, it’s more likely that you will make the leap successfully when the time comes.  

 Seth Godin recently wrote a book entitled This Is Marketing and these are the 5 things that I really liked from reading it. I’ve paraphrased from the book my 5 subtitles.


1. My product is for people who believe ...

I will focus on people who want ...

I promise that engaging with what I make will help you get ...


These three fill-in-the-blank statements are gold for anyone trying or wanting to figure out what their competitive advantage is in the marketplace. This has caused me to take the time to think about who my service is specifically for, what my intended audience actually wants, and what I’ll commit to giving my clients for their benefit. I have so much more focus and direction with my business and service offering by going through this exercise. And the really good news is that this is an exercise I, or anyone, could start at any phase of the business. It’s even a good exercise to do on a regular basis, even annually, to make sure I haven’t veered from my target or to confirm if I need to change my course.

2. Branding vs marketing, strategy vs tactics, and be a farmer not a hunter.

These lines speak to the refreshing wisdom of taking the longview when it comes to serving people and growing a business. Rather than trying to find a hack or a trick to get attention quickly, why not focus on building a strong foundation with fundamentals and principles. I’ve found many business owners must take short cuts and try to fast track revenue because they didn’t do the slow and steady work of saving up a cash reserve and honing their craft over the previous years in order to have a multiple year runway in their business. By runway, I mean the ability to live off of personal savings instead of forcing a business to become a high revenue source of income too soon.

3. Price is a marketing strategy.

This resonates with me because I don’t have to do things the way they’ve always been done when it comes to pricing. For example, just because the financial industry has been known for selling products in the past doesn’t mean I have to do the same. I can price simply and transparently for advice. That in itself can be a big benefit to those whom are looking for the ease of understanding what they’re paying for.

4. Marketers need to spend more time on helping, one person at a time, day-by-day.

This resonates with me because it’s comforting to remind myself that I can’t expect to get there over night. It’s the small incremental actions that make a big difference over time. It’s the compounding interest effect applied to serving clients and helping people one at a time over the long haul. It’s not until a decade down the road that someone can look back and see the mountains they’ve scaled. I also like the emphasis Seth places on taking action rather than coming up with ideas. Both are really good and important things to have as strengths, but it’s showing up with the courage to put yourself out there with a real product or service, day-in and day-out, that creates the real change.

5. The goal is to be known by the smallest viable audience.

This to me was the mantra of the entire book. I like this because it forces me as a business owner and financial advisor to be specific in whom I’m serving and why. It’s easy to say I’m going to be the best at everything or that I want to help everyone everywhere, but that’s not really committing to anything or anyone in particular. However, I can make a big impact when I force myself to put detail and commitments behind it all. I need to continually ask myself whom specifically am I best suited to serve and how many people am I capable of serving really well. This can also keep me from chasing distractions and losing focus on what’s really important.

My mission is to help 80 households be more generous over their lifetime. And that’s it. 

What’s a household? Partly it’s a way for me to measure how many people I’m helping. So it’s a family, a unit, it could be a husband and wife and their kids. Or, it could be an individual whose committed to the process of working together to make wise financial decisions. 

Why just 80 clients? There’s not a lot of science that goes into it for me. It’s a feel but also an understanding of my capacity. I want to give my full attention to my clients when they need it. I know I can do that with 80. So I’m capping it there. At least, that’s my conviction now.

I also believe there will be enough of a ripple effect with 80 committed clients working together for the next 5, 10, 15, 20+ years, that I’ll have plenty of reasons to feel like I made enough of a difference in enough people’s lives. Plus, it takes a long time to work one-on-one with clients to get clear on their goals, values, and action items. Then, there’s course corrections that happen as life happens. To do quality work, at some point you have to limit the quantity of work. Unless of course you’re building a corporate empire to scale, which I am not.


Why the focus on generosity? Of course there’s more that goes into a financial plan than being generous, but for me, that’s where all roads have to end up if I’m doing my job properly. 

Let’s take retirement, for example. Why do people want to retire. Well, there’s an infinite number of reasons, but there are a few main reasons. For some people it’s to rest, for others it’s to get away, for some it’s to spend time with family, and yet for others it’s to do nothing but their hobbies and passions. My thing is that retirement ought to be more of a change towards something else rather than an end in and of itself. And, I think the way to get it to be a change towards something new, is to have a reason outside of just making yourself more comfortable. Comfort is important, but at some point you max out on comfort. Then what? That’s where generosity comes in. I think we’re more fulfilled when we have an aim that involves giving something to someone else without expecting payback in return. To me, there’s an endless amount of financial planning work to be done in 80 households’ lives to maximize the generosity in each one, and thus the positive impact all around the world.

 Also, I feel that almost no one has anyone in their life challenging them to be more generous, nor teaching them wise financial principles to get to the point where they feel like they have “enough” or even “extra. For the most part, no one talks about their money at all to other people, let alone their closest family or friends. And it would be far too risky to tell someone what you think they should do with their money. So, that where my calling comes in. I’m not telling people what to do with their money, rather coming along side to provide a personal financial framework for you how and what to do to get the most out of what you have. 

How Bunching Expenses Can Enable Taxpayers to Continue to Itemize

In response to the significant changes to the tax deduction rules under the Tax Cuts and Jobs Act (TCJA), many taxpayers are searching for ways to recover some of the tax benefits associated with itemizing deductible expenses that have been eliminated. Taxpayers who were previously able to lower their tax bills by itemizing may want to consider using a “bunching” strategy, which generally means either accelerating or deferring deductible expenses so that more of these expenses fall in a single tax year rather than in multiple tax years.

Video: A Look at Recent Market Volatility

What should you make of recent ups and downs in the stock market? Here’s helpful context on volatility and expected returns.

While market volatility can be nerve-racking for investors, reacting emotionally and changing long-term investment strategies in response to short-term declines could prove more harmful than helpful. By adhering to a well-thoughtout investment plan, ideally agreed upon in advance of periods of volatility, investors may be better able to remain calm during periods of short-term uncertainty.

#AquilaWealth Newsletter -- No. 1 #IRA Mistake, Productivity Recommendation, and Jet Lag

I like to send out a newsletter to my clients and friends every-other week on Thursdays at 2 p.m. PT. I typically include 3 articles with my commentary around the topic of personal finance. Here are the ones I like this week, and I think you will too. (Feel free to email me at eric@aquilawealth.com if you want to be added to my email newsletter list.)

#1 The No. 1 IRA mistake

#2 Productivity Recommendation: Take the Kolbe A™ Index/Instinct Test

#3 The Scientific Secrets to Preventing Jet Lag

The #Fiduciary Rule is Dead

But Clients Should Ask Their Advisor This Simple Yes or No Question

Over the past year, investors have been receiving notifications about the U.S. Department of Labor’s fiduciary rule that would have impacted financial advisors and their clients. Simply stated, the DOL’s new “fiduciary duty” standard would have required financial professionals who receive compensation for transactions to act in their client’s “best interest.”

#Hurricanes and Your Relief Efforts #Florence

Giving is Not Just About Making a Donation – You Make a Difference

There are many opportunities to support disaster-recovery efforts and help people whose lives have been upended by Hurricane Florence, but you should be careful. It's also prime time for scam artists to take advantage of your generosity and steal your money or even your identity. Take these steps to help you choose a charity:

Countdown to Retirement: Strategies for Saving in Your 50s #retirement #aquilawealth

Strategies for saving in your 50s

Many retirees today are redefining the “golden years.” Forget about endless days of leisure. Retirees seek adventure, travel, and new business pursuits. While these changes may redefine retirement, will retirees be able to finance their plans? Today, many people age 50 and older have not begun to save for retirement or have yet to accumulate sufficient funds.

Helping Your Heirs While Helping Others via the Charitable Remainder Trust (CRT) #giving

Charitable Remainder Trust (CRT)

A charitable remainder trust (CRT) can be a highly effective financial and estate planning tool. The CRT can allow you to: avoid capital gains taxes on highly appreciated assets, however when income is distributed to the income beneficiaries it is taxable; receive an income stream based on the full, fair market value (FMV) of those assets; receive an immediate charitable deduction; and ultimately benefit the charity(ies) of your choice.

How Small Businesses Can Take Advantage of Tax Reform #TCJA

The Tax Cuts and Jobs Act (TCJA) of 2017

The Tax Cuts and Jobs Act (TCJA) of 2017 created substantial new tax breaks for companies of all sizes, but owners of smaller businesses in particular may still be reviewing how much their tax burden could change under the new legislation. The deductions individual business owners can take advantage of and the value of these tax breaks will vary considerably depending on the nature of their business activities, their income levels, and other factors that they may be able to adjust to maximize their tax benefits.

What is a blockchain token? #cryptocurrency #bitcoin

People are just becoming acquainted with the idea of digital money in the form of cryptocurrencies like bitcoin, where transactions are recorded on a secure distributed database called a blockchain. And now along comes a new concept: the blockchain-based token, which I’ve been following as a blockchain researcher and teacher of courses about cryptocurrency and blockchain tokens.

Was 9/11 This Generation’s Pearl Harbor? #NeverForget #UnitedWeStand #BetterTogether

There are chilling similarities – but fundamental differences too

On December 7, 2001, a Gallup Poll ran the following headline:

“Americans Say Sept. 11 Will Be More Historically Significant Than Pearl Harbor.”

That December 7th day when Gallop ran that headline marked the 60th anniversary of the attack on Pearl Harbor. But it was also just a few months after the September 11th attacks in New York and Washington – when many Americans were comparing the events in 1941 to those that had just occurred.