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Author: Steve LaFrance
Electing Delayed Social Security Retirement Benefits
What is it?
You can elect to delay receiving Social Security retirement benefits.
You can choose to delay receiving Social Security retirement benefits until you are past normal (full) retirement age. Perhaps you want to work longer because you enjoy it, or maybe you want your retirement benefit to be higher when you finally do retire.
Your benefit will be increased by the delayed retirement credit.
If you are eligible to receive Social Security retirement benefits but you delay receiving benefits until after normal retirement age, you will be eligible to receive the delayed retirement credit. The delayed retirement credit increases your retirement benefit by a predetermined percentage of your primary insurance amount (PIA) for each month you delay receiving retirement benefits up to the maximum age of 70. The amount of the credit you receive depends upon two factors:
- What year you were born
- How many months you delayed receiving retirement benefits past normal retirement age
If you were born in 1943 or later, you will receive 2/3 of 1 percent more per month or 8 percent more per year if you delay receiving retirement benefits. So, for example, if your normal retirement age is 66, and you delay retirement until age 70, your benefit at age 70 will be 32 percent more than it would be at age 66. If your normal retirement age is 67, and you delay retirement until age 70, your benefit at age 70 will be 24 percent more than it would be at age 66.
Although the delayed retirement credit increases your Social Security retirement benefit, it does not increase your PIA.
When can it be used?
You must be eligible to receive delayed retirement benefits.
In order to receive delayed retirement benefits, you must meet the following criteria:
- You must be at least one month older than normal retirement age, and
- You must be fully insured for retirement benefits (in most cases have 40 quarters of coverage).
You must apply for benefits.
Receiving delayed retirement benefits is not automatic. You must apply for benefits when you want to begin receiving them. The Social Security Administration (SSA) recommends that you contact an SSA representative two or three months before you want to begin receiving benefits. You can call the SSA at 1-800-772-1213 for more information.
Strengths
Your retirement benefit will increase.
If you continue to work past normal retirement age and delay receiving Social Security retirement benefits, you may increase your retirement benefit in two ways. Not only will you receive a delayed retirement credit, but your earnings after normal retirement age may be substantial enough to increase your average indexed monthly earnings (AIME), upon which your benefit is based.
Your surviving spouse’s benefit will increase.
If you elect to receive delayed retirement benefits, then die, your surviving spouse (at normal retirement age) may receive 100 percent of the benefit you were receiving. Therefore, if your spouse has a life expectancy substantially greater than your own, you might consider delaying retirement so that your spouse may receive a higher benefit after you die.
Your delayed retirement credit isn’t counted toward your family maximum.
When you retire, your family may be eligible to receive benefits based on your PIA. These benefits may be limited by the family maximum, which generally ranges from 150 to 180 percent of your PIA. However, if you delay receiving retirement benefits, your delayed retirement credit won’t count toward your family maximum and can be paid whether or not your family’s benefits are limited by the family maximum.
Tradeoffs
Delaying retirement won’t necessarily increase your lifetime retirement benefit.
Just because you receive a higher monthly benefit when you delay retirement doesn’t necessarily mean you’ll receive a higher overall lifetime benefit. If you delay receiving retirement benefits, the amount of each benefit check will be higher, but you’ll receive fewer benefit checks than you would have if you begin receiving retirement benefits at normal retirement age. How many fewer checks you receive will depend upon how many years you delay receiving retirement benefits.
For example, assume the following facts apply to you:
- You delay retirement by 4 years, and retire at age 70 instead of at age 66, making you eligible for an 8 percent delayed retirement credit for each year you delay retirement. You will receive 48 fewer benefit checks.
- Your PIA is $1,000, so if you retire at age 66, your annual benefit will be $12,000. If you retire at age 70, your monthly benefit will be increased by $320, so your annual benefit will be $15,840.
- Assume that even if you’ve saved or invested all or part of your benefits, your real rate of return is 0 percent.
Using these factors, it would take you more than 12 years from the time you retire at age 70 to reach the point at which your benefits would crossover with the amount you would have accumulated if you began receiving benefits at age 66 (does not take into account annual cost of living increases):
| By this Age | Accumulated Benefit if Retirement Age is 66 | Accumulated Benefit if Retirement Age is 70 (32% credit has been earned) |
| 70 | $ 48,000 | $0 |
| 76 | $120,000 | $95,040 |
| 82 | $192,000 | $190,080 |
| 83 | $204,000 | $205,920 |
If you were to die before reaching this crossover point, your lifetime benefits would be lower than if you had retired at your normal retirement age. Conversely, if you were to die after reaching this crossover point, then your lifetime benefits would be higher. That’s why life expectancy is one of the factors to consider when deciding whether to delay receiving Social Security retirement benefits.
The delayed retirement credit won’t increase benefits paid to most family members.
When you earn the delayed retirement credit, your retirement benefit will increase. However, because the delayed retirement credit doesn’t affect your PIA, benefits that are paid to family members won’t increase (unless you die, at which time your surviving spouse may receive the same benefit you were receiving).
How to do it
Decide whether you want to delay receiving retirement benefits by comparing your options.
You can estimate your retirement benefit online using the Retirement Estimator calculator on the Social Security website (ssa.gov). You can create different scenarios based on current law that will illustrate how different earnings amounts and retirement ages will affect the benefit you receive.
Consider the following questions before making your decision.
- Why do you want to delay receiving retirement benefits?
- Can you afford to delay receiving retirement benefits, or do you need Social Security retirement income as soon as possible?
- Do you expect to live long enough to benefit from delaying your retirement benefits?
- How important is it to increase the amount of survivor income available to your spouse?
Apply for delayed Social Security retirement benefits.
Three months before you’re ready to retire, fill out an application for benefits with the SSA.
Don’t forget to apply for Medicare benefits at age 65. See Questions & Answers.
Tax considerations
If you continue to work past normal retirement age, you will continue to pay Social Security or self-employment tax on your covered earnings. Even though your earnings may increase your AIME (and thus your retirement benefit), you may not be able to recoup those payroll taxes.
Questions & Answers
If you delay receiving Social Security retirement benefits, can you still receive Medicare at age 65?
Yes. Anyone age 65 or older who is entitled to receive Social Security benefits is eligible to receive Medicare, even if he or she has not yet filed an application for Social Security benefits. However, enrollment in Medicare is automatic only for individuals who are receiving Social Security retirement benefits for at least four months before reaching age 65. If you elect to delay receiving retirement benefits, you will need to apply for Medicare benefits online, in person, or through the mail.
Can you delay receiving Social Security retirement benefits until you’re 71 or older?
Yes, but there’s no advantage to waiting longer than age 70 to begin receiving Social Security retirement benefits. You can earn the delayed retirement credit only up until age 70. In addition, if you want to work, any money you earn from working after age 70 won’t decrease your Social Security retirement benefit. So why wait?
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals. Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Commonwealth Financial Network® or Blakely Financial does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.
May Market Update
Join Steve LaFrance, CFP® with Blakely Financial as he updates you on the last month in 3 minutes.
Decoding the Debt Ceiling Crisis: An Update
Presented by Steve LaFrance, CFP®
We’ve discussed the debt ceiling crisis in past articles, and now it’s back in the headlines. What does this mean, and why are we watching it now? Several months ago, the U.S. borrowed as much money as it’s legally allowed to borrow and, since then, has been prohibited from borrowing more. In the language of the headlines, we have hit the debt ceiling.
If that sounds like an awkward situation, it is. It also raises very real economic and market risks, which are being played out in the news. Let’s analyze in detail what this all means.
The Current Situation
The U.S. government runs a deficit, meaning it spends more than it brings in. So, it continually borrows more to pay the outstanding bills. The problem is that Congress has put a limit on the total amount the government can borrow, also known as the debt ceiling. Congress needs to raise that limit on a regular basis to account for approved deficit spending. Raising the debt limit has become a regular political football, which is why we’re having this conversation again. Congress has not raised the limit, and we have reached the debt ceiling again.
Once the debt limit is hit, the Treasury cannot issue any more debt but must keep paying the bills. There are “extraordinary measures,” tested in previous debt-limit confrontations, which would allow this to be done in the short term. These include shifting money among different government accounts to fill the gap until more borrowing is allowed. Two examples of this are affording the debt by suspending retirement contributions for government workers or repurposing other accounts normally used for things such as stabilizing the currency. The idea is that this will buy time for Congress to authorize more borrowing. This is where we are now, and where we have been for the past several months.
The Consequences If Congress Doesn’t Act
At a certain point—tentatively estimated to be around June or July, but this is very uncertain—the Treasury will run out of money to pay the bills. Among those bills are salaries for federal workers. So, at some point, the government will largely shut down. Some bills will get paid, but many government obligations will go unpaid.
Why We Should Care
Setting aside the political aspect of the situation, this affects investors for several reasons. First, cutting off government payments will hurt economic growth. Limits on social security payments, for example, would severely hurt economic demand and confidence. Although social security would likely be the last thing cut, other cuts would also hurt growth and confidence. We saw this in prior shutdowns, and the damage was real.
The bigger problem, however, is if payments to holders of U.S. debt are not made and the Treasury market goes into default. U.S. government debt has always been the ultimate low-risk asset, where default was assumed to be nearly impossible. Adding a default risk would raise interest rates, potentially costing the country billions over time. The economic risk, both immediate and long term, is very high—and that’s what the headlines are emphasizing.
Possible Solutions
We have been down this road before, and while the ending could be bad, we’ve resolved the problem every previous time. There are a few ways we could do this without systemic damage.
The easiest and most likely course of action is for Congress to cut a deal. At this point, it seems the group of Congresspeople really looking for an extended confrontation is quite small. If that’s true, a deal is very possible, and even likely, as pressure mounts.
On the other hand, if Congress cannot or will not come to an agreement, there are other ways the government can resolve the problem before it blows up. These range from the reasonably credible, such as using a line from the Fourteenth Amendment of the U.S. Constitution to justify ignoring the limit entirely, to the reasonable but iffy, such as issuing lower face value bonds with higher coupons. There are also borderline crazy solutions, such as issuing a $1 trillion coin. In short, there are many options other than default. As we saw in the financial crisis, the government is willing to do many things that were previously unimaginable to avoid a crisis, and I am quite certain that will be the case here as well.
What Happens If We Default
Defaulting is not the end of the world, and here’s why. First, a default happened in 1971 for technical reasons. Since the reasons weren’t economic, investors looked through the default and the long-term consequences were minimal. Second, a default this time around also would not be economic; it would be political. When countries default because they can’t pay, that is a systemic problem—the lenders won’t be getting their money. In this case, though, we can and will pay. It will just take some time to get through the political process. If you think about it in personal terms, a late mortgage payment is quite different from foreclosure. No one is talking about repudiating or actually defaulting on U.S. debt over time, and the markets are reflecting that. Real default won’t happen, even if temporary default does
The Takeaway Message for Investors
Don’t panic. This has happened before and will likely happen again. The headlines are making the most of potential consequences, and the worst case would indeed be bad. But there are enormous incentives to cut a deal before we reach the worst-case scenario. And even if a deal is not cut, there are other non-default options. If we do get to default, the likely market volatility will drive a deal at that time. Failure to solve this problem really isn’t an option.
This is a big deal, and worth watching, but not worth worrying about yet. We’ll be keeping an eye on it and writing about any developments. In the meantime, keep calm and carry on.
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.
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Blakely Financial, Inc. is located at 1022 Hutton Lane Suite 109 High Point, NC 27262 and can be reached at 336-885-2530.
Securities and Advisory Services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network®.
Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network®.
© 2023 Commonwealth Financial Network®
What Does the Silicon Valley Bank Collapse Mean for Investors?
Americans have suddenly witnessed three very large bank failures in only a few days’ time. The first was the collapse last week of Silvergate, also known as “the Crypto bank.” Soon after, we read the news of both Silicon Valley Bank (SVB) and Signature Bank collapsing. These are some of the largest bank failures in U.S. history. What is going on here? Should we be worried? Is another financial crisis on the horizon? The short answer is no.
Why We Shouldn’t Press the Panic Button
Let’s start with the bottom line before we get into the details. This is something to keep an eye on, but it’s not the start of the next financial crisis. Unlike in the great financial crisis of 2008, the government is getting ahead of the problem rather than trying to clean up afterward. That is a very positive sign. We can certainly expect market turbulence—in fact, we’re seeing it already—but the systemic effects will be limited, and we’re not set for another major crisis.
Instead, the takeaway so far is that regulators and the federal government are on the case and are willing and able to support the financial system. Sunday night, the U.S. Treasury announced that depositors would be fully protected in the interest of maintaining systemic confidence and that funds were being made available to support banks under stress. Again, this quick action is what differentiates this situation from that of 2008.
What Will Happen Now?
Many people have written good descriptions of how and why these banks collapsed, and I won’t try to replicate those. To investors, the “why” is interesting, but what we really need to know is what it all means for the future.
The Federal Reserve’s (Fed’s) interest rate hikes are indeed affecting the financial system. The fact that the collapses have principally been in the tech and crypto spaces suggests that these sectors are even more at risk than the economy as a whole. While other banks will likely move to replace SVB, they will not be as focused or as dedicated to the sector, and things will slow down in the tech sector going forward. In short, one of the primary enablers of the tech boom is now gone.
Do These Failures Indicate a System-Wide Problem?
The answer to this question is good news. To set the stage, let’s look at the three factors that caused the financial system to lock up in 2008:
- There was little transparency around asset values, which caused a lack of liquidity for those assets.
- Banks didn’t have sufficient capital to weather a crisis.
- There wasn’t enough available credit in the early stages of the crisis to support the banks until liquidity came back.
We’re in a very different place now on all three.
In terms of the liquidity issue, U.S. banks generally now hold very liquid assets, dominated by U.S. Treasury notes. Those values are clear, and there is a large market for them. Banks can raise cash, if necessary, simply by selling or borrowing against those assets.
Regarding sufficient capital, U.S. banks are, by and large, very well capitalized. They have the money to weather storms and, as noted, they can access those funds. These circumstances are both very different from those of 2008.
The third cause, lack of available credit, is where we must be careful. Banks have seen those Treasury notes decline in value significantly as rates rose, and there are questions in some cases about whether the value of the bank capital still covers the liabilities. This is what drove the collapse of SVB. What the Treasury did Sunday, however, was to solve this problem by providing a way for banks to borrow against long-term assets, like Treasuries, based on the par value, not the current market value. That largely eliminates the insolvency problem and will provide the credit that was missing in 2008. It will not eliminate the entire problem, though, as banks may still need to rebuild their capital bases. But it will allow the banks time to recover, which will be key to rebalancing the system.
Explained differently, the system is more transparent and has a more solid foundation compared to 2008. The government has also identified the remaining problems and put programs in place to deal with them. From a depositor’s perspective, the government’s decision to stand behind all deposits also reduces the risk of further bank runs. With a stronger system in place, and the government being aggressively proactive, there looks to be little systemic risk right now. We won’t see another great financial crisis.
What Comes Next?
What we can expect to see is continued turbulence. The primary purpose of diversification is to mitigate risk. By spreading your investment across different asset classes, industries, or maturities, you are less likely to experience market shocks that impact every single one of your investments the same. Our approach is to maintain a disciplined commitment to well-diversified portfolios. It may be a bumpy ride, but one that will eventually end. This story is not over yet, and we don’t fully know how it will play out. We do know, however, that we will make it through.
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index.
Steve LaFrance, CFP®, AIF®, ChSNC®, MBA | Blakely Financial
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals. Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Commonwealth Financial Network® or Blakely Financial does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.
Helping Your Child Build Credit
If you are the parent of a teenager or a child who will soon become one, you should consider helping them build credit from a young age. Teaching your children how credit cards work can help them integrate sound spending habits and a strong understanding of money. As a parent, setting your kids up for success is probably one of your top priorities, and helping them build credit is a great way to do this!
Why Should You Help Your Child Build Credit?
There are huge benefits to having a good credit score, and it can be difficult to build credit from scratch. When your child reaches the age to start making major purchases or applying for loans, a strong credit score will help them significantly. Starting your child off with healthy spending habits and a strong understanding of credit will help them immensely down the line; it is better for them to make small mistakes at a young age than potentially drastic ones later in life! Giving your teen a credit card can also be an opportunity to teach them about managing money and making responsible financial decisions. You can help them set a budget, keep track of their spending, and understand how interest and fees work.
When Should Your Child Have Their First Credit Card?
Because children cannot open a credit card until they are 18, you may consider adding them as an authorized user on your account before then. Doing so could help them establish credit history, ensuring they will be better qualified to open a good credit card when they are old enough. Regardless of the reasons you choose to give your child a credit card, most parents agree it is a good idea for teens to have one in case of an emergency. Ultimately, when your child first gets a credit card is up to you, but they should be prepared to have a credit card by age 18 or before going to college.
How Do You Teach Your Children to be Responsible?
Ideally, your child should have a strong sense of financial responsibility before they are old enough to open a credit card. Teaching your child about money can begin at a very young age, even through abstract methods. If you are going to be responsible for paying your child’s credit card bill, sit down with them each month and review their spending habits to assess whether or not they are using the card responsibly. Setting limits and establishing the difference between wants and needs will help your child make smart decisions, and also help them down the line when using money of their own. Make sure they understand why you have given them a credit card – it’s not a gift of unlimited spending. If your child opts to spend their allowed funds on a purchase you do not agree with- let them! As long as they are spending within their limits, they should have to learn for themselves which purchases are going to satisfy them in the long run.
What Type of Card Should They Have?
There are many different options for credit cards- and your child should understand the difference between them before they look into opening one for themselves. If you are choosing their first card, you would most likely want to open one that offers low-interest rates, low fees, and a manageable credit limit. This type of card is great for a teenager’s first experience using credit, as it will not cost you very much and lowers the risk of your child overspending.
Setting your child up for a successful future is an admirable feat, and teaching them proper money management skills can go a long way! No matter how you decide to help them build credit, your child will thank you down the line for the smart decision-making skills you have imparted to them.
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals. Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Commonwealth Financial Network® or Blakely Financial does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser
Planning for Major Spending Events
Your financial plan likely involves standard savings goals, such as retirement or education costs, but do you have savings prepared for expensive life events? The beginning of the year is a great time to take inventory of any upcoming life events and begin mapping out a savings plan. Your long-term plans should include funds set aside to celebrate some of life’s best moments!
Weddings
If you plan on getting married in the future, or plan to fund your child’s wedding, saving should start early. The venue, food, and music can be incredibly expensive- and prices are only continuing to increase. Weddings should be a joyous celebration- not a time to stress about debt. Identifying wants and needs long before the event, and prioritizing spending on which aspects of a wedding are most important, is essential to avoid overspending. If you prepare yourself early enough, you can throw a wedding without the constraints of a limited budget, and simply enjoy yourself and the special day.
Graduations
Graduating from high school or college is a momentous occasion in anyone’s life. If you have a child or loved one in school, think about how they may want to celebrate their graduation! Many parents give their children a large gift, a check, or a vacation to celebrate their accomplishments. If you are planning a party as well, familiarize yourself with the expenses involved and communicate expressly with your child about their expectations. The most important part of graduating is celebrating your loved one’s accomplishment, money should not hold you back from showing your pride!
Moving
Congratulations- you have purchased a new house! However, in the midst of the mayhem of the home-buying process, you may have forgotten about moving expenses. Depending on the distance of your move, it can be incredibly expensive to rent a truck, hire professional movers, or ship your belongings. Make sure you have set aside adequate funds for all aspects of purchasing a new home- not just funds for the home itself!
Birthdays
Some birthdays hold more significance than others. If you or a family member are anticipating a major birthday in the coming years, start setting funds aside now to celebrate them! For instance, many people see a 50th birthday as a significant milestone and throw a more elaborate party than in other years. If you are interested in planning a trip, throwing a party, or even just purchasing an expensive gift for a loved one, make sure you have considered the funding in advance.
At the end of the day, our wealth should be used to enjoy some of the best parts of life! Don’t let a lack of planning prevent you from celebrating yourself and your loved ones on important occasions. If you are interested in building a new financial plan that includes these types of funds, contact Blakely Financial to speak with one of our trusted advisors.
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals. Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Commonwealth Financial Network® or Blakely Financial does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.
The 4 A’s of Your Personal Finances
As the saying goes, there is no better time than the present. When it comes to setting up a system for managing your personal finances, the beginning of a new year is the perfect time to begin. The easiest way to be successful with a cash management program is to develop a systematic and disciplined approach. Spending a few minutes each week to maintain your cash management program can help you to keep track of how you spend your money and pursue your financial goals.
Any good cash management system revolves around the four As – Accounting, Analysis, Allocation, and Adjustment.
Accounting
Accounting involves gathering all your relevant financial information together and keeping it close at hand for future reference. Gathering all your financial information — such as income and expenses — and listing it systematically will give you a clear picture of your overall financial situation.
It’s important to note all of your expenses, subscriptions, memberships, and more. The small items add up quickly.
Analysis
Next, you need to sit down and review your financial situation once you have accounted for all your income and expenses. You will almost invariably find yourself with either a shortfall or a surplus. Ideally, you should be spending less than you earn, if this isn’t the case, you will need to take a very close look at your spending habits.
Allocation
Now you must determine your financial commitments and priorities and distribute your income accordingly. One of the most important factors in allocation is to distinguish between your real needs and your wants. If you need to reduce your expenses, you may want to start out by cutting back on your discretionary spending. This can help to free up cash that can either be invested for the long term or used to pay off fixed debt.
Adjustment
Even with a set budget, it’s important to be flexible and account for needed changes. You may want to review your budget monthly, quarterly or biannually to be sure it fits your lifestyle and needs, wants, and wishes Above all, be flexible. Any budget that is too rigid is likely to fail.
Using the four As is an excellent way to help you monitor your financial situation to ensure that you are on the right track to meet your financial goals.
Commonwealth Financial Network® or Blakely Financial does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.
Financial Planning Tips & Updates
The end of the year is a time for reflecting on what happened and planning for what is to come. As 2023 draws closer, we wanted to highlight the changes that occurred in the past year, tax considerations for this year and next, and how you can prepare for a prosperous 2023.
Changes in 2022 that May Impact You
Some financial planning limits have changed for 2023, which may impact your retirement plan, Social Security, Medicare, federal tax rates, and standard deductions. Learn more via the links below, or consult the IRS website for full details on contribution limits.
In October, the IRS announced an increase in the maximum amount you can contribute to your employer-sponsored retirement plan in 2023.
Due to high inflation, the cost-of-living adjustment means maximum retirement contributions will be rising almost 10% in the upcoming year. The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan has been increased to $22,500 (which is up from $20,500 in 2022). Annual contribution limits have also been increased for traditional and Roth IRAs, up to $6,500 from the $6,000 limit of 2022.
If you receive Social Security benefits, you can expect them to be boosted by 8.7% in 2023. This cost-of-living adjustment (COLA) was announced by the Social Security Administration on October 13th, and it is a massive increase from that of previous years.
The notice, issued by the Department of Treasury and the Internal Revenue Service, means updated regulations of required minimums for distributions, or RMDs. This notice comes in the wake of the significant confusion around the SECURE Act of 2019. This notice will provide some penalty relief to those who avoided taking RMDs as a result of the SECURE Act.
2022/23 Tax Considerations
Increase withholdings
Increasing your withholdings can be beneficial at any time of the year to ensure you will not be met with any unwanted surprises come tax season. Though it may not make a significant difference to increase withholdings close to the end of the tax year, it can be a great way to plan for 2023.
Save more for retirement
Though retirement savings should be a year-round consideration, the end of the year is an optimal time to reassess the amount you have contributed throughout 2022 and prepare for the year ahead. Make sure you have claimed your full 401(k) match before the end of the year, and contribute to IRAs before tax day, to reap the full benefits of these accounts. Similarly, consider setting up a Health Savings Account (HSA) for the tax benefits and savings on healthcare.
If you are 72 or older, do not forget to withdraw your required minimum distributions from traditional IRAs or 401(k)s before the end of the year!
Defer income to next year
If you choose to defer any of your income into the next year, you can spend that additional cash on investments, which would otherwise go toward income tax. If you are not planning on entering a higher tax bracket in 2023, there are multiple ways for you or your business to defer taxable income until the new year. Another way to lower your tax bill is to accelerate deductions, which can be done by making a charitable donation before the end of the year.
Charitable Giving Strategies
The holidays are the perfect time to make a charitable donation to help your family get into the giving mood. There are many ways to give to charity, but if your gift is substantial, you can establish a private foundation, community foundation, or donor-advised fund.
Donor-advised funds offer a way to receive tax benefits now and make charitable gifts later. A donor advised fund is an agreement between a donor and a host organization (the fund). Your contributions are generally tax-deductible, but the organization becomes the legal owner of the assets. You (or a designee, such as a family member) then advise on how those contributions will be invested and how grants will be distributed. Although the fund has ultimate control over the assets, the donor’s wishes are generally honored.
How can you prepare for next year?
In addition to your preparations for tax season, the end of the year can be a great time to take a wider look at your financial progress and goals. Do you still aim to retire at a certain age? Are you still saving for the same goal (vacation, car, property)? Take note of how far you have come, and review what needs to be adjusted in the year ahead!
The holidays can be a very busy and stressful time; we hope these insights will help you end the year on a positive note and guide you into a financially successful 2023! As always, reach out to the Blakely FInancial team if you have any questions about your portfolio.
Commonwealth Financial Network® or Blakely Financial does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.
Market Timing: More Risk than Reward
If you turn on the news, you are bound to see discussion about the uncertainty of the current financial market. When you log into social media, it’s easy to find hundreds of “experts” discussing “buy now” and “sell now” strategies. The idea of properly timing investments for a quick return is not a strategy we believe in and is not something we ever recommend for clients. In this article, we will discuss why we don’t believe in investing based on market timing.
What is Market Timing?
A practice typically used by day traders, market timing refers to the process of using predictive methods to determine when to move investment money in or out of a financial market. Certain investors believe if they can predict the movements of the market, they can buy and sell to create a significant return.
According to Investopedia, “many investors, academics, and financial professionals believe it is impossible to time the market.” For the majority of investors, engaging in market timing produces lower returns than long-term strategies.
Though some traders claim to have success with this method, there are no guarantees when it comes to the stock market. As professional financial planners, the Blakely Financial team will always stress the importance of the time your funds stay invested rather than encouraging investments based on an opportune time.
The Buy and Hold Strategy
The buy-and-hold strategy is essentially the opposite of market timing. Basically, with buy-and-hold, you purchase securities and hold on to them regardless of how the market is performing. Historically, this method yields significantly higher returns than market timing.
It is difficult to predict the ebbs and flows of the stock market. In the current bear market, it’s important to remember that historically, after every bear market, a bull market follows. Overall, the U.S stock market is positive most of the time, and bull markets last more than twice as long as bear markets. Though it can be difficult to navigate a bear market, rational thinking and patience are the best ways to ensure the success of your investments over time.
Avoid Emotional Strategies
When experiencing a rough patch, successful investors will look toward the future instead of taking drastic steps to correct a loss. If the market is trending downward, you may feel compelled to sell off stocks for fear of more substantial losses. On the other end of the spectrum, some may feel pressure to “buy the dip” with hope that prices will soon rise again rather than continue to fall. These reactions operate under contradictory assumptions, and can be incredibly risky maneuvers. Additionally, the financial and emotional stress of monitoring price changes so closely is rarely, if ever, worth it.
Choosing your investments intentionally based on your overall financial goals can give you peace of mind regardless of the state of the market. When you are experiencing stress or fear in regards to your portfolio, review your investments with your Financial Advisor, they will be able to provide the insight you need.
In closing:
Historically, the buy-and-hold method yields significantly higher returns than market timing. Attempting to time the market is not a strategy Blakely Financial supports, regardless of how attractive certain opportunities or indicators may be. The road to financial freedom looks different for everybody, but it is important to prioritize the time your funds stay invested over the timing of your investments. The team at Blakely Financial can guide you toward well-informed, diversified, and long-term investments to grow your wealth over time.
Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.
Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.