Your Retirement and the Handoff

FORECASTS & TRENDS E-LETTER
By Phil Denney
February 20, 2024

IN THIS ISSUE:

1. Some things no one tells you about retirement

2. Do you pay income taxes on Social Security?

3. Handing off your values, wealth, and control

The focus today is on retirement. We either look forward to retirement or dread the day that it comes. It comes down to how much you have planned for it, saved for it and accepted that it will happen ready or not. Some hope it will all work out in the end, so they didn’t think much about it. Well hope is not a strategy. We will also talk about handing off your wealth to the next generation.

Some things no one tells you about retirement.

There are some key challenges that catch many new retirees by surprise. There can be unexpected hurdles as an individual or a couple enter this new phase of life called retirement.

You feel differently about stock market volatility. It is just background noise while you are working. Then when you retire you no longer have that regular paycheck and have much more time on your hands. Depending on the size of a pension and/or Social Security you may or may not need to tap into your retirement savings. Yet if you are dependent on your savings/investments you may become anxious about outliving your investments. So you go online way too often to check your account balances and overdose on financial news. You then overreact to what you hear on the news and exit an investment at the worst time. You can now get 5% interest at the bank, so why take the risk?
Inflation risk has a whole new meaning. You perhaps start to notice price increases at the grocery store or the price at the gas pump more than you did in your earning years. Medical costs only go up to include your insurance premiums. Inflation can strain the finances of retirees, reducing the spending power of those living on a fixed income. You may be earning 5% on your bank CD, but the combination of inflation and taxes may have you breaking even. You still need an allocation to equities in retirement. Inflation is the number one risk to retirement security. Healthcare expenses are second.
Not having a purpose may leave you bored. Unlimited free time can become overwhelming. It is important to find activities that can offer fulfillment and satisfaction. We want our lives to have meaning and we want to finish well.
Your family relationships can shift in a negative way. There is a rising term called gray divorce. Divorce for those over 50 is on the increase. Adjusting to retirement is a gradual process which requires patience with each other. There can also be new expectations by adult children, such as free baby setting or paying for the grandchildren’s college expenses.
Your circle of friends’ changes. Friendships built in the workplace may erode through a lack of daily interaction. You need friendships outside of work, such as at church, senior centers in your community or other social circles. Nurturing relationships with family, neighbors, and old friends should always be important. It doesn’t just happen.
Spending your retirement savings can be scary and there is that thing called longevity risk. The fear of running out of money and being dependent on the government or becoming a burden to your adult children could be a concern. You are wired to save. Now you are expected to spend it. It will be helpful to develop a spending plan (that awful thing called a budget) with conservative estimated rates of return. It is better to underestimate your portfolio returns and overestimate your retirement expenses, than create a plan based off wishful thinking.

If you fail to plan, you are planning to fail.

Do you pay income taxes on Social Security?

Most states do not tax Social Security benefits. To see if your state taxes your Social Security income, click on this link to read an article about it at Yahoo Finance. For those of you that are retired from one of the military services, many states do not tax that income either. You can click on this link to see the list at World Population Review. You might consider moving to a tax-friendly state as part of your retirement plan.

Unfortunately, the federal government still wants to tax these benefits. However, there is a movement within the current congress to change the taxability of Social Security income. I really don’t know if it has a snowball’s chance in you know where but hope springs eternal.

U.S. Representatives Angie Craig, D-Minn., and Yadira Caraveo, D-Colo., have sponsored new legislation — the You Earned It, You Keep It Act — to repeal the federal taxation of Social Security benefits starting in 2025.

“For almost a century, America has upheld a fundamental promise – that if you work hard and play by the rules, you’ll be able to enjoy a secure retirement. However, historic inflation is eroding seniors’ budgets, jeopardizing the financial security they’ve worked their whole lives to achieve,” Caraveo said in a statement.

Craig’s bill would allow the Social Security Administration to continue making all payments on time and in full through 2054 — 20 years longer than the current projection of 2034, according to an analysis from Social Security’s Office of the Chief Actuary. The same analysis showed that the act would also reduce the federal debt by $8.9 trillion over 75 years.

The legislation would be fully paid for “by raising the cap for individuals earning more than $250,000 annually and asking them to continue paying into Social Security each year,” Caraveo added.

The Social Security Administration has weighed in on the bill to repeal taxes on benefits. The program's chief actuary says the bill would improve the long-term solvency of Social Security. The Social Security Administration found that the proposed tax legislation may indeed extend the lifespan of the retirement program.

“The date of projected depletion of the combined OASI and DI Trust Fund reserves would be moved from 2034 under current law to 2054 assuming enactment of the proposal, under the intermediate assumptions of the 2023 Trustees Report,” Goss said.

As of now, the You Earned It, You Keep It Act is on the floor but has not had much traction yet.

Handing off your values, wealth, and control.

Many baby boomers are reaching old age and starting to think about legacy, about the imprint of their lives upon their children and their children’s children. Very often in history, what one generation has created and intended for its heirs fails to embed in the next generation. If not planned, disappointments may set in, tensions may arise and wealth can be squandered.

David Green, the founder, and CEO of Hobby Lobby discusses the above in his book “Giving It All Away… And Getting it All Back Again.” It is worthwhile reading and inspiring too. “Great wealth and power can, when not managed well, lead to corruption. Boom can lead to bust, unless we’re aware of the situation and make a plan to succeed in legacy leaving.” He and his wife realized there were unseen and invisible aspects of legacy.

David gives a great analogy of runners in a relay race being able to effectively hand off the baton. The handoff can lead to success or disaster. What he discusses is more than having trusts, wills or just passing off wealth. “The inheritance of greater value is the sum of how we live, what we believe, and the content of the dreams that carry us to success.” If you aren’t happy with how things are going in our country today, perhaps it is due to a poor hand off. How well have you planned your handoff?

The way we live is often more convincing than the words we say.
—WISDOM FOR EACH DAY

Phil

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