When You Should File for Social Security

During the 1996 presidential campaign, MTV asked both candidates whether they favored boxers or briefs. Bob Dole, as legend has it, answered “Depends”, as in he was so old he needed their incontinence protection. My answer for when you should take Social Security benefits is the same, it depends. Ultimately, when to file depends on what will benefit you the most in the long term, an answer a good financial plan will provide.

When presenting financial plans for clients we review what they can expect to receive in income from Social Security to cover part of their needs during retirement. Almost without exception, our clients joke that Social Security will surely go bankrupt right before they need it. While one can lose a LOT of money betting on what Congress will ever do, I firmly believe Social Security will always exist – maybe in a slightly different form – and will be an important income source for most of during retirement. So, here are some key things you need to know to help you maximize your benefits:

Social Security (SS) wasn’t designed to replace all of your wages:

As a result, Social Security should not be viewed as your primary source of income during retirement. In fact, we often plan that SS essentially be viewed as supplemental payments to your income from investment assets or pension income. A decent rule of thumb is to estimate you will need to replace about 85% of your pre-retirement income during your actual retirement, at least at first. So, plan to save enough to produce most of that from your 401(k), IRA, etc. and supplement that with SS income.

Your benefits are based on your entire earnings history:

Yes, that 6.2% you pay each pay period to Social Security is what funds most of our benefits. So, your benefit is calculated on your highest 35 years of earnings. If you don’t have 35 years of earnings, your monthly benefit will be reduced.

Do you know your full retirement age for social security?

You can receive Social Security as young as age 62 but you will only receive 75% of your monthly benefit at that age. At what age you can receive 100% of your SS benefit depends on when you were born. For instance, if you were born in, say, 1955 your full retirement age is 66 and 2 months. If you were born in 1960 and later, your full retirement age is 67.

You can benefit by delaying taking Social Security:

Starting at full retirement age, you will earn delayed retirement credits that will increase your benefit by 8% per year up to age 70. For example, if your full retirement age is 66, you can earn credits for a maximum of four years. At age 70, your benefit will then be 32% higher than it would have been at full retirement age – 8% times 4 years.

Social Security benefits may be taxable:

When you begin taking SS may depend, in part, if you are still working because, believe it or not, your Social Security benefits may be taxable at the federal and/or state level. If your adjusted gross income plus half of your Social Security income totals more than $25,000 as a single filer, 50% of your Social Security benefits are taxable at federal ordinary income tax rates. For couples filing jointly, this figure is $32,000. If a couple filing jointly earn more than $44,000, up to 85% of your benefits may be taxable.

Can retired teachers receive their deceased spouse’s Social Security benefit?

As Kentucky is one of the 14 states in the country that do not provide Social Security coverage for teachers, spousal benefits of retired teachers can be impacted. The Government Pension Offset, the GPO, reduces Social Security spousal benefits by two-thirds of the monthly benefit from any government pension the spouse receives for work not covered by Social Security. For example, suppose a teacher receives a $1,000-per-month KTRS pension benefit and is also eligible for $600 per month in Social Security spousal benefits based on her husband’s employment. Under the GPO requirement, the pension offset amount is $660 (two-thirds of $1,000) per month. Since the offset is greater than the Social Security spousal benefit, the teacher receives no Social Security.

A thorough financial plan will examine these factors and more and, ultimately, help us guide you to determine when the best time will be for you to file for Social Security.

My Favorite Lexington Charities and Why We Give

I often tell my kids the best way to make yourself feel better when you’re down is to do something nice for someone else. It may be counter-intuitive, but it really works. Feeling sorry for yourself when you’ve had a bad day – or bad week – only makes you feel sorrier for yourself. Doing something nice for someone else, however, even as small as holding a door or complimenting someone on their appearance, can help you snap out of your funk.

From a financial planning perspective, saving and investing for our financial freedom is important but so is the personal satisfaction of helping others along the way. Webster defines altruism as “unselfish regard for or devotion to the welfare of others.” I don’t think that really captures the full value of charitable giving, though. Let’s face it, we humans are communal animals who would find life intolerable without others. So, any act of kindness isn’t “unselfish” but, rather, quite selfish because we derive great joy by doing something nice for others. The fact that helping others also helps us doesn’t diminish the act, it’s what makes communities work.

So, the two following organizations are special to me, here are their stories:

YMCA of Central Kentucky:

Did you know no one is ever turned away from the Y because they can’t pay? The Y’s Annual Giving Campaign raises over $500,000 each year to help children attend summer camp or take swim lessons if their families can’t afford it. Membership dues don’t pay for this, only dollars raised from this campaign. This is what makes the Y something much more than “swim and gym” and what makes it so special.

At the High Street Y a woman came to our board meeting a couple years ago to thank us for the support she received for providing swimming lessons for her autistic son. She told us that people with autism are naturally drawn to rivers or swimming pools because of the calming effect of the water and, as a result, drowning is one of the leading causes of death among autistic people. She lived in constant fear that she would be separated from her son and he would flee to an unsafe situation, but she couldn’t afford swim lessons for him without help. Now, I don’t know about you, but my memory of swim lessons is an experience filled with cold water, fear and sensory overload – not a good combination for an autistic person. She described her son’s swim lessons at the Y, however, as a soothing exercise where the instructor met her son where he was and helped him learn at his pace. Now, she said, not only does she no longer live in fear for her son’s safety, but he loves swimming.

You may contribute to the Y Annual Giving Campaign here:


God’s Pantry Food Bank:

You may be surprised to learn this, as I was, that in Fayette County approximately 50,000 people are considered to be “food insecure.” Of those, approximately 11,750 are children. What is food insecurity? The USDA defines it as “consistent access to adequate food is limited by a lack of money and other resources at times during the year.” I don’t know about you, but I find it astounding that 50,000 people in Lexington, Kentucky struggle to put food on the table. And I know for a fact that those almost 12,000 kids will have difficulty learning if they are hungry.

In 1955, a woman named Mim Hunt began distributing food out of her basement to those in need of assistance. That initial effort grew and grew and became what we today know as God’s Pantry Food Bank. Today, over 121,000 meals per DAY are provided to people in need across 50 central and eastern Kentucky counties. The Food Bank has a network of more than 300 partner agencies, including food pantries, soup kitchens and shelters, who can order what they need through an online ordering system so they may deliver it to all corners of this huge territory.

This year God’s Pantry will distribute over 25 million meals. While roughly half of the cost to make this happen comes from USDA commodities – essentially food from the federal government – donated food will amount to over $15 Million and contributions from people like you and me will total over $3 Million.

If you’d like to join me, $40 will pay for 320 meals for hungry children; $70 will pay for 560 meals for struggling seniors, $150 will provide 1200 meals at an abuse shelter and $500 will provide 4,000 meals for families struggling with job loss. Contributing online is easy here: https://give.godspantry.org/give.now.

My advice? Find a cause you believe in and donate your time, talent and treasure. It’s a selfish act, but you’re worth it.


How Do We Keep Our Schools Safe?

This week’s post will not contain any advice on financial planning or investments or how much to save to achieve financial freedom. Today, I take a break from that to discuss what may be the most important issue in America today: keeping our children safe while in school. I was recently appointed to the District Safety Advisory Council organized by Fayette County Superintendent Manny Caulk. This Council is charged with “developing specific and actionable recommendations” on ways to make our schools safer. We had our first meeting on March 1 and will submit our recommendations no later than the first week of April, so this is designed to be a crisp process.

Now, I am a product of 1970’s-era schools where my biggest fears at school were being ambushed with snowballs by Jimmy Horne and Mark Velicer, the terrifying prospect that Heidi Moisenko might actually speak to me, or that Mike Zack’s mom might put cow tongue in his lunch again. Fast forward to today, and you don’t need me to describe our fears as parents of children in school.

Dr. Caulk recently summarized the urgency of this issue in an email to Fayette County Public Schools families with the following:

Our community is hurting. And since our schools are a reflection of the community we serve, our schools are hurting too. In the span of six hours last month, three teenagers died of gunshot wounds in Lexington. And in the span of nine days this month, students from three of our high schools – Frederick Douglass, Henry Clay and Paul Laurence Dunbar – have been arrested for serious crimes involving guns and the safety of our campuses.

This is unacceptable and, as a parent and father, I share your frustration.

There is nothing more important to me than ensuring the safety of our students, staff and campuses. As your superintendent, I take seriously our responsibility to care for your children while they are in our schools and send them safely home at the end of the day. I fully understand the sacred trust you place in us when you send your children to school. Students cannot be successful when they don’t feel safe. And I will not tolerate anything that interferes with our children’s ability to learn at high levels and fulfill their unlimited potential.

The Council heard or is scheduled to hear the following presentations for our background and to stimulate discussion:

o March 1 — State and national best practices, at Paul Laurence Dunbar
o March 8 — Juvenile justice and crime, at Tates Creek
o March 15 — Mental health, at Bryan Station
o March 20 — Social media, at Lafayette
o March 22 — Discussion of recommendations, at Frederick Douglass
o March 29 — Discussion of recommendations, at Henry Clay

I will be the very first to admit that I don’t have all the answers. In fact, I’m quite certain I don’t even know all the questions. There are students dealing with issues in this community that, quite candidly, are unfathomable to me. Our schools have to help students that don’t get enough food, don’t speak English well, have little to no supervision at home, who don’t stay in the same place more than a few days at a time, are influenced by gangs and on and on. And, now, of course, we need our schools to take an even more active role in policing our schools for guns and for protecting those students who feel the need to have a weapon as well as those students who could be innocently harmed by those weapons. And then, and only then, can our schools begin to teach our kids.

This Council needs your input, ideas and suggestions. While there are several ways to make it more difficult for weapons to make it into our schools, there are tradeoffs with every single one of them. Understanding what kind of environment the people of this community want for their kids is vital as we prioritize options.

Please give us your ideas by emailing advisorycouncil@fayette.kyschools.us no later than March 20. Suggestions are being compiled there to ensure the Council has an opportunity to review all of them. You can also learn more about the Council here: https://www.fcps.net/domain/8953.

Thank you.

Smart Money Moves Prior to Year-End

I love Christmas but I find Christmas-time stressful. Let’s face it, the world just seems to spin faster during December. We’re already busy with work and family and then we add a slew of fun things like holiday parties, office open houses, gift buying and decorating to our schedule. Who has time for all this fun?!

I’m sure you’ve seen and maybe even read end-of-year financial checklists. While well-intended, I’m sure, I laugh out loud when I read suggestions like, “compute all your expenses for the year in a spreadsheet and develop a budget for next year”, or “review all your estate planning documents to make sure they are up to date.” Yeah, right, I’ll get on that just as soon as I replace all the batteries in the smoke detectors and re-grout the bathtub.

So, in the spirit of the Holidays, here is my advice on what deserves your attention before the end of the year and, what is important, but can wait until January.

Spend a few minutes on these items now:


Whether you suspect you will receive a refund or pay Uncle Sam in April, there are a few things you can do now to reduce your tax liability and help yourself in the process:

• Check if you have contributed the IRS-mandated maximum to your retirement plans – 401(k) or 403(b). The limit for those under age 50 is $18,000 per year, while those of us 50 and over can contribute up to $24,000 per year. Note to UK employees, you may contribute to a 457(b) plan in addition to your 403(b). So, if you’ve maxed out your 403(b) contributions you can also contribute $18k or $24k to your 457(b). That’s a great UK benefit.

• You may also contribute to an IRA or Roth IRA depending on your income and whether or not you have a qualified retirement plan at work. The rules can be a bit convoluted but you may be able to make a tax-deductible contribution to an IRA for $5,500 or an after-tax contribution to a Roth IRA for the same amount. For instance, if you have a 401(k) or 403(b) at work and your adjusted gross income (AGI) is less than $99,000 if married and less than $63,000 if single, you may make a tax-deductible contribution to an IRA. If your income exceeds those limits, consider a Roth IRA contribution if you are single and your AGI is less than $118,000 or $186,000 if married. (You can actually contribute to an IRA or Roth until April 17, 2018)

• If your income is too high to allow a tax-deductible contribution to an IRA and you don’t already have one, consider an after-tax contribution to an IRA and then converting the IRA to a Roth IRA. That move won’t decrease your tax liability this year but is a good long-term tax strategy for high earners who can benefit from tax-free earnings until the assets are withdrawn after age 59 ½.

• This is a great time of year to reduce your taxable income by making a donation to your favorite charity or charities. And, if Congress passes a new tax law these rules may change for next year, so take advantage now and help those who really need it. Lisa and I favor God’s Pantry Food Bank, the YMCA and, of course, the University of Kentucky.

• Tax loss harvesting is a tool that can also reduce your taxable income. If you own investment assets in a taxable account – not your work retirement plan or an IRA – you may sell assets that have declined in value during the year and 1) Use the losses to offset any gains realized from selling assets that have increased during the year; or 2) Deduct up to $3,000 in losses from your taxable income. You may also carry forward losses to future tax years. But don’t sell an asset just to get the tax deduction if you think the investment has potential for the future.

Focus on these items when you have time now or in January:

Did you meet your short-term financial goals for the year?

How did your investments perform this year?

Did you make progress toward your long-term financial goals?

I will discuss these in the Friday, December 15 Lexington Financial Planner blog post.







FOMO or LA – What Type of Investor Are You?

Last week the economist Richard Thaler won the Nobel Price in Economics for his work that explains that people behave irrationally. Well, duh, right? Anyone who has ever been to a frat party can tell you all about irrational behavior. What Thaler did was apply this to economics by trying to measure and predict how humans will “misbehave”, or not act in their own best interest. Thaler believes most individual investors have behavioral biases that get in the way of rational decision-making and can have a negative effect on the long-term growth of their assets. Some of us have FOMO – Fear of Missing Out – and others have LA – Loss Aversion. In fact, most of us have both! Long-term investing success requires us to overcome those natural biases. But how?

We’ve all heard that we’re supposed to Buy Low and Sell High but, in fact, many of us, if left to our own devices, do just the opposite. When the market is rising, and the media talks about it a lot, we tend to get FOMO. If everybody else is getting rich, I want some of that too! Buy! Conversely, when the market is diving, we acquire Loss Aversion. I can’t stand to see my investments go down! Sell, sell!

In fact, this fear of losing money seems to be hard-wired in almost all of us. Thaler said, “…losses sting more than equivalently-sized gains feel good.” The sage philosopher and former boxer, Mike Tyson, said it this way – “Everyone has a plan until they get hit in the mouth!” In other words, we make poor decisions such as selling when the market dives and making paper losses permanent, even when we really know better.

Now, it should be noted the U.S. stock market is in the midst of an 8-year Bull run where there has been little volatility since the recession in 2008. So, many of us may not even remember how we reacted when the market last tumbled.

To see how our personal biases can negatively affect performance, the chart below shows how individual investors, the do-it-yourselfers, have fared much worse than they should have over a 20-year period (JP Morgan Market Insight):

To quantify this further, $100,000 invested in 1994 in the S&P 500 would be worth $581,370 by 2013, but only $163,862 if managed by the average investor on their own. That’s because most of us get influenced when the markets rise and fall and do the opposite of what is in our best interest when facing gains and losses – FOMO or LA hits us – and we irrationally Buy High and Sell Low.

So, how do you remove your emotions and invest with success?

• Analyze your long-term needs;
• Quantify your financial goals;
• Develop a plan with annual savings and investment returns goals;
• Structure a portfolio to support your plan;
• Rebalance your portfolio quarterly to stick to your plan.

Having a financial plan supported by a well-designed portfolio that allocates your investments appropriately for your individual circumstances will help remove your emotions and personal biases from the equation, resulting in better returns.


The Financial Issues of Divorce

“Divorce is like death, but without life insurance!” As usual, our clients express their feelings more articulately than we ever could.

Here are our stories of Ethel and Desi – fictional composites of people who have faced divorce.

Ethel first came to us when she and her husband decided to divorce. As you might expect, she was sad, anxious, uncertain, eager and even scared. Most of all, Ethel just wanted the divorce process over so she could start her new life. In fact, she wanted the process over so much that she was willing to make concessions to her husband in order to just move on. “He can have everything, I just want the house and the kids!” Whoa, whoa, let’s not do anything you’ll regret for the rest of your life.

If marriage is about love, divorce is about money. Crass, but true. While Ethel was understandably emotional at times, it was our job to remove the emotion from the financial decisions we were about to help her navigate. So, we started the process with a few, key items:

1. Assemble all of your family’s financial data – assets, liabilities, tax returns, retirement accounts, checking, etc. The more you understand the pre-divorce financial position of the household, the better your negotiating position;

2. Do not cash out your retirement plan in order to purchase your husband’s half of the house – this is a common emotional mistake one should avoid for the sake of your future self;

3. Start creating your own financial identity – establish your own credit rating by getting a credit card in your name only; or take out a small loan and pay it back quickly;

4. Create a budget based on your new income and expenses;

5. Before the divorce is final close all jointly held credit cards, checking accounts;

6. Change your life insurance and retirement account beneficiaries, insure your car and home, determine how your children receive healthcare insurance and update your will;

7. Get emotional support, not just from family and friends but perhaps a counselor or a support group. Taking care of your emotional needs will help you manage the difficult, but critical, negotiation phase.

We helped prepare Ethel so she would be well-informed for the divorce settlement process. Even during that process, we helped her quantify her financial needs for after the divorce so she would be prepared to begin the next phase of her life.

Desi, unrelated to Ethel, first visited us a few months after his divorce was final. His share of the marital assets were now in his possession and it was time to think about his financial future as a single person. This part of the process can be intimidating as well, especially since financial decisions will now be made by Desi alone without benefit of his former wife’s wisdom. Here is how we helped him with his new financial life:

1. Developed a new budget based on his new, single income and expenses. It can be difficult to maintain the same standard of living with just one income while possibly paying alimony and/or child support;

2. Created a financial plan – fear of uncertainty is quite common but a plan can ease that burden. Desi has to plan to save and invest enough so he will have investment assets sufficient to provide enough income to maintain his standard of living throughout his retirement;

3. Desi was 50 when he came to us so he had less time until retirement and, in some ways, he was starting over. As a result, the margin for error was smaller, making planning even more important;

4. Designed an investment portfolio to support his new financial plan, given his new challenges;

5. Desi and his wife sold their former home and liquidated some other assets so we helped him plan for the tax consequences.

Divorce is difficult. Most of us don’t like to even imagine having to create a complete new life for ourselves. But, as with most things in life, a well-thought out plan will make the unknown a little more certain – both during the settlement process and after.





5 Keys to Building Wealth – #3 Compound Earnings

The book The Millionaire Next Door revealed, for the first time, that there were strangers living among us. No, not zombies or even Tennessee fans, but rich people, only disguised as you and me. The authors assumed the rich in this country were those living in the most expensive neighborhoods and driving the fanciest cars but, after extensive interviews and research, they discovered many of those that had actually accumulated $1 Million or more in actual wealth – meaning savings – were leading more prudent lives. And, as a lesson for all of us, these regular, everyday millionaires had followed five key strategies to build that wealth.

My post titled, You Aren’t What You Drive covered the first key strategy of living beneath your means. My post titled, How Much Do You Really Need for Retirement emphasized the importance of having a financial plan to guide how much to save. Now, we discuss a third key called the magic of compound earnings, which could also be called, start saving and investing at an early age.

Albert Einstein supposedly said, “Compound interest is the eighth wonder of the world.” Simply put, compound interest or earnings means one earns not only a percentage on your original investment, but also earns on the earnings from last period too. Huh? If you invest $1000 and make 10% in a year you will then have $1100, an increase of $100. Now, if you also make 10% on your new total investment of $1100 the following year, you will then have $1210, an increase of $110. Cool, huh?

Why is this important? Because compounding really only achieves amazing results over time, so start early. Take two examples:

1. Phoebe is 35 years old and makes $50,000 per year. She decides she will contribute 15%, or $7,500 per year, into her retirement account until she retires at age 65. During that time, she will earn raises of 2% each year while continuing to contribute 15% of her salary. Assuming an average rate of return on her investments of 7%, when Phoebe turns 65 she will have accumulated wealth of $1,022,306.

2. Joey is 55 years old and makes $80,000 per year. Joey spends almost all his money on clothes and sandwiches but decides he should probably get ready for retirement in 10 years. He, too, decides to save 15% of his salary, $12,000, over the next ten years and also receives raises of 2% each year. When Joey turns 65 he will have accumulated wealth of $182,315. Uh oh. So, Joey decides to save extremely aggressively and puts back 30% of his salary, $24,000, over the next ten years. Now, when Joey turns 65 he will have accumulated wealth of $364,630. Better, but not enough to live on for another 20 years.

The lesson learned here is, don’t be Joey, be Phoebe and start saving and investing early. You don’t have to save as much out of your paycheck each month if you have time on your side. If you’re closer to retirement and don’t have enough saved, you’ll have some tougher choices to make such as working longer than you wanted and/or cutting expenses dramatically in retirement.