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Joe Anderson
ABOUT Joseph

As President of Pure Financial Advisors, Joe Anderson has led the company to achieve over $2 billion in assets under management and has grown their client base to over 2,160 in just ten years of the firm opening. When Joe began working with Pure Financial in 2008, they had almost no clients, negative revenue and no [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CEO & CFO of Pure Financial Advisors. He currently leads Pure Financial Advisors along with Michael Fenison and Joe Anderson. Alan joined the firm about one year after it was established. At that time the company had less than 100 clients and approximately $50 million of assets under management. As of [...]

Published On
February 3, 2018

Seven new changes to your Social Security benefits – Joe and Big Al talk about the good and the bad. Plus, how small business owners may be in danger of screwing up their Social Security, how the new tax law lets you save big money if you’re taking required minimum distributions, and Joe’s fear of commitment is further cemented by the story of a fella who lost 60% of his life savings in a divorce.

Show Notes

Transcription

Your Money, Your Wealth listeners, we want to put you on the show! Call (888) 994-6257 for your chance to have Joe and Big Al answer your burning money questions live during Your Money, Your Wealth. Whether it’s about retirement, investing, Social Security, taxes, your portfolio – whatever the topic is, there’s a pretty good chance these fellas can give you the insight that will help you make better money moves. That number again is (888) 994-6257. (888) 994-6257 for your chance to have your question answered live on Your Money, Your Wealth. 

Social Security benefits got a raise in 2018. 2% cost of living, Joe. Highest increase in a number of years, although (laughs) if you look at this, the average benefit, at a 2% increase: $27 per month. $27. – Big Al Clopine, CPA

Today on Your Money, Your Wealth, seven new changes to your Social Security benefits – Joe and Big Al talk about the good and the bad. Just think of all the things you can do with 27 bucks! Plus, how small business owners may be in danger of screwing up their Social Security, how the new tax law lets you save big money if you’re taking required minimum distributions, and Joe’s fear of commitment is further cemented by the story of a fella who lost 60% of his life savings in a divorce. Now, to tell us how 70 is the new 60, here are Joe Anderson, CFP® and “Big Al” Clopine, CPA.

01:23 – Delaying Retirement Could Have Remarkable Benefits

JA: On this show, we talk personal finance, we talk taxes, we talk retirement, we talk, I guess, our personal lives, when we don’t have anything else to talk about. But there was an article that I read that I found somewhat interesting. And we’ve spoken about this quite a bit on the show, but the headline was “Delaying Retirement Can Have Remarkable Benefits.” I think we did a TV show saying “70 is the new 60” or something like that.

AC: As I recall, you were quite adamant about it on the TV show.

JA: Yes! And this article proves my point. They must have watched the TV show. Starts out saying, “You’re 49 years old. You make $113,000 a year, and you’re starting to get worried about financing your retirement.” So, you’re a little bit behind the eight ball and make some money, but you could take a drastic step of upping your retirement savings by 10% of your salary. That would be a pretty big step for a lot of people. Or, you could achieve the same result by retiring two years and five months later than you had planned to. So instead of 10% more savings, you just hold off on retirement for a couple of years couple of years. I think this helps people put things into perspective. Because we always want the instant gratification, don’t we? I want this, I want to buy that, I wanna look at this, and gotta live for today. But tomorrow will come, and procrastination is always a key factor. That’s why most people are not necessarily successful in saving. But, then if you think, “OK well, I could forego, I can still spend, but I’m going to have to work another two years and five months, or two and a half years, or I can save another 10% and retire two and a half years earlier.” Which is more important to you?

 

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AC: Yeah and if you think about it that way, it’s like, to save 10% more may mean some pretty drastic changes in your lifestyle, and working a couple of more years – and you’re right. On our TV show, we did examples of the mathematics behind that, and there are several things happening all at once. One is, first of all, we’re assuming your Social Security age. So that’s part of what goes into that. So you wait a couple more years before you take Social Security, so your benefit’s higher there.

JA: Yeah. I think the whole equation has to – if you’re going to retire at 55 to 57, the math is not going to work, because you need to at least be able to claim Social Security for this equation. So 62 to 70 is kind of the sweet spot.

AC: Yeah. So let’s just say you’re 65, and instead of retiring at 65, you retire to 67 or 68, for example. So you wait two or three more years, so your Social Security benefit is higher. You’ve had two or three more years to save, and generally, at the end of your career, you’re at higher earnings than you were at the beginning of your career, so you have more opportunity to save. And the third thing that happens, Joe, is that you have not used your portfolio yet. So that’s been able to grow further. And then furthermore, there’s a fourth thing that I just thought of, and that is, if you start taking your money later in life, then you can probably do a slightly higher distribution. In other words, if you retire 50, I probably would not want to take more than 3% of your portfolio on an annual basis, because money needs to last 40 years. Now if you’re 70, you could probably take 5%. And these are rules of thumb. I’m not saying these are cast in stone, but just to give me an idea. The older you are when you retire, you could probably take a higher distribution rate out of your portfolio.

JA: But also, now more studies have come out that the longer someone works, the longer their life expectancy is. And that’s kind of a weird little twist to things.

AC: Right. So that contradicts what I just said.

JA: Yeah but in all generalities, if we assume a normal life expectancy. If I’m working two or three years longer, and I still have the same life expectancy if I retire two or three years earlier. I’m that much closer to my death date. (laughs) It’s like hey, I’m drawing less out of the overall portfolio because I’m going to die at 85 or 90. Well, If I retire at 70, I have 15 years versus potentially 20 or 25 years that that portfolio needs to last.

AC: That’s the idea, right.

JA: So the basic result: there was a paper that was drafted here in the National Bureau of Economic Research, and there’s a bunch of people that were writing this. And the basic result is that delaying retirement by three to six months has the same impact on the retirement standard of living as saving an additional 1% of labor earnings for 30 years. So every three to six months, it’s like another 1% additional savings.

AC: OK. So I’m going to be working a while. (laughs)

JA: Yeah, well you got a big wallet, Al. You could retire now.

AC: (laughs) I need to fill that thing up.

JA: But it’s just choices that we make. And it’s funny, I was listening to this podcast. He’s been on our show. Pete the Planner? I like Pete.

AC: I do too.

JA: And so he has his podcast, it’s called Million Dollar Plan. So what he does is that he interviews people, and he asks them questions about their overall situation, and then he tries to find out their million dollar day. When are you going to be a millionaire? If you’re saving at this rate, with your age, and the amount of accumulated assets that you’ve already accomplished, how much longer is it going to take? Well, this gentleman was on. And if it doesn’t, man, put things in perspective, is that he was 57 years old. He went through a divorce. So he had like 1.8 million bucks. 57. Feeling pretty good. Gets a divorce. I don’t know what happened with this divorce, and he didn’t really get a lot of detail with it, but all of a sudden, she got 60%. He got 40%. So he’s got a half a million bucks, roughly. And he loses his job. So, he was making a few hundred thousand dollars a year, doesn’t have an income. Now his $1.8 million nest egg is now down to $500,000. And it’s like, “OK and I don’t have income coming in.” And then he’s always thinking, he’s like, “Man. It’s always been looming in the back of my hand I should have been saving a little bit more. We were making a couple hundred thousand dollars a year. Life was good, but we looked at our nest egg, our nest egg was nice. But you never know what life is going to throw at you.” So yeah, you can put that caveat in and say, “I’ll work a couple of extra years, but then we’ll throw this in there.” Half of people are forced into an early retirement. Half.

AC: Right. And so you may not have any choice.

JA: Exactly.

AC: And that’s why you need to be thinking about these things earlier. But, if you can, if you are able to work, it’s really great motivation to work another year, two, three years, it can make a pretty big difference in your retirement scenario, Joe. It’s a matter of actually getting by, or really enjoying your retirement.

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Time now for Big Al’s List: Every week, Big Al Clopine scours the media to find the best tips, do’s and don’ts, mistakes, myths and advice to improve your overall financial picture – in handy bullet-point format. This week, 7 Changes to Social Security for 2018.

09:49 – Big Al’s List: 7 Changes to Social Security for 2018

AC:  Couple of facts before we get started though, this is as of August 2017, 61 and a half million people, Joe, were receiving Social Security benefits. And of those, about 42 million of those folks were retired workers. Which is about 62% of that group. Because you can work and still receive Social Security benefits at certain ages, and sometimes your kids may be receiving payments, or disability payments. But the 62% of retired workers that are receiving Social Security payments, at least half of them count on that as their primary source of income. Social Security, by the way, is meant to cover 20, 25, 30% of your income. Not the whole thing. So if that’s all you have in retirement, you’re going to have a different lifestyle. So it’s not the goal. Yet, it is still a big chunk. 30%, if you make $100,000 and you’re getting $30,000, it’s still it’s still a good number. So you want to make sure you maximize it. So here are seven changes that happen in 2018, to try to educate you on what happened. And I guess the first thing is Social Security beneficiaries received a raise, got a raise in 2018. 2% cost of living, Joe. The highest increase in a number of years, although (laughs) if you look at this, the average benefit at a 2% increase, $27 per month. 27.

JA: I remember last year, I think the average was $12 a year. We talked about that that was enough to get you a can of Pabst Blue Ribbon – a six pack.

AC: $27 a month. So anyway, it’s good news that the cost of living is higher.

JA: Well 2%. That’s based on, what, the CPI index, so we, can see that there’s potentially a little increase in inflation.

AC: Yeah that’s what this is suggesting. We broadcast out of San Diego, the CPI in San Diego was 3.3% last year. That’s the highest it’s been in a long time. Anyway. So you get a little bit more money. That’s number one the change.

JA: Another thing to consider here too – so when you get your Social Security check, some of you might be saying, “Man, I don’t feel like a raise. It actually went down.” We have a client of ours that was like, “Joe, why is my Social Security going down?” I thought you said it would go up.” And I said, “well look at your statement, because your Social Security payment actually did go up, your net pay went down because your Medicare premiums increased.”

AC: Yeah, and that’s the problem. In fact in general, the last several years, Medicare premiums have increased more than the Social Security benefit. So your net pay keeps going down, even when the rates go up. The second thing Joe is the maximum payout rose is a bit. The maximum payout for this year, for full retirement age, is $2,788. That’s $101 increase from last year. Maximum meaning that if you retire at full retirement age, which right now is 66. But I will say this – if you’re 62 this year, which is the first year you can claim Social Security, your full retirement age is 66 and four months. So that’s what it is this year. But if you’re 66 right now, then that is your full retirement age. When you’re born before 1955, it’s actually 66.

JA: Yeah. For those born in 1954 and earlier. 66. And then what they’re doing is just increasing their full retirement age over the next several years from 66 to age 67. So if you were born in 1960 or later, your full retirement age will be 67.

AC: Correct. And so if you’re born between 1955 and 1960, that’s when that phased out from age 66 to age 67. They just add two months each year, till they get to age 67. The third thing Joe is wealthy Americans will owe a little bit more. The maximum payment to Social Security increased from $127,200 to $128,700.

JA: Yeah, a couple of things that maybe a lot of you might not know, is that once you reach that threshold, of $128,700 gross income, you stop paying Social Security. You’re still paying the Medicare. But the 6.2% that you put into the Social Security or FICA tax, you no longer have to put into the system, because you maxed out.

AC: Right. And let’s say you have a good job, you make $150,000 a year, and you kind of wonder, “why does my pay go up towards the end of the year?”

JA: Yeah right – December I had a really good year.”

AC: Yeah, “November December, really I had a better check.” And the reason is, you maxed out the Social Security. This year it’s $128,700, meaning that once your salary gets to that level, they don’t charge you for Social Security anymore. They do charge you for Medicare. So that’s an extra 1.4 or 1.5%. There is no cap on that. So regardless of your level. Anyway, so that amount goes up. Number four, I already mentioned this, the full retirement age is on the rise. So as I said, if you’re age 62 this year, then your full retirement age will be 66 and 4 months, when you get to that point. Number five, withholding thresholds for early filers will climb, once again. So what this is referring to is that, if you are not yet at full retirement age, and you want to take your Social Security – so in other words, 62, 63, 64, 65 years of age. You want to take Social Security at that point, we call it taking it early, if you are working, you have to make below a certain level. And that amount this year is $17,040. Last year was $16,920. So in other words, if you’re age 62 through 66, there’s an exception, which Joe will say in just a second – but right now, if you have a job, you can only make $17,040 without reducing the benefits that you’ll actually receive from Social Security.

JA: Yeah, they will reduce your benefits by one dollar for every $2 that you earn over that threshold. So just FYI. Here’s the rule of thumb: if you’re fully employed, and you’re making more than, let’s call it 50 grand. Don’t take your Social Security benefit, because it’s just going to cause problems for you. You will receive that benefit once you claim at 62, and you’ll receive that benefit all year long. And then guess what, you’re going to file your tax return, and then the Social Security Administration is going to say, “hey, you made too much money. So we’re going to take back a dollar for every $2 that you earned over $17,040.” So in that situation, I don’t know, they probably take the whole thing back. So the next year, let’s say you fully retire then, at age 63, you fully retire. Then you’re counting on that income. You’re not going to receive it, because they’re like, “No you owe this to us because we shouldn’t have paid it to you in the first place because you made too much income.” So just there’s a little bit of planning around taking Social Security benefits early. Now, once you reach your full retirement age, your earnings limit is $3,780 per month, for all months that you remain below your full retirement age in that year. So if my full retirement age is now in June, and it’s January, each month for the next six months, I can make $3,780 per month. If I make more than that, then for every $3 earned, they’re going to take a buck back. So the threshold is a lot higher once you reach your full retirement age in that last year.

AC: Then once you actually do reach full retirement age, it’s unlimited. You can make as much money as you want and you can still keep your full Social Security benefit.

In recent weeks on Your Money, Your Wealth, we’ve talked cryptocurrencies and blockchain with controversial crypto-celeb Amanda B. Johnson, we’ve covered some of the opportunities, challenges, and tricks coming from President Trump’s new tax law, and we’ve given you some ideas on how to capitalize on the “Goldilocks” economy in 2018. If you missed any of it, you’ve missed a lot! All you’ve got to do to rectify that is visit YourMoneyYourWealth.com. Catch up on previous episodes, and subscribe to the podcast – that way, you won’t miss future interviews with Chris Mamula, who retired at the age of 41, Jackie Beck, who created an app that can help you become debt free, and so much more. While you’re there, sign up for the podcast newsletter. Visit YourMoneyYourWealth.com to get all caught up and, hopefully, leave smarter than you were before! That’s YourMoneyYourWealth.com.

19:27 – Small Business Owners Are in Danger of Screwing up Their 401(k)

AC: We’ve been talking seven changes to Social Security in 2018. We got through the first five, and the sixth one is, disability income thresholds inch higher. So there’s a little bit higher benefit for those that have disabilities, that are not blind. That’s a qualification, I guess. So it increased $10 a month to $1,180, but if you are blind, you can earn up to $1,970 a month, a $20 increase over 2017. So a little bit more benefit there. And I know you’ve been waiting for the last one. Number seven is that qualifying for Social Security just got a little bit harder. Not much, but a little bit. So I guess let’s talk about the basic rules, Joe. To qualify for Social Security, you have to earn 40 lifetime work credits, and a work credit is defined as a quarter. Three month period of time. So another way to say that is ten years. You have to be working 10 years and contributing to Social Security to get a benefit. You could work 10 years for the government and not contribute to Social Security, and you wouldn’t get any benefit. So that wouldn’t count. You have to work for an employer where you contribute to Social Security, which by the way, is most employers, except for governments.

JA: And each credit for this 40 quarters requires $1,300 of earnings.

AC: So if you only earned $1,200 for a quarter, then that doesn’t even count.

JA: It won’t even count. So you need to make $1,320

AC: Yeah, and that’s the change because it went from $1,300 to $1,320 this year. So you’ve got to work a little overtime to get to that $1,320.

JA: You know a lot of things have changed a little bit with – God. Sometimes I listen to myself and I want to just slap myself. “A lot of things have changed a little bit.” What the hell does that mean?! (laughs)

AC: I don’t know. I’m excited to see how you’re gonna get out of this one.

JA: You know?! Why do people listen to this garbage?! (laughs)

AC: A lot of things have changed a little.

JA: A lot of things have changed a little bit. I just contradicted myself in mid-sentence.

AC: Well now, these were seven changes. A lot of changes to Social Security that changed a little. (laughs)

JA: There was a lot of changes, but it really didn’t affect you that much is what I was trying to say. (laughs)

AC: But still it’s good. Sometimes we go through these things, and sometimes people don’t even know some of these benefits or strategies apply. So it’s kind of good to go through them.

JA: Social Security used to mail out paper statements, to show us our past earning histories, but now you need to go online. Hopefully, most of you know this – SSA.gov. That’s where you would like to go, set up your own account – SSA.gov. You want to check out your earning history on that, just to make sure it’s accurate, because they’re going to take a look at the 35 years of work history, and they’re going to average that 35 years of work history, and then that’s going to come out with an average payment, and then that’s how they defined your Social Security benefit. But I don’t think if there are years that are over a few, you can go back and dispute.

AC: Yeah I’m not sure what the ruling is on that, and I do check mine, I try to check it each year. I actually, of all things, now Social Security Administration, if you sign up, you have to sign up for the website with a login and a password. And then, of course, they require your e-mail, but they send you an e-mail. I just got an e-mail a couple of weeks ago from them that said, “you can check your latest statement.”

JA: You know, I think a lot of – man, I’m telling you.

AC: (laughs) You’re tired.

JA: A lot of this show’s theme has been, well today versus tomorrow. And with some of you then have a small business, you might skirt out a little bit on your payment. Example: my father owned his own business. He’s dead so I don’t think this Security Administration can come back to him. He died.

AC: (laughs) Do you think they’re listening to the show anyway?

JA: But here’s what he did, he was a small business guy. Cabinet maker. Yeah. So he’d build cabinets and remodeled kitchens. And a lot of that was cash business. So I’m going to Big Al’s house. Hey Big Al, I’m going to quote you have 5000 bucks to put this cabinet up, or whatever it is, and you’re going to cut me a check for $5,000. And I’m not saying he did this. Well, yes I am. (laughs)

AC: (laughs) You’re deep into this story now. This is hypothetical.

JA: Hypothetically speaking! Sometimes, people with cash jobs might not claim 100% of their income. Imagine that. Have you ever heard of such a thing? (laughs)

AC: (laughs) Only this once.

JA: (laughs) First time. Sorry, Dad.

AC: No, Joe. It’s common. The IRS knows, this isn’t new information. The IRS knows that there’s a huge underground economy, which is why they came up with 1099s years ago because the people that had jobs got W2s, the people that were contractors, they didn’t have anything. So they never reported anything. So what the IRS said is, we’re going to set up this 1099 thing, so if you work for somebody and they’re a business and they pay more than $500, I think it’s $600 now, then they have to send you a 1099. And so, you get the 1099, but so does the IRS. Guess what, the IRS expects to see it on your return. And nowadays, it’s common. I’ve seen this lots, is you’ll have a small business owner. They made $100,000, but they add up their 1099, it’s only $59,000. I guess that was my income. You know it was more. And that’s what they claim.

JA There’s been a lot of strategies to mitigate the Social Security taxes. I’m coming full circle.

AC: Yeah, I can see that.

JA: They’re skirting around the system and saying, this was a huge strategy. “I’m going to become an S-Corp, and I’m only going to pay myself $10,000, and I’ll pay payroll tax on the $10,000. But the other $90,000, because I made a full $100,000, I’m going to call that a dividend, and dividends will be taxed at ordinary income rates. But I don’t have to pay self-employment tax on the dividend.”

AC: Right. And so your tax bill’s lower.

JA: Right. But what happens to your Social Security benefits?

AC: You kind of shot yourself in the foot.

JA: You blew yourself up. But you felt good today. “Man, look at how much tax savings I did.”

AC: Well and here goes back to another theme, which is, if you can save the difference and invest that, more power to you. But most people spend it and they get to retirement, and they screwed up their Social Security by kind of doing this cash system, and they haven’t saved. Now they’re in trouble in retirement.

JA: Right. The whole reason why they’re skirting around the system to begin with is that they’re spending probably everything. “I don’t want to pay the IRS this, I need to put junior through college,” whatever the case may be. I’m not judgin’. But now the fact is – and we see this quite a bit – they come to us in their 60s, and go, “we gotta make up for some Social Security. How do I?” Well, it’s 35 years of work history! You’re 62! (laughs) So if you understand the system a little bit better, I think you’ll be better off. Again, it’s procrastination, it’s that instant gratification. “Hey, I want this right now today” versus really looking at the entire picture.

AC: Yeah, no question about it, and what you just described, Joe, is such a common thing with small business owners. And some of them, many of them, know that they probably should record this income, but honestly, I’m just going to tell you, being a longtime CPA, there’s a lot of small business owners that, they honestly think all they have to report is the 1099 income. And I explain, “no, you have to report all of it. You always have to report all your income.” “Well, I never heard that rule before.” And it’s like, well maybe you shouldn’t have me do your taxes then because you’re not going to like the answer. (laughs)

JA: So I had a small business as a kid, I shoveled snow and mowed lawns. So, how much…?vWhat’s the threshold here?

AC: Well, there’s a couple thresholds. Let’s say you’re a kid, and assuming you’re being claimed on your parents return. In the old rules, as a dependent. So were you kind of going back now, but you could probably make, even being under your parents return as a dependent, you could probably make somewhere between $3,000 and $5,000 without paying tax. I can’t forget the exact number. Maybe it’s closer to $3,000 to $4,000. Let’s say that. Now, that’s income taxes. However, if your income is above, like $500, $600, I forget the exact threshold, you have to pay self-employment tax. And that’s your Social Security.

JA: It’s basically payroll tax.

AC: It’s Social Security taxes. It’s a fancy way if you ever heard a small business owner saying, “I hate self-employment tax” and you wonder what is it? That’s payroll tax, is what it is. And you may not know this, but when you’re an employee, you have to have 7.65% withheld for Social Security and Medicare, and your employer matches that. So it’s over 15% that goes to the government on your behalf. When you’re a small business, you’re the employer and the employee. You’re both. So you have to pay both sides. That’s why it seems like tax is so much higher because you’re now both parties.

JA: Right. And with the new tax law, and the new 20% deduction for small business owners, we were seeing some articles that came out to say, “maybe I’ll be a contractor and open up my own business, so just 1099 me to Anderson Consulting and I’ll work for you that way.” And then the employer was like, “OK, well that saves me self-employment tax on you, I don’t have to pay you benefits, offer you a 401(k) match and everything else, that’s fine.”

AC: “Great deal for me, the business owner.”

JA: “Sure, I’ll 1099 you.” And the employee is saying, “Great. Well, now I get this new 20% tax deduction. I can write off different things on my own business.” But you have to do the math because now you have self-employment tax, you’ve got to pay both sides of the payroll tax, or FICA tax. And then, do you have health insurance? How much is that going to cost you? And then, are you going to set up a separate entity for the business, maybe you want to say, hey, I’m going to put it in an LLC.” Then you have a separate tax return. Then you also have to have filing fees with the LLC agreements.

AC: Yeah, it goes on and on. You have no vacation time because you’re your own business. You have no sick time. You’re paying for your own health insurance. And on and on and on.

JA: Yeah, so you just want to make sure that you run the numbers, to make sure it makes sense. For some of you, it could make a ton of sense, because then you could set up a certain type of retirement plan. You could shelter a lot of the money from federal tax, from state tax, even though you still have to pay FICA tax on the total amount. So if I make $100,000 in receipts, I pay tax on the full $100,000. A payroll tax, not federal tax or state tax. Self-employment tax. But then I could shelter $50,000 or $55,000 roughly, in a retirement account. It’s not going to be that much, but you get the jist.

AC: And then you get a 20% deduction. And I would say – I hate rules of thumb, but I’m going to give you one anyway. So if you’re an employee, and you’re thinking, “maybe I should be an independent contractor because of this new tax law,” I would say to stay even, with you being an independent contractor, you probably should be getting 15 or 20 or 25% more pay as an independent contractor, just to stay equal. And the reason it’s a variable number is, it depends upon your benefits. If you’re at a company that only pays a week vacation, no holidays, and they don’t pay health insurance, you probably only add 15%, or maybe even a little bit less to be equal, because of the extra self-employment tax. But if you’re a company that has great benefits, you might need to charge, if you’re making $100,000, you might need to make $125,000 as an independent contractor just to stay even. Now that’s before tax benefits, in terms of deducting more, having a retirement plan, having this extra 20% now. That deduction that small businesses get, but it’s a little bit more complicated than, “oh, I should be an independent contractor,” you have to kind of go through all that math to figure out what’s best for you.

JA: If you’re a small business owner, I would highly encourage you to sit down with a professional to map out what your year’s going to look like to see,  do I get this 20% deduction? It’s going to depend on your income, it’s going to depend on what type of business that you’re in. Does it make sense to set up a different type of retirement plan to get even more bang for your buck? All sorts of different things. The rules have completely changed for you small business owners, and for some of you, it could mean tens of thousands of dollars of savings. And for others, you could be leaving that tens of thousands of dollars on the table.

AC: You may be going backward.

JA: You might be going backward, so you absolutely want to make sure that you get tight with this.

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34:01 – The Best Strategy for Retirees Under the New Tax Law? Maybe QCDs

JA: QCDs. You know what the heck that is?

AC: Yeah, qualified charitable distribution.

JA: You know, this is interesting because we’ve been talking about taxes now for way too long. (laughs)

AC: (laughs) Seems like about a century.

JA: But this new tax law has come up with some unique planning ideas. And for those of you that don’t know what a QCD is. It’s something that people should be paying attention to. But you have to be at least 70 and a half to take advantage of this.

AC: You do. But if you’re 70 and a half – so this is for those that are probably retired, or close to retirement, 70 and a half. This is perhaps, Joe, one of the best strategies available under this new tax law. And interestingly enough, it’s not really a new idea. It’s relatively new, it came about five years ago. But now, when you take the new tax law, how it’s structured with this strategy, it’s a big deal, it’s a big deal for a lot of people/

JA: Because I think before, this is where I would have to pound on Big Al’s brain just to figure this out, because what a QCD is is, let’s say if you have a retirement account, at 70 and a half you’re required to take a distribution. So what the law states is that you can either take the required distribution, or you could give your distribution directly to charity. And so then you would look, let’s say if I’m already giving $10,000 a year to charity, for instance. So, I would write that off on my tax return, because I would probably itemize my taxes. Because before, let’s say if I had medical expenses, I had charitable expenses, my mortgage expense, my state and local and property taxes, and miscellaneous expenses, whatever. Now all of those Schedule A deductions have been eliminated or reduced significantly. So most people, depending on your income, of course, are probably going to now do the standard deduction, which doubled from $12,000 to $24,000.

AC: Yeah, Joe. And so let me back up a second. So a qualified charitable distribution is where you give a charitable donation to any charity of your choice, has to be a 501(c)3 organization, which all charities are. But instead of writing a check out of your checkbook, it comes directly from your IRA. So that’s why they call it a qualified charitable distribution. And then, if that happens, then it doesn’t really show up. It doesn’t show up as income, because typically when you take money out of your IRA, it’s income. It also doesn’t show up as a deduction, because you never paid income tax on it, so it’s kind of a non-event. And in the past, there wasn’t a lot of cases – there were some cases where it was helpful, but there weren’t a lot of cases where it was a good strategy. Now it’s a fantastic strategy for a lot of people. And let me explain. So you think of a couple that’s in their early 70s, for example, so they’re taking required minimum distributions. Chances are that their home mortgage is paid off. So they don’t have any interest expense. Chances are if they live in California or any other state for that matter, they’re limited to $10,000 of state and local property tax deductions. So let’s say they have $20,000 of state taxes and $10,000 of property taxes, so $30,000, they used to be able to itemize their deductions with that. Now they’re limited to $10,000. So all they have is $10,000, they don’t have any mortgage interest, and they give $10,000 away to charity. OK, so that’s $10,000 for taxes that they get to deduct, $10,000 for charity. That’s $20,000. That’s below the standard deduction, the standard deduction is $24,000. So in other words, that $10,000 donation produced zero tax benefit, because you already get a $24,000 standard deduction. You don’t have enough itemized deductions to be able to itemize.

JA: Right. You would take the higher of the two, even though you’re itemizing certain items. But if it’s not higher than the standard deduction of $24,000, so you need enough deductions, either through your taxes charitable giving, and medical expenses to breach that $24,000. If you don’t have enough deductions to breach the $24,000, you’re just going to take the standard deduction.

AC: Yeah. So let me let me illustrate in a simple example, and hopefully, this will help. So this would be a couple that has $200,000 of income before their IRA. So, successful couple. But let’s say they do. And they’ve got a $10,000 IRA required minimum distribution. So typically, they would take that out. Now they’d have $210,000 of income. Let’s say they’ve got $10,000 of state and local property taxes, and they give $10,000 to charity. So that’s the $20,000 that I just mentioned, but that’s lower than the standard deduction. So what happens on their taxes is, they get to take the standard deduction, and their income’s $210,000, the standard deduction is $24,000. Their taxable income is $186,000, so they pay tax on $186,000. Now, if they had given the donation directly from their IRA the charity, now they don’t have to record the $10,000 of IRA income. Their income is $200,000, instead of $210,000. They still get the standard deduction of $24,000. It doesn’t matter how many itemized deductions you have. Now you got $200,000 of income, $24,000 standard deduction. Now your income is $176,000 taxable, income versus $186,000, at a 24% tax rate, which this couple would be in. They would save $2,400 of federal tax, and they’d probably save in California, who knows, another $1,000 probably at least, in state taxes – or approximately. So you’re looking at, here’s a simple transaction of someone that likes to give $10,000 away to charity a year, which a lot of people do when they’re retired that have the resources to do it. And it’s a way to save $3,000 or more on a $10,000 donation, just by doing this technique.

JA: Right. So cash flow wise, it felt like $7,000, even though you gave $10,000. And a lot of people give first, but then there’s also the benefit that the IRS gives us to give us a tax deduction. But a lot of that deduction might not be used now, because the standard deduction is $24,000 versus $12,000, and a lot of people will use the standard versus itemizing. So they’re not going to really see any benefit there. But if you have a retirement account, that’s where you’ve got to go. If you’re over 70 and a half and you’re giving to charity, look at the QCDs because it’s going to be a significant tax savings.

AC: Now you have to arrange that through your custodian. So maybe it’s TD Ameritrade, or Schwab, or Fidelity, maybe it’s through a bank. Most custodians would have this, if you have an IRA that doesn’t have a custodian, you might want to switch it. That doesn’t have this strategy, you might want to switch, but all the main ones have this strategy, Joe.

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42:08 – New Retirement Contribution Limits / Most Americans Can’t Cover a $1,000 Emergency

AC: We got some new retirement limits I want to go over.

JA: Ugh.

AC: So the 401(k) this year, you can defer up to $18,500 for most you. Now if you’re 50 and above, you can add another $6,000 to that so that’s $24,500. If you are in a SIMPLE plan, it’s $12,500. There was no change there. If you’re 50 and older, you can add another $3,000. So it’s $15,500. If you’re doing an IRA or a Roth IRA contribution, then you’re limited, it’s the same number – $5,500 unless you’re 50 and older, it’s $6,500. I thought our listeners would like to know that.

JA: It’s the same.

AC: Yeah same, no change.

JA: I wish that would increase a little bit.

AC: Yeah yeah me too.

AC: 85% of the people that we see, they have a hard time saving outside of their retirement accounts, because it’s easier to save into a retirement account, because it’s a 401(k) plan, or it’s a company retirement plan, and it happens automatically.

JA: And still most people don’t even do that. How many billions of dollars are left on the table with company match?

AC: Oh yes, it drives you crazy. But be that as it may, those that do save, it tends to be in their retirement accounts, and they tend to spend everything that’s left over. And to sort of prove my point, there is this article I was just reading, it just came out. It was a study by Bank One actually, and they said most Americans don’t have enough savings to cover a $1,000 emergency. And so you read through this, and we’ve seen stuff like this before, and sometimes it just seems hard to believe, but I think they talked to 2,000 people – they said here’s the question, how would you deal with a major unexpected expense, such as a thousand dollar emergency room visit or car repair? First of all, when I hear major unexpected expense, I’m thinking tens of thousands. At least that’s the way I think.

JA: Well, you got a big wallet, Big Al. You got a big lifestyle. You got everything.

AC: (laughs) But anyway, so be that as it may. That’s what it is, $1,000. How do you cover a thousand dollar expense? Basically, that’s the question. 39% would pay for it from savings, which means all the rest of the people, 61%, don’t have savings to pay for it. So how do the rest of them pay for it? 19% would finance it with a credit card and pay it off over time. 13% would reduce their spending on other things to try to make up for it. 12% would borrow from family or friends, and 5% would take out a personal loan. 39% have a thousand bucks that they can write a check for.

JA: There’s this other article that I have here. I’m just full of articles.

AC: Yeah. We have a new crack research team.

JA: Yes we do. And it’s very crack.

AC: (laughs) And we get all the all this stuff delivered to our e-mail.

JA: It’s wonderful. Maslow’s Hierarchy of Needs, remember that in college?

AC: Uhhh…. no, not really. (laughs)

JA: Come on! You know what was that thing called where you have baby Jesus and the shepherds and stuff?

AC: (laughs) Oh, you mean the manger?

JA: Yeah, but what is it called?

AC: Oh, the nativity scene.

JA: Yeah, the nativity scene, but you don’t know Maslow’s Hierarchy of Needs?!

AC: (laughs) Well probably. Enlighten me.

JA: (laughs) All right. So you got a pyramid. At the bottom of the pyramid, you know, there are needs that need to be met.

AC: So the basics.

JA: Yeah, the basics of human survival, you need food, water. Then the second is shelter, clothes. But if you have shelter but if you don’t have you don’t have food and water, you’re going to sell the shelter to get the food and water.

AC: Got it. That makes sense.

JA: So you start at the baseline. I need to nourish my body first.

AC: Because you can always live in a cave.

JA: If I’m hungry and thirsty, it’s the first thing I’m looking at.

AC: I could find a rock to live under. You need the food and the water.

JA: Then the next is love and affection, because again if you’re thirsty, you don’t really care who loves you. You don’t got a lot of love to give. Because you need a glass of water. (laughs)

AC: (laughs) OK I’ll buy that.

JA: And then it goes to esteem, and then self-actualization.

AC: Wow. Okay. That’s a big word. (laughs)

JA: Yes. I know. I got my Minnesota fat tongue, it’s very difficult for me to say big words. (laughs)

AC: So how does that relate to what we’re talking about?

JA: So then you look at the hierarchy of financial needs. So this is the Mad Fientist.

AC: Mad Fientist?

JA: Yeah, he’s a blogger. Pretty popular in the FIRE. You know what FIRE is? Yeah. Financial independence / retire early.

AC: Yeah. People want to retire early. OK.

JA: We had a couple of these guys on.

AC: We have. And they say all you have to do is save 80% of your income. (laughs)

JA: All ya gotta do! It’s really easy.

AC: Yeah and you can retire at 37. (laughs)

JA: (laughs) You live in your mom’s basement. You save 95% of your salary.

AC: You live in a cave.

JA: (laughs) Right, you eat Spaghetti-Os. So survival’s the first one on this pyramid. So the use of income debt to pay essential expenses. Hey, if I’m hungry, and if I don’t have cash, I’ve got to go into debt.

AC: Yeah or I stand on a street corner. Do you have an extra dollar? (laughs)

JA: Sure, that that happens often here in Southern California.

AC: Yes it does.

JA: But then the second is sustainability. So now, can you cover all of your expenses with your earned income? And then the third is accumulation. So now you have a little bit more excess because you can’t save if you don’t have income.

AC: That’s a hard thing when you start your career, you’re young, you don’t have a big salary yet, it’s hard to save, you’re just trying to get by, and then you think, “oh I’m going to be there with the next raise,” and then you get married, and kids come along, and then you buy a house, and then you’re in your 50s. What happened? (laughs)

JA: (laughs) Right? You’ve got college, and the kids are back at home.

AC: That a common story that we see.

JA: (laughs) You’re living it, brother.

AC: (laughs) That’s right. I’m on the other side.

JA: You are a poster child.

AC: My kids are out, almost. (laughs)

JA: Asterisk. (laughs)  So after accumulation comes independence. So what independence is, is that you’re paying all your expenses with investment income.

AC: Yeah, well that’s where we all want to be. That means you’re free.

JA: But not necessarily – the top of the pyramid is utilization.

AC: Utilization?

JA: So that’s, “spend, give, and fulfillment of life’s purpose.”

AC: Yeah that’s where I’m at.

JA: Yes, you are at a peak! You’re going to Mexic….

AC: Got money and time, doing things for people.

JA: Yeah you feed the homeless in Mexico even. Orphanages?

AC: Yeah. I’m, the president of a nonprofit that supports an orphanage in Tijuana, and I also help a kindergarten in Namibia, Africa, and (laughs) actually year there are lots of little things that I do.

JA: Yeah. You’re part of the…

AC: Part of the San Diego Men on a Mission.

JA: Yeah, Men on a Mission. He’s like talkin’, “oh yeah, we do all these good things.” I’m like, “really, what is it?” “W, ll it’s a bunch of guys that drink beer. We put a couple of hundred bucks in.”(laughs)

AC: We do write two checks for $100 to charity. So there’s something.

JA: Yeah, but that’s cool. How many guys are in this?

AC: Like 50. You should come. You like to drink beer.

JA: I do. Yeah I, like to give a couple hundred dollars and have a couple of beers.

AC: It’s right up your line.

JA: But yeah the utilization. I think this is, what, the softer side of financial planning that we talk about. Because we’re always striving to get to that financial independence.

AC: So we can have the utilization. Because, at least in my view, I think most people would agree, if you have a big pile of money, but are not fulfilled and giving back in some way, it’s kind of a hollow thing.

JA: Right. We’ve seen how many people, Al, that come into our office with millions that are miserable. Totally miserable.

AC: Yeah. And a common trait, when they’re miserable, is they don’t give. I’m not telling you you have to give, I’m just saying what we see. And those that have a lot of money, and they don’t really want to share or give, and I’m not telling you what to do. I’m just saying what we’ve seen. And then they start to worry about their money, and they’re more miserable having it than not having it because they’re afraid.

JA: Yeah. It’s a weird dynamic. Because you can look at two different people that are of similar age, and have the same amount of money, but they enjoy two totally different lifestyles and retirement.

JA: All right, that’s it for us. We’ll see you again next week for Big Al. My name is Joe Anderson. The show’s called Your Money, Your Wealth. Have a wonderful weekend.

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So, to recap today’s show: Social Security has been tweaked a little bit for 2018, and delaying your retirement can have remarkable benefits. Trump’s new tax law offers a great new saving strategy for retirees taking RMDs, but small business owners need to make sure the changes to the tax law doesn’t blow up their Social Security. And as a personal aside: the Mad Fientist’s Hierarchy of Financial Needs puts giving in the utilization stage, after you’ve “made it,” but in my experience, helping others can make you emotionally richer at any stage of your life.

Subscribe to the podcast at YourMoneyYourWealth.com, through your favorite podcatcher or on iTunes, where you can also check out our ratings and reviews. And remember, if you have a burning money question for Joe and Big Al to answer on Your Money, Your Wealth, just email info@purefinancial.com, or call (888) 994-6257! Listen next week for more Your Money, Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.