Permanent Value

Week in Review 8/14/14

Bruce Doole
August 14th, 2014

Tax Trick: When to Start Social Security

A client reaching age 66 now is at “full retirement age,” according to the Social Security rules. Such seniors can claim their retirement benefits without any reduction, no matter how much they continue to earn.

Most seniors claim Social Security at age 66 or earlier but they don’t have to do so. Many advisors typically recommend that clients wait until age 70 to take benefits. The obvious reason to wait is an 8% annual increase in benefits for up to four years, for those who wait past 66 to begin.


Many people who need retirement income in their 60s claim Social Security then, supplementing those benefits with IRA withdrawals if necessary. A double tax on Social Security benefits and IRA withdrawals has been called the tax torpedo; to reverse the process, seniors can delay Social Security until age 70 while using IRA funds for spending money until then. The later a person starts Social Security the larger the benefit will be, so smaller IRA withdrawals can generate the total required for retirement income.

“The formula for determining the tax on Social Security benefits includes IRA distributions in full but only half of Social Security benefits,” says Lumia. Thus, increasing Social Security by waiting until age 70 and consequently reducing the desired IRA withdrawals can dramatically lower the tax on Social Security benefits. Lumia calculates that a retired couple with $97,000 of income ($70,411 in Social Security after delaying benefits to age 70 plus $26,589 from their IRA) would owe $6,492 less in federal income tax than a retired couple with the same $97,000 income receiving $40,006 in Social Security benefits after starting early plus $56,994 in IRA distributions. Over an extended retirement, such tax savings can be substantial.

Source: Donald Jay Korn, Financial Planning


  • Factory orders rose a higher-than-expected 1.1% in June following a 0.6% decline in May.
  • ISM non-mfg index posted an economic recovery best of 58.7 in July, up 2.7 points from June.
  • International trade deficit shrank to $41.5 billion in June, from $44.7 billion in May.
  • Jobless Claims fell a sizable 14,000 in the Aug. 2 week to 289,000.

Source: Ivy Fund

Week in Review 8/7/14

Bruce Doole
August 7th, 2014

How Much Salary Should Clients Be Saving?

Generation Y is facing a retirement nightmare. The national personal saving rate is less than 5%, according to the Federal Reserve Bank of St. Louis — and that’s just not enough. Putting away even 5% of income each year in hopes of building a sufficient retirement portfolio won’t get the job done, even if people start saving for retirement as early as 30.

Let’s run the numbers, taking as an example a 30-year-old who currently makes $40,000; we’ll assume that salary will grow at 4% each year until retirement. If she saves 5% of her income each year, and her investment portfolio has a 9% annualized return before retirement, she will have just under $1.3 million (in nominal terms) saved by age 70.

Building up a $1.3 million nest egg sounds pretty good. Yet assuming 4% inflation during her 40-year working career, she would need to withdraw $120,026 in the first year of her retirement just to cover half of her needed annual income.

Moreover, the annual withdrawals from her retirement will need to increase by 4% each year to combat inflation during her retirement years. By age 80, she will be out of money. (The assumptions here include a 7% average annualized portfolio return during retirement, a 20% annual tax bite and a 50% replacement ratio — meaning that the first withdrawal from the investment portfolio is 50% of working income during the last year of work.)

If the same person were to wait until age 40 to start saving for retirement — and we make all the same assumptions, putting her annual salary by that point at $59,210 — her retirement portfolio would be empty by age 75.

If her retirement savings plan doesn’t get started until age 50, when her annual salary is $87,645, her nest egg of $365,895 would be gone in about three years, at age 73.

We’re assuming that she has retirement income coming from other sources, such as Social Security or rental income, so this doesn’t mean she has zero retirement income — but it does mean her retirement income is cut in half after her retirement portfolio is depleted.

Source: Craig L. Israelsen, Financial Planning


  • Consumer Confidence reached a much higher-than-expected 90.9 in July, its highest level since December 2007.
  • Gross Domestic Product posted a healthy 4% annualized rate for the second quarter.
  • Jobless Claims rose 23,000 in the July 26 week to 302,000.

Source: Ivy Funds

Week in Review 7/24/14

Bruce Doole
July 24th, 2014

Three Smart Fixes for Social Security and Medicare

The aging of America threatens the financial stability of the nation’s safety net programs. Last week Washington made a rare effort to help America’s fast-growing aging population. The U.S. Treasury and the IRS issued a new rule permitting people to use funds in their tax-advantaged retirement accounts to buy so-called longevity annuities—deferred annuities that typically don’t begin making payments until a person turns 80 or 85.

Many in Washington are pushing to raise the Social Security retirement age to 68, 69 or even 70. Still, longevity increases are not being shared by people with little education, lower incomes and, often, physically demanding jobs that wear out their bodies well before even the current full retirement age. So if we raise the retirement age, we also need to provide improved early retirement benefits for those who can no longer work.

Longevity and related healthcare issues will eventually lead to additional changes in the big three old-age safety net programs—Social Security, Medicare, and Medicaid. Few people in government have been willing to deal with these challenges. We do not have enough money to continue funding current benefit levels. Here are two aging and longevity reforms that you’ve heard less about but deserve serious consideration:

Social Security payroll taxes should be reduced for workers who stay on the job past full retirement age (this change should also apply to employers). Continuing to work will improve what are, for millions of baby boomers, looming financial shortfalls in retirement. The design would be tricky, to say the least, but it’s possible to do this in a way that lowers total government spending. Giving employers a financial incentive to hire older employees encourages them to do the right thing and covers any higher costs of employee benefits for this group.

A hybrid form of Medicare should be blended with employer health insurance to accommodate older persons who are still drawing a paycheck. The federal government will spend less than on pure Medicare. Employers will also spend less than for a purely private health policy. Older employees may spend more but they will have a job to help pay these bills. In the long run, these changes are well worth the cost.

Source: Philip Moeller, Money Magazine


  • Retail sales posted a 0.2% rise in June, falling short of an anticipated 0.6% rise. However, May data was revised upward from 0.3% to 0.5%.
  • Industrial production rose 0.2% in June, falling short of expectations of 0.4%.
  • Jobless claims fell 3,000 for the week of July 12 to 302,000. The four-week average is also down 3,000 to 309,000, a new recovery low.
  • Housing starts declined another monthly 9.3% in June following a 7.3% decrease in May.
  • Philadelphia Fed survey jumped 6.1 points to 23.0 for its highest reading since March 2011.

Source: Ivy Funds