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2018 SOCIAL SECURITY & MEDICARE: Give with one hand, take with the other

In October 2017, the Social Security Administration (SSA) announced that it would be increasing the social security benefit payments in 2018 by 2% for a Cost of Living Adjustment (COLA)[i].  In dollars, that means the average retirement benefit will increase by $27 to $1,404 per month and the average retired couple will receive a $46 raise to $2,340 per month[ii].  

Many retirees were thrilled at the news, as this was the most generous COLA increase in 6 years.  In 2010 and 2011, the COLA was 0%, making the average increase in the last 9 years a whopping average of 1.2% per year.  During the same period, however, the cost of food, energy, gas, entertainment, and medical coverage seemed to tick up faster.  In 2018, it is estimated that Medicare expenses will go up by 2.8%[iii] meaning that for a retiree, any increase in Social Security Income will be spent in full to try to cover increasing Medicare premium costs.  That just doesn’t make sense, now does it?

Medicare Premium Surcharges

Since 2006, Medicare Part B premiums, the medical insurance portion of your care (i.e.: for doctor’s visits) have been subject to a tiered premium schedule where higher earners pay higher premiums.  In 2018, the surcharge starts at an extra $53.50/month (on top of the baseline payment of $134/month) and can rise as high as an extra $294.60/month for those whose Modified Adjusted Gross Income (MAGI) exceeds $85,000 for individuals, or above $170,000 for married couples.[iv]  As a part of the Bipartisan Budget Act of 2018, in 2019, a 5th level will be added, bringing the premium surcharge to as high as 85%, or $321.40/month on top of the base of $134/month for a total monthly premium of $455.40/month.  

What does that mean for me?

For some unfortunate retirees, even if your income didn’t change much year over year, due to the new tax tables, your Medicare Part B premium might have.  This year’s premiums are based on last year’s taxes, but the new tables will take effect shortly, so it would be prudent to discuss what the future might hold when you sit down with your CPA to file your 2017 tax return.  

The consistently rapid and rising costs of medical care certainly exceed the average return on money market accounts at the bank, but also the COLA used for Social Security benefits and pension payments.  The average annual US inflation rate since 1914 has been approximately 3.24%[v], but the US Department of Labor tracks medical care costs to have increased at a higher rate of approximately 5% per year[vi] during roughly the same period.  This makes the case that in order to keep up with inflation, retirees need to find investments vehicles that allow them to protect their standard of living in retirement with returns that meet or exceed average inflation.  One of the safest ways to achieve this historically, has been a portfolio of diversified investments that captures both domestic and international equity market returns, but also offers protection from fixed income on the downside.  Your Certified Financial Planner™ can help construct a customized portfolio that suits your investment risk tolerance and retirement goals.

One of our clients said she was happy to hear that her Social Security Income was going to increase in 2018, only to find out her Medicare Premiums did too.  She estimates netting an $8 gain at year’s end.  Come to find out, she might have been one of the lucky ones!

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.



[i] https://www.ssa.gov/news/cola/

[ii] http://www.investmentnews.com/gallery/20180102/FREE/102009999/PH/2018-social-security-and-medicare-changes&Params=Itemnr=2

[iii] https://www.kiplinger.com/article/business/T019-C000-S010-inflation-rate-forecast.html

[iv] https://www.kitces.com/blog/bipartisan-budget-act-2018-irmaa-medicare-premium-surcharges-tuition-and-fees-deduction/

[v] http://www.usinflationcalculator.com/inflation/historical-inflation-rates/

[vi] https://data.bls.gov/pdq/SurveyOutputServlet

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Don't Forget About Inflation Risk

At a time when we're experiencing renewed volatility in the stock market, it's easy to be influenced by fear. When you turn on the news, the media tends to focus on just one risk -- stock market risk. They rarely mention a risk that may be even greater -- inflation risk.

The annual rate of inflation averages out historically to 4 – 4 ½% per year. It doesn't sound like much. However, over the course of 25 to 30 years of retirement, it can become a big deal. When the market is in the midst of a correction, it's tempting to move retirement assets to the low, but guaranteed, interest offered by banks, or the somewhat higher income presented by fixed annuities.

Returns from the stock market are not guaranteed. That's why your investment prospectus tells you, "Past performance is no guarantee of future results." However, it is this risk that forces the stock market to give the potential to receive much higher returns than guaranteed, fixed investments. When there is a growing gap between rich and poor, and the middle class is paying for big tax breaks to corporations, the stock market may be one of the few ways for average people to participate in the growth of the economy.

In order to not lose ground financially, we have to find ways for our assets to grow at least as fast as inflation. To give you an idea of the impact of inflation over a long period of time (like your retirement), check out this free, online calculator at:

            https://www.calcxml.com/do/ret05

Input your current age, the income that you are receiving, and the year in which you think you might pass away. Don't be too conservative about your life expectancy. A study by the Society of Actuaries Committee on Post-Retirement Needs and Risks stated that, "For a couple 65 years old, there’s a 25% chance that the surviving spouse lives to 98!"¹ The calculator will tell you what your income will need to be at some point in the future in order to maintain your purchasing power, and maintain your current lifestyle.

For example, suppose that you are age 65 today, and you are receiving an income of $100,000 per year from an annuity, and that income stays the same over your lifetime. How much of your future lifestyle will that annuity sustain by the time you're 90? The calculator shows that when you assume an inflation rate of 3% per year, you would need $209,378 at age 90 to enjoy the same lifestyle you enjoy today. In other words, the annuity would provide less than half of what you need at age 90.

Remember that I said that average inflation is closer to 4 to 4 ½% per year. If we use a 4% inflation rate, the future income needed to match today's $100,000 rises to $266,584.

I'm not saying that all annuities are bad. There are good annuities and bad annuities (we'll get into that at another time).  A good annuity is appropriate in the right circumstances as part of an overall retirement strategy, especially for people who aren't so fortunate to retire with a pension. However, when you see the results of your own calculation, you can understand why it makes sense for many retirees to assume a moderate amount of risk in a broad, globally-diversified portfolio.

Investments that grow over time may make it possible for you to afford a comfortable future retirement. The safety of bank CDs and guaranteed fixed income from annuities can have a place in your retirement strategy, but if they are the only assets you have, you may be swapping a guarantee not to lose money for a guarantee that you will run out of money in retirement.

¹ USA Today, 10/5/2016

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Happy Birthday Roth IRAs

2018 marks the 21st birthday for the Roth IRA retirement account – officially marking it a young adult, ready to go out and conquer the world!  The Roth IRA was originally passed in the Taxpayer Relief Act of 1997 and named after then Senator William Roth of Delaware[i].  Today, Roth IRA investments account for approximately $660 billion, or just 8.4% of the total IRA investments on record[ii].  Many wonder why the Roth IRA, with all its tax benefits, has not been more popular among investors.

What is a Roth IRA?

A Roth IRA is a type of retirement account for individuals.  Most are familiar with the traditional IRA in which the original contributions are generally tax deductible and the account benefits from tax-deferred growth until withdrawals are taken.  A Roth IRA operates opposite, but with the same end-goal of saving for retirement.  Roth IRA contributions are not tax deductible in the year made.  However, the after-tax dollars contributed to the Roth IRA benefit from tax-free growth, meaning both the original proceeds contributed plus all the accumulated growth during the years of investment can be withdrawn tax-free in retirement.  Depending on the life and gain on the investment, this tax-free benefit could be huge.

Who should open a Roth IRA?

Although each scenario should be independently analyzed, typically Roth IRAs are beneficial investments for:

1.      Young Investors – Youth is an advantage in this scenario because a 40-year-old investor could have 25+ working years and annual contribution opportunities during which their investment may grow.  Approximately 31% of current Roth IRA owners are under age 40[iii].

2.      Households Subject to a High-Income in Retirement – Although the future tax code is undeterminable, if a household expects a combination of retirement income (i.e.: pension income, social security income, dividends and interest, Required Minimum Distribution proceeds) that is equivalent to or greater than their working income, utilization of a Roth IRA may be a desirable strategy to control taxable income in retirement.  That is because Roth IRA withdrawals are generally tax-free, meaning you can take as much as you need, whenever you need, without worrying about taxation.  Unbeknownst to many, high income in retirement can result in a great deal of complexities such as increased taxes on Social Security benefits, higher Medicare premiums, a higher overall tax bracket and IRS required quarterly estimated tax payments. 

3.      Estate Planning – Roth IRAs are excellent estate planning tools.  Roth IRAs are not subject to Required Minimum Distributions, and therefore, can be left alone to grow tax-free.  Then, they can be passed tax-free to children or grandchildren through an Inherited Roth IRA account, extending the tax-free growth for another generation.

Additional Roth IRA Benefits[iv]

  • No Age Limit – After age 70½, the IRS does not allow individuals to contribute to their IRAs.  However, Roth IRAs are not subject to the age rule and contributions can continue as long as the person has eligible working income
  • Roth’s Utilized Alongside Work Sponsored Plans – An investor can participate in their company’s work sponsored plan, such as a 401K, and still contribute to a Roth IRA concurrently.
  • Easy Withdrawals – Generally speaking, as long as the Roth contribution has been invested for 5 years+, the account holder can withdraw gains from the account tax-free and penalty free. The basis, or original investment amount, is not subject to the 5-year rule, and may be withdrawn at any time.  

Roth IRA Contributions and Conversions

Annually, an investor can contribute a maximum of $5,500 per year to a Roth IRA, plus another $1,000 per year catch-up contribution after turning age 50.  Between January 1, 2018 and April 15, 2018, you may be able to make Roth IRA contributions for both 2017 and 2018. If you are getting your taxes prepared, ask your CPA.  

Keep in mind that Roth IRA contributions and conversions are different animals.  A Roth IRA conversion is the transfer of money from a pre-tax IRA account, to an after-tax Roth IRA account.  As the titles might suggest, the conversion is a taxable event and the transfer amount is considered earned income by the IRS.  Therefore, before making the conversion, check with your CPA how much a conversion of say $5,000, $10,000 or $15,000 might create in tax liability and only transfer what you are comfortable with.  Unlike Roth IRA contributions, conversions need to be completed before December 31st to count for that taxable year.

Due to the low Roth IRA annual contribution limits and phase out limits (if your Adjusted Gross Income is too high), many people are not able to make substantial investments directly into the Roth IRA.  Therefore, to take advantage of the Roth IRA tax benefits, investors may want to consider a Roth IRA conversion.  Consult with your CPA, attorney or Financial Advisor to ensure you are taking full advantage of opportunities.  

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] https://en.wikipedia.org/wiki/Roth_IRA

[ii] https://www.ici.org/pdf/ten_facts_roth_iras.pdf

[iii] https://www.ici.org/pdf/ten_facts_roth_iras.pdf

[iv] Financial Planning: Why aren’t more clients using Roth IRAs?

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The Past, the Present, and Your Long-Term Goals

The past year, 2017, was by any measure, an amazing year. The U.S. and international markets ignored North Korean missile threats, Presidential fire and fury, hurricane devastation, a ballooning national deficit, and yet produced the following broad market gains:

* The Wilshire 5000 Total Market Index -- the broadest measure of U.S. stocks -- finished the year up 20.99%.¹

* The Standard and Poors 500 Index of large company stocks returned 19.42% by the end of 2017.²

* The Russell Midcap Index finished 2017 up 18.52%.³

* The Russell 2000 Small-Cap Index gained 14.65% for the year.³

* The technology-based Nasdaq Composite Index rose 28.24% for the year.⁴

* In international stocks, the broad-based EAFE Index of developed foreign economies ended the year up 21.78%.⁵

* Emerging market stocks of less developed foreign countries, represented by the EAFE EM Index, posted a 34.35% gain for the year.⁵

* In the bond market, the coupon rate on 10-year U.S. Treasury bonds rose 2.41%.⁶

* Thirty-year municipal bonds yielded 2.62%.⁷

Last year's market performance caps a span of time from 2009 up to the present in which there have been no significant downturns, and returns have been generally upward. The questions on many people's minds are "How long can this last?" and "When should I get out?" Many investors who tried to time the market concluded over a year ago that the party was over, and cashed out their holdings. Then, they watched on the sidelines as the Dow Jones Industrial Average captured record high after record high. It's a demonstration of how difficult it is to predict market performance. 

Timing the market is made even more difficult by the fact that you have to be right twice -- when to get out, and when to get back in. The result for most people is missing out on periods of exceptional returns, taking a hit to the value of their portfolios, and suffering a setback on achieving their most important life goals.

The penalty for mistiming the market is high. For example, investors who stayed in large cap stocks for all 5,218 trading days between the beginning of 1997 and the end of 2016, achieved a compound annual return of 7.7%. If they missed only the 10 best days of stock returns in 19 years, they would have received only 4.0%. If they missed the 50 best days, they would have lost 4.2% per year.⁸

Trying to avoid bear markets (markets when stock values go down) is not that productive for long-term investors because bear markets tend to be short, and eventually come to an end. Bear markets have lasted on average less than two years since 1970. As long as you didn't panic, even the terrible Great Recession of 2008 and 2009 was not a disaster. You would have recovered in four years.⁹ By comparison, many people spend 25 to 30 years in retirement.

A broad, globally-diversified portfolio that balances all the asset classes is effective at tempering market fluctuations, and is well-suited to achieving long-term goals. Rather than stewing over when to get out of the market, your time and energy may be better spent maintaining a long-term outlook for your investment strategies, and working with your advisor to develop a comprehensive financial plan that is aligned with your life goals.

¹ www.wilshire.com/Indexes/calculator/

² www.standardandpoors.com/indices/sp-500/en/us

³ www.ftse.com/products/indices/russell-us

⁴ www.nasdaq.com/markets/indices/nasdaq-total-returns.aspx

⁵ www.msci.com/end-of-day-data-search

⁶ www.bloomberg.com/markets/rates-bonds/government-bonds/us/

⁷ www.bloomberg.com/markets/rates-bonds/corporate-bonds/

⁸ Loring Ward, 360 Insights, winter 2018

⁹ Associated Press, March 5, 2013

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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Tax Reform Highlights

On December 22, President Trump signed into law H.R.1, the Tax Cuts and Jobs Act.  People are calling the new law the most significant tax reform in 31 years since the Tax Reform Act of 1976 passed by President Gerald Ford.  The difficulty is the original law was passed in the House with tweaks, then passed in the Senate, with more tweaks.  Then the House and Senate versions of the law needed to be reconciled into H.R.1, which also underwent eleventh hour changes before its final presentation on the 22nd, just in time for Christmas.  Not surprisingly, many have not had the chance to read the full 500-odd page brand new law and so the details are sparse and whatever we thought we did know might not have made it into the final version of the passed law.  Here are some highlights of what we do know:

How will tax reform impact individual taxpayers?[i]

The impact of the bill from 2018 through 2025 on individual taxpayers include: 

1.      The top individual tax rate is reduced from 39.6% to 37%;

2.      In 2017, the standard deduction for a single taxpayer was $6,350, plus one personal exemption of $4,050.  Under the new tax code, those deductions are combined into one larger standard deduction for 2018: $12,200 for single filers and $24,400 for joint filers[ii];

3.      Personal exemptions are no longer deductible;

4.      The individual Alternative Minimum Tax (AMT), which is meant to prevent high income earners from paying too little in taxes, has now been eased with a higher exemption amount and increased phase-out levels;

5.      The mortgage interest deduction limit is reduced to $750,000 on new mortgages (previously, no limit) and home equity loan interest (HELOC) is no longer deductible;

6.      Individuals are capped at deducting up to $10,000 in total state and local taxes, which include income or sales tax plus property taxes (previously, no limit);

7.      The child tax credit is increased from $1,000 to $2,000; 

8.      Medical expenses in excess of 7.5% of Adjusted Gross Income (AGI) are deductible in 2017 and 2018, and then in excess of 10% of AGI thereafter;

9.      Moving expenses are no longer deductible;

10.  Alimony payments are no longer taxable or deductible starting in 2019;

11.  Miscellaneous itemized deductions are no longer allowed;

Did Estate Taxes Go Away?

Eliminating the estate tax was high up on the Republican tax agenda and was part of the original Republican Blueprint and the House version of the Tax Reform presented back in November.  However, the final version of the Tax Cuts and Jobs Act does not eliminate the estate tax.  Rather, the tax exemption amount is doubled from $5.6 million to $11.2 million per person for 2018 through 2025.  In other words, a married couple can pass up to $22.4 million of assets to their children upon their death, estate tax free.  

How Does the Tax Reform Affect Small Businesses?

Small Businesses were one of the major parties affected by the Tax Reform.  Changes to the individual taxes are temporary and expire after 2025, but the tax code changes to businesses are permanent.  

Pass-through entities are companies such as S-Corporations or LLCs where the profits of the business flow through to the owner’s personal tax return.  These entities are taxed at the owners’ individual tax rate, which was as high as 39.6% before the Tax Reform.  Under the new legislation, pass-through entities could receive a deduction to their Qualified Business Income (QBI) as high as 20%, subject to limits, restrictions and phase-out[iii].  

C-Corporations are entities with their own tax rate and tax filing.  Shareholders pay taxes at their individual tax rates for dividends or distributions from the company, which created the double taxation adage.  Under the new Tax Reform, Corporations will have a flat tax rate of 21%.  Prior Corporations were subject to a tiered tax table that ranged from 15% to 35%[iv].

Long story short, while the Tax Cuts and Jobs Act was meant to simplify tax filings and remove loopholes, filing taxes for businesses just got more complicated.  If you think you may be affected, reach out to your CPA or attorney to get ask for their advice as to how you can benefit from the new tax code.  

How will this affect me?

For high tax states like California, the cap on your ability to deduct state and local taxes and property tax could reduce your eligible itemized deductions and therefore increase your taxes.  You should consult your CPA to determine if you are affected.  

The National Association of Realtors argues, anytime you make home ownership less appealing, home owners suffer through reduced or stagnant home values.  The new Tax Act puts a cap on the amount of mortgage interest that can be deducted in your tax return and no longer allows home equity loan interest to be deducted.  Only time will tell how much these changes truly affect the personal real estate market.  

Other analysts have said the newly passed tax reform will greatly benefit corporations and stock holders which in turn benefits the stock market and ultimately mass America – Trickle Down economics theory.  Since the passage of the Tax Reform act in the House, we have seen the stock market react positively to the reduced taxation and therefore higher corporate profitability anticipated in the years to come.  

Our hope is that the truly neediest Americans are able to benefit from Corporate Tax cuts.  The changes discussed will affect your 2018 tax year which you will file in 2019.  However, businesses considering a corporate structure change need to act by March 15th to have that change apply for the 2018 tax year.  Consult with your CPA, attorney or Financial Advisor to ensure you are taking full advantage of opportunities.  

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.



[i]https://www.aicpa.org/taxreform?utm_source=Tax_SpecialAlert_A17DC902&utm_medium=email&utm_content=tax13&utm_campaign=TaxDec17&tab-1=2

[ii] http://www.businessinsider.com/tax-brackets-2018-trump-tax-plan-chart-house-senate-comparison-2017-11

[iii] https://www.forbes.com/sites/kellyphillipserb/2017/12/22/what-tax-reform-means-for-small-businesses-pass-through-entities/#5a83e26f6de3

[iv] https://www.fool.com/taxes/2018/01/03/heres-who-got-the-biggest-tax-rate-break-from-corp.aspx

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EDUCATIONAL WORKSHOPS

2019 TENTATIVE SCHEDULE 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 16, 2019

10:00 a.m. - 12:00 p.m.

South Pasadena Public Library Community Room**

1115 El Centro St.

South Pasadena, CA  91030

**This activity is not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 23, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

 

Contact Us

300 North Lake Avenue, Suite 920
Pasadena, California 91101
Phone: (626) 449-7783
Fax: (626) 449-7785
Email: info@kondowealthadvisors.com

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