Mastering Retirement Journal

Change of the Seasons

September and October on Delmarva means things are changing. Weather, color on the leaves, and the groans about the declining frequency of “beach weather.” The Tax Cuts and Jobs Act (TJCA) was signed into law on December 17th, 2017, and brought about significant changes to the tax code for nearly every American. Often built into new legislation to pass under budget muster are “sunset” dates or a date at which such a law will expire pending any extension. At current, TJCA will sunset on December 31st, 2025, meaning most Americans will wake up New Year’s Day in 2026 to a new financial season.

The most notable effect on most Americans will be the reversion back to 2017 rates and brackets. Most marginal brackets will increase by 2-3%, and brackets will narrow. In short, individual income taxes are going up in most cases. Two other provisions that will garner significant attention are the reduction of the “standard deduction” back to ½ of the current level and the possible elimination of the $10,000 state and local tax deduction (SALT). For many of our clients at or near retirement, this likely means taxes are going up.

As we prepare for what may be the plain vanilla “expiration” of these cuts, we’ve recommended that clients review their long-term tax strategy to determine if it makes sense to take advantage of the last 14 months of what is likely “lower taxes.” This could include accelerating income tax via distributions from IRAs or other qualified accounts, partial Roth IRA conversions, or realizing capital gains at a rate advantageous to you. A straightforward method of saving money in taxes is by paying the lowest rate you can – when avoiding it is impossible. So, for many people, that may mean it is as cheap today as it will be until January 1st, 2026.

It should go without saying that the major underlying assumption is that Congress fails to enact new legislation or extend the existing tax cuts. This isn’t an attempt to read tea leaves or handicap the odds of that happening. There is an election happening in 60 days, and that could absolutely change the facts of whether these cuts get extended, or tax policy receives an overhaul prior to January 1st. Any major tax decision should be carefully reviewed with these pending changes in mind.

Thankfully, taxes in this country don’t change as often as the seasons. However, much like you’re pulling those sweaters and jackets out of the closet, you should consider what these legislative changes may mean for your situation. If you are worried about your tax strategy in retirement, we offer an initial one-hour consultation that can give you some guidance on opportunities to minimize your taxes and increase your net worth.

 

Retirement Blind Spots?

Oftentimes, when driving, you might give a little glance over your shoulder and start to switch lanes only to hear a horn and find someone driving in your blind spot.  You move back over and keep heading in your lane.  The question might be, “Were you able to get back over, get off on the exit you needed, and get to where you are going?”  In investing and managing your retirement, there are times “when you can’t get over” and opportunities when you can. However, there are no horns to alert you.  What might be something on the road in your retirement that you can do but you’re not seeing it when it happens? There might be a few blind spots. Here are a few and what you can do.

Taking Profits:  When stocks return more than 20% in a year, in 2023, for instance, this is an opportunity to take some profits and reduce your risk and downside potential while locking in some handsome gains.  The timing of this matters. It is likely that you don’t want to rebalance every time you have a gain. However, there is great research that supports this timely profit-taking. Take profits. Reduce risk. Lock in gains. All nice moves in one fell swoop.

Roth Conversions: I’ve written and spoken about this on our podcast, but I’ve often found people, early in their retirement years, 62 or 65 years or so, aren’t even remotely paying attention to what their required minimum distributions are going to be when they turn 73. Roth conversions can help permanently reduce what these required distributions might be.  This gives you far more control of your tax situation once you turn 73 and on – before even considering the powerful tax-free growth in the Roth IRAs.  Once your required distributions start, you effectively lose control of your taxable income, and there is no exit ramp to avoid this if you don’t make some changes sooner.

Distribution Order:  Distribution order is the order from which you might take distributions from your accounts to supplement or pay for your lifestyle in retirement.  Tax-wise you might be tempted to take from your Roth IRA or taxable accounts first and only pay tax on your capital gains. This will allow your Traditional IR

As and 401(k)s to potentially grow without withdrawal. This effectively increases your required distribution from your IRAs once you reach 73, proportional to the growth of the account. This effectively doubles your required distribution from your IRA’s once you reach 73. This is not a great tax position or plan.  Take a look at this earlier than you think.  Roth IRA’s might be the last place from which you take distribution, instead of first.  Taking some of the growth from your Traditional IRAs might benefit you later.  You can end up at a better destination with some planning on distribution order.

These are what come to mind and some easy steps you can work on with your advisor.  Drive safe folks. Watch your blind spots. Get safely to where you want to go.  Some financial destinations are prettier than others.

 

This article is written by Eric W. Johnston, CFP®, Financial Advisor and President of InFocus Financial Advisors Inc., whose firm focuses on the needs of people in retirement.  For questions or comments, he can be reached at 410-677-4848 or [email protected]. His website is www.retireinfocus.com. His podcast is called Retirement Insights which is found on his website and YouTube.com

Investment Advisor Representative offering securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker-dealer, and a Registered Investment Adviser. Cetera is under separate ownership from any other named entity.

Investments in securities do not offer a fixed rate of return.  Principal, yield, and/or share price will fluctuate with changes in market conditions, and when sold or redeemed, you may receive more or less than originally invested.  No system or financial planning strategy can guarantee future results.

Disclaimer: For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisors LLC nor any of its representatives may give legal or tax advice. Re-balancing may be a taxable event. Before you take any specific action be sure to consult with your tax professional. Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

 

The Importance of Reviewing Your Homeowner Insurance Amid Rising Replacement Costs

As financial advisors, we often come across aspects of people’s financial lives from which others may benefit.  This is one of those times that relate to any homeowner.  As a homeowner, your house is likely one of your most valuable assets. It’s where you build memories, offer shelter to your loved ones, and, importantly, where a significant portion of your financial wealth is invested. Considering recent economic shifts, reviewing your homeowner’s insurance is crucial to ensure it adequately covers the rising costs of replacing your home.

The Escalating Cost of Home Replacement

Over the past few years, home construction costs have surged due to various factors. Supply chain disruptions have increased the prices of building materials, such as lumber, steel, and concrete. Additionally, labor shortages in the construction industry have driven up wages, further inflating overall construction costs. Consequently, the expense of rebuilding a home today is substantially higher than just a few years ago.

With a rough estimate I obtained from a couple of home construction companies, the estimated cost to replace your home is $200 to $300 per square foot, depending on your level of finish and customizations.  While your 2500 square foot home insured for $450,000 might have been adequate five years ago to replace your home, today, the cost to replace would be closer to $500,000 to $750,000, again depending on your home’s level of finish.  If your coverage is $450,000 and hasn’t been reviewed in some years, and something happens to your home (fire, etc.), you might have to come out of your savings to rebuild your home.  This is worth avoiding.

I spoke with Meghan Feagans at Deeley Insurance (DE/MD Insurance Agent), who said, “It is important to note that what you can sell the home for is rarely the cost to replace the home. A ‘replacement cost valuation’ might be a great idea if you’re unsure what you should be insured for. This really makes sure your insured value will cover replacement costs.”  She added, “Make sure you understand your coverages. Gaps in coverage can be substantial.”  I couldn’t agree with her more. A review of your coverage may be in order currently.

Why Review Your Homeowners Insurance?

  1. Ensure Adequate Coverage: Standard homeowners insurance policies are designed to cover the cost of rebuilding your home to its original condition. However, you may be underinsured if your policy has not been updated to reflect current replacement costs. This could leave you financially vulnerable in the event of a disaster. Regularly reviewing and adjusting your coverage ensures your policy keeps pace with market realities.

 

  1. Avoid Out-of-Pocket Expenses: Inadequate insurance coverage means that, in the event of a total loss, you might have to cover the shortfall out of your own pocket. This could entail depleting your savings, taking out loans, or compromising the quality or size of your new home. You safeguard your financial stability and peace of mind by aligning your coverage with current replacement costs.

 

  1. Account for Home Improvements: Many homeowners periodically invest in renovations and upgrades, which can significantly increase the value of their home. Whether it’s a new kitchen, an additional bathroom, or a finished basement, these enhancements must be factored into your insurance coverage. A periodic review ensures that all improvements are accounted for, and your policy is updated accordingly.

Reviewing your homeowner’s insurance in the context of rising replacement costs is not just a prudent financial move; it’s essential for protecting your most significant asset. By ensuring your policy is up-to-date and comprehensive, you can rest assured that your home, family, and financial future are safeguarded against unforeseen events. Don’t wait for a disaster to reveal gaps in your coverage—take proactive steps today to secure your home and peace of mind.

 

This article is written by Eric W. Johnston, CFP®, Financial Advisor and President of InFocus Financial Advisors Inc., whose firm focuses on the needs of people in retirement.  For questions or comments, he can be reached at 410-677-4848 or [email protected]. His website is www.retireinfocus.com.

Investment Advisor Representative offering securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker-dealer, and a Registered Investment Adviser. Cetera is under separate ownership from any other named entity.

Investments in securities do not offer a fixed rate of return.  Principal, yield, and/or share price will fluctuate with changes in market conditions, and when sold or redeemed, you may receive more or less than originally invested.  No system or financial planning strategy can guarantee future results.