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Category: Retirement Planning

Is the 4% Rule for Retirement Still Valid in 2025?

If you’ve nerded out on retirement planning, you’ve probably heard of the 4% rule. It’s a seemingly simple guideline. Retire with a million dollars, withdraw $40,000 in your first year, adjust for inflation each year after, and you’re set for 30 years. But is this rule-of-thumb still relevant in 2025? Interestingly, Bill Bengen, the ‘father of the 4% rule’ back in the 1990s, recently released a new book called “Richer Retirement” where he suggests the 4% rule might actually be too conservative.

In this blog post, we’ll explore

  • The background of the 4% rule
  • Examine Bengen’s recent updates
  • Discuss some downsides of following this rule too rigidly
  • Provide practical approaches for your own retirement income planning.

Let’s dive in!

What is the 4 Percent Rule in Retirement?

The 4 percent rule was developed by Bill Bengen in the 1990s as a worst-case scenario approach to retirement withdrawals. Essentially, Bengen wanted to determine a safe withdrawal rate that would allow a retiree’s portfolio to last at least 30 years, even in the most challenging market conditions.

Through his research, Bengen back-tested various withdrawal rates using historical market data going back to 1926. What he discovered was fascinating. While many retirees could have started with much higher withdrawal rates, those who retired in the fall of 1968 (right before two bear markets and a period of high inflation in the 1970s and 1980s) needed to be more conservative.

The 4 percent rule works like this: In your first year of retirement, you withdraw 4% of your total portfolio. For example, if you have $1 million saved, your first-year withdrawal would be $40,000. In subsequent years, you adjust that amount for inflation. If inflation runs at 3% after your first year, you’d add $1,200 to your withdrawal, taking out $41,200 in year two, and so on throughout retirement.

This approach was designed as a worst-case scenario. In Bengen’s research, a portfolio with this withdrawal strategy would have lasted at least 30 years, even for those unfortunate 1968 retirees who faced particularly challenging economic conditions.

How the 4 Percent Rule Has Evolved: Bengen’s New Research

In his new book “Richer Retirement,” Bill Bengen has updated his research with some interesting findings. One key change is that he expanded the asset classes in his analysis.

The original 4% rule study used a simple portfolio allocation:

  • 50% in S&P 500 (large-cap US stocks)
  • 50% in intermediate treasury bonds (either 5-year or 10-year)

In his updated research, Bengen added several additional asset classes:

  • Mid-cap stocks
  • Small-cap stocks
  • Micro-cap stocks
  • International stocks
  • Additional bond types

The results? That same 1968 retiree could have actually started with a 4.7% withdrawal rate and still had their portfolio last beyond 30 years. 

Even more interesting, in recent interviews promoting his book, Bengen has suggested that withdrawal rates of 5.25% or even 5.5% could be reasonable starting points for today’s retirees. That’s a substantial increase from the original 4% guideline.

Why the 4 Percent Rule Has Limitations

While the 4 percent rule provides a helpful benchmark, there are several important limitations to consider before applying it to your own retirement planning:

It Ignores Other Income Sources

The 4 percent rule assumes your investment portfolio is your only source of retirement income. In reality, most retirees have multiple income streams, with Social Security being the most common.

For example, if you retire at 60 but delay Social Security until 70, you might need to rely more heavily on your portfolio during that 10-year “bridge period.” Your withdrawal rate might be higher initially (perhaps 6-7%). Once Social Security kicks in, your portfolio withdrawals could drop significantly.

Let’s say you need $100,000 annually and have $1.5 million saved. That’s a 6.67% withdrawal rate—well above the 4% guideline. However, if Social Security later provides $50,000 annually, you’d only need to withdraw $50,000 from your portfolio. Your withdrawal rate drops to just 3.33% (assuming your portfolio hasn’t depleted).

It Doesn’t Account for Tax Efficiency

The 4 percent rule assumes all your retirement assets are in tax-deferred accounts like 401(k)s or traditional IRAs. While this is common, many retirees today have a mix of account types:

  • Tax-deferred accounts (401(k)s, traditional IRAs)
  • Tax-free accounts (Roth IRAs, HSAs)
  • Taxable brokerage accounts

By strategically withdrawing from different account types based on tax considerations, you can potentially increase your effective withdrawal rate well above 4% while maintaining the same after-tax income.

It’s Based on Retirement Spending Phases

The 4 percent rule assumes consistent spending throughout retirement, adjusted only for inflation. However, retirement spending typically follows three distinct phases:

  1. Go-Go Years: The early, active phase of retirement with higher discretionary spending on travel, hobbies, and bucket-list experiences.
  2. Slow-Go Years: The middle phase where activity levels and spending naturally decrease.
  3. No-Go Years: The later phase with limited mobility where spending on discretionary items decreases significantly.

A Morningstar study found that retirees’ spending typically lags inflation by about 1% per year. This means your spending power might naturally decrease over time. This pattern could allow for higher initial withdrawal rates that gradually decrease.

It Uses a Conservative Asset Allocation

The original 4% rule was based on a 50/50 stock/bond allocation, which Bengen considered the minimum acceptable stock percentage. In his research, portfolios with 75% stocks and 25% bonds often supported initial withdrawal rates of 5%, 6%, or even higher.

Your risk tolerance and capacity should guide your asset allocation. If you’re comfortable with more equity exposure (60/40 or 75/25), you might safely support a higher withdrawal rate.

It’s Based on Worst-Case Scenarios

Perhaps most importantly, the 4 percent rule is based on the worst retirement timing in modern history. The average safe withdrawal rate across all the historical periods Bengen studied was actually 7%—not 4%.

This means most retirees following the 4% rule not only preserved their principal but significantly increased their wealth throughout retirement. While having a backup plan for worst-case scenarios is prudent, planning your entire retirement around the worst possible outcome might lead to unnecessary sacrifice during your go-go years.

Practical Approaches to Retirement Income Planning

So how should you approach retirement income planning given these insights? Here are some practical strategies:

Use the 4.7% Rule as a Benchmark, Not a Rule

The updated 4.7% guideline should be viewed as a starting point, not a rigid rule. Compare your planned initial withdrawal rate to this benchmark. If you’re significantly higher (like 10%), that might be a red flag. But if you’re at 5.5-6% with Social Security starting in a few years, you’re likely on solid ground.

Optimize Your Tax Efficiency

Consider the timing of your distributions from different account types. For example, the period between retirement and age 75 (when Required Minimum Distributions begin) presents a potential “Roth conversion window” where you might be in lower tax brackets.

Strategically converting some tax-deferred assets to Roth during these years can potentially reduce your lifetime tax bill and enhance your legacy if that’s important to you.

Balance Risk Tolerance with Risk Capacity

Determine both how much risk you need to take (risk capacity) and how much risk you’re comfortable taking (risk tolerance). If your retirement is well-funded, you might not need to take on as much market risk, even if that means a slightly lower withdrawal rate.

Consider your different “buckets” of money and their time horizons:

  • Near-term spending money (more conservative allocation)
  • Mid-term money (moderate allocation)
  • Long-term/legacy money (more aggressive allocation)

Just be careful about overloading bonds in taxable accounts, as this can create tax drag on your returns.

Consider a Guardrails Approach

The “guardrails” strategy, developed by Guyton and Klinger, offers more flexibility than the static 4% rule. It allows for a higher initial withdrawal rate (perhaps 5-5.5%) with rules for when to reduce spending if your portfolio performs poorly or increase spending if it performs well.

This approach can be particularly valuable if you’re retiring early with a longer time horizon. It can also help if you’re borderline funded but don’t want to sacrifice your go-go years.

Develop a Long-Term Care Plan

Long-term care costs can derail even the best retirement income plan. About 70% of retirees will need some form of care in their later years. Without a specific plan for these costs, many retirees underspend throughout retirement out of fear.

Strategies you may consider include:

  • Insurance
  • Self-funding
  • A combination approach

Having a dedicated strategy for potential care needs is essential. It can also give you more confidence to spend and enjoy your early retirement years.

Is the 4% Rule Dead?

So, is the 4 percent rule outdated retirement planning advice? Not exactly. It remains a useful benchmark. The better question might be:

Should we make it the 7% rule, given that was the average experience across all historical periods?

The answer depends on your personal circumstances. Starting with a higher withdrawal rate early in retirement (perhaps 6-7%) and then reducing it once Social Security begins could be a reasonable approach for many retirees.

Remember that no one can predict the future. The key is having a disciplined, unemotional, and repeatable process for managing your retirement income—not just at the beginning of retirement, but throughout your retirement journey.

Final Thoughts

Retirement planning isn’t one-size-fits-all. While the 4% rule retirement strategy provides a helpful starting point, your personal retirement income plan should consider your unique circumstances, including:

  • The timing of different income sources
  • Tax efficiency across various account types
  • Your spending patterns and priorities
  • Your risk tolerance and capacity
  • Your legacy goals
  • Your long-term care strategy

By taking a more nuanced approach to retirement income planning, you can potentially enjoy a richer retirement without sacrificing long-term security.

Remember, the goal isn’t to die with the biggest possible portfolio—it’s to use your resources to live your best life while ensuring you don’t outlive your money. With thoughtful planning and regular reassessment, you can strike that balance and enjoy the retirement you’ve worked so hard to achieve.

This is for general education purposes only and should not be considered as tax, legal or investment advice. At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.

If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

Bear Market Preparation: 14 Retirement Planning Moves to Protect Your Wealth

The markets have recovered all of the losses from “Liberation Day,” AND SOME, so far in 2025.  Many investors have stopped worrying about tariffs, and are now looking at a high likelihood of the Fed cutting interest rates at their next meeting in September.

However, it’s crucial to begin preparing for the next bear market or recession before they actually happen. You’d rather be in proactive mode, rather than reactive mode!  In this article, I’ll discuss 14 retirement planning moves to help you prepare for the next bear market because it’s not a question of if, but when.

What Is a Bear Market?

Before diving into preparation strategies, let’s clarify what a bear market actually means. A bear market is defined by a decline of 20% or more in one of the major stock indexes over at least two months. A correction, on the other hand, is a 10% decline from previous highs.

Since 1964, the S&P 500 has experienced 27 corrections. In eight of those 27 instances (about 30%), the correction led to a bear market. Typically, bear markets last about 10 months on average, though some have lasted significantly longer.

Some notable bear markets include:

  • The Great Depression (1929-1932): The Dow dropped 86%
  • The Global Financial Crisis (2008): The S&P 500 declined by about 56%
  • The Dot-com Bubble (2001-2002): The S&P 500 fell about 50%, while the NASDAQ dropped almost 78%
  • The COVID-19 Pandemic (2020): The S&P 500 declined about 34% but fully recovered two months later
  • The Triple Bear Market (2022):  Stocks, bonds and cash were all in bear market territory as of June of 2022.  It lasted about 9 months, but the inflation effects are still lingering. 

Bear markets are part of the economic cycle. We experience booms and busts, expansions and contractions, peaks and troughs. With current concerns about tariffs, geopolitical conflicts, inflation, and interest rates, there’s significant uncertainty in the markets.

Now, let’s explore 14 strategies to prepare for the next bear market.

1. Prepare Your Mindset

Bear market preparation begins with your mindset. Bear markets are a normal part of investing. You didn’t accumulate seven figures by being scared of investing. You took on risk to achieve your desired returns.

The challenge is that as you get closer to retirement, volatility becomes more concerning because you’re transitioning from accumulation to needing to live on your portfolio. This is completely normal.

Remember that bear markets happen on average about every five years. Even when you retire, you’ll need to keep some money invested in the stock market to keep pace with inflation. If you have a 30-year retirement horizon, you can expect to live through approximately six bear markets during retirement.

2. Prepare Your Investment Portfolio

One of the most critical aspects of preparing for a bear market is having a properly structured investment portfolio. It’s easier to think about this during periods of volatility, but it’s even more important to implement when things are going well.

Think back to 2023 and 2024, when the S&P 500 delivered back-to-back returns exceeding 20%. After Trump won the election in late 2024, there was almost a euphoria in the markets with expectations of reduced regulations, tax cuts, and increased domestic manufacturing. This “Trump bump” created a situation where things were running hot—a common occurrence toward the end of a boom cycle.

Instead of riding that wave based on emotion, a disciplined, unemotional, repeatable process of rebalancing can prevent you from becoming overexposed to risk. This means:

  • Having specific targets for each asset class
  • Trimming winners and taking gains off the table
  • Buying underweight positions that might be underperforming

You can’t magically implement this in the middle of a bear market. You need to enter each year with a defined investment policy statement and strategy for each account—your taxable brokerage account, traditional IRA, 401(k), and Roth accounts.

For example, if your S&P 500 allocation increases significantly due to strong performance, consider reallocating some of those gains to areas that may have underperformed, such as fixed income or cash. This disciplined approach helps prevent emotional decisions when markets turn, which typically happens quickly.

3. Build Your War Chest

Investing in a down market requires having cash available. Building up your “war chest” is crucial for both protection and opportunity.

If we enter a bear market, there’s a decent chance we’re already in a recession or heading into one. The market is a leading indicator, typically declining before economic data confirms a recession. Having cash on hand helps if you lose your job or face reduced income during economic downturns.

But if you’re fortunate enough to keep your job during a bear market, cash becomes king for finding buying opportunities. As Warren Buffett famously said, “Be fearful when others are greedy and be greedy when others are fearful.”

Consider this eye-opening statistic: 56% of the best days in the S&P 500 occur during bear markets. Another 32% happen in the first two months of a bull market. That means 88% of the best market days happen when most people aren’t feeling optimistic about investing.

This war chest could be:

  • Cash within your investment portfolio
  • Cash alternatives in your investment portfolio
  • Increased contributions to retirement accounts during downturns
  • Front-loading contributions to take advantage of buying opportunities

It won’t feel natural to add money when markets are down. Imagine being told to add more money to your portfolio during the pandemic, when it had already dropped 30-40%. Most people want to take money out, not put more in. But that’s precisely when the greatest opportunities arise.

4. Plan Your Retirement Cash Flow Sources

Having a plan for where your retirement cash flows will come from is essential during market volatility. Let’s use a simple example:

If you have a $1 million portfolio with a 60/40 split ($600,000 in equities and $400,000 in fixed income), and you need $40,000 annually (a 4% withdrawal rate), you effectively have 10 years of income in fixed income without touching your stock portfolio.

Given that bear markets typically last about 10 months, with the longest in our lifetime being around five years, having 10 years of income in fixed income should provide significant peace of mind.

Additionally, if your portfolio generates income through interest and dividends—let’s say 2.5% overall—and your withdrawal rate is 4%, you only need to rely on capital sales for about 1.5% of your portfolio. That’s manageable even during market downturns.

During strong markets, like 2024, you can generate income by trimming gains from equities. When markets turn, as in early 2025, you can draw from fixed income or cash alternatives while waiting for stocks to recover.

5. Optimize Your Social Security Strategy

Social security planning is a critical component of retirement in a bear market. The timing of when to claim Social Security can significantly impact your retirement income floor.

If you delay Social Security until full retirement age or age 70, you’ll have a higher benefit base that will also receive cost-of-living adjustments. This creates a higher guaranteed income floor in retirement, which provides peace of mind during market volatility.

For example, if 60% of your cash flow needs come from fixed income sources like Social Security, you won’t need to rely as heavily on your investment portfolio during volatile periods.

If you’ve already retired and planned to delay Social Security until 70, but then face a bear market or recession, you have options. You could elect to start benefits earlier and then:

  1. Continue them indefinitely, or
  2. Stop them at full retirement age and then preserve delayed retirement credits until age 70

This flexibility allows you to adapt your strategy based on market conditions while still maintaining long-term income security.

6. Consider Part-Time Work

While not everyone’s favorite suggestion, considering part-time work during market downturns can be a valuable option. The goal in retirement is for work to be optional, not mandatory. However, even if you don’t mathematically need to work to preserve your portfolio, it might provide peace of mind.

Instead of drawing down your portfolio during a bear market or recession, finding fulfilling part-time work or a side hustle can reduce your withdrawal rate and put less pressure on your investments while they recover.

7. Evaluate Roth Conversion Opportunities

Roth conversions during market downturns present an interesting opportunity. When converting from pre-tax to Roth accounts, you pay taxes on the converted amount. If market values are down, you can convert the same number of shares at a lower tax cost.

If you believe in the long-term prospects of your investments, converting when valuations are down allows the eventual recovery to happen in the tax-free Roth environment rather than in your tax-deferred accounts.

The challenge is timing—you want to convert at the right moment. If you convert and the market continues to decline, you’ve paid taxes on a higher value. Typically, Roth conversions are best done toward the end of the year when you have a clearer picture of your annual income and tax situation.

8. Consider Gifting Securities at a Discount

Similar to Roth conversions, gifting stock or securities during market downturns can be advantageous if you regularly gift to family members or irrevocable trusts. Instead of gifting securities at higher values, you can gift them when values are down, allowing for a lower gift amount.

The eventual appreciation will be on the recipient’s balance sheet rather than yours. The value of this strategy depends on how much you’re gifting and the long-term outlook for the investments.

9. Implement Tax Loss Harvesting

Tax loss harvesting is a powerful strategy during market downturns. This involves selling investments at a loss in a taxable brokerage account (not retirement accounts like IRAs or 401(k)s) to realize the loss for tax purposes.

These realized losses can offset capital gains in the current year or be carried forward to offset gains in future years. If you have no capital gains, you can deduct up to $3,000 against ordinary income annually.

The key is to replace the sold security with something similar immediately but not “substantially identical” to maintain your market exposure. For example:

  • You can’t sell Apple and buy Apple back (that’s substantially identical)
  • You could sell Apple and buy Microsoft (not substantially identical)
  • For funds, you might switch from a Fidelity S&P 500 fund to a Vanguard Large Cap stock fund (also not substantially identical).

The “wash sale rule” prevents you from claiming the loss if you buy the same or substantially identical security within 30 days before or after the sale.

During the 2022 bear market, our clients built up significant tax-loss “war chests” that they’re still using to offset gains or reduce ordinary income.

10. Create Guaranteed Income with Fixed Annuities

Leveraging annuities to create guaranteed income can provide significant psychological benefits during market volatility. Social Security is essentially an annuity, but additional guaranteed income sources can enhance your retirement security.

The higher your guaranteed income floor, the more peace of mind you’ll have when markets are volatile. If guaranteed sources cover 60-70% of your income needs, short-term market fluctuations become less concerning.

For example, one client recently activated an annuity income stream with a 7.6% payout rate—significantly higher than what would be prudent to withdraw from an investment portfolio. This guaranteed income, combined with Social Security, covers about 70% of her cash flow needs, providing tremendous peace of mind during market volatility.

11. Leverage Cash Value Life Insurance

If you already have cash value life insurance, it can serve as a valuable resource during market downturns. It takes years or decades to build significant cash value, but once established, it can be a stable asset during volatility.

Unlike stocks or bonds, cash value in traditional life insurance policies typically doesn’t decrease in value during market downturns. You can access this cash through withdrawals, partial surrenders, or policy loans while waiting for markets to recover.

During the March 2020 market bottom, some investors used policy loans from their life insurance to invest in the market at discounted prices, capitalizing on the opportunity while maintaining their existing investments. Or if retired, they used that cash value as income instead of tapping into their stock allocations.

12. Consider Home Equity Options

Your home equity can serve as a last line of defense during severe market downturns. Options include:

  • Home Equity Line of Credit (HELOC): Opening a HELOC before things get bad provides access to a cash reserve that you don’t have to use unless necessary. While there are interest costs if you tap into it, having $100,000-$200,000 available can provide significant peace of mind.
  • Reverse Mortgage (if over 62): This can create a cash bucket similar to a HELOC without requiring monthly payments.

Home equity is often an underutilized asset class. Creating liquidity within your home equity can provide additional security if stock and bond markets experience severe downturns.

13. Trim Concentrated Stock Positions

Market downturns can present good opportunities to reduce concentrated stock positions. Many clients have significant concentrations in individual stocks, often from employer stock plans. These positions can be difficult to sell for two reasons:

  1. Behavioral attachment: The stock helped build their wealth, and they’re emotionally connected to it.
  2. Tax consequences: Selling may trigger significant capital gains taxes.

During market volatility, stock prices decline, making the tax consequences less painful. A position that might have generated $100,000 in taxes during a bull market might only generate $50,000 in taxes after a decline.

For example, a client with 45% of their portfolio in Microsoft stock is using the recent volatility to reduce their concentration to 30% with minimal capital gains due to the market decline.

If you have concentrated positions (generally defined as over 5% exposure to a single stock), market downturns can be an opportune time to rebalance toward a more diversified allocation with a lower tax bill.

14. Do Nothing

Sometimes, the best strategy during market volatility is to do nothing. Acting on emotion or making rash decisions during volatile periods can significantly damage your long-term plan.

If you’re uncomfortable with the 13 strategies mentioned above, it might be better to simply wait it out rather than make emotional decisions—unless you completely lack a financial planning strategy to begin with. In that case, consulting with a professional advisor would be beneficial.

Doing nothing is certainly better than abandoning a well-diversified, thoughtful investment strategy due to short-term market movements.

Final Thoughts on Bear Market Preparation

I don’t want to dismiss anyone’s emotions during volatile markets. Transitioning from working to retirement is already emotionally charged, with concerns about aging, health, and this next chapter of life. Market volatility adds another layer of stress.

However, having a trusted partner to lean on during these times can make all the difference. Someone who can coach you to stick to a long-term, disciplined strategy can help you navigate market turbulence with confidence.

Remember, bear markets are not a function of if, but when. With proper bear market preparation, you can not only protect your retirement savings but also potentially capitalize on opportunities that arise during market downturns.

As market volatility continues to make headlines, there’s no better time than now to evaluate which of these bear market preparation strategies align with your retirement goals and take decisive action to protect the financial future you’ve worked so hard to build.

This is for general education purposes only and should not be considered as tax, legal or investment advice. At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.

If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.




6 Retirement Planning Strategies for When You’re Feeling Behind

Are you feeling a little bit behind regarding your retirement plans? Well, you are not alone. In fact, over 57% of Americans today are feeling behind relative to their goals for retirement. In this blog post, we’re going to talk about six retirement planning strategies that may improve your potential outcomes for a successful retirement.

Retirement Planning: Why 57% of Americans Feel Behind

I’m sure each participant in this study has their own story.  However, the fact is that we live in a world of comparing ourselves to others, unfortunately.  Therefore, regardless of how well you’ve saved and invested up to this point, it’s completely normal to feel “behind.”  With that said, some of you truly are behind. Whether you were focused on

  • Building your careers or businesses
  • Raising children (which are VERY expensive)
  • Paying for private school or college
  • Caring for aging parents

There are countless reasons as to why you might be behind. 

However, implementing effective retirement planning strategies can significantly improve your financial outlook, even if you’re starting late. The transition from active income to passive income can be scary for many people. Additionally, it’s the fear of spending down the portfolio and worrying about uncertain events down the road that leads to serious anxiety as you approach quitting your day job.

At the same time, many folks tend to sacrifice those early years of retirement, what I like to call the “Go-Go Years.” This period of time is when you’re healthy and physically able to do the things you may want to do – traveling the world or spending precious time with your grandkids, whatever that might be.

I believe there must be a healthy dose of cautious optimism to implement a successful retirement plan. 

Let’s dive into six strategies that can help improve your retirement outcomes, give you greater peace of mind, and provide greater confidence as you approach this next chapter.

Strategy 1: Increase Savings Rate and Maximize Contributions

Let’s start with the low-hanging fruit.  Saving more is something primarily in our control, and certainly can move the needle if you have a few years left until you plan to retire.  Catch-up contributions are powerful retirement savings strategies for those over 50 who need to accelerate their nest egg growth. If you’re over 50, there are catch-up retirement plan contributions available for 401(k) plans as well as individual retirement accounts. Once you hit 55, there’s also a catch-up for Health Savings Accounts (HSAs).

401(k) Contribution Limits

If you’re over 50, you can contribute $31,000 into a 401(k) plan for employee contributions in 2025 (this includes the $7,500 catch-up for ages 50+). That’s important to note because I’ve seen people make this mistake before. They say, “I’m putting in $20,000 and my employer matches me $11,000, so I’m maxing my 401(k).”

That’s actually not true. The $31,000 is only related to employee contributions. Employer contributions are on top of that.

The total contribution limit in 2025 for ALL sources (employee, employer, and voluntary after-tax) is $77,500 for 2025.  This includes the $7,500 age 50+ catch-up contribution.

This applies to 401(k)s, 403(b)s, Thrift Savings Plans if you’re in the federal government, and 457 plans if you have one available.

Super Catch-Up Contributions

Thanks to the Secure Act 2.0, there’s now a “super catch-up contribution” available. Instead of the $7,500 extra that you can put into these plans, you can put in $11,250 if you’ve turned 60, 61, 62, or 63 in 2025 and beyond. That’s an additional $3,750 on top of the regular catch-up.

IRA Catch-Up Contributions

An Individual Retirement Account has a maximum contribution of $7,000 per year, whether it’s a Traditional or Roth account. If you put $3,500 into a traditional IRA, you can only put $3,500 into a Roth IRA.

If you’re over 50, you get an extra $1,000 catch-up, bringing your total to $8,000.

There are income thresholds you need to consider if you are looking to contribute to a Roth IRA or make a tax-deductible contribution into a Traditional IRA.  So, make sure to consult with your tax professional and financial advisor to confirm these limits.

Mega After-Tax Contributions

Many employers today are adopting what’s called the Mega After-tax Roth Contribution in their 401(k) plans. This allows for additional contributions beyond the employee and employer amounts, up to the total limit of $77,500 (for folks over 50).

Example:

If you’re putting in the max employee contribution of $31,000 and your employer matches $10,000, you’re at $41,000. You could potentially put up to an additional $36,500 into the 401(k) plan on an after-tax basis. 

The key factor, however, is making sure that after-tax contribution can be converted to Roth immediately!  This can often be done within the 401 (k) or to your Roth IRA.  Additionally, your plan administrators will calculate the exact amount allowed to the after-tax side, and this will be spelled out in your benefits details. 

This essentially allows a highly compensated employee to contribute tens of thousands of dollars into the Roth portion of their assets without worrying about the income phaseouts associated with Roth IRA contributions. 

HSA Contributions

HSAs are my favorite investment account for retirement because you get the trifecta tax benefit:

  • Pre-tax contributions (fully deductible regardless of income)
  • Tax-free growth
  • Tax-free distributions (as long as they’re used for qualified medical expenses)

Once you turn 55, you get an extra $1,000 catch-up. In 2025, for individual plans, you can contribute $4,300 plus $1,000, totaling $5,300. For family plans, it’s $8,550 plus $1,000, totaling $9,550.

Unlike a Flexible Spending Account (FSA), these accounts do not need to be emptied on an annual basis.  Therefore, if you can pay medical costs out of pocket for the year, it’s wise to allow the triple tax benefits to work in your favor until you fire your boss and retire.  This will serve as a nice tax-free income during retirement, or even perhaps serve as a self-funding mechanism for long-term care costs. 

Just make sure you spend these accounts during your lifetime, as any amounts left to children will be a tax bomb for them!

Strategy 2: Working Longer to Improve Retirement Outcomes

Working longer probably makes more of an impact than any of these other strategies in the long term. Delaying retirement by just one, two, or three years can significantly improve your financial outlook.

This doesn’t have to be in your current job. Maybe you’re a physician, working an intense tech job, or in a physically demanding blue-collar position that you can’t continue much longer. You could retire from your current role but transition to something else, perhaps even part-time.

Having one or both spouses doing something part-time to earn extra income can help bridge the gap years—the period between when you retire and when you start taking guaranteed income sources like Social Security or pension income. Those gap years can be stressful if you have no income coming in and are relying entirely on your portfolio, especially during times of market volatility.

The extra income allows you to delay portfolio withdrawals or reduce them, maximizing your Social Security benefits and allowing your tax-deferred and tax-free savings to continue growing.

Strategy 3: Review Your Spending Assumptions and Retirement Budget

Many people assume they’ll need their current spending level, adjusted for inflation, throughout their entire retirement. But retirement spending typically occurs in three distinct phases:

  1. The Go-Go Years: When you’re active and traveling
  2. The Slow-Go Years: When you start to slow down
  3. The No-Go Years: When mobility becomes more limited

In the go-go years, your spending may even go up compared to your working years.  After all, every day is Saturday. But these years probably won’t last forever. Therefore, it likely doesn’t make sense to assume that level of spending forever.

There is an argument that healthcare costs might be lower at the beginning of retirement, while discretionary expenses are higher. Then, over time, discretionary spending decreases while healthcare costs rise, particularly for long-term care. If you have unexpected healthcare costs later in retirement, you want to be prepared to maintain your independence and dignity without relying on family members.

This is where long-term care insurance can be valuable. It eliminates the potential risk of needing to spend down your portfolio for care, which could impact your spouse’s financial security, especially considering women typically outlive men.

Studies have shown that retirees lag inflation by about 1% a year over time. If general inflation is 2%, your experienced inflation might only be 1% because many of your expenses are fixed. Your mortgage might be paid off, or your property taxes might be homesteaded and not increase at the full rate of inflation.  The inflation assumption might be one of the most critical variables when you are mapping out your spending needs and the viability of retirement success.

Strategy 4: Finding the Right Asset Allocation for Retirement Investing

Adjusting your retirement investing approach as you age is crucial for balancing growth potential with risk management. One of the things you can control is your long-term asset allocation. The higher exposure you have to equities (stocks), the higher long-term rate of return you should expect, though it’s not guaranteed.

One of the biggest mistakes I see retirees make is getting too conservative too early in retirement. They reach 60 or 65 and think, “I’m done accumulating, now I’m transitioning to the distribution phase. I was 70% in the stock market, I’m going to go down to 20% or 25%.”

That’s a no-no, especially if you’re borderline in terms of being funded or not well-funded. The higher expected rate of return you have in your portfolio, the more likely you are to achieve your long-term goals.

However, there’s a fine line. If you go 100% in stocks and retire into a market downturn, that’s not good either, because you’ll have to sell stocks at the wrong time.

Bill Bengen’s 4% rule assumed an asset allocation of 50% equities (S&P 500) and 50% in government bonds (10-year Treasury). However, he suggested that as the minimum equity exposure, but actually leaned toward 75% in equities if you have the risk tolerance.

If you’re a bit behind for retirement, you don’t have the capacity to get ultra-conservative. Going too conservative brings other risks into play:

  • Interest rate risk
  • Inflation risk
  • Longevity risk.

Consider a bucketing strategy where you align your asset allocation with different accounts:

  • More conservative investments in your taxable accounts that you’ll tap first
  • Moderate risk in your tax-deferred accounts
  • More aggressive investments in your Roth accounts that you’ll access later

Strategy 5: Consider Relocating for Financial Benefits

Considering relocation could be a strategy to boost your chances of success. This retirement planning strategy can be particularly effective if you’re moving from a high-cost-of-living area to a lower-cost one.

For example, suppose you’re selling a house in New York worth $1.2 million and moving to Florida or Tennessee. In that case, you might be able to buy a comparable or better home for $700,000, leaving you with $400,000 to invest (after accounting for closing costs and taxes).

This cost-of-living arbitrage can significantly improve your retirement outlook. However, it’s essential to consider more than just the financial aspects:

  • Where are your adult children and grandkids?
  • Where is your circle of friends?
  • What about healthcare facilities and doctors?
  • Is the infrastructure (roads, schools, hospitals) adequate?

Before making a permanent move, consider renting for six months or a year to make sure the location is right for you.

Strategy 6: Utilize Home Equity

Don’t be afraid to use your home equity in retirement. I often see folks whose largest asset is their paid-off home, worth $750,000, $1 million, or more. They don’t want to sell it because they like it and want to age in place there.

However, if that home equity is added to their financial legacy upon passing, and it impacts their standard of living during retirement, they may have missed out on valuable experiences, opportunities to gift to their children, travel, or access to better healthcare.

One way to tap into home equity without selling is through a reverse mortgage, available once you turn 62. This gives you access to your home equity as an emergency fund, line of credit, or even income payments for life. It will reduce the equity you leave behind, but you can age in place and won’t have to pay back the loan during your lifetime.

Home equity can also be a great source for funding long-term care if you can’t buy insurance due to pre-existing conditions. Using home equity for this purpose can free up your retirement assets for lifestyle expenses rather than reserving them for potential care needs or financial legacy goals.

Additional Retirement Planning Strategies to Consider

Maximize Social Security Benefits

If you’re feeling a bit underfunded, maximizing your Social Security benefit can do wonders. Delaying until 70 (the latest retirement age) or at least until full retirement age gives you a higher baseline that adjusts with inflation long-term.

Consider Life Annuities

A life annuity that continues paying for as long as you live can provide peace of mind, especially if you’re concerned about market downturns affecting your portfolio.

Rethink Roth Conversions

Roth conversions may not be right for you if you’re behind on retirement savings. They require front-loading taxes early on, which could impact your breakeven long-term, especially with an underfunded plan. You can’t convert your way to a successful retirement.

Implement Tax-Efficient Withdrawal Planning

Which accounts you tap first matters. The traditional approach is taxable first, then tax-deferred, then tax-free. But you might consider a combination approach to maximize certain tax brackets, or even prioritize spending down tax-free assets if you plan to leave tax-deferred accounts to heirs in lower tax brackets or to charity.

Stress Test Your Plan

Use Monte Carlo simulations to test different scenarios, including bear markets at the beginning of retirement and different inflation rates. Be flexible and fluid with your plan, making adjustments as needed.

Consider using “guardrails,” where you start with a certain withdrawal rate and adjust spending accordingly if markets perform poorly or better than expected.

Financial Planning for Retirement: Getting Professional Help

Retirement planning requires a comprehensive approach that considers savings, investments, and potential lifestyle changes. With these six retirement planning strategies, you can improve your retirement outlook even if you’re feeling behind right now.

If you’re unsure whether you’re on track and don’t want to figure it all out yourself, consider working with a financial planner. At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.

If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

This is for general education purposes only and should not be considered as tax, legal or investment advice.

6 Reasons to Take Advantage of a Roth Conversion

While I recently outlined reasons to steer clear of a Roth conversion, today I’m flipping the coin to explore when it can be a smart, strategic move for your financial future.

Why Consider a Roth Conversion During Market Downturns

A Roth conversion can be particularly beneficial during market downturns. When the market is down, you’re essentially exchanging a number of shares based on the dollar amount you want to convert from your tax-deferred account (whether it’s an IRA or a 401k) into a Roth.

You’ll have to pay taxes now in exchange for tax-free growth, which is the advantage Roth accounts offer. When markets are down, you can convert more shares with the same dollar amount.

For example, if you were looking to convert $50,000 worth of Vanguard’s Total Index (VTI) back in 2022 (the last bear market), you’d be able to convert an additional 25% worth of shares because the market was down roughly 25% that year. Just a thought, given we had some rough patches this April with the tariff concerns. We could continue to see more volatility in the months ahead.

While we can’t control market volatility, we can control smart tax planning. Let’s jump into the top six reasons you may consider a Roth Conversion in your financial planning strategy.

1. For Accumulators: Backdoor Roth IRA Strategy

The first reason is actually for people who are pre-retirement, or what I call “accumulators.” There are income thresholds for single and married filing jointly to directly contribute to a Roth IRA. If you fall into that category, the Roth conversion or backdoor Roth IRA strategy comes into play.

Essentially, you’ll make a non-deductible contribution into an IRA and then convert those assets into a Roth IRA. There are some tax traps you might fall into (the aggregation rule), so consult with your tax planner or financial planner before making this move. This strategy is available for IRAs, and sometimes, for 401ks as well. Contribution limits are much higher for 401ks than IRAs. If you have this option within a 401k, this could really boost your retirement savings.

2. Tax-Free Growth Long-Term

Reasons 2 through 6 are for individuals nearing retirement who have accumulated substantial savings in tax-deferred IRAs or 401ks.

The second reason is for long-term tax-free growth. If you believe tax rates probably aren’t going down and are more likely to go up or stay the same, then tax-free growth and compounding interest are much more powerful than tax-deferred growth. This could be for legislative reasons, or even simply projecting out your lifetime tax brackets. We know now that the One Big Beautiful Bill Act has made the current brackets permanent. Still, that doesn’t mean YOUR tax bracket might rise over time based on changes in your income or assets.

3. Eliminate or Reduce Required Minimum Distributions

A Roth conversion can eliminate or reduce your required minimum distributions. Required Minimum Distributions (RMDs) are mandatory withdrawals from traditional retirement accounts (IRAs, 401ks, 403bs, TSPs, 457bs, etc.) that the IRS requires once you reach a certain age. The beginning age is currently 73 if you were born before 1960, or 75 if you were born in 1960 or later. RMDs could potentially push your income into higher tax brackets later in retirement when spending actually might go down. Furthermore, if you don’t need all that income, it forces you to realize it anyway to avoid the 25% penalty for a missed RMD.

4. Save Money on Medicare Premiums

Many people don’t realize that when you sign up for Medicare, you might find yourself paying MORE for Medicare Part B and D. Part A is free, and everyone has the same base premium for B and D. However, the more money you make in retirement, the chances of triggering an “IRMAA” surcharge goes up.

IRMAA stands for Income-Related Monthly Adjustment Amount. There are 5 different premium tiers, and each tier increases your IRMAA surcharge. You can also look at it like an excise tax. The more you’ve saved in tax-deferred vehicles (401ks and IRAs), the higher those RMDs might be. More income from RMDs means your Medicare premiums may go up.

5. Reduce the “Surviving Spouse’s Tax Penalty”

The likelihood that a married couple passes away in the same year is very low. Most of the time, women outlive men, or one spouse outlives the other by many years. This is especially relevant if there is a significant age gap between spouses.

Filing jointly is much more tax-advantaged for most people. The surviving spouse will have to switch to filing single, typically the year following the initial spouse’s passing. This could result in pushing the surviving spouse into a much higher tax bracket than when they could file jointly.

Taking this into consideration to ensure you’re not placing your surviving spouse in an unfair or unfavorable tax situation upon your passing is a compelling reason to convert assets from traditional to Roth.

6. Address Changes from the SECURE Act

With the SECURE Act going into effect at the end of 2019, we’re seeing the largest acceleration of taxes on retirement assets that we’ve ever experienced. Essentially, the stretch IRA is eliminated for most non-spousal beneficiaries. With the stretch IRA, beneficiaries could “stretch” their IRA withdrawals over THEIR life expectancy. However, the SECURE Act now requires most beneficiaries to liquidate the entire retirement account by the end of the 10th year. This could result in pushing your heirs into an unfavorable tax bracket, especially if they are successful in their own right. We hear all the time that our clients’ children are making more than they ever made! Couple this with large IRAs or 401ks as an inheritance in their peak earning years, and you can see the potential tax trap this brings about. We call it “The Death Tax Trap of 401ks.”

This acceleration of taxes is a big reason to convert from tax-deferred accounts to tax-free accounts. When Roth accounts pass to the next generation, the beneficiaries can enjoy tax-free distributions of the assets instead of tax-deferred distributions.

Understanding the Roth IRA Conversion Process

The concept of a Roth Conversion is essentially to pay the tax now as opposed to deferring those taxes in an IRA or 401k. If you follow the appropriate 5-year rules, everything that grows and compounds in that account, along with the withdrawals, should be tax-free in retirement.

Compare that to a traditional IRA or traditional 401k. These plans give you a tax deduction upfront, but all of that compounding interest and distributions in the back end are taxed as ordinary income in retirement.

Many of my clients over 55 have accumulated the majority of their retirement assets in tax-deferred vehicles, such as 401(k)s and/or IRAs. They may be concerned about the future direction of taxes, particularly given the funding levels of Medicare, Medicaid, and Social Security.

The general concept is: does it make sense to pay taxes now at a potentially lower rate and enjoy tax-free compounding as opposed to tax-deferred compounding going forward?

The Tax Trap of Traditional 401(k)s and IRAs

The impact of Required Minimum Distributions are oftentimes one of the biggest tax traps of 401ks and IRAs. Because our clients were diligent savers during their working years, they accumulated substantial assets in 401(k) plans and IRAs. When they turn 73 or 75, they’re forced to take out a certain percentage of those retirement accounts each year.

As your life expectancy shortens, the amount you’re required to take out increases. You start out at a little under 4%, and by the time you get to 90, you’ll be taking out north of 8% of your retirement account, whether you need it or not.

Think about what that can do to your taxable income, Medicare premiums, and ultimately, how those assets are passed on to the next generation. This tax trap is what we’re trying to solve well before clients hit that magic age.

Planning for Longevity in Retirement

More and more people are living longer, often into their 90s. The life expectancy of a 62-year-old female includes a 30% chance of living until 96. When planning with clients over 55 or 60, we may be looking at a retirement of 30 years or more, even longer than their working years.

You must consider this in light of the high inflation we have experienced these past few years. The cost of goods going up over that retirement period on a potentially fixed income is worrisome for many clients. That’s what we try to plan for and mitigate inflation risk coupled with longevity risk.

The Retirement Red Zone

I call the period ten years before you retire and the ten years after you retire the “Retirement Red Zone.” Decisions are magnified, and mistakes are magnified if you make the wrong move.

From an investment perspective, that’s important, especially during volatile times. Certainly, from a tax perspective, which also contributes to the long-term rate of return on your portfolio. This is something I aim to help my clients with as they prepare.

Strategic Planning for Retirement Success

While nobody can predict the future of taxes, you can take the known variables and project out your estimated lifetime tax rates. You will find that throughout retirement, there could be some opportunistic times when your income goes way down. If you’re making strategic moves during that time frame, such as Roth conversions, that planning can help position your retirement assets for better long-term growth and tax efficiency.

Remember, the planning doesn’t stop after retirement, it just changes. Whether you are on the brink of retirement or you’ve been retired for several years, having good guidance at every stage of the process is crucial for achieving financial peace and security in retirement.

Take a deeper dive into this topic by listening to Episode 10 of The Planning for Retirement Podcast. This is for general education purposes only and should not be considered as tax, legal or investment advice. At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.

If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

7 Reasons Not to Do a Roth Conversion

I’ve never met anyone who wants to overpay the IRS. As a result, one of the number one topics we discuss with clients is how to reduce their lifetime tax bill. More specifically, whether or not they should consider a Roth Conversion with some of their IRA dollars.

Before we talk about the seven reasons that might cause you to delay, reduce, or reconsider doing a Roth conversion, let’s look at some big news brewing in Washington related to taxes on Social Security.

Social Security has a complicated formula to determine how much of your benefit will be included in your taxable income. On the low end, your entire benefit could be tax-free (0% included in taxable income). On the high end, up to 85% of your Social Security benefit could be taxable.

Senior Citizens Tax Elimination Act

Congressman Thomas Massey from Kentucky, along with 29 Republican co-sponsors, has introduced the Senior Citizens Tax Elimination Act. To provide some context, prior to 1986, Social Security benefits weren’t taxable at all. In 1986, Social Security implemented revisions and created the provisional income formula that determines how much of your benefit is included in taxable income.

Massey’s bill would essentially repeal the inclusion of Social Security benefits in taxable income altogether. This would also include tier one railroad benefits (pensions from working at the railroad). The bill was first introduced last year, but now it’s legitimate. It’s in the House and seems to have a decent chance of passing.

However, there are costs associated with implementing this bill. According to the Committee for Responsible Government, this is estimated to cost taxpayers about $1.8 trillion over the next decade. When we couple this with Social Security’s projected insolvency date of around 2033-2034, it raises questions about funding.

Currently, 80% of Social Security benefits are funded by payroll taxes from current workers. The Social Security trust fund supplements the remaining 20%. If benefits become tax-free, this could accelerate the insolvency date.

So, how will they pay for this bill? My crystal ball says taxes will increase in some way to fund the deficits projected for Social Security and Medicare.

Why is this relevant to our Roth conversion discussion? Because, while we know what taxes look like today, it’s virtually impossible to be 100% certain about future tax rates.

What is a Roth Conversion?

A Roth conversion involves moving or converting funds from a tax-deferred vehicle (like a traditional IRA, 401(k), 403(b), or TSP plan) into a tax-free vehicle. In exchange for doing this, you elect to pay the taxes now.

Why would you do this? At one point, you believed deferring taxes was the way to go, or maybe you didn’t have access to a Roth account. This is pretty common—15-20 years ago, many employers didn’t offer Roth 401(k) plans. But now you have the ability to convert some of those assets to Roth.

The benefit of a Roth account is tax-free growth going forward, as opposed to tax-deferred growth. But there are situations where converting might not be the best strategy.

1. You’re in a Higher Tax Bracket Today Than You Will Be in the Future

The first reason to reconsider a Roth conversion is if you’re currently in a higher tax bracket than you expect to be in the future. There are several scenarios where this might happen:

When you retire, your W-2 income or self-employment income disappears. Your only income might be capital gain distributions, dividends, interest, a small pension, or IRA distributions. If your tax bracket will drop substantially in retirement, it might make sense to wait until you enter what we call the “Roth conversion window.” This window is after retirement, but before you start taking Required Minimum Distributions (RMDs) and/or Social Security.

Your income might be temporarily high due to things like

  • Selling a business, stock, or rental property
  • Receiving a large bonus
  • Inheriting money

Doing a Roth conversion during these high-income years could push you into an unnecessarily higher tax bracket.

You might believe taxes will decrease in the future due to legislative changes, making it beneficial to wait for potential tax cuts before converting.

In short, if you expect your income bracket to drop at some point, it might be worth evaluating conversions at that time instead of now.

2. You’re Leaving a High-Income Tax State for a Low or No-Income Tax State

According to the Tax Foundation, state income taxes significantly influence net migration in the U.S. The top third of states with positive net migration have an average state income tax of about 3.5%. The bottom third average nearly double that at 6.7%.

I don’t believe you should move to a state in retirement solely because of taxes. However, if you’re planning to move from a high-tax state like New Jersey, New York, or California to a low or no-income tax state, you might consider waiting to do Roth conversions until after your move.

You could potentially benefit from both a lower federal bracket at retirement and little to no state income tax, maximizing your tax savings on the conversion.

It will be interesting to see how migration patterns evolve as companies bring employees back to in-person work. For retirees with the flexibility to move anywhere, taxes will likely remain an important consideration.

3. Your Heirs Are in Lower Tax Brackets

The SECURE Act, passed at the end of 2019, eliminated the “stretch IRA” for most beneficiaries. Previously, individuals who inherited an IRA could stretch distributions over their life expectancy. Now, most non-spouse beneficiaries must liquidate the account within 10 years.

This applies to both traditional IRAs and Roth accounts. The key difference is that Roth account distributions during those 10 years are tax-free to beneficiaries, while traditional IRA distributions are fully taxable.

If your beneficiaries are in a very low tax bracket, while you are in a higher tax bracket, there could be an argument for not converting. For example, if you’re in the 24% or 32% bracket due to Social Security, a pension, and investment income, while your children are in the 10% or 12% bracket, it might make more sense to leave those assets to your heirs and let them pay taxes at their lower rate.

The challenge with this approach is that it requires knowing exactly when you’ll pass away and what tax bracket your children will be in at that time. Your 25-year-old child who’s currently in graduate school with no income might eventually have high earning potential or start a successful business, putting them in a higher tax bracket than you.

Additionally, even if your beneficiaries are in a relatively low tax bracket, inheriting a large IRA could push them into a higher bracket during the 10-year distribution period. For example, if your IRA is worth $2 million, your beneficiaries would need to distribute about $200,000 annually over 10 years, potentially pushing them into a much higher tax bracket regardless of their current income.

You should also consider the distribution of your assets between taxable, tax-deferred, and tax-free accounts when making this decision.

4. Hidden Taxes Could Reduce the Benefit of Converting

Any Roth conversion will increase your taxable income in the year you do the conversion, even though it doesn’t put cash in your bank account. This can trigger various “hidden taxes” based on calculations like modified adjusted gross income (MAGI), taxable income, or provisional income.

Here are some examples:

IRMAA Surcharge: The Income-Related Monthly Adjustment Amount applies once you’re Medicare eligible. While Medicare Part A is free, Part B has a premium (about $185 for 2025). Part D depends on your chosen drug plan. If your income exceeds certain thresholds, you’ll pay additional surcharges for both Part B and Part D. These surcharges can range from $1,000 to over $6,000 per year per person.

ACA Premium Tax Credits: If you retire before 65 and use the Affordable Care Act for health insurance, you might be eligible for premium tax credits based on your modified adjusted gross income. Roth conversions could reduce these credits.

Net Investment Income Tax: If your MAGI exceeds $250,000 (married filing jointly) or $200,000 (single), there’s an additional 3.8% tax on investment income like dividends, interest, and rental income.

Capital Gains Taxes: If you’re married filing jointly and your taxable income is below $96,700 for 2025, you don’t pay any tax on long-term capital gains. A Roth conversion could push you above this threshold.

Social Security Taxation: As mentioned earlier, between 0% and 85% of your Social Security benefits could be taxable depending on your provisional income. Roth conversions can increase this percentage.

While these hidden taxes aren’t necessarily reasons to avoid Roth conversions entirely, they should factor into your decision about timing and amount.

5. You’re Planning to Donate to Charity During Your Lifetime or at Death

Traditional IRAs are some of the best accounts to donate to charity. If you convert all your tax-deferred assets to Roth, you lose this potential tax benefit.

One powerful strategy is the Qualified Charitable Distribution (QCD). Once you turn 70½, you can donate up to $107,000 (in 2025) directly from your IRA to charity without recognizing an taxable income. What makes this even more powerful is that once you begin taking Required Minimum Distributions (RMDs), you can reduce your RMD dollar-for-dollar up to that cap.

For example, if your RMD is $50,000 and you typically donate $30,000 to charity, you could do a $30,000 QCD directly from your IRA. This would reduce your RMD to $20,000, essentially making that $30,000 completely tax-exempt—even better than a tax deduction.

Similarly, if you’re planning to leave money to charity at death, your traditional IRA is a great asset to use. While your non-spousal beneficiaries (typically children or nieces/nephews) will have to pay taxes as they withdraw from the inherited IRA over the 10-year period, charities don’t pay any taxes on these distributions.

This doesn’t mean you shouldn’t convert at all, but you might consider not converting as much or as aggressively if charitable giving is part of your plan.

6. You’re Planning to Self-Fund for Long-Term Care Costs

Long-term care is one of the most significant risks retirees face today. The uncertainty lies in whether you’ll need care, and if so, for how long—six months or ten years? The costs can be substantial, often exceeding six figures annually.

Some people buy long-term care insurance, while others plan to use their own assets. If you’re in the latter group, there’s an interesting tax angle to consider. While IRA distributions are taxable, there’s a deduction if your medical costs exceed 7.5% of your adjusted gross income. These expenses can be added to your itemized deductions.

If you need long-term care later in life, it’s almost certain your expenses will exceed that 7.5% threshold, given the high costs involved. If you have an IRA you can tap into to pay for care, you might be able to deduct some of those distributions because of the medical expense deduction.

While this deduction may not offset the entire tax on the distribution, it can be significant enough to argue against converting all of your IRA to Roth.

7. You Don’t Have the Cash to Pay the Taxes

The traditional approach to paying for Roth conversion taxes is to use cash on hand from a savings or checking account, or to increase withholding from sources like Social Security or a pension to offset the additional taxes.

If these aren’t options—if you don’t have the cash or need your income from other sources—you may have to use funds from your IRA to pay the tax. If you’re younger than 59½, this isn’t advisable because you’ll face a 10% early withdrawal penalty.

Even if you’re over 59½, using money from your IRA to pay the taxes leaves less money invested that could otherwise grow tax-deferred. This may not be ideal depending on your time horizon and the breakeven point of the Roth conversion.

Your plan should strongly favor Roth conversions for it to make sense to pay the tax out of the IRA. While there are cases where this works (I have a client for whom we’re doing exactly this), if you don’t have the cash and the case for Roth conversion isn’t compelling, you might want to pause or avoid the conversion altogether.

Final Thoughts on Roth Conversion Decisions

Understanding when a Roth conversion makes sense requires careful analysis of your current situation, future expectations, and overall financial goals. While Roth conversions can be powerful tools for retirement planning, they aren’t right for everyone in every situation.

Remember that tax laws and personal circumstances change over time, so regularly reviewing your retirement and tax planning strategy is essential for long-term success.

If you’re approaching retirement and wondering if you should do a Roth Conversion, check out Episode 66 of The Planning for Retirement Podcast. Consider working with a financial advisor who specializes in retirement income planning. They can help you analyze your specific situation and develop a claiming strategy that aligns with your overall financial goals.

At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.

If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

This is for general education purposes only and should not be considered as tax, legal or investment advice.




9 Reasons to Consider Delaying Social Security Benefits

You’ve probably heard financial experts advising people to claim Social Security as early as possible. They say things like:

  • “You don’t know how long you’ll live.”
  • “Take it now while you’re young and healthy.”
  • “Social Security might go bankrupt.”

But what if I told you that for high-net-worth retirees, claiming early could cost you several hundred thousand dollars in lost income and negatively impact your investment portfolio over time?

In this article, we’re going to dive into nine compelling reasons why you might consider delaying your Social Security benefits as long as possible. This advice is particularly relevant for individuals over 50 who have accumulated at least a million dollars in retirement savings.

The Current Economic Context

Before we dive into our main topic, it’s important to note some significant economic developments that could impact retirement planning. As of July 2025, all three major credit rating agencies have downgraded US credit from AAA to AA. This downgrade stems from rising national debt (currently at $36 trillion), large annual deficits, and higher borrowing costs for the government.

For retirees, this has several implications:

  1. Bond yields have increased, offering higher interest income on new issues
  2. Existing bonds may have decreased in value
  3. There’s increased volatility in fixed-income investments

These factors make your Social Security claiming strategy even more critical as part of your overall retirement plan.

Social Security Basics: What You Need to Know

Before discussing claiming strategies, let’s review some Social Security fundamentals:

  • Eligibility: You need 40 credits (typically achieved by working for 10 years) to qualify
  • Primary Insurance Amount (PIA): The benefit you’ll receive at full retirement age
  • Full Retirement Age: For most people born after 1960, this is age 67
  • Early Claiming: You can claim as early as 62, but with a reduction of up to 35% from your PIA
  • Delayed Claiming: For each year you delay beyond full retirement age (up to age 70), your benefit increases by 8%

In 2025, the average monthly Social Security benefit is about $1,840 across all recipients, with retirees receiving slightly more at around $1,900 per month. However, if you’ve had above-average earnings throughout your career, your benefits could be significantly higher.

The maximum possible monthly benefit at full retirement age is over $4,000. If claimed early at 62, the maximum is about $2,800, while delaying until 70 could provide up to $5,100 per month. For a married couple with two high earners, this could mean a combined monthly benefit of $8,000 to $10,000, a substantial fixed income stream.

Nine Reasons to Consider Delaying Social Security

1. You or Your Spouse Are Still Working

If you or your spouse continues working, whether part-time or full-time, this income might cover your basic necessities. You can supplement this with portfolio withdrawals if needed.

Additionally, if you claim Social Security while still working before reaching full retirement age, you’ll be subject to the retirement earnings test. This means Social Security will reduce your benefits if your wages exceed certain thresholds. While these reductions aren’t permanent (you’ll receive adjustments later), delaying benefits while working can simplify your financial situation.

2. Higher Guaranteed Monthly Benefit

This is perhaps the most obvious reason to delay. By waiting until age 70 instead of claiming at 62, you can increase your monthly benefit by approximately 77% (avoiding the 35% reduction at 62 and gaining 24% from delayed retirement credits between 67 and 70).

Example

If your primary benefit amount at 67 is $3,000, claiming it at 62 would reduce it to approximately $1,950, while waiting until 70 would increase it to approximately $3,720 per month. That’s a difference of $1,770 per month or $21,240 per year!

Of course, by delaying, you will be forgoing benefits for several years. The break-even point—where the cumulative benefits from delaying surpass what you would have received by claiming earlier—typically occurs around age 83. If you live beyond this age, delaying will have provided greater lifetime benefits.

3. Longevity Insurance

Social Security functions similarly to an annuity, providing guaranteed income for life. This “longevity insurance” becomes increasingly valuable the longer you live.

According to Social Security’s actuarial tables, a 60-year-old male today has a life expectancy of 80.4 years, while a female has a life expectancy of 83.5 years. However, many high-net-worth individuals have access to better healthcare and tend to live longer than these averages.

By delaying Social Security, you’re essentially purchasing a larger “annuity” that increases with inflation each year through cost-of-living adjustments (COLAs). Unlike private annuities, which may not include inflation protection, Social Security benefits are adjusted annually to keep pace with the Consumer Price Index.

4. Spousal and Survivor Benefits

For married couples, delaying benefits can significantly impact the financial security of both spouses.

While spousal benefits (up to 50% of the primary earner’s benefit at full retirement age) cannot be increased by delaying beyond full retirement age, survivor benefits can be. If the higher-earning spouse delays claiming until 70 and then passes away, the surviving spouse can step up to that higher benefit amount.

Example

Let’s say that Jack’s benefit at full retirement age is $4,000 per month, and Jill’s is $2,500. Jack decides to delay receiving benefits until age 70, which increases his benefit to $5,000 per month. When Jack passes away, Jill will receive $5,000 instead of $4,000. This provides significant additional income protection for the surviving spouse.

5. Tax Efficiency

Social Security benefits may be partially taxable depending on your “combined income” (adjusted gross income + tax-exempt income + half of your Social Security benefits):

For single filers:

  • Below $25,000: 0% taxable
  • $25,000-$34,000: Up to 50% taxable
  • Above $34,000: Up to 85% taxable

For married filing jointly:

  • Below $32,000: 0% taxable
  • $32,000-$44,000: Up to 50% taxable
  • Above $44,000: Up to 85% taxable

By delaying Social Security and strategically managing your income during the “Roth conversion window” (the period between retirement and Required Minimum Distribution age), you might be able to convert traditional IRA assets to Roth while keeping your tax bracket lower. Then, when you start Social Security at 70, a smaller portion (or potentially none) of your benefits might be subject to taxation.

6. Maximizing Legacy

While claiming early and investing those benefits might seem like a good strategy for maximizing your legacy, delaying can actually be more effective if you live a long life.

Yes, delaying Social Security means higher portfolio withdrawals in the short term. However, once you start receiving the higher benefit amount, your lifetime withdrawal rate decreases. Over a 15-25 year retirement, this can result in greater portfolio preservation and a larger inheritance for your heirs.

In one case study, a client with a $1 million portfolio who delayed claiming Social Security saw their portfolio initially dip but then recover significantly. By year 22 (around age 84), their portfolio value exceeded what it would have been had they claimed early, ultimately leaving a larger legacy.

7. Peace of Mind

The simple psychological benefit of having a higher guaranteed income stream shouldn’t be underestimated. Many retirees sleep better knowing they have a substantial, inflation-protected income source that isn’t dependent on market performance.

This peace of mind factor is why many people work longer than financially necessary—they want to maximize their guaranteed income in retirement.

8. Health Savings Account (HSA) Eligibility

This is a more technical consideration, but essential for those with HSAs. Once you enroll in Medicare at 65, you can no longer contribute to an HSA, even if you’re still working and covered by a qualified employer plan.

When you begin collecting Social Security after 65, you’re automatically enrolled in Medicare. If you plan to work past 65 and want to continue contributing to an HSA, delaying Social Security is necessary.

9. Flexibility

Deciding to delay Social Security doesn’t lock you in permanently. If you initially plan to delay until 70 but retire into a market downturn, you can start benefits earlier than planned to reduce pressure on your investment portfolio.

This flexibility allows you to adjust your strategy according to changing market conditions, health developments, or other life circumstances.

Real-World Impact: A Case Study

Let’s look at a real example of how different claiming strategies affect lifetime benefits. For a couple we’ll call Jack and Jill, we analyzed three scenarios:

  • Both claiming at 62
  • Both claiming at full retirement age (67)
  • Both claiming at 70

Assuming Jack lives to 85 and Jill to 90, with a 2% annual cost-of-living adjustment:

  • Claiming at 70: $2.3 million in lifetime benefits
  • Claiming at 62: $1.8 million in lifetime benefits

That’s a $500,000 difference in favor of delaying!

Making Your Decision

Every Social Security claiming decision is unique. There’s no one-size-fits-all approach, and hundreds of different claiming scenarios exist based on your specific circumstances.

Don’t let emotions or pessimistic assumptions about the system drive your decision. While concerns about Social Security’s future are valid, making claiming decisions based on fear rather than analysis could cost you hundreds of thousands of dollars.

Your Social Security strategy should be coordinated with other aspects of your retirement plan, including:

  • Your investment portfolio strategy
  • Tax planning
  • Healthcare costs
  • Spousal considerations
  • Legacy goals

For high-net-worth individuals, the decision is particularly nuanced. While you may not “need” Social Security to survive, optimizing this benefit can significantly enhance your retirement security and legacy planning.

Next Steps

If you’re approaching retirement and wondering if you should delay Social Security, check out Episode 79 of The Planning for Retirement Podcast.

At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.

If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

This is for general education purposes only and should not be considered as tax, legal or investment advice.

Where do I find a retirement focused financial advisor?

Where do I find a retirement focused financial advisor?

Congratulations on getting to the point where you are thinking about retirement and ultimately looking for professional help to execute it successfully.   I’ve personally seen many folks try to execute this phase as a “DIYer,” but we all have our blind spots.  And oftentimes those blind spots can cost you in the way of underspending, overspending, higher taxes paid, and ultimately higher stress/anxiety given you are the one in charge of flying the plane. 

Thanks for listening to our recent podcast episode about when you should hire an advisor.  For those who have not listened to it yet, I would highly recommend you do it before reading further.  If not, you can probably still learn something useful!

Without further ado, let’s jump in.​

Let me start by saying that I acknowledge that this advice is not meant for everyone.  I believe your life stage should dictate who you should hire and how you should engage with a financial advisor.  For this reason, I want to focus solely on talking to YOU all, PFR Nation (Planning for Retirement Nation).  You are likely somewhere in the ballpark of 50-60+, you’ve likely accumulated more than 7 figures for retirement, and now you are looking to make work optional.  This is NOT meant for the average American who barely has $100k saved for retirement.  Because of this, it’s very likely that taxes are going to be one of the largest, if not the single largest expense in retirement. 

As a result of this, finding a financial advisor who is a specialist in tax optimization in retirement is a must. ​

Is this easy to identify?  Not on the surface.  However, if you find yourself interviewing a financial advisor, here are a few questions you could ask them:

  • How do you help minimize taxes in retirement?
  • What tools do you use to assist in this process?
  • What are some of the common tax traps retirees you serve run in to?
  • What tax strategies are common recommendations you make for the clients you serve?

And then I would end with the kicker…

  • Do you review your client’s tax returns as part of your service?

If there is a bunch of stuttering, or a blank stare, or a “Sorry, we don’t provide tax advice” type of response, it’s time to move on.  And more importantly, if you have a financial advisor, and you are paying that advisor 1% or more of your investment portfolio…

Ask yourself, is that advisor reviewing your tax returns? 

Every movement of money has a tax consequence, wouldn’t it make sense for your FINANCIAL ADVISOR to know what your tax situation is?  I would think so!

With that out of the way, let’s talk about the big box firms vs. independents.

Yes, I’m an independent advisor, so I’m clearly biased.  However, I worked in “big box” firms the first 12 years in the industry.  There are absolutely rockstar advisors that work in both models.  However, there are many more phonies who don’t do real financial planning.  From my personal experience, I find the latter is more common in the big box model.  That is just the nature of the business.  They focus on sales quotas, asset growth and other sales type metrics.  They don’t necessarily focus on “value adds” for clients.  So, I recognize you may work with an advisor at a big box firm.  And that is OKAY!  Don’t let anyone beat you up on this.  However, you might ask some of those tax related questions I mentioned earlier as you think through whether you want to stay with that advisor.

We just brought on a new client that specifically said they fired their longtime advisor because he was not an expert in taxes in retirement and was more focused on “Investment Management.”  It’s okay to tell your long-time advisor that you need to move on to someone who is an expert in this retirement phase and furthermore can help you minimize your potentially largest expense in retirement. 

Let’s talk about credentials.

The CFP, or Certified Financial Planner designation, has been a long time “gold standard” in the advisory industry.  I went through the curriculum in 2011 @ Georgetown University, and I believed at the time, and still believe, it was a MUST for financial advisors to obtain.  I recall multiple times early on after obtaining the CFP clients hiring me simply because I was a CFP.  Because of this, many of the big box firms have pushed their newer advisors to obtain the CFP simply for “optics.”  Meaning, they weren’t really pursuing the CFP to add more value to clients, they were obtaining their CFP to increase sales and revenue from their “books of business.” 

I have been involved with the CFP board’s Disciplinary and Ethics Commission, and I have seen this firsthand.  I sat in on a hearing for a CFP Professional who clearly was doing wrong by his clients.  I asked him “Why do you even want to continue to use your CFP marks?”  His response, “Because clients expect it.”  I guess what I’m saying is, just because an advisor has their CFP does not mean they are a competent, ethical, financial advisor.  So, do your due diligence beyond designations. 

There are also additional designations that exemplify knowledge around retirement and taxes.  This list includes, but is not limited to:

  • Retirement Income Certified Professional (RICP)
  • Certified Public Accountant (CPA)
  • Enrolled Agent (EA)
  • Chartered Financial Analyst (CFA)
  • Certified Private Wealth Advisor (CPWA)
  • Accredited Estate Planner (AEP)

All of these designations help deepen the knowledge of specialization.  In other words, the CFP is wide and shallow.  Whereas a specialty designation will go narrow and deep…particularly in the areas of tax, retirement income, investments and estate planning.  

So, in short, make sure the advisor is AT LEAST a CFP, but can demonstrate knowledge in the specific area you are looking for help in. 

Does Location Matter?

When I first started in the industry, the optics of a fancy office with mahogany desks and a city view were very important.  I remember advisors were so hell bent on looking the part that they spent THOUSANDS of dollars on expensive suits and watches so their clients thought they were successful.  I always thought this was a bit disingenuous.  However, as a young whipper snapper early in my career, I sort of fell into this trap.  I did well as a 21-year-old coming out of college, especially entering the work force in the worst recession of our lifetime.  I bought a fancy car, wore nice suits and even bought a few expensive watches.  However, it all changed for me when I moved my office to a satellite office in Fairfax, VA.  I looked up to two of the advisors there (Rob and Nolan) and I wanted a practice like theirs.  They weren’t “salesmen,” they were true advisors.  True fiduciaries.  However, I noticed that I was driving a nicer car than both of these two!  They were the ones that kept me in check and made me realize that we need to practice what we preach.  And what they preached was sound money management.  Not overspending.  Not driving fancy cars just for the optics.  Instead, they used their money wisely to build multi-generational wealth and make an impact on their clients along the way.  So, after I totaled my fancy sports car one night in 2012, I bought a Hyundai Sonata and quit worrying about buying fancy things.  That still bleeds into how I manage my money today.  I drive a Honda, my wife drives a Honda, and we don’t buy fancy clothes or unnecessary frivolous things.  Sure, we do live a nice lifestyle.  We love to travel, we have a nice home, and I love to play golf.  However, we are pretty darn good about being a good steward of the blessings we have. 

What does this have to do with hiring an advisor who is local to you? Everything!

After the pandemic, people began to get comfortable with doing business online.  Heck, you couldn’t even meet with your advisor in the office during 2020 if you wanted to.  This made me realize.  Wow.  I can do this from anywhere.  I don’t need to pay for a fancy office downtown just for the optics, because my clients don’t care about the optics.  They care about value!  They care that their advisor is doing right with their money and making sure they are capitalizing on opportunities that help achieve their goals. 

And there are many other advisors around the country who think the same way as we do. 

So, if you are comfortable with it, ignoring the zip code of your advisor’s office can help open the door to find an advisor that TRULY fits the profile you are looking for! 

With that being said, if an “in person” relationship is important, just make sure to do the same due diligence I mentioned earlier prior to hiring that advisor, and don’t just take a recommendation from a friend who has no idea what your financial situation looks like. 

Ok, let’s get to it. Here are some places I would go to find an advisor (in no particular order):

National Association of Personal Financial Advisors (NAPFA)

https://www.napfa.org/

NAPFA has been the gold standard to find a “Fee Only” financial advisor.  These are advisors that cannot receive any third-party compensation and are always held to the fiduciary standard.  This does help to reduce, but not eliminate, conflicts of interest.  Additionally, the default search bar does filter by Zip Code or Location.  So, if you are hellbent on finding a local advisor that you can see face to face, this would be a great place to start.

Fee Only Network

https://www.feeonlynetwork.com/

This is really a spin-off from NAPFA, so I’m not sure how different your search results will be.  However, this is another place to search for a fee only financial advisor, if that is important to you.  Additionally, there are some additional filters that allow you to search for firms virtually as well, which I think is useful.

XY Planning Network

https://connect.xyplanningnetwork.com/find-an-advisor

XY Planning Network was founded by Michael Kitces and Alan Moore in an effort to serve generations X and Y.  However, many of the advisors also serve retirees/near retirees.  And frankly, Gen X is getting close to retirement now anyhow with the oldest Gen Xers turning 60 next year!!   XY Planning Network has a great search tool to filter by a variety of different search criteria, including specialty/niche.  They also have some qualitative search criteria as well that may or may not be important to you.  I will also note that the majority of XY Members that I am aware of operate virtual, but some have a hybrid model.  If you are comfortable with a virtual relationship, that won’t be an issue.  However, if you do prefer face-to-face or hybrid, you can also filter by location. 

Financial Planning Association (FPA)

https://www.financialplanningassociation.org/practice-support/plannersearch

The FPA claims to be the lead trade association supporting the mission of Certified Financial Planner (CFP) professionals.  You must go to the “FPA Planner Search” website in order to search for an advisor.  The search tool is primarily geared towards location only, not necessarily niche or expertise, for whatever that is worth. 

Unlike NAPFA, Fee Only Network and XY Network, FPA members do not have to be “Fee Only.”  This means they can charge fees, commissions, or both.  I am not saying this is necessarily good or bad, but if you want to avoid a hard sell insurance and annuity products, you’ll have to be keep your guard up.  Or, you can search one of the other sites for a fee only advisor.

The CFP Board itself

https://www.letsmakeaplan.org/

Naturally, if you are looking for a CFP professional, you can go directly to their site and search for an advisor.  You can toggle by location, name and service specialties.  It’s not the most robust tool, but if you want to ensure your advisor is in fact a CFP professional, this is a good way to confirm that information. 

Flat Fee Advisors

https://www.flatfeeadvisors.org/

There has been a big shift in the industry to fee-transparency (FINALLY!).  The days of charging 1% on $3mm of assets solely for investment management are going by the wayside.  If you calculate that fee, it’s $30k/year for a service that should cost closer to 0.5%/year.  Instead of charging a %, many advisors, including our firm, quote the fee in dollar terms.  This creates more transparency and defines what exact services you may or may not be receiving.  I’m not going to say % of AUM is good or bad.  Or that flat fee is good or bad.  We choose to charge flat fees because of the clients we serve ($1mm – $5mm) and how we serve them.  If you hire an advisor who charges a %, make sure they are also going to help in other areas beyond investment management (particularly in cash flow planning and taxes). 

Additionally, if you do not want to have an investment management relationship but still need financial advice, hiring an advisor who can charge without managing investments might be important to you.  The flatfeeadvosrs.org website could be a good place to search for one of these types of firms. 

Podcasts and YouTube

When I first started in the industry in 2008, the motto was, “See people or fight to see people.”  “See people” meant door knocking or meeting with family/friends/clients to try to drum up business.  “Fighting to see people” meant cold calling or networking.  And truthfully, the MAJORITY of the advisors in my office and offices around the country were focused mostly on these efforts.  It was a sales-focused culture.  With that being said, new business was the lifeblood.  Eat what you kill. 

Podcasting and YouTube has allowed me to spend ZERO time cold calling, sending mailers, hosting seminars or webinars for the purpose of drumming up business etc.  Instead, I have chosen to focus on content creation as my medium of new business generation.  Additionally, the creation of content allows me to further sharpen my skills and knowledge on topics that are important/relevant to the clients I serve. 

So, if I were looking for an advisor, I would listen to their podcasts, watch their videos, and read their articles to get a feel for their knowledge.  In addition, you can get a feel for their communication style to see if it resonates.  That way, you sort of know what you are getting prior to engaging in a relationship.  This is a great benefit to you as a consumer who may or may not be comfortable reaching out to a stranger online.  I’ve had multiple clients hire me after listening to my podcasts and they all said they felt like they already knew me, which was pretty cool. 

If the advisor isn’t podcasting or creating content, that’s okay.  Not everyone is good at this and frankly the advisor can still be a rockstar despite not being a content creator. 

Thanks for reading my rant about finding a financial advisor. 

Hopefully this helps you in your search to find the right fit to help you and your family achieve work optional. 

If you have any questions for me directly, feel free to send me an email:  Kevin@imaginefinancialsecurity.com

If you are interested in working with me 1×1, we are still taking on clients for 2025.  You can start by visiting “Our Process” page on our website to learn more:  “Our Process”

-Kevin Lao

How to self insure for long term care

The numbers don't add up...

These three statistics don’t add up to me!

1.  70% of Americans over 65 will need long-term care during their lives.

2.  Fewer than half of you over the age of 65 own insurance to pay for long-term care.  Essentially, you are planning to self-insure for long term care.

3.  This is the crazy part. 70% of the care being provided is done by unpaid caregivers!  Aka. family members…🤔

I wrote about long-term care planning before, but my convictions on this have only increased over the years.  

In my previous article, I talked about considerations on whether or not you should purchase insurance. 

We also just finished recording a three-part series on The Planning for Retirement Podcast (PFR) about how to fund long-term care costs.  Episodes 22 and 23 were about using long-term care insurance and episode 24 was about how to self fund long-term care. 

So why do these statistics bother me?

If the majority of retirees will need care, and they are intentionally not buying insurance, that means they plan to self fund for long term care (by default).  However, why are family members providing the majority of long term care and not hired help!?    

The answer:  because there was no real plan to begin with.  In reality, it was a decision that was never addressed, or perhaps in their mind they decided to “self fund.”  However, that decision was never communicated to their loved ones.  

Let me ask you.  If you are in the majority that plans to self fund, what conversations have you had with your spouse?  Your power(s) of attorney?  Your trustee(s)?  Do they know how much you’ve set aside if long term care was ever needed?  Do they know which accounts they should “tap into” to pay for long-term care?  

The chances are “no,” because I’ve never met a client who did this proactively on their own.  Ever.  And I’ve been doing this for 15 years.  

So, this article is for you if you are planning to bypass the insurance route and use your own assets to “self fund long-term care.”  I believe this is one of the most important decisions you can make when planning for retirement because it can save how you are remembered. 

How much should I set aside to self insure long term care?

how much to set aside to self fund long term care?

It is impossible to pinpoint the exact number YOU will need for care.  But let’s pretend your long-term care need will fall within the range of averages.  

On average, men need care 2.2 years and women 3.7 years.

The 2021 cost of care study by Genworth found that private room nursing homes cost $108,405/year.  Assisted living facilities cost $54,000/year.   These are national averages, and the cost of care varies drastically based on where you live.

So let’s use this ballpark figure of $118,800 – $238,491 for men, and $199,800 – $401,098 for women (2.2x the averages for men and 3.7x  the averages for women). 

The major flaw in using this math is that most people have some sort of guaranteed income flowing into their bank accounts.

  • Social Security Income
  • Pensions
  • Required Minimum Distributions 

Of course, not all of that income could be repurposed, especially if you are married.  However, perhaps 25%, 50% or 75% of that income could be repurposed for caregivers.

Let’s say you are bringing in $100k/year between Social Security, Pension, and Required Minimum Distributions.  Let’s say you are married, and all of a sudden need long term care.  For simplicity’s sake, your spouse needs $50k for the household expenses.  The other $50k could be repositioned to pay for long-term care.  After all, if you need care, you probably are not traveling any longer, or golfing 5 days/week.  This unused cash flow can now be dedicated to hiring professional help and protecting your spouse from mental and physical exhaustion.  

If we assume the high-end range for men of $238,491, but we assume that $110,000 could come from cash flow (2.2 years x $50k of income), then only $128,491 of your assets need to be earmarked to self fund long term care.

Hopefully, that’s a helpful framework and reassurance that trying to come up with the perfect number is virtually impossible.  After all, you may never need care.  Or, perhaps you will need care for 5+ years because of Alzheimer’s.  

My key point in this article is to address this challenge early (before you turn 60), and communicate your plan to your loved ones.  

What accounts are the best to self insure long term care?

which bucket to tap into

My personal favorite is the Health Savings Account, or HSA.  I wrote in detail about HSA’s in another blog post that you can read here.

Here’s a brief summary:

  • You can qualify to contribute to an HSA if you have a high-deductible health plan.
  • The contributions are “pre-tax.”
  • Earnings and growth are tax-free (you can invest the unused HSA funds like a 401k or other retirement plan).
  • Distributions can also be tax-free if they are used for “qualified healthcare costs.”

What is a qualified healthcare cost?

Look up IRS publication 502 here, which is updated annually.

One of the categories for qualified healthcare costs is in fact long-term care!  This means you can essentially have a triple tax-advantaged account that can be used to self insure long-term care in retirement.

However, you need to build this account up before you retire and go on Medicare.  Medicare is not a high-deductible health plan!

But, if you have 5+ years to open and fund an HSA, it can be a great bucket to use in your retirement years, particularly long-term care costs.  

The 2023 contribution limits are $7,750 if you are on a family plan and $3,850 if you are on a single plan.  There is also a $1k/year catch-up for those over 55.  

So, if you’re 55, you could add up to $43,750 in contributions for the next 5 years.  If you add growth/compounding interest on top of this, you are looking at 6 figures + by the time you need the funds for care in your 80s.  Not bad, right?  

Taxable brokerage accounts or "cash"

This bucket is another great option.  Mostly because of the flexibility and the tax advantages of taking distributions.  Unlike a 401k or IRA, these accounts have capital gains tax treatment.  For most taxpayers that would be 15%, which could be lower than your ordinary income tax rate (it could also be as low as 0% and as high as 20%+).

If you are earmarking some of these dollars for care, I would highly recommend two things:

  1.  Separate the dollars you intend to spend for care and give this new account a name (“long-term care account”)
  2. Invest the account assuming a time horizon for your 80s instead of your 60s.  In essence, you can make this account more aggressive in order to keep pace with the inflation rate for long term care expenses.

What’s nice about this bucket is that it’s not a “use it or lose it.”  Just because you segregated some assets to pay for care, doesn’t mean those dollars have to be used for care.  When these dollars pass on to the next generation, they should receive a step up in cost basis for your beneficiaries.  If the dollars are in fact needed for care, you will only pay taxes on the realized gains in the portfolio.   

🤔 Remember when we talked about tax loss harvesting in episode 19?  Well, this strategy could also apply to help reduce the tax impact if this account is used to self-insure long-term care.  

Of course, cash is cash.  No taxes are due when you withdraw money from a savings account or a CD.  Now, I wouldn’t suggest using a CD or cash to self-insure care, simply because it’s very likely that account won’t keep pace with inflation.  However, if there is some excess cash in the bank when you need care, this could be a good first line of defense before the more tax-advantaged accounts are tapped into.  

Traditional 401ks and IRAs

This bucket is often the largest account on the balance sheet when you are 55+.  However, many advisors and financial talking heads recommend against tapping these accounts to self insure long term care because of the tax burden.  

Well of course, it may not be ideal as a first line of defense to pay for care, but if it’s your only option, “it is what it is.”  

But here’s the thing.  If you are needing long term care, you’re most likely over the age of 80.  This means you are already taking Required Minimum Distributions or RMDs.  If you have a $1mm IRA, your RMD would be $62,500 at age 85.  Let’s say you also have Social Security paying you $24,000/year.  That’s a total income of $86,500 that is coming into the household to pay the bills.  This was my point earlier in that you likely have income coming in that can be repurposed from discretionary expenses to hiring some professional help for care.

This means that you may not need to increase portfolio withdrawals by a huge number if RMDs are already coming out automatically.  

But yes, you’ll have taxes due on these accounts based on your ordinary income rates.  And yes, if you increase withdrawals from this bucket, this could put you in a position where your tax brackets go up, or your Social Security income is taxed at a higher rate, or perhaps will have Medicare surcharges.  

On the flip side, this could also trigger the ability to itemize your deductions due to increased healthcare costs.  In fact, any healthcare costs (including long term care) that exceed 7.5% of your adjusted gross income could be counted as a tax deduction (as of 2023).  

The net effect essentially could be quite negligible as those additional portfolio withdrawals could be offset with tax deductions, where applicable.  

Life Insurance and Annuities

Maybe you bought a life insurance policy back in the day that you held onto.  Or you purchased an annuity to provide a guaranteed return or guaranteed income.  However, you may find that your goals and circumstances change throughout retirement.  Perhaps your kids are making a heck of a lot more money than you ever did, so they don’t have a big need for an inheritance.  Or, that annuity you purchased wasn’t really what you thought it was.  You could look at these accounts as potential vehicles to self-insure for long term care.

Life Insurance could have two components – a living benefit (cash value) and a death benefit.  In this case, you could use either or as the funding mechanism for long term care. 

Let’s say you have $150k in cash value and a $500k death benefit.  Instead of tapping into your retirement accounts or brokerage accounts, you could look at borrowing or surrendering your life insurance cash value to pay for care.  Or, you could look at the death benefit as a way to “replenish” assets that were used to pay for care. 

Annuities could be tapped into by turning the account into a life income, an income for a set period of time, or as a lump sum.  All of those options could be considered when it comes to raising cash for this type of emergency.

Roth Accounts

This is the second most tax-efficient retirement vehicle behind the HSA.  It’s not only a great retirement income tool, but it’s also a great tool to use for financial legacy given the tax-free nature from an estate planning perspective.  However, this account could be used to self insure long term care without triggering tax consequences.

Let’s say you need another $30k for the year to pay for care.  But an additional $30k withdrawal from your traditional 401k would bump you into the next tax bracket.  Instead, you could look to tap into the Roth accounts in order to keep your tax bracket level.  

Home equity

home equity line of credit and reverse mortgage strategy

The largest asset for most people in the US is their home equity.  However, people rarely think of this as a way to self insure long term care.  In fact, this is why many caregivers are family members!  They want their loved ones to stay at home instead of moving into a nursing home.  But perhaps there isn’t a huge nest egg to pay for care.  If you have home equity, you could tap into that asset via a reverse mortgage, a cash-out refinance, or a HELOC.  There are pros and cons of each of these, but the reverse mortgage (or HECM) is a great tool if you are over the age of 62 and need access to your equity.  

The payments come out tax-free, the loan doesn’t need to be repaid (unless the occupant moves, sells, or dies), and there are protections if the value of the home is underwater.

Inform your key decision makers

Now that you have a decent understanding of how much to set aside and which accounts might be viable for you, it’s time to have a family meeting.  

If you’re married, have a conversation with your spouse.

If you have children, bring them into the discussion, especially those that will have a key decision-making role (powers of attorney, trustee etc).

You know your family dynamic best.   The point you need to get across is that you do have a plan to self insure long term care despite not owning long term care insurance.  Your loved ones need to know how much they could tap into (especially the spouse) in the event you need care.  This is very important, give your spouse permission to spend!  Being a caregiver, especially a senior woman, will very likely result in burnout, stress, physical deterioration, mental exhaustion, and resentment.  If you simply leave it to your spouse to “figure out,” they will always resort to doing it themselves in fear of overspending on care. 

❌ Don’t do this to them!  

I hope you found this helpful!  Make sure to subscribe to our newsletter below so you don’t miss any of our retirement planning content!  Until next time, thanks for reading!

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How to Reduce Taxes on Your Social Security Retirement Benefits

If you have already begun drawing Social Security, you might be surprised to learn taxes are owed on some of your benefits!  After all, you’ve been paying into the system via payroll taxes, so why is your benefit also taxable?   If you have yet to begin drawing Social Security yet, you can never say you weren’t told!  As a result, I’m often asked if there is a way to reduce taxes on your Social Security benefits.  This blog post will unpack how Social Security taxes work and how to reduce taxes on your benefits.  Make sure to join our newsletter so you don’t miss out on any of our retirement planning content (click here to subscribe!).  I hope you find this article helpful!

A brief history of Social Security

roosevelt mt rushmore

The Social Security Act was signed into law by President Roosevelt in 1935!  It was designed to pay retired workers over the age of 65.  However, life expectancy at birth was 58 for men and 62 for women!  Needless to say, there weren’t a huge number of retirees collecting benefits for very long.  As people began to live longer, several key provisions were added later.  One was increasing the benefits paid by inflation, also known as Cost of Living Adjustments (COLA).  Another was changing the benefits from a lump sum to monthly payments.  Ida Fuller was the first to receive a monthly benefit, and her first check was $22.54!  If you adjust this for inflation, that payment would be worth $420.15 today!  If you compare this to the average Social Security benefit paid to retirees of $1,782/month, those early payments were chump change! 

The Aging Population has Led to Challenges

According to data from 2021, life expectancy at birth is 73.5 years for men and 79.3 years for women!  In 2008, there were 39 million Americans over age 65.  By 2031, that number is projected to reach 75 million people!  We’ve all heard of the notion that older (more expensive) workers are being replaced by younger (less expensive) workers.   While taxable wages are going down and retirees collecting benefits are increasing, the result is a strain on the system.

Social Security benefits are actually funded by taxpayer dollars (of course).  If you look at a paystub, you will see FICA taxes withheld automatically.  FICA stands for Federal Insurance Contributions Act and is the tax revenue to pay for Social Security and Medicare Part A.  The Social Security portion is 6.2% for the employee and 6.2% for the employer, up to a maximum wage base of $160,200.  So, once you earn above $160,200 you likely will notice a “pay raise” by way of not paying into Social Security any longer.  Medicare is 1.45% up to $200,000, and then an additional 0.9% for wages above $200k (single filer) or $250k (married filing jointly).    

Up until 2021, FICA taxes have fully covered Social Security and Medicare benefits.  However, because of the challenges mentioned earlier, FICA taxes no longer cover the benefits paid out.  The good news is there is a Trust Fund for both Social Security and Medicare for this exact reason.  If there is a shortfall, the trust fund covers the gap.  The big challenge is if nothing changes, Social Security’s trust fund will be exhausted in 2034 and Medicare’s in 2031. 

How are the taxes on Social Security calculated?

The first concept to understand is that the % of your Social Security that will be taxable is based on your “combined income,” also known as provisional income.  If your combined income is below a certain threshold, your entire Social Security check will be tax-free!  If your combined income is between a certain threshold, up to 50% of your Social Security benefit will be taxable.  And finally, if your income is above the final threshold, up to 85% of your Social Security benefit will be taxable.  Here are the thresholds below.

how is social security taxed

How is “Combined Income” calculated?

The basic formula is to take your Adjusted Gross Income (NOT including Social Security), add any tax-exempt interest income, and then add in 50% of your Social Security benefits. 

If you are retired, you likely will have little to no earned income, unless you are working part-time.  Your adjusted gross income will be any interest income, capital gains (or losses), retirement account distributions, pensions, etc.  This is important to note because not all retirement account distributions are treated the same!  Additionally, capital gains can be offset by capital losses.  So even though your cash flow might exceed these numbers significantly, you still might be able to reduce or even eliminate how much tax you pay on your Social Security Income. 

Let’s look at two examples (both are Married Filing Jointly)

Client A has the following cash flows:

  • $40,000 of Social Security benefits
  • $50,000 Traditional IRA distribution (all taxable)
  • $10,000 of tax-free municipal interest income

The combined income in this scenario is $80,000.

Half of Social Security ($20,000) + $50,000 IRA distribution + $10,000 municipal bond income = $80k.

Notice how the municipal bond income is added back into the calculation!  Many clients try to reduce taxes on their bond interest payments by investing in municipal bonds.  However, it’s important to note how this interest income might impact other areas of tax planning. 

In this scenario, 85%  of their Social Security benefit will be taxable. 

The first $32,000 of income doesn’t trigger any Social Security taxes. 

The next $12,000 will include 50% ($6,000)

And finally, the amount over $44,000 ($36,000) includes 85% (85% * $36,000 = $30,600).

$6,000 + $30,600 = $36,600

If you divide $36,600 by the $40,000 Social Security benefit, it gives you 91.5%.  However, a maximum of up to 85% of the Social Security benefit is taxable, so in this case, they are capped at 85% and $34,000 will be their “taxable Social Security” amount.

Client B has the following cash flows:

  • $40,000 Social Security Income
  • $50,000 Roth IRA distribution
  • $4,000 Interest Income

Client B’s provisional income is only $24,000!  

Half of Social Security ($20k) + $0 retirement account distributions + $4,000 interest income = $24,000

As you can see, the Social Security benefits are identical to client A.  However, the $50,000 retirement account distribution is from a Roth account, and in this case, it was a tax-free distribution.  And finally, the interest income was way down because the client elected to reduce their bond allocations in their taxable account and instead owned them inside of their IRAs (which is not taxable). 

So despite having essentially identical cash flows, Client B enjoys 100% of their Social Security check being tax-free!  In other words, they have reduced their taxable income by $34,000 compared to client A!

A huge challenge arises for clients who are under the max 85% threshold.  Each dollar that is added to their retirement income will increase how much Social Security is taxed!  If someone is in the 50% range and they take an additional $1,000 from a Traditional IRA, they will technically increase their adjusted gross income by $1,500!  $1,000 for the IRA distribution and $500 for taxable Social Security income!

helped retired couple reduces social security taxes

What can you do about reducing taxes on Social Security?

So while you shouldn’t let the tail wag the dog, you should absolutely begin mapping out how you can make your retirement income plan as tax efficient as possible!  Here are a few ways to reduce your “combined income” and thus reduce your taxes on Social Security payments.

Roth Conversions

Simply put, a Roth conversion allows you to “convert” all or a portion of your traditional IRA/401k/403b to a Roth account.  Of course, you will have to pay taxes on the amount converted, but all of the growth and earnings can now be tax-free! 

This is perhaps one of the most impactful strategies you can incorporate!  However, you must start this strategy at the right time!  If you are still employed and perhaps at the peak of your earnings, you may not benefit from Roth conversions…yet.  However, if you recently retired and have yet to begin the Required Minimum Distributions (RMDs), you might find it to be a valuable strategy if you execute it properly.  

One of our most recent podcast episodes is about this topic; you can listen to it here.

Avoid the RMD Trap!

The RMD trap is simply the tax trap that most people with Traditional IRAs or 401ks run into.  In the early years of retirement, your RMD starts out quite low because it’s based on your life expectancy according to the IRS.  However, each year the amount you are required to withdraw increases.  By the time you are in your 80s and even 90s, the amount you are taking out could exceed what you need for cash flows!  But despite needing it for income or not, you have to withdraw it to avoid the dreaded penalties, and this could push you into higher tax brackets later in retirement.  And of course, this could also increase the taxation of your Social Security check! 

Roth conversions help with this, but it could also help to try to even out the distributions!  Instead of just waiting for the RMDs to balloon, perhaps you devise a better withdrawal strategy to target a certain tax bracket threshold throughout your retirement.

Asset Location strategies

You may have heard of the term “Asset Allocation,” which involves careful selection of asset classes that align with a portfolio’s objectives.  In essence, what % of stocks, bonds, real estate, and cash does the portfolio hold?  Asset Location involves selecting which accounts will own those asset classes in order to maximize tax efficiency and time horizon. 

When we looked at the Social Security examples earlier, you probably noticed Client B had less taxable interest income.  This is because they elected to reduce the amount of fixed income in their “taxable” account, and moved those assets into their IRAs. 

Alternatively, you might have a longer time horizon with some of your accounts, like a Roth IRA.  Given Roth’s tax-free nature and the NO RMDs, this account is a great “long-term” bucket for retirement income planning.  As a result, you might elect to have this account ultra-aggressive and not worry much about capital gains exposure, etc. 

You should take advantage of the tax characteristics of different “buckets” for retirement income planning.  Not all of your investment accounts should look identical in that sense.

Tax Loss Harvesting

Perhaps one of the most UNDERRATED strategies is tax loss harvesting.  Oftentimes when the market is down, people bury their heads in the sand hoping that things will improve one day.  And this is certainly better than selling out and moving to cash!  However, there is one step many people miss: realizing losses when the markets are down.  These losses can then be used to offset capital gains, and even reduce your ordinary income! 

I oftentimes hear pushback that people don’t want to offload investments at a loss because they were trained to “buy low and sell high.”  This is a great point, but with tax loss harvesting, after the loss is realized, you then turn around and replace the investment you sold with something similar, but not “substantially identical.”  That way, you avoid the Wash-Sale rule so you can recognize the tax loss, but you stay invested by reallocating funds into the market. 

Episode 19 of The Planning for Retirement Podcast is all about this topic and you can listen to it here! 

Qualified Charitable Distributions

qualified charitable distributions

Okay, so you missed the boat on Roth conversions, and you are already taking RMDs from your accounts.  Qualified Charitable Distributions, or QCDs, allow for up to $100,000/year to be donated to charity (qualified 501c3) without recognizing any taxable income to the owner!  Of course, the charity also receives the donation tax-free, so it’s a win-win!  I oftentimes hear of clients donating to charity, but they are itemizing their deductions.  Almost 90% of taxpayers are itemizing because of the Tax Cuts and Jobs Act of 2017.   QCDs can be utilized regardless if you are taking the standard deduction or not!  And the most powerful aspect of the QCD is that it will reduce your RMD dollar for dollar up to $100k. 

Let’s say your RMD for 2023 is $50k.  You typically donate $10k/year to your church but you write a check or donate cash.  At the end of most tax years, you end up taking the standard deduction anyways, so donating to charity doesn’t hurt or help you. 

Now that you’ve learned what a QCD is, you go to the custodian of your IRA and tell them you want to set up a QCD for your church.  You fill out a QCD form, and $10k will come out of your IRA directly to your Church (or whatever charities you donate to).  Now, your RMD is only $40k for 2023 instead of $50k!  In essence, it’s better than a tax deduction because it was never recognized as income in the first place! 

Two important footnotes are the QCD has to come from an IRA and the owner must be at least 70.5 years old!  It cannot come out of a 401k or any other qualified plan! 

We wrote an entire article on QCDs (and DAFs) that you can read here.

Final Thoughts

Retirement Planning is so much more than simply what is your investment asset allocation.  Each account you own has different tax characteristics, and the movement of money within or between those accounts also has tax consequences.  Instead of winging it, you could save tens or even hundreds of thousands of dollars in taxes in retirement if you are proactive.  However, the tax code is constantly changing!  In fact, the Tax Cuts and Jobs Act of 2017 is expiring after 2025, so unless something changes, tax rates are going up for most taxpayers.  Additionally, the markets are beginning to recover, so strategies like tax loss harvesting or Roth conversions become less impactful.  But, there is still plenty of time and opportunity!   

Thanks for reading and I hope you learned something valuable.  Make sure to SUBSCRIBE to our newsletter to receive updates on me personally, professionally, and of course, content to help you achieve financial independence!  CLICK on the “keep me up to speed” button below.

-Kevin   

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Q1 2023 Market Update

Despite two major US banks failing, coupled with central banks’ attempt to fight persistent inflation, the US and International markets experienced some positive momentum!

The Banking System

One of our recent articles was about the collapse of Silicon Valley Bank (SVB), the 2nd largest US bank failure in history.  This sent a ripple effect into the banking system, particularly a flight of deposits from smaller regional banks to big banks.  

JP Morgan posted a 52% jump in its first-quarter profits.

Wells Fargo topped analysts’ projections by 10 cents a share in Q1.

Citigroup also beat analysts’ estimates on revenue.  

In short, customers were worried that their bank might also fail following SVB and Signature’s collapse.  As I discussed in our previous post, which you can read here, SVB and Signature were heavily concentrated on client bases that had unique challenges in this economy (tech industry and crypto).

However, bank capitalization looks very healthy and has been on the uptrend since 2008 following the Global Financial Crisis.  This is one positive impact of tighter regulation on big banks following The Great Recession.

Source: JP Morgan Asset Management

The real fallout

Despite big banks experiencing an inflow of deposits from smaller banks, they are still facing tighter lending standards and rapidly increasing interest rates.  They now have to pay us all higher yields in return for their money market or CD accounts.  Smaller and more regional banks, however, will face a reduction in deposits AND increased lending standards.  Regulators and board members are going to be watching like a hawk to ensure more banks don’t have the same risks that SVB and Signature Banks did.  

As banks tighten their lending standards, individuals and businesses are going to struggle to get loans.  Individuals who could previously afford that new or used vehicle might not qualify any longer.  Or, people shopping for their first home can’t afford the mortgages given the rapid uptick in rates.  

Businesses that rely on these smaller and regional banks for loans to keep their lights on or survive this challenging market will find it harder to get capital.

All of these ripple effects will contribute to a slowing economy.

But after all, this was the Fed’s goal ever since they announced their rate hike and quantitative tightening strategy back in 2021.  Their main objective was to fight inflation, and they needed to slow the economy in the short run to win the battle in the long run.

Speaking of inflation...

After setting 40-year highs in 2022, inflation is finally cooling a bit.   The peak was 8.9% in June, but we’ve seen a gradual decline ever since.  The March numbers were just released and showed a 5% year-over-year CPI figure.  The Fed’s target overall is 2%, so we are still a ways from that number.  Despite the trend going in the “right” direction, I don’t believe the Fed will get all the way to their 2% goal unless unemployment falls exponentially over the coming months.  The cooling inflation story is the primary reason the market has rallied since the start of 2023.  Inflation under check means the Feds might actually STOP raising interest rates very soon.  The market is pricing in one more 0.25% rate hike and then the expectation is rates will level off and eventually fall in 2024.  

The real question is, has the Fed done so much damage with its policy that they send the economy into a recession?  If this happens, they could even pivot to rate cuts as early as the end of 2023 or the beginning of 2024.  My hope is that they take a pause and let the economy settle itself out.  

Source: JP Morgan Asset Management

Unemployment and Wages

The unemployment story has been a big part of why inflation has been so sticky. 

We entered 2020 with a 3.5% unemployment rate, which was a 50-year low.  After topping over 10% unemployment (briefly) in 2020, the US now has a 3.6% rate.  Additionally, wage growth is at 5.3%, which is above the historical average of 4%.  So, if people are “working” and wages are still growing, it’s no wonder inflation has been so tough to fight.  People did not stop spending money in 2022 because of prices going up.  Sure, consumer discretionary categories took a hit, but the core goods and services were still being purchased at elevated prices.  This is a big reason I don’t believe prices are going to come down as much as the Feds want them to.  Why would corporations cut prices when their consumers have the wages to buy them?  

One of the chips likely to fall is the unemployment story in big tech firms.  Since 2018, Amazon and Meta (Facebook’s parent) have almost doubled their workforce.  During that same period, Microsoft increased its workforce by 53%, and Alphabet by 60%!  Meanwhile, Apple only grew its workforce at a moderate 20% rate.  

Remember the Paycheck Protection Program in 2020?  This was a federal loan to corporations to keep their employees on payroll during COVID.  All they had to do was use at least 60% of those loans to cover payroll and the “loan” was forgiven.  The word on the street is that big tech used their loans to go on massive hiring sprees.  Not because they NEEDED that many more workers, but to reduce the talent pool for their competitors and have their PPP loans forgiven!  Now that the economy is slowing, we’re seeing big tech begin layoffs.  Coincidently, Apple hasn’t laid anyone off just yet.  

Look at this headline from a Fortune article:

‘Penned’ tech specialists are earning six-figure salaries to ‘do nothing’ and string out 10-minute tasks. Some are even using the time to scuba dive

Some of the highest unemployment numbers by industry are:

  1. Farming – 7.4%
  2. Mining, quarrying, oil and gas extraction – 6.5%
  3. Construction – 5.6%
  4. Leisure and Hospitality – 5%
  5. Transportation and utilities – 4.6%

Meanwhile, big tech unemployment is only at 2.6%, up from 1.5% to start the year.  All of the remote workers that migrated out of the big cities during the pandemic are now experiencing some layoff concerns, and it will be very interesting to follow that narrative as big tech continues to cut their unnecessarily large workforces.  

Returns by asset class, YTD

As you can see year to date, all of the major asset classes are positive.  International, developed economies are in the top spot, with US Large Cap a close second.  What’s very encouraging is that the fixed-income markets are now showing positive returns after a rough 2022.  

During the re-balancing process for our clients at the beginning of 2023, the only asset classes we added exposure to were Large Cap Growth companies (big tech) and international equities.  This isn’t to pump our chest to say “I told you so.”  However, part of our process is to sell the winners and buy the losers.  Big tech was the worst-performing asset class in 2022, and stock performance is a leading indicator.  What I mean is, the layoffs and bad news for big tech this year were already priced into the market in 2022 (at least we hope so).  We talked a lot about interest rate increases during 2021 and 2022 and how it would impact tech companies.  After the brutal selloff in 2022, valuations looked much more attractive going into 2023…hence, buying the loser.  So far year to date it’s paid off well, but that’s not to say there isn’t more volatility ahead for big tech with the challenging interest rate environment they face.  

The same can be said about international equities as they had a rough go in 2022 but are very well positioned from a valuation perspective for the decade ahead.  International stocks tend to do well during periods of high inflation, like in the 70s and 80s.  However, geopolitical concerns with Russia/Ukraine and China still make international stocks much more volatile.  

Final thoughts

Attempting to time the market is very dangerous.  If you look back at the past year, consumer sentiment has been at record lows.  People have not been feeling good about the economy.  This feeling oftentimes leads to investors flighting to safety.  How many articles have you seen about I-Bonds or CD Rates over the last 12-18 months?  Well, stock market returns typically accelerate very quickly after a recovery.  In fact, more than 50% of the best daily S&P 500 returns occur during a bear market.  So if you bailed out during 2022, you did not get the benefit of a strong Q1 in 2023!  

While we are going to be experiencing a tighter economy for the foreseeable future with higher rates, there is now hope with the inflation story beginning to unfold.  Let’s hope the market is correct in that the Fed will only increase rates one last time at 0.25% and be finished.  The unemployment and wage growth figures will be key to watch over the coming months as that will dictate how quickly inflation comes down in late 2023.  

If you are curious about how the market has impacted your financial goals, we’d love to hear from you!  You can either send me an email at kevin@imaginefinancialsecurity.com or book a Zoom call with us.  

Until next time, thanks for reading!

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