Understanding Your Retirement Options

In late October, Governor Tony Evers created a task force for retirement security. The task force will investigate how Wisconsin can support its growing number of retirement-aged citizens.

One of the greatest concerns facing individuals nearing retirement is a lack of knowledge on their options. Many individuals rely on Social Security with no other plans for income after retirement, which may leave some retirees in tough financial situations. Like Gov. Evers, KerberRose Wealth Management hopes to educate our clients about the importance of saving for retirement and the many tools available to optimize your financial security upon leaving the workforce.

Social Security

At the time of Social Security's installation in 1935, life expectancy was only 61 years of age.  Today, however, life expectancy has drastically increased and it is common to see individuals spending 20+ years in retirement. Therefore, it is crucial to have a plan in place for steady income during retirement.

Most people's conception of Social Security is the longer you wait, the more money you receive, which is true. Yet, most people don't realize how much money is lost when Social Security is drawn early. For every month you claim your Social Security retirement benefit before reaching full retirement age, your initial monthly benefit will be permanently reduced, according to these two rules:

• Your benefit will be reduced by five-ninths of 1% per month (6.67% per year) for as many as 36 months before full retirement age.

• Your benefit will be reduced by five-twelfths of 1% per month (5% per year) for every month you claim early beyond 36 months. For someone with a full retirement age of 67, they will receive a 30% reduction in benefits if they start drawing at 62.

It's also worth noting your benefit will be permanently increased if you wait until after your Full Retirement Age to start your benefits. Delayed retirement credits will increase your initial benefit 8% per year up to age 70.

Married couples also have a lot to consider when determining the optimal time to begin benefits. Too often people simply take benefits as soon as they are eligible and don’t plan for income needs in the event a spouse dies. Unfortunately, Social Security doesn’t allow you keep both spouses’ benefits when the first spouse dies; taxpayers will simply receive the higher of the two benefits. Not having a sound strategy in place can make things difficult later on for a surviving spouse. 

Let’s look at an example where Spouse A and Spouse B are the same age and both have a Full Retirement Age benefit of $2,000 per month at age 67. If they both decide to take Social Security at 62, we know their benefits will be reduced by 30% to $1,400 per month. If spouse A dies, spouse B will no longer receive spouse A’s benefits, which will result in a 50% decrease in planned income. Although, if one of the spouses decides to draw at 62 while the other waits till 67, the surviving spouse will be guaranteed more income later in life (they will receive the higher of the two benefits when the first spouse dies). This is why it’s so important for couples to coordinate the withdrawal of their benefits and seek out professional help if they do not understand all of their options.

Depending on the retirement goals of an individual, withdrawing early can be a better option. Some prefer not to spend their personal investments upfront so as to pass those on to beneficiaries later. In this case, drawing Social Security early makes sense. People should have concrete goals of what they want their legacy to look like and plan their retirement around these goals.

Making informed decisions about when to draw Social Security greatly increases the chances of securing a stable income stream in retirement. Helping clients understand what factors go into this decision is one of the many services KerberRose Wealth Management offers. KerberRose Retirement Planning consultants create financial plans and conduct probability testing on those plans to help clients determine the optimal time to start drawing Social Security.

Retirement Plans and Benefits

Governor Evers and his task force are also investigating which retirement plan and benefit options Wisconsin citizens have available once they leave the workforce. Shocking statistics cited in Evers' task force presentation reveal upwards of 427,000 Wisconsin seniors could be facing the risk of retiring in poverty by 2030. The state already devotes approximately $1.5 billion in senior care each year, and this number could rise to $4.7 billion in the next 20 years. Employers can help decrease this cost by offering employees retirement plan options.

From the employer side of retirement, businesses often struggle to find retirement plan packages ideal for the company and the individual. Employers have a number of different plans they can choose to offer; 401(k), 403(b), Simple IRAs and Sep IRAs are a few of the plans available to companies, non-profits, and government agencies. Determining which plans will benefit a business and its employees is a task Kerberrose Wealth Management can help with.

Individuals also have several accounts available to choose from; typically, individuals can choose a tax deferred account, Roth accounts, and individual investment brokerage accounts.

Each has different tax implications, and understanding these different plans will help individuals decide which combination of accounts will provide them with the most favorable tax situation.  Consulting both wealth advisers and tax professionals proves helpful for individuals when determining which of their account to draw from, and when, so as to minimize the taxes they pay along the way. At KerberRose, our tax team and wealth advisers work closely together to provide this added value for our clients.

Conclusion

Understanding Social Security and retirement planning can be difficult — most people are not aware of all the various claiming strategies Social Security offers. This lack of information is made more difficult by the individualized nature of retirement planning: there is no "one size fits all" plan, as everyone has their own post-workforce goals, financial needs and accumulated assets influencing decisions affecting their retirement. Additionally, small businesses often struggle to create retirement packages best serving the company and its employees.

Fortunately, our team of experienced KerberRose Wealth Management advisers can help clients make personalized decisions about their retirement. KerberRose Wealth Management Advisers utilize tools like financial planning software to ensure each client feels comfortable they have made the right decisions to optimize their retirement success. Social Security Analysis and Retirement Needs Projection are two services KerberRose Wealth Management has available to help clients understand the optimal time to take Social Security or draw from a retirement account. Additionally, our Retirement Planning Advisors can educate business owners on how to set up retirement plans, so small businesses can feel they are making the most effective decisions to help their employees save for retirement.