February 2023

The $1.7 trillion budget bill signed by President Biden on Dec. 29, 2022, included the bipartisan SECURE Act 2.0. The legislation expands on many of the provisions in the original SECURE Act, which was signed into law in 2019. SECURE is an acronym for Setting Every Community Up for Retirement Enhancement, and the combined goal of both pieces of legislation is to remove obstacles and create incentives to help more Americans do a better job of saving for retirement.

In this report, we’ll highlight some of the more than 100 provisions in the SECURE Act 2.0 that could impact your retirement savings and/or savings strategy immediately or in the coming years.

Later Start for RMDs
Like the original bill, the SECURE Act 2.0 further raises the starting age for taking Required Minimum Distributions, which are mandatory withdrawals the IRS makes you take from your retirement accounts starting at a certain age. For years that age was 70½. The first SECURE Act raised it to 72 — and starting in 2023 the age is now 73. That means if you turned 72 in 2022 or before you need to keep taking RMDs as usual. But if you turn 72 in 2023, you can choose to wait until next year before taking your first RMD. The RMD starting age will continue getting higher until it reaches 75 in 2033.

Raising the age is a recognition of the fact that people are living longer and often retiring later. It gives you more time to grow your nest egg tax free. That’s great news, but it doesn’t change the fact that having the right strategy to help satisfy your RMDs will continue to be one of the most important steps in your retirement plan!

Lower RMD Penalties
Another change relating to RMDs is that the penalty for failing to satisfy your distribution in any given year will drop from the current 50% to 25%. The fine drops even further, to 10%, if you miss or underpay a distribution but correct your mistake “in a timely manner.”

Few inventions in recorded history have revolutionized the way we live like the Internet. It has changed the way we communicate and has made thousands of previously slow, complex processes faster and more efficient. Yet, while solving old problems, the Internet — like any invention — has also created new ones. Among the biggest of those problems is the vulnerability of sensitive and/or personal information to a relatively new breed of criminal: cyberthieves.

Most of the country was personally impacted by this problem in September 2017 when Equifax reported a security breach that allowed hackers to access the personal information of 143 million Americans. Equifax is one of three major credit reporting agencies (Experian and TransUnion are the others), and all keep extensive databases of credit-user information that include everything from dates of birth to addresses to Social Security numbers. Once a cyber thief gains access to such information, they can use it to steal your identity and potentially gain access to your credit accounts and personal finances.

Electronic identity theft can ruin a family financially, and unfortunately, it is an issue with no easy solution. According to a 2017 study by Javelin Strategy & Research, between 2011 and 2017, identity thieves stole over $107 billion. In 2016 alone, some $16 billion was stolen from 15.4 million U.S. consumers, up from $15.3 billion stolen from 13.1 million victims a year earlier.1 The increase illustrates that even as cybersecurity measures improve, criminals become increasingly savvy.

Greater Risk for Older Americans
The bottom line is that keeping our identities and finances safe from criminals in the digital age will be an ongoing challenge for both businesses and individuals. That’s especially true for individuals at or near retirement age whose accumulated assets can potentially make them more attractive targets for thieves than younger people who are still in the early process of building their wealth. A top priority for most Americans over age 50 should be “financial defense,” which means they should focus on the use of strategies designed to generate income and protect assets from major losses due to extreme fluctuations in the financial markets. In the digital age, however, another essential component of financial defense is cybersecurity: knowing how to protect your identity as you do everything from online shopping and banking to buying gas.

It seems that tax laws and regulations are constantly changing. That’s why it’s always good to meet with your CPA or financial advisor on an annual basis to talk about potential tax savings strategies as they exist under current tax rules and guidelines. While it’s generally best to have that meeting in November or December to beat all the IRS’s year-end deadlines, a meeting in January or February can also be extremely beneficial and potentially save you thousands of dollars.

The tax savings strategies discussed in this report are primarily geared toward filers in the 12% to 24% income tax brackets and are strategies related to retirement contributions, investments, savings, healthcare expenses, charitable donations, and other key areas. But first, let’s go over some basic tax guidelines as they stand for the tax year 2023.

Deductions & Exemptions: The standard deductions for the tax year 2023 are:

• Singles get $13,850, plus an additional $1,850 if age 65 or over
• Married couples get $27,700, plus $1,500 per spouse if both are 65 or over
• Heads of household get $20,800, plus $1,850 if age 65 or over

Personal exemptions were eliminated with The Tax Cuts and Jobs Act and remain at 0. Most people know how basic tax preparation works: your adjusted gross income minus deductions and exemptions equals your taxable income. Beyond your standard deductions and personal exemptions, you and your advisor may want to explore and possibly implement some of the following additional strategies:

401(k)s and Other Qualified Plans
It is generally a good idea to maximize tax-deferred 401(k) contributions whenever possible. If you feel you can’t afford to put in the maximum amount of money allowed, try to contribute at least the amount that will be matched by employers’ contributions. Contribution limits for 401(k), 403(b), and 457 plans are $22,500, with an additional $7,500 catch-up contribution limit if you are over age 50. You might even consider taking an entire paycheck in December and putting it into your 401(k), if that’s feasible, or taking the equivalent amount from a savings account and putting that into the 401(k) to maximize the contribution.

Everyone understands that the mass media has changed drastically. Not so long ago, we relied on daily newspapers, TV, and radio for all the information we needed to help us make informed decisions and stay abreast of current events. Now, in the age of the internet, we seem to be constantly bombarded with headlines, updates, and “breaking news” from our laptops, desktops, and cell phones—not to mention our TVs and radios!

However, as mass media has become so pervasive in our lives, one thing that hasn’t changed is the existence of “spin.” The explosion of media outlets in recent years has dramatically increased the pervasiveness of spin and made it harder to find truly objective reporting. With fierce competition among media companies, and the line between news, advertising, and “infotainment” growing thinner, modern journalists are under more pressure than ever to cut corners and put
pleasing their bosses ahead of serving the public on their priority lists.

The result, more often than not, is reporting that is “spun” to someone’s liking or advantage, lacking objectivity. I often remind clients of this fact because I’m well aware that, amid this daily bombardment of mass media, it is likely they will come across news and information about annuities that has a negative “spin.” I point out that financial news is particularly susceptible to being “spun” a certain way because of a fundamental flaw in the financial system.

The Need for Optimism
The crux of the problem is that the heads of major financial firms on Wall Street are financially obligated to their shareholders first and to their customers and clients second. They have a legal obligation to maximize shareholder value, in part by keeping customers invested for growth in the stock market as much as possible. People are more likely to invest and stay invested for growth when they’re optimistic about the market and believe it is trending upward. Thus, Wall Street CEOs and the people who work for them have an inherent need to sell optimism and always speak optimistically about the stock market, often regardless of economic realities or how the market might be trending.

When people think of Investing for Income, the first thing that might come to mind is investing in non-stock market investments, like bonds. Yes, bonds and bond-like instruments are an important part of investing for income, but there is also a way for those with the willingness and ability to endure some level of stock market risk to enjoy the benefits of earning a steady income through dividends. That’s exactly what we are going to talk about in this report — investing for income in the stock market.

Keep in mind that stocks are generally considered to be riskier than bonds because they can drop in value, and because dividends can be cut or reduced. Some financial firms might tell you that they have some proprietary formula or advanced algorithm to manage stocks and help protect your investments from downside risk. Well, these algorithms don’t work forever, and eventually, they fail to protect the investor.

However, a dividend-paying value stock strategy can help to mitigate stock market risk. One reason is that you are buying “undervalued” stocks, which means they should have somewhat less downside risk than an “overvalued” stock. Another reason is that your dividend payment is a “bird in the hand.”

The Real Estate Analogy
To illustrate the benefits of a “bird in the hand” strategy, let’s consider two different couples who decide to invest in real estate. The first couple decides to invest in a plot of land — hoping that the value of their land will appreciate by the time they retire so they can sell it for a profit. Then, just as they’re about to retire, the real estate market experiences a downturn and the value of their land drops significantly. This couple would most likely feel the pain of this drop in value.

Now, consider the second couple, who decide to invest in a rental property instead. Each month this couple can collect rent from their tenant. Because of the steady income coming in, this couple wouldn’t be so concerned about a potential drop in value. The steady income they receive would help to soften the blow of a drop in property values. If they had no intention of selling their property anytime soon, it might not even impact their ability to fund their retirement.

Aggressive instruments are those primarily invested in for growth. As the chart shows, they include things such as common stocks, stock mutual funds, commodities, Business Development Companies (BDCs), and speculative real estate. Again, these are typically invested in growth or capital appreciation, not income. They are considered aggressive because, while they can provide large short-term gains, they can also carry a higher risk of sudden losses.

On the left of the chart are investments that are considered conservative because, in theory, they are deemed to have no default risk. These include bank CDs, government bonds, fixed annuities, and insured municipal bonds.

In the middle of the chart are moderate instruments that have some default risk but are generally considered to have a much lower risk of loss than aggressive investments. These moderate options include corporate bonds, indexed annuities, preferred stock, and Real Estate Investment Trusts (REITs).

The instruments on the left and in the middle have two things in common:
1. They’re considered to have less risk of loss than the instruments in the aggressive category.
2. They are instruments that people invest in primarily for income.

In other words, they are not instruments that people typically invest in first for growth — although they do appreciate in value. The interest and dividends that are typically yielded by the vehicles on the left and in the middle represent a way for investors to generate reliable income and grow their money “organically” through the reinvestment of any interest and dividends they may not need for income. This is known as the “bird-in-hand” approach to portfolio growth. You aren’t crossing your fingers and toes and hoping for capital gains to provide you with growth. Instead, you’re building growth strategically through a dependable process.

Most people are aware that charitable contributions to qualified recipients are tax-deductible, provided they are made by December 31 of the tax year for which you are filing. It’s a great benefit for people who feel strongly about supporting various causes and organizations, and it makes for a great year-end tax-saving strategy. Rather than donating cash, some people donate appreciated securities, which can allow them to avoid capital gains tax.

What many people don’t realize, however, is that they can also use charitable contributions strategically in other financially beneficial ways, all while supporting worthwhile groups and programs. This is true now more than ever thanks to the Qualified Charitable Distributions law (QCD), which was made permanent in 2016.

For example, one of the most important areas of retirement planning involves having a sound strategy in place for satisfying your Required Minimum Distributions (RMDs). One benefit of the QCD law is that it provides a great option to cost-effectively satisfy your RMDs if you are charity-minded or have a particular organization you regularly support. But there are other potential benefits as well. That means benefits for you in addition to the obvious good your money
does for your favorite charity!

How it Works
In basic terms, a QCD allows you to transfer a gift of up to $100,000 directly to a qualified charity from an Individual Retirement Account (IRA) without counting it toward your Adjusted Gross Income (AGI) or incurring a tax. The key word there is “directly.” Money transferred from an IRA account to the IRA owner and then gifted does not qualify. By the same token, you cannot use the QCD as a way to reimburse yourself for a charitable gift you’ve already made; the distribution must be a direct transfer from your IRA account to the charity.

One of the first things people do once they get serious about planning and saving for retirement is to look at a retirement calculator to find out how much they need to save. There’s nothing wrong with that. However, every person’s situation is completely different. What might be the right amount for one person will not be right for everyone. For example, someone who is happy staying home and fishing at their local lake during retirement will need less than someone who plans to travel frequently and fish in the Florida Keys. These are the types of things a retirement calculator might not take into consideration before giving you the lump sum amount you’ll need for retirement.

You may have heard some financial advisors try to answer this question very broadly. For instance, one popular notion is that you’ll need one million dollars in savings to retire more comfortably. Another is that you’ll need to be able to generate 80% of your current income after you retire. So, if you brought home $100,000 per year during your working years, you would need to get $80,000 per year from your investments during retirement. But again, taking a broad approach to this question is pointless in a way because each person’s situation is different based on their retirement timeline, goals, health, and a variety of other issues, such as: Are you debt-free? Do you have a history of longevity in your family? Do you have other sources of income like a pension that can help to supplement your savings?

Where to Begin
One good way to begin calculating the answer for yourself is to perform a budget analysis. This involves identifying all the expenses you will have once you retire, as well as those you expect to go away, such as your FICA tax, commuting costs, and perhaps your mortgage payments. Next, you’ll need to determine how much income you will have coming in the door once you stop working. For example, an important source of retirement income will be your Social Security benefits. You can use the benefits calculator on SSA.gov to estimate how much your benefits will be based on claiming them at the optimal time. The right age will vary from person to person, and it will, again, be determined by considering many factors such as your age, earnings, and retirement goals.

If you’re like most people, you believe there’s a great deal of truth in the adage, “history tends to repeat itself more often than not.” That’s an important adage to keep in mind when it comes to saving and investing for retirement because it allows you to get a glimpse into the future by knowing something about the past. The fact is, the stock market has been repeating itself consistently enough throughout history to allow us to see some repeatable long-term patterns, or market “biorhythms,” which are important to recognize and understand when it comes to building a smart, defensive investment strategy.

First, you need to understand something about what particular “version of the truth” Wall Street and most brokers like to tell when talking about the stock market. Most people have probably been told that the market averages about a 9% return over the very long run. The way that breaks down is that 2-to-3% of this return comes from stock dividends, and 6-to-7% comes from capital appreciation — in other words, a 6-to-7% average growth rate over the very long run.

That may sound pretty good, but you must bear in mind something about how “averages” can be determined and why they can be misleading. If a friend told you that he jogged “an average” of 10 miles per week with his business partner, you might be impressed until he explained that his partner jogged 20 and he didn’t jog at all. Together, they do still “average” that 10 miles, so he did tell the truth, but it was a misleading “version of the truth.”

That’s kind of how that “average” growth rate is determined for the stock market. The way the 6-to-7% breaks down over the long run is that there are huge periods of time where the market experiences extreme volatility, but the net result is zero growth. Then, there are huge periods of time where the market does very well, averaging over 10% growth and often into the 12-to-15% range. Factor zero in with that high range, and there is your 6-to-7%.

Working Americans at or approaching retirement age today face many unprecedented challenges unique to their generation. That’s why it’s important to have a retirement plan that addresses these challenges and uncertainties head-on. One of the keys to doing just that is being aware of the retirement planning milestones that occur from age 50 onward. Several of these milestones present you with options that could significantly impact whether you have enough income to help achieve your retirement goals.

Of course, sound retirement planning is more than just a matter of paying attention to these age milestones. But being aware of them and making the right decisions in coordination with your financial advisor when each one comes along can help improve your odds of success! With that in mind, let’s go through each milestone one at a time and discuss its significance along with some of the things you may want to consider when deciding whether to take action.

1. Age 50
This is when you are first allowed to make “catch-up” contributions to 401(k)s and other tax-deferred employer-sponsored retirement plans, as well as IRAs. Amounts are subject to change each year, and up-to-date guidelines are always available at irs.gov. Congress added the catch-up contribution option to retirement plans due to concerns that Baby Boomers, specifically, haven’t been saving enough for retirement—which most studies and surveys indicate is true. Deciding whether you should make catch-up contributions is a matter you should discuss with your financial advisor while considering numerous factors, including when you’d like to retire, your additional financial assets (both current and expected, including Social Security), and your retirement goals—which we’ll discuss much more in just a bit.