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The Million Dollar Question & Let's Talk About QCD's

The Million Dollar Question & Let's Talk About QCD's As we inch closer to RMD season, Jake and Jon sit down this week to discuss the ins and outs of Qualified Charitable Distributions, or QCD’s, and why they consider them to be a useful tool.

The Million Dollar Question & Let's Talk About QCD's
As we inch closer to RMD season, Jake and Jon sit down this week to discuss the ins and outs of Qualified Charitable Distributions, or QCD’s, and why they consider them to be a useful tool.

Five Things You Should Know

  1. Equity Markets – were lower this week with U.S. stocks (S&P 500) down -1.38% while international stocks (EAFE) fell -1.44%.
  2. Fixed Income Markets – were lower with investment grade bonds (AGG) down -1.15% while high yield bonds (JNK) fell -0.93%.
  3. Inflation Persists – Following the release of September CPI data that showed both core and headline numbers increasing, markets are now pricing in the likelihood of back-to-back 75 basis point rate hikes over the next two Fed meetings. While Treasury Secretary (and former head of the Fed) Janet Yellen reiterated the top economic priority at the moment is, “…to bring down inflation while maintaining a strong labor market”, she is yet to express serious concern on recession risks.
  4. BOE Ends Emergency Buying – Today marked the end of the two-week intervention by the BOE in the UK bond markets centered around concerns of pension plan viabilities going forward. While a full economic crisis appears to have been avoided for now, Finance Minister Kwarteng will now lead efforts to deliver a new updated medium-term fiscal plan by Oct. 31st, with all signs pointing towards significant monetary policy response in efforts to curb inflation.
  5. Key Insight – [VIDEO] As we inch closer to RMD season, Jake and Jon sit down this week to discuss the ins and outs of Qualified Charitable Distributions, or QCD’s, and why they consider them to be a useful tool. [ARTICLE] Portfolio allocation and markets are important, but there are many aspects to one’s overall plan that demand attention as well. Social Security is one of those topics that affect us all, and one that raises many questions. This week we explore one common question we get… “Can I still count on it?”

Insights for Investors

The Million Dollar Question…when to file for Social Security?
By Ben Klündt

Every once and a while we like to address important topics beyond the markets and the intense focus they can command. This means covering the other portion of financial planning that truly can become, “The Million Dollar Question.” Social Security is a system that many believe is straight forward from a benefits standpoint. But in reality, there are many different ways to file and claim benefits. Today I want to address some of the most common questions, filing types, and the do nots of Social Security.

Should I file as soon as possible since the system is projected to run out of money in 2037?

If we think that something is going to go under then we want to get as much money as we can as soon as possible – think of a “run on the bank.” It is true that the Social Security trust fund is currently projected to no longer have capital in the year 2037 and any future benefits would be from the Social Security Tax, e.g., they’re spending more than they’re making. We’ve been here before. A very similar situation occurred in the mid 1980s when the Fed’s opted to change the FRA (Full Retirement Age) to age 67 from age 66. This was phased in over a multi-year period as not to hurt those that were within a year or two from retirement. FRA is the age at which your benefit isn’t reduced by earning a living and you stop getting an increase in your PIA (Primary Insurance Amount), minus the annual step up for deferring.

A few current options to “fix” Social Security:

  1. Remove the earnings cap – currently anything over $147,000 in earnings is NOT taxed the Social Security rate of 6.2% (paid by Employee and Employer)
  2. Increase the tax – going from 6.2% to 7.2% today would also allow for payments for another lifetime.
  3. Change the FRA – just like they did in the 80s, we could see the FRA jump to create a solvent trust fund.
  4. Reduce benefits – if no solution agreed upon and it comes to the deadline, this is the default solution. An approximate 13% reduction in benefits across the board immediately would fix it. Actual reduction at that time if they defer is closer to 21%.

My suspicion is that the government punts the ball until the last minute, then comes out with Social Security reform (like they did in the 80s) that implements some combination of A and C above, and we DO NOT see a default in Social Security benefits.

Knowing Social Security likely isn’t going away, keep in mind on average, you get an approximately 8% step-up in your benefit amount after your FRA until you reach age 70.

While we can tell you from a financial planning standpoint what makes the most sense based on your current asset base, earnings, and a few other considerations, it does come down to preference if you have one. For many, that’s to get the most in benefit they can!

Should I file for my own benefit or a Spousal Benefit?

Many are not aware that if they have been married for one year or divorced and had been married for 10 years and NOT remarried, they are eligible for a spousal benefit based off their Spouses PIA. One’s PIA is calculated using the average of 35 working years earnings indexed for inflation.

This could be best answered by a couple benefit examples:

  1. In the case of a high earner and a part time or stay at home spouse: it could certainly make sense to file for a benefit off your spouse’s PIA vs your own once you reach age of eligibility. You would be entitled to 50% of their PIA and may take that if it is greater than the benefit on your own earnings.
  2. One is significantly older than the other or ailing health of the high earner: since you get a step up in benefit until age 70 if you haven’t yet filed, it can make sense to defer taking your Social Security so that when the higher earner does pass, the spouse receives a step up to the higher benefit.

The time at which you file can have a big impact on your financial planning longevity. We calculate this automatically when we do financial planning with clients and are happy to strategize filing strategies with you.

The DO NOT pass go, do not collect $200 of Social Security.

Occasionally we hear of someone who believe they could double dip, getting their Social Security Benefit early (age 62) while also still earning a living and just invest one or the other. I applaud their out of the box thinking! The catch is, the IRS will reduce your benefit by $1 for every $2 you earn over the 2022 limit of $19,560. So, if you earn $50,000 and file for Social Security, you’re going to lose about $15,000 in annual benefit. When able, defer taking your benefit and let that baby grow!

If you find yourself in a negative situation where you have started to receive a benefit and didn’t know you’d be getting hit with a penalty, you may not be in total trouble. The IRS allows you to pay back the benefit you took within a year and be able to continue deferring your future benefit to not get dinged.

In Conclusion

If you’re wondering what the best filing strategy for you and your partner may be, we’re here to help and can illustrate that in your plan, including how we currently have you filing. I hope you enjoyed a bit of a change from the “market talk” and got some insight you may find beneficial. We’re always here to help.

Enjoy your weekend!

Ben and the Team at TEN Capital

Data, Just the Data

Data points this week included:

  • U.S. Jobless Claims – rose by 9K to a six-week high claimant count of 228K for the week ending October 8th. This was up from last week’s count of 219K and surpassed expectations of 228K and alludes to a loosening labor sector. The four-week moving average jumped by 5K people to 211.5K.
  • U.S. CPI – inflation slightly eased for the third consecutive month to a rate of 8.2% YoY for September and was fractionally lower than the previous reading of 8.3%. Cost increases slowed for food, up 11.2% from 11.4% and energy, up 19.8% from 23.8%. Used cars and trucks also slightly edged down from an 7.8% rise to a 7.2% rise. Shelter prices did although increase from 6.2% to 6.6%. The core inflation rate rose above market expectations of 6.5% to 6.6%. The Fed is expected to be hawkish moving forward with rates declining slowly.
  • U.S. PPI Final – crept up to 0.4% MoM in September which marks the first increase in three months and are up 8.5% YoY. Service costs rose 0.4% and the indexes for food retailing, and machine and vehicle wholesaling rose 2.6% and 1.5%, respectively. Cost of goods rose 0.4% and prices for diesel fuel rose 9.1%. Core prices (excluding energy & food) contracted from 8.1% to 7.2% YoY.
  • U.S. Retail Sales – remained unchanged (0.0%) MoM for September and missed expectations of a 0.2% rise. Sales fell at vehicle dealers by (0.4%), gas stations by (1.4%) and miscellaneous store retailers by (2.5%). Core retail sales (excluding vehicles, gas, building materials and food) rose 0.4% MoM. YoY, sales have slowed to 8.2%.
  • Eurozone Industrial Production – on a MoM basis, industrial production has risen 1.5% in August and is a stark rebound from the (2.3%) decline in July. Capital goods output increased 2.8%, durable consumer good production moved up 0.9%, with non-durables contracting (0.7%). YoY, production has bumped up 2.5% which is above the forecasts of a 1.2% expansion.
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