Archives for April 2022

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Investing Blog Roundup: 2022 Bogleheads Conference Tickets Available

I’m happy to report that after a two-year hiatus, the Bogleheads Conference will be happening again this fall. It will be October 12-14, at the Oak Brook Hills Resort, in Westmont Illinois (15 miles from O’Hare Airport).

Attendees will get to hear from Burton Malkiel, Michelle Singletary, Bill Bernstein, Jason Zweig, Christine Benz, Jim Dahle, Rick Ferri, Chris Mamula, Allan Roth, Jon Luskin, and Mike Piper.

You can find more information (and get your tickets) at the link below. (And if you’re interested, do go ahead and get tickets, because Bogleheads events always sell out.)

There’s also an ongoing Bogleheads forum thread about the conference here, with some additional information or if you have questions:

Recommended Reading

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How Do State Taxes Affect Retirement Planning?

A reader writes in, asking:

“Would it be possible for you to write an article on how to best account for state income taxes when planning as a retiree or near-retiree?”

It’s obviously challenging to write any sort of catch-all article about state taxation, because the rules vary from one state to another. But the following are the primary questions that I start with when doing a retirement/tax plan. (Of course, the answers to these questions sometimes bring up other questions.)

  • What are the state’s rules regarding taxation of Social Security benefits?
  • What are the state’s rules regarding distributions from traditional IRAs?
  • What are the state’s rules regarding distributions from tax-deferred employer plan accounts such as a 401(k)?
  • Does the state have an estate (or inheritance) tax? If so, what is the threshold, how is the taxable estate calculated, and what are the tax rates?

A relevant point is that these rules do change from time to time. So be skeptical about the websites that purport to tell you about all 50 states, as there’s a meaningful chance that that information is out of date, given how hard it is to keep something updated for so many states. (Plus there’s the chance that any general-audience media publication will simply get something wrong or leave out important facts.)

If at all possible, it’s best to find the applicable information on the website of your state’s department of revenue.

Tax Treatment of Social Security and Retirement Accounts

There are many states in which Social Security benefits are not taxed, yet distributions from tax-deferred accounts are taxed. When this is the case, it’s a point in favor of spending down tax-deferred accounts in order to delay Social Security. Reason being, when you spend down tax-deferred accounts earlier, you’re giving up future gains in those accounts. And those additional tax-deferred dollars that you’re giving up would have been fully taxable, whereas the additional Social Security dollars that you’re getting in exchange will not be taxable.

And then there are cases where particular states have very specific rules that create planning opportunities.

For example, Connecticut gives better tax treatment to distributions from 401(k) or similar plans than it does to distributions from traditional IRAs (at least for now), which is a point in favor of rolling IRA assets into a 401(k) just to take advantage of that better tax treatment.

Colorado has an annual “pension or annuity deduction” for people age 55 and up, which allows you to deduct annuity income, pension income, Social Security income, or tax-deferred distributions that were taxable at the federal level. However, there is an annual limit based on your age ($20,000/person if age 55-64, or $24,000/person if age 65+). One exception to the limit is that if your Social Security benefits exceed the limit, all of your Social Security benefits will be excluded from your Colorado taxable income. How this affects planning is that a) it’s another point in favor of delaying Social Security and b) you don’t want to go under the limit in some years and then way beyond it in other years. (You can use Roth conversions to take up any space in a given year that would otherwise be unused.)

These are just the sorts of things where you have to take the time to learn the rules in your state and think through what the ramifications might be.

State Estate Taxes

The federal estate tax only affects a very small percentage of households these days, with its $12,060,000 exemption as of 2022 (and double that for a married couple).

But there are some states that have their own estate tax, and in some cases the exemption amount is much lower. For example, Oregon’s estate tax applies to the amount by which an estate exceeds $1,000,000. In Massachusetts, any estate over $1,000,000 has to pay estate tax, and it has to pay the tax on nearly the whole amount, not just the amount by which the estate exceeds the threshold. Washington state has an estate tax for estates over $2,193,000.

Again, it’s best to just take the time to look up the rules specific to your state.

If your state has such a tax, depending on the threshold amount, the accompanying rules, and your projected assets, there could be lots of planning implications. It might be a big point in favor of gifting/donating during your lifetime. It might be a point in favor of creating certain types of trusts. It’s often a point in favor of Roth conversions, because when you do a conversion, the size of the taxable estate is reduced. (For example, after a given year’s conversion you may be left with $80,000 in a Roth IRA rather than $100,000 in a traditional IRA, which is a good thing as far as estate tax goes.)

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Investing Blog Roundup: Preparing Family for Their Inheritance

A lot of people who read this blog are “super savers” — saving a high percentage of their income through most of their careers. One thing that eventually happens for many super savers is that they reach a point where they realize they have not only saved Enough, they have saved More Than Enough. Their desired standard of living in retirement is well secured, and it’s very likely that a major part of the portfolio is eventually going to be left to loved ones and/or charity.

That realization raises a whole list of new considerations. Some of those are financial (e.g., how much can I afford to give away to charity during my lifetime?), and some are non-financial, such as those discussed in the following article from David Foster:

Recommended Reading

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The Three Biggest Social Security Misconceptions

Many people’s mental model of Social Security spousal/survivor benefits works like this:

  1. Your spousal benefit is equal to half of your spouse’s retirement benefit.
  2. Your survivor benefit is equal to the amount your spouse was receiving as a retirement benefit prior to his/her death.
  3. If you file for a spousal benefit and a retirement benefit (or a survivor benefit and a retirement benefit), you get the greater of the two amounts.

Unfortunately, all three of those statements are wrong. They’re close enough, if you’re far from Social Security filing age and you just want a rough understanding of the system. But if you’re trying to do any planning with actual math, or if you’re trying to interact with the SSA, you need a more accurate understanding.

Let’s start with #3, because it is in my opinion the “wrongest.”

Here’s how it actually works: if you are entitled to (i.e., have already filed for) a retirement benefit of your own, and you then become eligible for (and file for) a spousal or survivor benefit, you continue to receive your own retirement benefit and you receive a spousal/survivor benefit in addition to that retirement benefit. If that sounds wrong or surprising to you, it’s because you have a misunderstanding about how spousal or survivor benefits are calculated.

How is a Spousal Benefit Calculated?

Your spousal benefit is initially calculated as half of your spouse’s primary insurance amount (PIA). A person’s primary insurance amount is the monthly retirement benefit they would get if they filed exactly at full retirement age.

Note that your spousal benefit is not half of your spouse’s monthly retirement benefit. It’s half of their PIA. If your spouse files for their own retirement benefit before or after their full retirement age, they would receive a retirement benefit that is more or less than their PIA. But your spousal benefit is still half of their PIA, not half of what they’re actually getting.

Then, after that initial calculation, your spousal benefit can be reduced for a whole bunch of different things.

Firstly, if you are also receiving your own retirement benefit, your spousal benefit gets reduced by the greater of your own retirement benefit or your own PIA.

Second, if you file for your spousal benefit before your full retirement age, your spousal benefit will be reduced for early filing.

And then that spousal benefit could also be reduced by various other rules (e.g., the government pension offset if you have a government pension, the family maximum rules if a child is also receiving benefits on your spouse’s work record, or the earnings test if you or your spouse are younger than full retirement age and still working).

Example: Sandra’s PIA is $2,000. Her husband Mark’s PIA is $600. Mark files for his retirement benefit four years prior to his full retirement age, so he gets a retirement benefit equal to 75% of his PIA, or $450. Later, after Mark reaches his FRA, he becomes entitled to a spousal benefit as well (because Sandra has filed for her own retirement benefit).

Mark’s spousal benefit is calculated as half of Sandra’s PIA, minus the greater of his own PIA or his own retirement benefit. That is, $1,000 – $600 = $400.

So his total monthly benefit is $450 + $400 = $850.

A few big takeaways here:

  • He receives a retirement benefit and a spousal benefit.
  • His retirement benefit is still reduced for having filed early.
  • His spousal benefit is not half of Sandra’s retirement benefit.
  • His total monthly benefit is $150 less than half of Sandra’s PIA. That’s because he’s still receiving his retirement benefit, and that retirement benefit is still reduced by $150 due to early filing.

If Mark’s spousal benefit had begun prior to his full retirement age, it would have to be multiplied by the applicable reduction factor for early entitlement. For example if his spousal benefit also began four years prior to his FRA, it would be multiplied by 70%. So it would be ($1,000 – $600) * 0.7 = $280.

How is a Survivor Benefit Calculated?

If your spouse had filed for his/her own retirement benefit by the time he/she died, then your survivor benefit is initially calculated as the greater of:

  • The amount your deceased spouse was receiving at the time of his/her death, or
  • 82.5% of your deceased spouse’s PIA.

If your spouse had not filed yet for his/her own retirement benefit by the time he/she died, then your survivor benefit is initially calculated as:

  • Your deceased spouse’s PIA, if your spouse died prior to his/her full retirement age, or
  • The amount he/she would have received as a retirement benefit if he/she had filed on his/her date of death, if your spouse died after reaching his/her full retirement age.

And from that point, some reductions can apply.

Firstly, if you are also entitled to your own retirement benefit, your survivor benefit is reduced by the amount of your own retirement benefit. (Note that this is different than with a spousal benefit, where it’s reduced by the greater of your own retirement benefit or your own PIA.)

Next, if your benefit as a surviving spouse begins prior to FRA, it has to be multiplied by an applicable reduction factor (details here).

And again, various other reductions might be applicable (e.g., government pension offset, earnings test, family maximum).

Why Does This Matter?

Things that reduce your benefit as a spouse or survivor (e.g., government pension offset, family maximum, or earnings test when it is your spouse who has excess earnings) do not reduce your own retirement benefit. So it’s important to know what portion of your total monthly benefit is a retirement benefit and what portion is a spousal/survivor benefit. If you think that you “get the greater of the two amounts” you would think that your whole benefit is a spousal/survivor benefit and the whole thing would be subject to reduction. But that’s not the case.

It’s also important when interacting with the SSA. SSA employees are tasked with implementing and explaining a very complex system of rules, so yes, mistakes do sometimes happen. But in the overwhelming majority of cases in which I hear that the SSA has provided incorrect information, it turns out that the SSA employee provided information that was precisely correct — though insufficiently explained — and that correct information collided with a preexisting misconception in the person’s mind (usually one of the three above), and the person ends up hearing something different than what the SSA employee actually said. It’s like a Who’s On First scenario, though not so funny when there are actual consequences.

You can easily imagine how something like that can happen. Just take Mark from our example above. He’s currently receiving a retirement benefit of $450. And, before Sandra files for her retirement benefit, he calls the SSA to ask for details about his spousal benefit. And imagine that Mark has previously heard that 1) a spousal benefit is equal to half of your spouse’s benefit and 2) you get a spousal benefit or your own retirement benefit. So he’s anticipating a spousal benefit of something like $800-$1,000.

SSA employee: Your spousal benefit will be $400 per month.
Mark: Wait, what? It’s only $400 per month? I thought it was going to be more than that.
SSA: No, I’m sorry. It’s $400 per month.
Mark (now worried that not only is his benefit not going to increase, but it might even decrease from $450 to $400): Well can I just choose not to file for it then?
SSA: No, you will automatically be deemed to have filed for your benefit as a spouse as soon as Sandra files for her retirement benefit.

Everything the SSA employee said was correct. But they didn’t catch on to the underlying misconceptions that Mark has. So now Mark is freaking out because he had been anticipating a benefit increase, and he thinks he has just been told that his benefit is about to go down and there’s nothing he can do about it. But in reality, he will be getting a benefit increase. He’ll keep getting his $450 retirement benefit, plus the $400 spousal benefit.

Many experienced SSA employees are well versed in these misconceptions, and they’re skilled at noticing when a miscommunication is occurring and then guiding the applicant toward a proper understanding. But that doesn’t always happen. It’s important to understand the rules for yourself.

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Investing Blog Roundup: Investing and Life Lessons from Taylor Larimore

Anybody who spends time on the Bogleheads forum quickly becomes aware of the contributions made by Taylor Larimore. In addition to being one of the authors of the Bogleheads Guide to Investing, he’s one of the most prolific members on the forum, with thousands of posts answering people’s nuts and bolts questions about investing.

This week I really enjoyed seeing Taylor get some mainstream-media recognition.

Recommended Reading

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