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Key Questions to Answer Before Taking Social Security

Social Security may be a critical component of your financial strategy in retirement, so before you begin taking it, you should consider three important questions. The answers may affect whether you make the most of this retirement income source.

 

When to Start? The Social Security Administration gives people a choice on when they start receiving their Social Security benefit. You can:

  1. Start benefits at age 62 or later.
  2. Claim them at your full retirement age.
  3. Delay payments until after full retirement age.

 

If you claim early, you can expect to receive a monthly benefit that will be lower than what you would have earned at full retirement. If you wait until age 70, you can expect to receive an even higher monthly benefit than you would have received if you had begun taking payments at your full retirement age.

 

When researching what timing is best for you, it’s important to remember that many of the calculations the Social Security Administration uses are based on average life expectancy. If you live to the average life expectancy, you’ll eventually receive your full lifetime benefits. In actual practice, it’s not quite that straightforward. If you happen to live beyond the average life expectancy, and you delay taking benefits, you could end up receiving more money. The decision of when to begin taking benefits may hinge on whether you need the income now or if you can wait, and additionally, whether you think your lifespan will be shorter or longer than the average American.[i],[ii]

 

Should I Continue to Work? Besides providing you with income and personal satisfaction, spending a few more years in the workforce may help you to increase your retirement benefits. How? Social Security calculates your benefits using a formula based on your 35 highest-earning years. As your highest-earning years may come later in life, spending a few more years at the apex of your career might be a plus in the calculation. If you begin taking benefits prior to your full retirement age and continue to work, however, your benefits will be reduced by $1 for every $2 in earnings above the prevailing annual limit ($17,640 in 2019). If you work during the year in which you attain full retirement age, your benefits will be reduced by $1 for every $3 in earnings over a different annual limit ($46,920 in 2019) until the month you reach full retirement age. After you attain your full retirement age, earned income no longer reduces benefit payments.2,[iii]

 

How Can I Maximize My Monthly Benefit? The easiest way to maximize your monthly Social Security is to simply wait until you turn age 70 before claiming your benefits.1,2

 

To learn more about CapSouth and the services we provide, please call 800.929.1001 or visit our website at www.capsouthwm.com

 

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable.  CapSouth does not guarantee the accuracy or completeness of the information.  This material has been prepared for planning purposes only and is not intended as specific tax or legal advice.  Tax and legal laws are often complex and frequently change.  Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

 

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third-party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

[i] https://www.nerdwallet.com/blog/investing/take-social-security-benefits/

 

[ii] https://www.thestreet.com/retirement/social-security/maximum-social-security-benefit-14786537

 

[iii] https://www.fool.com/retirement/2018/12/01/4-things-you-need-to-know-about-filing-for-social.aspx

 

Life Insurance as an Asset Class

By J. Scott Fain

July 2019

Viewing life insurance as an asset class provides an additional benefit to consider when evaluating the purchase or continuation of an insurance policy.

 

What do I mean by asset class?  Traditional asset classes might include equities, fixed-income securities, cash equivalents, and real estate.  These categories organize various financial tools into groups that have similar characteristics, primarily in terms of risk.  Equities are generally considered to provide the greatest return over time, but also can carry the greatest amount of risk and volatility.  Advisors and portfolio managers typically strive to diversify clients’ portfolios to manage the amount of risk taken while still achieving acceptable rates of return over time.

 

Through the types of investments referenced above, what circumstances are needed for you to make money?  (Hint:  We’ve mentioned two big factors twice already…)  That’s right, you need returns and time.  We all hope for long, prosperous lives, but what if death occurs prematurely?  Now we have removed the element of time.  Though our money may have been invested well, those investments may not have had time to perform.

 

So what options do we have available to provide a greater return in the short-run?  You guessed it:  Life Insurance.  What if we had sufficient liquidity for our lifetime needs, and took one portion of our assets and invested in a life insurance policy?  Let’s look at an example:

 

Charlie is a 42 year-old male in good health.  Charlie is married to Sara, and they have two children, Larry and Mary.  Charlie and Sara currently have $750,000 in assets, and Charlie has an annual income of $85,000.  We will utilize sample average rates of return for the typical asset classes, and guaranteed internal rates of return for the life insurance death benefit based on a sample Nationwide illustration.

 

Charlie plans to contribute an additional $7,500 per year to his investments.  Using a $1,904 annual premium for a $250,000 permanent life insurance policy guaranteed to Age 121, let’s look at potential outcomes:

 

 

 

 

Under this simplified example, if all typical investments average the assumed rates of return, the portfolio diversified with insurance is more favorable if death occurs any year through age 76.  Following that age, investing the full $7,500 annually in equities would’ve generated a higher asset value.  Note:  These figures do not provide an adjustment for the tax savings.  The $250,000 death benefit generated by the life insurance policy pays to Charlie’s heirs income tax free under current law.  It is also important to note that the return generated by the life insurance policy is guaranteed, subject to the claims paying ability of the insurance company.

 

Might it be time for you to consider insurance as an asset class?

 

Contact CapSouth at 800.929.1001 for more information on this concept and how it might apply to your particular situation.  Also visit our website at www.capsouthwm.com 

 

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm.  CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

Red Flags for Tax Auditors

 

No one wants to see an Internal Revenue Service (IRS) tax auditor show up at their door. In 2018, the IRS budget is roughly $1 billion less than it was 8 years ago, down from $12.1 billion in 2010 to $11.2 billion. And even though the number of audits has dropped 40 percent from 2010 to 2017, an IRS tax audit remains a fear for many individuals.[i]

 

The IRS can’t audit every American’s federal tax return, so it relies on guidelines to select the ones most deserving of its attention. Here are six flags that could make your tax return ripe for an IRS audit.

 

The chance of an audit rises with income. According to the IRS, less than 1% of all individual taxpayer returns are audited. However, the percent of audits rises to over 1.5% for those with incomes between $200,000 and $1 million who attach Schedule C and is over 4% for those making more than $1 million annually.[ii]

 

If this year’s 1040 deviates greatly from last year’s, that could raise a red flag. The IRS has a scoring system called the Discriminant Information Function (DIF) that is based on the deduction, credit, and exemption norms for taxpayers in each of the income brackets. The agency does not disclose its formula for identifying aberrations that trigger an audit, but it helps if your return data is within the range of other taxpayers with similar incomes.[iii]

 

If your business passes for a hobby, you could be scrutinized. Taxpayers who repeatedly report yearly business losses on Schedule C increase their audit risk. In order for the IRS not to consider your business as a hobby, it typically needs to have earned a profit in three of the last five years.2

 

Not fully reporting your income boosts the chances of an audit. The IRS receives copies of all of your 1099 and W-2 forms. Individuals who overlook reported income are easily identified and may provoke greater scrutiny.2

 

Alimony discrepancies between exes can raise eyebrows. When divorced spouses prepare individual tax returns, the IRS compares the separate submissions to identify instances where alimony payments are reported on one return, but alimony income goes unreported on the other party’s return.2 Keep in mind that The Tax Cuts and Jobs Act repealed the alimony deduction after December 31, 2018.

 

If you claim rental losses, you had better be a real estate professional. Passive loss rules prevent deductions of losses on rental real estate, except in the event you are actively participating in a property’s management as a developer, broker, or landlord (the deduction is limited to $25,000 and begins to phase out when adjusted gross income exceeds $100,000) or you are devoting more than 50% of your working hours to this activity. This is a deduction to which the IRS pays keen attention.2  

 

To learn more about CapSouth and the services we provide, call our office at 800.929.1001 or visit our website at www.capsouthwm.com

 

CapSouth Wealth Management – Dothan, AL, Atlanta, GA, McDonough, GA, Charlotte, NC

 

The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

 

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable.  CapSouth does not guarantee the accuracy or completeness of the information.  This material has been prepared for planning purposes only and is not intended as specific tax or legal advice.  Tax and legal laws are often complex and frequently change.  Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

 

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third-party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

 

[i] https://www.washingtonpost.com/business/economy/your-chances-of-an-irs-audit-are-way-down-but-keep-it-on-the-up-and-up/2018/04/06/cb6c5794-3779-11e8-9c0a-85d477d9a226_story.html?utm_term=.77485a954004

 

[ii] https://www.kiplinger.com/slideshow/taxes/T056-S001-red-flags-for-irs-auditors/index.html

 

[iii] https://www.cpapracticeadvisor.com/news/12418908/how-to-prepare-your-clients-for-an-irs-tax-audit

 

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