2Q2018  |   Ages 50-65

The Three Investment Stages of Life

I have been involved in the financial services industry since 1999 and, due to my birth date, am part of the baby boomer generation – which there are about 78 million of us in America. I graduated from college in 1975, and at that time guaranteed pensions were the common thread as it relates to retirement opportunities. As time unfolded, pension opportunity became less, and the burden of retirement responsibility shifted from the companies providing the benefit, to the employee accepting the responsibility through participation in employer 401(k) plans and/or self-directed IRA’s of various forms. Three phases of our investment lives have been well documented as a result. Those identified are the accumulation, consolidation, and distribution phases of our investment lives. For the purposes of this article, I would like to focus on the consolidation and the distribution phases. I have observed from clients I serve and various articles I have read that most people are encouraged to start the accumulation phase of their investment life in their 30’s. My perception is that most people generally don’t become real serious about their retirement considerations until they reach about age 50. At some point in time, reality sinks in that people are living longer, medical costs are skyrocketing, and inflation has to be considered upon reaching their retirement goals. At about age 60, people start to become concerned how taxes are going to affect their quality of life in retirement and therefore start to ask questions about the above considerations. I have heard repeatedly that most people feel they will be in a lower tax bracket when they retire and therefore the burden of taxes should be less. Most are familiar with President Trump’s recent TAX CUT AND JOBS ACT of 2017 helping to facilitate their thinking. I would have to agree with that thinking pattern for the most part until age 70.5 is reached. Once this age is obtained, folks become familiar with what is described by some as a TAX TORPEDO. By April 1st of the year following obtaining age 70.5, according to IRS rules, one must take 3.65% from all qualified accounts. The amount withdrawn increases on a prorated basis thereafter each year. As an example, at ages 80 and 90, the amount withdrawn will be 5.35% and 8.77%, respectively, putting pressure not only on federal and state taxes, but also on provisional income taxes on Social Security benefits. In order to calculate provisional income, the taxpayer must add together adjusted gross income, non­exempt interest, plus one-half of the taxpayer’s social security benefits. Once that amount is calculated one must be cognizant of the accompanying tax filing status chart to be aware of one’s tax implications, particularly as it relates to the Social Security benefits.

TAX FILING STATUS PROVISIONAL INCOME SOCIAL SECURITY TAXATION
 Single or Head of Household Less than $25,000 0%
  $25,000 – $34,000 Up to 50%
  More than $34,000 Up to 85%
Joint Filers Less than $32,000 0%
  $32,000 – $44,000 Up to 50%
  More than $44,000 Up to 85%

It is also important to know the above numbers are not adjusted for inflation. Now that we know what contributes to the tax implications under current law, it is also imperative to understand non-triggering events. Provisional income does not include tax deferred build up inside IRA’s, 401(k) plans and annuities, as well as income from Roth IRA’s or non-taxable income from life insurance. From my perspective i t is imperative that at about age 50 and beyond, one must become cognizant of the tax planning opportunities available and begin that discussion with their financial advisor to hopefully minimize the effects of the TAX TORPEDO. If one waits until age 70 for this important consideration it is generally too late.


Gary Walker
Financial Advisor
[email protected]

Chart: https://www.fool.com/knowledge-center/how-to-calculate-provisional-income.aspx

Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a Registered Investment Adviser. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Qualified Plan Advisors (“QPA”).

This commentary is provided for information purposes only and does not pertain to any security product or service and is not an offer or solicitation of an offer to buy or sell any product or service.

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