In late December 2020, Congress passed an additional Coronavirus Relief Package as a part of the Consolidated Appropriations Act of 2021. The bill contained guidance on the original Paycheck Protection Program (PPP) that was made available to small businesses in April 2020 as well as announced an additional round of the loan program for certain eligible businesses.
Businesses who received PPP loan under the first round finally have guidance on the taxability of their forgiven loans. All forgiven loans are still not subject to income tax. Congress also cleared up that any qualified expenses paid by the loan proceeds are still deductible in 2020.
For any businesses that haven’t used their first round of funds, there are new additional expenses that the loans can be used for: operations expenditures (software that assists with the operations of the business), property damage costs (related to vandalism or looting that occurred in 2020), supplier costs (payments to suppliers of essential goods), and worker protection expenditures (costs associated with meeting CDC guidelines such as masks, sneeze guards, etc.).
If a business missed out on the initial round of PPP loans, additional funds have been allocated to the program and applications should hopefully begin to processed the week of January 11th.
The second round of PPP loans are available to businesses that have already received and spent the first round. Applications should likewise begin to be accepted in mid-January 2021. The caveat with the second round of PPP is the business must have experienced a drop in revenue of more than 25% in any quarter of 2020 compared to that same quarter in 2019. This second round is also only available to businesses with less than 300 employees (down from 500 employees in round one).
A common guideline is that you should aim to replace 60-80% of your annual pre-retirement income. You can replace it using a combination of savings, investments, Social Security, and any other income sources (part-time work, a pension, rental income, etc.). The Social Security Administration website has a number of calculators to help you estimate your benefits.
It’s important to consider how your expenses will change in retirement. Some, like health care and travel, are likely to increase while some recurring expenditures will go down. You no longer need to dedicate a portion of your income to saving for retirement. You may have paid off your mortgage and other loans. However, you may wish to increase your traveling for the first few years of retirement and then start making gifts to family in later years. This may require you to aim to replace 100% or even 110% of pre-retirement income.
Regarding taxes in retirement, most retirees have been saving for years in their pre-tax 401(k) or 403(b) workplace retirement accounts. One benefit of these plans is that while contributing, you did not pay income tax on any of the income you deferred to your account. The downside to this is in retirement, you will have to pay tax at ordinary income tax rates.
The great news for most retirees is that their post-retirement tax brackets are typically lower than their tax brackets during their working years. This makes saving while working into a pre-tax account like a 401(k) or IRA a great option. However, if you have a substantial pension benefits or a large Required Minimum IRA Distribution, you could end up in a higher tax bracket post-retirement.
If you weren’t aware, pre-tax retirement accounts like 401(k)s and IRAs have an IRS mandate to begin taking distributions by age 72. These Required Minimum Distributions (RMDs) can be quite the surprise for folks that will not need the full distribution but will be required to take them anyway.
If this sounds like it could be you, there are a number of tax planning techniques that can be implemented to help lower your taxes in retirement. We recommend working with a financial planner that specializes in tax planning in conjunction with your tax professional to help you plan for future tax consequences.
Cash Flow Planning
A great place to start with determining how much you’ll need to retire is by creating a written cash flow plan.
The best place to start with determining your ability to retire is to create a detailed record of your required expenses. We like to break up these expenses into two main categories: living expenses and variable/periodic expenses.
Living expenses should be expenses that aren’t expected to change drastically on an annual basis and are required for your standard of living. Utilities, gas, groceries, and personal care are common examples of living expenses. Periodic/variable expenses are items you are planning to include in your spending, but may be more flexible in the amount you spend. Examples may include vacations, dining out, and other lifestyle spending. You would also want to include any future expenses such as roof replacement and vehicle purchases.
Once you have a clear list of your required monthly/annual expenses you will know what your income need will be in retirement. (Pro tip: the first time you create a cash flow plan, leave a bit of wiggle room as most people miss a few things)
Once you know how much income you’ll need, you can start creating a plan to strategically liquidate savings in retirement. This is where is gets a bit more tricky.
Many people are great at the initial creation of their cash flow plan but forget the silent killer of long-term planning: inflation. Inflation is defined as: “A general increase in prices and fall in the purchasing value of money.” In simple terms, a dollar today will not be able to purchase the same amount of goods as a dollar in the future as prices for goods increase over time. The average cost of a loaf of bread in 1990 was 75 cents whereas today it’s over three dollars.
General inflation has been about 2-3% on average over time. The cost of healthcare has increased higher than average inflation (typically 8.5%). The average cost of college has increased by 7%. Accounting for inflation is one big missing variable many folks planning retirement on their own often overlook.
We use a real rate of return in our clients’ Financial Plans so that we can accurately understand the purchasing power of future dollars. We use real rate of return by removing inflation from income and expenses (except for medical and college expenses) and the rate of return on investments.
For medical expenses, we assume a 5.5% inflation rate. For college costs we assume a 4% inflation rate. For your investments, we use a real rate of return of 4% (based on a 60% equity/40% fixed portfolio). This is an 7% rate of return – less an inflation rate of 3%. (The historical rate of return for stocks is 10% and bonds is 6%).
Once you have your cash flow plan and have accounted for inflation, you can now start to determine how much you will actually need for retirement.
In celebration of our 30 -year anniversary, we are also offering our Initial Financial Overview at a reduced cost of $300 (normally $775).This service is a personalized 2-hour review of your entire financial situation. From this meeting, we will provide you with specific recommendations in written form. Since we do not sell any products or accept commissions, our recommendations will always be objective and free from bias. Our ultimate goal is to help you get clarity on your current situation and provide you with steps on how to transition successfully and confidently into retirement.
If this sounds like something you would be interested in, or if you would like to schedule a complimentary introduction call, you can schedule a time using the link below:
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While the biggest shopping day of the year is this week and Christmas is right around the corner, this article talks about ways that you can shop this Friday while Covid cases have been on the rise. Normal Black Friday’s have shoppers in massive crowds and in close proximity to each other – most likely not this year! With Covid deaths averaging 1,300 per day, public health officials have issue bold warnings not only about shopping, but getting together for Thanksgiving day itself. The ideas that this article explores are as simple as spreading your shopping out over several days versus just one day and doing more of your shopping online. Be safe and happy shopping.
Now that we have hopes for a vaccine to fight against COVID-19 from Pfizer, a Goldman Sachs analyst is saying that this is an even more important development than the US presidential election and the new policies that may come from that. Goldman boosted their year-end price target on the S & P 500 Index to 3,700 from 3,600. They are also targeting 4,300 by the end of 2021 and 4,600 by the end of 2022. One reason why this is so significant is that they are seeing positive markets and a positive economy over the next two years. I think we would all agree that as little as 6 months ago, a lot of people were expecting a prolonged recession that could last years.
The presidential election may take weeks to resolve itself but we believe after we have a resolution, another stimulus package will come to the American people. Mitch McConnell wants a package no more than $1.5 Trillion while Democrats are wanting a package in excess of $2.2 Trillion. This article takes a look at different scenarios on whoever is elected and whoever takes the Senate. We believe that the package could come as early as December and as late as February. A lot of economists fear that the longer we wait for a stimulus package, the more the economy could be hurt.
Amazon Prime day begins today and will run through tomorrow evening as shoppers begin to look for deals and prepare for the Holiday season! Americans are expected to spend billions of dollars in the next two days as they start seeking out bargains. The discounts are not only expected to run on high ticket priced items but also on Amazon-brand essentials. Unfortunately, shoppers won’t see major bargains this week on some items because of the Covid pandemic such as high-demand items. Some extra advice from the article is not to buy oversize items like TV’s and furniture and to wait until later to buy toys and winter clothing. Happy shopping.
We all know that the airlines industry, along with cruise lines, hotels and restaurants have been some of the hardest hit industries since Covid-19 hit but we are starting to see some recovery in some of these companies. United Airlines 52 week high was $95.16. They are currently trading at 1/3 of that price at just $36.88. Unless Congress approves another $25 Billion bailout in the airlines industry, United is planning on furloughing as many as 16,000 workers – this is fewer than originally expected. The reason for the number being significantly less than originally expected is that many employees have already taken early retirement, buyouts or long-term leaves of absence. Any way that you look at it, this is better news for the airline industry and we hope that travel picks up sooner rather than later.
When it comes to going to the Social Security office, a lot of people cringe at the thought. Long lines and wait times are just the beginning and it doesn’t get much better. In today’s age, you can manage your own Social Security profile and execute many critical moves yourself online. By setting up a free MySocialSecurity account at www.ssa.gov, you can manage many details as well as protect against fraud. On this site you can do things like estimating your Social Security benefits, reviewing your earnings history, apply for Medicare benefits and even appeal a Social Security decision. Take a look at the website and pull up your current benefits statement.
The IRS announced Monday that it has begun accepting Forms 1040-X, Amended U.S. Individual Income Tax Return, electronically, which it calls a “major milestone in tax administration” (IR-2020-182). According to the IRS, it has put years of effort into developing the ability for taxpayers to e-file Form 1040-X, “and the enhancement allows taxpayers to quickly electronically correct previously filed tax returns while minimizing errors.” The IRS announced in late May that Form 1040-X e-filing was coming sometime this summer.
I have personally been curious to what people did with the $1,200 stimulus checks they received earlier this year. More than half of the people who received checks used it to pay down debt while another one third saved their check. One of the major goals for these checks was to help spur economic activity via consumer spending which is one of the driving forces of the U.S. economy. So, it appears that only approximately 15% of people who received checks used the funds for this purpose. We await to see if there will be more stimulus after the last round.