Financial Newsletter 4.23 - Armstrong Advisory Group

Bye, Bye, Buyout

As businesses attempt to manage their costs due to inflation or poor planning, many are turning to voluntary buyouts as a tool to reduce the size of their workforce. While the details of buyouts may vary based on the specific company, industry, or even role that you find yourself in, there are some general questions that you should be asking in the event your employer comes to you with a potential buyout package:

• What is my long-term plan for working or retirement? This is the first place everyone needs to start. If you were planning on retiring this year and your employer is offering money to retire, that is something that will make you dramatically more likely to accept and more likely to see a buyout as working for you. Likewise, if you’re 40 years old and still have a 20-year career in front of you and uncertain job prospects if you do get laid off, it becomes a much bigger question as to whether accepting the buyout makes sense. Thus, we have to ask additional questions.

• How much money do I receive up-front? What are they going to pay you to leave? Is it equivalent to a year of salary? Six months of salary? If you’re in the middle of a career, knowing how much cushion you have from the buyout allows you to build in time to look for a new job. If you’re at the end of a career, knowing how big the buyout is can help you to determine how much a potential buyout could speed up your retirement plan.

• How much money do I receive later? For both mid-career and near-retirement employees, any compensation that is paid out at a later date should be a consideration as well. Do you receive a chunk of the buyout today and then another piece down the road? Is a portion of it paid every month over a six or twelve-month period?

• Are there any pension or retirement plan considerations? If you do happen to work at a company that still features a pension plan, buyouts can sometimes feature additional years vesting into the pension plan that allow you to boost up your potential retirement income. Make sure you have a clear understanding of whether this is offered and the actual dollars on the table. You may also have the option to select this as a lump-sum or as an annual pension, so examine your choices on that front as well.

• How am I going to cover healthcare costs without a job? Health insurance is one of the biggest costs for Americans, whether retired or not. If you’re approaching age 65, what is your plan to bridge the gap until Medicare? If you’re over 65, have you priced out what Medicare and supplemental insurance coverage will cost you? If you’re not near retirement, is your employer offering COBRA, do you have a spouse who’se coverage you can join, or do you have to go into your state marketplace to look for a plan? Make sure you have a clear understanding of these costs, as they can be significant.

Who is Irma?

When discussing Medicare, you may hear someone mention the name, “Irma.” But what does Irma have to do with Medicare? Who is she, anyway?

In fact, what people are referring to is not a person, but the Income-Related Monthly Adjusted Amount (IRMAA). Ah, IRMAA. This is the adjustment given to your Medicare Part B or Part D premiums based on how much you earned two years prior to the current year. For 2023 premiums, your 2021 income is examined, because you have only just filed your 2022 taxes in the past couple of months.

Medicare is built such that your premiums increase significantly in the event your income goes up. The IRMAA brackets are built on a term called Modified Adjusted Gross Income (MAGI). This includes your Adjusted Gross Income (AGI), plus any tax-exempt interest or interest earned or accrued from U.S. savings bonds used to pay for higher education. Then add in any income from living abroad or in the U.S. territories of Puerto Rico, American Samoa, Guam, or the Northern Mariana Islands that was excluded from your gross income. Yikes. That is your MAGI that is used in the IRMAA brackets. Here is what the IRMAA brackets look like, according to the Social Security Administration:

File Individual Tax Return	File Joint Tax Return	Married Filing Separate	Part B Monthly Premium
$97,000 or less	$194,000 or less	$97,000 or less	$164.90
Above $97,000 – $123,000	Above $194,000 – $246,000	N/A	$230.80
Above $123,000 – $153,000	Above $246,000 – $306,000	N/A	$329.70
Above $153,000 – $183,000	Above $306,000 – $366,000	N/A	$428.60
Above $183,000 – $500,000	Above $366,000 – $750,000	Above $97,000 & less than $403,000	$527.50
Greater than $500,000	Greater than $750,000	$403,000 or more	$560.50

As you can see, the monthly premiums go up rather quickly as your income increases. You might think that you are unlikely to see incomes that high, but consider for a moment the sale of a property. Imagine you purchased a two-family in South Boston in 1980 and spent $50,000 on it. Today, you go to sell it for $2 million. Guess which IRMAA bracket you end up in? You guessed it – the highest one, but only for the year two years after you sold the property.

What Are You Witholding?

As you file your taxes, you’ll be able to see what your tax refund or required payment looks like to close out 2022. This gives you a great opportunity to assess whether you should be updating your tax withholding for 2023. Here are some key items to consider:

Are you comfortable with the size of your refund or payment from last year? Do you want to tweak your withholding to see a different result when you file next year?
Are you retiring this year? Have you discussed with a tax professional how much to withhold from Social Security, a pension, or from your portfolio income? Have you discussed with a financial advisor how to manage the income from these different sources? If you’d like to chat with a financial advisor regarding your planning, click here to set up a time with a member of our team.
Are you starting required minimum distributions (RMDs) this year? Do you know how much you need to withhold from those distributions?
Do you have tax deductions that are ending or starting in 2023? Have you considered how to adjust your tax withholding if you are no longer seeing similar deductions to prior years?
Did your spouse pass away last year? You may now be filing as a single individual and may need to look at the new tax brackets for single filers.

These are just some of the items for you to consider at this point in time, and as always, any time you are considering making changes to your tax withholding, you should consult with a qualified tax advisor when doing so.

Give Me An Estimate

Estimated taxes are one of the ways that the federal government makes sure it can pay its bills on time throughout the year. If you are an employee of a company, you typically have your taxes withheld from your paychecks on a regular basis. Many people collecting Social Security benefits or pension benefits have taxes taken out at the source as well. However, if you have income from other sources, such as an investment portfolio, a business you operate, or real estate you own, you may file estimated taxes throughout the year in order to be in compliance with the tax code and avoid having to pay penalties for underpayment throughout the year.

If you file estimated taxes, the first estimated tax payment for 2023 is due on April 18, 2023. If you aren’t sure whether or not you file estimated taxes, or are wondering whether you should file estimated taxes this year, please consult with a qualified tax advisor.

Now Give Me Credit

One of the toughest challenges that many families are dealing with today is managing the amount of credit they have outstanding. According to data from the Federal Reserve, Americans’ credit card balances have risen by over $200 billion since May of 2021. The decisions that you make today in dealing with these debts can have major impacts on your future, in particular when it comes to future borrowing. The prime culprit here is your credit score, put together by the major credit bureaus in order to build a picture of your creditworthiness to any lenders you may work with in the future.

Credit scores have five major factors:

Payment History – Do you have any missed payments in your past? How many? Are they recent or from years ago? Your past history of paying back money lent to you tends to be a good predictor of your future behavior. Lots of people may get into trouble at one time or another, so one missed payment isn’t the end of the world, but it is a negative mark, as it does suggest that you may have had trouble paying bills, if even for a month. Longer missed payment issues tend to represent bigger problems, and as such, they will result in larger reductions in your credit score.
Current Balances and Amounts Owed – Maxed out all your credit cards and their credit limits? That’s going to hurt your score. Why? Because it suggests that if you have credit made available to you, you are putting yourself in danger of a gap in your payment history because you are borrowing the maximum amount allowed and not making a strong effort to reduce that amount or pay it off over time. This may happen to most people at one time or another. And one month of high usage won’t hurt you very much. But consistently keeping your balances near the top end of your credit limit will significantly impact your score.
Length of Credit History – Did you just open your first credit card or car loan this year? Well, you may have a great payment history and low balances, but you just don’t have much of a track record. And that matters to lenders. Not as much as your payment history or the balances outstanding, but it still matters. It may take you several years to build a strong enough history to get your credit score up as high as you want it.
New Credit – While you need to open new accounts to start building a credit history, new credit inquiries do negatively affect your credit score in the short-term. Why? Because until there is a proven track record of paying back those new accounts, they represent additional risk to lenders if you don’t pay them back. Your credit score is negatively impacted in the short term to account for the additional risk you’ve taken on recently.
Types of Credit – This is the one that can be a challenge for people starting out. Effectively, lenders want to see that not only can you pay back a credit card bill every month, but also that you can pay back loans that are larger, such as car loans or mortgages. This makes up a relatively small portion of your score, but it does create an incentive to start borrowing for things like cars and homes to boost up your score.

Now that we’ve covered what goes into your credit score, let’s look at how you boost it:

Make your payments on time. There isn’t any further explanation needed. Pay your bills when you need to.
Don’t max out your credit lines. Show that you can responsibly handle credit that is given to you, and that you aren’t simply trying to pile up unpaid bills on a credit card or home equity loan.
Get started in the credit marketplace early. Even if you don’t plan on using it very much, have a credit card opened in your 20s, as it starts to build your track record of using credit responsibly.
Don’t open new accounts within 2 years of a big purchase. If you have a big purchase coming up soon, try not to take on any other new credit within a couple of years of that purchase. It may help to boost you score a few points and potentially get you a lower rate on that loan.
Do not take out a loan just for the sake of buying a car or house. This goes against trying to diversify into different types of credit. Diversity of credit makes up 10-15% of your credit score. It’s not worth reaching to buy a car or home on credit just so you can boost your score. If it happens naturally, that’s great. But you may get into trouble trying to max out your score by taking out different kinds of credit when it’s not right for you. Unlike the previous four areas, where playing along responsibly can help you, be careful on this item.

Schedule Your Review

Tax time is a great time to look at your overall financial plan. Our financial advisors are happy to meet with you to discuss your situation and how we may be able to assist you in crafting a financial plan that is right for your situation. Click here to schedule a time to speak with a member of our team about your planning.

Delivered to your inbox.

We aim to release two newsletters a month, one focused on financial planning and another on investing. If you are interested in having our monthly newsletters delivered directly to your email inbox, choose what topic you prefer and submit this form. Thank you for your interest in our newsletters.

Our mailing address is:
144 Gould Street, Suite 210
Needham, MA 02494

The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

Armstrong Advisory Group, Inc. does not offer tax or legal advice and no portion of this communication should be interpreted as legal or accounting advice. You are strongly encouraged to seek advice from qualified tax and/or legal experts regarding any tax or legal matters relevant to you.

ARMSTRONG ADVISORY GROUP, INC. – SEC REGISTERED INVESTMENT ADVISER
The information contained herein, including any expression of opinion, has been obtained from or is based upon, sources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy, sell or hold or a solicitation of an offer to buy, hold or sell the securities, if any referred to herein.

All investments involve the risk of potential investment losses. An investor cannot invest directly in an index. Diversification seeks to reduce the volatility of a portfolio by investing in a variety of asset classes. Neither asset allocation nor diversification guarantees against market loss or greater or more consistent returns. Bonds are subject to interest rate risk and if sold or redeemed prior to maturity, may be subject to additional gain or loss. Armstrong Advisory does not provide any tax or legal advice; please consult with your tax and legal advisers on such matters.