Why Baby Boomers Need a Financial Advisor

For baby boomers entering or already in retirement, financial decisions have never been more complex—or more consequential. You’ve worked a lifetime to build your wealth, and the stakes are high: protecting your savings, generating reliable income, managing taxes, and leaving a meaningful legacy. The challenge isn’t just growing assets—it’s using them wisely, sustainably, and with confidence.

At Good Life Wealth Management, we understand that investors between 55 and 75 face a unique set of financial questions that require expertise, objectivity, and proactive planning. That’s where partnering with a fiduciary financial advisor and Certified Financial Planner™ (CFP®) can make a measurable difference in your family’s financial well-being.

The Challenges Facing Affluent Pre-Retirees

For individuals and couples with $1 million to $5 million in investable assets, retirement planning is both an opportunity and a challenge. While you may have more financial flexibility than most, higher net worth also brings more complexity—and greater tax exposure. Here are the most common issues affluent pre-retirees face:

Decumulation Strategy:
You’ve spent decades accumulating assets. But when and how should you begin drawing from them? Without a plan, it’s easy to pay unnecessary taxes or deplete accounts too quickly. Coordinating withdrawals from taxable, tax-deferred, and Roth accounts requires precise planning to maximize after-tax income and longevity of assets.
Tax Management and Roth Conversion Timing:
The years between retirement and age 73 (when RMDs begin) often present the best window for Roth conversions and other tax-optimization strategies. A fiduciary advisor models these moves to minimize lifetime tax liability, not just this year’s return.
Market Risk and Sequence of Returns:
Even affluent retirees can face shortfalls if markets decline early in retirement. A thoughtful investment strategy—emphasizing risk management, income diversification, and behavioral discipline—can protect against that risk.
Rising Health Care and Long-Term Care Costs:
With health care inflation outpacing general inflation, even wealthy families must plan for potentially hundreds of thousands of dollars in out-of-pocket costs. A CFP® can help evaluate insurance options, long-term care funding, and how these expenses fit into your financial plan.
Estate and Legacy Planning:
The SECURE Act has changed how beneficiaries inherit IRAs, and tax laws are constantly evolving. High-net-worth families need coordinated strategies among their advisor, attorney, and CPA to preserve wealth and ensure an efficient, meaningful transfer to the next generation.
Behavioral and Emotional Challenges:
Many successful individuals are highly capable but still feel uncertain when managing large sums in retirement. The shift from saving to spending, and from working to living off your portfolio, can feel uncomfortable. A trusted fiduciary advisor provides reassurance through data-driven planning, transparency, and accountability.

Why Work with a Fiduciary Financial Advisor?

Not all financial professionals are required to act in your best interest. Brokers and agents may recommend products that pay higher commissions, even if they’re not ideal for you. A fiduciary advisor, on the other hand, is legally and ethically bound to act solely in your best interest—without product incentives or conflicts of interest.

At Good Life Wealth Management, our fiduciary standard means:

Objective advice. We recommend strategies because they fit your goals—not because of any outside incentive.
Fee transparency. Our compensation is clear, predictable, and aligned with your success.
Comprehensive oversight. We coordinate your investments, taxes, estate plan, insurance, and retirement income strategy under one cohesive plan.

The Value a CFP® Brings to Your Financial Life

A Certified Financial Planner™ brings a level of rigor and expertise that goes beyond investment management. CFP® professionals complete advanced training and adhere to strict ethical standards, focusing on every aspect of your financial well-being.

For baby boomers, that means:

Customized Retirement Income Planning: Creating a tax-efficient withdrawal strategy that provides predictable income without depleting principal too soon.
Investment Management Tailored to Your Goals: Balancing growth, income, and preservation through a disciplined, evidence-based approach.
Tax-Aware Portfolio Construction: Using asset location and tax-loss harvesting to improve after-tax returns.
Social Security and Medicare Optimization: Timing benefits strategically and avoiding costly IRMAA surcharges.
Charitable and Legacy Planning: Aligning your wealth with your values through donor-advised funds, QCDs, and trust structures.
Behavioral Coaching: Helping clients avoid emotional mistakes during volatile markets, maintaining focus on long-term goals.

Studies by Vanguard and Morningstar have shown that working with a professional advisor can add 3% or more per year in net returns through better behavioral discipline, rebalancing, and tax efficiency. But beyond numbers, the real value of a trusted advisor is peace of mind—the confidence that you’re on track and making wise decisions.

How a Fiduciary Advisor Simplifies Complexity

Affluent families often have multiple accounts, business holdings, or real estate investments. A fiduciary advisor serves as your financial quarterback, bringing everything together into one cohesive strategy.

We help you see the full picture—net worth, cash flow, taxes, and investments—in one plan.
We coordinate with your CPA and attorney to ensure that tax and estate decisions align.
We proactively adjust your plan as tax laws, markets, and life circumstances change.

This holistic approach ensures your wealth works efficiently for you today, while positioning your legacy for tomorrow.

The True Benefit: Financial Confidence and Freedom

Ultimately, the goal of financial planning isn’t just to accumulate wealth—it’s to create the freedom to live your best life. For baby boomers entering retirement, that means:

Knowing your income is secure regardless of market conditions.
Paying only the taxes you owe—and not a dollar more.
Protecting your spouse and family from uncertainty.
Having a clear legacy plan that reflects your values and priorities.

At Good Life Wealth Management, we believe your retirement years should be a time of clarity, not confusion; of confidence, not anxiety. Working with a fiduciary CFP® ensures that every financial decision is guided by your goals, your timeline, and your values.

Take the Next Step Toward Financial Clarity

If you’re approaching retirement or already there, now is the time to build a comprehensive plan. The right guidance today can make all the difference over the next 20–30 years.

We invite you to schedule a conversation with Good Life Wealth Management to see how our fiduciary, evidence-based approach can help you protect, grow, and enjoy your wealth with confidence.

Falling Interest Rates: Why MYGAs Belong in Your Portfolio

The Federal Reserve cut the Fed Funds rate by 0.25% this week, with more reductions likely ahead. As inflation cools and employment weakens, bond yields are already dropping. This is a problem for retirees: many bonds are callable, meaning issuers redeem them early and reissue at lower rates. Investors who held 5.5% and 5% bonds are seeing them called and replaced with yields closer to 4%.

For retirees relying on bond income—or taking RMDs—this environment means lower expected returns from balanced portfolios. And with U.S. stocks expensive and possibly due for a correction, conservative investors should not depend on equities for stable income.

Enter the MYGA

A MYGA (Multi-Year Guaranteed Annuity) is a fixed-rate annuity that behaves like a CD but often pays more. MYGAs currently offer rates in the mid-5% range and unlike many bonds or CDs, they are non-callable. That means your rate is locked for the full term (3–10 years), even if market yields fall.

Benefits of MYGAs:

Guaranteed fixed rate of return, non-callable.
Principal protection—very safe.
Tax-deferred growth until withdrawal.
Option for tax-free rollover at maturity (1035 exchange).
Creditor protection in many states.
Nearly 2% higher than comparable 5-year Treasury (5.6% versus 3.7%).

The Fine Print:

Limited liquidity; surrender charges for early withdrawals.
Some MYGAs allow interest to be withdrawn, others none.
Withdrawals before age 59½ may face a 10% IRS penalty on earnings.
Best suited for investors with sufficient liquidity elsewhere.

Why MYGAs Belong in Portfolios Now

With rates expected to trend lower, locking in today’s 5%+ yields through a MYGA can secure income for years. A callable bond at 5.5% may vanish if rates fall, but a 5.5% MYGA will not. This makes MYGAs particularly attractive for retirees and conservative investors looking for income stability.

Strategies for Using MYGAs:

Fixed Income Replacement: Substitute part of your bond allocation with a MYGA to boost yield and avoid call risk.
Laddering: Buy multiple MYGAs with staggered maturities to improve liquidity and reinvestment flexibility.
RMD Support: Use MYGA interest or partial withdrawals to help cover RMDs without tapping into equities in down markets.

Is a MYGA Right for You?

If you’re over 59 1/2, have significant fixed-income holdings, and don’t need immediate access to these funds, a MYGA may be an excellent fit. For many retirees, locking in 5%+ guaranteed and tax-deferred is far more attractive than taking chances on callable bonds or expensive equities.

Roth Conversions After 60: When They Make Sense—and When They Don’t

Posted On September 10, 2025 By Scott Stratton, CFP(R), CFA In Financial Planning, Tax Strategies / No Comments

For investors over age 60 who have significant assets in Traditional IRAs or 401(k) accounts, Roth conversions after 60 can be one of the most powerful financial planning strategies. Conversions are often a multi-year process and can yield significant benefits in terms of taxes, RMDs, and estate planning. Each year that you skip a Roth conversion may be a lost opportunity.

In this article, we’ll explain how Roth conversions work, when they make sense, and key factors affluent retirees should consider before deciding.

How Roth Conversions Work

Traditional IRA, 401(k), and 403(b) contributions are pre-tax. The money grows tax-deferred, but withdrawals are taxed as ordinary income. With a Roth conversion, funds are moved from a Traditional IRA into a Roth IRA. The converted amount is taxed in the year of conversion, but once inside a Roth, the funds grow tax-free for life.

Benefits of a Roth Conversion After 60

Lower Taxes in Retirement – If you are in a lower tax bracket now than you expect to be in later years, converting makes sense.
Avoiding Required Minimum Distributions (RMDs) – Roth IRAs have no lifetime RMDs, unlike Traditional IRAs.
Estate Planning Advantages – Heirs inherit Roth IRAs income-tax-free. Under the SECURE Act, most non-spouse heirs must empty inherited IRAs within 10 years, making Roths especially valuable.
Tax Diversification – Having both taxable and tax-free accounts gives you flexibility in managing retirement withdrawals.

Key Considerations for Roth Conversions After 60

Tax Brackets and Timing

Income taxes are relatively low today, but they may rise in the future. For many affluent investors, the sweet spot for conversions is the period between retirement and age 73 (when RMDs begin).

Rather than converting everything at once, many retirees use a multi-year bracket-filling strategy—converting just enough each year to stay within a target tax bracket.

Social Security and Provisional Income

If you have not yet started Social Security, there is a window of opportunity for conversions. Once benefits begin, your taxable income will be higher, which might put you into a higher tax bracket or reduce the amount you want to convert to a Roth.

Medicare IRMAA Surcharges

Conversions increase Modified Adjusted Gross Income (MAGI), which determines your Medicare Part B and D premiums. Crossing IRMAA thresholds ($106,000 single, $212,000 married, 2025) can increase costs significantly, so conversions should be planned carefully.

Net Investment Income Tax (NIIT)

Roth conversions can push other income above NIIT thresholds ($200,000 single / $250,000 married), triggering a 3.8% surtax on investment income.

State Taxes and Residency

Where you live matters. Converting before moving to a no-tax state could mean unnecessary tax costs. Conversely, converting before moving to a higher-tax state may be wise.

Charitable Giving and QCDs

If you plan to leave IRA assets to charity or use Qualified Charitable Distributions (QCDs) after age 70½, Roth conversions may be less valuable.

Legacy and Estate Planning

Affluent retirees often want to maximize what heirs receive. For families subject to the estate tax ($15 million single, $30 million married in 2026) Roth conversions may reduce taxable estate growth while creating tax-free wealth for beneficiaries.

Who Should Consider Roth Conversions After 60?

Retirees in a temporarily lower tax bracket.
Those with large Traditional IRAs who don’t need RMD income.
Affluent couples with taxable estates who want to leave heirs tax-free assets.
Retirees in low-tax states planning, before moving to a higher-tax state.
Investors with long investment horizons who can let Roth accounts compound.

When a Roth Conversion May Not Make Sense

If you expect to be in a significantly lower tax bracket later.
If IRA assets are destined for charities.
If paying conversion taxes requires liquidating investments with gains or dipping into retirement assets.

Final Thoughts

Roth conversions after 60 can be a powerful wealth management tool, but the decision depends on your tax bracket, retirement timeline, charitable goals, and estate plan. Affluent retirees should run multi-year tax projections and coordinate conversions with Social Security and Medicare planning. We can assist with this planning and help you with your decision.

Where possible, pay conversion taxes with non-retirement assets to maximize the amount that goes into the Roth. With careful planning, a Roth conversion strategy can provide tax savings, estate planning advantages, and peace of mind in retirement.

How Investors Can Thrive in 2025’s Uncertain Economy

Posted On September 1, 2025 By Scott Stratton, CFP(R), CFA In Financial Planning / No Comments

If you’ve felt like following the news this year is like trying to drink from a firehose, you’re not alone. Every headline out of Washington seems more “unprecedented” than the last. Political upheaval, tariffs, inflation fears — it all feels deeply concerning, especially for investors with significant wealth at stake.

And yet, behind the noise, the markets are quietly teaching us timeless lessons.

Yes, what happens in Washington matters. Yes, policy decisions will impact the economy, interest rates, and your portfolio. But if 2025 has proven anything, it’s this: the single biggest risk to your wealth isn’t Trump, tariffs, or the next headline — it’s how you react.

The Lessons of 2025

This year has been a masterclass in what works — and what doesn’t — when investing during turbulent times:

Market timing has been a disaster.
Buy and hold has worked beautifully.
Diversification has been your best defense.

Consider just a few examples:

At the start of 2025, U.S. stocks were dominating international markets. Many investors threw in the towel on foreign equities — just in time to miss out. Year-to-date, international stocks are up 23.3%, compared to 10.8% for the S&P 500.
In April, when tariffs were announced, U.S. stocks plunged 20%. The consensus was clear: disaster was coming. But if you sold, you locked in losses. Since that bottom, the market has rebounded 30%.
Small caps? Down slightly through July… then up nearly 9% in August alone.

The takeaway is simple: trading the headlines hasn’t worked. Staying the course has.

A Reminder From Market History

Corrections are normal. Bear markets are normal. What matters is how you position yourself before they happen.

Since the Global Financial Crisis in 2009, the S&P 500 has grown nearly 10x (including dividends). Along the way, we’ve seen terrifying headlines, recessions, pandemics, political chaos — and yet, long-term investors have been rewarded.

Even in 2025, despite fears of overvaluation, the S&P has already made 20 new all-time highs. The reason isn’t mysterious: when there are more buyers than sellers, stocks rise. Concern is healthy. Panic is not.

Investing in an Age of Uncertainty

You don’t need to “do nothing” to be successful. But you do need a disciplined strategy that keeps you from reacting emotionally. Here are the principles that matter most for protecting and growing wealth in uncertain times:

Control what you can. You can’t control the market, but you can control your saving and investing habits. Automate contributions and focus on building wealth consistently.
Use bonds for peace of mind. By building bond ladders for 5 years of income, you avoid being forced to sell stocks at the wrong time. For many investors, a mix between 80/20 and 50/50 (stocks/bonds) provides both growth and stability.
Lean into expected returns. Today, that means emphasizing international stocks, value stocks, and equal-weighted indices over pure U.S. growth and cap-weighted benchmarks.
Keep costs and taxes low. Low-cost ETFs give you broad diversification, minimal turnover, and greater tax efficiency.

The Bottom Line for Wealthy Investors

The political and economic headlines of 2025 may be unsettling — even frightening. But history, data, and this year’s results all point in the same direction: wealth is built by staying invested, diversified, and disciplined.

The “smart money” isn’t chasing the news. It’s sticking to timeless strategies that preserve and grow wealth across decades, not news cycles.

At Good Life Wealth Management, we help investors like you cut through the noise and focus on what truly drives long-term success. If the headlines have you worried — about Trump, the economy, or your portfolio — let us guide you with strategies built for resilience, not reaction.

Because while Washington may feel chaotic, your financial future doesn’t have to.

The Tariff Tantrum: Why Patience Still Pays

Posted On April 6, 2025 By Scott Stratton, CFP(R), CFA In Financial Planning /

This week, the stock market threw a tariff tantrum — and for good reason. Economists, business leaders, and investors alike agree: the administration’s sudden new tariffs are bad news.

Starting this week, U.S. tariffs include:

20% on imports from the European Union
24% on goods from Japan
34% on products from China
Overall range: a minimum of 10%, and up to 50%

While the White House describes these as “reciprocal,” they’re not actually based on other countries’ tariffs on U.S. goods. Instead, the new tariffs are tied to each country’s trade deficit with the U.S. — the higher the deficit, the steeper the tariff.

Why Tariffs Backfire

The logic behind these tariffs might sound simple: make imports more expensive so people buy American. Unfortunately, that’s not how the real world works.

Other countries are retaliating. They’re imposing their own tariffs on U.S. goods, making American exports more expensive — and less competitive — overseas.
Prices are rising. Estimates suggest these tariffs could cost American households an extra $2,100 to $4,600 a year.
Factories can’t pop up overnight. Even if demand shifted suddenly, new U.S. production would take 3–5 years to ramp up.

Bottom line? These tariffs aren’t boosting exports or domestic manufacturing — they’re just increasing costs. It’s a lose-lose proposition for families and businesses alike.

The Market’s Harsh Reaction

The response on Wall Street was swift — and brutal. On Thursday and Friday, U.S. stocks lost $6.6 trillion in value. That’s the largest two-day drop in history.

As the saying goes, “Stocks take the stairs up and the elevator down.” The ride down can be fast and painful — but it’s part of the journey.

Panic Will Not Profit

Yes, investors are panicked. And yes, we’ll likely see more selling early this week. But am I selling anything in my own portfolio? Absolutely not. Am I advising clients to “get out” of the market? Again, no.

I don’t have a crystal ball, but I do have history on my side. And if history tells us anything, it’s this:

Panic selling never works.

Here are some interesting charts on market corrections. First, from Vanguard, here are US Equity drawdowns since 1980.

Since 1980, the U.S. stock market has been in correction territory (down 10% or more from recent highs) about 30% of the time. Bear markets — drops of 20% or more — happen, too. And recovery can take time.

Looking at monthly returns, the next chart shows up months versus down months.

You can see that there are nearly as many down months as up months. The stock market does not go straight up nor does it go down forever. It is volatile, with good months and bad months, and good years and bad years.

These charts show the volatility of stocks, but mask the cumulative gains. In fact, since 1980, the S&P 500 has delivered a total return of 16,415%, or about 11.99% annually. That’s the big picture — and it’s why long-term investing works.

No Pain, No Gain

In 2009, I saw that investors who got out did worse than those who did nothing. The same thing happened in March of 2020. The human brain often tells us to do the wrong thing at the worst time. But real success comes from staying invested — even when it’s uncomfortable.

Trying to time the market rarely works. But owning a simple index fund and not selling? That’s the most likely way to access the 11.99% historical returns over time.

We’ve built your portfolio to withstand volatility. Most of our clients have 30% to 50% in bonds, including five-year bond ladders for retirees. That means we don’t need to sell stocks when they’re down.

What We Can Do Now

Even in market downturns, there are smart moves we can make:

Rebalancing: When stocks are down, it’s a chance to buy — not sell.
Tax-loss harvesting: Use losses to offset gains and reduce your tax bill.
Dollar-cost averaging: If you’re still investing, this is your opportunity. Stocks are on sale.

We’ve been saying for a while that the market, especially tech, was overvalued and due for a pullback. Bubbles don’t pop because of valuations — they pop when an external shock happens. This tariff tantrum may have simply triggered what was already overdue.

Keep The Faith

It’s easy to focus on the negative — but don’t let fear cloud your long-term vision. Investors who panicked in 2001, 2009, and 2020 missed out on the powerful recoveries that followed.

I’m no fan of these tariffs. I hope they’re just a negotiating tactic — or that billionaires who lost hundreds of millions of dollars this week can push for a better path. But regardless of what happens next, I know this:

We’ve seen this before, and we’ve come out stronger every time.

Each investor should have a solid financial plan. That plan should account for volatility — even when it’s driven by unpredictable policy. We’re not selling based on headlines. We’re staying focused on long-term goals.

If you’re feeling uncertain or want to revisit your plan, don’t hesitate to reach out. That’s what I’m here for.

Stay steady. Stay smart. And hang in there.

Social Security to End WEP and GPO

Posted On December 27, 2024 By Scott Stratton, CFP(R), CFA In Financial Planning /

In a surprise move, Congress passed the Social Security Fairness Act, which will end the WEP and GPO programs. The WEP (Windfall Elimination Provision) and GPO (Government Pension Offset) reduced Social Security benefits for retirees who receive a government pension that did not participate in Social Security. The legislation is headed to President Biden, who is expected to sign it into Law.

What are the WEP and GPO?

Some government jobs do not participate in Social Security, as they are covered by their own pension program. This includes many police, firefighters, some state employees, and about 40% of teachers. There are about 2.5 million such retirees today. Many who receive a pension also had other jobs (before, after, or during) where they paid into Social Security. The WEP/GPO programs reduced Social Security benefits since these retirees were already receiving another government pension. These were designed to prevent retirees from “double dipping” into two government pensions and have been around since 1983 and 1977.

Employee participation in Social Security was up to state and local governments. For example, teachers in Texas do not participate in Social Security but teachers in New York do. So, the teachers in TX do not have FICA withheld from their paychecks, but do have 7.7% withheld to pay into the Texas Teachers Retirement System. The teachers in NY have money withheld for both Social Security and for the state teachers benefits. And the teachers from NY can collect both a pension and their full Social Security in retirement.

But what was unfair to the Texas teacher is that if they also worked 10+ years at a different job, their Social Security benefits from that job were reduced under the WEP. But the NY teacher does not get dinged for collecting both a pension and SS, and gets the full amounts.

The WEP reduces an employee’s own Social Security benefits, when they also receive a government pension. The GPO reduces Social Security spousal and survivorship benefits by two-thirds, for individuals who receive a government pension.

Planning Strategies

This change creates an opportunity for additional planning for many employees. We should evaluate your individual situation, and make calculations for your exact numbers. Here is our general advice:

1: There is now a larger incentive for teachers, police, etc. to qualify for Social Security benefits. You need 40 quarters of contributions to become eligible for SS. You can track your eligibility online at SSA.gov by creating an individual account. Teachers and others should look for summer work, self-employment, or for a part-time job in retirement, to qualify for Social Security, if they have not already done so. Having both retirement benefits will be enormously valuable.

If you are thinking about going into a career that does not participate in Social Security, please think about how to get 40 SS credits. At the same time, it is now much more attractive for retired police and firefighters to work another type of job after they retire.

2: You will want to think carefully about the timing of your Social Security benefits. In many cases, government employees retire relatively young, but it may pay to delay Social Security to receive a larger benefit. This can help reduce longevity risk. Again, we should be running the calculations individually. You do NOT have to claim both a pension and SS at the same time or year.

3: Spousal benefits. Many more government employees will now be eligible for a larger spousal benefit (based on their spouse’s earnings). And so we now need to think about when a spouse claims their benefit and when the other spouse should claim their spousal benefit. There are no deferred retirement credits for spousal benefits, meaning you should never defer from age 67 to 70, if your SS benefit will be a spousal benefit. If you are divorced, but were married for at least 10 years, you may be eligible for a spousal benefit in Social Security, based on your ex-spouse’s contributions. This is true, even if you never worked in a SS-eligible job.

Really, Washington?

The repeal will increase Social Security benefits for 2.5 million Americans today, and more in the future. The benefits will be retroactive to December 2023. The additional cost will be $195 Billion over the next 10 years. (And more for each subsequent decade.) Unfortunately, Congress did not include any way to fund this increase in benefits, so these costs will be added to the Government debt. This bill will accelerate the bankruptcy of Social Security by about six months, presently estimated in 2033.

While government employees have been lobbying for a repeal for decades, I am a bit surprised that Congress suddenly felt that this was a priority. I didn’t hear any politicians talking about the WEP and GPO during the campaigns this fall or summer. Recently, we’ve heard the goals of trimming $2 trillion from government spending. Instead, some of those same Congresspeople just voted to add $195 Billion in new spending over the following decade.

I have been writing for 17 years about how Social Security is broken. We have to either reduce benefits (such as increasing the retirement age), increase taxes, or some combination of both. Instead of understanding this necessity, our elected officials just decided to make Social Security more expensive. And while I support and appreciate government employees, including many family members, many of the government pensions were already fair, if not generous, compared to Social Security benefits.

There are a large number of retirees who do not need additional Social Security benefits. The average age of millionaires in the US is 61. The average net worth of Americans age 65-74 is $1,794,600 according to a 2023 Federal Reserve Study. (Granted, the median is much lower than the average.) From 2019-2022, 65-74 year olds saw their net worth increase by 27%, whereas Americans aged 35-44 saw only a 9% increase and 45-54 year olds (my age cohort) saw an increase of just 1%. While there are many poor elderly people, there are also many retirees who are doing very, very well.

We Must Save Social Security

Social Security is an entitlement program where current taxes pay for current benefits. The SS taxes you paid in 2024 are not being saved for you. They are paying your parents or grandparents this year. And this worked because there were 40 workers for every retiree in 1940. Today, however, there are less than three workers per retiree and this will gradually approach two workers per retiree by 2050. And so, we ought to ask if ending the WEP and GPO is intelligently alleviating elder poverty, or is it just giving away money to older Americans and leaving a massive debt to our grandchildren?

Unfortunately, we can’t save Social Security by keeping it as is. Something has to change, and soon. In our retirement planning process, Social Security is an essential component of the financial plan. When I remove Social Security benefits from our MoneyGuidePro retirement software, the plans usually project a strong possibility of failure. We need to be telling our elected officials that saving Social Security is a top priority. Some difficult decisions need to be made. We’ve been waiting a long time for politicians to speak honestly about Social Security, to debate intelligently about solutions, and to show the will to do the right thing even if it’s unpopular. Unfortunately for us, the day for fixing Social Security is not going to be today.

How To Invest When Stocks Are High

Posted On November 3, 2024 By Scott Stratton, CFP(R), CFA In Financial Planning /

More investors should be asking about how to invest when stocks are high. The first three quarters of 2024 were the best for the S&P 500 Index since 1997. But what is the outlook going forward for investors?

In a new paper by Goldman Sachs, they project that the return of the S&P 500 Index for the next 10 years, 2024-2034, will be only 3%. How did they reach this dismal projection? The model considers projected earnings growth, current valuations, interest rates, likely recessions, and stock market concentration.

How bad is it?

The return would be in the worst 7% of 10-year returns since 1930.
There is a 72% chance that the S&P 500 will do worse than a 10-year Treasury Bond.
While their median projection is 3%, the 95% confidence range is between -1 and +7%.

The projections from Goldman are quite similar to the analysis from Vanguard. Currently, the Vanguard Capital Markets Model has a 10-year projection of 4.2% for US stocks. Both projections are very alarming, a far cry from the 11% annualized returns of the S&P 500 over the long-term.

Which Projections Matter?

In the short-term, markets are really impossible to predict. Long-term investors should not make portfolio decisions based on short-term projections. I remember one firm said there was a 100% chance of a recession in 2023. But it never happened. Short-Term predictions can be wrong and there are too many variables and surprises to consider. No one has a crystal ball and short-term predictions are about as accurate as guesses.

Long-term projections, however, may have some value in that there can be an eventual reversion to the mean. Periods of above average performance are often followed or preceded by below average performance. If you start with stocks being very expensive, then often the following decade has below average returns. And when you start with cheap stocks, like we had in 2003, March of 2009, or March of 2020, the following periods are typically above average.

Our approach is to ignore the noise of quarterly or annual projections. But we do position our portfolios towards the long-term trends of what the historical evidence suggests, based on today’s situation. We are not going to attempt to time the market, but we are going to listen to what market history tells us. Let’s talk about three ways investors can position their portfolios for a potentially low-return decade ahead.

Which Equities?

While both Goldman Sachs and Vanguard have low projections for the whole market, both also see opportunities in certain areas. The S&P 500 Index has been a great performer over the past decade, but other categories could do better over the next decade.

Goldman’s analysis believes that the current market concentration will be a major detractor from performance. What is market concentration? The biggest stocks have become the most overvalued, and the weighting of the largest 10 companies is exceptionally high today. While the regular, cap-weighted S&P 500 returns are projected at 3%, Goldman projects that the equal-weighted index could return 7%.

What is an equal weighted index? An equal weighted index invests the same dollar amount into each stock. If there are 500 stocks, each has a weight of 0.2%. And there is an easy solution here, because we can invest in an Equal Weighted Index fund.

Vanguard also expects better returns when we look outside of the US Growth segment. Here are their 10-year median return projections:

US Growth: 1.1%
US Value: 5.7%
US Small Cap: 6.0%
Developed ex-US stocks: 8.0%

This is why we diversify. Past performance is no guarantee of future returns. Even with the low projections for the entire market, there can be categories which could do better. This is the first strategy: diversify away from growth and cap-weighted indexes, and towards the areas with higher expected returns, such as equal-weight, value, small-cap, and international stocks.

DCA and Rebalancing

If you are a younger investor, I don’t want you to look at these reports and think you should forget about investing. The market will not go in a straight line over the next decade and there will undoubtedly be both large drops and large rallies. If you are investing monthly into your 401(k) or IRA, keep doing that. You are dollar cost averaging (DCA) and can benefit from all the volatility. Focus on your accumulation and diversify into low cost index funds in many categories.

For larger portfolios, even a relatively low-return environment can benefit from rebalancing and ongoing portfolio management. In fact, it is during long bull markets that rebalancing is the least helpful. In volatile markets, rebalancing allows us to benefit from the differences between stocks and bonds cycles. With rebalancing, we can sell stocks when they are high (like now) and buy stocks when they are low (like we did in March of 2020). This is part of our ongoing risk management process.

Bonds

Our third pillar of investing in a low-return environment is Bonds. Bonds are back. Our approach is to buy individual high-quality bonds and ladder them for five years. This means we have the bonds in place that will mature each year to meet the cash flow needs of our clients. For retirees, this means we do not have to touch our Equities to meet income requirements when the market is down. This gives us additional flexibility rather than always having to sell Equities to meet withdrawal needs. We want to create certainty with our bonds: income and capital preservation.

More conservative investors may find that this is an opportune time to overweight bonds and have more predictability in their portfolio. We can still get up to 5.4% on a 5-year fixed annuity today. That remains a compelling safe return. Most of the time, people are expecting to get 10% in the stock market. But if we are only expecting to get 3% to 5%, then it hardly seems worth it to take the gamble on stocks. Today, the expected return of a portfolio that is 80% stocks and 20% bonds is hardly different from one with 40% stocks and 60% bonds. Historically, those two portfolios are very different, but not today. Unfortunately, however. there will be a lot more volatility with 80% stocks than 40%.

High Stock Market Equals Low Returns

This can be a difficult lesson for investors to accept. Our natural tendency is to project the current returns into the future and assume the bull market continues. And maybe it will for a while longer. But long-term investors should understand that when the stock market is high that means projected returns are low.

Thankfully, we have a plan and our portfolios reflect the long-term outlook. We diversify into other categories with better expected returns. We dollar cost average and rebalance. And we consider the role and weighting of bonds for each client’s needs. There is no doubt that the projections from Goldman Sachs and Vanguard will prove to be imperfect. The future is always an unknown. Our plans will change, evolve, and adapt. But our focus will remain on doing our best work for planning and creating a portfolio strategy using the information, evidence, and research that is available.

The Bank of Mom and Dad

Posted On October 22, 2024 By Scott Stratton, CFP(R), CFA In Financial Planning /

More and more young adults are relying on the Bank of Mom and Dad. For perhaps the first time in US history, today’s 30 year old faces a tougher time than their parents did. Today’s young adults may be worse off than their parents were at age 30. And it’s not because of laziness. It has gotten harder for young people to reach the same milestones as their parents.

Thirty years ago, the average house price in the US was $154,200. Today, it is $501,700. The average private university tuition was $11,481, 30 years ago. Today, my Alma Mater, Oberlin College charges $66,410 for tuition alone and has a total annual cost of $86,800. Many of my classmates pursued a 5-year double degree program, which today will probably cost over $450,000.

Wages in many careers have not kept pace with inflation. Students are encouraged to go to the best college possible and to pursue advanced degrees, racking up massive student debt. 45% of student loans are on an income driven repayment plan, and over one million Americans have so little income that they qualify for a $0 monthly payment on their federal students loans. Of course, the interest still accrues and they cannot discharge student loans in bankruptcy.

The cost of healthcare has risen more than inflation and child care expenses have made it difficult for parents. Many have calculated that after-tax, they are better off having one parent stay home.

I think the Wealth Inequality in America is likely to widen rather than shrink for the decades ahead. Who will come out ahead? Adults from wealthy families will likely stay ahead of young adults from less privileged backgrounds. We would like to think that America is a meritocracy, but it is becoming harder for young people to create their own economic security. 70-year old millionaires can lecture young people about hard work, but it’s not in touch with the reality of the times.

I’ll leave it to Washington to solve the nation’s problems, but I doubt that solutions will be coming soon. I think parents are going to have to look out for their kids more and for longer than just getting them to age 18 or 22. Parents will have a role in making sure their children become wealthy. We can only take care of our own family, so let’s start there.

This does not mean setting up a massive Trust Fund so that your kids don’t have to earn a living. No, parents don’t want their kids to become dependent on their generosity. We don’t want to create the moral hazard that they would fail to pursue their own career to the fullest. But there are ways that The Bank of Mom and Dad can help establish your child’s financial success, security, and stability.

The Good News

The good news is that wealthy parents tend to have wealthy children. At age 30, children’s income is highly correlated to their parent’s income. Children may not listen to what you say, but they often make similar decisions as their parents, including in their careers.

Minimizing Student Loans

Here is an important rule of thumb for college students. Keep your total student loans to no more than one-time (1X) your future salary. Entering a career with a $50,000 salary? Your student loans should be $50,000 or less to allow you to repay over the standard 10-year schedule. And only a surgeon making $350,000 a year should ever consider having $350,000 in student loans. But I have seen people with incomes under $100k with that level of student debt.

Here’s some advice for parents:

Make sure your kids are thinking about the 1X rule and choosing a college which will not cripple them with future debt. It’s okay for your children to have some skin in the game and have to pay or borrow a little for college. But don’t let them be foolish and invest $500,000 into a field that will only pay $50,000 a year. Debt is not the path to economic security.
Start saving earlier in a 529 Plan or be willing and able to absorb more of the college costs at the time they are in school.
Aim to have them go into a field with 90% plus employment. There are great careers which are highly in demand and offer a terrific salary. Are there jobs which will have this exact degree as a pre-requisite? Seek degrees with value.
After college, help your kids be mobile. In their 20’s, it is the time to pursue a career and go where that takes them. If the great jobs are on Wall Street, Silicon Valley, or wherever, that flexibility gives them a leg-up versus older job candidates who are unwilling to move. My wife’s company has promoted her four times, including most recently to Paris. This is how you build a career in 2024, not by going back home and living in the same town as your parents.

Fund Their Roth IRAs

I got my first job at age 16 at the minimum wage of $3.35 an hour. I worked at the Long Point amusement park for about four weeks before it burned down from an electrical short. The owner didn’t have insurance and that was the end of the 80 year old park – and my first job. I do think having a part time job is a great learning experience and can help young people develop important skills.

Anyone who has earned income can fund a Roth IRA, including someone who is 16 or younger. What I would suggest parents do is allow your kids to keep their income while the parents fund their children’s Roth IRAs. You will give them a tremendous advantage in their future wealth by getting this early start. You can invest up to $7,000 a year, or the level of their annual income, whichever is lower.

Let’s say you fund a Roth IRA for your son or daughter for $5,000 for 10 years from age 16 through 25. We invest in an Index Fund and earn 7% per year. By the time they are age 66, they would have $1,181,000 in their tax-free account, all thanks to Mom and Dad funding a Roth IRA for their first 10 years of part-time work. That’s the power of compound interest.

Annual Gift Exclusion

If you have enough in resources to know that your retirement is secure and you will have more than enough, then you may want to start giving away some money during your lifetime to your children. The annual gift tax exclusion for 2024 is $18,000 per person. You can give that amount to each child and a married couple can double that, to $36,000 per child per year.

Every article seems to get this wrong: If you give away more than the annual exclusion you don’t immediately owe a gift tax. But you must file a gift tax return and the amount above the exclusion will reduce your lifetime unified estate/gift exemption. For 2024 that amount is $13.61 million and again it is double for a married couple. Most parents are going to be below the lifetime exemption amount and could give away more. But, the easiest first step is to use the full $18,000 annual exclusion.

This could be a great way to gradually create an account which your adult children could use as a house down payment, or to start a business, or pursue extra career development. This account could also serve to teach them about long-term investing, the benefits of index funds, and planning for goals.

Housing and Living Expenses

Certainly a lot of parents are helping their young adults with housing, a car, health insurance, cell phones, etc. Hopefully, this will allow them to focus on developing their long-term career and avoid going into debt. In a lot of expensive areas, kids are returning home to live with their parents after college. This can help them pay down their student loans faster. And with rents having gone up so much since 2019, this seems to be becoming more and more common.

What about buying a duplex for your child to House Hack? There are lots of creative ways to help your children with expenses. The goal is to have them get started investing and be able to save aggressively or pay down debt faster.

Managing The Bank of Mom and Dad

No One Is Self-Made. We have all benefited from the Education system in America, as well as the laws and regulations which promote free trade and protect employee rights. Compared to the rest of the world, the US remains a great place to become an entrepreneur or highly paid professional. We shouldn’t forget the unique opportunities we have to find economic security in the US. But even with all the benefits, the fact remains that parents have a very large role to play.

It is getting harder for today’s young adults. Inflation is a problem for housing, college tuition, health care, and starting a family. Those costs have grown much faster than incomes. As a result, young adults are falling behind previous generations. The Bank of Mom and Dad can help with planning, wisdom, and yes, sometimes with more money. Nearly half of all first-time homebuyers under age 35 have had some family assistance with their purchase.

Hopefully, well-to-do parents are already thinking about how they can create inter-generational wealth. What are the most effective ways and times to be giving money to your kids? What can go wrong or what are some unintended consequences? How do you treat two or three kids with different needs and abilities to handle the money? These are not easy decisions or conversations. But they are vital discussions to be having as a family, and yes, with your financial planner, too.

We can help you determine what you can truly afford and think about how to best help children with your financial support. We have a number of families where we work with the parents and with their children in their twenties and thirties. Wealth is a habit, and financial planning is a skill. Being good with money is not a skill which is being taught in school, unfortunately. But parents do have a role in talking about money, and even more importantly, modelling the behavior and generosity which you hope to instill in your children.

Home Mortgage Strategies

Posted On December 13, 2023 By Scott Stratton, CFP(R), CFA In Financial Planning /

With the 30 year mortgage rate at 7.50% today, it’s time we revisit home mortgage strategies. Loving your home is an undeniable part of the Good Life. In the past couple of months, we’ve had several clients who have moved or looked at buying a second home.

Understandably, the 7.5% mortgage rate is giving many people anxiety about this decision. And that is exactly what the Federal Reserve wants. To slow housing inflation, they needed to drive out buyers and reduce speculation to cool an overheated market. With home affordability problems in many areas, it may be a good thing to slow the rapidly rising house prices of recent years.

In the past, we might have seen real estate prices plummet given how quickly the Fed has raised interest rates. Prices today are not dropping, but at least the prices have stabilized and are no longer growing at double digit rates. We have an under-supply of housing, and there is relatively little construction of single family homes occurring, given the nationwide need. What is unique for 2023 is that sellers are disappearing, unwilling to move out of a home with a 3% mortgage (you will see why, below). There were 300,000 fewer homes on the market in September 2023 compared to one year earlier. Inventory remains very thin and that is why prices do not appear likely to drop anytime soon.

2023 versus 2021

We’re going to look through some mortgage examples and share some of the numbers that are typical today. We will go over a couple of home mortgage strategies that still make sense today. And we will revisit our philosophy and beliefs about home ownership.

The median home price was recently $412,000. For our examples, we are rounding that to $400,000 and putting down 20%, or $80,000, for a mortgage of $320,000. With a 7.5% 30-year mortgage, your monthly payment including taxes and insurance would be around $2,671 depending on your location.

For the rest of our examples, we are going to strip our taxes and insurance from the monthly costs and only look at the principal and interest payments. Your mortgage-only payment would be $2,237.49 a month. Over 30 years, you will pay a total of $805,495.11, in payments. That will repay your $320,000 loan plus $485,495.11 in interest payments. You will, in effect, be paying 150% more in interest than you borrowed. Borrow $320 thousand, pay back $805 thousand. It is just obscene, although not without precedent. Your parents may have had a similar mortgage rate at some point in the previous century.

Staying Put

If you had made the same purchase in 2021 with a 3% mortgage, or refinanced, it is a very different story. Your principal/interest payment would have been only $1349.13 a month, almost $900 less a month. Over 30 years, you would pay total payments of $485,687.85. That is only $165,687.85 in interest plus $320,000 in principal. And it seems much nicer to know that you are primarily paying principal and the interest payments are much less.

If you have that 3% mortgage, you probably don’t want to move to a new house. The 7.5% rates are keeping you out of the market, which again, is just as the Fed wants. There’s no doubt it can be preferable to stay put and enjoy your low mortgage rate. A few thoughts about your 3% mortgage:

Don’t send additional payments to a 3% mortgage. There are money markets, CDs, and government bonds yielding 5-6% today. Only send the minimum mortgage payment. Talk to me if you have extra cash.
Will it cash-flow? Rather than selling, have you considered turning your house into a rental or Airbnb? It is a lot of work and not for everyone. However, if you have a 3% mortgage, you have a much better possibility to turn a profit than a new investor who is going to have a 7.5% mortgage (or higher).
Downsize. If you have built a lot of equity into your home and have more space than you need, I would not hesitate to downsize. If you can take your tax-free gains and buy a small house for cash, this can improve your retirement readiness. Having no mortgage at all can be very freeing.

Jump Starting Your Amortization

Back to our $320,000 mortgage at 7.5%. You’ve just bought this house and now have a monthly payment of $2,237.49. In the first month, that payment includes $2,000.00 in interest and only $237.49 in principal. In the second month, your payment would consist of $1998.52 in interest and $238.97 principal. These high interest rates have a horrible, ugly amortization schedule. Your initial years of payments are primarily interest and you hardly make a dent on your principal.

After three years of payments, you will have made $80,550 in mortgage payments, but only paid $9,555 in principal. If you go to move, you would still owe $310,455 on the mortgage. All this money spent on interest is gone.

Now, let’s take a look at what would happen if you could make a one-time extra payment of $10,000 in the first month. This is probably the last thing any new homeowner is thinking of doing, but let’s run the numbers and talk about why it might be a good idea.

That one early payment of $10,000 will reduce your loan by 37 months, saving you $73,452 in interest over the life of the loan. And it jump starts your amortization, shifting $62 from interest payments to principal payments every month.

Mortgage Strategies:

If you have a 7.5% mortgage, try to make prepayments as early as you can. This can dramatically shorten your loan. Every dollar of principal will save you a multiple of interest in the years ahead.
Evaluate your cash levels. Keeping a ton of money in the bank at 0% while you have a 7.5% loan isn’t helping. Make those prepayments now and avoid excess cash. Here is a Prepayment Calculator to estimate your situation.

15-Year Mortgage

I’ve long been a fan of the 15-year mortgage and have written about it previously. I’ve used 15-year mortgages previously on primary residences and been very happy with the decision.

Back to our example, we buy a $400,000 house and put down $80,000 leaving us with a $320,000 mortgage. With a 15-year mortgage, the interest rate today is 6.75% rather than 7.50% for the 30-year. Yes, the 15-year mortgage is going to be more expensive. It will be $2,831.71 a month, versus $2,237.49 for a 30-year. For less than $600 extra per month, you can cut your mortgage in half, from 30 years to 15 years. I like that, and it will help reduce expenses for retirement.

The 15 year mortgage also allows you to more rapidly build equity in the house, with more of each payment going towards principal. Remember for the 30-year, the first payment of $2,237.49 consisted of $2,000 in interest and $237.49 principal. With the 15-year, your first payment of $2,831.71 consists of $1,800 in interest and $1,031.71 of principal. I prefer this quicker amortization – the payment is $600 more, but $800 more is going towards principal.

After 15 years, you own a house outright with a 15-year mortgage. You might think that after 15-years, you would be halfway through a 30-year mortgage, but that isn’t the case. You would still have a balance of $241,365 of your original $320,000 loan. In the first 15 years, you paid less than 25% of the principal, and will pay 75% in the second 15-years. So, if you decide to move after 15 years on a 30-year mortgage, you have not accumulated a lot of equity to put towards the next home.

Home Perspectives

No doubt that a home is a key to building wealth. Oh no, I don’t mean that a home is a good investment. Not at all. Rather, a home is an expense, your largest liability. Choose poorly and a house can consume all your income and leave nothing left to save and invest. Living beneath your means remains the way to accumulate wealth. Consider House Hacking if you really want to minimize your expenses. So, a few more thoughts, most of which I have shared previously.

Don’t wait for a housing crash. The supply of homes may be well under the demand for many years. I think we are unlikely to have a repeat of the 2008 housing sell-off, at least on the nationwide level. You can buy now, and potentially refinance in a couple of years if interest rates drop. But we also might see house prices rise again with lower interest rates as houses become more affordable. So, waiting for lower house prices or lower mortgage rates is not guaranteed to be beneficial. If you can find a great long-term home today, maybe it still makes sense long-term.
Renting has become more attractive. In most of the country, renting is now much cheaper than buying. Renting gives you fixed expenses, few surprise repair costs, and the flexibility to move. There is too much pressure to own a home in the US. For many people, renting is preferable, especially if you plan to be there for less than 5-10 years.
Your home is not an investment. Over the long-term, house prices only have done a little better than inflation. And that statistic is highly misleading because it doesn’t account for expenses. Don’t buy a home hoping for substantial appreciation. Buy it as a place to live and for your family.
Tax benefits. Sorry, most people are not getting a tax benefit from their homes anymore. And yet, I still see realtors talking about tax benefits. The standard deduction for 2024 will be $14,600, or $29,200 for a married couple. Very few people will actually have enough in mortgage interest and property taxes to take an itemized deduction. Also, there are caps on what you can deduct: State and Local taxes up to $10,000 and interest only up to $750,000 of a mortgage. Most of my clients used to itemize before 2017 and almost none of them do today.

Financial Planning

Financial Planning is more than just investing well, and that is why we talk about things like Home Mortgage Strategies. The 7.5% mortgage rates are hurting home affordability. If you have to buy a house, understand what your amortization looks like and try to be sure to refi if you can save one percent or more. Back in 2020, I saw people who were looking at paying off a 3% mortgage because cash yields were so low. We discussed the opportunity cost of paying off a mortgage, and that still applies today. Unfortunately now in 2023, the expected 10-year return of stocks have not changed as much as mortgage rates have, and so today the weight of leverage at 7.5% is too great to ignore.

If you are thinking about moving, carefully consider the home mortgage strategies we discussed. Staying put can make sense. If you have an expensive mortgage, consider making prepayments in the early years. If you can afford it, choose a 15-year mortgage. I worry a lot about housing because it has become so much more expensive that people risk being House Rich and Cash Poor. And then, there is nothing left to invest. A home is often the biggest purchase of your life, so choose carefully! Think about how will this help to maximize your future net worth.

Taxes Living Abroad

Posted On November 17, 2023 By Scott Stratton, CFP(R), CFA In Financial Planning, Tax Strategies /

Since we moved to Paris in February, we’ve become much more familiar with taxes living abroad. This may be of interest to anyone who is thinking of living or retiring to another country. I will share the situation for me as a US citizen living in France, but the basics will apply to most countries.

If you thought US taxes were complex, things get really difficult when you add in a foreign tax system and then have to figure out how they will interact together. Given this complexity, this article should be considered just a primer on basic terms and not used as individual tax advice. You need a tax professional who has experience with US clients living abroad.

In general, US citizens have to pay US income taxes on their global income, regardless of where you live. You don’t get out of US taxes by going abroad. But you may be able to reduce your US taxes and that is what we will discuss. Also, there are many other tax considerations besides the annual income tax bill to understand.

Tax Residency

If you spend more than one-half of the year in France (183 days), they will likely consider you a Tax Resident of France. This makes you subject to full France income taxes, which is levied on your global income. If you live in France less than half the year and are not a tax resident, you would still be subject to France taxes on any French derived income.

If all your income sources are from the US, you could potentially live abroad for just under half of the year and not become a Tax Resident. And then you would only have to file US taxes. Currently, as a US tourist, you can stay in the European Union for up to 90 days out of the rolling previous 180 days. Make sure you fully understand the “rolling 180 days” part – it is not based on a calendar year. If you can stay a tourist and not become a tax resident, this will make your life much simpler!

Avoiding Double Taxation

For a US citizen living abroad, you have the problem of double taxation. Your income will be taxed by your resident country and then it will be taxed again by the US. Thankfully, there are tax treaties with 70 countries which provide some benefit and there are several ways to reduce or eliminate the double taxation. Still, you will need to file a US tax return even if you don’t end up owing any US taxes.

Foreign Earned Income Exclusion

The US tax code allows for a citizen to exclude up to $120,000 (2023) in Foreign Earned Income from being taxable on your US taxes. This is doubled to $240,000 for couples who are married filing jointly and who both have foreign wages. You must live abroad for 330 out of the past 365 days. For someone whose income is below the FEIE threshold, you could end up with zero taxable income for the US. You would calculate this exclusion on IRS form 2555 “Foreign Earned Income”.

The FEIE does not apply to any US wages or to any US capital gains, dividends, interest, rent, or other US sourced income. So if you have US wages or income, those earnings are still taxable outside of the FEIE amounts.

In addition to the FEIE, there is also a US tax exclusion for foreign housing expenses, which has a cap of 30% of the FEIE, or $36,000 for 2023. If you reduce your US taxable income to zero through the FEIE and/or housing exclusion, please note that you will be ineligible to make any IRA contributions. (Because your taxable income is zero.)

Foreign Tax Credit

Alternatively, you may be able to claim a credit on your US tax return for foreign taxes paid. The FEIE may take many people’s taxable income to zero and you can stop right there. However, US citizens who make more than the FEIE thresholds, or who have some US-sourced income, may still owe US taxes. And in those situations, applying the Foreign Tax Credit may be preferable. Please note that you have to choose either the FEIE or the Foreign Tax Credit, but cannot do both.

In my situation, we will probably end up using the Foreign Tax Credit. That’s because we have both US and France sources of income (US for me and France for my wife). And since the French taxes will likely be higher than the US taxes, it may take our US tax bill to zero.

Except for one thing: although France taxes us on global income, they exclude Real Estate income. They believe that all real estate income should be taxed locally. And indeed, if you buy a rental property in France, they will charge you income tax on that property even if you never set foot in the country or become a tax resident. As a result, our AirBnb Properties in Hot Springs will remain solely taxed in the US.

One challenge with using the Foreign Tax Credit is that it requires that you finish your foreign taxes before you complete your US tax return. For many, this will require filing a US tax extension past April 15th. And once you are beyond April 15th, you have passed the window to make Traditional or Roth IRA contributions or to calculate 401(k) profit sharing amounts. You may not be able to determine your eligibility until you complete your tax return, so you might miss out on some opportunities.

Social Security

In France, the payroll tax for Social Security is 20%. That is much higher than the US contribution of 7.65% for Social Security and Medicare. However, the French contribution includes all social programs, including Health Insurance, unemployment, maternity leave, as well as “retirement” Social Security.

Although 20% is 12% more than what we would pay in the US, we don’t have any health insurance expenses in France. And so it may be fairly comparable to what we would pay in the US for total costs. As a self-employed person in the US, we might pay $1,200 a month for a family plan with a $5,000 deductible. That’s a $19,400 annual expense we don’t have in France. And the medical system here is excellent.

We just had a baby girl a month ago, and I have no complaints about the value we have received. I will say that the social charges here are a great deal if you have a modest income, but if you have a very high income, you may feel that you are paying in more than you are getting back.

Social Security Vesting

There is one problem for us, however, with social security taxes abroad. Just like the US Social Security, the French retirement system has a 10-year vesting period. Only after you have contributed for 10 years do you become eligible to receive a retirement pension. We do not plan to stay in France for 10 years, so all the money we will pay into their Social Security will not come back to us later in retirement.

Our French earnings are not credited toward the US Social Security system either. US Social Security benefits are calculated based on your highest 35 years of inflation adjusted earnings. We are effectively losing these years of contributions. We are paying in France for no future benefit, while losing the years that could have been added to the US benefits. There’s no 401(k) in France, so no other employer retirement contributions, either.

If you are considering working abroad, make sure you understand its impact on your future benefits! We have enough in ongoing savings and investments for this not to be a major problem, but it is an opportunity cost that we are missing by working outside the US.

Pitfalls Abroad

Besides wages, there are other tax events which could become major pitfalls when living abroad. Here are a few things which could become huge tax bills for US citizens in other countries.

Home capital gains. In the US, we have a $250,000 capital gains exclusion on the sale of your primary residency. France does not. If your US house sale closes a week after moving to France, it occurred while you are a tax resident of France! Maybe you have a $100,000 capital gain which is ignored in the US but now taxable in France. Sell your house before you move! Or keep it.
Gift Taxes. Large gifts to children or others are fine in the US with a lifetime Gift/Estate tax exemption of $12.92 million. Not so in France. Gift taxes could be 20% and apply with thresholds dependent on the relationship. There are even gift taxes between spouses! The French gift tax exemption is only 31,865 Euros per 15 years.
Trusts not recognized. Based on Civil, not Common Law, France does not recognize trusts for tax purposes. Don’t set up US Trusts before becoming a tax resident abroad.
Inheritance Taxes. If you are in France for more than six years, you are subject to inheritance taxes. These are paid by the recipient, unlike US Estate Taxes, which is paid by the Estate. The US threshold is $12,920,000 before any Estate taxes are due. In France, inheritance taxes start at 5% at 8072 euros, but steps up to 45% tax on amounts above 1,805,677 euros (2023).

Get Help

If you are contemplating working or retiring outside the US, taxes living abroad can be complex. Luckily, you’re not the first one to do this. You will want to have tax advisors in the US and in your new country who have experience navigating these complex rules. And having a Wealth Manager who understands the tax implications of your portfolio construction is very important, too.

When my wife’s employer offered her a position in their Paris office, it was an offer we could not refuse! It has been a remarkable opportunity. If you could have the chance to live or work overseas, I would encourage you to see if it is possible. The taxes are a headache and will take a bit more time, but I do think it will be worth it for the experience. Certainly part of achieving the Good Life is being able to fearlessly make the choices to live your life as you dream it could be!