How Social Security Spousal Benefits Impact Your Retirement

If you’re married, Social Security spousal benefits can impact your retirement.  Today we’ll take a deeper dive into how they work.  And if you are no longer married, we have a bonus tip for you at the end.

Video: How Social Security Spousal Benefits Impact Your Retirement.

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Whether you’re married now, or were married, you should be aware of the provisions for Social Security spousal benefits. This allows you to receive an income based on your spouse’s earnings if their income was more than yours.

Here is how it works.

Computing Social Security Spousal Benefits

When you’re married, and you’re the lower earning spouse, your Social Security benefit will be

  1. Your own benefit based on your own earnings, or
  2. A spousal benefit equal to one half of your spouse’s earnings.

Here’s some numbers. (Click the images to enlarge)

Here are some key things you need to know.

Your Age Matters

Social Security reduces your benefits if you retire early. The spousal benefit portion of your income faces a bigger discount. So if you were born after 1960, your normal retirement age is 67. Your benefits get discounted 30%. The spousal benefit gets discounted 32.5%.  (Click image to enlarge)

The Higher Earning Spouse Must Also Receive Benefits

You can apply for your own benefits any time after age 62. However, you won’t receive spousal benefits until your spouse starts their Social Security.

So if your spouse continues to work, you can receive your $800 per month adjusted for your age. Then when your spouse retires, you can get the spousal benefit, adjusted for your age.

If Higher Earning Spouse Retires Early, It Reduces the Spousal Benefit.

Social Security computes your spousal benefit based on the higher earning spouses actual benefit.

So if the higher earning spouse retires early, the maximum spousal benefit will also be reduced.

Spousal Benefits Do Not Benefit From Delayed Retirement Credits

If you delay retirement beyond your normal retirement age, your primary benefit increases. The delayed retirement credits add 8% each year you delay your benefits until age 70. But these delayed retirement credits don’t apply to spousal benefits.

Your spousal benefit is capped at half of your spouses benefit at their normal retirement age.

The higher earning spouse will see their benefits increase for delaying retirement. But, the spouse will not. 

Bonus Tip:  Divorced spouses can file on their former spouse’s earnings record.

If you meet certain conditions, you can claim a spousal benefit on your former spouse’s social security record. Here’s how. (Click Image to Enlarge)

Your ex doesn’t have to be receiving their Social Security in order for you to file for spousal benefits.

And your age will factor into any discounts you may face.

Social Security has a lot of wrinkles and moving parts. And often times it can be tough to work through it.  Spousal benefits can have a significant impact on your retirement income.  Knowing some of the key decision points can help you plan for a better retirement.

Financial Planning

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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There aren’t a lot of choices you can make when it comes to your Social Security Retirement Benefits. In fact, you only have one choice–when  do you start?  So should you claim your benefits as early as possible, or should you wait?

Today we’ll dig into the numbers to show you how waiting can pay off in the long run.

Before we get into the weeds too far, let’s lay down a foundation. This is a simplified scenario, and there are often many different moving parts. We created this illustration using some generic and simple assumptions.

Also, for this episode, we won’t be talking about the impact this decision has on your retirement savings or other parts of your life. Those things should also be considered.

Your situation is unique. Please consult a professional before making any significant decisions.

A Case Study: Tom and Mary's Social Security

blank

One of the biggest decisions Tom and Mary will make is when they start their Social Security. Do they retire this year? If so, it means they receive their benefits for a longer period of time.

But it also means, their benefits get reduced. In this case by 27%. In real dollar terms, it means they receive less.

Waiting means the discount shrinks, and they receive more each month compared to age 62. 

And if they delay their retirement to age 70, they qualify for delayed retirement credits. This is where your benefits increase by 8% for each year you delay your decision.

62 vs. 65: Evaluating Their Options

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Waiting to retire at age 65 means they receive $612 more per month. But they also receive fewer monthly payments over their lifetime. It will be worth it, if they live long enough. But how long do they have to live to “break even.”
 
This graph shows the cumulative benefits starting at age 62 (dark green line). And the total benefits received starting at age 65 (light green line). We are looking for where the two lines cross. This is how long they have to live to make waiting worth it.
Evaluating Your Social Security
If they live to age 80, waiting to take their Social Security makes sense. What about some other ages?

62 vs. Full Retirement Age (66 and 6 Months)

Evaluating Social Security
SOcial Security
The break even point pushes out to age 82. This makes the “payoff” of waiting a little less certain, but certainly within reason.

62 vs. Maximum Benefits (Age 70)

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Evaluating Your Decision
Delayed Retirement Credits make this interesting. The break even point is age 83. It might be too far away to make it worth considering. But, if they are healthy, they might want to.

Full Retirement Age vs. Maximum Benefits

Of course we should look at this option.  If they decide to work until their full retirement age, should they consider waiting until age 70 to collect Social Security?
blank
Evaluating Your Social Security Decision FRA v 70
With a break even point of age 84, they may not be comfortable taking the risk.
 
A lot of factors go into evaluating your Social Security decision. The break even point of your cumulative benefits is only one of them. If you would like help looking at your numbers, please click the button below (or give us a call). We would be glad to show you how you can include Social Security into your retirement plans.
Financial Planning

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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It is better to contact the Social Security Adminstration directly than to deal with a phone call.

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How Would A Roth IRA Impact Your Retirement?

We all know Roth IRA’s allow for tax free growth.  But how will a Roth IRA impact your retirement?  We’ll take a look at a couple of real life examples to show you the real value of these accounts.

Video: How Would A Roth IRA Impact Your Retirement?

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The Common Example.

Every advisor has used this example at some point in time.  But it doesn’t provide any practical answers.

The Impact Example 1 - Monthly Income

Here is what we typically see. People retire. They have this pile of money, and they need to get some income each month. In most cases, at least to this point in time, the money has been in the traditional 401(k) or IRA accounts.

They set up monthly distributions from their accounts. But most people don’t like to pay quarterly tax estimates. So they have taxes withheld from those withdrawals.

So if we use the $600,000 accumulation from the first graph, and use the 4% rule, it works out to a gross monthly income of $2,000.  Here is how we see this work in real life.

But with the Roth IRA, there are no taxes.  You get to keep the entire distribution.  

Over time, the impact of this can be huge.  Over the course of 23 years, the amount of taxes you pay can be significant.

Let’s say you start at $2,000 per month.  You increase it each year for inflation.  Over 23 years, you’ll take total distributions of $750,000.  Of that, $150,000 would go to the state and federal government.  With the Roth, it all stays in your pocket.  That’s a pretty big impact.

 

The Impact Example 2 - Large One-Time Distributions

Here is the second way a Roth IRA would impact your retirement.  People will often need to take a larger one time distribution from their IRA. Maybe it is a car purchase, or a major home repair, or a vacation. They may call and need $10,000.

 If that money comes from a traditional IRA or 401(k), we  often have to “gross up” the distribution. They want to NET $10,000. That means we have to increase the amount they take out to cover thetaxes.   In this example, to get $10,000 they have to actually withdraw $12,500. The government gets that $2,500.

But if you use a Roth IRA, you take out $10,000 and the $2,500 stays in your account.

The Impact Example 3 - Required Minimum Distributions

We still see people who don’t depend on their IRA’s for income. And then they get to age 70 1/2 and get a nice tax surprise.

If the money is in a Roth, no tax surprise.

This also impacts inherited IRAs. You do have to take money from an inherited roth account. But unlike the inherited IRA, you don’t have to pay taxes on those withdrawals.

At least your kids will be glad you have the Roth IRA to pass on to them.

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The Worst Outcome: Running Out of Money During Retirement

One of the things we talked about in a previous episode, was how your initial withdrawal rate impacts how long your savings will last. Unfortunately, we have seen people run out of money in their retirement. The primary reason they did–they withdrew too much money.

You see, if you don’t take money out of your nest egg, there is a very small chance of seeing your account values go to zero. But when you start taking income, you introduce that risk.

The “safe withdrawal rate” has been a hot topic in the financial planning world for decades. It continues to be the subject of many debates. The “holy grail” we are looking for is how much income you can take, and not run out of money.

The Basics of the 4 Percent Rule

What we have recommended the past 20 years is the “4 Percent Rule”.  It’s pretty simple to compute, really. You take what you have accumulated over time, multiply it by 4%.  And, then divide that by 12.  That’s the monthly gross income you take from your savings. 

Why Do We Use the 4 Percent Rule?

Two reasons:  There’s a lot of research on this subject, and our own real life experiences.

We live in a world where investment returns are sometimes negative and always unpredictable.

You see, if those negative returns happen early in your retirement, things can get dicey.  And if we have back to back negative years early in retirement…..Yikes that’s a whole different thing.

This is what people call the sequence of returns risk. If you retired at the end of 1994, and had 5 straight years of 20% gains in stocks…things looked really good. But, if you retired at the end of 1999, the picture was much different.

You pick a year to retire, and you have no idea if the next 12 to 24 months are going to be good or bad. And unfortunately that has a huge impact on your chances for success.

Let’s look at some real life historical situations. There are two major factors here: withdrawal rate, the annual percentage you take from your savings. And the allocation, the mix between stocks and bonds.

We’ll look at the three WORST bear markets in my lifetime, and I was born in 1971, so that’s where we start.

(Note, all allocations are 50% Stock 50% Bond, rebalanced annually. Stock Market returns are represented by the S&P 500 Total Return and bond returns are the annual total returns of 10-year Government Bonds.  Rates of return illustrated are not guaranteed, and past performance does not predict future results)

1973-74 Bear Market

Top to bottom the stock market dropped just under 50%. There were two straight negative years. The 4% withdrawal rate is the dark green line. The year end values grew significantly over the next 20 years.

With the 5% withdrawal rate, things still worked well, but growth was more subdued. And at 6%, which is the light grey line, the portfolio was the initial amount two decades later. Not a failure, but probably not ideal either.

The Dot Com Bust: 2000-2003

It featured three straight years of negative returns. Total drop of roughly 50% in the stock market. The years that followed also included the great financial crisis. This 19 year period is the worst since the great depression.

The 4% withdrawal rate survived. The account value was below the initial investment. but it didn’t go to zero either.

The 5% withdrawal rate isn’t a complete failure and the 6% withdrawal rate goes to zero….Not good.

Great Financial Crisis: 2008-2009

And if you retired at the end of 2007—57% top to bottom decline in the great financial crisis…

The 4% withdrawal rate, has worked out, as has the 5% withdrawal rate. But 6% is worth less than the initial investment just over a decade later.

More Supporting Data

JP Morgan has provided some additional research which shows the probabilities of success of various withdrawal rates and various allocations.

Their research shows, somewhat conservative portfolios create better chances of success.  But it is worth pointing out, being too conservative in some situations can also increase your longer term risk.  Something to keep in mind.

One Last Thing: There are No Guarantees

Starting at a 4% withdrawal rate does not guarantee success. You’ll notice none of these scenarios show a 100% probability of success.  Things can happen which could be far worse than anything we’ve seen before.

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Health Savings Accounts – Ep. 05

Health Savings Accounts are reshaping the way we think about saving for retirement. They are said to be triple tax advantaged. And when you consider the average couple will spend $280,000 on health care in retirement, the HSA should be in our plans.

Video: Health Savings Accounts

Where does the $280,000 go?

You may think the $280,000 figure would include things like Medicare supplements or even the costs for a nursing home stay.  Not according to Fidelity.  This figure covers the bare minimum as shown in the graph below.
Health Savings Accounts

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We publish a new episode each week.  And, we will deliver it right to your inbox.

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Do you have a health savings account? If so, this could be one of the best tools to help you save for retirement. They are triple tax advantaged. The government created Health Savings Accounts in 2003. They allow people covered by a high deductible health plan, to set money aside to pay for their regular health expenses. They are one of the more advantageous tools to use for retirement savings.

Health Care Costs in Retirement

The average couple will spend over $280,000 on health care in retirement. Those costs include:
  • medicare part b and part d premiums
  • Costs for prescriptions and,
  • the outlays you have for deductibles and co-pays.
This can be one of the largest expenses of retirement. Paying these expenses out of your 401(k) or IRA, create taxable income. If you pay those costs out of an individual or joint account, you may incur capital gains. But if you use a Health Savings Account….

The Triple Tax Benefits of Health Savings Accounts

Consider this.
  • A health savings account allows you to accumulate money on a tax deferred basis,
  • It’s funded by tax deductible contributions,
  • And distributions to pay for those qualified health care expenses are not taxed.
The list of qualified health expenses includes:
  • co-pays and deductibles.
  • Prescriptions,
  • and even your medicare premiums
  • long term care insurance.
  • eye doctor and eye glasses, and
  • dental expeneses.
And if you wanting to retire before you reach age 65, you can also use your HSA to pay for your insurance premiums. And if you do, all those distributions are TAX FREE. To be eligible to use a Health Savings Account, you have to be covered by a high deductible insurance plan. If you aren’t sure if your health plan is a high deductible plan, check with your employer or your agent. You can contribute up to $7,000 if your plan covers more than one person and $3,500 if it only covers you. You get a tax deduction for the contributions you make, even if you don’t itemize. If your employer makes the contributions, the amount is not included in your income. So how can you best use this type of plan?

Prioritize Your HSA

Shift your saving strategy. For years, people would try to maximize their retirement plans or IRA contributions. Consider shifting some of those savings to your HSA. You want to maximize the employer matching contributions in your 401(k). But it may be worth it to shift some of your savings to maximize your HSA contributions.

Conserve Your Health Savings Account

Pay for your current small medical expenses from other accounts. You can use the health savings account for those qualified medical expenses. But don’t use it to pay for that $5 generic drug, the $25 office co-pay, or even the $150 dental visit. By spending less from that account, it will help your balance grow faster.

Pursue Long Term Growth

Invest it. I have an HSA account. My provider allows the participants to open an investment account to pursue long term growth. Be careful though. Your provider may have service fees if your primary HSA checking account falls below a certain level. Make sure you know their rules. The triple tax benefits of :
  • deductible contributions,
  • tax deferred growth,
  • and tax free distributions for qualified medical expenses
are game changers. And, they are reshaping how we think about saving for retirement.    

Are You On Track To Retire? Ep 03

People want to know if they are on track to retire.  And often times, they are looking for a quick and easy way to tell if they are doing enough, or if they need to do a bit more.  Fidelity created some general guidelines.  to help you quickly identify if you are making significant progress.  We talk about it in this episode of Monday Morning Money.

Video: Are You On Track To Retire?

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Are You On Track? Here are the Guidelines…

Multiply the factor by your annual household salary.  This is the level of savings recommended to be on track to retire at your normal retirement age.  For most people, normal retirement age is now 67 years old.

Example:  

Bob is 35 years old.  He earns $65,000  per year.  According to these guidelines, he should have $130,000 saved.

on track to retire

(The following is the transcript from the video shown above)

I recently met with a couple who was my age, 47 years old.  And the husband asked the question am I on track?  Have I saved enough at this point in my life to be able to retire?

It’s an interesting question, we dug into the numbers to see just where they were and where they might end up. But what if you are looking for something simple to see if you are on track? Stick around, we’ll share an idea with you.

Hi there, welcome to Monday morning money. I’m Neal Watson.

Are you on track to retire?

It’s a pretty common question. Sometimes people just want to have an idea if they are doing enough to be able to retire.  Something simple, where they can look quickly and say to themselves either I’m in good shape
or I really need to do more.

Well Fidelity has done some research on this topic, and they have come up with a measuring stick to help you quickly identify if you are making progress.  Let’s take a look.

  • By the time you are thirty, you should have one year’s salary saved.
  • By the time you are 40, you should have 3 times your annual salary saved.
  • That increases to six times by age 50.
  • 8 times by age 60,
  • and 10x by the time you reach your “normal retirement age.” Which for most people is 67 years old.

Let’s take a look at an example:

At age 30, Jane and Jim were making $75,000 per year.  To be on track they need to have at least that much in savings.

Over the next decade, they both see their earnings increase, and by age 40 they are earning $90,000 combined.  Hopefully they have continued to save, because to be on track they need to have $270,000.

At age 50, their combined income has grown to $120,000 per year.  If their savings has grown to $720,000, they are in pretty good shape to retire.

Their income increases to $140,000 per year over the next decade.  Their savings needs to improve as well.  The target for this age:  $1.1 Million dollars.

And when they reach age 67, which is their normal retirement age, it is suggested they have at least 10 times their annual salary.

Keep in mind, We are trying to hit a moving target. As time marches on, our wages and salaries tend to increase.  When that happens, our lifestyle—how we spend our money—tends  to increase.  Our savings needs to keep pace.

This yardstick is designed with the idea that you want to build a nest egg which will last for your entire retirement no matter how many years that is.

What About Retiring early?

So what if you want to retire before age 67?  Their guidelines also account for early retirement. Because your Social Security benefits will be lower when you retire early, you’ll need more in savings to create additional income.

So If you want to retire at age 65, you should have about 12x your annual income saved. And if you want to retire even sooner, you should have well over 14x your income in savings, and probably more if you have to buy your own health insurance.

And if you’re thinking about working later, Your increased social security benefits mean you may not need as much in savings to maintain your lifestyle.

Keep in mind this isn’t a perfect system.  Everyone is different and your needs may require a different number.

Are you on track?  If so, keep up the good work, it will take effort to stay on pace.  And if you are behind schedule? Well, perhaps it’s time to step back and look to see what you can do to improve your situation.

If you would, please take a moment to like us on facebook, subscribe to our youtube channel or join our mailing list.

And if you have a question you would like answered on a future episode, send us an email.  We’d love to hear from you.

Thanks for watching and join us next week for another episode of Monday morning money, have a great week.

Monday Morning Money Ep. 02

When thinking about how you spend money in retirement, do you consider what you might spend for healthcare?  You probably should.  Fidelity estimates a couple will spend over $280,000 on healthcare in retirement.  It is a staggering number.  We’ll talk about that in today’s video.

Video: Monday Morning Money Ep. 02: Healthcare in Retirement

Watch Other Episodes of Monday Morning Money

Where the $2800,000 Goes….

healthcare

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Video Transcript

As your thinking about retirement, how do you see yourself spending your money? A few rounds of golf, maybe some other Hobbies? Travel? Spoiling those grandkids?

Those answers are typically what we hear.  Most people look forward to the good things. But there is something else we need to consider.  It will likely be one of your biggest expenses during retirement.

Stick around we’ll talk about that right after this.

Hi I’m Neal Watson, Welcome to Monday Morning Money. Please take a minute to like our facebook page, And subscribe to our YouTube Channel, A link for all of those can be found below.

Planning for retirement should be something we look forward to.  Once we leave the workforce, we’ll have time to do many of the things we’ve wanted to do, but couldn’t seem to fit them into our daily lives.   And people tend to get excited about those new opportunities.

But there are some realities we must face. And one of those are health care costs.  A recent study estimated the average couple will spend over $280,000 on healthcare in retirement.  That’s a pretty staggering number when you think about it.

It’s even more surprising when you consider this figure doesn’t include premiums for medicare supplements, costs for a nursing home or long-term in home care.

It simply includes things like your part B and part D medicare premiums.  Prescriptions, and other common costs like co-payments, and deductibles.

Over a quarter million dollars on health related expenses.  It’s Mind boggling!  But this will easily be one of your biggest expenses in retirement. And one many people aren’t considering

So what are some of the things you can do to help with these costs?  Let’s take a look.

1.  Invest in a Healthier Lifestyle.

By this we don’t mean putting money in an account.  We mean, make the effort to change some of your habits. Lose weight, exercise more, be more active.  Also take time to give your brain a work out.  Making healthier choices can help reduce some of those expenses you’ll face later in life.

2. Delay retirement to age 65 when you are eligible for Medicare.

Many people want to retire as early as possible, but one of the major obstacles to retiring prior to age 65 is the high cost of health insurance. Health insurance premiums for a 62 year old couple could easily exceed $1,500 per month. That’s over $54,000 total to get to Medicare.

3. Consider Medicare Supplement Insurance.

Some of the deductibles and co-pays for medicare can be significant. These supplements are designed to help cover some of those costs. These supplements do come at an expense, so consider that in your decision making process.

4. Do you have a Health Savings Account?

Not everybody participates in a high deductible health plan that offers health savings accounts.  But if you do, consider maximizing your annual contributions.  This money can be used to pay for health related expenses, and the earnings are tax free.

The cost of healthcare in retirement is not something any of us like to think about.  But it could easily be one of your largest expenses.  And something we should consider in our plans.

Emergency Fund – Part 1: How to Get Started

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Did you hear about the Government Shutdown?  Some 800,000 government workers didn’t get paid for a little over a month.  Have you stopped to consider how you would pay your bills if you didn’t get paid for a month?  What about 3 months?  Do you have an emergency fund?  (You probably should).

The first part of this video series offers a few tips on how you can start or improve your emergency fund.

Bonus Tips

Emergency Fund Bonus Tip 1 – Consider reducing your 401(k) contributions temporarily

To bolster your short-term savings, you may want to consider reducing your contributions to your 401(k) temporarily.  This can free up cash flow to add to your emergency fund.  Once  you reach a comfortable level, resume the deferrals.  One note of caution:  Pay attention to the company match, it’s free money.  Don’t reduce your contributions to a level where  you won’t maximize the employer matching funds.

Emergency Fund Bonus Tip 2 – Use Your Tax Refund.

Do you normally get a large tax refund?  Consider using part or all of it to boost your short term cash reserves.  Whether you expect it or not, it can be an easy way to help you get to that goal.

Emergency Fund Bonus Tip 3 – Take Advantage of Direct Deposit

Is your paycheck deposited directly into your bank?  Consider splitting the deposit to two accounts, one your normal check account, and the other your cash reserve fund.  Sometimes it is easier to save it, if it never reaches your spending account.

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Online Savings Accounts

Some of the online banks make it easy for you to save and reward you for doing so.  Most of them have no minimum balances, and all three of them pay you interest.  They have an easy to use online interface.  And you can transfer money back and forth to your local checking account.  We have experience using both Capital One and Synchrony Bank (and neither of them pay us anything to talk about them.)  Three of the more popular ones are linked below.

Capital One

Synchrony Bank

Ally Bank

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The Correction of 2018

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Would you like to take a closer look at the annual correction chart shown in the video?  you can download it in the link below.  Just click on the image for a full sized pdf file.

[/et_pb_text][/et_pb_column][/et_pb_row][et_pb_row admin_label=”Row”][et_pb_column type=”2_3″][et_pb_image admin_label=”Image” src=”https://flemingwatson.com/wp-content/uploads/2018/02/AnnualCorrections-Full.png” alt=”Correction” title_text=”Annual Corrections since 1980″ show_in_lightbox=”off” url=”https://flemingwatson.com/wp-content/uploads/2018/02/Annual-Corrections-Since-1980.pdf” url_new_window=”off” use_overlay=”off” animation=”left” sticky=”off” align=”left” force_fullwidth=”off” always_center_on_mobile=”on” use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [/et_pb_image][/et_pb_column][et_pb_column type=”1_3″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Adobe Acrobat Reader is available as a free download directly from Adobe.

Click Here to download it.

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We’d Love to Hear From You

This is our first venture into video content.  We’d love to hear your feedback.  Likewise, we would like to know if there are any topics you would like to see us cover in future videos.  You can use the form below to send us your feedback or your questions.

Thanks for watching.

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