He's not the starting Mike Singletary Womens Jersey He's a Authentic Mitchell Schwartz Jersey quarterback, said. Payton's progress Payton says he feels good about his jump-shot, which was under repair all . The 1996 free-agent class was -studded Devin McCourty Jersey future Hall of Famers , Mourning, Dikembe Mutombo, Bobby Massie Youth Jersey Payton and Rodman were on the open market -- yet it was O' who was considered the crown jewel. and it's not necessarily PEDs. Brent Burns Womens Jersey Hey , Dominic Moore Youth Jersey enjoy your insights. Just the discipline my parents put me. NFL Comparison.

First off, his skill set tantalizes. Bears insider Brad Biggs believes WR Alshon 's relatively disappointing Jimmy Graham Jersey has been due Borje Salming Jersey his knee and hamstring injuries. recorded longer routes 2016, but both players also stopped to check if the ball had actually left the yard or not. A Amara Darboh Youth Jersey heart Nathan MacKinnon Womens Jersey There's no I-told-you- detectable Crowder. It's Authentic C.J. Uzomah Jersey

Retirement Archives - Pinnacle Investment Management, Inc.

Leisure in Retirement

November 13, 2017 / Blog

What will you do with your time in retirement?  This question can extract a lot of different answers. Some people have a very clear vision and can quickly imagine what their days will look like. Others may not have such a clear picture and the transition from working to retirement can be worrying.  Fortunately, for those that are worried, you can turn to those already retired to help gain clarity about what life in retirement may look like.

A paper from Merrill Lynch in partnership with AgeWave, a thought leader on issues related to aging,  explores and documents the experiences of retirees in a paper titled, “Leisure in Retirement: Beyond the Bucket List.” Below are some of the key findings from this paper.

 

New Definition of Retirement

 

The very idea and concept of retirement is changing:   “Rather than winding down, retirement is becoming the time of life when most individuals report having the greatest fun.” With average life expectancies consistently increasing, retirees today have decades of life to plan for.

This increasing life span gives retirees the time to follow and cultivate new passions and interests. Retirement is no longer viewed as a time of winding down, but rather as fresh start and a new chapter in life’s story. “Rather than viewing retirement as the finish line, 9 out of 10 retirees now describe it as an opportunity for new beginnings, bringing greater freedom and flexibility and often an entirely new state of mind.”
 

Well Being

Fun, happiness and general well being are usually portrayed as the domain of the youth. However,  “contrary to stereotypes that portray youth as a time of psycho-social vitality and maturity as a period of emotional decline, our study reveals that lifetime wellbeing actually peaks in retirement. Feelings of happiness, contentment and relaxation soar, while anxiety seems to plummet.”

A number of studies have shown that retirees suffer less from depression, experience fewer negative emotions than people in their 20s and 30s, and when they do experience negative emotions they tend to get over it much quicker than younger people.

In her book “A Long Bright Future,” Laura Carstensen, Founding Director of the Stanford Center on Longevity, tells the story about a 104-year-old woman who was asked, “What’s the best thing about being over one hundred?” Her reply: “No peer pressure.”

One of the many possible reasons for this general contentment is that retirees tend to put more emphasis on experiences vs.  things. “Most retirees (95%) say they would prefer to have more enjoyable experiences rather than buy more things.” A key finding that was discussed in the book “Happy Money: The Science of Happier Spending” by Elizabeth Dunn was that purchasing experiences leads to more and longer lasting happiness than purchases of material goods.

 

Transitions, Social Connections, and Family

The study also showed promising results in the experience of the initial transition into retirement: “Although you might assume that leaving the structured environment of work behind would be difficult to adjust to, nearly all retirees (92%) say they definitely enjoy the freedom of a less structured life in retirement.”

Social relationships are a key to both mental and physical health for retirees. Retirees can find time in retirement to deepen their relationships with existing friends and find new ones.

Family is another area that retirees place high value. As the father of a 6 month old baby, I found one area in particular quite interesting:  “Most retirees (60%) say spending time with grandkids is more fulfilling than spending time with their own children.”

Final Thoughts

Obviously not every experience will look the same and their will be challenges that retirees face, but I found the overall message of this study to be encouraging. Many retirees are able to craft a new identity, enjoy their freedom, and experience fulfillment throughout retirement.

For soon to be retirees, it may help to start thinking more about what you want your retirement to look like. What experiences do you want to have and who do you want to share them with? Are their old hobbies that you would like to pick back up or new hobbies that you want to start? What are potential roadblocks that can get in the way of this vision?


Filling Up Tax Brackets with Roth IRA Conversions

August 7, 2017 / Blog

Roth IRA’s are a powerful retirement savings vehicle. When you contribute money to a Roth you don’t receive a tax deduction, however any growth on those funds and future withdrawals are tax-free. An added benefit to these tax free withdrawals is that they don’t count as income for purposes of determining whether your Social Security benefits will be taxed and whether you will have to pay a surcharge for Medicare. You also are not required to take money out of a Roth IRA at age 70.5, as you are with traditional IRA’s.

 
One way to quickly get money into a Roth IRA is through a Roth IRA conversion. A Roth conversion is the simple act of converting a portion (or all) of your Traditional IRA into a Roth Account. The “cost” to a conversion is that you have to pay taxes on the amount converted.

 

Understanding Tax Brackets

Before we look at when someone should convert, it’s first worth understanding how our tax brackets work.

Our tax code is progressive. This means that as you earn income you fill up each tax bracket. In 2017 the first $18,650 in taxable income is taxed at the 10% rate for married couples. Income from $18,651 to $75,900 is taxed at 15%, income above that is taxed at 25%, and so on. The tax rate that your last dollar of income is taxed at is considered your marginal tax bracket.

Jack and Jill have income of $90,000. Their deductions and exemptions total $20,000, leaving them with taxable income of $70,000. When you look at the chart below (courtesy of Oblivious Investor) you can see that $70,000 of taxable income falls in the 15% tax bracket. However this doesn’t mean that all $70,000 is taxed at 15%. Rather the first $18,650 in income is taxed at 10% and the rest of their income above that amount is taxed at 15%. Their marginal tax bracket is 15%.

 

 

As you can see from the chart, there is no 0% tax bracket. However, there can be situations in which you can pay $0 in federal taxes. This occurs when your deductions and exemptions equal (or are more than) your taxable income.

Barbara (single) was laid off from her job half way through the 2016. Her income for the year was $15,000. She has deducitons and an exemption that total $15,000. Barbara’s taxable income is $0 and so she wont pay any federal taxes.

 

In 2017 the standard deduction is $6,350 for singles and $12,700 for married couples. The personal exemption is $4,050. So a single person can have, at a minimum, income of $10,400 that will not be taxed and a couple can have income $20,800 that will not be taxed. If you itemize deducitons that amount is higher. The standard deduction is also higher for people over age 65.

 

When to Convert?

An opportune time to look at Roth Conversions is in years where you have lower income than normal and/or have higher deductions than normal. This can include someone who just retired and doesn’t have much taxable income coming in, or someone that was laid off but expects to go back to a high income in the future, or someone who has large tax deductions because of charitable gifts.


Mark and Teresa are 60 years old and recently retired. They have no taxable income for the year and have enough in savings to live off of. They have itemized deductions of $25,000 and personal exemptions of $8,100, for a total of $33,100.

They run a tax projection with their Financial Planner and see that they can convert $33,100 entirely tax free.

Mark and Teresa also see from the tax projection that in future years, when they start Social Security and begin pulling money from their traditional IRA’s, they will be in the 25% marginal tax bracket.

Mark and Teresa decide that they want to take advantage of the low tax brackets today and so they convert another $18,650 to fill up the 10% tax bracket. They pay $1,865 in tax for that conversion.

In total, Mark and Teresa were able to convert $51,750 to a Roth for just $1,865 in taxes. That is an effective tax rate just 3.6%!

If Mark and Teresa never did these conversions, a future withdrawal of $51,750 from their IRA could cost them as much as $12,937 in taxes ($51,750 x 25% marginal tax bracket). By making Roth conversions at the right time Mark and Teresa were able to save a substantial amount of money in taxes.

Mark and Teresa may also want to look at filling up the 15% tax bracket with conversions this year as well.

I simplified this example in order to help make the important points clear. But with that said, the example isn’t unrealistic. We often see situations similar to Mark and Theresa’s, even though the tax situation may not be as simple and clean. If planned for properly, a Roth conversion can help you save in taxes and in turn help your bottom line throughout retirement.


How Much Will Health Care Cost in Retirement?

June 26, 2017 / Blog

Most know that healthcare can be a big expense in retirement. But what is hard to figure out is just how “big” of an expense we are talking about. Luckily, ever year HealthView Services (a leading producer of health care cost projection software) releases a report analyzing current and future health care costs in retirement. They just recently released their 2017 edition and below I outline some of their findings and our views.

 

Before we dig in I wanted to share two quick thoughts:

First, it is extremely hard to predict what health care costs will be 10, 20, 30+ years into the future. While the report is very well done and is consistent with present data, they are still making assumptions about the future and so is their obviously quite a bit of room for error. With that said, I think these numbers are useful in serving as a baseline.

Second, the numbers reported are averages. Your experience may differ from the average, and quite possibly by a lot.

 

The HealthView report is pretty extensive. Their projections include costs for Medicare Parts B and D, supplemental insurance, out of pocket costs, and dental premiums. For supplemental insurance they used a national average. The actual costs for Part D and supplemental policies will differ by state and by the plan you choose. More on this below.

Now to some of their findings:

 

 

Health Care Costs For Average American Retiree


“Total Projected lifetime health care premiums for a healthy 65 year old couple retiring this year are expected to be $321,994. Adding deductibles, copays, hearing vision, and dental cost sharing, that number grows to $404,253.

 

I know what you’re thinking: Wow that’s a lot of money! And it is. But don’t panic just yet. Let’s unpack the costs of Medicare so that you can see where these numbers come from.

In 2017, the Medicare Part B base premium is $134/m.

Part D (prescription drugs) premium will vary based upon the plan you choose. The national average premium is $35.63/m. In Connecticut, it looks to be closer to $50/m.

Medicare supplement policies (MediGap) are important as they pick up a lot of the gaps in coverage with original Medicare (Parts A & B). However, there are various types of supplemental plans and their premiums can vary substantially. So take these averages with a grain of salt. The national average premium for Medigap is $183/m. In Connecticut they look a bit higher, so lets just assume $250/m.

With these numbers in hand we can calculate a rough estimate of what a 65 year old retiree in Connecticut may pay in Medicare Premiums.

• Part B: $134/m
Part D: $50/m
Supplemental: $250/m

TOTAL: $434/m.

For a couple that equals $868/m.

This rough estimate is JUST for Medicare premiums. It does not include dental or out of pocket costs. Many retirees don’t realize that Medicare Parts A, B and supplemental policies do not provide dental coverage, and dental can be a very expensive. However some Medicare Advantage plans may cover dental.

 

The HealthView Services Report has a great chart which looks at retiree health care costs by age and these numbers include estimates for dental and out of pocket costs:

HealthView Services

*These are future dollars

As the chart highlights, a 65 year old couple can expect to pay on average about $950/m for medical costs (that is a combined cost).

 

Retirement Health Care Cost Inflation

 

“HealthView Services’ 2017 Retirement Health Care Cost Data Report shows retiree health care expenses will rise at an average annual rate of 5.47% for the foreseeable future… As this Report details, the compounding impact of health care inflation means that health care costs will be one of the most significant expenses in retirement.”

A challenge with financing health care in retirement isn’t just that it is expensive, but also that it will most likely get more expensive as one ages. Over time the percentage of your budget that is used for health care costs increases. Inflation at 5.5% is substantial and one needs to look at how they can grow their money so that it keeps pace with those costs in the future.

 

Ways to Plan for and Manage Health Care Costs in Retirement


“Americans are not powerless when it comes to reducing costs… At an individual level, behavior modification and a long term savings plan will reduce the impact of retirement health care costs.”

As I have mentioned a few times in this post, your costs can vary a great deal from the average. Your personal health will dictate how much you are spending on out of pocket costs and should also be considered when determining what policies are the correct ones to purchase. If you are going to choose a supplemental policy, take a long look at what each type of policy covers and doesn’t cover. For instance, MediGap Plan F can be purchased as a high deductible plan, which has lower monthly premiums with high deductibles. If you are in good health this can be an option worth exploring.

Some people will use a Medicare Advantage plan rather than a Medicare Supplement plan. These plans also require a good bit of due diligence as they carry their own design and costs. Many Advantage plans will bundle in prescription drug coverage as well. Whether you are going to go with a supplemental policy or Medicare Advantage, it pays to do your homework.

Another way to help manage your costs is by revisiting your plans each year. During Open Enrollment (October 15 – December 7) you should take a look at your Part D coverage to see if you still have the right plan at the right cost. Plan formularies (the list of drugs that are covered) can change yearly, so it’s worth taking the time to understand what drugs you may need (if any) and what plan best suites you. Medicare Plan Finder is a good tool to help you with this.

 

One final way to help manage drug costs is by managing your income. Why does your your income have anything to do with your health insurance? It is because of a Social Security Provision known as “hold harmless.” This rule states that the premium increases on Medicare Part B can not be greater than the Cost of Living (COLA) for Social Security. What this rule does is prevent your Social Security payments from being reduced due to large increases in Part B Premiums.  We have talked about this in a previous post, as can be seen here.

In order to qualify for the hold harmless provision you must be collecting Social Security, paying your Part B premium out of your Social Security check, and your income must be below $85,000 for singles or $170,000 for couples.

The hold harmless provision was applied for a majority of retirees in 2016. Medicare Part B premiums increased from $121.80/m in 2016 to $134/m in 2017, a 10% increase. However, because the COLA on Social Security was very low (.3%) many retirees were held harmless and paid a Part B premium of just $109/m.

Importantly, hold harmless only applies to Part B, and just because you are held harmless today doesn’t mean that the cost increases in Part B premiums won’t eventually come around to impact you in the future.

 

FINAL THOUGHTS

 

What all of the above probably showed you is that health insurance in retirement can be expensive. It can also seem a bit daunting to get a grasp of at first. But taking the time to understand your options and doing a bit of homework can pay off. By looking at your health needs, talking with your doctors, and doing some research you can potentially save on costs and, more importantly, get the right type of coverage you need.  I would recommend that you work with a Medicare Specialist to help you find the correct plan and help you understand what it entails.

As a final point, the numbers above do not include any costs for long term care. That is a topic for another day.

 

Sources & Further Reading
HealthView Services: 2017 Retirement Health Care Costs Data Report©
HealthView Services Website
Medicare Plan Finder
Medicare Interactive


Longevity Insurance

June 16, 2017 / Blog

“If I retire, I’m 65 years old, a question is not so much how I will create money tomorrow. It’s how will I create money if I’m alive 25 years from now?
– David Blanchett, PhD, CFA, CFP® and head of Retirement Research for Morningstar

 

The above quote refers to the challenges that come with planning for a long retirement. As people live longer and longer, they need to stretch out their resources over ever longer time frames. This is known as “longevity risk,” the risk of outliving your assets.

We have written a post on longevity in the past, and in this article we further our discussion by looking at one way of potentially hedging against longevity risk.

 

What is Longevity Insurance?

Deferred income annuities, also known as longevity insurance, have been around for a long time. The basic idea behind a deferred income annuity is that you give money to an insurance company today in exchange for a guaranteed income stream in the future. What has changed is that a ruling by the Treasury Department in 2014 now allows you to purchase a longevity annuity with retirement money (i.e. IRA or 401k), while also allowing you to defer the required minimum distribution on that money. This type of deferred income annuity is referred to as “QLAC,” qualified longevity annuity contract.

So why would the government pass this ruling and why should you care? J. Mark Iwry, deputy assistant  secretary for Retirement and Health Policy, offered a nice summary in the press release of the final ruling:

 

“All Americans deserve security in their later years and need effective tools to make the most of their hard-earned savings. As boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”

 

Aren’t Annuities Bad?

Before we delve into how QLAC’s work, lets briefly talk about annuities. Annuities are generally frowned upon by the investing public, and with good reason. A lot of annuities are complex, loaded with fees, and sold by insurance professionals rather than bought by informed retirees. With that said, not all annuities are bad. Its value depends on the type of annuity and how it fits into your plan. Annuities are a type of insurance, and they can offer certain benefits that investing in stocks or bonds may not.

While I am obviously a bit biased, I would strongly recommend you work with a fee-only financial advisor (like Pinnacle) when trying to look at annuities. Fiduciary advisors can approach the decision from a financial planning point of view, rather than trying to sell you something to earn a commission.

 

Minimum Required Distributions

If unfamiliar, in the year you turn 70.5 you must start taking distributions from your retirement accounts (i.e. IRA’s and 401k’s). These are known as Minimum Required Distributions (MRD’s). The amount you must take out is based upon life expectancy tables published by the IRS. Each year the percentage that you must take out increases. When you take money out you must pay taxes on that money.

Example:
Louise turned 70.5 this year and has a retirement account balance of $500,000. Based upon the IRS table, her minimum distribution is $18,248. This amount will be subject to income tax.

 

QLAC’s: A Form of Longevity Insurance

Unlike some other annuities, QLAC’s are relatively easy to understand: you pay a premium to an insurance company today for the guarantee of an income stream in future years.

There are restrictions on how much money you can put into a QLAC. The maximum QLAC purchase is the lesser of:

• $125,000 (this amount is indexed for inflation in $10,000 increments) OR

• 25% of your IRA account value.

Example:
Adam is 62 with a $400,000 IRA. The most he could purchase of a QLAC is $100,000 (25% of his account balance).

 

The limits are also a per person limit. So for a married couple they could each purchase QLAC contracts if they both have IRA accounts.

The latest age you can defer payments under a QLAC is 85. You can begin payments sooner as well.

QLAC’s are fixed annuities. They cannot be sold as variable or equity indexed annuities. You can purchase them with inflation adjustments once the payments start as well.

Another important feature is that you can add your spouse as a joint annuitant to your QLAC. This means that the income from the annuity will last for both of your lifetimes, no matter how long either of you live. For married 65 year old couples, there is an 18% chance that one of them will live to 95, making longevity insurance a potentially more attractive proposition.

Example:
Dan and Maria are 65 and planning for retirement. Dan purchases a QLAC for $125,000 that will cover the lifetime of him and Maria. If Dan passes away before Maria, the payout continues until she passes.

One other feature that can be added to these contracts it the ability to have a death benefit. If you purchase a QLAC but pass away before payments begin, you can receive 100% of the premium back.

Example:
Jack bought a $125,000 QLAC with a Return of Premium rider when he was 65 with payments set to start at 85. Unfortunately Jack passes away at 75. Since he had the Return of Premium option, his beneficiaries can receive the $125,000 back. There is no growth on the $125,000; it is only the initial premium amount of $125,000 that is returned.

 

QLAC’s and MRD’s

As we mentioned above, at age 70.5 you need to start taking money out of your retirement accounts. With a QLAC however, any money that is in the QLAC is not part of the MRD equation.

Example:
Tom, age 69, has an IRA valued at $700,000. When he turns 70.5 his Minimum Required Distribution would be about $25,500. If he takes $125,000 and purchases a QLAC, the $125,000 is no longer included in the MRD calculation. He now calculates the MRD on $575,000 balance. His MRD would be $20,980.

Research from financial researcher Michael Kitces (see here) has shown that QLAC’s used solely for the purpose of deferring MRD’s isn’t a great idea. Rather, they should be viewed for their benefits as longevity insurance. That is where they have the greatest value.

 

How much income would a QLAC pay?

The amount that you would receive from a QLAC depends on a number of options. The primary determinants are the age you start the contact, the age you will start receiving payments, current interest rates, and whether you add a joint annuitant or not. Adding other features like inflation adjustments and return of premium will also impact the payout.

Below is a very general example with quotes received from immediateannuities.com. Quotes will vary. This is purely for illustrative purposes.

Joe and Marilyn are 65 years old. A 100% Joint and Survivor annuity with a Cash Refund would pay out about $2,500/m starting at age 85. So when they turn 85, they will receive $30,000 of guaranteed income for as long as either of them lives. If Joe passes, the payment doesn’t change, Marilyn receives the same $2,500/m. There is also a death benefit that would ensure that at the minimum the $125,000 premium is paid out in the case that Joe and Marilyn pass away early.

 

Why Would You Consider a QLAC?

QLAC’s are risk transfer strategies. You are transferring the risk of outliving your money to an insurance company that guarantees that they will pay you an income no matter how long you live. The ability to hedge against longevity risk is the greatest benefit of a QLAC.

QLAC’s can also serve as a hedge against market risk later in retirement. The payment is guaranteed for you no matter what may have happened in the markets during the interviewing years.

One final advantage is that by purchasing a QLAC up front in retirement, you have in some respects lessened the time frame for how long you have to relay upon your portfolio. Rather than planning for 30 years, you are planning for say 20 years, with the understanding that you will have the QLAC starting to pay out at 85.

 

QLAC Disadvantages

Everything in life is a trade off, and that especially applies to QLAc’s.

One disadvantage to QLAC’s is that you have no flexibility with the money you use to purchase the QLAC. Once you purchase the annuity you have parted with that money, and can no longer access it.

You also lose the ability to invest that money, which some may not be comfortable with. While I think it’s a valid concern, I don’t believe it’s the appropriate way of analyzing annuities. Annuities are insurance, not investments. If you could invest your money and be ensured that you will have enough later in life then it would be a no brainer to invest it. However, there is no investment that can guarantee that. With a QLAC you are buying insurance to protect you against that longevity and market risk.

Another disadvantage is the potential impact of inflation. While you can purchase inflation adjustments on the income amount, that inflation adjustment only starts when the payouts start. The payment isn’t adjusted during the years in between the time you pay the premium and the payments start. If inflation increases substantially, your future income may not go as far as you had originally planned.

Lastly, “longevity insurance” protects you from living long. If you have reasons to believe you may have a shorter life expectancy, then a QLAC may not be the right option for you.

 

Final Thoughts

Longevity risk is something that all retirees must consider. Understanding the risks that you face in trying to stretch your money out over a multi-decade time frame can help you analyze appropriately all the different options for you, with QLAC being just one of the many.

 

Sources and Further Reading
Morningstar: How to Fund A Long Retirement
Michael Kitces: Don’t Use a QLAC to Avoid IRA MRD Obligations
Immediateannuities.com: QLAC, Qualified Longevity Annuity Contract

 


Timing Matters in Retirement

June 12, 2017 / Blog

Investing in retirement is different than investing for retirement. One of the most important differences is that the impact of market volatility (the ups and downs of your investments) gets amplified once you switch from accumulation to decumulation (the process of withdrawing money from a portfolio). This risk is manifested in what is called the “sequence of returns risk.”

The sequence of returns risk is just as it sounds: the order in which you experience investment returns matter, and they especially matter in the early years of retirement. If you retire and have poor market returns early on it can be very difficult to ever recover. Two similar retirees, who retiree with the same amount of money, withdraw the same amount from their portfolio, live the same length of time, and achieve the same average return, can have vastly different experiences all due to the market environment they retire into.  As with most domains in life, timing matters in retirement.

Lets look at an example (while extreme) that shows how sequence risk works.

 

Bob and Joe both have $100,000 saved for retirement. First, let’s imagine that they don’t need any money from their portfolio. Bob’s portfolio returns 100% in year 1, and loses 50% in year 2. So after 2 years he is back to his $100,000 portfolio. Joe’s return order is flipped. In year 1 he loses 50% and in year 2 he makes 100%. He too is back to his $100,000 balance after 2 years. Bob and Joe’s geometric return is the same, 0%.

But now let’s imagine that Bob and Joe both need to take a $50,000 withdrawal from their portfolio at the end of the first year. Bob’s portfolio grows from $100,000 to $200,000 and then he takes out $50,000, leaving him with $150,000 at the end of year 1. After the second year drop of 50% his portfolio is down to $75,000. On the other hand, Joe’s portfolio goes from $100,000 down to $50,000 due to the first year loss of 50%. He then takes out $50,000. Joe has no money left.

 

Again, this is an extreme example, but the point holds true no matter how much you withdraw. It is a mathematical reality for anybody withdrawing money from a volatile investment portfolio. When you retire, “average” market returns don’t tell us the full story.

Sequence of returns risk is also sometimes referred to as “reverse dollar cost averaging.” With regular dollar cost averaging you buy more shares when the markets go down. However, if the market goes down and you have to withdraw money, you will have to sell shares of your investments. Those shares then aren’t available to participate if the markets rebound.

 

So what is a retiree to do?

 

Sequence of returns risk is a function of volatility. So one step to minimize sequence risk is to decrease the overall volatility of your portfolio. You can achieve this by having less stock exposure and by making sure you are properly diversified. While sequence risk never disappears, it is most impactful in the first 10 years of retirement. Therefore early in retirement you need to be very mindful of how your portfolio is allocated.

Another way to manage sequence risk is by having some flexibility in your spending from year to year. Having some room in how much you need to withdraw from your portfolio gives you better chance of responding to poor market conditions. This flexibility is tied in large part to your other income sources, i.e. Social Security and pensions.

It pays to have a comprehensive plan in place before you retire that takes into account sequence risk. It is easy to model in excel a retirement plan assuming an average rate of return on investments. However, as hopefully the above illustrates, average returns aren’t the whole story. With financial planning software you can model sequence risk through the use of Monte Carlo simulations, which can simulate market volatility and its impact on your plan.

The final point that I would share is that managing your investments and finances in retirement should be an iterative process. You should revisit your plan periodically and make changes as needed.


Will my Social Security Benefits be Taxed?

June 8, 2017 / Blog

Like most things with Social Security, this answer isn’t always straightforward. Your Social Security benefit may not be taxed at all or, up to 85% of it may be taxed.

The determination of it being taxable or not depends upon what other sources of income you have. If the only income you have is Social Security then your benefit will not be taxed.

If you have other income then you need to do some calculations. I would recommend you use a calculator (such as this one) to do this for you, however I also believe it is worth understanding the basics of how it is determined, which is what I explore below.

The first step in figuring out if your Social Security benefit is taxable is calculating your “combined income.” Combined income is defined as adjusted gross income + nontaxable interest + ½ of your Social Security benefits.

Pretty much all income you can think of (wages, IRA distributions, pensions, dividends, capital gains) is considered as part of your AGI. One income item that wouldn’t be included are withdrawals from a Roth IRA or Roth 401(k).

 

EXAMPLE

Teresa is 66 and collecting a Social Security benefit of $15,000/year. Her other income includes a pension of $10,000 and municipal bond interest (tax free interest) of $3,000. Teresa’s combined income is

               $10,000 (pension)
               $3,000 (tax free interest)
               $7,500 (1/2 of Social Security benefit)
               $20,500 (combined income)

Once you have figured your combined income, you can then determine how much of your benefit is taxable. There are two thresholds (based on your filing status) that determine the amount:

To help understand the chart, for a single filer:

  • If your combined income is below $25,000 then none of your Social Security benefits are taxable
  • If your combined income is between $25,000 and $34,000, then up to 50% of your benefit may be taxable
  • If your combined income is more than $34,000 then up to 85% of your benefits may be taxable.

The same reasoning goes for married couples, however the thresholds are higher.

So, from the example above, Teresa’s Social Security benefits would not be taxable since her combined income is below $25,000.

It is also important to know that its only the portion of your combined income above these thresholds that is taxed.  For instance, if you have combined income of $26,000, that doesn’t mean that all of your Social Security benefits are now taxable. Rather, $500 of your benefit ($1,000 above the $25,000 level x 50%) would be taxable.

Another example to help clarify:

Jake has income from his IRA of $20,000 and Social Security benefits of $15,000. His combined income is $27,500,000 ($20,000 + $7,500), which means he has $2,500 of income over the first threshold $27,500-$25,000). Half of this amount, so $1,250, of his Social Security benefit is subject to tax. The rest of his benefit will be non—taxable.

As your income rises, the amount of your Social Security subject to tax rises. The highest amount of Social Security that can be subject to tax is 85%.

An important note: this does not mean that 50% or 85% of your Social Security benefit will disappear. It just means that 50% or 85% of your Social Security benefit will be taxable. The rate that your benefit will be taxed at depends on your tax situation. Some states, Connecticut being one, also tax (or partially tax) Social Security.

 

Planning Points

• This is a yearly calculation, so the amount of your Social Security subject to tax can change as your income changes in retirement.

• The income thresholds that are listed above are not adjusted for inflation. So as your income rises, you may quickly surpass these thresholds.

• There is only so much that can be done to plan around this Social Security tax. However, having money in Roth accounts or taxable accounts can help by giving you the ability to manage your income streams throughout retirement. It can be worth exploring tax planning opportunities such as Roth conversions as your prepare for retirement.

If you are interested in learning more about Social Security, download a free copy of our eBook “Social Security: How to Make it Work For You” which you can find on the top right of this page.

 

Sources & Further Reading
SocialSecurity.gov: Income Taxes and Your Social Security Benefits


The Basics of a Reverse Mortgage

June 1, 2017 / Blog

In a previous post we tackled some of the pre-conceived notions attached to Reverse Mortgages. In this post we will look into how Reverse Mortgages work and the payment options available.

 

THE BASICS

• In order to open a Reverse Mortgage, the youngest borrower must be at least 62 years old.

 • You must own the home.

• It must be your primary residence.

• If there is a mortgage on the property, it must be paid off with the loan proceeds.

• There is a financial assessment to determine if you have the resources to cover taxes, insurance, and maintenance.

• You must attend a counseling session with a HUD approved counselor. They will discuss your options with you.

• Recent changes brought by the government have put a cap on how much reverse mortgage proceeds can be used in the first year. It has also put in protections for non-borrowing spouses.

• Distributions from a reverse mortgage are tax-free.

 

PAYMENT OPTIONS

Tenure

Similar, in some ways, to an annuity/pension. You receive a fixed monthly payment for as long as you remain in your home. If you were to move, pass away or sell the home, the payments would stop.

Term

Just as it sounds, the term is a fixed monthly payment that lasts for a fixed period of time (e.g. 20 years).

Lump sump

You receive just one up front payment of the loan proceeds.

Line of Credit

When you open a reverse mortgage you do not need to use the proceeds right away (or ever for that matter). The line of credit allows you to draw on the loan whenever you would like. You can draw on it at any time and for any amount until the line of credit is exhausted.  You will pay interest only on the money you take out of the credit line.

An interesting feature to the Line of Credit is that the credit line grows. This means that you can have access to more money later. The line of credit grows at a variable interest rate, which is usually the same rate that applies to the loan balance.

The line of credit is one of the more challenging aspects to understand with reverse mortgages, however it’s also arguably one of the greatest features. Below is a very general example which may help clarify how this line of credit option works:

 

Joe is 62 and recently retired. He has a home worth $300,000 with no mortgage and he would like to stay in his home for as long as he can. Joe doesn’t need any additional funds today as he can live off his investments. However, he is interested in learning more about the reverse mortgage line of credit as he heard it may help improve the long term success of his retirement plan. He gets a quote on a Reverse Mortgage and it says that he has a line of credit option available for $155,000. Joe likes the idea and decides to sign up for the Reverse Mortgage. 

 

At this point, all Joe has really done is given himself the option of accessing some of this equity either now or in future years. As was mentioned above, the reverse mortgage line of credit grows every year. The $155,000 grows by a variable interest rate, meaning that if Joe doesn’t touch the line, he will have access to more money in the future. For instance, if the interest rate in the first year is 6.5%, then next year Joe will have access to a credit line of $165,380 ($155,000 x 6.5% interest rate compounded monthly).

 

Let’s imagine that Joe decides to take out $20,000 from the Reverse Mortgage Line of credit. At that point Joe will have a mortgage balance of $20,000, which accrues interest. You only owe interest on the amount you actually borrow. So Joe will pay interest on $20,000, not on the entire credit line. Joe can pay off the balance if he wants, but he doesn’t have to. A reverse mortgage does not require any payments. The interest rate is most often the same rate as the rate on the line of credit. So, from our example above, Joe would be charged 6.5% interest on the $20,000 loan. 

 

Now lets say that unfortunately Joe passes away next year, what happens then? Once Joe passes the reverse mortgage loan balance comes due, meaning that his heirs will need to pay off the $20,000 balance plus whatever interest may have accrued. This is the same as if there were a regular mortgage on the property. The heirs have numerous options for paying off this balance. One option would be to pay off the balance with other resources. Another option is to sell the home. The heirs would keep any equity in the home above the $20,000 loan. The bank isn’t due anything above the mortgage balance. This point is important as most people think that once they have a reverse mortgage the bank owns the home. That is not true.

 

So why would Joe even bother of looking at the Reverse Mortgage in the first place? There are a number of reasons and we will touch on them in more depth in future posts,  but one potential reason could be to pay for any unexpected expenses  in the future. Another option is to use the reverse mortgage line of credit in years where his investment portfolio has declined. Instead of selling investments after they have lost money, he can use the line of credit while he waits for his portfolio to (hopefully) rebound. Joe may even use it as a way to bridge a gap before he starts collecting Social Security at 66. There are a number of options, but a reverse mortgage, if used appropriately, can help improve a retirement plan  for some retirees.

 

In order to try and convey the basic message, this example is meant to be very general. The numbers I have listed aren’t actual quotes and the amounts will vary. The example is intended to help illustrate how a reverse mortgage line of credit works conceptually

 


An Overlooked Way to Lower Your Medicare Premiums

February 17, 2017 / Blog

We mentioned in a previous post that some retirees will pay more for their Part B and D premiums due to having a higher income. As a refresher, higher earners have to pay the base premium along with an additional amount, which is called the income related monthly adjustment amount (IRMAA).

 

The income threshold is determined yearly and is determined by your MAGI (Modified Adjusted Gross Income). MAGI is your adjusted gross income plus your tax exempt income. On your 1040, those are lines 37 plus line 8b:

 

 

If your MAGI income is above certain thresholds, then your premium will be adjusted upwards. The following is the premium costs for 2017 based upon different MAGI thresholds:

Part B

 

Part D


If you are just $1 above that threshold then your premiums will be higher for the entire year.  For instance, if you are single with an AGI of $85,001 in 2015, your Part B premium in 2017 will be $53.50/m higher ($187.50 – $134) than the base premium and your Part D premium will be $13.30/m higher. Over a full year that is about an extra $801 you will pay in premiums due to that $1 of income.

As you may have noticed in those charts, Medicare determines your AGI by looking at the most recent tax return that the IRS provides, which is the tax return from 2 years prior. So to determine your premium for 2017, they will look at your 2015 tax return.

If are subject to IRMAA, Social Security* will send you a letter with your premium amounts and the reason for their determination.

 

So where do the potential savings come in??

If your income has dropped due to a “Life Changing Event” then you may be able to get your IRMAA reduced.

The following (from SSA.Gov) are considered life changing events:

You married, divorced, or became widowed;
• You or your spouse stopped working or reduced your work hours;
• You or your spouse lost income producing property because of a disaster or other event beyond your  control;
• You or your spouse experienced a scheduled cessation, termination, or reorganization of an employers pension plan; or
• You or your spouse received a settlement from an employer or former employer because of the employers’ closure, bankruptcy, or reorganization.

If any of those life changing events occurred then you can contact Social Security and they can make a new determination on your premium. You will need to fill out form SSA-44, Medicare Income-Related Monthly Adjustment Amount- Life-Changing Event.

 

Retirement

When you retire you may very well see a reduction in your MAGI. If this is the case, and you are subject to IRMAA, then you will want to fill out the SSA-44 form and contact Social Security. They will most likely ask for further information, including possibly a letter from your employer about your retirement.
As an example:

James is single and retired at the beginning of 2017. His MAGI when working was $95,000. Now that he is retired he will be living off of Social Security, a small pension, and withdrawals from his IRA and taxable accounts. Due to the nature of his income, his MAGI will be around $70,000.

When singing up for Medicare in 2017 James receives a notice from Medicare that he will be subject to IRMAA and will have to pay the higher premium. Since his AGI will be lower than $85,000, the first Medicare threshold for singles, James should contact Social Security and fill out the SSA-44 form so that we can request the lower premium.   

 

In general, most people that meet the specifics of a “life changing event” and put in the request in a timely fashion are successful in getting their IRMAA reduced.

 

If subject to IRMAA this process can be a relatively easy way to lower your premiums in the year you retire. If you have any questions please don’t hesitate to call or email.

 

*While we are discussing Medicare, it is Social Security that administers the program.

 

Sources & Further Reading
Medicare Premiums: Rules For Higher-Income Beneficiaries
Form SSA-44: Medicare Income-Related Monthly Adjustment Amount- Life-Changing Event
Medicare Interactive: Appealing a higher Part B or Part D premium

****
If you liked this post, don’t forget to subscribe to our blog


Reverse Mortgages: Myths & Misconceptions

February 1, 2017 / Blog

Over the last 5 years or so there have been a number of research articles that have espoused the virtues of utilizing a reverse mortgage as part of a retirement plan. Like many, I started reading these articles with trepidation as reverse mortgages carry many pre-conceived notions. However, as I read about the program, learned about the recent changes the government has made, and analyzed the research findings, I started to see the potential value in reverse mortgages.

 

Obviously, a reverse mortgage is not for everyone. It’s probably not for most people. However, I do believe understanding how reverses mortgages work and how they may fit into a retirement plan is important. For many retirees, a large part of their net worth is in the value of their homes. After diligently paying off their mortgage, they enter retirement with a large, relatively illiquid asset that is generally not part of their retirement planning equation. By understanding a reverse mortgage as just another tool you have at your disposal, you can look at your overall balance sheet and create a retirement income plan that best matches up with your goals and desires.

Before we go further, I would stress that although I see the potential value in Reverse Mortgages, you should never enter into one without having a full understanding of how they work and all their pluses and minuses.

 

There are numerous aspects to reverse mortgages. In this article we will discuss a few common misconceptions and in future articles we will examine how they work and ways of incorporating them into your retirement plan.

The most common type of reverse mortgage, and the one we will discuss, is known as the Home Equity Conversion Mortgage (HECM), which is insured by the FHA, and offered by private lenders.

As a rough primer for those unfamiliar with Reverse Mortgages, the following from HUD (Department of Housing and Urban Development) provides a helpful introduction:

A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you.  However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage. 

 

THE 4 NEVERS

There are many misconceptions about Reverse Mortgages. In her book “What’s the Deal With Reverse Mortgages“, Shelley Giordano, Chair of the Funding Longevity Task Force, tackles some of these misconceptions and describes the safeguards that are in place to protect borrowers. She titles these the 4 Nevers.

 

  1. “The Homeowner and Estate NEVER give up title to the home.”

This is one of the most misunderstood aspects to reverse mortgages. When you take out a reverse mortgage, you do not give up title to your home. The home remains in your name.

 

  1. “The homeowner, when leaving the house, or his estate, can NEVER owe more than the homes value; conversely when the house is sold, sale proceeds in excess of the debt amount belong to the borrower/estate.”

Reverse Mortgages are NON-RECOURSE debt and that means that you OR your estate will never owe to the bank more than the value of your home.

For instance, if you have a reverse mortgage debt of $600,000 when you pass away, and your home value is $500,000, your heirs will not be liable for coming up with $100,000 to meet your total debt. Rather they can give the home to the bank and walk away. This is possible due to the insurance component, which is administered through FHA. This is an overly simplified example; however, the important point to understand is that you will NEVER OWE more than the value of the home.

 

  1. “Even if all the money that can be borrowed through the reverse mortgage has reached its limit, the homeowner NEVER has to move, provided tax, insurance, and home maintenance care continued.”

This is rather self explanatory: as long as you pay the tax, insurance and home maintenance costs, you will not be forced to leave the home. Even if you have used all the reverse mortgage proceeds, you can remain in your home.

 

  1. “Monthly payments are NEVER required or expected, although voluntary payments are accepted.”

Unlike a traditional mortgage, You DO NOT need to make payments with a reverse mortgage. With a traditional mortgage, you are making payments and thus increasing your equity in the home. With a reverse mortgage, you are tapping that equity. You don’t need to pay down your loan balance as it accrues, though you can if you want.

 

In our next post we will dig deeper into the mechanics of a Reverse Mortgage and how they can be used.

 

Sources & Further Reading
“What’s the Deal With Reverse Mortgages?” by Shelley Giordano
HUD: Top Ten Things to Know if You’re Interested in a Reverse Mortgage

****
If you liked this post, don’t forget to subscribe to our blog.


Social Security and Spousal Benefits

December 14, 2016 / Blog

 

One of the most misunderstood (or unknown) areas of Social Security is spousal benefits. According to a survey by AARP, only 48% of more than 2,000 respondents aged 52-70 knew that they could collect Social Security benefits based on their living spouse’s record.

 

Spousal Social Security Benefits

If you have been married for at least 1 year, then you may be eligible to collect Social Security benefits based on the work record of your spouse. Spousal benefits can be a great benefit for someone who never worked or who didn’t work many years, such as stay-at-home parents.

 

So how much is the Spousal benefit? If you collect your spousal benefit at your Full Retirement Age (FRA), then you are eligible to collect 50% of your spouse’s benefit (otherwise known as Primary Insurance Amount).

Example:

Ryan and Amy are both 66 and have just retired. Ryan has a benefit of $2,000/m and Amy does not have a benefit of her own, as she stayed at home to raise their kids.

If Ryan collects his benefit now, Amy will be eligible to collect her spousal benefit, which is $1,000/m (50% of Ryan’s PIA).

 

If you collect your spousal benefit earlier than your Full Retirement Age, then your benefit will be reduced. If your FRA is 66, then the reduction of your spousal benefit would be as follows:

ss-spousal-chart

Example

Joe is 62 years old and his wife Melissa is 66. They are both retired and their FRA is 66. Melissa is eligible for a benefit of $2,000/m while Joe isn’t eligible for a benefit on his own record, as he was a stay at home dad.

If Joe collects his spousal benefit now, at 62, he will get $700/m. That is Melissa’s benefit of $2,000/m reduced by 50% for the spousal benefit and then reduced 30% because Joe is collecting early.

 

While both examples above show spouses who didn’t work and thus had no Social Security benefit of their own, you can still take advantage of spousal benefits if you worked and are entitled to your own benefit. In this case, you will be eligible to collect the higher of the two benefits, but not both.

Example

Brittney and Tom are both 66 years old. Tom has a benefit of $2,500/m. Brittney worked part time while raising their kids, and has a benefit of $800/m. Brittney is entitled to a spousal benefit of $1,250/m (50% of $2,500). Since the spousal benefit is higher, she will collect this benefit rather than her own benefit of $800.

 

Importantly, in order to collect a spousal benefit, your spouse must have filed for their benefit already. You cannot collect a benefit before they have done so.

 

Another point regarding Spousal benefits is that there is generally no benefit in delaying Spousal benefits past your Full Retirement Age, as the amount will not increase.

So while retirement benefits will increase the longer someone waits to collect them, the spousal benefit will not increase after someone reaches their FRA.

Example

Anne and Victor are 66 and 70, respectively. Victor’s Social Security benefit was $2,000/m at 66, his Full Retirement Age. However, he decided to wait until 70 to start collecting his benefit, which would have grown to $2,640/m.

Anne is eligible to collect a spousal benefit of $1,000/m (50% of Victor’s benefit at his FRA). There is no benefit to Anne waiting to collect the benefit like Victor did. Her spousal benefit will not increase.

 

 

One final point regarding Spousal Benefits is the potential benefit of a strategy known as “restricted application.” Recent changes to Social Security has eliminated “restricted application” for future retirees, however if you were 62 by December 31st, 2015 then you may be able to still take advantage of it. To understand how restricted application works, see our previous post on “Important Social Security Changes.”

 

Sources & Further Reading
Social Security, Retirement Planner: Benefits for Your Spouse
AARP Research

 

****
If you liked this post, don’t forget to subscribe to our blog.


Before being claimed off waivers earlier this month by the Brewers, the 27-year-old appeared 40 for the San Francisco Authentic Howie Long Jersey last , hitting .254 Cameron Erving Jersey two doubles, two home runs and seven runs batted . Message sent to Greene, and any other veterans who think they have more leverage than they actually do. Headed into the final Randall Cunningham Jersey of his rookie contract, the 2014 second-rounder started the final three of the at left tackle as Cordy dealt with a back injury. Read The delayed Sunday's noon start against the Kings to hold a ceremony honor of Ovechkin's 1th point, a goal scored on 11 against the Pittsburgh Penguins. The groups added that also agreed to sit down with a broader section of community groups at unspecified date. These were the only four he would ever play the minors. Few teams do. The 23-year-old hasn't had many injury Mike Williams Jersey to this point his career and is quickly becoming one of the top offensive players the league.

And after 3 Pro Bowl seasons, the Saints had just made Byrd the Connor Barwin Jersey paid safety the NFL.

Eberle misses two out of three by definition. Payton said that he pays Will Compton Womens Jersey to how games are called, Nick Foles Jersey in Daniel Sedin Jersey case of the Moore penalty, things can be learned that can help the New Orleans offense. We're here to win and help the team maybe win the one-on-one battles Julius Peppers Jersey the end of the game we didn't get last year. With , TJ Rivera and , Cecchini seems expendable to the Mets while he Authentic Michael Crabtree Jersey be the starting 2B for the Angels. We can't hardly believe it. Rondae Hollis- and Justin Hamilton could end up seeing a few extra minutes apiece. Forward Lorenzen Wright, who has averaged 17 rebounds his last six , had a career-best 32 points Friday night's loss to the Lakers. The last time the Oilers played the Hawks, they walloped them 5 at Rogers Place two months ago what might have been their J.T. Thomas Jersey complete game of the .