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5 Questions to Ask Yourself 5 Years Before Your Retirement - Part V

11/18/2019

We discussed the fourth question here, now the last question to answer.

5. How does your home factor into your retirement?

Your home is likely one of your most valuables assets. If either downsizing or relocating is in your plans, you may want to start plotting the move now. If moving isn't in the cards, you may still want to think through whether it makes sense to pay down your mortgage faster—thereby saving on interest payments and improving cash flow in retirement.

Alternatively, consider how to use some of your home equity to help finance your retirement. If tapping home equity is only a temporary solution to bridge the gap until you start to draw down your retirement assets or start receiving guaranteed income payments, consider applying for a home equity line of credit while you're still employed and more likely to qualify for the best rates. If home equity factors into your long-term planning, you could also consider a reverse mortgage. But proceed with care and be sure you understand all the associated costs and requirements. Before considering any of these ideas, make sure you consult a tax professional or attorney.

5 Questions to Ask Yourself 5 Years Before Your Retirement - Part IV

11/17/2019

We discussed the third question here, now the fourth question.

4. Where will your retirement income come from?

At the same time you think about shoring up your retirement nest egg, you need to begin thinking about how you'll convert some of these savings into retirement income. For many people, it's helpful to start by grouping potential sources of income into 2 basic buckets: guaranteed income from sources such as Social Security, pensions, and annuities, and variable income from a job, retirement savings, and other sources such as rental real estate.

Next, estimate your retirement expenses and then map out ways to meet essential expenses with guaranteed income sources, and discretionary expenses with nonguaranteed income. If you plan to work a bit during retirement, that may provide a conservative boost to your retirement income. But be cautious here. Survey data shows that many people are not able to work as long as they wanted. Finally, before you rush out to file for your Social Security benefits at age 62, consider the big picture: Generally, the longer you wait, the higher the potential lifetime benefits.

After your review your current investment mix, you may also want to consider shifting a portion of your investment portfolio into income-producing assets, such as bonds or dividend-paying stocks. A guaranteed income annuity is another option to consider if you're interested in converting your assets to income. Generally, the older you are when you buy an annuity, the higher the monthly payout, but there may be advantages to purchasing an annuity before you reach retirement age. But these potential moves should still be done within the context of maintaining an appropriate overall asset mix across stocks, bonds, and cash. Remember, your retirement income will likely need to last for 30 years or more, which typically requires some exposure to stocks.

Read the last question here.

5 Questions to Ask Yourself 5 Years Before Your Retirement - Part III

11/16/2019

You can read the second question here, now the third question to answer.

3. Are you invested properly?

As you round the bend toward retirement, it’s not a good idea to take on any more investment risk than necessary for your time frame, financial circumstances, and risk tolerance. But remember that this does not mean the answer is always to become more conservative. The consequences of being too conservative can be just as worrisome when you account for inflation and the possibility that you could outlive your savings. That is why it is important to think about an appropriate asset allocation.

Although you can't control market behavior, you can help manage its long-term effect on your portfolio through investment choices and by modifying portfolios so they have an age-appropriate mix.

An ideal investment mix will depend on a number of factors, including your age, time horizon, financial situation, and risk tolerance. Retirement is often the time to take some risks off the table, but some people are tempted to become too conservative. Don't forget that your goal is for your retirement savings to last for a 30-plus-year retirement time horizon. This usually means some longer-term growth potential is needed in the portfolio.

Keep reading the fourth question here.

5 Questions to Ask Yourself 5 Years Before Your Retirement - Part II

11/15/2019

First question - what are your expectations here. Now the second question.

2. Will you have enough?

This is the most important question that many preretirees need to answer.

With 5 years to go, you'll want to run some real numbers. If the numbers aren't encouraging, you may need to rethink your plans, step up your savings, or both. The good news: If you're age 50 or older, you may be able to make up for a savings shortfall with additional catch-up contributions to your 401(k) or IRA. If you are age 55 or older, you can also make an additional $1,000 catch-up contribution annually to your health savings account
.
For baby boomers who are nearing retirement, saving more and adjusting their asset mix has less impact for the simple reason that they have less time for those changes to impact accumulated wealth—though it may still help. For them, postponing retirement is generally the most effective step. Delaying retirement from 65 to full Social Security retirement age (between 66 and 67, depending on birth year) may be the best way for most preretirees to boost their retirement savings and increase their retirement income levels. If you delay claiming, you’ll have more time to build your retirement nest egg and a shorter retirement to fund.

Check out the third question here.

5 Questions to Ask Yourself 5 Years Before Your Retirement - Part I

11/14/2019

1. What are your expectations?

It seems like a simple question, but many people have no idea how much they expect to receive in monthly retirement income, and most either don't know or are unsure of what their Social Security payments may be in retirement.

This lack of planning and understanding may affect more than just your happiness in retirement; it could also affect when and how you'll be able to retire. Five years before you plan to retire may be a good time to refine your retirement planning estimates and reprioritize your goals.

Where do you plan to live?
If you plan to move, make sure you also consider how that will impact your cost of living, including the cost of health care and your access to it. If you have your eyes on moving to another state, be sure you understand any differences in taxes (e.g., state, income, estate, local, sales, and property taxes) as well as differences in the cost of living. If you plan to stay put, you'll want to consider how your home equity factors into your plans.

What do you want to do?
The early stages of retirement can be an expensive time. Many people overestimate how much they'll be able to work in retirement, and underestimate how much they'll spend. Take a hard, realistic look at both fronts.

How will you pay for health care?
After food, health care is likely to be your second largest expense in retirement. According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2019 may need approximately $285,000 saved (after tax) to cover health care expenses in retirement.

While many preretirees are thinking ahead and factoring health care costs into their retirement savings plan, almost 4 in 10 are not.2 In fact, 48% of preretirees estimated that their individual health care costs in retirement would be less than $100,000—far lower than Fidelity's current estimates.

If you've relied on your employer to pick up most of your health care tab, retirement could be a rude awakening: Only 18% of large companies offer health care benefits to retirees, according to a 2018 employer survey by the Kaiser Family Foundation. Although Medicare kicks in at age 65, you may need to buy supplemental insurance or, at the very least, budget for higher out-of-pocket health care expenses than you had while you were working.

Continue for next question here.

Basic Questions About Medicare Part D

11/13/2019

While Medicare Part A and Part B provide coverage for hospital and routine health care services for those 65 and older and those with certain medical conditions or disabilities, Medicare Part D covers the high costs associated with prescriptions..

3 key things to know about Medicare Part D

Part D helps you pay for self-administered prescription drugs. You can sign up for Part D when you enroll in Medicare Part A and/or Part B. Alternatively, you can skip Part D and go with a Medicare Advantage plan with drug coverage included.
Part D is optional. While prescription drug coverage through Part D (or Medicare Advantage with drug coverage) isn't mandatory, there are no other options with traditional Medicare for help with prescription drugs after age 65.
If you don't sign up for a prescription drug plan (PDP) on time, it can cost you. Sign up after your initial enrollment period or after a special enrollment period ends, and you can face a permanent late penalty.

What Part D does not cover?

Drugs used for weight loss/gain, fertility, erectile dysfunction, and cosmetic effects
Non-prescription drugs (over the counter medications)
Vitamins
Insulin (when used with an insulin pump)
Inpatient drugs (these may be covered by Part A)
Drugs not listed on a PDP's formulary (list of covered drugs)

How and when do I sign up for Medicare Part D?
You can sign up for a prescription drug plan with a private health insurance company that offers them through their website, over the phone, or with a licensed agent. When you can sign up is a little more complicated.

Just like Medicare Part A and Part B, you can enroll in Part D during your Initial Enrollment Period (IEP). That's up to 3 months before and up to 3 months after your 65th birthday. You can also enroll during a qualifying Special Enrollment Period (SEP), such as when you or your spouse’s employer-based health coverage ends.

How to avoid Part D penalties?
If you sign up for a Part D plan after your IEP or SEP, a permanent penalty—potentially adding up to thousands of dollars over your lifetime— gets tacked on to your monthly premium. The penalty amount can change each year as well.

You can avoid the penalty if you show proof of creditable drug coverage during the time you were supposed to sign up. If you had acceptable coverage includes a prescription drug plan through an employer (yours or your spouse's).

If you don't sign up for a prescription drug plan on time, and you don't have proof of creditable drug coverage, you also have to wait until the next open enrollment period (October 15–December 7 each year) to sign up. Your coverage starts shortly after you enroll (on January 1) and will include the premium penalty.

How Part D penalties are calculated?
Medicare doesn't charge a flat rate penalty for enrolling late. Instead, the amount is determined by multiplying the number of months an individual went without a Medicare drug plan (or creditable drug coverage) by 1% of the national base premium, the premium rate Medicare establishes for Part D each year.

For example, if you delayed signing up for Part D for 5 years, you would face a 60% penalty (60 months × 1%). The penalty amount is rounded to the nearest $0.10 and added to your monthly Part D premium. There is no cap on the Part D penalty.

Since the national base premium changes every year, so does the Part D penalty. For more about Part D penalties, visit Medicare.gov.

Yield Curve 101

11/12/2019

A yield curve is a graphical representation of yields on bonds with different maturities. The most common example is the government bond yield curve, but it is very well possible to render a yield curve for other types of bonds, such as corporate bonds, high yield bonds, etc.

The government bond yield curve is often referred to as the benchmark yield curve; the image above shows this curve for US government bonds on 1 November 2019. Data to draw a yield curve (for US gov bonds) are readily available from various sources. A good source to check yields for various maturities of government bonds is the website of the US Department of the treasury (www.treasury.gov). The image above is rendered using data from that source.

On the horizontal axis the maturity of the bonds is translated to no of months in order to get a proper scaling on the chart. On the vertical axis the yield is shown.

In a normal situation, one would expect to receive a higher compensation (yield) for longer maturities. When you lend money to the government for 20 or 30 years, it intuitively makes sense to receive a higher compensation than when you lend it only for a year or a few months.

As these yields change every day, the shape of the curve will change accordingly. Because financial markets have a tendency of throwing curve balls from time to time, unusual/unintuitive situations can and will happen.

In general, the yield curve reflects the way investors think about risk. In a normal yield curve situation, the thinking is that the shorter the maturity, the less risk for the investor and, therefore, a lower yield (compensation) than for longer-dated bonds.

A normal-shaped yield curve is usually seen in an economic environment that shows normal growth and little-to-no changes in inflation or available credit.

An inverted curve is usually seen as a signal that economic growth will soon stabilize or reverse, maybe even signaling the start of a recession. This is caused by investors thinking that the period of economic growth is or will soon be over, making them more likely to accept lower rates before they fall even further. This process can cause (partial) yield curve inversions.

An inverted yield curve does not have to be "completely" inverted as in the image. Sometimes only part(s) of the curve are inverted; this can cause humps or dents in the curve as we would expect it to be shaped.

It is not so much the current shape of the curve that can help us to solve the financial puzzle, but more the transition and the changing of the shape of the curve that will provide us with clues for the potential future direction of the economy.

As with many graphs/tools/relationships/etc. that we use in our analysis, the yield curve will not provide us with the definitive answer. Like all other tools that we have at our disposal, it is just a piece of the puzzle that we are trying to solve every day.

Top 20 China Region Funds With Best 5-year Returns

11/11/2019

If you are optimistic about China's stock market futures, you may want to consider invest in some of these top 20 China region funds with the best 5-year returns ...

Long Term Care and U.S. Government: What You Need to Know

11/10/2019

Americans are living longer, and that raises the question of how to pay for long term care. Can you count U.S. government for help? What are the government benefits program? How about the eligibility requirements?

This Securian Financial article explains this topic very well, it's a good educational read!

5 Questions to Ask About Long Term Care Insurance

11/9/2019

Start thinking about long-term care insurance options while you’re healthy
It’s important to begin the process and make some crucial decisions now — before an unexpected health change could suddenly change your needs.2 And the chances of needing health care down the road are likely.

Americans turning 65 have almost a 70 percent chance of needing some form of long-term care in their lives. And about 8 percent of those between ages 40 and 50 have a disability that could require long-term care services.

Plus long-term health care can be expensive. The annual cost for a private, one-bedroom in an assisted-living facility is $43,536. The hourly rate for a home health aide is $20.50.

Questions to ask your financial professional
It’s always a good idea to consult a financial professional as you plan for the future. But whether or not you speak to a financial professional, here are five questions to consider as you think about your long-term care insurance options:

1. What are my insurance options for covering long-term care?
There are several kinds of long-term care (LTC) insurance policies, including traditional and hybrid options. And because Medicare doesn’t pay for LTC, it’s important to understand the pros and cons of each type so you can choose the policy that’s best for you.

Traditional LTC
This insurance can help pay for your future care — and in the event you go on claim, depending on the policy structure and benefits, may provide some of the most robust benefits to cover the costs for LTC. These policies stay in force as long as you keep paying the premiums, and although they may be affordable and less expensive than a hybrid policy initially, over time, the cumulative out-of-pocket costs can add up. Also, if you don’t need LTC, you generally won’t receive any benefits from your policy. Traditional LTC policies sold today do not offer guaranteed premiums or benefits so premiums may increase over time.

Hybrid LTC
Hybrid policies (typically a combination of life insurance or an annuity with long-term care insurance) guarantee premiums will never increase and benefits will never decrease. They also may offer a return of premium option so you can get your money back if you decide to give up your policy. They offer an income tax free death benefit and inflation protection options to help your LTC benefit keep up with rising health care costs.

Some hybrid policies are available with a single-pay (up front) or multi-pay (various payment periods may be available). Due to the shorter premium durations, Hybrids may be more expensive in the short-term compared to traditional policies.
Hybrid LTC policies are becoming increasingly popular — some 404,000 policies were sold in the United States in 2018.

2. What does LTC insurance generally cover?
Long-term care insurance may cover expenses related to assisting chronically ill people with their personal care needs, such as bathing, dressing, and moving between a bed or chair. It can also involve helping them accomplish everyday tasks, such as housework, managing money, preparing meals, shopping, and caring for pets.

Policies may also help pay for home- and community-based services, such as adult day care, caregiver training, home health care options, and respite care. They generally cover facility-based services, like assisted living, hospice, and nursing home care.

3. How will I receive benefits?
Your benefits will typically begin when you8 are certified as being chronically ill by a licensed health care practitioner and have satisfied your elimination period. This means you can’t perform at least two daily living activities due to a loss of function, or you need supervised protection due to severe cognitive impairment.

You can receive your benefits in one of two ways, either as a reimbursement for expenses incurred, or through a set monthly benefit amount often referred to as cash indemnity. With a reimbursement policy, you must first pay for qualifying medical expenses out-of-pocket, and then submit a receipt to the carrier to be reimbursed. On the other hand, a cash indemnity policy automatically sends you a monthly cash benefit that you can use to cover any of your care expenses, such as informal care, medical equipment, prescriptions, and even housekeeping and home maintenance needs.

4. What happens if I buy a policy but don’t need long-term care?
Traditional LTC insurance is generally “use it or lose it”, which means you typically won’t get any benefits from your policy if you don’t need LTC. Some traditional LTC insurance may allow you to get your money back if you decide you no longer want the policy, but this feature tends to be very expensive.

Hybrid LTC insurance will typically pay a death benefit if the policy is not used for long-term care costs. Also, many hybrid LTC policies offer a “return of premium” feature, which means if you give up your policy you can get back some or all of the money you have paid in.

5. Are there tax benefits to long-term care insurance?
For traditional LTC insurance, all or a portion of the premium may be tax-deductible based on some IRS limitations and qualifications. However, other than a handful of hybrid policies, the premiums associated with these plans are generally not tax deductible.

When it comes to how your LTC benefit may be taxed, LTC benefit payments are not taxable so long as:

Your benefit is equal to the actual expenses incurred, or
Your benefit is less than the IRS per diem ($370 in 2019)9

A rewarding life is really about being present in the here and now. Planning for your future health care can help you and your family do that. So you can enjoy the everyday moments — and confidently look forward to the major milestones, like retirement.

How to Include Medicare In Your Retirement Planning

11/8/2019

First off, know what Medicare’s different letters mean:

Medicare Part A covers hospital visits
Medicare Part B entails doctor visits
Medicare Part D is for prescriptions

What about Part C?
Medicare Part C (also known as Medicare Advantage plans) is all-in-one coverage (hospital, doctor, and prescription coverage) that is sold through private insurers that contract with Medicare. It may also include dental and vision coverage.

When does Medicare become available to me?
You’re automatically enrolled in Medicare Parts A and B at the age of 65, if you’re already earning Social Security, Or you’ll have the option to receive it when you get disability benefits from the Social Security Administration or Railroad Retirement Board.

Perhaps you’re eligible for Medicare Parts A and B, but need supplemental insurance for costs not covered by “original Medicare” (i.e., dental, vision, hearing aids, eye glasses, long-term care, and private-duty nursing)
.
There is a six month initial open enrollment period for Medigap coverage that starts the month you turn 65.5

How are Medicare premiums paid?
For Part A, no additional premium is paid. For Part B, the premium is paid through a reduction in Social Security benefits. And for Parts C and D, it all depends on the kind of private insurance you have.

How much will Medicare cost me?
It all depends. Just know that health care costs could be your biggest expense post-retirement. For a preview of what your costs could be, go to Medicare.com, enter your zip code and select a plan. Then, consider your health history (and your family’s), what your future finances will be, and other factors that could affect your money in retirement.

And remember that Medicare doesn’t cover dental, vision, hearing conditions or long-term care. You’ll need a separate insurance plan if you don’t want to pay for these medical expenses out-of-pocket. And, oftentimes, you might still need to pay deductibles and copayments on services covered by Medicare.

Do I need to save for Medicare when planning for retirement?
Yes, you should do what you can now to help plan for your costs due to Medicare.

According to a recent report, health care expenses are expected to increase by 5.5 percent every year, which is triple the inflation rate from 2012 to 2016. In 10 years, a retired couple will need up to 92 percent of their Social Security benefits to help cover health care costs.

Consider contributing to a health savings account (HSA), which has a triple tax advantage — meaning that contributions are pretax or tax-deductible, grow tax-free, and can be withdrawn without being taxed when used on qualified medical expenses and premiums. And any unspent funds roll over to the next year.

Long-term care insurance provides services (such as nursing home care) that Medicare doesn’t cover. To qualify, you likely will need to purchase while in good health. So make it something you consider when planning for your retirement.

Can I do anything now to make paying for Medicare later any easier?
You can also make healthy choices now to increase your chances of aging well and helping to mitigate extra health expenses down the road.8 It will help you feel better now – especially with all this talk about Medicare costs – and potentially in the long run.

Are there any unexpected taxes related to paying for Medicare?
Your modified adjusted gross income (which includes capital gains, Social Security, required minimum distributions from IRAs and 401(k)s, and more) determines the amount you pay for Medicare Part B premiums.

The 10-10-10 Product From AIG Will Knock Out 3 Birds With 1 Stone

11/7/2019

The document below shows annual premiums if you apply for this product at different ages ...

How to Grow Protected Lifetime Income While You Defer RMDs?

11/6/2019

The document below is a good description of QLAC and how to grow protected lifetime income while you defer RMDs.

QLAC FAQs

11/5/2019

What’s a QLAC?
It’s a special type of deferred income annuity (DIA). A DIA provides protected lifetime income starting in the future. A QLAC allows income from a traditional IRA to be deferred from taxation beyond age 70½ without running afoul of the RMD rules.

How does QLAC work?
A DIA, including a QLAC, works much like a qualified SPIA (single premium immediate annuity) — except that the payments do not begin for at least 13 months and may be deferred up to age 85. The income date is selected at issue. Income payments will be made provided the annuitant is alive at the income start date. (If no annuitant survives, no income payments will be made, and no other benefits provided, unless the owner has elected a return of premium (ROP) death benefit.) Funds in an IRA can be transferred tax-free to the insurance carrier for the purchase of a QLAC.

The account value of the QLAC is disregarded for purposes of calculating the client’s RMDs. A QLAC has to meet many requirements, but it can help address longevity risk by reducing the probability of outliving savings by providing an income stream in the later stages of retirement.

How long can income payments – and thus RMDs – be delayed?
Distributions must begin no later than the first day of the month following the annuitant’s 85th birthday. The longer the deferral period, the larger the income payout amount.

Can I access the funds?
No. A QLAC does not have any cash surrender value or commutation benefit. QLACs may allow limited changes to the income date and payment frequency.

What IRS reporting applies to QLACs?
Insurance carriers will report to purchasers and the IRS using Form 1098-Q, Qualifying Longevity Annuity Information. Form 1098-Q must be furnished to individuals by January 31 of the year following the first year of purchase and every following year while the QLAC is in existence.

How much can be contributed?
Contributions to a QLAC are limited to the lesser of either $130,000 (subject to annual cost-of-living adjustment) or 25% of qualified funds, less premiums for other QLACs.

The dollar limit – $130,000, as indexed for 2019 – applies across all qualified funds. The 25% limit applies to each qualified plan separately based on its most recent valuation date. It applies to IRAs on an aggregate basis as of the prior December 31. Roth IRAs and Inherited IRAs are excluded.

Example: Jesse had $260,000 in his 401(k) as of the latest valuation date and had $260,000 in his traditional IRA as of the prior December 31. He can only use 25% of his IRA or $65,000 to purchase a QLAC. If his 401(k) plan allowed for the purchase of a QLAC, he could purchase a QLAC for 25% of his 401(k) or $65,000. Many defined contribution plans do not yet provide for the purchase of QLACs. Thus, Jesse would need to have at least $520,000 in his IRA as of the prior December 31 if he wanted to purchase the maximum QLAC for $130,000. If Jesse elected to roll over any amounts from his 401(k) plan into his IRA, he would need to wait until the following year to purchase a QLAC with those rolled over funds. Remember, the 25% limit is applied to the fair market value of the IRA as of the prior December 31.

What happens if the contribution limit is exceeded?
Any excess premium must be returned by the end of the calendar year following the calendar year in which the excess premium was paid to avoid jeopardizing the contract’s QLAC status. If not returned in a timely manner, the annuity then fails to be a QLAC beginning on the date that the premium payment was made. The value of the annuity contract thereafter cannot be disregarded for purposes of calculating RMDs. It is the client’s responsibility to comply with the contribution limit. Clients should consult with their own tax and legal advisors before purchasing a QLAC.

Can additional premiums be added as the account value increases and/or the indexed limit increases?
More premium may be added to flexible premium QLACs to take advantage of any unused portion of the then-current contribution limit. What if part of the IRA has already been used to purchase a qualified SPIA? Is that value included in determining the fair market value of the IRA? The fair market value of any IRA SPIAs should be included in determining the account value of all aggregated IRAs (except Roth and Inherited) as of the prior December 31 for purposes of calculating the 25% limitation for QLAC contributions. Insurance carriers annually send clients a fair market valuation letter for IRA SPIAs.

What are the QLAC payment options?
Options are limited to single or joint life only and single or joint life with cash refund. Payments, once begun, must satisfy RMD rules.

What happens if the last annuitant dies during the deferral period?
If the ROP death benefit option was not selected and no annuitant survives, no income payments will be made and no other benefits provided.

If the last annuitant dies during the deferral period, can the ROP death benefit be directly rolled over or transferred to an IRA?
It depends. If the annuitant dies after their required beginning date (RBD), the ROP payment is treated as an RMD and cannot be rolled over. Likewise, if the surviving joint annuitant dies after their RBD, the ROP payment will be an RMD and not eligible for rollover. If the annuitant or survivor annuitant dies before their RBD, however, the ROP payment may be rolled over.

5 Estate Plan Pitfalls to Avoid

11/4/2019

Below are 5 common pitfalls of an outdated estate plan. If any apply to you, take time to meet with your estate planning team to review and, perhaps, update your plan.

1. The wrong executor or trustee is named
Do you know who your fiduciaries are? A fiduciary is someone appointed to take legal control over assets for the benefit of another person (the beneficiary). It is a fiduciary's legal responsibility to act in the beneficiary's best interest. The two types of fiduciaries often seen in estate plans are executors and trustees.

Executors are typically appointed in a will and are given control of your assets until they are ultimately distributed to the beneficiaries. Executors are responsible for collecting all the assets of the deceased, paying final debts, paying expenses, and filing any estate tax returns.

Trustees control the assets held within trusts, which may have been set up during a person's life, or at death under the terms of a will. While an executor's role is typically for a finite period, a trustee's role may continue either forever or until the trust is terminated. A key role of the trustee is to make distributions to a beneficiary in accordance with the trust agreement.

Although fiduciaries are bound by certain standards of law, it is most important to name individuals you trust. Other important considerations are the age, maturity, and level of financial knowledge of the fiduciary. It is possible that the individuals who had fit most of these qualifications no longer do.

Tip: Check to see who you have named as fiduciaries in your estate planning documents to determine whether you need to revisit these choices.

2. Assets and beneficiaries change over time
When a child is young, a key estate planning decision parents often make is to determine a guardian. However if your child is now an adult, new considerations may come into play and you may feel differently about their ability to handle a large inheritance. Further, if the adult child is married, an inheritance can easily be commingled with the spouse's assets. An inheritance outside of the trust will also be subject to any existing or future creditor claims.

Tip: Periodically review the ways that assets will be left to your children and encourage them to have the appropriate estate planning documents in place.

3. Health care privacy rights are not understood
The Health Insurance Portability and Accountability Act (HIPAA) was passed in 1996, in part to establish national standards for protecting the confidentiality of every individual's medical records. Generally, health care powers of attorney, living wills, and advance health care directives should contain provisions waiving an individual's health care privacy rights with respect to their health care representatives.

These stipulations allow physicians and other health care professionals to share a patient's medical information with their representatives, empowering them to make informed health care decisions. Without these HIPAA authorizations, doctors may be unwilling to share medical information, which may impede decision-making regarding a patient's care and any end-of-life wishes.

Tip: Take stock of your family's health care powers of attorney, living wills, and advanced health care directives, to ensure that health care representatives can make informed decisions regarding your family's care.

4. Your state residency changes
Where were you living when you drafted your most recent estate plan? Each state has its own estate and income tax laws, and it is important to plan appropriately.

Some states are common law property states and others are community property states with significant differences when it comes to transferring assets. States also have different estate tax exemption amounts. And differences between state exemptions and the federal exclusion may mean certain estates are now subject to a state estate tax, even if they are exempt from the federal estate tax. And married couples may be surprised that some states levy estate taxes after the first spouse's death.

Tip: Review your estate plan with your attorney and tax professional, with an eye toward reducing federal and state estate taxes, and make sure to reevaluate and potentially update your plan if you establish residency in another state.

5. Changes in the federal tax laws impact estate taxes
Changes in the federal tax law make it increasingly important to focus on the income tax consequences of estate planning in addition to the estate tax consequences. For estates still subject to federal estate tax, the top federal estate tax rate is 40%. These rates must be compared with the top federal income tax rates of 37% on ordinary income and 20% on long-term capital gains and qualified dividends, plus a 3.8% Medicare net investment income tax.

Furthermore, trust income tax rates must be taken into consideration. Trust income over $12,751 is taxed at the top federal income tax bracket of 37%. Therefore, when transferring assets to a trust for estate planning purposes, consideration should be given to the potentially negative consequences of higher income taxes. Outdated estate plans may not provide the flexibility required to shift the income tax burden from the trust to individuals in potentially lower tax brackets.

Successful estate planning requires more than just having signed the initial documents: Your plan should evolve as your circumstances do.

Factors To Consider When Diversify Stock and Bond Portfolios

11/3/2019

Q. What factors should I consider when diversify my stock and bond portfolios?

A. You should have different considerations for stocks and bonds.

Among individual stocks and stock funds, for example, your holdings could include a mix of investments in each of the following categories:

Size: Consider stocks of small, medium, and large companies, because different-sized companies tend to lead the market at different times.
Style: Different investment strategies, such as growth and value, tend to trade market leadership. Holding both types means you can help minimize volatility in your portfolio, and potentially benefit in all types of environments.
Sector: You may want to include investments tied to many different parts of the economy.
Geography: You may want your portfolio to include exposure to domestic and international stocks, including those from emerging markets. Financial markets around the world respond differently to regional and global events.

Your bond and bond fund holdings can be diversified within the following categories:

Sector: Consider investing in various types of government and corporate bonds.
Maturity: Bonds of different maturities provide diverse levels of yield and interest rate risk. Choose to diversify, or target maturities that make sense for your strategy.
Credit quality: Bonds of different qualities may perform very differently as the business and credit cycles evolve. Make sure your mix of credit quality offers an appropriate balance of risk and reward for your goals and financial situation.
Geography: Consider holding both domestic and foreign bonds, possibly including emerging markets debt, to gain exposure to the opportunities and spread out the risks offered by various regions.

Keep in mind the risks associated with the different types of holdings, and remember that just creating a diverse mix isn't enough. You also need to make sure that your individual investments remain in line with your plan and to adjust them as necessary. For instance, a small-cap portfolio can grow to become mid-cap, or a period of high returns in one region of the world can leave you over-exposed to the fortunes of that part of the market.

Free Stock Trading: What Are Free and What Are the Pitfalls?

11/2/2019

What commissions are being eliminated?

Charles Schwab
Zero commission rates for trading stocks, ETFs and options listed on U.S. and Canadian exchanges. It will also eliminate commissions on online over-the-counter stock trades, but the standard $50 foreign transaction fee still applies. All domestic retail brokerage accounts other than Schwab One Organization accounts are eligible for the commission-free trading regardless of account size.

TD Ameritrade
Zero commission rates on online trades of U.S. exchange-listed stock, ETF and options trades. No account minimum applies. There will be no limits on commission-free trades, but the standard rules will apply to day-trading on margin.

E*Trade
Zero commission rates for online U.S.-listed stock, ETF and options trades. It also plans to cut its options contract charge—a premium buyers pay to sellers—to 65 cents per contract while maintaining its active-trader pricing at 50 cents per contract.

Interactive Brokers Group
Zero commission rates for trades of U.S.-listed stocks and ETFs on a new “lite” version of its trading platform, which offers a simplified trading experience for less-active traders. There is no account minimum.

Fidelity
Zero commission rates for online U.S.-listed stock, ETF and options trades, plus 65 cents per contract on options.

Merrill Edge
Its self-directed program will expand its zero-dollar online trades, which were limited and varied in number by customer segment. Now it will offer unlimited commission-free trades of stocks, ETFs and options for self-directed clients who are also enrolled in the bank’s Preferred Rewards, a program that gives clients additional benefits — like rewards on credit cards or preferential interest rates — for using multiple products and services at the company.

Does this mean trading is free?
Trading won’t be free in all cases. Schwab will still charge a commission for trading foreign stocks and fixed-income investments. Additional fees may apply if a Schwab client wants assistance when trading large blocks of stocks, typically 10,000 shares or more of illiquid securities.

Service charges of $25 and $5, respectively, will still apply for trades placed through a broker or by automated phone. Though Schwab does not generally charge a withdrawal fee, fees may apply if a client wants funds wired out of their account the same day.

Schwab and TD Ameritrade will also continue to levy a 65-cent fee per options contract.
At TD Ameritrade, a $6.95 commission applies to trades of over-the-counter stocks. IBG also will charge a commission on OTC stocks.

What are some pitfalls for investors?
Commission-free trading could tempt some investors to trade more frequently, which could prove detrimental to their returns through untimely trades and potentially higher tax bills on short-term holdings.

Brokerages could also offset some of the losses from commissions by increasing charges that are less transparent to investors or dipping into their pockets in other ways. For example, consumers may save on commissions but earn less on the cash in their brokerage accounts. Brokerages earn money by borrowing from account holders and lending to others at a higher interest rate, and they could adjust the interest paid to help negate free trading.

There are other ways for brokerages to recoup their losses. When an investor buys or sells a stock, for example, he usually pays more or receives less than the stock’s prevailing price. That’s because market makers, the trading firms that handle the trades, are compensated. This difference is known as the bid/ask spread. To make up for revenue lost from commissions, brokerages could route trades in a way that leads to wider spreads.

November 2019 PFwise.com Newsletter

11/1/2019

For archived newsletters, please visit here.

Use Numbers to Show Why Delaying Social Security Payments Makes Sense

10/31/2019

Q. Why people usually advise wait until 70 to take social security benefits?

A. It's because you will be buying the best annuity in the world! Here is an example with numbers to illustrate:

Consider someone who is age 66 right now, if she delays taking social security until she is age 70, she will have to pull about $36,000 annually from her savings over the 4 years in order to replace the benefits that she would have gotten if she claimed.

In return, however, when she does claim at age 70, she will get a monthly benefit that is $1,040 higher than it would be had she claimed at age 66. To buy that $1,040 monthly payment with inflation protection as an annuity in the private market, it will cost her $252,000!

So in return for using $150,000 for 4 years, she would get a government annuity that is worth $252,000, that is a discount of 40%!

Prudential's Term Life Products Have 3 Standout Features

10/30/2019

Term to Perm Conversion Flexibility
Prudential is the only leading insurance carrier that does not place restrictions on conversions. While some remove restrictions for an additional cost, Prudential’s flexibility means there’s no extra charge for Pru term to Pru perm conversion. Prudential allows conversion at any time during the conversion period—without a medical exam. What’s more, many of Prudential's permanent policies offer the BenefitAccess Rider (BAR), an optional chronic illness rider.

Age Last Birthday Pricing
An advantage to Prudential’s underwriting is that they use age last birthday to calculate premiums. This means potential savings on annual premiums for the clients. For example, many other companies calculate premiums at age nearest birthday. So, a client who is age 59½ plus one day will get age 60 rates. Prudential would calculate at age 59.

An Accelerated Death Benefit Rider—At No Extra Charge
The Living Needs BenefitSM (LNB) is one of the most robust accelerated death benefit riders offered in the industry. It’s critical component of Prudential’s term policies because it pays a portion of the death benefit early, while the insured is still alive, but terminally ill, it also goes on to providing superior value. LNB also covers permanent confinement to a nursing home and life-saving organ transplant procedures. LNB can be a valuable resource as the money can be used in any way the client chooses. In approved states, up to 100% of the death benefit can be accelerated.

Common 401(k) Fees

10/29/2019

Plan administrative fees
Many plans have a fee that is charged for the administration of the 401(k) plan. This is a charge to cover services, such as record keeping, compliance, accounting, legal, and trustee services. In some 401(k) plans, the cost of this fee is paid by the employer.

This is typically a flat fee, say $50, that is charged annually. While it won’t have much affect on a high-balance plan, it can impact plan returns on smaller accounts. It’s also possible that the administrative fee will be higher, say $100 or $150, in which case it will be a factor even on larger accounts.

Individual service fees
These fees may apply if the plan offers optional services. These services can include customer service contact, educational services, retirement planning software, and even investment advice from an investment professional. Such services may come with a flat fee arrangement, or be based on services actually rendered.

Investment advisory fees
If the plan is being managed by a professional investment advisor, there may be a fee charged as a percentage of your total 401(k) portfolio balance. For example, the investment advisor may charge 1 percent of the value of your plan in order to manage the investments contained within it.

Fund-related fees
Since most plans offer numerous mutual fund options, the fees associated with these can be a major part of the overall fee structure of the plan.

Load fees
These are sales charges imposed by mutual funds. They are expressed as a percentage of the principal amount invested in a fund. They can be as high as 8.5 percent, but generally do not exceed 3 percent.

Load fees can be charged upon the purchase of a fund, commonly known as a front-end load. They can also be charged on the sale of the fund, which are commonly known as back-end loads, deferred sales charges, or redemption fees.

Some funds may charge a front-end load only, while others may charge only a back-end load. Still other funds charge both. In a situation where both loads are charged, it might be set up as something like a 1 percent front-end load and a 1 percent back-end load, or even as a 2 percent front-end load and a 1 percent back-end load.

With many funds, the back-end load can be waived if the fund is held for a certain minimum period of time, such as two years or three years.

Loads are most often charged in connection with mutual funds, because such funds are typically actively managed (involving management activity and frequent trading within the fund). On the other hand, index funds—as well as exchange-traded funds (ETFs)—are no-load funds, since the portfolio is tied to an underlying index, and involves very little trading or management expertise.

12(b)-1 fees
These are fees that cover commissions to brokers and salespeople, as well as advertising and any costs associated with marketing the fund, as well as certain fees for bundled-services arrangements with 401(k) plans.

The fee can range between 0.25 percent and 1 percent of fund assets. It is often overlooked, since it is deducted from the fund balance, and not charged to the account owner as a stand-alone fee. However, all mutual funds are required to disclose their 12(b)-1 fees to their shareholders in their prospectus.

Account fees
This is an annual fee charged by some funds, most typically as an account maintenance fee on fund positions that are below a certain dollar threshold. It is not universal, and the amount of the fee will vary from one mutual fund to another.

Transaction Costs
Apart from load fees, there may also be certain fees charged by an investment brokerage account for specific transactions.

Commissions
These are sales charges paid to the investment broker that is actually holding the account. They’re most typically charged on the purchase and sale of stocks, options, futures, and certain types of mutual funds. They are usually a flat fee per trade, such as $9.95 on either the purchase or sale of the security position.

Purchase, redemption, or exchange fees
These are fees that can be charged by a mutual fund that is considered to be a no-load fund. It is essentially a small fee, like a commission, that will be charged on any exchanges involving a particular mutual fund.

These fees are not considered loads because they are paid directly to the fund itself, and not paid to brokers.

Interest rate spreads
These are fees charged in connection with stable-value funds, including short-term bond funds and individual fixed-income securities, such as Treasury securities or certificates of deposit. Because such investments rely primarily on interest-rate returns, and because short-term interest rates are so low, they do not charge load fees. Rather they charge a certain percentage of the interest-rate return on the underlying securities.

For example, on a portfolio of short-term fixed income securities yielding 1 percent, the net amount payable to you may be 0.90 percent. The difference between the two—0.10 percent—is the interest-rate spread paid to the fund manager.
Interest rate spreads can apply in either a mutual fund, or in a brokerage account that allows the direct purchase of individual interest-bearing securities.

Calculating your 401(k) fees
This can be a complicated process since different types of fees are being charged in connection with the various components of your plan. In addition, how much you will pay depends largely on how active you are with your account. For example, if you frequently purchase or sell securities or funds, your overall fees will be much higher.

Much also depends upon the type of funds your plan holds. For example, if your plan is comprised mostly of actively managed mutual funds, you will likely have to pay loads on those funds. If on the other hand, the plan has mostly index-based ETFs, there won’t be any load fees.

If you’re the do-it-yourself type, you can start by using FINRA’s Fund Analyzer, which can analyze more than 18,000 mutual funds, ETFs, and exchange-traded notes (ETNs). The tool provides an estimate of the fees and expenses connected with each fund.

Once you have that information, you can add in the dollar costs of any fixed fees associated with the 401(k) plan itself, as well as any investment advisory fees. You should also calculate the cost of any commissions or other applicable trading fees.

If you can convert all of your percentage-based fees into actual dollar amounts, you can total up those amounts, and divide them by your average 401(k) account balance for the year. This will give you the percentage that you are paying in 401(k) fees every year.

For example, if you have a plan administrative fee of $100, and during the past year, you paid $1,000 in mutual fund loads, $200 in commissions, and $300 in 12(b)-1 fees, your total expenses are $1,600. If your 401(k) plan had an average balance of $100,000 for the past year, your 401(k) fees paid will be 1.6 percent ($1,600 divided by $100,000).

Checklist for Your Social Security Claiming Strategy

10/28/2019

Know your numbers. Find out your FRA, earnings history, and estimated benefits.
Stay current. Sign up for your most current statements on SSA.gov
Do the math. Use calculators on SSA.gov to check out your monthly benefit options.
Get the facts. Don't succumb to myths; use primary resources such as SSA.gov

Top 10 Landlord Mistakes From Zillow

10/27/2019

Here are 10 of the most common mistakes landlords make and how to avoid them - from Zillow.

1. (Not) Understanding your local market
The three most important words in real estate investing continue to be location, location, location. This is twofold: First, it means making sure your rental is in a desirable area so you can attract more potential tenants. Just because the price is right doesn’t mean that the location is. Get to know the neighborhood, including access to transportation, grocery stores, area features and businesses. Second, understanding your location means learning about the dynamics of the local market, researching area taxes and determining what you can charge for rent — all of which are key to estimating the return on investment for your property so you can predict your monthly rental income.

2. (Not) Understanding fair housing laws
Before you start looking for tenants, you need to understand fair housing and discrimination laws; otherwise, you risk getting into legal trouble. Fair housing laws are federal statutes that ensure equal access to housing for everyone. It is illegal to discriminate against anyone on the basis of race, color, religion, national origin, sex, familial status or disability. Many local and state governments have additional protections that you’ll want to become familiar with. A general rule of thumb is to focus on the property and amenities in your advertising and conversations — not on who you think the ideal tenants would be or features geared toward a specific group. The bottom line is to treat and communicate with every applicant and renter in the same way.

3. (Not) Putting your best marketing foot forward
While advertising a rental property may not be as sexy as advertising a hot new car, there are many similarities. Just like the best product ads, you’ll want to feature high-quality photos of your rental — and the more, the better. It’s worth the expense to have professional photos taken during the spring and summer months so your property looks its best. You’ll also want a clearly written, accurate and error-free description of the property and amenities. Consider posting your property on Zillow Rental Manager to reach as wide of an audience as possible.

4. (Not) Conducting a thorough tenant screening
While speed is important in filling your vacancy, you still want to choose a highly qualified renter. Create a documented process and criteria for finding, screening and securing your tenants. Make each potential renter fill out an application and verify everything from employment to past addresses (and get landlord references while you’re at it). You’ll want to perform a tenant background check and run a tenant credit report. Confirm that renters have paid the rent on time and have not caused problems for their previous landlords or employers.

5. (Not) Completing accurate leasing paperwork
A lease serves as a binding, legal agreement between you and the tenant. As such, you’ll want to make sure it thoroughly addresses the rules, policies, and conflict resolution procedures for living on your property, and clearly defines tenant and landlord responsibilities. Remember to put everything down in writing: A handshake or verbal agreement won’t hold up in court. You can find many generic leases online, but you’ll want to review the lease requirements specific to your state or municipality and incorporate them into your rental agreement. Have it examined by a legal professional to ensure that the terms protect your interests and comply with local and state regulations.

Tip: Zillow Rental Manager offers state-specific, customizable online lease agreements for free. This feature is currently available in select locations.

6. (Not) Knowing your landlord responsibilities
Securing a tenant for your property is a huge milestone. But, your work is not done. As a landlord, it’s your job to meet your terms of the lease agreement: Check in with your tenants, keep tabs on the condition of the property, complete regular preventative maintenance and seasonal maintenance, and respond quickly to requests. Make sure your property is a healthy and safe place to live, and that you keep up on your taxes and financial reporting. Neglecting your tenants and your property can result in higher turnover, more vacancies, less rental income or even lawsuits.

7. (Not) Anticipating maintenance costs
Be prepared for the possibility that your property won’t always be occupied. If you aren’t able to fill a vacancy right away, do you have enough cash set aside to pay for the mortgage, utilities and other maintenance costs? Maintaining a rental property comes with unforeseen expenses, such as damages and unexpected repairs, and the bills still need to be paid. Complete a cash flow analysis and establish a budget so you’ll be able to cover these potential costs, then track your expenses to ensure you’re staying in the black.

8. (Not) Knowing when to hire a professional
If you live in the area, are handy around the house and have the time to quickly respond to requests, you can maximize your rental income by handling some of the general maintenance and management of your property. However, if you have several properties or are juggling an investment on top of a full-time job, you may be better off enlisting the services of a professional property manager. Also, depending on your experience and the condition of the rental after your tenants leave, you might want to hire a contractor to make significant improvements or repairs.

9. (Not) Managing your time efficiently
For many landlords, managing even one investment property can be a full-time job. Between securing a tenant and keeping up the books, you should understand that any investment property is a big time commitment. No matter how much you love what you do, make sure to take time for yourself and create a list of people you can rely on for backup. Having a network of people who can help in a pinch is important for the maintenance and safety of your property.

10. (Not) Treating your rental like a business
However you got into landlording, your rental property is a business and an income source — and you need to treat it that way. Consider setting up a Limited Liability Company (LLC) for ownership. This can help protect you personally from legal actions or claims. In addition, consider using accounting software or a spreadsheet to keep close track of your income, expenses and ultimately your return on investment. Document all of your procedures and communications with applicants and tenants, and make sure to stick to your procedures. When you’re renting a property, you will hear a lot of different stories, and some of them may be sad. There are many opportunities to help your community, but you want to make sure any action you take makes good business sense.

Successful landlords leverage skills from many different areas: customer service, marketing, accounting and home repair, among others. Reduce the risks that come with being a landlord by educating yourself and networking with other experienced landlords and related professionals. Join local or national landlord associations to keep up with changing rules and regulations, and share your experiences, so you can avoid the most common landlord mistakes.

Top 25 Retirement Cities

10/26/2019

WalletHub compared the retiree-friendliness of 182 U.S. cities across 46 key metrics, including affordability and health care costs. Here’s a look at the top 25 regions.

The Impact of IUL's Fees on Performance

10/25/2019

Some IUL products might be loaded with high fees and high multipliers, see the document from Securian below that explains the implications ...

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