Blog Archives - PFwise.com

Withdraw Money Early From 401K to Lower Tax?

2/28/2019

Q. If my income is below a tax threshold, I could withdraw some money out of my 401k account and still remain in the same tax bracket. Is it a good idea?

A. Let's look at the upside and downside of this action.

Money withdrawn form a retirement account is treated as taxable income, and you might find yourself in a higher tax bracket as a result. Worse, it could cause you to pay taxes on Social Security or lose deductions you otherwise would enjoy. This is why, in a perfect world, you’d want to carefully orchestrate the timing and amount of annual withdrawals, perhaps even starting before the IRS requires you to do so at age 70½.

The Downside
First, you’ll be making withdrawals sooner than needed, thus paying taxes on that money sooner than needed.

Second, less of your money will remain in the tax-deferred account, meaning less will enjoy further tax-deferred growth.

The Upside
On the plus side, you’ll invest whatever’s left of the withdrawal after you pay taxes on it — and those profits can enjoy capital gains tax rates, which theoretically are lower than the ordinary income tax rates paid on withdrawals from your tax-deferred account. And if you use low-turnover index funds, your taxable account should produce low annual distributions, enabling the bulk of the portfolio to, in effect, grow tax-deferred. (This, of course, does not apply to the interest and dividends produced in the portfolio.)

The Uncertainties
None of the above takes into consideration the impact of generated income on the rest of your tax return, such as the aforementioned implications on Social Security income and taxes, ability to deduct medical costs and other Schedule B items, and so on. Nor does this consider the impact of future tax-law changes.

Values of US-based Life Insurance For Foreign Nationals

2/27/2019

Q. What're the values of U.S.-based life insurance for foreign nationals?

A. US-based life insurance appeals to Foreign Nationals in many aspects:

Desire to diversify assets in the safety and security of the U.S.
Appreciate the privacy of a life insurance purchase
Non-resident Foreign Nationals avoid taxation on U.S.-based life Insurance proceeds
Non-residents can insure the loss of the unlimited marital deduction on U.S. assets and the associated estate taxation
Value the accumulation potential and flexibility of U.S. life insurance products
Recognize that U.S.-based life products offer lower costs than those offered elsewhere
Welcome the potential of legacy assets for family members in a safe jurisdiction

Business Cycle Framework - US in Late Cycle

2/26/2019

The business cycle, which is the pattern of cyclical fluctuations in an economy over a few years, can influence asset returns over an intermediate-term horizon. Cyclical allocation tilts are only one investment tool, and any adjustments should be considered within the context of long-term portfolio construction principles and strategic asset allocation positioning.

Heart Disease and Life Insurance - Part C

2/25/2019

In last blogpost, we discussed how underwriters would look at insurance applicants with heart disease. Now we will show you the questions one should expect to answer.

The primary questions to be asked of a proposed insured who presents with heart disease history are:

Age of onset or diagnosis? How long has it been/time since diagnosis?
What is the specific cardiac issue(s)?
How is it being treated? Are there good cardiac follow-ups?
If they’ve had an MI, did they have CABG or PTCA? If so, how many vessels?
Has recent cardiac testing been favorable? When was last Echo and/or EKG?
Any family history of CAD?
Any other significant health issues or impairments?

The underwriting of an applicant with heart disease is very dependent on the individual case, as well as what’s in the doctor's and cardiologist’s notes. Time passed since the event will also be a major factor.

Please contact us if you are interested in applying for life insurance but are concerned with heart disease.

Heart Disease and Life Insurance - Part B

2/24/2019

In last blogpost, we discussed a variety of heart diseases. Now we will discuss underwriting heart disease.

Factors for Underwriting Heart Disease
The underwriting of heart disease looks very closely at the cardiac testing results of the EKGs and echocardiograms, as well as stress and treadmill test results. Key factors they’ll be looking at, depending on the impairment or issue at hand, will be ejection fractions, wall thickness, condition and performance of the valves, and basic overall performance of the heart and circulatory system. Obviously, those who are diagnosed with heart disease at an earlier age are going to be more of a concern for possible progression than those that have onset later in life.

If a case presents with a heart attack history (myocardial infarction aka MI), obviously that’s a significant concern; heart attacks are the leading cause of death in America. Typically, after such an event, there’s going to be some kind of treatment to address the stenosis (narrowing of the blood vessels). Usually that will come in the form of coronary artery bypass graft (CABG), angioplasty (ANGP), and/or stenting (also known as percutaneous transluminal coronary angioplasty, or PTCA).

After such an event, underwriters are typically going to be looking at a six-month postponement, and then a Table 4 (minimum) depending on the condition of the heart and coronary arteries after the event. Also considered is the age of the patient and if there are good cardiac follow-ups and cardiac testing results afterward.

In next blogpost, we will share the questions a life insurance applicant with heart disease should expect to answer.

Heart Disease and Life Insurance - Part A

2/23/2019

Q. I had a heart attack before, how it will impact my life insurance application?

A. One of the most common impairments in life insurance underwriting is heart disease. It comes in many shapes and forms, as well as degrees of severity.

About Heart Disease and Heart Attack

The broad category of heart disease can include mild issues such as an abnormal EKG, palpitations, mitral valve prolapse, or chest pain (angina). More commonly seen moderate concerns are issues like cardiomyopathy, arrhythmias, and atrial fibrillation. Additionally, there is a high frequency of more severe cases of heart disease such as congestive heart failure, those needing valve replacements and/or pacemakers, and those with histories of myocardial infarctions (heart attacks) with bypass, angioplasty, and/or stenting.

Each of these categories of heart disease — and there are many more — will need to be looked at on a case-by-case basis. Typically, this needs to have the home office underwriter — and more commonly a senior underwriter or medical director — review the complete case to determine an accurate offer. This is not only to assess the severity of the presenting disease, but also to try to find healthy credits or favorable lifestyle characteristics that they may be able to use to improve the offer.

In next blogpost, we will discuss key factors for underwriting heart disease.

ETN or ETF: which is better?

2/22/2019

In last blogpost, we showed disadvantages of ETNs over ETFs.

The decision of whether to opt for an ETF or ETN in the same product area depends largely on your investment time frame. Given that ETFs are subject to yearly capital gain and income distributions which are taxable events to the holder—and ETNs are not—it seems reasonable to conclude that ETNs are a superior product for the long-term investor.

The irony is while ETNs offer tax advantages to long-term investors, the majority of ETNs offer access to more niche product areas that are not generally the recommended staple for long-term investors. There are about 140 ETNs currently trading in the US and most are in the areas of commodities, currencies, emerging markets, and specific strategies. An investor who wishes to diversify a core holding of stocks and bonds and gain exposure to these areas—for the long-term—might well consider ETNs because of the tax benefits.

For an investor who is looking at various commodities or emerging markets to take advantage of shorter-term trends, there is little difference between ETFs and ETNs because the tax advantage is negated. In those circumstances, it's generally better to opt for the product with the most volume and liquidity in order to achieve the best transaction prices.

ETNs' Disadvantages Over ETFs

2/21/2019

In our last blogpost, we discussed ETNs' advantages over ETFs.

ETFs are subject to market risk, whereas ETNs are subject to both market risk and the credit risk of the investment bank issuing the ETN. Given the rapid implosion of the banking structure in the 2008 financial crisis, the credit risk issue should not be dismissed as irrelevant. Banks do collapse.

ETNs are less liquid than ETFs and they may also contain holding-period risk. The performance of ETNs over long periods can differ from the performance of the underlying index or benchmark.

As described above, the ability to escape the short-term capital gains tax is one of the most compelling benefits to ETNs. It's quite possible that the Internal Revenue Service may change the rules in a way that erodes the current benefit.

In next blogpost, we will show you which one to choose - ETN or ETF.

ETNs' Advantages Over ETFs

2/20/2019

In our last blogpost, we discussed the differences between ETNs and ETFs. Now we will discuss advantages of ETNs.

ETNs were constructed to meet investor needs and have several advantages to consider:

Taxes
Because ETNs don't hold any portfolio securities, there are no dividend or interest rate payments paid to investors while the investor owns the ETN. ETN shares reflect the total return of the underlying index; the value of the dividends is incorporated into the index's return but is not issued regularly to the investor. Thus, unlike with many mutual funds and ETFs which regularly distribute dividends, ETN investors are not subject to short-term capital gains taxes. The short-term capital gains rate is equivalent to an individual's ordinary income tax rate.

When the investor sells the ETN, the investor is subject to a long-term capital gains tax. The taxable event occurs only when the investor sells the ETN. With conventional ETFs, a long-term holder would be subject to capital gains tax each year. The ability to significantly boost returns by escaping annual taxes on dividends is a huge benefit to ETNs. However, this tax treatment does not apply to currency ETNs.

Tracking error reduced
Theoretically, an ETF should give you the exact return of the index it tracks, minus the expense ratio. But sometimes the difference between the ETF and its index is larger than the expense ratio. This extra difference between the portfolio's return and the value of the index is called the tracking error.

Tracking error can be a significant issue for ETFs that are unable to hold all the components of a benchmark index, either because there are too many components and/or the components are illiquid. As a result, the value of the ETF and the value of the benchmark index may diverge. In contrast, the ETN issuer promises to pay the full value of the index, no matter what, minus the expense ratio, completely eliminating tracking error.

It should be noted that ETNs do have an underlying foundation. Typically, they are constructed of futures, options, stock swaps, and other instruments to approximate the benchmark index return. However, the underlying foundation is irrelevant to the investor; if the bank's strategy fails to match the index, the bank is on the hook for paying off the rest of the gains to the investor.

Market access
ETNs bring the financial engineering technology of investment banks to the retail investor, providing access to markets and complex strategies that conventional retail investment products cannot achieve. For example, Barclays Bank in 2011 issued ETNs that allowed investors to profit from increases in stock market volatility and another ETN that allowed investors to profit from changes in the shape of the US Treasury yield curve.

In next blogpost, we will discuss disadvantages of ETNs.

ETN vs ETF: what are the differences?

2/19/2019

Q. What are the differences between ETN and ETF, and which is better?

A. Exchange-traded-notes (ETNs) are similar to exchange-traded funds (ETFs) in that they trade on a stock exchange and track a benchmark index. However, there are important differences:

An ETN is a senior, unsecured debt security issued by a bank, unlike an ETF which holds assets such as stocks, commodities, or currencies which are the basis of the price of the ETF. The return of an ETN is linked to a market index or other benchmark.
An ETN promises to pay at maturity, the full value of the index, minus the management fee. Like any other debt security, the investor is subject to the credit risk of the bank issuer.

ETNs were developed in 2006 by Barclays Bank to make it easier for retail investors to invest and maximize the returns in hard-to-access instruments, particularly in the commodity and currency areas.

By moving to a debt structure, Barclays eliminated the costs associated with holding commodities, currencies, and futures and improved the tax structure for investors.

An ETN is essentially a bet on the index's direction guaranteed by an investment bank. As the index moves, so moves the ETN. The financial engineering underlying ETNs is similar to the financial engineering that investment banks have long used to create structured products for institutional clients. ETNs are different from ETFs because they don't own the underlying assets that their return tracks. ETNs are unsecured debt obligations.

In our next blogpost, we will discuss what are the advantages of ETNs.

Should You Take Social Security At Age 62?

2/18/2019

If you claim Social Security at age 62, rather than waiting until your full retirement age (FRA), you can expect up to a 30% reduction in monthly benefits.
For every year you delay past your FRA up to age 70, you get an 8% increase in your benefit. So, if you can afford it, waiting could be the better option.
Health status, longevity, and retirement lifestyle are 3 variables that can play a role in your decision on when to claim your Social Security benefits.

Investment, Life Insurance, and Annuity: How Combined They Make Secure Retirement Income - Part B

2/17/2019

In our last blogpost, we discussed two major risks one face when planning for retirement incomes. Now we will introduce the solution:

The solution
Address these risks with a portfolio consisting of investments, life insurance and income annuities.

Investments provide necessary liquidity and growth, while the combination of permanent life insurance and income annuities introduces actuarial science to the planning and can lead the individual portfolio to perform more like a defined benefit plan.

How it works
One can take a portion of retirement assets and purchase a single premium immediate annuity at retirement. This will generate guaranteed lifelong income that will cease at the annuitant’s death.

Returning to our example, if Sue lives for 35 years she continues to receive income payments every month. But what if Sue dies in 10 years? That doesn’t seem to be a compelling value.

That is where the life insurance comes in: If Sue owns life insurance, then although the income ceases, the life insurance death benefit pays out to her beneficiary. The combination of permanent life insurance and income annuities creates “actuarial bonds.”
This solution can be used by many pre-retirees to prepare them now to employ this strategy when they reach retirement. Some studies show that maximum impact is created when one transitions into retirement with his or her life insurance already in place.

In many of these scenarios, people adopting the solution could increase their retirement incomes by 10%, 20%, or even more by deploying this strategy versus a traditional sustainable withdrawal rate approach.

But perhaps the biggest positive impact to people is the psychological benefit of knowing that short-term market fluctuations like those in recent months, or more sedate markets, will not cause them to run out of income, even if they live beyond assumed life expectancy.

Investment, Life Insurance, and Annuity: How Combined They Make Secure Retirement Income - Part A

2/16/2019

Most people saved in their entire working life in order to accumulate enough to produce a stream of predictable income throughout their retirement.

However, there are some potential issues with the sustainable withdrawal rates. Most notably, we must make a planning assumption around the retirement time horizon, and although statistical life expectancies can inform this assumption, we cannot say with any certainty how long an individual will live.

The dilemma: Assume a plan of 25-year retirement for Sue.

If Sue ultimately lives only 10 years, a too conservative plan would force her to live a less comfortable lifestyle to preserve assets for the later years, but those were not actually needed. Conversely, if Sue lives for 35 years, the probability that she runs out of money compounds because a sustainable withdrawal rate was based on a shorter timeline.

This dilemma highlights two of the challenges that we must address in retirement income planning: longevity and sequence of returns risk.

Our next blogpost will introduce a solution that combines investment, life insurance, and annuity.

Home Exchange Websites

2/15/2019

How to Choose the Right Medicare Choices - II

2/14/2019

In our last blogpost, we shared all the basic terms of Medicare plans, now we will show you how to research the right Medicare choices -

Visit Medicare.gov.
Use the free tool on Medicare.gov - the Medicare Plan Finder - by checking on "Find health & drug plans".
Go to the State Health Insurance Assistance Programs website (shiptacenter.org) to find the agency in your state that provides free one-on-one counseling about Medicare options and other resources to cover medical expenses.
Visit AARP's Medicare Question and Answer Tool
Search the internet for other free tools, such as medicaredrugsavings.org

How to Choose the Right Medicare Choices - I

2/13/2019

Q. How to choose the right Medicare plan?

A. If you are over age 65 or have certain disabilities, you are eligible for Medicare. But it's complicated, see its various terms below -

Part A - provided by Medicare, pays for hospital bills.
Part B - provided by Medicare, pays for outpatient care, doctor visits, physical therapy and other services.
Part C - Medicare Advantage plans, often called Part C, offered by private insurance companies, take the place of Part A, Part B, and Part D drug plans.
Part D - offered by private insurance companies, pay for medicines.
Medicare Supplement (Medigap) Plans, offered by private insurance companies, cover some or all of the costs that are not covered by Part A and Part B. They generally do not cover long-term care, vision, or dental care, hearing aids, eyeglasses, or private-duty nursing.

Now you understand the various Medicare terms, in next blogpost we will discuss the next step.

How to Choose the Best HSA Bank?

2/12/2019

Q. How to choose the best HSA bank?

A. Based on a recent Morningstar study, the answer varies as it depends on how you plan to use your HSA money.

See the chart below which could give you a clue for your own investigation about the best HSA bank for your needs.

CD vs Annuity: Which Is Better?

2/11/2019

Q. I heard that a deferred annuity is better than CD, is it true?

A. You might not realize that fixed annuities offered by insurance companies usually are better than CDs, see the CD vs Annuity comparisons below for yourself.

If you want to see further how much have insurance companies' fixed annuities' interest rates today and how they changed over the past years, please see American National's page here.

Legit Work-at-Home Job Listing Sites

2/10/2019

It's estimated only 2% of online work-from-home offers are legit. If you are looking for legit work-at-home jobs, below are some of the legit websites you could use to search -

Flexjobs.com: it lists many work-at-home jobs, a monthly subscription fee might apply.
Jobspresso.co: It's a Canada-based site for remote employments.
Ratracerebellion.com: it includes screened links to home-based job listings.
Remote.co: it's started by the founder of flexjobs, although with fewer listings.
Retiredbrains.com: it features part-time jobs for people over 50.
Skipthedrive.com: it features full and par-time telecommuting jobs.
Virtualvocations.com: it offers free and paying accesses to listings.
WAHVE.com (work at home vintage experts): it is a contract staffing firm that places older professionals in work-at-home jobs.
Weworkremotely.com: it includes programming, sales, and other jobs.
Workingnomads.co: it lists tech, management, marketing, and other jobs.

If you know any other legit work-at-home sites, please let us know and we can add it to the list.

3 Things That Scare Gen Xers More Than Retirement Costs

2/9/2019

Q. What are the top challenges facing Gen Xers?

A. Insured Retirement Institute has done an online survey of Gen X Americans (ages 36 to 55), they found that 87% of the Gen Xers with financial advisors said they were confident about having enough income to cover basic expenses in retirement.

But even the Gen Xers with advisors expressed grave doubts about their ability to handle the following three major financial challenges.

1. Covering their own long-term care costs
2. Meeting their parents’ LTC needs
3. Paying their children’s college bills

Do you have a plan in place to handle the above 3 challenges?

Case Studies For Using Annuity to Achieve Retirement Income Streams

2/8/2019

The Palladium® Single Premium Immediate Annuity from American National offers a number of income payment options and a Cost of Living Adjustment (COLA) that can be added to many of those options.

INCOME PAYMENT OPTIONS

Life Only
Period Certain from 5-30 years
- some periods may be unavailable at some times
Life with a Period Certain from 5-20 years
Joint & Last Survivor with 50%, 60%, 66.6%, 75%, or 100% paid to the survivor, with or without a period certain period of 5-20 years
Joint & Spouse with 50%, 60%, 66.6%, 75%, or 100% paid to the spouse, with or without a period certain period of 5-20 years
Installment Refund
Cash Refund

COST OF LIVING ADJUSTMENT (COLA)The Cost of Living Adjustment is an additional option that can be added to most of the available income options at the time of application. Palladium SPIA offers a 3% compounding COLA.

Below are some income stream case studies from American National so you can see how other retirees take advantage of annuity products to achieve income streams.

Tax Preparation Checklist From TurboTax

2/7/2019

If you want to get all your tax filing documents ready, here is a checklist from Turbotax about what you need to gather in advance for your tax filing:

You Can Still Deduct These Even With Standard Tax Deduction

2/6/2019

Q. I will use standard deduction, can I still deduct anything?

A. Under the Tax Cuts and Jobs Act of 2017, the standard deduction was consolidated with personal exemptions to create a new, higher standard deduction… which in total was only slightly higher than the prior combination of the two, but nonetheless will substantially curtail how many households can itemize their deductions at all.

As in 2017, couples claimed a $12,700 standard deduction and $8,100 in personal exemptions for a total of $20,800, and in 2018 they will claim a single consolidated $24,000 standard deduction… which means while total deductions went up just $3,200 from $20,800 to $24,000, the threshold for itemizing went up a massive $11,300 from $12,700 to $24,000. And at the same time, the number of itemized deductions themselves were also curtailed with the elimination of miscellaneous itemized deductions.

However, many deductions are still available “above the line” (claimed on the front page of the tax return to calculate Adjusted Gross Income in the first place, and not in the “itemized” category). The most popular above-the-line deductions that are still available going forward, including the following:

Traditional IRA contributions of $6,000 in 2019 (which as long as the individual has earned income and isn’t a high-income active participant in an employer retirement plan as well);
Student loan interest;
Alimony payments (but only for divorce settlements that had already taken place prior to December 31st of 2018);
HSA contributions;
Various deductions for the self-employed, including self-employment taxes (the self-employed individual’s 50% share of payroll taxes), retirement plan contributions, and health insurance; above-the-line teacher expenses;
and certain low-income performing artist expenses.

4 Arguments For and Against Whole Life Insurance - Part IV

2/5/2019

Argument three here.

Nobody owns whole life insurance anymore

In reality, whole life remains the most popular product in the industry, having accounted for 36% of life insurance premium in 2016, followed by index universal life at 21%, term life with 21%, and variable universal life at 6% (versus 33% in 2000), according to LIMRA’s 2016 Life Insurance Sales Report.

4 Arguments For and Against Whole Life Insurance - Part III

2/4/2019

Argument two is here.

Cash values in Whole Life takes forever to build and returns are poor

Whole Life policies certainly don’t boast the exciting ups and downs of the stock market, but that’s OK. Most investment advisors will agree that fixed income needs to be a part of a responsible portfolio.

Just as one can’t expect a term policy to last forever, nor one can expect the cash values of a whole life policy to jump 20% in a year. The tax-deferred nature of whole life cash values and potential tax-free access provides a nice tax hedge, complimented by fluctuating dividends that can mitigate the interest rate risk felt in other investment vehicles.

Keep reading argument four here.

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