Blog Archives - PFwise.com

Alternatives to Long Term Care Insurance

7/31/2019

LTC options
- regular LTC
- hybrid LTC; also has a death benefit (bigger LTC benefit, smaller death benefit)

Insurance alternatives
- GUL/Whole Life policy with an accelerated death benefit or LTC rider (which I know most don't consider it true LTC coverage).

Annuity alternatives
- FIA + income rider; can double the payout for several years, which would help in case of a LTC event
- LTC annuity; 3-4x the principal to be used for LTC costs if needed

GUL + Reverse Mortgage alternative
- Reverse mortgage, line of credit; let it grow for years, compounding the interest rate. The money can then be used as needed if/when LTC is needed.
- GUL; to leave money to kids; if reverse mortgage money is used, there's less equity in the house to leave behind; so the GUL is to "protect" the inheritance of the children.

What Income In U.S. Pays No Income Tax?

7/30/2019

There is a saying - you can not escape from death and tax in the U.S. However, here is a list of 12 types of incomes that you don't have to pay income tax in the U.S. -

1. Gift income. The US tax law stipulates that the recipient does not have to pay any gift tax, instead, tax is paid by the giving parties.

2. Inheritance income. The 2018 federal estate tax threshold is $11.2 million. If the amount is less than this threshold, you do not have to pay the estate tax. The heirs are exempt from any taxes.

3. Municipal bond interest income. Interest income from the purchase of municipal bonds is exempt from interest tax, and there is no federal income tax and state income tax.

4. Life insurance payout. You pay no tax on any life insurance payout. If a foreigner purchases a life insurance policy, the beneficiary pays no income tax when receiving the death benefits.

5. Disability insurance payout. Any benefit paid by the disability insurance policy is tax exempt.

6. Capital gain from primary residency. If you have lived there at least 2 years in the past 5 years, any capital gains less than $500,000 for married couple is tax exempt.

7. Capital gain from investment properties under 1031 exchange. You need to lock the new property within 45 days, and settle within 6 months.

8. Capital loss offset income. If you have a capital loss from investment, you can use it to offset $3,000 income per year.

9. Income from Roth IRA account. No tax on income from your Roth IRA investment.

10. Money from HSA account. If you use funds from HSA account for medical related expenses, there is no tax.

11. Scholarship income. If funds from scholarship is used to pay for education expenses, books, etc. there is no tax.

12. For low income families in the 10%-15% tax bracket, any long term capital gain tax is exempt.

What Is Enough To Make You Happy?

7/29/2019

Have you thought about what is really fulfilling and “enough” to make you happy?

Wealthy, Successful, and Miserable is a New York Times article that looks at how more and more research shows what really makes us happy in our jobs, yet in practice people are less and less happy at work.

Jack Bogle told the anecdote in his book Enough: “At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds,’Yes, but I have something he will never have . . . enough.'”

The Most Important Thing To Do Right Before You Retire

7/28/2019

Q. I am planning my retirement which should be soon, what's the most important action I should take?

A. As you approach retirement, you may have a lot of questions - will I have enough? Where is my income coming from? But if you actually map out your spending ahead of time, you will know the answer, and you will have less worry.

As you prepare for retirement, you have accumulated a sizable retirement portfolio, while the long term return of the portfolio is uncertain, you can make sure your first 3 years' retirement income source is certain by doing the following:

Put your first year's spending amount in a money market account, put the next 2 years' spending amounts in either a CD or Treasury Bills. Such allocation holds true regardless current stock market status and interest rate environment.

In short, for your near term cash needs, you focus on safety, and the rest of your portfolio could focus on the longer term.

AIG Underwriting Sweet Spots

7/27/2019

How Grandparents Could Help Grandkids Build a Financial Asset Last Rest Of Their Lives

7/26/2019

Grandparents tend to spoil their grandkids and wish them a future that is easier than their own.

You can help grandparents provide their grandchild a financial asset that can follow them the rest of their lives with a Signature Whole Life policy from American National. See the case study below.

Could Over-diversification Dilute My Returns?

7/25/2019

Q. Could over-diversification dilute my returns? If I already own a S&P 500 fund, why do I need anything else?

A. This is a good concern and valid question, and the answer is yes, because when you over-diversify, you simply create redundancy, for example, if you might own 50 ETFs, and ends up with Apple in all 50.

On the other hand, when you try to streamline and become more efficient, you could hurt yourself too. For example, if you own a S&P 500 fund, you may wonder why do I need another fund that represent the U.S. stock market?

The reason is, S&P 500 only includes 500 companies, and it's cap-weighted which means it places more money on the biggest companies. So the performance of the bottom 450 companies makes little difference when they are dwarfed by the top 50 companies' performances. If you want to diversify, you need to own stocks from those 450 companies, plus other middle and small companies' stocks.

Use Annuity To Prevent 4 Major Retirement Risks

7/24/2019

This article below covers the 4 major retirement risks well and shows why annuity could be an effective tool to prevent these 4 common risks.

How To Build A Mixed Group and Individual Life Insurance For Full Coverage

7/23/2019

Q. I already have group life insurance, do I still need individual life insurance coverage?

A. The answer is yes, the best strategy is to build a layered life insurance plans for full coverage as the chart below shows.

For a more detailed 3-step discussion, please read the article from Fidelity.com.

4 Reasons To Revisit Your Retirement Plan and Consider Revising It

7/22/2019

Here are four reasons you may want to check in on the growth of your retirement plan—and consider revising it.

You set your plan assuming a 7 percent return.
While that 7 percent number has been a rule of thumb for years, you may want to ratchet it down to 6 percent to be safe—especially as past performance of assets may have been under 7 percent.
You haven't adequately considered health care cost inflation.
Health care may be your biggest expense, and you want to be sure that you can stay even with costs as they rise. Check to see if what you calculated for health care costs when you first created your plan matches the current projections for health care and medical costs.
Your asset allocation hasn't changed as you approach retirement age.
Your assets should become less risky as you get closer to needing liquid assets in retirement. But you need to make sure that your assets continue to grow even in retirement. Not doing so means that you are taking on what is called longevity risk, when you may outlive your assets. Keep a healthy allocation to stocks to help you stay ahead of inflation, especially health care inflation.
You haven't checked it in years.
Don't let your retirement portfolio go for five or 10 years without looking at it and checking its asset allocation. An annual check-up is wise. If you revisit your plan annually and find that your original calculations are falling short, you still have time to put money away and get back on track. You should review your current spending needs and try to put away more money than you are currently saving.

What Are The Potential Uses Of IUL Product?

7/21/2019

Q. Can you show me what are the potential uses of IUL?

A. Attached brochure from American National shows many case studies about how an IUL policy could be used for many different life needs ...

20 Top Performing China Region Focused Funds

7/20/2019

Q. What's the best performing China focused ETFs?

A. Volatility related to trade tensions with China have left nearly all of the top-performing funds tied to the region over three years with short-term losses.

Here is a list of the best 20 China region focused funds you can check out, note that not all funds are created equal and expense ratios for some of them are quite high as well ...

When to Take the New Qualified Business Income Tax Deduction?

7/19/2019

If you own a small business, you might be interested in reading this very detailed article on Financial-Planning magazine that explains when to take the new QBI (qualified business income) tax deduction, it has many examples to illustrate the complexities.

==========================================
The hallmark of good tax planning is to pay taxes when your rates are the lowest. All too often, however, people simply look at their taxable income, compare it to a chart showing the tax brackets and assume that any additional income will be taxed at that rate.

That’s not always true.

Case in point, one of the most significant pieces of tax legislation passed in 2017 was the creation of IRC Section 199A, allowing small business owners to deduct up to 20% of the profits of their business. This qualified business income, or QBI, deduction presents taxpayers with a significant tax planning opportunity. By accelerating income, a portion of the tax liability that would normally be attributable to the increased income can be covered by a corresponding increase in the taxpayer’s 199A QBI deduction.

Ultimately this can lead to so-called deduction production income being taxed at just 80% of the otherwise applicable tax rate. And insofar as tax planning is first and foremost about trying to pay taxes at the lowest possible rate, that becomes much easier to do when 20% of your income is effectively tax-free thanks to a deduction that increases in tandem with your income.

Keep reading here ...

How Low Whole Life Insurance Product's Premium Could Go?

7/18/2019

American National's Signature Whole life insurance is designed to provide permanent coverage. The coverage and the financial benefits provided will be there when it is needed, no matter when that may be. Signature Whole Life provides a stable premium, a guaranteed death benefit, and cash values. It also provides the potential to receive policy dividends.

GUARANTEED VALUES

Premiums – Signature WL premiums are fixed at the beginning of the policy and will not increase, regardless of health or age.
Cash Value – The guaranteed cash value will grow each year at a fixed rate and be able to borrow in the event of financial emergency or other need.
Death Benefit

DIVIDENDS: NON-GUARANTEED POTENTIAL
Dividends depend on the financial results of American National and may be paid to policy holders at the end of each policy year. Although dividends are not guaranteed, American National has a history of paying dividends to whole life policy holders. Dividend options:

Cash
Premium Reduction
Dividend Accumulation
Paid up Additions

PAID UP ADDITIONS RIDER
Allows the client to purchase paid-up participating whole life insurance. The paid up insurance can be paid as either a one-time purchase payment at the time of application or via scheduled payments for a specified duration of time.

ADDITIONAL RIDERS

Accelerated Benefit Riders
Children’s Term Rider
ANICO Signature Term Rider – ART, 10, 15, 20, 30 years
Disability Premium Waiver
Guaranteed Insurance Option Rider

AIG's QoL Product Accelerated Benefits Riders Testimony

7/17/2019

AIG's QoL Product Portfolio Competitive Comparison

7/16/2019

AIG's QoL insurance product portfolio comes with built-in living benefits and is very competitive, see comparison chart below.

Should I "Let Winners Run" Therefore Not To Rebalance Portfolio?

7/15/2019

Q. Is it a good idea to "let winners run" therefore not to rebalance my portfolio?

A. There answer is NO.

In the chart below, you can see the performance of the seven-asset portfolio where each asset class was equally weighted with an allocation of 14.29%. One version of the portfolio was never rebalanced and the other version was rebalanced at the end of each year. It shows 20-year rolling period performances for both versions.

The big question: should we "let winners run" therefore not to rebalance portfolios?

It’s a logical idea to let winners run by not rebalancing — but it’s short-sighted.

1) The problem comes when the outperforming asset class suffers a correction (which they all do) and their large losses are experienced by a larger-than-originally-specified portion of the portfolio.

2) Moreover, how is anyone capable of knowing how long an asset classes will continue on a hot streak?

For these two reasons, rebalancing each year is advisable.

Marriage Tax Penalty Still Exists?

7/14/2019

Q. Does marriage tax penalty still exist?

A. Unfortunately, the answer is yes, and it's usually for high income couples.

For high earners, a bigger tax bill can come from a few different sources.

For starters, the top federal rate of 37% kicks in at taxable income of $510,300 for single filers in 2019. Yet for married couples, that rate gets applied to income of $612,350 and higher.

For illustration: two individuals who each have income of $500,000 would pay the second-highest rate, 35%, on their income if they filed as single taxpayers.

However, as a married couple with combined income of $1 million, they would pay 37% on $387,650 of that (the difference between their income and the $612,350 threshold for the highest rate). That would mean paying about $7,750 more in income taxes.

There also are other parts of the tax code that can cost married couples more. For instance, while an individual can have up to $200,000 in income before the Medicare surtax of 0.9% kicks in, the limit for married couples is $250,000.

Likewise, the income threshold for when a 3.8% investment-income tax kicks in is not doubled. Singles with modified adjusted gross income above $200,000 pay the tax, while married couples filing jointly pay it if their income exceeds $250,000. (The tax applies to things such as interest, dividends, capital gains and rental or royalty income.)

Additionally, the limit on the deduction for state and local taxes — also known as SALT — is not doubled for married couples. The $10,000 cap applies to both single filers and married filers. (Married couples filing separately get $5,000 each for the deduction). However, the deduction only is available to taxpayers who itemize.

For people with incomes at the other end of the earnings spectrum, a marriage penalty can come from the earned income tax credit.

The credit is generally available to working taxpayers with children, as long as they meet income limits and other requirements. Some low earners with no children also are eligible for it.

Because it’s refundable — meaning it could result in a refund even if your tax bill is zero — it’s considered valuable to working parents with low or modest income.

However, the income limits that come with the tax break are not doubled for married couples. So two people with income of $25,000 each and one child would have paid $3,117 less in taxes in 2018 if they had remained unmarried, according to the Tax Policy Center, a nonprofit research group. The reason is that their $50,000 combined income exceeds the income limit for married couples with one child.

What Are Rules On Ownership Transfers About Custodial Accounts?

7/13/2019

Q. I have a custodial account with my child who is turning 18 this year, what should I do with it?

A. The rules on transferring ownership of your child's custodial account to him vary by state and account.

There are two key ages:
a) the age of majority (often 18)
b) the age of termination on the account (usually 21)

When children reach the age of majority, the account can be transferred into their names only with custodian consent. Otherwise, they can remove the custodian from the account at the age of termination.

You can ask your brokerage firm what ages apply to your child's accounts and the steps you need to take at each point.

What Is the New Tax Law On Repaying A 401(k) Loan?

7/12/2019

Q. I heard there is a new requirement on repaying a 401k loan if you leave your job, what is it?

A. Previously, you had to repay the loan within 60 days of leaving your job to avoid taxes on the money, plus a 10% penalty if you left before age 55.

The new and extended deadline to repay the loan and avoid taxes and penalties is the due date of your tax return for the year you leave your job.

If you file an extension for your tax return, you will have until Oct 15 of the year after you leave your job to repay the loan without penalties or taxes.

How Much Does It Cost To Retire In Every State?

7/11/2019

Barron's recently had an article that calculates the average cost to retire in every state:

Annual spending to ensure a comfortable retirement

Alabama: $55,425.11
Alaska: $80,877.32
Arizona: $60,503.17
Arkansas: $54,743.91
California: $85,893.44
Colorado: $65,333.51
Connecticut: $79,762.62
Delaware: $65,643.15
District of Columbia: $100,879.90
Florida: $61,246.30
Georgia: $56,477.88
Hawaii: $117,724.18
Idaho: $58,335.71
Illinois: $59,264.62
Indiana: $55,796.68
Iowa: $56,849.45
Kansas: $55,548.97
Kentucky: $56,849.45
Louisiana: $57,964.14
Maine: $72,579.03
Maryland: $81,310.81
Massachusetts: $82,859.00
Michigan: $55,301.26
Minnesota: $62,856.41
Mississippi: $53,071.87
Missouri: $54,991.62
Montana: $64,404.60
Nebraska: $57,778.36
Nevada: $67,067.48
New Hampshire: $67,686.76
New Jersey: $75,861.19
New Mexico: $57,468.72
New York: $84,035.62
North Carolina: $58,211.85
North Dakota: $61,122.44
Ohio: $57,468.72
Oklahoma: $54,558.13
Oregon: $81,248.88
Pennsylvania: $61,060.52
Rhode Island: $75,861.19
South Carolina: $60,874.73
South Dakota: $60,998.59
Tennessee: $55,425.11
Texas: $56,539.81
Utah: $60,812.81
Vermont: $73,507.94
Virginia: $63,166.05
Washington: $67,810.61
West Virginia: $58,645.34
Wisconsin: $59,326.55
Wyoming: $56,044.39

Source: GoBankingRates

According to data from the Bureau of Labor Statistics, the average over-65 household will spend nearly $50,000 a year. The biggest chunk of that is on housing at more than $16,000 a year, but health care is high on the list too (about $6,600), as is transportation ($7,500) and groceries ($3,815). (Of course, people who have paid off their mortgage can dramatically slash this amount, and there are other ways to save as well.)

Of course, these are statewide figures, so it may be that certain cities in the state where it’s pricier to retire in than others. For example, someone looking to retire in San Francisco is probably going to spend more than a person in other spots in the state.

Fixed Annuity Sales Surge and An Example of Annuity Products

7/10/2019

New contracts reached a 10-year high as key stakeholders praised a bill before the U.S. Senate which could expand the products to more 401(k) plans.

What Is Earnings Test And Its Complexities

7/9/2019

Q. What is earnings test?

A. The decision of when to begin taking Social Security benefits is one of the most important questions that many retirees face. Thanks to the maze of rules that individuals and couples must navigate, however, it is also one of the most frustratingly complex.

And while many retirees are aware that claiming Social Security benefits early can lead to a reduced benefit, research has shown that fewer individuals understand the earnings test rules that can also impact benefits when a pre-full retirement age worker decides to claim benefits while also still working.

What Is Earnings Test?
When an early retiree claim Social Security Benefits prior to one’s full retirement age, which could be age 66, 67, or some number of months in between depending on the individual's birth year, and earns too much, the Social Security benefits are reduced, potentially all the way to $0.

Why It Is Complicated?
The Social Security rules are extraordinarily complex, a virtual labyrinth that retirees must navigate to get the most out of the system they have likely been paying into for most of their lives. The timing of when benefits are claimed can have a significant impact, not only because benefits are adjusted — i.e., reduced — for those who retire early, but also because the Social Security earnings test applies to anyone who receives benefits early.

When calculating the impact of the Social Security earnings limit for those who claim benefits before full retirement age, it is important to distinguish between the calendar year in which an individual attains full retirement age and years prior to reaching that landmark. This is due to the fact that the earnings limit test uses both a different limit and a different formula in the year a person reaches full retirement age, as compared to earlier years.

Thankfully though, benefits lost to the earnings test aren’t generally lost forever. Instead, when an individual reaches full retirement age, the Social Security Administration will recalculate the individual’s earnings test reduced benefit, reducing the actuarial reduction for claiming early by the number of months in which no benefits were received.

Another complication could come when one spouse retires early while the other one still works, see a summary table below.

This Financial-Planning.com article cites many examples to discuss the complexities and point to the right solution, worth a read for anyone who may face earnings test problem now or later.

How To Avoid "Widow's Penalty" Tax Trap?

7/8/2019

Q. What is "widow's penalty" tax trap and how to avoid it?

A. Widow's penalty tax trap refers to the situation that after a spouse’s death, the survivor will eventually go from a joint return to being a single filer. The widow or widower’s tax bracket likely will rise, resulting in a plumper tax bill.This bracket creep occurs because the survivor’s taxable income may be about the same as it was on a joint return. (The reduction in taxable income from the loss of one Social Security check may will be partially or fully offset by a smaller standard deduction.)

For example, someone could go from a 24% tax bracket, filing jointly, to a 32% bracket for the survivor. The result will be thousands of dollars a year in extra tax payments. As a single filer, the surviving spouse also could owe more tax on Social Security benefits or face more exposure to the 3.8% surtax on net investment income.

How to Avoid Widow's Penalty?

First, it is important to address the widow’s penalty while both members of the couple are alive.

After age 59-1/2, but before begin taking Social Security benefits, couples could convert part of their traditional IRAs to Roth IRAs at a lower tax rate. The 10% early distribution penalty won’t apply then and the conversion would be taxed at the lower joint filing rate. Moreover, Roth IRA conversions reduce taxable RMDs from traditional IRAs after age 70-1/2.

Today’s tax rates for married couples filing jointly are relatively low, no higher than 24% on taxable income (after deductions) up to $321,450. That same income would put a single filer in the 35% bracket.

A series of partial conversions should be done over a period of years, taking care to keep the amounts within low tax brackets. For the money moved to the Roth IRA, there are no RMDs for the owner or the surviving spouse, therefore, the account can continue to grow or be used with no tax consequences.

Drawing down a reverse mortgage line of credit or taking life insurance policy loans could be other sources of cash flow that won’t trigger highly taxed income.

Downsides of Owning Real Estate Inside an IRA

7/7/2019

Q. What are the downsides of owning real estate inside an IRA?

A. While most of IRA money invested in various traditional investment vehicles, direct-owned real estate (the owner has direct title to the property) inside an IRA could provide a substantial amount of flexibility.

However, while the allure of non-traditional, non-stock-market-based investments like direct real estate can be an attractive proposition for many investors – especially in times of increased market volatility – such investments can also create unique planning challenges not normally associated with traditional investments.

Here is a great article that discusses all the potential pitfalls of direct-owned real estate properties inside an IRA, it's worth everyone's read if you are interested in this topic.

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