Blog Archives - PFwise.com

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 ...

Why IUL Illustrations Can Not Be Trusted Any More - Part B

10/24/2019

In last blogpost, we showed you two IUL products, one looks very good on paper with its large multiplier. Now we will show you their actual performances in the real world!

Actual Performances in Real World
From 2000-2009, the S&P 500® was down an average -0.7%. During that same time, the traditional IUL example (Strategy A) experienced a 4.8% index credit, and although it had four years with 0% crediting – there were no negative impacts to a client’s cash value because of zero index crediting or indexing fees.

However, the story is a bit different with Strategy B. Its average index credit would have been 3.5% - but there were 5 years where the net result to the cash value was negative. The high-fee/large-multiplier strategy functioned as expected, accentuating the good years, but exposing the client to reduced cash values in other years because of the indexing fees.

Illustrations and illustrated rates don’t really help a client understand the impact of the volatility of indexing credits – including these negative years.

The Bottom Line
It is more important than ever to understand the details of the products you are considering and talk to an expert who can be trusted. When you request an illustration run at a particular rate, you will need to be aware of any high fees and large multipliers that result in comparatively aggressive illustrations, even though the illustrated rate seems low.

Why IUL Illustrations Can Not Be Trusted Any More - Part A

10/23/2019

Q. I saw IUL products with large multipliers which means the cap could be much higher, what's the trick?

A. Be careful when you compare IUL products' illustrations, after ACTUARIAL GUIDELINE 49 (AG49), here is why.

AG49
First, what is AG49? In 2015, AG49 was developed to bring uniformity to the illustrations of policies tied to an external index or indices by providing a reasonable maximum on the illustrated credited rate. Uniformity across illustrations helps clients more easily compare policies of different companies. However, it’s also prompted the creation of very controversial product features: high fees and large multipliers.

Compare IUL Products
Now comparison of IUL products cannot simply be based on illustrated rates as a gauge for how a policy is going to perform, and what the risk/return profile of an IUL might be.

In the following example, both strategies show an illustrated rate of 5.85% - and much of the indexing specifications are similar. But, when you look closer, you see that Strategy B employs a multiplier and a fee. The best and worst case won’t show up because the illustration is only going to show averages – and won’t show the impact of paying the fee during years of zero index crediting. A consumer using Strategy B needs to be prepared for years that the cash value decreases because of the fees.

In the next blogpost, we will show you what these two products could actually perform in the real world and how they are different from what the illustrations show.

Financial Worksheets to Justify Your Insurance Needs

10/22/2019

AIG has put all the financial worksheets into one documents, this helps insurance applicants to explain to the underwriters why they need the coverage amounts, because one frustrating fact for some insurance applicants is being declined for their applications.

6 Tax Saving Strategies Still Available For 2020 - Part D

10/21/2019

In last blogpost, we wrapped up introducing the 6 deductions available. The $12,000/$24,000 standard deduction hurdle — for individuals and married filing jointly, respectively, increasing to $12,200 and $24,400 in 2019 — presents a significant challenge to itemize deductions because only a few deductions in practice are capable of sustaining such a large deduction annually on an ongoing basis.Accordingly, the so-called big six itemized deductions that can actually sustain ongoing itemized deductions include:

1. Big mortgages:
Homeowners with a sizable mortgage used to acquire, build or substantially improve their primary residence or a second home can generate enough in ongoing interest deductions to exceed the standard deduction thresholds.

Notably though, in an environment where mortgage interest rates have long hovered around 4%, it still takes a very sizable mortgage balance to actually generate enough interest to trigger itemized deductions, especially since it’s only the interest portion of the mortgage payment, not the entire mortgage payment, that is deductible. For an individual, generating a $12,000 mortgage interest deduction at 4% would require at least a $300,000 mortgage; for a married couple the trigger is a $600,000-plus mortgage.

2. Big, ongoing charitable deductions:
For higher income individuals it’s not uncommon for annual charitable giving to top the $12,000/$24,000 standard deduction thresholds. And at higher income levels the charitable deduction AGI thresholds are not an impediment to exceeding these targets. Of course, giving away money just to get a tax deduction isn’t necessarily a net positive, as the household still gives more away than it receives back in tax benefits. Still, for those who already engage in sizable, ongoing charitable giving, sustained charitable giving alone can support ongoing itemized deductions.

3. Big SALT deductions:
One of the unique peculiarities of the current tax planning environment is that when TCJA imposed a maximum cap on SALT deductions, it imposed the same cap of $10,000 for both individuals and married couples. This is significant because the standard deduction threshold for individuals is only $12,000, while it is $24,000 for married couples.

This means maxing out the $10,000 SALT deduction is at best only part of the way to the $24,000 threshold for married couples, but gets an individual almost all the way to their $12,000 threshold. Still, it takes a sizable income with the associated tax deductions or a big home with substantial property taxes to reach the individual threshold. Assuming an average state income tax rate of 5% and a 1% property tax rate, reaching the SALT cap still typically requires around a $100,000-plus annual income and a $500,000-plus property, or for those who rent, a $200,000-plus annual income.

4. Big margin investing:
While mortgage deductions are limited as to the amount of debt principal on which interest can be deducted, investment interest is limited only by the amount of interest and dividends generated by the investments themselves and that the interest be taxable — i.e., no investment interest deductions for municipal bonds.

As with the mortgage interest deduction though, generating sufficient interest requires a substantial amount of debt principal. On the other hand, since margin interest rates tend to be higher — currently averaging around 8% — it doesn’t take quite as much debt principal, potentially just on the order of $150,000 for individuals or $300,000 for married couples.

5. Big long-term care events:
Most medical events are covered by health insurance, and while individuals may still have to pay a non-trivial deductible, coverage is usually sufficient to prevent medical expenses alone from triggering the $12,000/$24,000 thresholds, particularly on an ongoing basis.

However, long-term care insurance is adopted far less often than health insurance, and tends to have much larger annual expenditures, whereas semi-private care alone averages $225 per day or over $80,000 per year. Those who have an ongoing long-term care event consequently often trigger more than enough in annual medical expenses — over and above the 10%-of-AGI threshold — to trigger ongoing itemized deductions.

6. Big, IRD-eligible stretch IRAs:
One of the largest and most commonly overlooked itemized deductions is the Income in Respect of a Decedent, or IRD, deduction, which provides beneficiaries of inherited retirement accounts and other inherited pre-tax assets an income tax deduction for any Federal estate taxes that were caused by that IRD asset.

This means the IRD deduction is only available to those who inherit a pre-tax asset like an IRA from someone who actually paid a Federal estate tax — which isn’t many, given the sizable Federal estate tax exemption. Nonetheless, with a top Federal estate tax rate of 40%, those for whom the IRD deduction is available effectively receive an itemized deduction for 40% of their inherited IRA withdrawals.

This in turn means inheriting a big IRA from a big estate can trigger a big IRD deduction and, therefore, ongoing itemized deductions. It will still take an IRA of $1 million or more for an individual, or of $2 million or more for a married couple to generate enough in IRD deductions to claim ongoing sustained itemized deductions — assuming the stretch IRA faces an annual RMD of only about 3% per year.

6 Tax Saving Strategies Still Available For 2020 - Part C

10/20/2019

In last blogpost, we showed you 3 deduction areas to consider, now the next 3 areas.

4. Charitable giving:
Under IRC Section 170, taxpayers are allowed to deduct charitable contributions made in the current tax year, whether donated in cash or as in-kind property. However, charitable deductions are subject to a number of limitations on the maximum amount that can be deducted relative to total AGI, depending on the type of receiving charity and the nature of the property being donated.

5. Casualty and theft losses:
Akin to allowing tax deductions for interest paid to generate income, IRC Section 165 also allows a tax deduction for losses incurred in income-producing activities — i.e., a trade or business. Personal losses are much more restricted, though they may still be available in the event of a loss due to “firm, storm, shipwreck, or other casualty, or from theft.”

Such personal casualty losses are subject to additional limitations though, including that only losses above $100 for each incident are deductible; total casualty and theft losses must exceed 10% of AGI; and, from 2018 through 2025, IRC Section 165(h)(5) limits such losses to only those that were attributable to a federally declared disaster.

6. Miscellaneous deductions:
While the tax legislation eliminated the category of “miscellaneous itemized deductions [subject to the 2%-of-AGI floor]” under IRC Section 67, there are still several other miscellaneous deductions that don’t fall into the preceding categories, but are still tax deductible because of their own separate standalone sections of the tax code to authorize them as deductions.

This includes gambling losses to the extent of gambling winnings; Ponzi scheme losses and other similar casualty/theft losses of income-producing property; income with respect to a decedent deduction for pre-tax assets inherited from someone who paid estate taxes; investment-related deductions for amortizable bond premiums and certain losses on contingent-payment or inflation-indexed debt instruments, e.g., TIPS; the unrecovered portion of basis in a pension or lifetime annuity that isn’t recovered when payments cease, e.g., due to death before life expectancy; and certain types of qualified disaster losses.

In our next blospost, we will discuss the significance of the big six itemized deductions that can actually sustain ongoing itemized deductions.

6 Tax Saving Strategies Still Available For 2020 - Part B

10/19/2019

In last blogpost, we showed you 6 core types of deductions still available, now we will discuss each of them in details.

1. Medical expenses:
IRC Section 213 allows for the deduction of a wide range of medical expenses, including payments for medical and dental care, health insurance premiums and even a portion of long-term care insurance premiums. However, medical expenses are only deductible to the extent they exceed 10% of AGI in 2019, up from a 7.5%-of-AGI threshold in 2018.

2. Taxes paid to other governmental entities:
IRC Section 164 allows taxpayers to deduct for Federal tax purposes any taxes that were paid to other governmental entities, effectively ensuring that the individual doesn’t have to pay Federal taxes on the money they used to pay other taxes.

In practice, the deduction for taxes paid applies broadly to real estate, personal property and income taxes, whether paid to a state or local municipality, or even to a foreign government. That said, under the tax legislation and IRC Section 164(b)(6)(A), foreign real estate taxes are not deductible. However, the taxes-paid SALT deduction is limited under IRC Section 164(b)(6)(B) from 2018 through 2025 to only a $10,000 maximum deduction — and it’s the same $10,000, whether individual or married filing jointly.

3. Interest paid:
Under the general principle that borrowing money to make money should be treated as a cost of generating income — i.e., a deductible expense/cost of producing that income — IRC Section 163 allows a deduction for at least some types of interest paid. This includes not only interest paid for investment purposes — albeit limited the total amount of investment income generated from taxable interest and dividends in the first place — but also for mortgage interest paid on up to $750,000 of debt principal used to acquire, build or substantially improve a primary residence or designated second home, and even mortgage points that were paid out of pocket and not themselves financed.

We will discuss the next 3 deduction areas in next blogpost.

6 Tax Saving Strategies Still Available For 2020 - Part A

10/18/2019

The tax reform passed in 2017 led to significant increase in the threshold to itemize, it also,reduced the number and size of available itemized deductions, including placing a $10,000 cap on state and local tax, or SALT, deductions; a reduction in the maximum debt balance eligible for mortgage interest deductions to just $750,000 of debt principal; an elimination of the deduction of interest on home equity indebtedness; the limitation of casualty and theft losses to just those in a federally declared disaster area; and the repeal of the entire category of “miscellaneous itemized deductions subject to the 2%-of-AGI floor,” which included unreimbursed employer business expenses, variable annuity losses, tax preparation fees and, notably, the deductibility of an investment advisor’s own fees.

IRS data showed in the past that approximately 30% of households were able to itemize deductions rather than claiming the standard deduction, but the Tax Policy Center estimates only about 10% of households will be able to itemize deductions going forward.

However, there are still 6 core types of deductions you could consider, as shown in the highlighted areas below.

We will discuss each of the 6 core types of deductions in next blogpost.

6 Medical Expenses That Medicare Will Not Cover

10/17/2019

Q. Does Medicare cover all medical expenses?

A. No. Here are 6 medical expenses that Medicare will not cover, and solutions you could consider -

1. Opticians and eye exams
While Original Medicare does cover ophthalmological expenses such as cataract surgery, it doesn’t cover routine eye exams, glasses or contact lenses. Nor do any Medigap plans, the supplemental insurance that is available from private insurers to augment Medicare coverage. Some Medicare Advantage plans cover routine vision care and glasses.

Solution: For some people, it makes sense to buy a vision insurance policy for a few hundred dollars a year to defray the costs of glasses or contact lenses.

2. Hearing aidsMedicare covers ear-related medical conditions, but Original Medicare and Medigap plans don’t pay for routine hearing tests or aids.

Solution: First, check if your Medicare Advantage plan covers hearing-related needs. If it doesn’t, or if you have Original Medicare, consider buying insurance or a membership in a discount plan that helps cover the cost of such devices. Also, some programs help people with lower incomes get needed hearing support. Or you can pay as you go. Congress has passed legislation allowing some hearing aids to be sold without a prescription. The devices could be available in a few years.

3. Dental work
Original Medicare and Medigap policies do not cover dental care such as routine checkups or big-ticket items, including dentures and root canals.

Solution: Some Medicare Advantage plans offer dental coverage. If yours does not, or if you opt for Original Medicare, consider buying an individual dental insurance plan or a dental discount plan.

4. Overseas care
Original Medicare and most Medicare Advantage plans offer virtually no coverage for medical costs incurred outside the U.S.

Solution: Some Medigap policies cover certain overseas medical costs. If you travel frequently, you might want such an option. In addition, some travel insurance policies provide basic health coverage; check the fine print. Finally, consider medevac insurance for your far-flung adventures. It’s a low-cost policy that will transport you to a nearby medical facility or back home in case of emergency.

5. Podiatry and cosmetic surgery
Medicare doesn’t generally cover routine medical care for your feet, such as callus removal. Nor does it cover elective cosmetic surgery, such as face-lifts or tummy tucks.

Solution: If you face these costs, you may want to set up a separate savings program for them.

6. Nursing home care
Medicare pays for limited stays in rehab facilities — for example, if you have a hip replacement and need inpatient physical therapy for several weeks. But if you become so frail or sick that you must move to an assisted living facility or nursing home, Medicare won’t cover your custodial costs. (Nursing homes average about $90,000 a year.)

Solution: Planning for nursing home care is a big issue, with lots of choices and decisions. But for those with limited income and savings, Medicaid might help fill in the gaps.

Late Business Cycle and Investment - Global Perspective

10/16/2019

Around the world, most big economies are in the late phase of the business cycle.
We expect financial markets to become more volatile than they have been in recent years.
Central bank monetary policy may boost asset prices without necessarily stimulating global economic growth.
In this environment, prioritize portfolio diversification.

How to Determine Various Life Insurance Needs

10/15/2019

The spreadsheet from AIG below has many different worksheets to help either individuals or businesses to determine the appropriate life insurance needs.

Differences Between ETFs and Mutual Funds - Part C

10/14/2019

In our last blogpost, we discussed key consideration points when deciding between ETFs and Mutual Funds. Now to we will further discuss the decision based on what kind of investor you are.

Typically, the best way for an investor to choose an investment is to use their own goals, financial situation, risk tolerance, and investment timeline to create a strategy. Using that perspective may help to identify appropriate investment vehicles. Consider the following types of investors and their varied objectives.

Active investor
If you prefer to manage your own accounts and want to trade during market hours to implement your preferred investment strategies, ETFs can offer the flexibility to meet your needs. Similar to stocks and other types of investments, ETFs can be traded throughout the trading day and on margin. Investors also have the ability to set limit orders and sell short. Most open-ended mutual funds can only be purchased at their closing prices, or NAVs. ETFs offer transparency, allowing investors to review holdings daily and monitor portfolio risk exposures more frequently than with traditional open-ended mutual funds.

For the active investor, ETFs may may satisfy the investor's need for more trading flexibility and holdings transparency.

Long-term investor
With a long-term view, investors may not want to devote a lot of time to worrying about the intricacies of an active trading strategy; they might have little use for the potential of buying or selling shares during the day; and they would likely want to minimize transaction costs for regular purchases.

Many open-ended mutual funds are available with no loads, no commissions, and no transaction fees. Many brokerages and banks offer automatic investing plans that allow regular purchases of mutual funds. These programs generally do not exist for ETFs. Moreover, open-ended mutual funds are bought and sold at their NAV, so there are no premiums or discounts. While an ETF also has a daily NAV, shares may trade at a premium or discount on the exchange during the day. Investors should evaluate the share price of an ETF relative to its indicative NAV.

Finally, any tax benefits that may exist for an ETF are irrelevant for someone saving in a tax-deferred IRA or workplace savings account, such as a 401(k), since taxes are paid upon withdrawal.

For the long-term investor, a traditional open-ended mutual fund could be an investor’s preferred option due to low transaction costs and automatic investing options.

Investors in a high tax bracket
Investors in a high tax bracket who are saving in a taxable account, like a brokerage account, may be interested in investments that offer tax efficiency for their taxable assets. In this scenario, if an investor finds that an open-ended index mutual fund and an index ETF are similar relative to their investment objectives, passive investments—index funds and passive ETFs—have the potential to be more tax-efficient than active funds and active ETFs.

Relative to actively managed mutual funds, some actively managed ETFs offer potential tax advantages. However, we caution investors against making long-term investment decisions based solely on any potential tax benefits. Investors should evaluate how an investment option fits with their time horizons, financial circumstances, and tolerance for market volatility, as well as cost and other features.

Investors in a high tax bracket may choose ETFs to take advantage of potentially greater tax efficiency.

Differences Between ETFs and Mutual Funds - Part B

10/13/2019

In our last blogpost, we discussed the key differences between ETFs and actively managed Mutual Funds. Now we will show you how to decide if ETFs or Mutual Funds are right for you.

While mutual funds and ETFs are different, both can offer exposure to a diversified basket of securities, and can be good vehicles to help meet investor objectives. Here are some points to consider when weighing vehicle options:

Trading
Is it important to be able to execute fund trades at prevailing prices throughout the trading day? Consider ETFs.
Transaction costs
Would you prefer trading a fund at NAV without paying a load, and avoiding the potential of paying a premium at purchase (discount at sale)? Consider ETFs or no-load mutual funds.
Margin
Do you like the flexibility of trading on margin? Consider ETFs.4
Automatic saving
Does your investment strategy include dollar-cost averaging? Consider the automated savings features of mutual funds in brokerage accounts.
Transparency
Do you want to know a fund’s holdings each day? Consider ETFs that offer holdings transparency.
Cost
Make sure to consider all costs and expenses related to any investment vehicle.
Diversification
Do the benefits of both ETFs and mutual funds have the potential to help meet investment goals? Consider building a portfolio incorporating both types of vehicles, including other types of investments, to gain exposure to different asset classes.

In our next blogpost, we will further discuss how to make the ETF vs Mutual Fund choice based on what kind of investor you are.

Differences Between ETFs and Mutual Funds - Part A

10/12/2019

Q. What are the key differences between ETFs and Mutual Funds?

A. The table below summarizes the key differences between ETFs and actively managed Mutual Funds -

In our next blogpost, we will show you how to evaluate and decide if ETF or Mutual Fund is right for you.

How a Financial Planning Pro Planned His Own

10/11/2019

David Littell is a Professor Emeritus at the American College of Financial Services, where he co-created the Retirement Income Certified Professional® designation. In other words, he’s a pro at one of the most complex tasks retirees face: turning a lump sum of savings into a reliable income stream that will last for life. And as he approached retirement himself, Littell discovered some key differences between what the textbooks say and the way things play out in real life.

Here’s what Littell has learned by finally living what he’s taught all these years:

Start with Something
Financial advisors love to ask their clients detailed questions about their future plans: When are you going to retire? Will you work in retirement? If so, how much?

In reality, “it’s hard to nail that down until you’re close to it,” Littell says. “I’ve changed my plans four or five times.”

For starters, you don’t know how your health will hold up. Some 43% of workers retire earlier than planned, and of those 35% stop working due to a health problem or disability, according to the Employee Benefit Research Institute.

Also, while you’re still working full-time, you’re probably not looking for a part-time job to supplement your retirement income. So you don’t know how feasible it is to get the kind of part-time work you want, or how much you might earn once you find it. Alternatively, if you’d rather continue working for your former employer on a part-time or consulting basis, you won’t likely broach the topic with them until you’ve given your notice. All this means that it’s hard to have real numbers to plug into retirement income calculations in advance.

Yet that doesn’t mean you shouldn’t try, Littell says. There’s a good reason advisors ask all these questions, to try to make accurate projections of your retirement income. It’s helpful to know how much you’ll have coming in, to make sure it’s enough to meet your needs. (To ballpark those needs, Littell suggests a simple method: use your most recent paycheck as a proxy for the retirement income you’ll need each month — assuming, of course, that you live within your means and aren’t racking up credit card debt to fund your lifestyle.)

So go ahead and make some assumptions, and do your calculations based on those. But understand that estimates are just that, and are subject to change. Revisit your plan regularly, and make sure the numbers are going to work before you give up your full-time gig. “People should think really carefully before they leave full-time work,” Littell says. Many people get tired of the grind and let their emotions govern the decision of when to quit, he says. But if you leave the workforce and then regret your decision, it’s very hard to re-enter at the same salary with the same benefits.

For his part, Littell recently cut back to working three days a week and plans to further reduce his hours as he shifts to a consulting role early next year.

Listen to Your Gut
Littell’s father lived to age 104. Aware he might have similar longevity, Littell didn’t want to risk outliving his savings. So he bought several annuities, insurance products that turn your lump sum into guaranteed income for life.

Financial advisors commonly recommend that clients use annuities to cover their essential spending. This way, all of your necessary needs will be covered by a “floor” of guaranteed income, and you can use your 401(k) or IRA withdrawals for discretionary fun. The logic behind this strategy is that, if stocks take a dive, you can always curtail your travel plans, but you can’t suddenly stop paying your mortgage or your Medicare premiums.

To determine your essential spending, you would tally up what you pay for housing, health care, food, and other necessary categories. Then, you calculate how much of the total would be covered by Social Security and any pensions you might have. An annuity or annuities would be used to cover any shortfall.

But Littell didn’t go through this exercise. Instead, bought annuities with the percentage of his portfolio that he felt comfortable parting with about 25% of the total. Many consumers balk at annuities because they reduce your liquidity. Littell was willing to give up control over a quarter of his portfolio in return for guaranteed income, and staying within that comfort zone — rather than imposing textbook calculations — helped him execute that strategy. “The intellectual and the reality didn’t match very well,” he says. “The reality for me was, how much are you willing to give up?”

He’s deferring claiming Social Security until age 70, and he estimates that once he reaches that age, about 75% of his essential and discretionary needs will be covered by guaranteed income. The annuities will help him sleep at night and not fret about outliving his savings. “I have no intention of worrying about that,” Littell says.

Money Advice From the Pros

10/10/2019

The Wall Street Journal asked prominent financiers and leaders how they'd advise young people on money. Here are excerpts of what five of them said.

Beth Ford, Land O'Lakes CEO
I think you have to work for money in order to understand its value. My advice to this generation of young adults would be to get started developing their work ethic even before they start their careers. Find a job, work hard and develop a strategy for managing your money—save for the future, invest your time and money in others and in your community, and spend on what makes you happy and healthy

Hank Paulson, former Secretary of the Treasury
Among the most important things we've tried to communicate to our children is to live in an environmentally and financially sustainable way which helps protect the planet and your economic security in a world where there is almost certain to be unforeseen adversity and risks. That means consuming less and saving and investing more.

As young people make decisions about which jobs to pursue, I always tell them that learning is more important than initial compensation. They can't afford not to learn. They should choose a career that truly fits their skills and interests because, ultimately, they are only going to enjoy something where they can do well and succeed.

When it comes to how they spend their money, young adults owe it to themselves to be financially literate, to try to live within their means and never to borrow or invest if they don't understand the terms. Often the terms are framed in technical jargon, which is difficult to understand and unfortunately there are sometimes unscrupulous lenders who take advantage of trusting people. So, they should insist that terms be explained in plain English.

Whitney Wolfe Herd, Founder and CEO of Bumble
Never be financially dependent upon anyone else in your life. Don't rely on a parent, a spouse or a boss. It will only erode your self worth and negatively impact the important relationships in your life. Instead, learn to save money, make money and then you can rule your own world!

Andy Sieg, President of Merrill Lynch Wealth Management
There's good news and bad news for young adults today. Thanks to longevity, you could live 100 years or more, though unfortunately your longer financial life may begin under a mountain of student debt. Start by mapping out your priorities and create a plan aligned to your financial goals. This is different for everyone. Early on, stick to a budget, and track expenses to identify areas to reduce them. For those with debt, pay off high-interest, non-tax-deductible first such as credit cards, then more aggressively tackle lower-interest debt such as student loans or a mortgage. Also, take advantage of workplace benefits such as a 401(k) and employer match, as well as health savings accounts. Discipline, early planning and guidance can accelerate your journey to financial freedom and help you achieve more life goals.

My wife and I have been in the financial advice business for decades. Our philosophy is to make sure our 16, 13 and 9-year-old children feel informed about the economy, markets and money, and not intimidated by them. We look for natural opportunities to educate them on these topics so that they understand the world.

Markets represent opportunity, and it's never too early to start learning the lifelong benefits of good saving and investing habits. Time is one of their best allies. Regardless of what path they take in their lives, we hope to instill an understanding of and appreciation for what the economy and money has the power to do, for them and for others.

Abigail Johnson, Chief Executive, Fidelity Investments
I've passed along the same advice that I was given when I was a kid: be cautious with leverage. What I mean by leverage is buying assets with borrowed money. It's dangerous and can be financially toxic when people use too much credit card or home equity debt to pay for current consumption. I was taught to have the patience to invest for the long-term and build a portfolio that can withstand market downturns, which also means being responsible with how you're spending money. I call this having an investor mind-set.

This means several things, including don't optimize the easy short-term solution at the expense of a harder and less certain—but more promising—long-term opportunity. It means your investment decision process should be analytical, logical, and grounded in empirical data. Calibrate the risks and know which ones, if not properly addressed, can sink your money plans.
When the stock market and real-estate prices are going up, leverage can seem like a sure way to boost returns. But when the bull market eventually stalls, as it always does, then too much debt can quickly overwhelm an individual's personal finances, just like it does with a company's balance sheet.

I'd encourage this generation to take a long-term view of the stock market and stay appropriately diversified across stocks, bonds, and cash. Pretty boring, I know, but as my Fidelity colleague Peter Lynch says, the most important organ for investing is the stomach, not the brain. Being diversified based on your age, personal circumstances, and tolerance for risk will help you stay the course when market volatility spikes. Asset allocation is still the most important factor in determining the long-term risk and return characteristics of a portfolio.

Whether with money or work, I tell young adults to always have a hunger and intellectual curiosity to learn. When I meet with interns and new hires at Fidelity, I encourage them to think of their career paths as a stream of experiences. Don't get caught up with trying to get a specific job title, because a title in one company could mean something completely different in another. Instead, focus on obtaining new skills, more education, and new experiences. Always bring your whole self to work and get involved in the communities where you work and live—if you do this, you'll have a lasting impact and find more meaning in your job.

Why It Is Important To Save Early For Retirement

10/9/2019

Q. I just started working and don't have much money to save. How much difference does it make if Isave for retirement later?

A. Assume you save $475 a month, the following table shows you much much you would save when you reach age 67.

3 Perspectives To Review Your Life Insurance Policy

10/8/2019

Q. I just bought a life insurance policy, how do I review it a few years later?

A. You can review your life insurance policy, especially if it is a permanent life insurance policy, from the following 3 perspectives -

From Financial Strategy Perspective

How are you preparing to achieve your financial goals and aspirations?
Are you taking advantage of all of the tax strategies available inside of life insurance?
Will your financial strategy be realized in the event of a premature death or disability?
Are you comfortable using your retirement savings to pay for health care/nursing home costs?

From Coverage Perspective

When was the last time you evaluated your life insurance needs?
What type of life insurance do you have?
How much coverage do you currently have?
Why or how did you choose your current coverage? • Has it kept up with inflation?
What is the termination date of your coverage?
Do you intend to use your coverage to provide living benefits as well as a death benefit?
Have your goals for these policies changed?

From Protection Perspective

Will your outstanding debt be covered by your current coverage?
If you¹ unexpectedly passed away, would your family be financially stable?
Have you experienced any life changing events since you purchased your coverage?
Do you desire to leave a legacy to your spouse and next/future generations?

How to Navigate the Medicare Maze?

10/7/2019