Blog Archives - PFwise.com

5 Common Types of Modern Family Arrangement - Part E

10/31/2021

In last blogpost, we discussed Same-sex couples.

Multigenerational families
In a multigenerational family, two middle-aged adults might find that their dependents include not just children, but also an aging or disabled parent.

Financial hurdles for multigenerational families include loss of income and retirement assets due to providing assistance to a parent. When you have an aging parent living with you, just the normal day-to-day living costs can start to add up, which can affect the couple’s cash flow and savings. While any income the parent receives can help offset the additional living costs, often that income is used to pay for medical and health care expenses for that parent.

Further, that parent may need around-the-clock assistance at some point, which will put further stress on the family.

Considering paying for full-time care is extremely expensive. Some families have elected to have one spouse stay at home and be the caregiver. The decision to quit your job to stay at home with Mom or Dad has an impact on your current financial situation and a lasting impact on your future retirement. Leaving work means losing not just current income but also future Social Security or pension income, as well as employer benefits such as health insurance and 401(k) contributions.

If you do not take care of your own physical, mental, and financial health, then ultimately no one will benefit from this arrangement.

5 Common Types of Modern Family Arrangement - Part D

10/30/2021

In last blogpost, we discussed Single person, living alone, with no children.

Same-sex couples
Thanks to the Supreme Court decision legalizing same-sex marriage nationwide on June 26, 2015, same-sex couples now face simpler financial planning that makes it easier to jointly own assets, inherit assets, and file taxes. Their notion of a dependent is no longer unique.

Nonetheless, establishing trusts and making an estate plan provide extra protection through clear legal documentation, especially in states that are still fighting against the law.

And same-sex couples that consist of two high-earning professionals may need extra help investing their money wisely.
What else is still different about financial planning for same-sex couples?

Because they are not guided by the traditional relationship mores, they have to make big decisions about how intertwined they want to be with one another from a financial perspective.

Even life partners can have a hard time comingling their finances because some people are very protective about their money. One partner might want to plan as if their money is one, and the other might want to approach assets as being individually owned.

One of the most common pieces of advice is that aren’t married is to consider marriage for the sake of love, and nothing else. When finances become a part of the marriage decision-making factor, it almost never works. In fact, if love wasn’t a part of marriage, the advice would generally be to stay unmarried for the sake of finances. Managing individual investment portfolios simplifies tax implications, investment decisions, income distributions, et cetera.

In next blogpost, we will discuss Multigenerational families.

5 Common Types of Modern Family Arrangement - Part C

10/29/2021

In last blogpost, we discussed Single-parent households.

Single person, living alone, with no children
For singles living alone with no children, your primary dependent is yourself. And single-person households make up more than a fourth of all U.S. households nowadays.

Not having a partner can make it harder to save — you don’t have two incomes and you don’t have the economies of scale that you get from sharing housing, utility, and food costs. In expensive parts of the country, home ownership can be out of reach for singles.

On the plus side, not having children means incredible savings. There may be less of a need to purchase life insurance since, depending on circumstances, no one directly depends on your income. On the other hand, some single situations may contradict that thinking.

While everyone should plan to be financially self-sufficient, considering long-term care insurance options is extra important for this group, who can’t count on children to help care for them in old age.

Planning for unemployment and disability is also essential for singles, since there’s no second income to fall back on. Saving a substantial emergency fund to cover several months’ worth of expenses, purchasing disability income insurance, and starting a side job or piece work to diversify your income stream can make things less precarious.

It’s also important to have a will and a trust to spell out what should happen to your assets when you die and keep the process out of probate court.

In next blogpost, we will discuss Same-sex couples.

5 Common Types of Modern Family Arrangement - Part B

10/28/2021

In last blogpost, we discussed blended families.

Single-parent households
In 2020, there were about 15.31 million children living with a single mother in the United States, and about 3.27 million children living with a single father, according to one analysis. In these families, caring for a dependent can be especially tough, because divorce often slashes a family’s income and assets, as does never partnering up in the first place.

Single parents are less likely to be saving enough for their own retirement and may be extra stressed by trying to save for themselves while wanting to help children pay for college. Alimony and child support may be insufficient to pay for major expenses like childcare during work hours, extracurricular activities, braces, and college because the original arrangements were made without the child’s long-term needs in mind.

What will happen to the child if the single parent becomes ill or passes away is the primary concern for single-parent households. So, a sole breadwinner should focus on disability planning and insurance.

To that end, the parent should establish an emergency fund and secure disability income insurance. The emergency fund is key because disability income insurance policies typically have a waiting period before making payments on a claim. The emergency fund can provide for living expenses before the disability income insurance policy’s waiting period is up and even while it’s paying benefits, since the insurance typically will only replace 50 percent to 70 percent of monthly income.

Life insurance is also a priority to help ensure children’s financial needs will be met if the parent passes away before they become financially self-sufficient.

Single parents must resist the urge to put saving for their children above saving for their own retirement because they have no spouse to help with retirement savings or retirement expenses and since the division of assets in a divorce may have taken a bite out of their retirement savings. Further, federal financial aid doesn’t count a parent’s retirement assets against a child’s college financial aid package.

One simple thing single parents can do to improve their finances is to file as head of household on their annual tax returns. This status will result in a lower tax rate and higher standard deduction than filing single.

If you feel as though things are particularly precarious as a single parent, keep this in mind: no family style is guaranteed to be stable. All families must create their own stability and recognize what they can and cannot count on.

Next, we will discuss Single person, living alone, with no children.

5 Common Types of Modern Family Arrangement - Part A

10/27/2021

How has the changing notion of a dependent affected family finances and financial planning?

Families are smaller these days, and two-parent households are less common. Same-sex couples can legally wed in all 50 states. And a “dependent” is no longer always a biological child younger than 21; it may be an older parent, a same-sex partner, a spouse, or stepchild from remarriage, a former spouse, or even in a sense oneself.

We will take a look at five of the more common types of modern family arrangements:

Blended families
Single-parent households
Singles
Same-sex couples
Multigenerational households

Blended families
It’s common these days for adults who decide to marry or live together to bring children from a previous relationship into the picture. That can mean more dependents to take care of. A family might include children from each spouse’s previous marriage, plus new children from the new union.

More kids mean more expenses, the biggest of which is college. Who should pay? The biological parent the child lives with most? The biological parent with the most resources? The stepparent? And who do colleges expect to shoulder the costs? Figuring out how to maximize financial aid for college can be tricky in blended families since there are both FAFSA guidelines and, for many private schools, CSS/PROFILE guidelines to learn the ins and outs of.

The good news is that blended families can pool their assets. They might be able to afford things that single and divorced parents can’t. Blended families can find it difficult to save, though, because of financial liabilities created by a previous marriage, such as child support and alimony, not to mention the loss of shared assets that were divided in the divorce settlement.

Also complicating finances are tax matters related to selling previously shared assets and claiming dependents.

Blended family estate planning is more difficult, too.

Carrying life insurance to provide for your new dependents and updating beneficiaries on old policies are key. You don’t want proceeds accidentally going to your former spouse.

Further, there may be a need for increased life insurance in blended families where the parents are not married because of the loss of survivor’s benefits or the ability to draw on the higher earner’s Social Security benefits.

In next blogpost, we will discuss single-parent households.

Assessing the First Bitcoin Futures ETF

10/26/2021

One of the challenges for people interested in investing in Bitcoin is how to actually invest in it. ProShares debuted its Bitcoin Strategy ETF (BITO), which invests in Bitcoin futures contracts to give investors exposure to the cryptocurrency in an exchange-traded product with a 0.95% expense ratio. The ProShares ETF could be the first of many ETFs to follow, with several other managers planning launches in the fourth quarter of 2021, potentially leading to fee wars that could drive the costs of these investments lower (and in fact, VanEck is expecting to imminently be launching their own Bitcoin Strategy ETF [XBTF] with ‘just’ a 0.65% expense ratio).

An article at ETF.com agrees that Bitcoin Futures ETFs will make it easier for investors to invest in and manage Bitcoin exposure, however, systemic risk could develop due to an unnatural supply-and-demand imbalance for the Bitcoin Futures themselves. This could occur not only because of the potential popularity of the ETFs from consumers, but also because the ETFs could see huge flows from other funds managed by the issuer of a Bitcoin Futures ETF that could create destabilizing demand shocks.

The article suggests that ETFs that invest directly in Bitcoin itself, rather than via futures, would avoid many of these problems, citing the success of funds in Europe and Canada that hold Bitcoin directly. But so far, the Securities and Exchange Commission (SEC) appears to view the risk to investors of funds investing directly in Bitcoin or other cryptocurrencies (which are largely unregulated) as greater than the risk of funds investing in Bitcoin futures (which are SEC-regulated).

For now, investors seeking crypto exposure through ETFs will have to rely on products based on derivatives, and accept the risks that come with doing so!

6 Forgotten Tax Benefits of Life Insurance - Part B

10/25/2021

We discussed 3 forgotten tax benefits of life insurance here, now the next 3 tax benefits.

4. Tax-Advantaged Access to Cash When Needed
Most potential buyers don’t understand that permanent life insurance policies have contractual features that allow the owner of the policy to withdrawal cash from the policy using tax-advantaged loans and withdrawals.

Money borrowed or taken from the cash value of a life insurance policy is generally not subject to income taxes up to the “cost basis” — the amount paid into the policy through premiums.

Also, there are no regulatory restrictions on how the cash taken from a life insurance policy must be used by the owner. This creates significant flexibility to use the cash to fund a variety of needs, be they health or personal needs, such as putting on a new roof.

5. Supplemental Source of Tax-Free Retirement Income
Policyowners can withdraw or borrow against the value of their permanent life insurance contracts for any need, like supplementing their retirement income. If this benefit is used, the policyholder needs to clearly understand that tapping a life insurance policy’s cash value decreases the remaining cash value as well as the death benefit.

6. Tax-Free Way to Leave a Legacy
Life insurance can be used to create an income tax-free legacy to beneficiaries using the income tax-free death benefit. For very large death benefits there is the possibility of triggering estate taxes, which must be planned.

Legacies can be created for family members, charities, religious organizations and educational institutions. This can allow individuals to benefit numerous entities using the leverage that the life insurance death benefit creates.

The key takeaway is this: When you read about tax advantages provided to the middle class, the benefits of life insurance are infrequently mentioned.

Life insurance offers significant tax benefits that provide families with protection, the ability to accumulate cash and leave a legacy to those they care about. We need to beat the drum louder to promote these intrinsic benefits.

6 Forgotten Tax Benefits of Life Insurance - Part A

10/24/2021

Here are the top six tax advantages of cash value life insurance.

1. No Limit on the Amount Purchased
In comparison to qualified plans, there is no limit on the amount of life insurance that can be purchased subject only to the underwriting limitations of issuing life insurance carriers.

Using cash value life insurance as a tool to save for the future and to generate supplemental retirement income are valuable benefits in a world where households need to save more as corporate pension plans disappear.

2. Tax Deferral on Earnings
Permanent life insurance policies can generate cash value over time as premiums are paid and excess cash beyond the policies’ cost is generated. All cash income earned is not taxed currently and is able to earn interest on the taxes not currently paid. As we face the prospect of increasing future income tax rates, this benefit could become even more valuable.

3. Income-Tax Free Death Benefit
One of the most forgotten tax benefits of a life insurance policy is that the death benefit is income-tax free. Beneficiaries receive the policy’s death benefit, usually in a lump sum, and don’t have to report the payout as taxable income.

They can use it as they please. The fact that the payment is received without any federal or state income taxes multiplies its value to the beneficiary.

Keep reading for the next 3 forgotten tax benefits of life insurance.

Income Case Study - Use Annuity to Achieve Income Guarantees

10/23/2021

Do you seek greater certainty in your retirement income strategies? The case study below shows how an index oriented option can help offer income guarantees and increase income success rates.

Multiple Accounts and Impact on Estate Planning

10/22/2021

Q. For estate taxes, does it matter what types of accounts I'm leaving to heirs? What if all my money is in a retirement account, like a 401(k), or it's all in a brokerage account or some other type of account? Do I need to start reorganizing how my money is held given the changes ahead?

A. The federal estate tax applies to the value of all assets that a decedent owns or controls at death, regardless of the type of account in which the asset is held.

You might want to consider, though, that only assets held in certain types of accounts can be efficiently transferred. For example, retirement accounts, such as 401(k)s or traditional IRAs, cannot be transferred to a third party during the account holder's lifetime without triggering income taxes and possibly penalties.

For this reason, most gifting strategies focus on transferring nonqualified, or taxable, assets, such as assets in a brokerage account or real estate. For people with a disproportionate amount of their wealth in retirement accounts, planning strategies shift to improving the income tax efficiency of the transferred accounts to reduce the beneficiary's income tax burden. Roth conversions, for example, may be an effective strategy to accomplish this goal. But, for estate tax purposes, the entire value of the converted Roth account will be included in the owner's estate.

Life Insurance and Impact on Estate Planning

10/21/2021

Q. How should I deal with life insurance and my estate? Will any of that change in 2026 or sooner, if the estate laws are modified?

A. The death benefit of life insurance is includable in the decedent's gross estate. None of the current tax change proposals contemplate changing the taxability of the death benefit of life insurance. However, there are some potential changes to the gift tax laws that could have an impact on certain estate planning strategies that leverage life insurance.

Currently, there is no limit to the number of annual exclusion gifts, whether to a trust or otherwise. As a result, people with multiple children and/or grandchildren (or other beneficiaries) can utilize their annual exclusion gifts to make $15,000 gifts to each beneficiary of a trust to fund life insurance policy premium payments.

Because an irrevocable trust is a separate and distinct entity for estate tax purposes, the value of a life insurance policy owned by the trust is not included in the estate of the insured.

Tax Plan Upends Estate Planning Using Trusts With Life Insurance

10/19/2021

Financial-planning.com has an article that details why the proposed tax plan upends estate planning using trusts with life insurance.

‘Crisis stage’
The blow to life insurance in trusts, a bread-and-butter wealth preservation strategy of the rich for decades, is one of many proposals in the emerging tax bill that take aim at the wealthy to finance President Joe Biden’s $3.5 trillion social spending plan.

The draft bill would raise the top individual rate to 39.8% from 37% and bump up the top capital gains rate to 28.8% from 23.8%. It would tax capital gains at the top ordinary rate once income hits $1 million, crack down on large retirement accounts and end backdoor Roth conversions, a favorite strategy of high-income earners to create tax-free profits. And it would kill the use of grantor trusts, the workhorse of estate planning, whether or not they contain life insurance.

It's easy to see what the tax perk has been. Say a person dies owning a $3 million home, $7 million in retirement accounts and $4 million of life insurance not held in a trust. With the current estate tax exemption at $11.7 million, $2.3 million of that $14 million estate would incur the 40% estate tax — a bill of $920,000. Now assume instead that the insurance policy is in a grantor trust. It wouldn’t go into the person’s estate, leaving nearly $1 million more for heirs.

Such savings would no longer be possible under the proposal. In any case, the historically high level at which estate taxes kick in would fall by nearly half to under $6 million in the House plan.

Under the House bill, “the life insurance issue has moved things to crisis stage,” said Steve Parrish, who co-directs the Center for Retirement Income at The American College of Financial Services.

“Right now, webinars, emails and panicked calls are circulating among estate planning professionals.”

One particularly hairy element, he said: Advisors are “trying to draft answers to their clients that avoid professional liability if they’re wrong.”

‘A major impediment’
The legislative proposal has upset financial advisors and estate lawyers because it’s common for life insurance to be held in a widely used type of trust called a grantor trust.

“This problem with insurance is really buried in the legislation,” said Warren Racusin, the head of the trusts and estates group at law firm Lowenstein Sandler in New York.

A grantor trust is a type of trust over which the owner, meaning the grantor, retains control and pays income tax on its gains. It comes in many flavors, including intentionally defective grantor trusts, or IDGTs, and grantor retained annuity trusts, or GRATs — all alphabet soup names well known to estate planners for the rich. Advisors say that most irrevocable life insurance trusts, or ILITs, are set up as grantor trusts, so they’d be hit by the curb, too.

The proposal says, in obscure language, that any assets contributed to grantor trusts come 2022 would become part of the grantor’s estate for estate tax purposes. The issue is that under the plan, a policyholder who pays her annual premiums for a policy that’s held in a trust would be “contributing assets,” thus making the trust subject to the 40% estate levy.

While the proposal would “grandfather” existing grantor trusts, that’s small comfort for those with life insurance. According to Mari Galvin, the chair of the trusts and estates group at law firm Cassin & Cassin in New York, it’s not clear from the proposal whether all of a trust could be shunted into the owner’s taxable estate if premiums are paid after this year, or just the portion related to the premium payments starting next year. “Time will tell,” Galvin said.

In any case, the grandpa safety net could be mighty small. Trusts that already exist and whose policies are fully paid would “most likely” remain grandfathered, according to Andrew Bass, the chief wealth officer of Telemus Capital, an independent advisor with brokerage services in Southfield, Michigan, that manages nearly $2.2 billion for high net worth investors. But only, Bass added, if the terms of the trust prohibit it from using its own income to pay premiums. The problem, he said, is that “most trusts were written with language that allowed trust income to be used for payment of premiums, thus forcing a loss of grandfathered status.”

In any case, wealthy individuals who want to create a future trust for their life insurance couldn’t make their spouse a beneficiary without subjecting the trust to estate tax. That’s because such a trust is automatically a grantor trust and thus would have to pay estate tax under the proposal.

“That is a major impediment, as insurance is typically needed by a surviving spouse,” Bass said.

The solution becomes the problem
The proposal has the potential to upend retirement planning.
“Life insurance is used by the well-heeled to both conserve and create an estate,” Parrish said. But if a policy’s death benefit gets hit with a 40% tax at death, “the insurance becomes the problem rather than the solution.”

The idea of pre-paying premiums revolves around using outside funds, not money inside the trust, as the latter would get caught by the proposed curb.

“We are advising clients to pre-fund their premiums now” by contributing cash or other assets before the new law passes so that no additional outlays are required to pay future premiums, said David Handler, a partner in the trusts and estates group at law firm Kirkland & Ellis in Chicago.

That’s easier said than done. Ponying up early premiums for a large “permanent” policy that lasts for life can cost millions of dollars. Where to find those dollars between now and New Year’s Eve? Individuals might have cash on hand, or they might contribute securities to the trust which can be sold over time to pay the premiums, Racusin said.

Handler said that others "might borrow from banks.” But Parrish said many investors would be left out in the cold, because “in many cases, these policies are financed through loans, so it’s impractical to pre-pay the premiums.”

Flying blind
The proposed curb would hit not just the very rich. People of more middling wealth, for whom a life insurance policy is often their trust’s single largest asset, would also feel pain.

For example, a person might have a net worth under the estate tax threshold but also a large life insurance policy to care for their family if they die prematurely and their income grinds to a halt, Handler said. Which means that when the insurance death benefit is paid, the decedent’s total assets can exceed the estate tax exemption.

Wealth advisors and estate planners say they're flying by the seat of their tax pants.

Advisors, Parrish said, “are feeling damned if they do” (pre-paying or taking other moves) and “damned if they don’t" (adopting a wait-and-see approach to whether the proposal becomes law).

Bass said one solution might involve “decanting” a grantor trust, like a fine wine. That strategy involves “pouring” a trust’s assets into a new trust. Or a trust could pay the insurance premiums through so-called split dollar arrangements, which are common with wealthy executives.

Or it could be set up so that beneficiaries other than a spouse would have to approve any distributions out of the trust to the spouse, “but that could cause family rifts and may have gift tax implications for the kids,” Handler said.

Racusin likened the tax contortions to navigating wealth planning with blinders on. “It’s kind of like an architect telling a builder, ‘hey, I need you to build this house right now, but I don’t have the plan, but you need to start building it right away.’”

5 Reasons to Make Changes to Medicare Coverage

10/18/2021

The good news for individuals enrolled in Medicare: If you're not satisfied with your current Medicare coverage, you can make changes during the Medicare Annual Enrollment Period (AEP), which runs every year from October 15 to December 7.

Generally, there are 5 reasons why you might consider making changes to Medicare coverage:

You want a less expensive plan. If you find that Medicare is taking a bigger bite out of your retirement budget, it can pay to shop around to save money.
Your health situation has changed, and you need different coverage. If you experience a significant change to your health, you may find that the plan you signed up for cannot support such a change.
The cost of your prescription drugs has increased. Sometimes health insurance companies that provide prescription drug coverage raise the price of certain medications. If you happen to take one of those medications, it could end up costing you a lot more money.
You're not satisfied with the quality of medical services in your current network. You may need the ability to see certain specialists or pursue additional avenues of treatment.
You want to simplify and consolidate coverage options. This is often the case when people want to shift to an "all-in-one" Medicare Advantage (MA) plan to bring all their coverage together instead of multiple plans handling different types of health care coverage such as Part A, Part B, a Medicare Supplement plan, or a Part D prescription drug plan (PDP).

Tip: Keep in mind, any changes you make take effect on January 1 of the upcoming year.

Why You Might Want to Switch Your Medicare coverage

10/17/2021

Not to Enroll in Medicare When Turn 65 If With Insurance

10/16/2021

Q. I am retired and covered under my wife's work insurance. Do I need to enroll in Medicare when I turn 65?

A. As long as your spouse is actively employed and insured, you can remain on her policy until she leaves the job or retires.

After that, you can sign up for Medicare Part B (covers doctor visits and outpatient services) and Part D (covers prescription drugs) without paying any late sign up penalties.

In the meantime, when you turn 65, you can still enroll in Medicare Part A (covers hospital bills), there is no cost for that and it gets you into the system.

The caveat, if your spouse works for a business with fewer than 20 employees, you may have to enroll in both Parts A and B.

Prostate Cancer and Life Insurance Application - Part B

10/15/2021

In last blogpost, we discussed what is prostate cancer. Now we will discuss life insurance underwriting for Prostate Cancer below.

The primary questions to be asked of a proposed insured that presents with this history are:

What was the age at diagnosis and the date when treatment ended?
What was the prostate cancer stage and/or grade?
What was the Gleason score? (This is a tumor grading, based on how different from normal tissue the cells are.)
How was the cancer treated?...and has there been any recurrence?
What was the pre-op PSA reading?
What is the current, or most recent, PSA reading?...and has there been good follow-up?

Underwriting decisions for prostate cancer are based on three things:
(1) the tumor grading,
(2) what the Gleason score and PSA were prior to surgery, and
(3) age and time since treatment ended. Diagnosis prior to age 50 or with a Gleason of 9 or greater will typically have a 5-year postponement period.

A lower stage/grade cancer and a Gleason of 2-6 often are available for offer as soon as treatment as been completed, typically in the Table 2-4 range (depending on the age). Standard offers are possible with low staging, usually at 5 years post prostatectomy, and 10 years if treated with radiation.

Prostate Cancer and Life Insurance Application - Part A

10/14/2021

About Prostate Cancer
The prostate is part of the male reproductive system. It's a gland about the size of a walnut that surrounds the urethra at the base of the bladder. Even though prostate cancer is the most common form of cancer for men overall, it's only the third most common cause of death from cancer in men of all ages. However, it's the most common cause of death from cancer in men over age 75. Prostate cancer is rarely found in men under age 40.

Types & Detection
Most prostate cancers are adenocarcinomas, but another form is sarcoma, which have a worse prognosis. It's usually detected through blood tests and PSA screening, typically before any symptoms occur.

Once a PSA reading of 4.0 or higher is seen, typically the doctor will request a biopsy to determine if there are signs of cancer. Treatment for prostate cancer may be done in several ways, including prostatectomy (removal of the prostate), chemo and radiation, and hormone therapy.

In next blogpost, we will discuss life insurance underwriting for prostate cancer.

6 Things to Know About RMD

10/13/2021

How much do I need to withdraw? RMDs will vary from person to person and account to account because they’re based on your age and the value of your account on December 31 of the previous year. It’s a good idea to be aware of the IRA and workplace retirement plan minimum distribution rules that apply to you. Worksheets and tables are available on the IRS website. Your RMDs should be calculated each year based on your account balance at the end of the previous year, your current age, and your life expectancy. It’s important to plan properly for these annual distributions if you want to avoid paying penalties and excess taxes.
Are there exceptions? Of course. A Roth IRA has no RMDs during the owner’s lifetime. However, Roth IRAs are subject to RMDs after the owner dies, and the same 50% penalty will apply if the beneficiary of the Roth IRA does not take the RMDs.
How will it affect my taxes? IRA RMDs usually count as ordinary income in the year you receive the distribution. The RMD will be added to all your other income for that year and will be taxed according to your tax bracket. If you made nondeductible IRA contributions or after-tax contributions to your company retirement plan, the amount of your contribution will not be taxable, but the earnings are. For your IRA, review your IRS Form 8606 to calculate how much of your RMD would be taxable. For your company retirement plan, contact your plan administrator to determine what amount is nontaxable.
Will this impact my Social Security check? It definitely could. RMDs increase your taxable income, which may push you into a higher tax bracket. That can impact other retirement benefits like Social Security and Medicare.
What is the deadline to take the RMD? Your first IRA required minimum distribution is due by April 1 the year after you turn 72. After that first year, the annual deadline is December 31. Consider taking your first distribution by December 31 the year you turn 72 if you want to avoid having two taxable distributions in the same year. Similar rules apply to taking RMDs from company retirement plans. The difference is you may need to withdraw your first RMD by April 1 of the year after you turn 72 or retire, if your employer’s plan allows it.
What is the penalty? It’s a big one, which is why it’s important to make sure you adhere to the guidelines. If you don’t take your full RMD by the deadline, you may end up paying a 50% tax on the amount you failed to take, as well as any applicable income taxes on the entire amount of the distribution.

3 Social Security “Do-over” Strategies

10/12/2021

There are three Social Security “do-over” strategies for people who have already claimed benefits.

First, any individual who has claimed Social Security retirement benefits can withdraw their application within 12 months of doing so. This allows the individual’s monthly benefit to continue to grow, but they (and any family members receiving benefits based on the worker’s earnings record!) must pay back any benefits already received. This strategy could be useful for individuals who decide to go back to work within a year of claiming their benefits.

Second, going in the opposite direction (for those who wish they had claimed earlier) is to elect to receive a lump sum payout of six months of retroactive benefits, which is available to (only) those individuals who have reached their Full Retirement Age (FRA). Thus, a retiree in need of a short-term cash infusion could retroactively start their benefits if they wish they had started earlier (and take the lump sum for what they missed!).

The third strategy for recipients who have reached their FRA is to suspend retirement benefits in order to get delayed retirement credits until age 70, at the latest. This option is potentially useful for married couples because, if the higher-earning spouse had originally started benefits early (reducing their payments), subsequently suspending their benefits can increase their benefits again, such that if the higher-earning spouse dies first, the survivor will get the larger benefit amount.

Notably, those who claim a retroactive 6-month payment for delaying can do so and then also suspend their benefit after taking the lump sum, receiving the lump sum (for a small infusion of cash) and still earning delayed credits up to age 70!

What Are Realistic Income Opportunities in the Rest of 2021?

10/11/2021

Below is an article from Fidelity that scans income opportunities on the horizon for the rest 2021:

That possibility that higher inflation will eventually lead to higher rates is increasing the attractiveness of floating-rate assets including preferred stocks and loans from both the US and Canada. Unlike bonds that pay fixed rates of interest, floating-rate assets pay interest at rates that adjust periodically, based on a publicly available, short-term interest rate. That means floating-rate preferreds and loans are less likely than most fixed income investments to lose value when inflation and interest rates rise. While past performance is no guarantee of future results, floating-rate loans and preferreds historically have performed better than longer-duration fixed income bonds in rising rate environments. Remember though, that floating-rate loans are sub-investment grade assets that may be more volatile and present higher credit risk than investment-grade corporate and government bonds.

Master limited partnership (MLP) and clean energy yieldco dividends are another interesting source of income right now, though investing in them is best left to professional managers. MLPs pay the highest yields of any income-oriented asset class and have historically maintained their value in times of inflation. MLPs operate real properties, mostly oil and gas pipelines, and many also continue to be mispriced by the market. Clean energy yieldcos also operate real properties, mostly solar and wind power projects. Many MLPs have been increasing their free cash flows by cutting their capital spending and paying down debt and offer historically attractive yields, compared to high-yield bonds issued by energy companies. MLPs may also benefit if proposed increases in corporate income tax rates come to pass because as partnerships, rather than corporations, they have tax advantages that would become increasingly valuable in a higher tax environment.

Real estate investment trusts (REITs) in the US and Canada may also offer attractive and steady (or even rising) dividends plus the potential for capital appreciation as more people eventually return to offices, stores, and leisure activities. REITs can grow their earnings by raising rents and they pay dividends that are higher than the yields of both the S&P 500 and investment-grade bonds. Despite their improving fundamentals, some REITs are still being underpriced by the market and that's creating opportunities for skilled managers who practice careful security selection. Some of the concern about the persistence of COVID has been priced into casino and shopping mall REITs.

Dividend-paying value stocks from companies including oil producers and gold miners are another potential source of income. These stocks are paying healthy dividends and are also inexpensive by historical standards because investors may be pricing in an eventual rise in real yields. Gold miner stocks usually move with real yields which take into account inflation. If inflation rises and real yields move lower, gold miners and gold itself typically move higher. If real yields rise sharply, then gold miners might sell off, but a lot of that risk is already priced in.

While the market may or may not be correct in pricing in the risk of a rise in real yields, gold miner stocks offer a natural volatility dampener in the event that real yields rise. However, if real yields do not fall sharply, investors may reasonably expect to collect growing dividends and eventual capital appreciation.

Finding ideas
Investors interested in multi-asset income strategies should research professionally managed mutual funds or separately managed accounts. You can run screens using the Mutual Fund Evaluator on Fidelity.com. Below are the results of some illustrative mutual fund screens.

Multi-asset class income funds
Fidelity funds
Fidelity® Multi-Asset Income Fund (FMSDX)

Non-Fidelity funds
BlackRock Multi-Asset Income Portfolio (BAICX)
Invesco Multi-Asset Income Fund (PIAFX)

Separately managed accounts
BlackRock Diversified Income Portfolio

How to Retire Early But Not Risking Your Future?

10/10/2021

This excellent article from Fidelity.com discusses how to delay Social Security, boost benefits, and build an income bridge to get there.

It answers or helps you think several questions:

Does it make sense to delay claiming Social Security benefits?
How to factor in your longevity into the consideration.
How to avoid running out of money?
How to bridge an income gap to Social Security?

Potential Retirement Income Approaches

10/9/2021

Despite the advancements in measuring risk tolerance, Pfau and Murguía argue that risk tolerance questionnaires are more valuable during a client’s accumulation years, and are less useful when assessing risk tolerance in their decumulation years in retirement when sequence-of-return risk becomes a serious issue.

Accordingly, Pfau and Murguía suggest advisors and clients first need to decide on a retirement income strategy, and only then consider a (risk-tolerance-appropriate) asset allocation in retirement.

Potential retirement income approaches include:

total return (drawing from a diversified investment portfolio)
protected income (using guaranteed lifetime income products to build a floor for essential expenses)
risk wrap (blending investment growth potential with lifetime income benefits), and
time segmentation (earmarking assets for spending immediately, soon, and later).

Once a strategy is selected, Pfau and Murguía propose a tool that uses two scales to determine the client’s risk tolerance in the decumulation period: probability-based income sources (e.g., from market growth) versus safety-first income sources (e.g., from contractual obligations), and optionality (degree of flexibility) versus commitment (adherence to a single solution) with respect to how much a client is willing to change their approach in response to economic or personal developments.

The results of this exercise can then be used to select appropriate investment products to meet the client’s needs. The key point is that selecting an appropriate allocation of assets in retirement isn’t just a function of the retiree’s tolerance for market volatility… instead, it starts with their preferences for even taking a risk-based investment (versus a more guaranteed-income) approach in the first place, and how much spending flexibility they have (or want or need) along the way!

4 Stock Investment Exit Strategies

10/8/2021

1. Support and resistance
These 2 key technical levels can be good barometers of when to buy or sell.

Support occurs when a security bounces off a series of lows in price. Basically, it's the level at which demand for a security is strong enough to stop the security from falling any further. However, once a security breaks a support level, it could mean further downside pressure. Therefore, many investors place stop orders just below support to protect themselves.

Resistance is the opposite of support—when a security bounces off a series of highs. Here, the supply is strong enough to stop the security from moving higher. When a security struggles to break through resistance, it might be time to think about getting out and taking your profits.

2. Target profit/loss ratio
You can set profit and loss targets from a purchase price. For example, a rule could be a 2:1 or 3:1 profit/loss target. You can also use percentage terms, such as 10% profit/5% loss target or if you want something with a tighter stop a 9% profit/3% loss target.

3. The 1% rule
Provides a general rule of thumb that says investors should set their max loss at 1% of their liquid net worth. For example, if you have $50,000 in savings, you shouldn’t stand to lose more than $500 on any one investment.

4. Time exit strategy
Defines the maximum amount of time you plan on being exposed to a particular investment. What you do once you've arrived at that time is up to you, but most traders use their time exit signal as an indicator that they should, at the very least, re-evaluate their investment. Time exit strategies can work when the security is moving sideways for an extended period of time, when prices are moving against you but not enough to trigger a stop-loss (an order that triggers at a specific price which executes at the next available price), or when it's moving up too slowly for your liking.

Why Splitting Contributions Between Traditional and Roth IRA is Not Tax Diversification

10/7/2021

Mathematically, the Roth-versus-traditional IRA decision will actually be the same, regardless of growth rates and time horizon, as long as both accounts remain intact and tax rates don’t change.

If future tax rates do change, though, the Roth IRA will result in more wealth when tax rates rise in the future, while the traditional IRA will benefit when tax rates are lower in the future. Though in practice, because the tax burden for a Roth IRA is paid upfront – when the (after-tax) contribution is made – there is no future uncertainty with respect to its future tax rate; instead, changes in tax rates primarily impact the future value of a traditional IRA, in particular, making it better or worse off depending on whether or how tax rates change.

To cope with this uncertainty, one popular approach is to ‘tax-diversify’ between the two types of accounts, splitting contributions between traditional and Roth IRAs so that there is at least ‘some’ benefit regardless of which direction tax rates go (as higher tax rates benefit the portion of dollars in the Roth, and lower tax rates would benefit the traditional IRA dollars instead).

However, the reality is that splitting dollars between traditional and Roth retirement accounts isn’t just a form of diversification; because the outcomes are correlated to each other, the net result is that tax diversification doesn’t actually diversify the risk, it simply neutralizes the opportunity altogether. Or viewed another way, splitting between traditional and Roth IRAs is more akin to just bailing out of stocks altogether and owning zero-return cash.

If you want to see a more thorough discussion of this topic, here is an excellent article.

Retirement Solution Shopping Video

10/6/2021

Are you ‘shopping’ for retirement solutions? You may have growth, guarantees, lifetime income, tax advantages and more on your list … but do you know annuities could offer you all?

Here is a “Retirement Shopping” video.

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