Category: Retirement - PFwise.com

The Swiss Army Knife Approach to Retirement

3/25/2020

If you’re like most people, you want financial security. This means having protection from future uncertainty and the flexibility to make changes to your financial plan. And because you’re likely to spend 20 or more years in retirement, you probably want a smart way to potentially increase your savings to help pay for health-related expenses not paid for by Medicare.

Sagicor's WealthCare can help you feel confident about your future
By adding a WealthCare policy to your retirement portfolio, you’ll have the advantages and financial flexibility you’re looking for in one efficient solution. So, you can focus on enjoying your retirement because you have the following flexibility and benefits -

Why Life Insurance Trusts Are Better For Multi-generational Planning

3/24/2020

Q. Why life insurance trusts are better for multi-generational planning?

A. This is because the new Secure Act!

Consider this scenario
Someone is leaving a $1 million IRA to a conduit IRA trust for his grandchildren.

Under the old stretch IRA rules, if the trust qualified as a see-through trust, RMDs could be based on the age of the oldest grandchildren, say, 19-year old. RMDs would be paid to the trust and from the trust right through to the grandchildren over 64 years (the life expectancy of a 19-year old), leaving the bulk of the inherited IRA funds protected in trust for decades.

Meanwhile, the grandchildren receive only about 1.6% to 2% of the account for the first 14 years, with the percentage increasing very slightly each year. That percentage of IRA funds being released to the grandchildren would stay under 10% for 50 years. Those smaller RMDs would keep tax bills lower for many years and keep balance of the nondistributed trust funds protected.

Why it won't work anymore
But not anymore! Under the new Secure Act, if the plan stays as is, all the funds will be released to the grandchildren and taxed by the end of the 10th year after death. Even if a discretionary trust was used to keep more funds protected, the entire inherited IRA balance would still have to be paid out to the trust by the end of 10 years - and taxed at trust rates for any funds retained in the trust for continued protection.

That's why the person with $1 million IRA could instead withdraw the IRA funds over time using today's low tax rates and use them to buy a life insurance policy. Due to the life insurance leverage, the payout after death can far exceed the $1 million balance in the IRA, depending on the person's health and age.

The caveat?
In order for the new life insurance strategy works, the person has to qualify for life insurance.

5 Ways the SECURE Act Could Harm Retirees

3/14/2020

1. Less Wealth Passed to Heirs (and More Taxes Being Paid)
In the past, most beneficiaries could stretch out the RMDs of inherited IRAs and 401(k)s over their own life expectancy. This allowed inherited IRAs and 401(k)s to grow tax advantaged for heirs for many years. Additionally, RMDs were relatively small, since they were based off of their longer life expectancy.

Now, these non-spouse beneficiaries must cash out the entire IRA within 10 years. Because the withdrawals will be larger, they will likely force beneficiaries to pay higher tax rates on taxable distributions, and because the time period is limited, the opportunity for tax-deferred growth is also being shortened.

2. Confusion Leading to Possible Missed RMDs (and Penalties)

If you were born before July 1, 1948, you were already taking RMDs, and that continues unchanged going forward.
If you were born on July 1, 1948, through June 30, 1949, you turned 70.5 in 2019. Your first RMD is due by April 1, 2020. Your second one is due by Dec. 31, 2020. And then you continue to take RMDs by the end of each year going forward.
If you were born on July 1, 1949, or later, your first RMD is due by April 1 of the year after which you turn 72. Your second would be due by Dec. 31 of that same year, and then by Dec. 31 of each year thereafter.

3. Conduit or Pass-Through Trust RMD Failure (and a Big Tax Bill If Not Corrected)
In the past, many IRA and 401(k) owners have been encouraged to use conduit or “pass-through” trusts as beneficiaries of their retirement accounts to help qualify for the “stretch” provisions and provide creditor protections for their heirs. However, many of these trusts only gave access to the RMDs each year to the beneficiary of the trust.

With the new 10-year distribution period for many beneficiaries, there is actually no RMD for year one after the year of death of the account owner. In fact, the way the SECURE Act was drafted, the only year that has an RMD is year 10, as the act states all money must be distributed by the end of year 10 after the year of death of the IRA owner.

This means the trust provisions that were drafted prior to the SECURE Act could lock up money for heirs for up to a decade and then cause a full taxable distribution in one tax year for the full retirement account. This has potential for disaster, so trusts need to be reviewed as a consequence of the SECURE Act.

4. More Money Leaking Out of Retirement Accounts
A positive provision was added to the SECURE Act that allows those under the age of 59.5 to take out up to $5,000 from their IRA or 401(k) to cover costs within a year associated with childbirth or adoption and avoid the 10% penalty tax for early withdrawals. If both parents have their own retirement accounts, they could each withdraw $5,000, for a total of $10,000, without a penalty. Of course, they’d have to pay taxes on the money, though.

One issue with these types of additional access points, in regards to retirement money, is that they can encourage leakage — money leaving retirement plans and being used for other needs, instead of retirement.

5. Improper Annuity Ownership in Retirement Plans
A new rule in the SECURE Act lessened the standard of care and review that a retirement plan sponsor must use to vet insurance products going into the plan. As such, there will be a large push to add more annuities into 401(k)s. The reality is, more Americans need access to lifetime income options inside of their retirement plans. Because investment advice and help with financial planning in a 401(k) can be hard to receive, many investors are on their own when picking investment allocations within their employer retirement plans.

By adding more annuities into retirement plans, younger investors who do not yet need to be invested in an annuity might end up with large percentages of their wealth in this strategy. The reality is that annuities can add value, but they will not be the right investment option for all participants … and without quality guidance, education and advice, individuals could have improper ownership and investments in these assets.

9 Actions to Take When You Are 12 Months Before Retirement

3/11/2020

1. Review your retirement assets and expenses
You need to develop a truly comprehensive budget to be sure you understand what fixed expenses you are going to face in retirement, what your assets are, and how inflation may impact that budget.

Compiling such data should take a minimum of six months to give spending patterns time to emerge and to ensure any bills that get paid quarterly get factored into the budget. This will give you a chance to see trends, like how much you spend on dinners and vacations per year.

As you budget plan for the long haul, consider, too, which bills may disappear over the next five years, including perhaps your car loan or monthly mortgage. But also project for healthcare expenses, which tend to increase as you age.

Indeed, many retirees underestimate the cost of future medical expenses. The latest figures from Fidelity Benefits Consulting estimate that a 65-year old retiring today with traditional Medicare insurance coverage will need an average of $280,000 (in today’s dollars) to cover medical expenses throughout retirement, not including any costs associated with assisted living or long-term care.

2. Analyze your income stream
Once you’ve calculated your future expenses, determine how much money you will have coming in from guaranteed sources of income, such as Social Security and any pensions, annuities, or trusts.

Find out, too, whether those income streams include cost of living increases. If not, your future purchasing power may be far less than you bargained for.

The difference between your expenses and guaranteed income is the amount of money you will need to generate from your personal savings, IRAs, 401(k)s, and other investments to make ends meet.

A 4 percent withdrawal rate, adjusted annually for inflation, is often advised, as it may allow you to leave your principal untouched and minimize the likelihood you will deplete your savings, but rules of thumb don’t always apply. The ideal withdrawal rate for you will depend on your living expenses, the amount you have saved, and your portfolio’s annual rate of return.

If you can’t generate enough from your personal savings and investments to cover your bills, you face some tough decisions. You can potentially downsize to reduce your living expenses, assume more risk to chase higher investment returns, or simply work a few years longer to supplement your savings.

Remember, if you are age 50 or older by the end of the calendar year, you can potentially supercharge your savings by making additional catch-up contributions to your 401(k), 457 or 403(b) retirement plan.

Depending on the circumstances, some of these calculations get complicated. Some people opt to consult a financial professional to help determine an appropriate savings rate and withdrawal rate.

3. Stress-test your retirement budget
Before you bid farewell to the boss, it is also important to give your budget a test drive.

Try living off your projected income for a period of several months to make sure it meets your needs. Don’t forget that in the first decade of retirement, you are likely to spend more money than you did during your working years as free time allows for more travel, dining out, and spoiling the grandkids.

Your entertainment expenses may drop during the last decade of retirement, but your healthcare costs will likely rise.

4. Pay down your debt
If your budget looks tight, you may be in the position to lower your expenses by paying down some of your debt, such as your car loan or high interest credit card bills, before you retire. Indeed, minimizing debt is an important strategy when you move to a fixed income.

Don’t fret if you still have a mortgage. Unlike their parents’ generation, many retirees today still carry a mortgage. Some even “upsize” to nicer digs. Just be sure your income stream can support your future payments.

That said, it may make sense to refinance your mortgage loan to lower your monthly expenses if you can still secure a lower rate than you currently pay. Those who intend to renovate or relocate in the near-term may also wish to close on their new loan before they stop receiving a paycheck, as borrowing money in retirement can be more challenging,

5. Plan for healthcare costs
If you plan to retire before you are eligible for Medicare, the federal government’s health insurance program for those age 65 and older (and some younger people with disabilities), you’ll need to factor in the cost of private health insurance for the gap years until you are Medicare eligible.

Some employers allow retirees to continue on their plan at a much better rate (than you’d find on the private market), but for other companies, that’s not an option. You need to be sure you have a bridge.

Once you are Medicare-eligible, you’ll need to decide whether it makes sense to purchase a supplemental policy to cover some of the costs traditional Medicare doesn’t pay for, including copays and deductibles.

6. Strategize Social Security benefits
Nearly half of Americans aged 50 years or over failed a Social Security quiz in a nationwide MassMutual survey. That can be concerning because not knowing Social Security essentials could result in fewer benefits.

For instance, the age at which you begin taking Social Security benefits can have profound implications on your future income stream.

Those who claim benefits at the earliest opportunity, for example, which is age 62 for current retirees, get a reduced benefit for life, which may make sense if you do not expect to reach the average life expectancy due to family history or poor health.

By waiting until your full retirement age, however, which ranges from age 65 to 67 depending on the year you were born, you can increase your monthly benefits to the full amount to which you are entitled, as determined by your earnings record.
You can maximize your monthly benefit further still by delaying Social Security until age 70 — at which point the benefit of postponing any longer disappears. If your full retirement age is 66, for example, you would receive 132 percent of your monthly benefit by waiting until age 70.2

7. Consider longevity insurance
As you enter retirement, you may also potentially help insulate yourself from the threat of outliving your retirement savings by purchasing longevity insurance, or an annuity contract designed to pay a guaranteed income for life once the policyholder reaches a certain age.

If you buy an annuity in your mid— to late—70s, that’s when these products can offer a lot of value because you’re pooling mortality risk. If you live to 100, you get the resources of others you outlived, so it protects against longevity.

To that end, it may also make sense to purchase a deferred annuity when you retire that delivers an income stream at some point in the future – whatever age you select. That creates a much simpler financial problem. If you have an annuity that kicks in at age 85, now you only need to survive on your savings from now to then. An annuity allows you to hedge longevity risk.

8. Have an emergency fund
If you haven’t done so already, now is also the time to set up an emergency fund worth at least six months of living expenses in a liquid, interest-bearing account.

Why? A “cash stash” can help cover the bills when the market takes a tumble, minimizing the likelihood that you’ll have to liquidate a portion of your equity (stock) investments in a down market to generate income.

The other benefit of an emergency fund? A cash cushion may grant you the flexibility to keep a larger portion of your portfolio in growth-oriented investments, which could also help mitigate longevity risk.

You need some money in a ‘growth bucket,’ which is designed to add additional income for a few more years into your 70s, you can use the ‘Rule of 100.’ - “Take 100 and subtract your age. That’s the total amount of money a retirees could have at risk in a growth position.

9. Watch the Tax Man
When it comes to retirement, timing is everything. The last paycheck you collect is likely to be the biggest you’ve ever received. It may include unpaid vacation days, bonuses, and proceeds from stock options.

Picking the right retirement date is important. If you work the entire year and get that last check-in December, your entire salary could be subject to a higher tax bracket. It can pay big dividends to retire early into the new year so you’d be in a lower marginal tax bracket versus towards the end of the calendar year.

How Smart Use of Permanent Life Insurance Can Help Reduce Tax At Retirement Time - Part B

3/8/2020

In our last blogpost, we showed the first couple how they use term life and stuck in their current tax bracket.

Couple 2: Has tax-sensitive distribution strategy

The second married couple has the ability to design a tax-sensitive distribution strategy because they are using permanent life insurance to protect their family and their wealth.

Just like the previous couple, their desired income is $100,000 and their required income is $78,950. However, they have the flexibility to take out $21,050 from any of the three financial toolboxes.

This year, they decide they want to be as tax-efficient as possible and will take dollars from a tax-advantaged toolbox to fill their income gap.

Net worth: Includes assets from all three financial tools: capital assets, retirement income and tax-advantaged

Achieving desired income

The taxpayers with a tax-sensitive distribution strategy desire to be as tax-efficient as possible.

Desired income of $100,000 Sources of income
Required income $78,950 Social Security and RMDs
Income gap $21,050 Filled with income from a tax-advantaged asset (cash value life insurance)

Taxes for tax-sensitive couple

This couple will pay taxes in the first two tax brackets only. Their total taxes due will be $9,086, and their effective tax rate is 9.1 percent.

Results

In this case, the second couple has a tax savings of $4,631 and a decrease in the effective tax rate of 4.6 percent compared to the other couple:

How Smart Use of Permanent Life Insurance Can Help Reduce Tax At Retirement Time - Part A

3/7/2020

This is a case study, we have two couples, each couple puts away the same amount for retirement, but they allocate assets differently among the tools. Some contributions were made to qualified plans.

Couple 1: Stuck in their tax bracket

The first couple chooses to protect their family’s dreams, aspirations and accumulated wealth with term life insurance until it runs out. They focus solely on capital assets and retirement income assets to fund their retirement.

Desired income: $100,000

Required income: $78,950; required income includes income clients are obligated to receive due to automatic payments, like pensions, or tax law (e.g., Required Minimum Distributions – RMDs, starting at age 70½)

Retirement income gap: $21,050; which will be filled using their capital asset or retirement income toolbox

Net worth: Includes only capital assets (e.g., investments and real estate) and retirement income assets, or qualified assets

Achieving desired income: The taxpayers stuck in their tax bracket decide to take dollars out of their retirement income toolbox to cover their income gap.

Desired income of $100,000 Source of income
Required income $78,950 Social Security and RMDs
Income gap $21,050 Filled with only retirement income assets (taxed at ordinary income rates)

Taxes for “stuck” married couple: This couple will pay taxes on the first two tax brackets and some ($21,050) in the 22 percent brackets. Their total taxes due will be $13,717 and effective tax rate is 13.7 percent.

In our next blogpost, we will look at the second couple that uses permanent life insurance smartly.

The Power of Zero - Fixed Indexed Annuity From Lincoln National

3/4/2020

As you approach retirement, you want to protect your savings from market losses.

A Lincoln fixed indexed annuity offers the potential for growth beyond that of a traditional fixed annuity, since the indexed accounts have earnings tied to the performance of an outside index. When the index increases over the indexed term, the account will be credited with earnings determined by that account’s crediting method.

But what happens if the index performs poorly and has a negative return?

The “power of zero” gives the client protection – the indexed account will never decrease due to negative performance…the lowest return is 0%.

What To Do When Stretch IRAs Are Eliminated?

3/3/2020

Q. What can I do with "stretch IRA" is eliminated due to the new rules?

A. First, what is a "stretch IRA"?

Before 2020, you could bequeath your IRA to anyone you wanted. The recipient has to take "required minimum distributions" every year. But those distributions, which are taxable, could be stretched out based on the recipient's presumed life span. The younger the recipient, the smaller the distributions the inheritor has to take.

So a "stretch IRA" is a perfect tool could be used to pass assets to people two or three generations younger, no estate tax.

However, from January 1, 2020, under the new rules, stretch IRAs for non-spouses were pretty much eliminated - it limits the life of bequeathed IRAs to 10 years if you give them to anyone but a surviving spouse or sick or disabled beneficiaries.

The Solution
So what you can do? If you have the money, you can create a "synthetic stretch IRA" by setting up a trust to which you bequeath your IRA, with the trust instructed to pay lifetime income to whomever you choose on whatever terms you like.

One Powerful Policy that Can Meet Many Goals - A Case Study

3/2/2020

People in or near retirement need solutions that can evolve with their changing needs — for 20 or more years.

While your may have CDs, annuities, and bonds in your retirement portfolios, below is a case study from Sagicor to use its WealthCare Indexed Single Premium Universal Life Insurance to illustration how it can help address the many needs of today's retirees.

Impact of State Estate and Inheritance Taxes on Estate Plans

2/9/2020

There are 19 states that currently impose an estate tax or inheritance tax, these taxes usually have lower threshold for you to qualify which pose a significant challenge for your estate plans.

The article from Prudential below has a very good discussion of this topic and includes a case study as well.

QLAC 101 - Which Carriers Have the Best QLACs?

2/7/2020

In our last blogpost, we discussed factors to consider when purchasing QLAC. Now the question - which carriers have the best QLAC products?

We recommend products from AIG, Lincoln, and Principal.

Below is up-to-date information about AIG's QLAC product, including producer and consumer guides, sales ideas, fact sheets, and more. If you are interested in the other carriers' QLAC products, please contact us.

QLAC 101 - Factors to Consider Before Purchasing QLAC

2/6/2020

In our previous blogposts, we discussed what is QLAC and showed an example of QLAC. Now we will discuss what factors to consider before purchasing QLAC.

The decision to purchase a QLAC is a personal one and should take into account your family's needs and financial goals. For instance, you may not want to take RMDs on the entire pretax balance of your IRA if doing so would provide you with more income than you need. But will your financial standing be as strong 20 or even 10 years from now? A QLAC would allow you to enjoy your earlier retirement years knowing that you have guaranteed income in place when you really might need it.

Specifically, the following QLAC related decisions should be considers.

Single or joint life?
If you are married, you can choose a joint contract, which will provide income payments that will continue for as long as one of you is alive. Choosing a joint contract may decrease your income payments—compared with a single life contract—but may also provide needed income for your spouse should you die first.

Include a cash refund death benefit?
When purchasing a QLAC, the income lasts for your lifetime (joint contracts pay income for you and your spouse, as long as one of you is alive). You may also want to consider adding a cash refund death benefit. This provides for a lump sum paid to your beneficiaries if your lifetime payments do not exceed the dollar amount you invested in the QLAC. While a contract without the cash refund death benefit may provide higher income payments, it does not include beneficiary protection for your heirs.

When to start income?
A QLAC should be part of a broader income plan, to help ensure that your essential expenses like food, health care, and housing are covered during retirement—ideally with lifetime income sources such as Social Security, a pension, or lifetime annuities. Deciding on an income start date will depend on how this income stream will best fit into your overall plan. Here are some hypothetical examples of how someone might choose an income start date:

A 70-year-old retiree with an existing income stream that will stop at age 75 (for example, proceeds end from the sale of a business, the retiree stops working part time, inheritance income ceases) might start income at age 76 for the QLAC to replace the income that is ending.
A couple in their late 60s might like to include an income stream that begins at age 80 or 85 as part of their overall plan, to help cover higher anticipated health costs later in retirement.
A couple at age 65 might be comfortable taking withdrawals from their investment portfolio to cover their expenses at the beginning of their retirement, but they are concerned about the potential need for it to last 30 years or more. They might consider a QLAC that provides lifetime income starting at age 85 to help address these concerns.

Need to change the income start date?
For contracts that include a cash refund death benefit, you typically have the ability to change the income date by up to 5 years in either direction (subject to an age-85 maximum). For example, if you initially select age 78 as your income start date, you could subsequently change this date to any time from age 73 to age 83. Of course, the amount of income that you will receive will typically be adjusted to a lower amount if you decide to change the date to an earlier age, and a higher amount if you change the date to a later age.

In our next blogpost, we will show you some of the best QLAC providers.

QLAC 101 - How to Use QLAC?

2/5/2020

In our last blogpost, we discussed what is QLAC, now we will show how to use QLAC to create steady later in life income streams.

Let's say you own one or more traditional IRAs with a total balance of $200,000 as of December 31 of the previous year. You would be limited to using $50,000, which is 25% of $200,000 and is less than $135,000, to fund the QLAC. But if your total IRA balance is worth $540,000 or more, the maximum you can contribute to a QLAC is $135,000. Keep in mind that in both cases the money that remains in your IRA or 401(k) is still subject to RMDs.

An Example
Let's assume a woman is approaching age 70½ and does not need her full RMD to cover current expenses. By investing a portion of her traditional IRA assets in a QLAC at age 70, she would not have to take RMDs on the assets invested in the QLAC, and she would receive guaranteed lifetime income starting at a date of her choice, up to age 85.

During the deferral period, she would rely on Social Security, RMDs from the remaining money in her IRA, withdrawals from investments, and other income, such as part-time work or a sale of a business, to cover expenses. If she invests the $135,000 in a QLAC and defers to age 80, her guaranteed income would be $15,200 a year no matter what happens over time, and she would receive a total of $228,000 in payments if she lived to age 95—or more if she lived longer.

In our next blogpost, we will discuss what factors to consider if you should purchase QLAC or not.

QLAC 101 - What Is QLAC?

2/4/2020

Q. What is QLAC?

A. A QLAC is a Deferred Income Annuity (DIA) that can be funded only with assets from a traditional IRA or an eligible employer-sponsored qualified plan such as a 401(k), 403(b), or governmental 457(b).

The US Treasury Department issued a rule creating Qualified Longevity Annuity Contracts (QLACs) in 2014. QLACs allow you to use a portion of your balance in qualified accounts—like a traditional IRA or 401(k)—to purchase a deferred income annuity3 (DIA) and not have that money be subject to RMDs starting at age 72.

At the time of purchase, you can select an income start date up to age 85, and the amount you invest in a QLAC is removed from future RMD calculations. QLACs address one of the biggest concerns among individuals in retirement: making sure they don't outlive their savings.

Why Purchase QLAC?
There are two main reasons.

First, you can delay required minimum distributions (RMDs) on the money in your QLAC. Without a QLAC, you would be forced to start taking distributions based on the total value of that retirement account at age 72 (formerly 70 ½) - and paying income tax on those distributions. Many people don’t need distributions at that age, and don’t want to pay tax on that money yet. With a QLAC, you won’t have any RMDs on premiums paid until age 85.

Second, longevity. If you are worried about outliving your funds, a QLAC solves the problem. It provides guaranteed monthly income as long as you live. Plus, you get the amount you were promised at purchase, no matter what’s happened to the stock market or interest rate in the interim. You're effectively transferring that risk to the insurer.

In our next blogpost, we will show you a few QLAC examples about how it works.

5 Years Count Down Plan to Your Retirement

2/2/2020

Below is a Barron's article that lays out a 5-year plan for anyone whose retirement is 5 years away -

Five years out
Start building cash reserves, if you haven't already, to tap during market downturns in retirement. Experts suggest savings at least equivalent to a year of expenses.

Take advantage of post-tax savings opportunities in qualified retirement plans.

Beyond those 2020 contribution levels, post-tax contributions are possible. The Internal Revenue Service allows for a total of $57,000 in contributions between the employee and employer, which bumps up to $63,500 for people over age 50. A survey by the Plan Sponsor Council of America shows 17% of 401(k) plans offer the option of making contributions on an after-tax basis.

Why put post-tax money in a 401(k)? It's another way to fund a Roth IRA, he says, which allows tax-free growth if the money is rolled over. However, making a post-tax 401(k) contributions can be complex, so people should both work with their financial advisor and read through the plan summary or other documents to confirm what their plans allow.

Three years out
Make major purchases while still employed.
It sounds counterintuitive, but look to repair or replace expensive goods with long lifespans such roofs or cars ahead of retirement.

For those who might want to work part-time in retirement or turn hobbies into businesses, look into certification programs or other training now.

Pay off loans from 401(k)s and other qualified plans to avoid carrying debt into retirement and creating a taxable event that qualifies as ordinary income. Loans from 401(k)s need to be repaid within 60 days of leaving an employer. Whatever isn't repaid is considered a retirement distribution and creates a taxable event and if you're not 59½, a penalty, too.

Two years out
Review estate planning if not up to date, including updating wills, reviewing power of attorney, health-care proxies, and beneficiaries.

Decide whether to pay off the mortgage and review other debts. For people who have debt, plan to stay in their homes, and aren't concerned about leaving a financial legacy, consider refinancing to a lower interest rate.

Meet with a financial planner to review tax strategies and firm up retirement cash flow projections.

Some retirement experts, including Nobel Laureate William Sharpe, say professional advice can be worth the cost even for do-it-yourself types. “When you retire and make your initial decision on buying annuities, investing, and adopting some sort of spending plan, I would think that it would make sense to sit down at least once, at the outset, with a financial advisor,” he told Barron’s.

One year out
Confirm all financial resources—pensions, profit sharing, Social Security, and other income.

Pre-retirees should call previous employers to see if they have left behind retirement benefits, says Jackie Cooper, a financial fitness coach.

For 401(k)s or other qualified plans subject to Employee Retirement Income Security Act of 1974 rules that may have been terminated when the company dissolved, search the U.S. Department of Labor’s Employee Benefits Security Administration; the EBSA maintains a searchable “Abandoned Plan Database”. Pre-retirees may find the name and contact information of the Qualified Termination Administrator, who can be contacted for information on the retiree’s account.
Lastly, check with the state treasurer's office for any unclaimed property.

Do a retirement lifestyle dry run.
Even while earning a paycheck, experts suggest pre-retirees start living on their retirement income to get comfortable with that cash flow. Save any excess cash in liquid assets to build those emergency reserves as needed in a high-yield money-market account or fund, certificates of deposit, or short-term Treasuries.

Begin conversations with human resources for formal transition plans if necessary.

Three months out
Gather copies of all plan documents including qualified plans, health savings accounts, medical plans, and other information before leaving. Those documents are easier to access while still employed.

Confirm with human resources final financial compensation.
That includes getting current information about 401(k), profit sharing and any vested or unvested balances in those plans.

Confirm total vacation and sick leave balance and check the company's employment policy to see what unused leave may be cashed in at retirement. Check state laws about a company's requirement to pay these balances.

Ask about the final paycheck: what pay period does it cover, how much will it be, when will vacation and medical leave balances be paid. Pre-retirees who are moving should give human resources their final mailing address to receive W2 statements and other correspondence.

Pre-retirees with employer stock in their qualified plans should consider taking advantage of net unrealized appreciation planning to reduce taxes.

Rather than rolling over the entire qualified plan balance into a traditional IRA, first take a lump-sum distribution of the employer stock, and then roll the balance of the qualified plan to an IRA. To take advantage of net unrealized appreciation planning, a retiree doesn't have to roll the remaining 401(k) balance into an IRA. However, at retirement, an IRA may offer greater investment selection options and planning flexibility that may not be available with a 401(k).

You would pay ordinary income tax on the cost basis of the employer stock distributed out of the qualified plan. However, you then can sell the employer stock outside of the qualified plan and enjoy long-term capital gain treatment on the gain in the employer stock that exceeds the cost basis.

What Is IRMAA and Why It's Import to Know About It?

1/28/2020

Q. What is IRMAA and why I should know about it before retire?

A. IRMAA is for Medicare Income Related Monthly Adjustment Amount surcharge, and it refers to the extra premiums for Part B and Part D that higher income beneficiaries pay for Medicare coverage.

In some cases, even a tiny increase in your income can put you in a higher income bracket and trigger the surcharge, a married couple, for example, could suddenly be paying as much as $1,000 a month more than planned. And if you convert a traditional IRA into a Roth account, thinking it’s a smart strategy for avoiding higher taxes later in retirement, your additional income could put you in surcharge territory and wipe out some of your expected savings.

What is the IRMAA trigger?
For 2020, the surcharge is triggered when your modified adjusted gross income - your adjusted gross income plus tax-exempt interest income - exceeds $174,000 for taxpayers who are married and file jointly or $87,000 for individual taxpayers.

Part B premiums combined with premium surcharges for Part B and Part D range from a total of $214.60 to $568.00 per month per person in 2020.

Not only are many pre-retirees unaware of the surcharge, they also don’t understand how it works. For example, the surcharge is calculated based on your tax returns from two years prior.

How to tackle it?
If you are married and one spouse is still working, coordinate your health insurance coverage. You don't need to enroll in Medicare and pay the related IRMAA surcharge as long as your spouse is still working and you are covered under that plan.

Before using this strategy, confirm whether your spouse’s health plan requires you to enroll in Medicare at age 65. In companies with fewer than 20 employees, for example, the employer plan may pay secondary to Medicare when an enrollee is Medicare eligible.

You also can appeal the surcharge. Request a reconsideration by calling the Social Security Administration at 800-772-1213. An inaccurate tax return or a life-changing event, such as divorce or death of a spouse, can qualify for an appeal.

3 Key Changes to Retirement Plans Thanks to SECURE Act

1/27/2020

Q. What are the key changes with the new SECURE act?

A. Changes are coming to retirement rules, following the passage and signing into law of the Setting Every Community Up For Retirement Enhancement Act of 2019 (SECURE Act).

But for most people, there are three general areas addressed in the new law worth considering:

1. Retirement plan access
The new law helps make it easier for more employers, especially smaller ones, to offer 401(k) retirement savings plans. Businesses can get a tax credit to help cover the costs of starting an automatic-enrollment retirement plan. Small businesses can also band together to set up and offer 401(k) plans through a third-party to help them manage fiduciary responsibilities and costs on an easier basis than exists today.If such changes mean your employer will probably start offering a 401(k) plan, you’ll likely want to take advantage of it.

And if you are a business owner, you may want to investigate taking advantage of the law’s provisions as a way of rewarding workers or attracting talent.

2. New age limits for retirement plans
The new law pushes back the age at which you will be required to start withdrawing money from those accounts. It was 70 ½ years of age. But, as the new law takes effect, will be increased to 72 years of age. That means savings can grow longer.

The new law also pushes back the 70 ½-year-old limit on contributing to a traditional IRA to 72.

3. Annuity Considerations
The new law also opens the door for more in the way of annuities to be offered in retirement plans.

Generally, an annuity is a financial contract where, in exchange for a lump-sum payment or a series of payments, the annuity will make payments to you at a future date or series of dates. Annuities tend to appeal to those who may be concerned about outliving their savings and want a guaranteed income stream in retirement.

But annuities can vary widely in type and function. And what is appropriate for one person may not be appropriate for another.

Benefits of Converting Retirement Accounts to Roth

1/23/2020

Q. What are the benefits of converting my retirement accounts to Roth IRA?

A. Here are a few key benefits by converting your retirement accounts to Roth -

Money in traditional 401(k) and IRA is subject to mandatory annual withdrawals after age 70.5. The larger your RMDs, the bigger your tax bills in retirement.
Money is Roth IRA is exempt from RMDs, and when you withdraw money from Roth IRA, it will be tax-free.
Money in Roth 401(k) can also avoid RMD if you roll it into a Roth IRA before you are 70.5, otherwise, there will be an RMD, but there will be no tax on it.
Having access to tax-free money can help manage your tax bill in retirement, for example, whether you will owe tax on your social security benefits, how much your annual premium will be for Medicare Part B.

The only thing you need to be careful is every dollar you convert will be taxed as ordinary income in the year, you don't want your current year's income balloon to a higher tax bracket.

Impact of Retirement Age Uncertainty on Savings

1/21/2020

Morningstar has an article that discusses how early retirement, especially the uncertainty surrounding it, can have significant implications on required retirement savings. It quantifies the costs associated with this uncertainty, a very interesting read if you are planning your retirement.

So You Want to Retire in 2020? Here Are Topics to Consider

1/20/2020

The Motley Fool has a good article that discusses various topics one needs to consider with the decision to retire in 2020 -

The following topics are covered in the article:

Healthcare costs: Know how much to expect and how to save for it
Inflation: Learn how to manage how far your money will go, over time
Social Security: Know how much to expect, how to decide when to take it, and how to increase benefits and avoid reductions
The best-case scenario: You have enough saved to retire
The medium-case scenario: You have nearly enough saved to retire
The worst-case scenario: You don't have enough saved to retire
Annuities
Early retirement
Taxes in retirement: What you need to plan for and how to minimize taxes
The non-financial side of retirement
Seeking professional help

The Decade in Retirement - How Americans Pay for Health Insurance

1/19/2020

New York Times had an article that reviews the changes in the past decade how Americans pay for health insurance, a good read for people who care about this topic!

Workers who lost their jobs in the recession often lost not only their incomes but also their health insurance. Older jobless people who were not yet eligible for Medicare were at the mercy of the individual insurance market, where the likelihood of pre-existing conditions meant that they paid much higher premiums — and higher deductibles — if they could find coverage at all.

But the passage of the Affordable Care Act in 2010 changed that, and the number of pre-Medicare older Americans without health insurance has dropped during the decade.

This year, 9.4 percent of adults ages 50 to 64 were uninsured, a decline from 14 percent in 2010, according to the Commonwealth Fund. The decline would have been much greater if 14 states had not rejected the law’s Medicaid expansion, according to Commonwealth — in states that expanded, the rate for this age group has fallen to 6.4 percent.

“People in that age group have much better protection now,” says Sara Collins, vice president for health care coverage and access at Commonwealth. “If they have to leave a job, or elect to leave to do something different as they approach age 60, they can buy a policy in the individual market — that used to be quite risky and often out of reach due to pre-existing conditions.”

In Medicare, the decade has been marked by sharp increases in enrollment and federal spending — and privatization.

This year, 61 million Americans are enrolled in Medicare, 33 percent more than in 2010. Program spending will be $749 billion, up 47 percent compared with 2010. And an aging population means there are just 2.9 workers contributing to the system for every Medicare enrollee this year, down from 3.4 in 2010, according to a Kaiser Family Foundation analysis of Medicare data.

The standard premium for Part B (which covers outpatient services) in 2020 will be $144.60 — 31 percent higher than it was in 2010. And Medicare’s trustees project annual increases of nearly 6 percent over the coming decade.

“The numbers speak to an underlying question and challenge that we have yet to embrace: How will we pay for a growing and aging population?” says Tricia Neuman, director of Kaiser’s program on Medicare policy.

Another striking trend has been the growth of privately offered Medicare Advantage plans, the all-in-one managed-care alternative to original fee-for-service Medicare. This year, 34 percent of enrollees are in Medicare Advantage plans, up from 24 percent in 2010, according to Kaiser.

The growth comes despite studies that raise doubts about Advantage plans. For example, a report last year by federal investigators found a pattern of inappropriate denial of patient claims; other studies have questioned their quality of care. And this week, a report released by the U.S. Department of Health and Human Services Office of Inspector General raised concerns that Advantage plans were overbilling the program by improperly adding conditions to patient records.

“The growing role of private plans — Medicare H.M.O.s and PPOs — stands out as perhaps the most significant change to Medicare over the past decade,” Ms. Neuman said. “This growth has occurred without an explicit policy debate or major change in policy.”

One Retirement Risk Many People Have Overlooked - Part C

1/15/2020

In our last blogpost, we used two examples to illustrate the risk of sequence of returns. Now we will discuss two ways about how to protect yourself from the sequence of returns risk.

Use the right tools for the right job. For income, do not put money into a vehicle like the stock market where the sequence of returns plays a big part. Instead, put it into an investment that will guarantee you a payout for life, like an annuity. By guaranteeing your living and lifestyle expenses are covered, you can put your other assets into investments that you won’t be pulling money from on a consistent basis, such as ETFs and bonds.
Separate your assets into buckets that work for you differently. For example, secure liquid funds needed for large purchases in the beginning years of retirement in a stable vehicle in one bucket of assets, such as a bank account, money market account or CDs. In the next bucket, supplement your Social Security with other products that provide lifetime income, such as annuities. In a third bucket, determine your probable long term care costs and put money in a hybrid long term care product that does not have ongoing costs. That way you will have your long-term care needs covered down the road. All of your remaining assets should be put into an investment vehicle like ETFs, equities, bonds and mutual funds for future growth to keep up with inflation and taxes.

One Retirement Risk Many People Have Overlooked - Part B

1/14/2020

In our last blogpost, we introduced the sequence of returns risk for retirees. Now we will use two hypothetical examples to illustrate this risk.

The following two people having $100,000 in the market during a 10-year period and withdrawing 5% each year. You will see that the order of the returns of the market plays a big role in the final outcome.

Example 1.

Example 2.

If you look back, you will see both people started with $100,000, however, one ran out of money after 15 years, withdrawing a total of $77,593, while another has withdrawn $95,000 over the same amount of time and still has $58,043 left in her account.

In our next blogpost, we will discuss how to protect yourself from the sequence of returns risk.

One Retirement Risk Many People Have Overlooked - Part A

1/13/2020

You have been saving diligently for your retirement, but one retirement risk you may have not considered - the sequence of returns, or the order of the returns in your portfolio.

During your accumulation years (while you’re working), you are not subject to this risk because you are not withdrawing money. But when you retire (during your distribution phase) you will be.

Sequence of returns risk is a result of the timing of withdrawals from a retirement account that can have a negative impact on the overall rate of return on the investment. This may seriously hurt a retiree who depends on the income stream from a lifetime of investing.

In our next blogpost, we will use two examples to illustrate this risk.

A Comparison of 5 Small Business Retirement Plans

1/8/2020

Whether you are self-employed or the owner of a small business, there is a wide range of retirement plans designed to meet your specific needs. All of these retirement plans can help you save money for retirement while potentially providing tax advantages.

The table below is provided by Fidelity that summarizes 5 small business plans that you should consider -

SEP IRA
Solo 401k
Simple IRA
Investment Only
401k

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