Facing Transition? Adjusting Your Finances for the Journey

Jan 26 2016

You have been employed by the same employer with a steady paycheck for a long time. That’s about to change. As a transitioning Service member, you are about to embark on a journey called your second career. It involves the instability of multiple employers and the possibility of unemployment. Planning will enhance your chance for success.

Life insurance. SGLI goes away. If the bread winner dies, how will the family maintain their financial lifestyle? What are your expenses now and in the future? Will the family live on investments and savings? Spouse career income? Other family members? Downsizing? Life insurance.

Retirement accounts. How many accounts will you have? You will probably be changing employers over the years. Have a retirement account to act as your ‘base camp’ to consolidate accounts as employers change. Your TSP can serve this purpose as can IRAs and future employer 401ks.

Transition account. Have you got accessible money to tide you over should you find yourself unemployed for a period? Better have money for 3 to 6 months of expenses.

Survivor Benefit Plan (SBP). Another way to ensure your family carries on if you are gone. It’s the only way to ensure the retired pay you earned over all those years continues after your death.

College. Have you transferred Post 9-11 GI Bill benefits to the spouse or kids? Is other funding in place?

Disability insurance. What if you don’t die but you can’t work due to illness or disability? How will your family get by without your source of income?

Taxes. You are leaving a very nice tax favorable situation. Only your base pay was taxed. And you probably claimed living in a low tax state. Now every dime you make will be taxed and you may pay state income tax. Have a tax plan. Retirement accounts offer your best tax advantages—especially employer 401ks and TSPs.

Real retirement someday. What is your plan to stop working someday? You know, that 40-year period of unemployment called retirement. How much will your retirement cost and what will be your sources of income? Do you have a plan to ensure your expenses in retirement will be minimized? Fewer expenses; less required income. More money for fun.

MOAA can help. Your MOAA Life or Premium membership entitles you to a financial planning consultation with one of our staff experts. E-mail beninfo@moaa.org to get the process started.

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Fixed Index Annuities

Jan 11 2016

Fixed Indexed Annuities (FIA) are very popular at this time. Let’s get to know the product.

These annuities are sold by insurance sales people and financial advisers. FIAs are an insurance product and they are a savings account rather than an investment account. Being a savings vehicle rather than an investment account allows financial people who do not have securities licenses to sell the product—most insurance sales people for example. Some sales people may pitch it as a safe investment to entice sales but it’s not an investment.

Like any financial product, it can be good or bad depending on your circumstance. We want to prevent buyer’s remorse when possible. Many features and benefits of any product sound good on the surface and only later when you realize how things really work, you realize you made a mistake—usually after the product doesn’t do something you thought it would in a given situation.

The FIA is a savings vehicle in the form of a deferred annuity. Deferred meaning you don’t have to make the annuity pay a stream of lifetime income until you choose to do so in the future—or not. Annuities are insurance companies’ savings or investment products that have guarantees (insurance) and some tax benefits. Some annuities can be considered a third-level of retirement account after employer plans (401ks, etc.) and IRAs.

The sizzle behind FIAs is the interest rate. The interest rate floats based on the performance of an outside measurement. Most use the S&P 500 Index (a stock portfolio) as their outside measurement to determine their rate of interest. You are not invested in the S&P 500 Index; it is just used as the basis of the interest rate paid to the account.

The typical FIA has a guaranteed minimum rate of interest like 1 or 2%–the floor you are guaranteed to earn. The upper limit of interest paid is a portion of the outside measurement. If the S&P 500 Index is used as the outside measurement, your interest rate is a portion of that Index’s rate. So as the sales pitch goes, you capture some of the stock market’s highs while being protected from the stock market’s lows.

Wow, that’s great! What’s the rest of the story? Best to think of these accounts as principal protection and not wealth creation. If this isn’t your objective, these are probably not for you.

You get a portion of the outside measurement’s return on the upside. The FIA has “cap rate” and a “participation rate” (terms may vary).

Cap rate is the most interest you can earn. Example…say the S&P 500 Index gains 15% in a year. Your cap rate may be 6%. In this case, you gave up 9% of the S&P 500 upside to insure your safety.

The cap rate can be decreased by the participation rate—limiting your interest rate even more. Let’s say you have a participation rate of 80%. Say the S&P 500 Index goes up 6% in a year. Your cap rate is 6% so you get the 6% right? Not so fast. In this case, your participation rate kicks in and limits you to 4.8%; 80% of the S&P500 return. The insurance company can’t pay you the same as the Index in this case. They are going to make their money.

So there you are, an interest bearing account that pays between 1 and 6% in this example.

Tax-wise, annuities are tax-deferred until withdrawal—your gains are not taxed as long as they sit in the annuity. You pay regular income tax rates upon withdrawal for all amounts that are not a return of principal. Your principal was already taxed money at the time of contribution. This means you will not get more favorable capital gains tax rates upon withdrawal. Even if you have a variable annuity (not an FIA) with investment options and capital gains, you pay regular income tax rates upon withdrawal.

Other issues are fees, surrender charges, whether you are limited to one lump-sum deposit or contributions over time, your need for a lifetime income option, liquidity options, your time horizon, your other interest rate account options, income needs, emergency withdrawal options, and your ability to close the account.

Carefully define the objectives and requirements for your money before you open a FIA. Your objective and requirements should help determine whether a FIA is right for you.

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Elimination of Social Security Retirement Benefit Claiming Strategies

Dec 11 2015

As soon as the public started to understand the mysterious Social Security strategies for enhancing their retirement benefits, the rules are changed. Just goes to show that Congress can work together and quickly when they want to.

The legal changes eliminate strategies that allow couples to maximize their Social Security retirement benefits over their lifetime. These strategies are known as the “restricted benefit” and “file and suspend.”

The “restricted benefit” is typically used by the spouse with the lesser earnings record. To set the stage, if you apply for the Social Security spouse benefit (50% of your spouse’s benefit amount if you wait until your Full Retirement Age (FRA)), by law your personal benefit amount (based on your own earnings record) is paid before the spouse benefit amount to bring you up to the 50% level. In other words, the spouse benefit formula is actually a combination of your personal benefit and the spouse benefit thereby bringing you up to 50% of your spouse’s benefit amount.

Just so you know, if you apply for the spouse benefit prior to your FRA, you don’t get the full 50% of your spouse’s amount. You get a reduced early benefit amount. And you can’t use the restricted benefit method.

The “restricted benefit” strategy allows spouses to collect the spouse benefit only and not use their personal benefit as a part of the 50% formula if you wait until FRA. By restricting yourself to the spouse benefit only, it allows your delayed personal benefit to continue to grow until age 70. The strategy is useful when your personal benefit will grow to be larger than the 50% spouse benefit over time.

The restricted benefit strategy is eliminated for everyone turning age 62 after 2015.

The “file and suspend” strategy opens the door to use the “restricted benefit.” You can’t file for the spouse benefit unless the spouse whose earnings record is used for the 50% spouse benefit amount has first filed for their own benefit. The “file and suspend” strategy permits a spouse to file for his/her benefit which opens the door for the other spouse to file for the restricted spouse benefit and then turn around and suspend his/her personal benefit so it can continue to grow until age 70. The “file and suspend” spouse has to be at FRA or beyond to use file and suspend method.

Elimination of the file and suspend strategy is effective on 1 May 2016. You may still use the strategy if you turn FRA prior to 1 May. FRA for people born between 1943 and 1954 is 66. If you are over your FRA or turn 66 prior to 1 May, go talk to Social Security as soon as possible to determine your potential file and suspend options.

People already receiving benefits under the strategies are not affected.

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Actively Managing Your Investments is Dangerous to Your Financial Health

Oct 19 2015

I find interesting connections among my readings and discussions I have with members.

There are a couple noteworthy articles in the November 2015 Kiplinger’s Personal Finance magazine; “4 Investing Rules to Live By” on page 50 and the Andrew Feinberg article on page 51. Put these two articles together with the book, “DIY Financial Advisor, A Simple Solution to Build and Protect Your Wealth” by Wesley R. Gray and a story begins to develop.

The Andrew Feinberg article is about the difficulty of managing investments to beat the markets. Mr. Feinberg is an intelligent person who ran a hedge fund with a staff of equally smart people. They spent their lives trying to be successful for their clients and for the challenge of beating the markets. They lost and they are not alone when you consider how few mutual fund managers ever beat the market. Even the ones that do only beat the markets for limited amounts of time then they revert back to the norm.

Given all the overwhelming evidence about the difficulty of beating the markets, why do ordinary working people like us think we can do it? The data are out there that indicate the public’s inability to actively manage our investments. We fail because we think actively managing our investment selections and timing our buys and sells is the way things are done.

We have been so conditioned by various sources to think of investing as a complicated process of trading that many of us believe investing for our futures is more luck than planning. I hear all the time how investing is nothing more than gambling and how the deck is stacked against us.

Too often I’m drawn into discussions about trading stocks or mutual funds, hot tips, “put” and “call” options, alternatives (investments outside the stock and bond norm), investment programs offered by insurance firms and even penny stocks. My response is usually disappointing to most because I always state all the complexity, costs and risk are not necessary. Investing should be simple and boring. And neither the Koch brothers nor George Soros has anything to do with you building wealth.

That’s where the “4 Investing Rules” article and the “DIY” book come in. Plus there are plenty of my articles on the MOAA web. Successful investing comes down to a simple plan, discipline and ignoring the media and financial sector noise.

Fact is, we can all be successful but success rests with simple, proven, boring strategies and not fly-by-the-seat-of-our-pants investing or fancy trading programs bought at fast-talking pitchmen seminars.





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Medicare Part B Premium Increases in 2016

Sep 30 2015

See update at the bottom of the article.

Some of you need to prepare for higher Medicare Part B premiums next calendar year.

Given how it appears there will be no cost of living increase for Social Security or military retirement checks next year, these premium increases will pack a punch for some Part B enrollees.

Note that most will not pay increased premiums next year. All current Medicare Part B enrollees who pay the lowest premium at $104.90 and are receiving Social Security benefits will not face a premium increase in calendar year 2016.

The people facing the premium increases include:

  • Brand new Medicare enrollees in 2016.
  • All current and new higher-income Medicare enrollees paying the higher premiums.
  • People who have suspended/delayed their Social Security benefits whether enrolled in Medicare Part B now or not.

Most Medicare enrollees will not pay the higher premiums in 2016. Those currently enrolled in the lowest Medicare Part B premium bracket and receiving Social Security benefits are protected from the premium increases by law in years where there is no Social Security cost of living increase.

However, the law does not protect those currently enrolled in Medicare Part B who are in the higher income brackets. Part B participants paying higher premiums due to indexed income will pay the increased 2016 premiums.

The law’s premium increase protections do not apply to people who have delayed their Social Security benefits. So if you are a current Medicare Part B participant but not collecting Social Security, you will pay the higher premiums.

Here is the scorecard for Part B premiums in 2016 per person per month:

Income Singles <$85K $85K – $107K $107K – $160K $160K – $214K >$214K
Income Married <$170K $170K – $214K $214K – $320K $320K – $428K >$428K
No Part B premium increase for 2016 $104.90 mo see below see below see below see below
With 2016 Part B premium increase $159.30 $223.00 $318.60 $414.20 $509.80

(Source: InvestmentNews, 7 Sept 2015)

It is expected that the lowest Medicare Part B premium bracket will reset for everyone in 2017 at $120 per month.

UPDATE: Compromise was reached on Capitol Hill. See the 2016 rates here: https://www.medicare.gov/your-medicare-costs/part-b-costs/part-b-costs.html

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