Health Care Cost Crisis Looming

Financial Advisor Magazine, JUNE 10, 2014  KAREN DEMASTERS

Health care costs are increasing at a higher rate than Social Security increases, setting retirees up for a crisis if proper planning is not done now, says new data from HealthView Services.

In 10 years, 98 percent of an average couple’s Social Security benefit will be needed to cover health care costs, says HealthView, a research organization for health care issues. In 20 years, health care costs will exceed the average Social Security payment. The report, “Addressing the Retirement Health Care Cost Crisis: Cost Management Strategies,” was released Tuesday.

Health care costs are increasing at a rate of 5 percent to 7 percent a year while Social Security goes up 2 percent or less. This leaves an educational vacuum that can be filled by advisors, but so far advisors have not jumped in to fill that role, HealthView says.

“Until recently, retirement health care costs haven’t been included in retirement planning for several reasons,” says Ron Mastrogiovanni, founder and CEO of HealthView Services. “First of all many clients mistakenly believe Medicare will cover all or part of their health care costs in retirement. Meanwhile, their advisors–who have been focused on rebuilding assets after the financial crisis–haven’t had the tools to calculate healthcare costs for individuals.”

In reality, Medicare covers about 51 percent of the average couple’s health care costs, and there will be pressure in the future to increase the cost of Medicare to recipients, HealthView says. Advisors who can help their clients determine future costs and prepare for them will be in the best position to help clients.

A recent survey of nearly 1,800 financial advisors, Financial Advisor magazine’s Retirement Planning Survey 2014, showed only 13 percent of advisors are now offering clients extensive advice on health care. Sixty-three percent are providing limited advice and 24 percent are offering no health care cost advice.

“We believe that having actuarial-based cost data for individuals, allocating funds for retirement health care costs, managing retirement income and optimizing Social Security, among other strategies, can increase retirement security,” Mastrogiovanni says. “Saving for health care may not be the goal most boomers had in mind when they first started saving for retirement, but given expected health care costs in retirement, it needs to be among the top priorities.”


To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Half of Boomers Do Not Know Retirement Need

More than half of Baby Boomers polled expressed uncertainty about how much money they will need in retirement. —

Plan Adviser Magazine, Rebecca Moore, June 10, 2014

According to the Wells Fargo Millennial Survey, 54% say they “can’t estimate” how much they will need in retirement. Twelve percent say they will need $500,000 to $1 million, and another 12% say $1 million to $2 million.

The survey also found more than half of Boomers (56%) favor a mandatory retirement savings policy. Only two-thirds (66%) say the stock market is the best place to invest for retirement, representing a roughly 10 percentage point increase from last year’s study.

Boomers are also feeling vulnerability in their careers; 58% of Baby Boomers said if they lost their job they could find a comparable one within a year. This is in sharp contrast to 78% of Millennials who said the same (see “Millennials Learned Lesson About Saving”).

When asked whom they trust for financial advice, Boomers cited “personal finance experts/personalities” as their first choice (57%), followed by “financial institutions” (45%) and “family” (40%). Asked what advice they would give to those starting out in their careers, 43% would tell them to start saving for retirement now.

The 2014 Wells Fargo Millennial study was conducted online by Harris Poll on behalf of the Wells Fargo Wealth, Brokerage, and Retirement (WBR) team between April 15 and May 2. Survey respondents included 1,639 millennials between the ages of 22 and 33, as well as 1,529 baby boomers between the ages of 49 and 59. 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Maximizing Retirement Savings Through Smart Tax Planning

By Robert D. Flach, MainStreet.com

NEW YORK (MainStreet) — Careful planning of how you invest your retirement savings can help to maximize your net after-tax yield, both for yourself and your beneficiaries.

Let’s look at the various types of investment accounts.

First there is the currently taxable liquid investment account. Interest and dividends on this type of account are fully taxed when earned, except for tax-exempt municipal bond interest and dividends from muni bond funds. Capital gains, and losses, are taxed, or deducted, when an investment is sold.

Next there are the multitude of traditional retirement accounts - IRA401(k), 403(b), 457, SEP, Keogh, SIMPLE, etc.

Contributions are usually currently tax deductible, at least on the federal level, either by way of being “pre-tax” or via a deduction on the Form 1040. Current earnings are tax-deferred. Distributions from these accounts are usually fully taxed. If there is a basis in the account from non-deductible contributions distributions will be partially tax free. Premature withdrawals, taken prior to reaching age 59.5, and excess contributions are penalized.

And finally there are ROTH IRA, 401(k), and 403(b) accounts. Contributions are never tax deductible, but, as with traditional retirement accounts, current earnings are exempt. If the account is held for at least five years distributions are totally tax free.

Now let us look at how different types of investment income are taxed.

Interest, dividends, and short-term capital gains (on the sale of investments held one year or less) are generally taxed as ordinary income. The tax on this type of income depends on your “regular” income tax rate – from 10% to 39.6%. If you are in the 25% federal tax bracket you will pay $250 in tax on income of $1,000. If you are a victim of the dreaded Alternative Minimum Tax (AMT) you will pay either 26% or 28% tax on this income.

“Qualified” dividends are taxed at special lower capital gains tax rates, as are “capital gain distributions” from mutual fund investments. Depending on your “regular” tax bracket the rate is 0%, 15%, or 20%.

Long-term capital gains on the sale of investments are also taxed at the capital gains tax rates. You have a long-term gain if you held the investment sold for more than one year – at least a year and a day.

Qualified dividends, capital gain distributions, and long-term capital gains are also taxed at the special rates under AMT, but the income from these categories increases net taxable income, and therefore increases Alternative Minimum Taxable Income, and may cause you to become a victim of the dreaded alternative tax.

If your Adjusted Gross Income is more than $200,000 if Single or Head of Household, $250,000 if Married filing jointly or Qualifying Widow(er), or $125,000 if Married filing separately, you may be subject to an additional flat 3.8% tax on current net investment income.

Earnings from municipal bonds and funds investing in tax-exempt municipal bonds (but not capital gains, both short and long term, from the sale or capital gain distributions) are exempt from federal income tax. However, otherwise tax-exempt interest and dividends from “private activity bonds” are taxable in the calculation of AMT. And it is possible that the amount of tax-exempt interest can cause more of your Social Security or Railroad Retirement benefits to be taxed at ordinary income rates.

Taxable distributions from retirement accounts are taxed as ordinary income at “regular” tax rates, regardless of the source of the income that has accumulated within the account. Qualified dividends, capital gain distributions, long-term capital gains, and tax-exempt municipal income earned within a tax-deferred retirement account are all taxed as ordinary income when the money is withdrawn from the account.

Distributions from retirement accounts are not subject to the 3.8% tax on net investment income. But since the 3.8% tax is paid on the lesser of net investment income or the amount your AGI exceeds the threshold for your filing status, retirement account distributions may push your AGI over the income threshold and end up being subject to the tax.

Let’s say you are married and your AGI is $260,000, which includes a $12,000 taxable IRA distribution. Let’s say your net investment income is $15,000. $10,000 of the IRA distribution will be subject to the 3.8% tax. Without the $12,000 distribution your AGI would have been $248,000, and you would not have been subject to any Net Investment Income tax.

Beneficiaries who inherit assets such as stocks, bonds, mutual fund shares and real estate receive a “stepped-up” basis. The beneficiary’s cost basis for an inherited investment is generally the value of the investment on the date of death, which is the value of the investment reported on the estate or inheritance tax return(s). If my father bought 100 shares of XYZ Corp for $100 in 1980, and these shares were worth $1,000 on his date of death, if I inherit the shares and then sell them for $1,100 I have a long-term capital gain of $100 and not $1,000.

Beneficiaries who inherit retirement accounts are subject to federal income tax on distributions in the same way the deceased would have been taxed if distributions were made prior to death, regardless of the value of the account on the date of death.

For example, when a traditional IRA owner passes with a “basis” in the IRA from non-deductible contributions that has been documented on IRS Form 8606, the remaining basis is inherited by the beneficiary in proportion to the percentage of the IRA the beneficiary inherits, and the beneficiary continues to compute the taxable portion of subsequent distributions on Form 8606.

Distributions to beneficiaries from inherited ROTH accounts are totally tax free.

Strictly from a tax point of view, traditional retirement accounts should contain “fixed income” investments and investments that you anticipate will generate short-term capital gains. These investments produce income that is taxed at ordinary income tax rates. And the best place for “appreciating” investments, like stocks and mutual funds, and investments that produce “qualified” dividends and capital gain distributions is in taxable investment accounts. This way you will be able to take advantage of the tax benefit provided by the lower capital gains tax rates.

I must point out that tax-deferred accrual of income will cause money invested in traditional retirement accounts to grow faster than investments in currently taxable accounts, assuming that the taxes on current earnings are paid from the investment. And it is usually better to pay taxes tomorrow than today.

You should never invest traditional retirement account money in tax-exempt municipal bonds or mutual funds that invest in tax exempt municipal bonds. This income is, for the most part, exempt from federal income tax, while, as pointed out above, earnings accrued within a traditional retirement account will be taxed at ordinary income rates when money is taken out of the account, even if some of the earnings are from tax-exempt municipal bonds.

With ROTH accounts your goal should be to get the greatest return on investment, regardless of the type of investment. Qualified distributions from ROTH accounts are totally tax free. And they pass totally income tax free to your beneficiaries.

Of course the tax treatment of investments that I have discussed above apply to current tax law. And my discussion assumes that tax law will not change drastically in the future. However tax rates and treatments are subject to the whim of the members of Congress, and with Congress anything is possible.

Your first consideration in any financial transaction should always be economic. Taxes are second. However it is important to be aware of the tax treatment and consequences of the various types of investments and investment accounts when making financial decisions.

It is also very important to run investment recommendations from a broker or a banker past your tax professional before making any decisions. Never assume that a broker or a banker knows anything about tax law, or even takes tax consequences into consideration when recommending investments. You must always remember that a broker and a banker are basically salesmen.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Don’t Let Employer Matching Cutbacks Hurt Your Nest Egg

By BRIAN O’CONNELL , Investing Daily, JUNE 6, 2014

There is some good news – and bad news – on the 401k retirement front these days.

The good news:  Total U.S. retirement assets reached $23.0 trillion as of December 31, 2013, according to the Investment Company Institute.

That’s up 15.6 percent from year-end 2012. Retirement savings accounted for 34 percent of all household financial assets in the United States at the end of 2013.

The ICI also reports that Americans held $5.9 trillion in all employer-based DC retirement plans on December 31, 2013, of which $4.2 trillion was held in 401k plans. Those figures are up from $5.6 trillion and $4.0 trillion, respectively, as of September 30, 2013. Mutual funds managed $3.5 trillion, or 60 percent, of assets held in 401k, 403b, and other DC plans at the end of December, the Institute said.

The bad news: More U.S. companies are cutting back on — or cutting out — programs in which employers “match” an employee’s 401k contribution up to a certain dollar amount or percentage of annual, work-related income.

A recent survey from American Investment Planners reported that the number of employer 401(k) matching programs has decreased by 7 percent. And another recent survey by consultant Towers Watson reported that 18 percent of 334 companies surveyed have suspended or reduced contributions to conserve cash. And 23 percent of companies that reinstated matches offered less generous contributions than before the recession

Those are trends industry professionals say will continue, given the soft economy.

Said Brett Goldstein, director of retirement planning at American Investment Planner:  “Clearly, as businesses look for ways to lower expenses and improve bottom lines, it is not surprising that businesses have stopped matching. We don’t see the trend abating any time soon.”

What’s more alarming to workers is the growing number of companies cutting 401(k) plans altogether.

Since 2009 approximately 6 percent of 401(k) plans have been terminated. To make matters worse, the number of traditional defined-benefit pension plans decreased by 15 percent in 2011, Goldstein says.

Goldstein attributes that to the weak, post-recession business climate, along with significantly higher health insurance premiums, which cuts into company profits.

What can workers do to mitigate lost income from 401(k) matching decreases?

401k Millionaires should check with their employer to make sure they’re getting every penny of any matching contributions, and to take steps to cut monthly spending by five percent, and use the proceeds to make up the difference of lagging 401k matching funds (or to beef up their 401k funding, even if they do receive matching contributions).

Also, there is no law that says you should take a raise or a bonus and spend it on a new car or a vacation to Hawaii. Instead, take the proceeds and plow them into your 401k fund.

Do that, and you’ll gain some much-needed momentum on your way to becoming a 401k Millionaire – on your terms, and no matter what your employer does.

As always, good luck, and good 401k savings – and I’ll see you next week.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®



When Your 401(k) Has a Bad Heir Day

Wall Street Journal, April 5, 2014,  The Intelligent Investor, Jason Zweig

Even where there is a will, there can be a won’t.  That is the hard lesson learned by the three adult children of a wealthy telemarketing executive who died suddenly last month. His will states that all his assets are to go to his children, according to Laura Mattia, a principal at Baron Financial Group, a financial-advisory firm in Fair Lawn, N.J., who was consulted after the executive’s death by his estate attorney.

However, much of his wealth was in his 401(k) retirement account, and the fate of those assets isn’t dictated by wills.

It is a little-understood situation: After a lifetime of saving, what ultimately happens to your individual retirement account, 401(k) and other retirement savings often hinges on what you scribbled down, decades earlier, as you filled out a form designating your beneficiaries.

If you haven’t updated that paperwork to reflect how your life has changed, you might not be able to leave your wealth to your heirs as you wish. Instead, you could bequeath them a bureaucratic nightmare.

The executive who died last month, Ms. Mattia says, should have asked his wife to sign a waiver and then named his children as the beneficiaries of his 401(k). Because he didn’t, his wife inherits it—although he married her only two months before he died. By neglecting to update his beneficiary form, the executive effectively disinherited his children.

No wonder Stewart Sterk and Melanie B. Leslie of the Benjamin N. Cardozo School of Law at Yeshiva University in New York call retirement accounts “substitute wills.” In a study they have just published on the problem, the law professors point out that most Americans believe their retirement savings will be divided according to the instructions in their will—like their other assets. In fact, who inherits retirement money is usually determined by the language on beneficiary-designation forms that many people have long since forgotten or lost.

The assets at stake are staggering. Savers have amassed $5.9 trillion in 401(k) and other “defined contribution” plans, plus another $6.5 trillion in IRAs, according to the Investment Company Institute, a trade group.

Among the pitfalls are designating your parents as your beneficiaries while you are still single and failing to update the form when you marry, and naming your children but not stipulating that the money should go to your grandchildren if any of your children die before you.

If you mistakenly leave a former spouse designated as a beneficiary of your 401(k), he or she will generally be entitled to the assets upon your death—even if those assets were excluded from the divorce settlement.

“The system works fine most of the time, getting people the money quickly and cheaply,” Prof. Sterk says. “The problem is it comes at a huge cost in the minority of cases.”

Lauren Lindsay, director of financial planning at Personal Financial Advisors in Covington, La., once worked with an insurance executive who had four children. He gave one child so much money to fund her own business that he told all the children (including her) that it would be unfair to give her anything more.

He informed Ms. Lindsay that he would be changing the beneficiary-designation forms on his retirement accounts so his other three children would inherit them exclusively. Before he could complete the paperwork, he died in a car accident, leaving his prodigal daughter with title to 25% of his retirement assets.

F. Dennis De Stefano of De Stefano Wealth Management in Kihei, Hawaii, had a client who named her live-in boyfriend as a beneficiary of her IRA. She later moved away and married another man. As she lay dying of cancer, her husband tried to get the beneficiary form revised, but she was no longer mentally competent to make the change.

The husband “was frustrated as heck by the trauma and heartache of trying to get it corrected,” Mr. De Stefano says.

Kevin Reardon of Shakespeare Wealth Management in Pewaukee, Wis., points out that if your adult child dies before you and you don’t change your beneficiary forms, that child’s heirs will typically be cut out of any bequest you mean to give them. Your retirement assets will be divided among your other children—cutting off one branch of your family.

That wouldn’t be what you directed in your will. Virtually every state has laws requiring that wills be written to ensure that your grandchildren will automatically become your direct heirs if your children die first.

However, Profs. Sterk and Leslie found that only five of 20 forms from top retirement firms expressly offer that option. Many forms don’t even allow you to name more than two primary beneficiaries.

It is high time that retirement firms overhaul these rigid and antiquated forms. Until they do, you are overdue to check up on how you checked those boxes so long ago.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®