06/29/15

How Older Americans Can Cut Student Debt

By Sharon Epperson   June 18, 2015 CNBC.com

Student loan debt is not only a financial burden facing millennials. It’s a big—and growing—problem for many older Americans who are near or in retirement. Student loan balances among borrowers in their 50s or older made up 17 percent—or about $204 billion—of the nearly $1.2 trillion in outstanding student loan debt in the U.S. last year, according to researchers at the New York Fed.

And while student loan balances have grown substantially for borrowers of all ages in the past decade, researchers say the fastest growth has been in total balances held by borrowers age 60 or older, which have increased nearly nine-fold since 2004.

“Student loan debt owed by older Americans includes debt borrowed or co-signed to help a child or grandchild pay for college as well as student loans for the borrower’s own education,” said Mark Kantrowitz, senior vice president and publisher of Edvisors.com, a college financial planning website. In financing their own education, “most of this debt is more recent…student loans borrowed when returning to college to finish an undergraduate degree, to switch to a new occupation or to obtain a graduate degree.”

Older borrowers are also more likely to have defaulted on loans (meaning they fell behind or failed to make payments), and many incorrectly believe their balances can be discharged in bankruptcy. “Student loans are cancelled when a borrower dies, not when the borrower retires,” reminds Kantrowitz. In the fourth quarter of 2014, the average student loan balance for all borrowers was $26,700. If you’re still carrying student loan debt as you approach retirement, here’s what you need to do:

Don’t default on your loan

Make your payments on time. If your loan goes into default, the government can garnish your wages, withhold your tax refund and even take a portion of your Social Security benefits. From 2002 through 2013, the number of Americans whose Social Security benefits were offset to pay student loan debt increased five-fold from about 31,000 to 155,000, according to the U.S. Government Accountability Office. Among those 65 and older, those whose benefits were offset grew from about 6,000 to about 36,000 over the same period. Student loan borrowers who graduate, don’t postpone payments, track their progress, and communicate with their servicer increase their chances of successful repayment, according to an analysis by Navient, a loan management and servicing company.

Explore income-driven repayment plans

If you qualify for an income-driven repayment plan, you can lower monthly payments on federal student loans, which may help keep you from going into default. You’ll make payments based on 10 to 20 percent of your discretionary income. Any remaining balances on your federal loans will be forgiven after 20 to 25 years as long as you’ve made your payments on time. Go to the U.S. Department of Education’s website to find out more about the three income-driven repayment plans (“Pay As You Earn”, income-based, and income-contingent) for federal student loans.

Stretching out the term of your loan as long as possible through extended payments or income-based repayment can help to reduce the monthly payment to a more affordable level and improve cash flow, though keep in mind that you could end up paying more in interest over the lifetime of the loan.

Consider consolidation or refinancing options

Parents who took out federal PLUS loans for a child or a grandchild may be eligible for income-contingent plans, if the loan is consolidated. But, unfortunately, private student loans—including loans parents co-signed for their kids—are not eligible for income-driven repayment plans. For those, try to negotiate a lower payment with the lender. Refinancing student loans may also help borrowers with excellent credit find lower interest rates.

“Refinancing all or some of those loans enables borrowers to receive a new loan at one interest rate that, depending on the borrower’s circumstances, tends to be lower than what they were paying previously,” said David Klein, CEO and co-founder of CommonBond, a startup student lending platform that refinances existing graduate student debt. “Many people just aren’t aware of the refinance options out there.”

Bottom line: Investigate all of your repayment options—and cut other expenses too—so you can get rid of that student loan debt before you retire.

06/22/15

The Triple Tax Benefit of Health Savings Accounts

The tax advantages are appealing, but don’t overlook HSAs as a way to save for health care in retirement. An HSA allows account holders to pay for current health costs and save for future expenses. Americans are generally aware of tax-advantaged investment vehicles such as 401(k) plans, individual retirement accounts and 529 college savings plans. But one instrument, the health savings account, isn’t as well known, although it offers three separate tax benefits.

An HSA allows account owners to pay for current health care expenses and save for those in the future. Its first advantage is that contributions are tax-deductible, or if made through a payroll deduction, they are pretax. Second, the interest earned is tax-free. Third, account owners may make tax-free withdrawals for qualified medical expenses. Qualified expenses include most services provided by licensed health providers, as well as diagnostic devices and prescriptions. They even include acupuncture and substance-abuse treatment.

Unlike health care flexible spending accounts, which have a maximum year-to-year carry-over of $500, HSAs have no limit on carry-overs or when the funds may be used. Even if the account is opened through an employer-sponsored program, all money in an HSA belongs to the account owner. Accounts are held with a trustee or custodian, which may be a bank, credit union, insurance company or brokerage firm.

Although the tax advantages are appealing, advisors say investors shouldn’t overlook HSAs’ role as vehicles to save for medical expenses in retirement, when health care expenses generally rise. “When they are discussed, they’re thought of as a tax shelter, which is true,” says Shelby George, senior vice president of advisor services at Manning & Napier, a Fairport, New York, investment manager. “There’s no other vehicle under the tax code that has the kind of preferential treatment that health savings accounts have. But it’s a way for those who are not focused on tax-shelter opportunities to put the money aside as well,” she adds.

HSAs were established under the Medicare Modernization Act of 2003 and are available to people covered by high-deductible health plans. According to the IRS, those are plans “with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) do not exceed $6,450 for self-only coverage or $12,900 for family coverage.”

As employers try to shift health care costs away from the company and onto workers, high-deductible plans are becoming more common. That means more Americans are becoming eligible for HSAs. It also means financial advisors see more opportunities to educate clients about the benefits of HSAs.  Ann Reilley Gugle is co-owner and principal at Alpha Financial Advisors in Charlotte, North Carolina. For people who are eligible, an HSA is a good choice, she says.

“We typically advise clients to take advantage of enrolling in HSA-eligible, high-deductible health plans if their employer offers them and they don’t typically have high out-of-pocket health care expenses. We recommend contributing the maximum amount to the HSA annually, as this vehicle allows you to save tax-free for future health care costs,” she says. Gugle adds that there is a strategy to maximize the account’s benefits. She suggests investing the money for long-term appreciation, letting it grow tax-free, rather than spending it on current health care needs.

“In this sense, the HSA resembles a Roth IRA, in that it grows tax-free, but you also get the benefit of a current deduction. We advise clients to keep growing the HSA as long as possible as a hedge against the risk of rising health care costs,” she says. HSAs have contribution limits. For 2015, an individual may contribute up to $3,350; for a family, that amount is $6,650. People over 55 may add another $1,000 per year as a catch-up contribution.

Rising health care expenses. The investment industry often appeals to retirement savers with images of healthy, attractive couples walking on the beach. But it leaves out an unpleasant reality of aging: increased medical expenses. HealthView Services, a Danvers, Massachusetts, maker of health care cost-projection software, studies retiree medical expenses. In a 2015 report, it found that medical expenses for a 65-year-old couple retiring today rose by 6.5 percent over a year ago.

Rapidly rising health care expenses are a reason to designate funds specifically for medical costs, says Ryan Monette, a financial advisor at Savant Capital Management in Rockford, Illinois. “Because the HSA grows tax-deferred and distributions for qualified medical expenses are tax-free, I recommend funding the HSA even at the expense of lowering retirement plan contributions for those near retirement age,” he says. “We know that medical expenses will play a role at some point, so why not take advantage of the deduction from current contributions and the tax-free nature from the distributions? In a way, it is saving for retirement, but the funds are earmarked towards qualified medical expenses.”

To quickly fund an HSA, Monette suggests a transfer from an IRA. An individual may make a tax-free rollover from an IRA to an HSA once in his or her lifetime. The rollover is limited to the maximum allowable contribution for the year, minus any amount already contributed. Before age 65, account owners face a 20 percent penalty for withdrawals for nonqualified medical expenses. These include elective cosmetic surgery, hair transplants, teeth whitening and health club memberships, among other things.

Starting at age 65, account owners may take penalty-free distributions for any reason. However, to be tax-free, withdrawals must be for qualified medical expenses. Although HSAs may seem a little more complex than other retirement-savings vehicles, advisors say some research can pay off. “An HSA is really an important financial planning tool,” George says. “Individuals could benefit from taking some time to understand how these plans and savings accounts work.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

06/15/15

Don’t Be Scared of Retirement

US News & World Report, By Tom Sightings  May 18, 2015

Many retirement fears are overblown or untrue. There’s no reason to be nervous about retirement if you make sensible financial choices. I’m not saying you shouldn’t live within your means and save for retirement. For that matter, you should probably exercise and eat your vegetables, too. But sometimes you have to stand back, gain some perspective and ignore all the anxious advice you get about retirement. Scaremongering often comes from people trying to push a political agenda or sell you a financial product. Here are five ways pundits and politicians try to scare retirees.

1. Social Security is going broke. Social Security is not going broke. The system has the resources to pay full benefits until the mid-2030s. That gives Congress two decades to make some adjustments, which is plenty of time, even for politicians. If nothing changes, Social Security will still be able to pay 75 percent of its obligations. Nobody wants to take a 25 percent pay cut, but that’s not the same as going broke. Also, consider that when our parents took their first Social Security checks around 1980, the average monthly benefit for a retired worker was $321. Accounting for inflation, that $321 would be worth about $900 in today’s dollars. But the Social Security Administration says the average benefit for today’s retired worker is $1,333. That’s a lot better than what our parents got.

2. You’re not saving enough to retire. The Employee Benefit Research Institute, a Washington-based think tank, reports that a third of adult Americans have not saved anything for retirement. But that means two-thirds have saved at least something. Furthermore, the older people are, the more they’ve saved. Less than 5 percent of workers under age 35 have assets worth $250,000 or more, but about a quarter of workers age 45 and older own assets worth at least that much. The vast majority of Americans have built up a nest egg. They may not have enough for an affluent retirement, but it will be enough, along with Social Security, to keep them out of poverty and stave off starvation, especially if they’re willing to move to an area with a lower cost of living.

3. Your medical bills will send you into bankruptcy. Fidelity has published reports saying the average 65-year-old couple will end up spending about $220,000 on health care. But that’s an average, not a certainty. It’s true that Medicare does not pay for all your medical expenses. That’s why it’s important to purchase a supplemental insurance plan, which typically costs a fraction of the cost of regular health insurance. It’s also true that if you become incapacitated and are forced into a nursing home, the expense can be astronomical. That’s why you should consider long-term care insurance, especially if you have assets you want to protect.

4. There’s a war on seniors. Janet Yellen has allegedly declared war on seniors by keeping interest rates low. President Obama has supposedly declared war on seniors by raiding Medicare to pay for his health plan. And financier Stan Druckenmiller warned that the mushrooming costs of Social Security and Medicare will bankrupt the nation, and he joined the chorus calling for drastic cuts in these programs. But remember 2005? A re-elected President Bush proposed replacing part of Social Security with individual retirement accounts. His idea got nowhere. Of course, seniors should be watchful of politicians trying to target retirees for major cuts in benefits. But the idea that there is an organized war on seniors is the product of politics and paranoia.

5. Your expenses will increase after you retire. Maybe that’s true if you have a bucket list that includes an extensive European vacation or shopping excursions to Rodeo Drive. But a retiree with a small earned income and some investment income is likely to pay lower taxes. You may even pay no tax on your Social Security benefit. Your housing costs could go down if your mortgage is paid off, and your local government probably offers a senior discount on real estate taxes. You could save even more by moving to a smaller, less expensive place. Presumably you will not be supporting your kids. Plus, you will no longer have to set aside 5 to 10 percent of your income to save for retirement.

There are plenty of reasons to plan ahead for retirement, from both financial and personal standpoints. But don’t let the pundits scare you into thinking it’s hopeless. You have a lot of resources, including your own brain power, that can help you make retirement the positive experience we all hope it will be.

 To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

06/8/15

How to Plan for Semi-Retirement

US News and World Report, By Geoff Williams May 19, 2015

If you’re not ready to completely leave the workforce, semi-retirement might be a happy medium. Tell your friends or family that you’re semi-retired, and you may receive a look of pity or envy. After all, semi-retirement can describe a period of your life in which you’re retired but are still working because you want to. Or you might be semi-retired because you need to work, although not as much as you used to.

However, nobody wants to be in a state of semi-retirement in which you just want to sit or lie down all day, but you still work part time because you have to – at least if you want to keep a roof over your head. If you’re thinking about semi-retirement, what should that look like? It’s hard to say, of course, because everyone’s financial portfolios are different, but presumably, we can agree on the following characteristics.

You planned. The best type of semi-retirement is the planned kind, where you don’t mind, or at least don’t hate working while many of your peers are lounging on a beach in Florida (or at least that’s what they’re telling you on Facebook). Whether on purpose or out of necessity, 42 percent of working-age Americans plan to semi-retire before fully retiring, according to a recently released report from the bank HSBC, which in August and September 2014 surveyed 1,000 Americans age 25 and up about their long-term financial futures.

Kyle Exline, executive director of The Clare, a continuing care retirement community in Chicago, says from his perch, the retirees who plan poorly don’t have anyone advising them, like a tax accountant or financial advisor, and then wind up with more monthly expenses than income. “As you near retirement, there are significant tax implications, depending on what you do with your money,” he says. Exline also says some retirees rely too much on their Social Security. ”I don’t think anyone can predict what the future is for Social Security, but relying on it as your only source of income is not a good idea,” he says.

You found work you enjoy. Plenty of semi-retirees are working because they have to, and not every semi-retiree can make money doing something that interests them. But, as the 1937 song goes, it’s nice work if you can get it. If there’s a model to follow, it’s probably something close to the path Jerry Koncel managed to take.

Koncel was a 67-year-old editor at Marina Dock Age, a magazine focusing on marina and boatyard management. Then another company bought the publication and moved it from Chicago to St. Louis. Koncel was invited to work for the magazine if he was willing to move, but he declined. He was happy living in the Windy City and not at all upset about the idea of retiring. He had a lot of interests, from politics to volunteering at his church and numerous charities. He also wanted to write his memoirs and play a lot of golf.

But almost immediately – he was only retired a week – he was asked if he’d like to work as an associate editor for Great Lakes Boating, a magazine for boating enthusiasts.”The boating community, in terms of writers, is a very small community,” Koncel says of the quick invite to go back to work.

Koncel was inclined to decline until he and the publisher worked out an arrangement where he would only come in two days a week – three if the editors really needed him. He didn’t really need the work, or the money, but as Koncel says: “I like the creative process.”

Your money has a purpose. Ideally, you aren’t using your income for everyday bills and mindless spending without putting any away for savings, unless you’ve already saved up for retirement. An objective and advantage of semi-retirement should be to delay tapping retirement funds such as a 401(k) or Roth IRA,” says Brian Porter, a professor of management who specializes in financial accounting at Hope College in Holland, Michigan.

With any luck, Porter says, you’re either socking away all or most of your semi-retirement income into your retirement funds, or better yet, you’re using your semi-retirement money for day-to-day living so you don’t have to tap into your investments. “Every year that one delays tapping retirement funds is one less year those funds need to last, increasing the likelihood that one does not outlive one’s retirement savings,” Porter says. And if you’re able, maybe you can use all or most your semi-retirement income to leave something to your kids and grandchildren.

“Most of my [semi-retirees] are working because they like to work,” says John Voltaggio, a certified public accountant and managing director at Northern Trust, an asset management firm in New York City. Some of his clients who become involved with startup businesses end up transferring their interest in the company to a trust for their heirs.

You’ve thought through the unexpected. Anything can go wrong at any point in your life, but when you’re in your 60s, 70s and beyond, one of life’s more obvious tripwires is your health. That’s why it’s important not to rely too much on your semi-retirement income, and to be able to adjust quickly if you can’t work as long as you planned.

“I know a lot of people who are retired and haven’t been very happy,” Koncel says. “They become grumpy old men or not very happy with their lives. They always worked very hard and got up every day and went to their jobs, and suddenly retirement came, and they didn’t have any plans … There’s a real danger after you retire that you become – to be perfectly honest – fat and lazy, and I didn’t want that to happen.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

06/1/15

Early Retirement Withdrawals Could Fuel Risky Behavior

The Wall Street Journal, May 19, 2015, David Harrison

The U.S. makes it easy to withdraw money from a defined-contribution retirement account. That gives workers plenty of leeway in managing their savings. However, it also risks undermining Americans’ retirement security, according to a new paper comparing policies in six advanced economies.

The working paper, from a group of economists at Harvard and Yale universities and the National Bureau of Economic Research, found that other countries impose limits on cashing out of defined-contribution plans. This is quite different from the U.S. rule which allows transfers of employer-sponsored accounts to individual retirement accounts once workers leave that employer. Money in IRAs can then be withdrawn in most cases by paying a 10% tax penalty before the worker reaches the eligibility age of 59 ½.

Withdrawals can be used for any reason a worker chooses. Americans increasingly relied on the flexibility during tough times in the recession and its aftermath. Politicians have seized on the opportunity, too. Sen. Marco Rubio (R., Fla.), a 2016 presidential candidate, disclosed in a Federal Election Commission filing last week that he withdrew about $68,000 from one of his own retirement accounts last year.

Germany, Singapore and United Kingdom ban withdrawals before their respective eligibility ages, but  make some exceptions for people with disabilities or terminal illnesses. Singapore will also allow limited withdrawals for home purchases, which must be repaid if the home is sold, and for education expenses, which must be repaid within 12 years. Canada and Australia provide tax advantages for early withdrawals when workers see their incomes fall or lose their jobs.

In the U.S., by contrast, workers can withdraw their savings with relatively little penalty. The researchers offer a few possible explanations for the differences between the programs including the strength of countries’ safety-net systems, the preferences of their citizens and the fact that in some cases, defined-contribution retirement plans were originally intended as a backup savings option.

On the one hand, they write, easy withdrawals give people access to money in times of need such as when medical bills arise or when they lose a job. “On the other hand, pre-retirement liquidity is undesirable when it leads to under saving arising from, for example, planning mistakes or self-control problems,” they write.

A separate paper last year using data from the Federal Reserve’s Survey of Consumer Finances found that the looser withdrawal rules in the U.S. encouraged people to draw on their savings during the last recession. Roughly 15.4% of taxpayers under 55 with retirement accounts withdrew money early in 2010, up from 13.3% in 2004.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®