01/25/16

Should you Use a 401(k) to Buy a Home?

US News & World Report, By Amanda Falcone November 13, 2015

Property values have increased this year, but experts warn against using your 401(k) to buy a house. Before using a 401(k) to buy a home, consider that you’ll be locked into a geographic area and it is an expensive investment to get into and out of.

You’ve found the perfect house in the cutest neighborhood. And you’re tired of writing a rent check every month, with nothing to show for it. All that’s keeping you from making an offer on your first home is that big down payment. So is it OK to use your 401(k) account to buy your first home? Before making that decision, you need to decide if it makes more sense to keep your money in your 401(k)’s stocks and mutual funds, or if you’ll make more money in the long term by shifting that money to your primary residence.

Weighing your options. Real estate is just starting to recover after the bubble burst on prices during the Great Recession, but it’s a hot investment right now – the National Association of Realtors says the median price for existing single-family homes is $229,400 — up 8.2 percent from the previous year.

That outperforms nearly anything that you’d find in target-date funds that are included in many 401(k) plans; for instance, the Vanguard Target Retirement 2050 fund (ticker: VFIFX), for those who are planning to retire about 2050, has returns of 1 percent in the last year.

Of course, a one-year snapshot doesn’t tell the whole story. The markets are in a six-year bull run, but returns are lower this year because of August’s correction and concerns that the Federal Reserve will raise interest rates. Fidelity says its average 401(k) account dropped from $91,100 to $84,400 in the third quarter.

Robbing Peter to pay Paul. It comes down to a decision, financial advisors say, between trying to increase your long-term investment portfolio through your home or through the stock market, mutual funds and bonds held in a 401(k).

Andrea Heuson, finance professor at the University of Miami, says a 401(k) is a better investment vehicle because investors can choose where to invest their money, and they have the ability to get to it quickly in an emergency. “That is probably not a wise economic decision [to dip into your retirement] simply because, from an investment standpoint, a 401(k) gives you much more flexibility as an investor than a house does,” she says.

Taking money from your 401(k) also comes with a big penalty, unless you’ve turned 59 1/2. Investors can expect to pay tax of 10 percent, which means that money is already lost before the initial transaction. And by draining 401(k) accounts, buyers could also miss out on the magic of compounding interest. “If it’s not one of the worst things you can do, it’s close,” says Chris Copley, a regional sales manager for TD Bank in Pennsylvania and New Jersey.

Copley says there is seldom a time where he would recommend that a client liquidate their 401(k) account. “That would be an occasion with special circumstances,” he says, adding that potential buyers should be able to put 3 percent down plus cover closing costs without dipping into their retirement accounts. If they don’t have the money, Copley says they should hold off.

Heuson says buying a home locks an investor into a geographic area, and it is an expensive investment to get into and out of. Closing fees take 5 percent of the value of a house off the table, while fees for most mutual funds, exchange-traded funds and target-date funds are fractions of a percent.

Tapping into a 401(k) account to pay for a house also means that a person is relying on the idea that the appreciation rate while they live in the house will be at least as high as the appreciation rate of the investments that they have in their 401(k), Heuson says. A typical 401(k) investment in the stock market has returned, on average, around 8 percent a year since 1920 – much higher than 2015′s performance – but few housing markets in the U.S. can be relied on to return that high of a percentage. And if money is withdrawn from a 401(k), investors are assuming their real estate investment will make up for the financial penalties incurred.

 Taking a loan against your 401(k). Another option, if an employer allows, is to secure a 401(k) loan, which would allow investors to dip into their retirement account without risking taxes or penalties. However, the money must be paid back, and the account would lose the advantage of compounding interest that makes 401(k)s so valuable.

Michael Wiginton, a financial adviser in Jasper, Alabama, says many people who borrow from their 401(k) accounts never pay themselves back and find themselves in a worse financial position than they were previously, he says. Wiginton says people have 401(k) accounts because there are no loans for retirement. If you can’t afford a property without dipping into your retirement account, rent elsewhere until you can, he suggests. ”Borrowing against one’s 401(k) is almost never advisable,” Wiginton says. “That’s typically very poor advice, no matter how many so-called justifications you see promoting it.”

Barry Jenkins, a real estate agent for Better Homes and Gardens Real Estate’s Native American Group in Virginia, says he would rather have his money in real estate than the stock market. He liquidated his 401(k) account to invest in real estate. ”I know I’m going to look out for my best interest more than a mortgage broker,” says Jenkins, who owns more than 17 homes and bought his first as an investment property at age 18.

It is an idea that resonates with millennials, Jenkins says. They want to be in control of their finances, and they trust themselves more than they trust others, he says, adding that he regularly has millennial clients who choose to use their 401(k) money when purchasing a home. Recognizing the advice of financial professionals, Jenkins acknowledges he is missing a financial opportunity by not contributing to a 401(k), but it’s a sacrifice he’s willing to make. Jenkins says he is increasing the number of investment properties that he owns, building his wealth in the process. ”I’m just doing so well with real estate,” he says.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

01/18/16

Should You Invest in a 401(k) If You Don’t Get a Match?

US News & World Report, By Maryalene LaPonsie, Nov. 13, 2015

It’s a no-brainer to put money in a 401(k) if you get an employer match. But what should you do if there’s no match to be found? Even if your employer doesn’t offer matching, you still have options.

For millions of workers, there is no easier way to save for retirement than contributing to a 401(k) plan. Set up by employers, these investment accounts allow participants to automatically deposit money from their paycheck. To sweeten the deal, some companies will even partially or fully match worker contributions to a 401(k).

“People call it free money,” says Scott Dougan, co-founder of the financial education program Retirement Elevated. “To me, it’s not free money. It’s already calculated into a compensation package.” That means workers who don’t claim a match are essentially missing out on a portion of their income.

Contributing to a 401(k) when there is a match is a logical choice. However, the issue becomes murky for those who work someplace where there is no employer match. The 401k Performance Survey, conducted by American Investment Planners, found that 42 percent of businesses didn’t offer a match in 2011. In those cases, finance experts like Dougan say workers need to consider several factors before deciding where to put their retirement money.

The Case for Investing in a 401(k)

Even without a match, a 401(k) remains an attractive way to invest for retirement. Employers have a legal responsibility to ensure a 401(k) operates in the best interests of workers. In other words, a company must set up a plan in such a way to ensure reasonable fees and diverse investment options.

Besides providing stable investment funds, a 401(k) is accessible, even for those who don’t feel financially savvy. “Because it comes out of payroll deductions, it’s easy and simple,” says Nathan Boxx, associate financial consultant at Fort Pitt Capital Group in Pittsburgh.

Finally, for higher income households, a 401(k) plan may be the only option if they want to deduct contributions from their taxes. The ability to deduct contributions to a traditional IRA begins to phase out for single workers once they reach $61,000 or more in annual income. For couples, the phase-out begins at $98,000.

Another plus for high-income households is the contribution cap for 401(k)s. Workers can invest up to $18,000 per year in their plan in 2015 and 2016. Those older than age 50 can put in an additional $6,000 per year. Traditional IRAs, on the other hand, limit annual contributions to $5,500 for workers under age 49 and $6,500 for those age 50 or older.

Why You May Want to Put Your Money in an IRA

Although 401(k) plans have a lot going for them, they may not be right for everyone. The key is to look at your options, says Ann Summerson, a certified financial planner and vice president of The Wise Investor Group in Reston, Virginia.

401(k) plans may have diverse options, but workers could find more choices and even lower rates by taking their money to an IRA. “Some employers may have higher fees,” says AJ Smith, managing editor of the finance site SmartAsset.com. “You want to be sure your money is working for you and not going to administrative fees.”

Tax planning should also play a role in determining whether to put money in a 401(k) or IRA. “There’s this misconception that we should pile as much money as possible in a [traditional] 401(k) or IRA to lower our taxes now,” Dougan says.

Instead of focusing on current taxes, Dougan advises workers to consider how much they may pay in taxes during retirement. He predicts tax rates will increase in the years to come, and that means money would be better invested in Roth 401(k) or Roth IRA. Traditional 401(k)s and IRAs allow workers to deduct contributions from their current year taxes. Then, when they withdraw money in retirement, it is taxed as income. With Roth accounts, contributions are not tax deductible now, but withdrawals in retirement are tax exempt.

According to the Vanguard Group, 56 percent of employers offering 401(k) plans managed by their company have a Roth option. However, those working somewhere with neither a 401(k) match nor a Roth 401(k) may want to put their money in a Roth IRA, which anyone can contribute to.

Ultimately, financial experts say which retirement account you choose is less important than simply saving money. Summerson says if a 401(k) is the easiest way for people to save, they shouldn’t dismiss the option simply because they don’t get a match. She puts it this way: “Is your employer saving for your retirement, or are you saving for your retirement?”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

01/11/16

The Sting of 2016 Medicare Premium Rates

Investment News, Nov 13, 2015, By Katy Votava

The Centers for Medicare & Medicaid Services (CMS) announced a host of new Medicare costs for 2016. Among them were the highly anticipated Medicare Part B 2016 premiums, Income Related Monthly Adjustment Amounts (IRMAA), deductible and $3 monthly across the board surcharge.

The Social Security Administration had already released its decision that there will be no Social Security Cost of Living Adjustment (COLA) increase for 2016. As a result, by law, most people who are currently receiving Medicare Part B benefits will be “held harmless” from any increase in premiums and $3 monthly surcharge in 2016. Those folks will pay the same monthly premium as last year, which is $104.90. Regardless, many others will pay more.

In the face of the Medicare hold harmless provision, all other Medicare recipients were going to have to absorb the entire Medicare Part B cost increase for 2016. It was estimated that it would result in a 52% Medicare B cost increase to all of those who were not held harmless.

The recent federal budget agreement brought down the magnitude of that increase substantially by instituting much lower premium growth and funding the difference with a $7.5 billion Treasury loan. It is anticipated that the loan will be paid back over a five-year period by adding a flat-rate $3 monthly surcharge to all of those beneficiaries not held harmless in 2016. In the future, when there is a Social Security COLA, all other beneficiaries will pay a higher base premium and the $3 monthly surcharge as well.

HOLD HARMLESS CHECKLIST

Approximately 30% of current Medicare beneficiaries will not be held harmless. If your clients meet certain criteria they will not be “held harmless” from the Medicare B premium and IRMAA increases or the flat rate $3 month surcharge. Here is a hold harmless checklist:

• Not collecting Social Security benefits in November and December 2015.

• Not paying Medicare Part B premiums as a deduction from Social Security benefits from November 2015 through January 2016.

• Currently paying or will be paying in 2016 a Medicare Part B IRMAA.

• Enrolling in Medicare Part B effective Jan. 1, 2016 or after.

In total, all of those subject to the higher 2016 Medicare Part B monthly cost will see a 16% increase for this one portion of Medicare alone. CMS also announced that the annual deductible for all Part B beneficiaries will be $166.00 in 2016, a 13% increase over 2015. Part B deductibles are not subject to the hold harmless provision and are therefore paid by all Medicare beneficiaries.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

01/4/16

YOUR MONEY-How to care for two parents at once without going broke

By Chris Taylor, Nov 23 2015 Reuters Markets

For years, Madeleine Smithberg has been at the forefront of American comedy as co-creator of “The Daily Show” and a talent coordinator for “Late Show with David Letterman.” That sense of humor was especially handy during the last few years. That is because Smithberg had to cope with not one, but two elderly parents in rapid decline.

“It’s heartbreaking,” says Smithberg, 56, who heads a production company in Los Angeles. “And yet it’s invisible, because nobody talks about it.” Dealing with one aging parent is challenging enough, whether you are helping navigate the complex healthcare system, paying for an assisted living facility or struggling with cognitive decline as the parent slips away. But the emotional and financial stress can be more than double if you are caring for both parents at the same time.

“It’s like having toddlers,” says Smithberg, whose father passed away in 2014 after she moved her parents to Los Angeles. “They’re hot, they’re cold, they’re hungry, they ask repetitive questions, and their needs become the most important thing in the world at that second… The biggest challenge of all is holding onto your patience.” According to a new study by Northwestern Mutual, the childrearing comparison is apt: 59 percent of Americans feel that taking care of two parents between ages 85 and 90 would be even harder than handling two kids between ages 3 and 5.

Caregivers may also have kids of their own. In that case, it’s not just the “Sandwich Generation” – it’s a Triple-Decker. The Northwestern Mutual report found that 38 percent of those surveyed have not planned at all for handling the financial burdens of caring for elderly parents. The costs can be gigantic: National median costs for an assisted-living facility are now $43,200 annually, according to insurer Genworth Financial in its annual Cost of Care study. A private room in a nursing home? $91,250. That is more than enough to blow up any financial plan. The following is advice on how to care for your parents without going bankrupt yourself.

LONG-TERM CARE

“Long-term care, long-term care, long-term care.” That’s the simple advice from Smithberg. Her father had taken out coverage for himself and his wife, which she calls “the best thing he ever did.” Long-term care insurance covers expenses for nursing home or home care if you become incapacitated – most of which is not covered by Medicare. The coverage, like the care, can be extremely expensive, and to be sure, it did not cover all of Smithberg’s parents’ assisted-living costs. But, combined with their own life savings, the policy has meant that she has not yet had to dip into her own savings to pay for their care.

HAVE THE TALK

Being that it’s the New Year and everyone is talking about their goals and desires, it’s the perfect time to have the talk. Don’t let the opportunity slip by to discuss your parents’ expectations, should illness arrive. Find out if they have advance directives – documents that spell out what treatment they would and would not want during a life-threatening health crisis. Make sure you establish who has power of attorney, should they need someone to make important decisions.

CONSIDER A REVERSE MORTGAGE

Reverse mortgages allow homeowners aged 62 and above to borrow against their home equity and to receive either a lump sum, a series of monthly checks or a line of credit that can be tapped as needed. The upside of a reverse mortgage? With the bank paying you every month, instead of the other way around, that check can help cover costs for in-home caregivers. Tom Davison, a financial planner in Columbus, Ohio, is working with a 90-year-old woman whose daughter moved in with her as a caregiver. “A reverse mortgage could help (the daughter) pay her the wages she has given up,” Davison said. The downside, of course: The family home will eventually become property of the bank.

GET HELP

Your first instinct as a child may be to drop everything and handle all your parents’ needs yourself. But if it comes at the cost of your own career, think about the ripple effects – on your retirement savings, on the needs of your own kids, even on your own sanity. With Americans extending their lifespan – 76.4 years for men, 81.2 years for women, according to the National Center for Health Statistics – this is a family challenge that won’t be going away anytime soon.

Denver financial planner Kristi Sullivan recommends hiring a case manager to do the heavy lifting. ”For an hourly fee, these people can handle tasks quickly that it might take you hours to do – scheduling doctor’s appointments, handling medical payments and dealing with insurance, helping find a good nursing home or in-home care,” Sullivan says. “Spending this money may seem expensive, but it’s less than putting someone’s career on hold to become a full-time caregiver.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®