A noted economist disputes that generalization.

True or false? You may have heard this claim before (or something like it): “Many Americans are being forced to retire later because their savings and investments took a hit in the Great Recession.”
Recently, a big-name economist disputed that belief. In a commentary for Bloomberg, former White House budget director Peter Orszag wrote that some of the statistics don’t seem to back up this conventional wisdom, but perhaps it all depends on which statistics you cite.

A fact that can’t be ignored. In mid-January, a widely reprinted Washington Post article mentioned that since the start of the recession, the population of U.S. workers older than 55 has increased by 12% to 3.1million.¹

Examining this Labor Department finding, the Post feature referenced longevity and the loss of traditional pension plans as contributing factors. It presented stories of older workers who didn’t think they could easily retire, and quoted respected commentators such as Alicia Munell, director of the Center for Retirement Research at Boston College, who remarked that “some of these people are just clinging by their fingernails to jobs.”¹

But is there more to the story? It turns out that Americans were trending toward staying in the workforce longer even before the recession. In 1994, Orszag notes, 43% of Americans aged 60-64 were working; in 2006, it was 51%. Nearly half of 62-year-olds went and claimed Social Security benefits in 1994, but 12 years later, less than 40% of 62-year-olds followed suit.²

Orszag mentions another factor that may have kept older employees working during the recession: declining home equity. Put that alongside diminished IRA and 401(k) balances, and there was every reason to stay on the job these last few years.

However, just because older Americans wanted to keep working didn’t mean that they could.

In the 2011 edition of its respected Retirement Confidence Survey, the Employee Benefit Research Institute found that 45% of retirees ended their careers earlier than they wanted to, in many cases due to layoffs and health issues.³

The Post article noted that the jobless rate for workers older than 55 was just 3.2% in December 2007 when the downturn began. In December 2011, it was up to 6.2%.¹

The percentage of employed Americans aged 60-64, which had steadily risen during the 1990s and early 2000s, has remained at roughly 51% for the past five years.²

That brings us to Orszag’s central point: “The bottom line is that people’s retirement decisions aren’t always entirely voluntary.”²

How about your retirement decision? Do you think you will retire when you want to retire? Are you prepared for retirement financially? A new year is a good time for a new look at the state of your finances and your retirement readiness. With astute planning, you might be able to retire sooner than you think.

Citations.

1. www.usatoday.com/USCP/PNI/NEWS/2012-01-17-PNI0117biz-older-workersART_ST_U.htm [1/11/12]
2. mobile.bloomberg.com/news/2012-01-18/look-at-jobs-before-leap-on-older-retirement-commentary-by-peter-orszag [1/18/12]
3. www.ebri.org/pdf/briefspdf/EBRI_03-2011_No355_RCS-2011.pdf [3/15/11]

It’s All in Your Hands

You have just gone through one of the most challenging and difficult periods that a woman can experience in her life – a divorce. While many things may still be in up in the air, one aspect of your life that you should make sure you’re in control is your finances.

Financial planning for divorced women is not that much different than financial planning for married couples. Several basic elements are the same. However, the differences offer both good news and bad news. The good news: you can make plans and decisions based solely on your needs and goals. There won’t be miscommunication or conflicting ideas. The bad news: it’s all in your hands. Any mistakes will be your own and a poor decision can’t be salvaged by the income or assets of a partner.

The following post-divorce action plan offers a few things worth considering:

One way to counter the bad news is to find a trusted professional to seek advice from.

After a divorce, friends are often split between spouses. Financial representatives can be the same way. If you lost yours in the divorce or never had one to begin with, it’s a good time to consider finding a professional who can help you make sound financial decisions for your new life.

To find one, start simply. Ask friends or acquaintances who it was that helped them when they went through a divorce. The attorney who handled your divorce may also be a good source for a referral. It’s important to have someone help you who has previously assisted or – best of all – who specializes in helping divorced women.

Selecting the right financial professional for you is a critical step. After all, this person will be helping you with the important financial decisions you now have to face.

Long-term care insurance may become even more important post-divorce.

Long-term care policies are designed to cover the costs of care if you are unable to care for yourself because of age or if you become ill or disabled. Long-term care is especially important for women because they typically pay more for it than men do. The reason is simple: women typically live longer than men and usually require longer care during those additional years.¹

A woman’s retirement is usually more expensive than a man’s.

The reason that women usually need long-term care insurance more than men is the same reason that retirement income planning for women may be more important. Women live – on average – 5 to 10 years longer than men. Eighty-five percent of people over 100 are women.² This means a woman’s retirement savings must, on average, be stretched out over a larger number of years.

While, in general, retirement planning for a single person is easier in many ways than for a couple, remember … you can no longer rely on a spouse’s financial resources if a mistake is made. It’s important to review your social security estimates, any pensions you have and your retirement assets. You can then compare that to the kind of lifestyle you would like to have during retirement.

Because retirement may be more expensive, you may want to make an employer-sponsored retirement plan a larger deciding factor in any job search. Also, you may decide that you must retire at a later date than you had originally planned.

Update your beneficiaries and consider using a trust to help manage your assets. People often forget to update the beneficiaries of their life insurance and retirement accounts after a divorce. If not changed, your ex-husband may stand to inherit a large portion of your assets. Also, the estate laws give certain breaks to married couples that are not available to a single person. Establishing the proper type of legal trust may be a way to pass along more of your assets to your heirs, rather than to the IRS.

Finally, after you have moved on from your divorce there may come a time when you consider remarriage. It’s important that you understand the financial effects this may have. If you were married longer than 10 years you may be collecting or entitled to 50% of your ex-husband’s social security benefit. If you remarry you will no longer have that right. While you will become entitled to your new husband’s benefit, you must know if your new husband’s benefit will be lower or higher, and how that will affect your retirement.

Remarriage can also lead to blended families, blended assets and blended income. Your new husband may have his own family from a previous relationship. A financial professional can help the two of you prepare for this blending that satisfies the financial needs of each of you, as well as your new family.

While it’s all in your hands, partnering with a financial professional can help you move on to the next phase of your life with a more solid plan for your financial future.

1. www.wife.org/long-term-health-care.htm (2008)
2. www.time.com/time/health/article/0,8599,1827162,00.html (August 6, 2008)

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Originally posted. March 2, 2010

The Healthcare reforms may lead to some short-term aid.

Could Medicare soon be in better shape? Maybe. At the start of August, Medicare’s politically appointed trustees reported to Congress that Medicare should remain financially in the black through 2029, a 12-year improvement over last year’s estimate.¹ They credited the healthcare reforms carried out by Congress and the Obama administration, citing greater efficiency that would translate to savings for the program.

However, there is no guarantee that Medicare will get to retain those federal savings, and no certainty that the savings projected by eliminating subsidies paid to private insurers will result.

Additionally, as Concord Coalition executive director Robert Bixby told the Los Angeles Times, “You can’t spend the same money twice.”² It would seem unwise to use Medicare savings to expand Medicare coverage.

The Medicare trustees claimed that with the projected $192 billion in cuts to Medicare Advantage plans, home health care and hospitals across the next ten years, both the 75-year shortfall for its hospital fund and projected costs of the Medicare Supplementary Insurance program will shrink. More alterations will be needed to keep Medicare running in decades to come, the August report notes.^1,3

Medicare’s own chief actuary claimed that the estimates used by the White House and its allies underestimated costs by a whopping 68% and could not possibly be seen as a good-faith projection of the program’s future:

“(T)he financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range. . . or the long range. . . . I encourage readers to review the ‘illustrative alternative’ projections that are based on more sustainable assumptions for physician and other Medicare price updates.”⁵

Social Security’s fortunes could be enhanced in 2019. Why 2019? In that year, a new tax is scheduled to kick in for so-called “Cadillac plans” – health insurance packages with annual premiums of $8,000 or more for individuals or $21,000 or more for families. In 2019, insurers offering these plans will have to pay a 40% federal tax for every dollar spent over the $8,000 or $21,000 cutoff.^1,4 The research shows it would likely affect a broad swath of Americans regardless of their income, which could indeed amount to the tax on the middle-class that President Obama promised would not happen.⁶

That tax is projected to give Social Security a bit of relief.  In 2010, Social Security is paying out more than it is taking in – and by previous federal estimates, that wasn’t supposed to happen until 2016. According to government forecasts, it can continue using payroll taxes and interest income to cover benefits until 2024.¹

The projection that Social Security’s accumulated surplus will run dry in 2037 is unchanged. After 2037 (assuming things don’t change), Social Security’s program revenues would only cover about 75% of its expenses – so payroll taxes would have to increase, or benefits would have to be scaled down.¹

Until both programs receive true long-term fixes, we will all have to make do with these short-term encouragements.

Citations

1. nytimes.com/2010/08/06/health/policy/06medicare.html [8/5/10]
2. latimes.com/news/nationworld/nation/wire/sc-dc-0806-social-security-20100805,0,6306255.story [8/5/10]
3. csmonitor.com/USA/Politics/2010/0322/Health-care-reform-bill-101-What-does-it-mean-for-seniors [3/22/10]
4. slate.com/id/2232434 [10/14/09]
5. cms.gov/ActuarialStudies/Downloads/2010TRAlternativeScenario.pdf
6. politicsdaily.com/2009/12/17/cadillac-tax-in-health-plan-would-hit-middle-class-hard/

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Originally posted. August 9, 2010

Taking Care of Your Business After You’re Gone

Business owners are builders. They spend their lives building a business that provides goods and services to their clients and provides themselves a living. But nothing can tear down that lifetime work faster than their own death, or the death of a business partner. Often, much of the value of a business dies with the owner.

Each business encounters different problems. The questions facing a sole proprietor are two-fold. First, if he or she dies, how can the heirs continue the business or keep from selling the business at fire sale prices? The executor of the estate can continue the business, but must find someone willing to run it. They can sell the business, if the heirs wish, but must find a buyer. This is made harder by the fact that any potential buyers will be in a better negotiating position, knowing the business is becoming less valuable with each passing day following the owner’s death. Also, the heirs may be in disagreement over what to do with the business. Some may want to keep the business, while others want to cash out. If the business is kept running by some heirs, those wanting out would need to be compensated. If the cash to do this can’t be found, this could potentially force a liquidation of the business.

The second question facing a sole proprietor is this – how does the business owner keep key employees confident that the business, and their jobs, will survive after his or her death?

If a partner dies, the surviving partner can be left with uncertainty. First, they may find themselves in business with the deceased partner’s heirs – who may have different goals for the company. If the heirs wish to sell to the surviving partner, can they be paid? And will the cash needed to buy the business be on hand?

These questions can throw the value and continuation of a business into doubt.  This could make creditors more likely to call loans, and key employees less likely to stay with the firm.

Buy-sell agreements are designed to answer these questions and work toward eliminating these problems.²

Basically a deal struck by interested parties in the firm to sell their share of the business to another person if one should die, these agreements are often funded by life insurance. Owners take out a life insurance policy on themselves with a key person as the beneficiary. If the owner passes away, the key person can use the proceeds to buy the business from heirs. This way, the key person continues to work and operate the business. That same key person will have the funds to purchase the business, and the heirs would receive a fair price (agreed to before the owner’s death). They also get an easy liquidation of the estate.¹

The business owner also benefits from the arrangement. They have the satisfaction of knowing the business will continue after their death, and that their regular employees will continue to have stable employment. In addition, the business owner may find greater productivity and loyalty from key employees, who may be aware that ownership is in their future.²

In a partnership, life insurance policies are purchased on each partner with the other partner named as the beneficiary. The proceeds from any one owner’s death can be used to purchase the deceased partner’s interest from the heirs. The agreement also provides some security to the heirs and the partners – assuring them that the business will continue after either of their deaths.²

As with the death of a sole proprietor, the heirs may be freed from certain business worries since the sale can happen rather quickly. They also know they won’t be forced to sell the business under duress. The family will get the pre-determined fair price for the business. Also, estate issues will be settled more quickly allowing them to move on with their lives.¹

Buy-sell agreements, whether between sole proprietors or partners, do have disadvantages.⁴

First, the participants have to trust and verify that each partner keeps his or her policy in force. This isn’t as simple as making sure the premiums are paid. Usually the policies are owned personally – not by the firm. If a partner goes through a bankruptcy, creditors may go after the cash value of the buy-sell agreement’s life insurance policy.

Also, the more partners involved, the more policies must be taken out. Two partners require two life insurance policies, but a partnership of three will require six policies – each partner will be the beneficiary of two other partners. Thus, as the number of partners increases, the number of policies grows exponentially – as does the cost of the buy-sell agreement.

Finally, if the partners have a wide disparity in age or health, the older or less healthy partner will be paying much more for the agreement than the younger, healthier partner.

Before you make a decision about how you’ll protect the future of your business, it may be wise, in addition to researching your options, to speak to a qualified professional who can guide you through these complex options.

Citations

1. businessdictionary.com/definition/cross-purchase-agreement.html
2. thestartuplawyer.com/startup-issues/buy-sell-agreements-the-cross-purchase
3. keypersoninsurance.com/what_is_a_cross_purchase_buy_sell_agreement.php#disadvantages_cross_purchase_plans

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Originally posted. March 26, 2010

What can you do to help yourself get pre-approved?

Remember when getting a mortgage was easy?
Now, you need pre-approval. So how can you increase your chances of passing that all-important test?

You want a lender in your corner. Sellers and agents don’t want to waste their time working with a buyer who isn’t pre-approved. Why should they contend with uncertainty?

A buyer with a pre-approved loan gets respect when a seller gets multiple offers. A pre-approval shows the seller the size and terms of the loan the bank is ready to green light. Commonly, a pre-approval is good for 90-120 days.¹

Pre-approval is a whole different level than pre-qualification. You can supply very basic financial information to a bank or lender and walk out with an estimate of how much mortgage you might be able to carry. However, that is no promise. Pre-approval is an actual commitment from the lender to you.

So what can you do to earn that commitment?

Test the waters well before you test the housing market. Visit more than one lender, and see what you can borrow, just how much home you can afford, and what kind of mortgage options you have. Keep in mind that a pre-approval is a pledge that a mortgage lender makes to you, not a contract. Should some other bank or mortgage company make you a more attractive pledge, you are free to switch horses.²

Make your case. Don’t skimp on the documentation you bring to the appointment. Usually, a mortgage lender will want to see the hard data of your financial life over the last couple of years: the bank statements, the federal tax returns, the W2s, the pay stubs. If you earn investment income, bring paperwork showing that you do. If you deposited any big sums into your bank account recently, you’ll probably be asked what that deposit represents.

The amount you are pre-approved for typically reflects three factors: how much you have saved up for a down payment, your FICO score and your current address. It should only take a few business days for a lender to get back to you and let you know how much mortgage it will pre-approve for you.¹

Aim to get pre-approved within 30 days. This way, you don’t risk harming your FICO score so much. The majority of credit-scoring paradigms out there don’t penalize your credit rating for home loan, student loan and car loan inquiries made 1-30 days prior to the score calculation.²

Don’t expect all the details right away. When you apply for a loan, your lender is using that day’s mortgage rates to calculate costs and payments, and rates move. So the pre-approval may be light on particulars about the interest rate or the loan type.

Avoid fly-by-night lenders. The seller and the seller’s agent want to see that a reliable, “name” lender is issuing its stamp of approval here, not an obscure Johnny-come-lately. Credibility counts.

Can’t get a standard loan? Don’t forget about the Federal Housing Administration, through which you might be able to arrange a mortgage with as little as 3.5% down. Most lenders can process an FHA loan like a standard loan, and commonly the rates are about an eighth of a point higher than a standard mortgage. Also, remember that first-time buyers have until the end of 2009 to qualify for an $8,000 federal tax credit which can be put toward the down payment and closing costs.¹

Originally posted. October 30, 2009

1. forbes.com/2009/07/01/pre-approval-mortgage-personal-finance-ask-money-builder.html [7/1/09]
2. smartmoney.com/personal-finance/real-estate/7-tips-for-getting-a-preapproved-mortgage/ [8/6/09]

Run the numbers, because the answer could be “yes.”

An underreported story. In 2010, we have a wave of IRA owners converting traditional IRAs to Roths. There are all kinds of compelling reasons to make that move. Yet for some IRA owners, the conversion may have an unintended consequence: it may reduce their son or daughter’s chances for college financial aid.

A Roth conversion will increase your taxable income. As some scholarships, grants and loans are awarded based on income levels, a big jump in AGI could potentially jeopardize them. This can be a problem if you’re a “millionaire next door” who wants your kids to exploit financial aid as much as possible.
That income must be recorded on the FAFSA. Universities commonly use the Free Application for Federal Student Aid (FAFSA) as a test to determine whether a student is eligible for grants, loans and some scholarships. The FAFSA is all about family income – factors like net worth and invested assets don’t come into play. Mom and Dad’s higher AGI could mean lower levels of financial aid, because the income boost from the Roth conversion will make it look like Mom and Dad can now shoulder a greater percentage of education costs.^1,2

A New York Times article offered an example. Take a hypothetical family of four with total 2010 income of $75,000 and one college student. For every $10,000 of taxable income stemming from a Roth conversion, the parents’ expected annual contribution to that student’s education would go up by $3,200 in a FAFSA estimate.¹

In April, Mark Kantrowitz (publisher of FastWeb.com, an online scholarship directory) told Financial Advisor Magazine that the Department of Education had requested universities to recognize the effect of 2010 Roth conversions on family incomes. No evidence suggests colleges are doing this en masse.²

Financial aid decisions are often based on multiple years of income. Keep this in mind. IRA owners who go Roth this year are well aware that they may divide taxes on the conversion across the 2011 and 2012 tax years. Well, that decision may affect family incomes for those years, and possibly chances at student loans, grants and scholarships through 2013.¹

If your kids are young, time is on your side. If your children are a few years or more away from college, you can make a Roth conversion without having to worry about its impact on FAFSA applications.

Any potential Roth IRA conversion should be analyzed for its impact on other aspects of your family’s financial life. The impact on college financial aid is but one factor to consider. The potential long-term benefits of a Roth IRA conversion are considerable. Confer with a financial consultant to see if the decision is appropriate before you elect to make the move.

Visit the College Savings Strategies section of Rainstone Financial.

Citations.

1. bucks.blogs.nytimes.com/2010/04/16/how-a-roth-i-r-a-conversion-can-hurt-financial-aid/ [4/16/10]
2. fa-mag.com/fa-news/5452-roth-ira-rollovers-could-affect-college-financial-aid.html [4/21/10]

Originally posted. April 27, 2010

A way to “sweeten the pot” and retain executives and managers with “Golden Handcuffs”.

A job that is simply too good to leave. Businesses arrange “golden handcuffs” or “golden handshakes” agreements with key managers to reward loyalty and promote retention. A golden handcuffs strategy can make a management position so attractive that it would be financially irresponsible to walk away.

A flexible option for a widely held or publicly traded business. The classic golden handcuffs arrangement is a “top hat” program – a non-qualified deferred compensation plan (NQDC) designed solely for management employees. Being a NQDC plan, it does not have to comply with the bulk of ERISA regulations – and there are no IRS reporting requirements. The business must still file Form 5500 with the Department of Labor; however, if the business sends the DOL a letter notifying it of the presence of the plan, no further filing is necessary.¹

Substantial rewards for the executive who becomes fully vested. Most golden handshakes are discreetly offered as extensions to executive employment contracts. Typical arrangements include:

• 401(k) mirror accounts (NQDC plans) into which an executive can defer X% of salary and/or bonus annually. There may be a company match – perhaps the company kicks in 50¢ for each $1 deferred.
• The money can be withdrawn at retirement or merely at some other future point, and the executive can bolster his or her retirement savings using pre-tax dollars.
• SERPs (supplemental executive retirement plans) funded entirely by the employer.
• Upon retirement, the SERP assets can foster a pension-style income for the key employee.

• Stock options with a vesting period of 3 years or less, perhaps complemented by subsequent options down the line. (This could also take the form of restricted or phantom stock.)
• Many key managers owe sizable income tax to the IRS corresponding to their considerable salaries. In the sweetest scenario, the key employee defers most or all of his or her annual salary – so instead of regular income tax, he or she faces a lesser burden of paying capital gains tax linked to the income from the options.^2,3,4

To fully reap benefits like these, a key employee must fulfill the designated terms and conditions of the golden handshake. Usually this requires staying in the executive position for X number of years and/or completing a specific major task. (Most NQDC plans also provide a death benefit to a designated beneficiary if there are still benefit payments remaining for the employee at the time he or she passed.)²

If the key manager quits or jumps ship before becoming fully vested, he or she could lose the matching dollars contributed to the plan by the company. There will also be the matter of having to deal with a lump sum of income and a big tax bill.³

How do companies fund top hat plans? Many businesses elect to do this with corporate-owned life insurance. Other options include a private annuity contract, company stock, or even earnings from a company investment portfolio.

You may be wondering how a life insurance policy can be tapped to make payments to a living individual. Here’s how: loans are made against the cash value of the policy, or policy withdrawals are made. Such loans are commonly tax-free, and withdrawals are also tax-free to the extent of the premiums paid toward the coverage.²

COLI funding offers the business the potential for tax savings and cost recovery. If a 45-year-old executive puts away $15,000 annually into an NQDC plan for 20 years at 7% interest, in 20 years he or she will end up with $658,000. If those assets enjoy tax-deferred growth with COLI funding of the plan, the business can save 35% (nearly $120,000) in federal taxes on the gains in that period. If the executive passes away at age 78 with the company still owning the life insurance policy, the company would collect a $2.3 million death benefit.²

NQDC plans are commonly unsecured. This means that if a company goes belly-up, a golden handshake may amount to an empty promise. Bankruptcy and cash flow factors may delay or reduce payments to the key manager. The company may undergo a change of control; acrimony between the key manager and ownership may even result in a change of heart. Some firms conscientiously address these risks by establishing trust funds with banks and trust companies.

A top hat plan is usually not a good idea for a small family business due to tax reasons. When a closely held business sponsors a NQDC plan, it can’t deduct employee contributions to the plan until the year in which the employee recognizes income. If it sponsors a qualified retirement plan such as a profit-sharing plan or a 401(k), it can deduct such contributions before the worker has to recognize them as income.¹

A useful tool to help big companies retain their superstars. A golden handshake can make key managers feel appropriately rewarded – and cause them to think twice if they are ever tempted to leave your business.

Citations.

1. umass.edu/fambiz/articles/money_issues/nonqualified.html [8/11/11]
2. capitasfinancial.com/producercenter/docs/Article%20on%20insurance%20in%20NQDC.pdf [1/28/09]
3. shrm.org/Publications/hrmagazine/EditorialContent/1000/Pages/1000agn-compensation.aspx [10/1/00]
4. investopedia.com/terms/t/top-hat-plan.asp#axzz1UlHffgkb [8/11/11]

Originally posted. September 9, 2011

Meeting your obligations and finding some opportunities.

After you turn 70½, the IRS requires you to withdraw some of the money in your retirement savings accounts each year. These withdrawals are officially called Required Minimum Distributions (RMDs).¹

While you never have to make withdrawals from a Roth IRA, you must take annual RMDs from traditional, SEP and SIMPLE IRAs, pension and profit-sharing plans and 401(k), 403(b) and 457 retirement plans annually past a certain age. If you don’t, severe financial penalties await.¹

If you are still working as an employee at age 70½, you don’t have to take RMDs from a profit-sharing plan, a pension plan, or a 401(k), 403(b) or 457 plan. Your initial RMDs from these accounts will only be required after you retire. However, you must take RMDs from these types of accounts if you own 5% or more of a business sponsoring such a retirement plan.²

You must take RMDs from IRAs after you turn 70½ regardless of whether you are still working or not.²

The annual deadline is December 31, right? Yes, with one notable exception. The IRS gives you 15 months instead of 12 to take your first RMD. Your first one must be taken in the calendar year after you turn 70½. So if you turned 70½ in 2011, you can take your initial RMD any time before April 1, 2013. However, if you put off your first RMD until next year you will still need to take your second RMD by December 31, 2013.¹

Calculating RMDs can be complicated. You probably have more than one retirement savings account. You may have several. So this gets rather intricate.

• Multiple IRAs. Should you have more than one traditional, SEP or SIMPLE IRA, the annual RMDs for these accounts must be calculated separately. However, the IRS gives you some leeway about how to withdraw the money. You can withdraw 100% of your total yearly RMD amounts from just one IRA, or you can withdraw equal or unequal portions from each of the IRAs you own.
• 401(k)s and other qualified retirement plans. A separate RMD must be calculated for each qualified retirement plan to which you have contributed. These RMD amounts must be paid out separately from the RMD(s) for your IRA(s).
• Inherited IRAs. The same applies; a separate RMD must be calculated for each inherited IRA you have, and these RMD amounts must be paid out separately from RMD(s) for your other IRA(s).¹

This is why you should talk to your financial or tax advisor about your RMDs. It is really important to have your advisor review all of your retirement accounts to make sure you fulfill your RMD obligation. If you skip an RMD or withdraw less than what you should have, the IRS will find out and hit you with a stiff penalty: you will have to pay 50% of the amount not withdrawn.²

Are RMDs taxable? Yes, the withdrawn amounts are characterized as taxable income under the Internal Revenue Code. Should you be wondering, RMD amounts can’t be rolled over into other tax-deferred accounts and excess RMD amounts can’t be forwarded to apply toward next year’s RMDs. ²

What if you don’t need the money? If you are wealthy, you may come to see RMDs as an annual financial nuisance, but the withdrawal amounts may be redirected toward opportunities. While putting the money into a savings account or a CD is the usual route, there are other options with potentially better yields or objectives. That RMD amount could be used to:

• Start a grandchild’s education fund.
• Fund a long term care insurance policy.
• Leverage your estate using life insurance.
• Diversify your portfolio through investment into stock market alternatives.

There are all kinds of things you could do with the money. The withdrawn funds could be linked to a new purpose.

So to recap, be vigilant and timely when it comes to calculating and making your RMD. Have a tax or financial professional help you, and have a conversation about the destiny of that money.

Citations.

1. www.hartfordinvestor.com/servlet/Satellite?c=Page&cid=1284290138050&pagename=Investor%2FPage%2FCommon [9/23/11]
2. www.irs.gov/retirement/article/0,,id=96989,00.html#8 [1/5/12]

Create a pool of healthcare dollars that will grow in any market.

How will you pay for long term care? The sad fact is that most people don’t know the answer to that question. But a solution is available.

As baby boomers leave their careers behind, long term care insurance will become very important in their financial strategies. The reasons to get an LTC policy after age 50 are very compelling.

Your premium payments buy you access to a large pool of money which can be used to pay for long term care costs. By paying for LTC out of that pool of money, you can preserve your retirement savings and income.

The cost of assisted living or nursing home care alone could motivate you to pay the premiums. Genworth Financial conducts a respected annual Cost of Care Survey to gauge the price of long term care in the U.S. The 2010 report found that

• In 2010, the median annual cost of a private room in a nursing home is $75,190 or $206 per day – $14,965 more than it was in 2005.
• A private one-bedroom unit in an assisted living facility has a median cost of $3,185 a month – which is 12% higher than it was in 2009.
• The median payment to a non-Medicare certified, state-licensed home health aide is $19 in 2010, up 2.7% from 2009.¹

Can you imagine spending an extra $30-80K out of your retirement savings in a year? What if you had to do it for more than one year?

AARP notes that approximately 60% of people over age 65 will require some kind of long term care during their lifetimes.²

Why procrastinate? The earlier you opt for LTC coverage, the cheaper the premiums. This is why many people purchase it before they retire. Those in poor health or over the age of 80 are frequently ineligible for coverage.

What it pays for. Some people think LTC coverage just pays for nursing home care. That’s inaccurate. It can pay for a wide variety of nursing, social, and rehabilitative services at home and away from home, for people with a chronic illness or disability or people who just need assistance bathing, eating or dressing.³

Choosing a DBA. That stands for Daily Benefit Amount – the maximum amount that your LTC plan will pay per day for care in a nursing home facility. You can choose a Daily Benefit Amount when you pay for your LTC coverage, and you can also choose the length of time that you may receive the full DBA on a daily basis. The DBA typically ranges from a few dozen dollars to hundreds of dollars. Some of these plans offer you “inflation protection” at enrollment, meaning that every few years, you will have the chance to buy additional coverage and get compounding – so your pool of money can grow.

The Medicare misconception. Too many people think Medicare will pick up the cost of long term care. Medicare is not long term care insurance. Medicare will only pay for the first 100 days of nursing home care, and only if 1) you are getting skilled care and 2) you go into the nursing home right after a hospital stay of at least 3 days. Medicare also covers limited home visits for skilled care, and some hospice services for the terminally ill. That’s all.²

Now, Medicaid can actually pay for long term care – if you are destitute. Are you willing to wait until you are broke for a way to fund long term care? Of course not. LTC insurance provides a way to do it.

Why not look into this? You may have heard that LTC insurance is expensive compared with some other forms of policies. But the annual premiums (about as much as you’d spend on a used car from the late 1990s) are nothing compared to real-world LTC costs.⁴ Ask your insurance advisor or financial advisor about some of the LTC choices you can explore – while many Americans have life, health and disability insurance, that’s not the same thing as long term care coverage.

Citations

1. genworth.com/content/etc/medialib/genworth_v2/pdf/ltc_cost_of_care.Par.85518.File.dat/Executive%20Summary_gnw.pdf [4/10]
2. aarp.org/families/caregiving/caring_help/what_does_long_term_care_cost.html [11/11/08]
3. pbs.org/nbr/site/features/special/article/long-term-care-insurance_SP/ [11/11/08]
4. longtermcare.gov/LTC/Main_Site/Paying_LTC/Private_Programs/LTC_Insurance/index.aspx [6/25/09]

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Originally posted. July 2, 2010

Four tips for recovering from unemployment.

Any period of unemployment is fraught with stress – both personal and financial. While landing that formerly-elusive new job can be a relief, it is only the first step on the road to recovery from unemployment. This transition time is akin to breaking the surface after being underwater for several minutes. It’s a relief to be breathing again and feel the sun on your face, but it’s no time to relax. You must start swimming right away to get back to a healthy financial shore.

Here are four steps you can take to help make sure your recent unemployment doesn’t cast a long shadow across your future financial health.

Continue to live lean. More likely than not, you weren’t buying $4 coffees while unemployed. Five star restaurants were out too. Hamburger may have replaced steak. You may want to continue to follow that pattern. We tend to grow into our incomes, our budgets bloating along with our salaries. Fighting that urge will help with the rest of the steps to unemployment recovery.

Protect yourself ASAP. The longer your unemployment lasts the more important basic survival becomes. Someone who is unemployed may let life insurance, disability insurance or health insurance policies lapse as they try to keep current on the mortgage, pay utilities and put groceries in the pantry. Sometime during the first few days of your employment you should enroll in whatever benefits you need that your company offers. If the new firm does not offer the coverage you need, make an appointment with an insurance professional and use part of your first paycheck to protect you and your family. Remember, the income from your new job won’t benefit anyone if a catastrophic illness, disability or death suddenly takes it away.

Develop a plan to pay down your debts. When you have a job, debts are a nuisance. When you don’t have a job, they may become a threat to your future financial well-being. While it’s normal to hope that you never have to go through unemployment again, you must start preparing for the possibility.

If you are behind on your mortgage, call your lender to let them know of your new job and to work with them on a plan to catch up on your payments. If they are unwilling to work with you, consider using a Federal resource such as those offered by the U.S. Housing and Urban Development Administration.

While there are fewer similar programs for car loans, calling your lender and trying to develop a plan for a loan you’re behind on should be your first step.

All too often during unemployment, credit cards may be used to get by when cash is low. While your interest rates may have been low when you initially signed up for the card, new legislation has caused a spike in credit card rates.¹ Rates of 20% – 30% are not uncommon as banks react to new rules. Paying down these balances should also be a primary goal.

Remember to start paying yourself. Whether you call it a rainy day fund, a nest egg or emergency cash, slowly, paycheck by paycheck, begin paying yourself a fraction of your salary. Some experts will argue that a family should keep six months to one year’s worth of expenses in the bank for unexpected events such as a blown car engine, the roof caving in, or another round of unemployment.¹ For many families, that may feel like an insurmountable sum. But as the old joke goes “How do you eat an elephant?” The answer: “One bite at a time”. Paying yourself has to be done paycheck-to-paycheck, little by little.

Citations.

1. http://www.marketwatch.com/story/credit-cards-gouge-consumers-ahead-of-new-law-2009-11-06 [11/10/09]

Originally posted. February 22, 2010