Should I worry if my 401k savings are down?

Contributed by: Robert Ingram, CFP®

It can be scary when financial markets are volatile and selloffs happen. Understandably, many are concerned about how COVID-19 will impact the economy, our health, and our financial security. These fears and the volatile markets that follow can temp retirement savers to make drastic changes to their investment portfolios; some may even cease investing entirely. For example, if you watch your 401(k) continue to lose value, you may want to stop contributing. However, I’ll explain why you should stick with your current long-term savings and investment plan.

Why Its Beneficial to Keep Contributing

Contributing to a retirement plan like a 401(k) or 403(b) is still one of the best ways for most Americans to save and build wealth for retirement, particularly in times of economic uncertainty. 

• Tax Benefits 

  Contributions to most 401(k) plans are made pre-tax, meaning these amounts are excluded from your taxable income in the year they are made. This reduces your current income taxes. It also allows those savings to grow tax-deferred year-after-year until they are withdrawn.

  Employer plans that offer a Roth designated account (i.e. a Roth 401(k) or Roth 403(b)) can present a great opportunity for investing. Roth contributions are made after-tax, so those amounts do not reduce your taxable income like the 401(k) does. However, those savings grow tax-deferred. The withdrawals and earnings are tax-exempt, provided you are at least age 59 ½ and have held the account for at least 5 years. This tax-free growth can be a powerful tool, especially for individuals that may be in a higher income tax bracket in the future.

• Opportunity To Buy Low

  For investors that are still contributing to their plans, a downturn in markets actually presents an opportunity to invest new savings into funds at lower prices. This allows the same amount of contributions to buy more shares. As markets and economic conditions rebound, you will have accumulated more shares of investments that could grow in value.

• Matching Contributions

  Need another incentive to keep those contributions going? Don’t forget about opportunities to receive employer matching with retirement plans. If your employer offers a 401(k) match, you would receive additional savings on top of your own contributions. Let’s say your employer matches 50% on contributions you make up to 6% of your salary. By putting 6% of your income into your 401(k), your employer would contribute an extra 3%. That’s like earning a 50% return on your invested contributions immediately. Those extra contributions can then buy additional shares which can also compound over time. 

Should I Ever Consider Stopping Contributions?

Even in a booming economy and during the strongest bull market, it’s important to have a strong financial foundation in place before deciding to invest over the long-term. Having key elements of your day-day-finances as stable as possible is necessary as we navigate the incredible challenges created by COVID-19. A few examples include:

• Control Over Your Cash Flow

  Do you know exactly how much money you earn and spend? Understanding where your income exceeds your expenses gives you the fuel to power your savings. How secure is your employment? Are you in an industry directly or indirectly impacted by the economic shutdowns due to COVID-19? What would happen to your cash flow if you had a reduced income? If there are other expenses you could cut in order to maintain your contributions, you should still try to contribute. However, if you need every dollar possible to pay your bills, you would have no choice but to suspend your 401(k) contributions.

• Cash For Any Short-Term Needs

  Having cash reserves is a critical part of a sound financial plan. If an unexpected expense occurs or you had a loss of income, be sure to have cash savings to draw from rather than being forced to sell investments that may less valuable or to use credit cards with high-interest debt. If your savings is less than a month’s worth of normal expenses, you should consider focusing your efforts on reinforcing your cash reserve rather than on your retirement plan. Then, ideally, you should work towards building 3 to 6 months’ expenses for your emergency fund as you continue to save for retirement or other goals.

• Tackling Your Debt

  If you have high-interest rate debt that you are working to pay off and are unable to find additional savings in your budget to increase your payment amounts, it could make sense to redirect your retirement plan contributions to pay the debt down first. On the other hand, if your employer offers a company match, you should still consider contributing at least enough to get the full amount of matching dollars (remember that free money could see a return of 50% or more). You could then redirect any amounts you are contributing above that maximum match percentage.

Your situation and needs are unique to you. It’s important to work closely with a financial advisor when making decisions, especially in these incredibly difficult times.

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

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Keep in mind that investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results.

Can I Afford To Buy A Second Home In Retirement?

Contributed by: Robert Ingram, CFP®

It’s a dream for many Americans as they envision retirement, having a second home as a vacation getaway, a seasonal escape, or a primary residence someday.  Even with the relatively mild winter we’ve just experienced in Michigan, it’s easy to appreciate the idea of living away during the cold months or enjoying a summer home up North.  But before you can live the dream, do your due diligence and crunch the numbers.

Retirement income expenses include the daily cost of living and the things you want to enjoy.  Making a large purchase, such as buying a second home, will take a significant chunk of your savings.  If you’ve underestimated the cost, it will wreak havoc on your retirement income.  

So, how realistic is your second home retirement plan? Factor in our suggestions below.

Purchasing costs

If you plan to buy the home using a mortgage, you will of course have a monthly payment.  While the continued low interest rates may help with the home’s affordability, this payment does add to the expenses that your retirement income sources will support.  Calculate your withdrawal rate (the percentage of savings needed to be withdrawn each year) and determine if it’s sustainable over your retirement years.

Now, if you’re able to purchase the property without a mortgage, yes, you would avoid paying interest and you would have no monthly payment.  On the other hand, using a portion of your retirement savings to purchase the home could mean that you have fewer assets reserved for other retirement spending needs.  Consider the impact it may have on the sustainability of your retirement income and whether purchasing or financing the property is more advantageous.

Don’t forget about property taxes. They’re ongoing expenses that you must factor into your budget. They vary widely depending on the state and local community.  Consider any difference in tax rates; non-homestead property is taxed higher than homestead property.

Additional costs

Unfortunately, we know that the cost of owning a home doesn’t end with the purchase. This is certainly true with a second home as well.  Depending on the property type, location, and climate/environment there may be additional costs that you aren’t used to with your current home.  It’s vital that your plan supports these costs as well.  Some examples include:

• Insurance: You’ll pay annual premiums for homeowner’s insurance on two properties.  Plus, homes with higher risk (e.g. hurricane prone southern states) often require additional flood or wind damage insurance.  In some cases, this nearly doubles the cost of the new policy.

• Condo/Association Fees:  Buying a condominium or a standalone house in a community with a neighborhood association will likely mean additional monthly fees.  Homeowners associations may also impose special assessments during the time you own the property for maintenance projects, community amenities, etc.  Understanding the previous history of assessments and the need for future projects can help you better prepare for those potential costs.

• Maintenance on two properties:  Now you have two homes to maintain.  If your second property is far away or you won’t visit often, you may need to hire people locally to provide the maintenance services for you.

• Home security:  Especially for a home that is unoccupied for long periods of time, you want to protect it from vandalism, trespassing, and burglary.  That could mean investing in security systems or working with local service providers to routinely check-in on the property.   

• Heating and cooling year-round: Unlike cottages or houses up North that you can close down and winterize, vacation homes in warm climates may require you to run the air conditioning when you’re not there.  Issues like mold and mildew can be a problem when temperatures and humidity are too high, which is another reason you may need to hire local services to make sure everything is working properly.

• Insect/pest control:  Your second home may be in a region with insects or other critters that require more regular/aggressive pest control.  Add this to your list of monthly or annual maintenance expenses.

What if I plan to rent out my second home?

• Renting out your second home could be an excellent way to generate additional income to offset the costs of ownership.  However, you could face lifestyle compromises. Here are some considerations:

•  Local rules on renting:  It’s critical to understand any local government ordinances or homeowners association restrictions on using your property as a rental.  In some cases, short-term rentals are not allowed or there are limits on the total number of rentals.

• Property management:  The farther the distance between your rental and primary properties, the greater chance you’ll need to hire a property manager to provide on-site service for your vacation guests or long-term tenants.  Property managers can advertise, book renters, and manage financial transactions.  The cost to outsource these services is typically between 10-35% of the rental cost.

•  Additional insurance coverage:  Tenants may not be covered by your insurance.  Homeowners insurance often covers incidents only when the property is owner-occupied.  You may need to add a form of landlord insurance, depending on factors such as the frequency and amount of days you will have the property rented.  Review your policy to be sure.

• Extra maintenance and repair:  You may face repairs and/or need to replace furniture.  Studies suggest that the cost to maintain a vacation rental is 1.5-2% of the property value each year.

The decision to buy a second home involves a combination of both lifestyle and financial considerations. Build a sound plan by balancing your priorities.  Consult with your financial planner as you work through these important life goals, and if we can be a resource for you, please reach out to us! 

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Harvesting Losses in Volatile Markets

Contributed by: Robert Ingram, CFP®

In times of market volatility and uncertainty there are still financial strategies available as part of a sound long-term investment plan. One example to keep in the toolbelt can be the use of tax-loss harvesting. It’s when you sell a capital asset at a loss in order to reduce your tax liability.

While this sounds counter-intuitive, taking some measures to harvest losses strategically allows those losses to offset other realized capital gains. In addition, remaining excess losses can offset up to $3,000 of non-investment income, with remaining losses carrying over to the next tax year. This can go a long way in helping to reduce tax liability and improving your net (after tax) returns over time. So, how can this work?

Harvesting losses doesn’t necessarily mean you’re giving up on the position entirely. When you sell to harvest a loss you cannot make a purchase into that security within the 30 days prior to and after the sale.  If you do, you are violating the wash sale rule and the loss is disallowed by the IRS.  Despite these restrictions, there are several ways you can carry out a successful loss harvesting strategy.

Tax-Loss Harvesting Strategies

• Sell the position and hold cash for 30 days before re-purchasing the position. The downside here is that you are out of the investment and give up potential returns (or losses) during the 30 day window.

• Sell and immediately buy a position that is similar to maintain market exposure rather than sitting in cash for those 30 days. After the 30 day window is up you can sell the temporary holding and re-purchase your original investment.

• Purchase the position more than 30 days before you try to harvest a loss. Then after the 30 day time window is up you can sell the originally owned block of shares at the loss. Being able to specifically identify a tax lot of the security to sell will open this option up to you.

Common Mistakes To Avoid When Harvesting

• Don’t forget about reinvested dividends. They count. If you think you may employ this strategy and the position pays and reinvests a monthly dividend, you may want to consider having that dividend pay to cash and just reinvest it yourself when appropriate or you will violate the wash sale rule.

• Purchasing a similar position and that position pays out a capital gain during the short time you own it.

• Creating a gain when selling the fund you moved to temporarily that wipes out any loss you harvest. You want to make the loss you harvest meaningful or be comfortable holding the temporary position longer.

• Buying the position in your IRA. This violates the wash sale rule. This is identified by social security numbers on your tax filing.

As with many specific investment and tax planning strategies, personal circumstances vary widely.  It is critical to work with your tax professional and advisor to discuss more complicated strategies like this. If you have questions or if we can be a resource, please reach out!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Bob Ingram and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

The SECURE Act Changes the “Stretch IRA” Strategy for Beneficiaries

Contributed by: Robert Ingram, CFP®

It’s hard to believe that we’re nearly two months into the New Year. As people have had some time to digest the SECURE Act, which was signed into law in late December, our Center team has found that many clients are still trying to understand how these new rules could impact their financial plans. While several provisions of the Act are intended to increase retirement savers’ options, another key provision changes the rules for how non-spouse beneficiaries must take distributions from inherited IRAs and retirement plans.

Prior to the SECURE Act taking effect January 1st of this year, non-spouse beneficiaries inheriting IRA accounts and retirement plans such as 401ks and 403(b)s would have to begin taking at least a minimum distribution from the account each year. Beneficiaries had the option of spreading out (or “stretching”) their distributions over their own lifetimes.

Doing so allowed the advantages of tax deferral to continue for the beneficiaries by limiting the amount of distributions they would have to take from the account each year. The remaining balance in the account could continue to grow tax-deferred. Minimizing those distributions would also limit the additional taxable income the beneficiaries would have to claim.

What has changed under the ‘SECURE Act’?

For IRA accounts and retirement plans that are inherited from the original owner on or after January 1, 2020:

Non-spouse beneficiaries who are more than 10 years younger must withdraw all of the funds in the inherited account within 10 years following the death of the original account owner.

This eliminates the non-spouse beneficiary’s option to spread out (or stretch) the distributions based on his or her life expectancy. In fact, there would be no annual required distributions during these 10 years. The beneficiary can withdraw any amount in any given year, as long as he or she withdraws the entire balance by the 10th year.

As a result, many beneficiaries will have to take much larger distributions on average in order to distribute their accounts within this 10-year period rather than over their lifetime. This diminishes the advantages of continued tax deferral on these inherited assets and may force beneficiaries to claim much higher taxable incomes in the years they take their distributions.

Some beneficiaries are exempt from this 10-year rule

The new law exempts the following types of beneficiaries from this 10-year distribution rule (Eligible Designated Beneficiaries). These beneficiaries can still “stretch” their IRA distributions over their lifetime as under the old tax law.

• Surviving spouse of the account owner

• Minor children, up to the age of majority (however, not grandchildren)

• Disabled individuals

• Chronically ill individuals

• Beneficiaries not more than 10 years younger than the original account owner

What if I already have an inherited IRA?

If you have an inherited IRA or inherited retirement plan account from an owner that died before January 1st, 2020, don’t worry. You are grandfathered. You can continue using the stretch IRA, taking your annual distributions based on the IRS life expectancy tables.

Your beneficiaries of the inherited IRA, however, would be subject to the new 10-year distribution rule.

What Are My Planning Opportunities?

While it still may be too soon to know all of the implications of this rule change, there are number of questions and possible strategies to consider when reviewing your financial plan. A few examples may include:

• Some account owners intending to leave retirement account assets to their children or other beneficiaries may consider whether they should take larger distributions during their lifetimes before leaving the account to heirs.

• Roth IRA Conversions could be a viable strategy for some clients to shift assets from their pre-tax IRA accounts during their lifetimes, especially if they or their beneficiaries expect higher incomes in future years.

• For individuals age 70 ½ or older, making charitable gifts and donations directly from your IRA through Qualified Charitable Distributions (QCD) could be even more compelling now.

• Clients with IRA Trusts as part of their estate plan should review their documents and their overall estate plan to determine if any updates are appropriate in light of the this new 10-year rule.

It’s important to remember that your individual situation is unique and that specific strategies may not be appropriate for everyone. If you have questions about the SECURE Act or you’re not sure what these changes mean for your own plan, please don’t hesitate to contact us!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Keeping Your New Year’s Resolutions in 2020

Contributed by: Robert Ingram, CFP®

Set a goal to keep your goals. With the start of January, it’s that time of year again.  You’ve likely made one or more New Year’s resolutions whether it’s getting back to the gym, improving your financial life, or spending more time with family.

But sometimes the goals we set can be hard to commit to. We begin with the best intentions and later find that we’ve broken our resolutions within the first few months.  In fact, a U.S. News & World Report survey says as many as 80% of resolutions fail by the middle of February.

So, how can we be part of the 20% who succeed?  

Try these ideas:

• Keep your goals focused: You may have several things you wish to accomplish in 2020, but begin with no more than 3 goals.  Juggling too many can make it difficult to stay organized. Your energy and attention can only stretch so far. Focusing on fewer goals helps you prioritize what you value the most.

• Be specific: Saying “I want to lose weight” or “I want to save more for retirement” may be well-intentioned, but it’s not specific enough to wrap your mind around.  Instead, define your goals further by saying “lose 10 pounds over the next the 3 months” or “save an additional 5% of your income in your 401(k)”.

• Make them actionable and measurable: Now that your goals are specific, it’s time to make a plan.  If your goal is to lose weight, plan on going to the gym. Write down what days you’ll go and what exercises you’ll do. This allows you to quickly assess your progress and figure out what adjustments are necessary.

• Shorten the timeframe: Don’t risk losing motivation. Break down quarterly and monthly goals. Making progress more frequently makes goals more manageable, even if the wins are smaller. If your goal is to save money, look at your spending habits by the week or even the day. 

• Be accountable to a third party: Have someone hold you accountable or even motivate you. A family member, friend, colleague, or mentor could help. If your goals are financial, of course your planner can be your accountability partner…helping you establish goals and developing actionable steps.

Like any good plan, the best way to achieve success is to put it in writing, take action, and improve along the way. Wishing you a healthy and prosperous New Year!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Webinar in Review: Year-End Tax and Planning Strategies

Contributed by: Robert Ingram, CFP®

With 2019 winding down and the holidays right around the corner, it’s understandable when our personal finances don’t always get our full attention this time of year. However, you should keep several important and timely tax and financial planning strategies top of mind before the year ends. During this 60-minute discussion, we will cover the following topics and more:

•       Tax planning strategies to consider for your investments and retirement accounts

•       Charitable giving in light of the recent tax law changes

•       Retirement planning tips and updates on 2020 contribution limits

If you weren’t able to attend the webinar live, we’d encourage you to check out the recording below.

There are time stamps provided so you can fast-forward to the topics you are most interested in.

• 3:00- Medicare Overview

• 6:30- Required Minimum Distributions (RMD)

• 12:00- Tax Reform Refresher & Income Tax Brackets

• 22:00- Long Term Capital Gains Rates

• 23:30- Efficient Charitable Giving & Donating Appreciated Securities

• 34:00- Roth IRA Conversions

• 41:00- Tax Efficient Investing & Tax Loss Harvesting

• 46:00- Employer Retirement Plans

• 49:00- Health Savings Accounts (HSA)

• 54:00- Gifting Ideas

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

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Changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While familiar with the tax provisions of the issues to be discussed, Raymond James and its advisors do not provide tax or legal advice. You should discuss tax or legal matters with the appropriate professional.

Reducing Your Medicare Premium Surcharges

Contributed by: Robert Ingram, CFP®

For many clients with incomes above a certain level, Medicare premiums may be higher for Part B and Part D. As a Medicare recipient’s income exceeds specific thresholds, they may pay adjusted amounts in addition to the baseline Part B and/or Part D premiums.

Now, what if you have been paying these Medicare surcharges, but you experience a drop in your income? Can you also get your Medicare surcharge reduced? The answer is, possibly yes.

If you experience a change to your income because of certain life events, you can request that the Social Security Administration (SSA) review your situation and use your more recent income to determine what premium adjustment (if any) should apply. Examples of these life-changing events include:

• Work stoppage or work reduction

• Death of a spouse

• Marriage

• Loss of pension income

• Divorce or Annulment

• Loss of income-producing property

You might be asking yourself, “Why do I have to request this? Aren’t Medicare premiums automatically adjusted according to my income?”. A big reason for making the change request when you experience a qualifying change in income has to do with how and when the SSA measures your income.

Income-Related Monthly Adjustment Amount (IRMAA)

To determine whether your income makes you subject to an Income-Related Monthly Adjustment Amount (IRMAA) to the regular Medicare Part B or Part D premiums for the current year, the SSA looks at the income you reported to the IRS for the previous two years. This means that your Modified Adjusted Gross Income (Adjusted Gross Income with tax-exempt income added back) reported for 2017 determines your Medicare premiums for 2019. 

For individuals paying Part B premiums, for example, the standard premium in 2019 is $135.50 per month. However, the following table illustrates what you would pay in 2019 for Part B depending on your 2017 income.

For a couple who filed a joint return with income above $170,000 and up to $214,000 in 2017, each spouse paying for Medicare Part B may pay an additional $54.10 per month above the standard premium (a total of $189.60 monthly) in 2019. A couple with income that falls between $320,000 and $750,000 (or an individual filing single with income between $160,000 and $500,000) in 2017 could each pay an additional $297.90 above the standard premium, for a total of $433.40 per month in 2019.

If an individual (or couple) experienced a drop in income for 2019, it might normally take until 2021 for the Medicare premiums to reflect any reduction based on the 2019 income. Let’s say the couple who had reported income between $320,000 and $750,000 retires in 2019 and sees their income drop to an expected $165,000. The expected income falling within the $170,000 threshold could mean a difference of $297.90 per month (each!) in Medicare Part B premiums (from $433.40 to $135.50).

If a qualifying life event caused the drop in expected income, then filing a request with the SSA could mean a more immediate change in Medicare premiums, rather than waiting for the savings until 2021.

How do you request the premium surcharge reduction? 

If you think you have experienced a reduction in income due to one or more of the qualifying events, make your request to the Social Security Administration by submitting the Medicare Income-Related Monthly Adjustment Amount –Life-Changing Event form (form SSA-44).

Along with this form, you will also provide supporting documentation for your Modified Adjusted Gross Income and your life-changing event (see form SSA-44 instructions). Examples of supporting documentation may include items such as:

• Federal income tax return

• Signed statements from employers, pay stubs

• Certified documents for transfers of a business

• Marriage certificate

• Certified death certificates

• Letter or statement from pension administrator explaining a reduction/termination

For other disagreements with an IRMAA determination, you have the right to appeal. You can file an appeal online (socialsecurity.gov/disability/appeal) and select “Request Non-Medical Reconsideration”, file a Request for Reconsideration form, or contact your local Social Security office.

If you disagree with an IRMAA determination because your reported Modified Adjusted Gross Income is incorrect, you need to address the correction first with the IRS.

Because these Medicare surcharges are determined each year, you have opportunities to do more proactive income and tax planning leading up to and after Medicare enrollment. Employing different strategies that help control your Adjusted Gross Income could also help control potential Medicare premiums in future years. If you have questions about your particular situation, feel free to reach out to us!

• Want more information about Medicare? Check out The Center’s Medicare FAQ

• Looking for financial strategies and tax tips for year-end? Check out this webinar.

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Open Enrollment Season for Health Insurance and Medicare 2020

Contributed by: Robert Ingram, CFP®

It’s hard to believe we’re already down to the last official days of summer and about to begin another fall season. And along with the foliage, football games, and cider mills comes the health insurance open enrollment season for many employers and for Medicare.

Now, I know reading through benefits manuals may sound about as fun as cleaning out the gutters or raking those autumn leaves. But as our health care costs continue to rise (federal government actuaries estimate U.S. health care spending averaged $11,212 per person in 2018), making smart decisions is critical to keeping more money in your wallet.

Investing a little time to make sure your coverage meets your needs, and limits your financial risks, can really pay off.

Employer-sponsored health insurance plans

Many employers offer an annual open enrollment this time of year, giving employees an opportunity to select, or make changes to, benefits effective in the next calendar year.

Consider these points as you make your health insurance elections for 2020:

• Review and compare your available plan offerings (e.g. PPO vs. HMO). For some key differences among plan types, click here.

• Focus on more than just the premium costs. Compare the potential total out-of-pocket costs, including deductibles, copays, and the annual out-of-pocket maximums.  

• Consider your health history and the services you may use in the next year. Are you likely to hit the deductible or maximum out-of-pocket costs each year? The benefit of lower premiums for a high deductible plan may be outweighed by higher overall out-of-pocket costs. Are you less likely to hit the deductible, or do you have excess cash in savings to cover unexpected health care costs? A lower premium, high deductible plan may be a good choice.

• Consider whether funding an available Flexible Spending Account (FSA) for health care or Health Savings Account (HSA) makes sense. Keep in mind some key differences:

  • HSA requires a high deductible health plan.

  • You generally must spend FSA dollars on eligible expenses by the end of each plan year or forfeit unspent amounts (use-or-lose provision).

  • HSA balances carryover (no use-or-lose provision).

• For working spouses, it is also important to review each of your employer-sponsored health plan options and consider any limitations on spousal coverage. It has become increasingly common for employers to add surcharges to the premium for spousal coverage, or to entirely exclude coverage for spouses who have access to their own employer-sponsored coverage.

Medicare Open Enrollment

The *Open Enrollment for Medicare Advantage and Medicare prescription drug coverage window opens each year for anyone currently enrolled in Medicare to make changes to their plan, add certain coverages, or enroll in a new plan. It also allows first-time enrollment for individuals who have qualified for Medicare but have not previously enrolled at age 65 or during a Special Enrollment Period.

 This window opens from October 15 through December 7. Changes you can make include: 

• Changing from Original Medicare (Part A/Part B) to a Medicare Advantage Plan

• Changing from a Medicare Advantage Plan back to Original Medicare

• Switching to another Medicare Advantage Plan

• Joining a Medicare Prescription Drug Plan (Part D)

• Switching from one Medicare drug plan to another Medicare drug plan

• Dropping your Medicare prescription drug coverage

*There is also a Medicare Advantage Open Enrollment from January 1 through March 31, but only for those currently enrolled in a Medicare Advantage Plan. It allows changing from one Medicare Advantage Plan to another, or changing from a Medicare Advantage Plan back to Original Medicare.

Unlike the fall open enrollment period, this window does NOT allow changes such as switching from Original Medicare to a Medicare Advantage Plan, joining a Medicare Prescription Drug Plan, or switching from one Medicare Prescription Drug Plan to another if enrolled in Original Medicare.

What if I am employed at age 65 or older?

For employees age 65 and older who are reviewing their health coverage options, the decisions can become more complicated due to Medicare eligibility. If such employees have access to great employer group health insurance coverage at very reasonable costs, it could make sense to continue this coverage even while Medicare eligible. This can lead to additional questions such as:

• Should I enroll in Medicare if I have other coverage?

• For which parts of Medicare should I apply?

With more than one potential payer (e.g. employer health insurance provider and Medicare), “coordination of benefits” rules determine which pays first. Understanding how your employer coverage coordinates with Medicare is an important factor in your decision-making process.

For employers with more than 20 employees, the group health plan generally pays first, and Medicare is secondary. This means that if the group plan does not pay all of the bill, Medicare would pay based on its coverage structure, what the group plan paid, and what the provider charged. Because the group health plan is the primary payer, you may have more flexibility to apply for portions of Medicare, such as selecting Part A (which is premium-free for most everyone) and deferring Part B (which has a monthly premium).

If an employer has fewer than 20 employees, Medicare generally pays first, and the group health plan becomes secondary. In this case, as an eligible employee, you should probably enroll in Medicare Parts A and B. (Medicare Advantage Plans also cover services under Parts A and B.) Failing to enroll in both parts of Medicare could leave you responsible out-of-pocket for anything that Medicare would have covered.

While many factors apply to your own unique circumstances, here are some additional tips for employees age 65+ who are making Medicare enrollment decisions:

• Get the details of your employer-provided coverage in writing to help you decide how to handle Medicare choices. Confirm with your employer plan how benefits coordinate with Medicare.

• Coordinate with your spouse when evaluating your coverage options (just as you would if you were under age). If you are both still working at age 65, you can compare employer health plans and how they work with Medicare, as well as understanding any available spousal/family coverage options. Doing a little homework can help you choose the optimal plan.

• Are you contributing to a Health Savings Account (HSA)? By enrolling in any part of Medicare, you lose the ability to continue HSA contributions. Determine which is most important to you, enrolling in Medicare or continuing the HSA contributions.

• If enrolling in Original Medicare Parts A and B, don’t forget to look at Medicare Supplement Insurance (Medigap), which literally helps fill certain coverage gaps in traditional Medicare. 

Health care costs may be one of your largest expenses over your lifetime, and the planning decisions are often complex. Take advantage of these other great resources available to you:

• Have a Medicare question? Check out The Center’s Medicare FAQ.

• Want to learn more about Medicare Open Enrollment? Check out our latest webinar.

• For enrollment details and other information visit medicare.gov.

As always, if we can be a resource for you or someone you know, please get in touch.

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

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Source: https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nationalhealthaccountshistorical.html Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Prior to making a decision to purchase an insurance product, please consult with a properly licensed insurance professional.

3 Reasons to Get an Early Start on College Savings

Contributed by: Robert Ingram

The back-to-school season is right around the corner. And if you have school-aged children, the thought of planning for their college education may be enough to cause your own case of back-to-school jitters. Costs of a four-year education at many colleges and universities are already well into the six-figure range (per child!). For many families hoping to cover a large portion of the costs, significant savings goals are likely required. That’s why, more than ever, you should create a college savings plan as early as possible. 

College Costs Keep Rising

When planning to fund an education goal that may be years away, focusing on today’s costs is (unfortunately) just the beginning. Like the prices of many other goods and services, college costs have increased over time. These costs, however, have been rising much faster than those of other household expenses. According to JPMorgan Asset Management’s research, tuition costs have grown by an average annual rate of 6.4% since 1983. At this rate, today’s cost of tuition would double in about 11 years. Even if this rate of inflation slowed somewhat, potential college costs are eye-opening.

The illustration below shows projected total tuition, fees, and room and board expenses for a four-year, public or private college education, with a 5% annual increase in costs.

Source: JPMorgan Asset Management College Planning Essentials, using The College Board, 2018 Trends in College Pricing. Future college costs estimated to inflate 5% per year. Average tuition, fees and room and board for public college reflect four-year, in-state charges.

As you can see in this example, a child who is 10 years old today could expect a total cost of $136,085 at an in-state public college or university. Her education at a private college could cost over $308,000.

The power of compound growth on your savings and invested earnings can be one of your best allies as you save for these potential future costs. Let’s say the family of our 10-year-old child began saving $3,600 each year. At 7% growth compounded annually, they would have $36,935 by the time she turned 18. What if, instead, they began saving that same amount eight years earlier, when the child was age 2? At the same 7% annual return, they would have $100,396. The sooner you can begin saving and investing, the more time compounding has to work its magic.

The Burden of Student Loan Debt

As the costs of college have continued to rise, the amount of student loan debt has grown as well. A recent report from the New York Federal Reserve Consumer Credit Panel showed that outstanding student loan debt totaled $1.44 trillion as of September 30, 2018. In addition, studies from the Institute of College Access and Success found that 65% of students graduating in 2017 from public and private, non-profit colleges had student loans, and the average borrower owed $28,650.

Loans can help provide students the funds to complete their educations, but a large debt balance can have serious implications for a graduate’s personal finances. As new graduates begin their careers, servicing this student loan debt can take up a large portion of their budgets. More dollars going to pay down debt means fewer dollars available for other needs, for building an emergency fund, saving for a house, or saving for retirement. (Click here to see some financial tips for new graduates). Parents managing student loan debt can also feel similar constraints. Often, parents in the home stretch toward retirement are paying down debt instead of funding their own retirement plans. 

Of course, every dollar of college expenses paid from savings can mean one less dollar of debt to service. More than that, the longer you have to build college savings, the greater the difference between the out-of-pocket cost of paying for college with debt and the out-of-pocket cost of saving. Take a look at the following chart, which compares the cost of funding education through loans (the principal borrowed and interest) with the cost of saving over 18 years.

In this hypothetical example, the total out-of-pocket amount of $65,800 contributed to the savings plan combined with investment earnings of 6% annually provided the total balance of $117,698. Borrowing that same $117,698 could result in total spending of $168,390 for the loan principal and interest.

What about Financial Aid?

If you’re like many clients thinking about college planning, you may be concerned that your savings and investments will negatively affect your eligibility for college aid. You might be worried that the more you save, the less likely it is that you will receive assistance.

To determine financial aid eligibility, schools use an Expected Family Contribution (EFC), which is a measure of a family’s financial strength. The EFC formula takes into account the incomes and assets of both the student and the parents. While the amount of savings and investment assets are considered, assets – and particularly those held in parents’ names – are a much smaller factor than incomes.  

The EFC formula includes up to 50% of the student’s income and 47% of parents’ income. On the other hand, the EFC considers up to 20% of the student’s assets and only 5.64% of the parents’ non-retirement assets, above a protected amount. Although balances in college savings plans are counted along with other non-retirement assets, the smaller percentage applied to parental assets can allow parents to build some meaningful savings without drastically affecting their student’s EFC. For a closer look at the financial aid process, check out our college planning webinar.

As with other areas of financial planning, college savings involves balancing your goals and priorities in order to most effectively align your resources. Your own unique circumstances will determine the right amounts to save, and when and where to save. If we can be a resource for any of your college planning needs, please let us know!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

5 Financial Tips for Recent College Graduates

Contributed by: Robert Ingram

Congratulations Class of 2019! This is an exciting time for recent college graduates as they begin the next phase in their lives. Some may take their first job or start along their career path, while others may continue their education. Taking this leap into the “real world” also means handling personal finances, a skill not taught often enough in school. Fortunately, by developing good financial habits early and avoiding costly mistakes, new graduates can make time an ally as they set up a solid financial future.

Here are five financial strategies to help get your post-college life on the right path:

1. Have a Spending Plan

The idea of budgeting may not sound like a lot of fun, but it doesn’t have to be a chore that keeps you from enjoying your hard-earned paycheck. Planning a monthly budget helps you control the money coming in and going out. It allows you to prioritize how you spend and save for goals like buying a home, setting up a future college fund for children, and funding your retirement.

Everyone’s budget may be a little different, but two spending categories often consume a large portion of income (especially for younger people early in their careers): housing costs and car expenses. For someone who owns a home, housing costs would include not only a mortgage payment, but also expenses like property taxes and insurance. Someone renting would have the rental cost and any rental insurance.

Consider these general guidelines:

• A common rule of thumb is that your housing costs should not exceed about 30% of your gross income. In reality, this percentage could be a bit high if you have student loans, or if you want more discretionary income to save and for other spending. Housing costs closer to 20% is ideal.

• A car payment and other consumer debt, like a credit card payment, can quickly eat into a monthly budget. While you may have unique spending and saving goals, a good guideline is to keep your total housing costs and consumer debt payments all within about 35% of your gross income.

2. Stash Some Cash for Emergencies

We all know that unexpected events may add unplanned expenses or changes to your budget. For example, an expensive car or home repair, a medical bill, or even a temporary loss of income can cause major financial setbacks.

Start setting aside a regular cash reserve or “rainy day” fund for emergencies or even future opportunities. Consider building up to six months’ worth of your most essential expenses. This may seem daunting at first, but make a plan to save this over time (even a few years). Set goals and milestones along the way, such as saving the first $1,000, then one months’ expenses, three months’ expenses, and so on, until you reach your ultimate goal.

3. Build Your Credit and Control Debt

Establishing a good credit history helps you qualify for mortgages and car loans at the favorable interest rates and gets you lower rates on insurance premiums, utilities, or small business loans. Paying your bills on time and limiting the amount of your outstanding debt will go a long way toward building your credit rating. What goes into your credit score? Click here.

• If you have student loans, plan to pay them down right away. Automated reminders and systematic payments can help keep you organized. To learn how student loans affect your credit score, click here.

• Use your credit card like a debit card, spending only what you could pay for in cash. Then each month, pay off the accumulated balance.

• Some credit cards do have great rewards programs, but don’t be tempted to open too many accounts and start filling up those balances. You can easily get overextended and damage your credit.

4. Save Early for the Long Term

Saving for goals like retirement might not seem like a top priority, especially when that could be 30 or 40 years away. Maybe you think you’ll invest for retirement once you pay off your loans, save some cash, or deal with other, more immediate needs. Well, reconsider waiting to start.

In fact, time is your BIG advantage. As an example, let’s say you could put $200 per month in a retirement account, like an employer 401(k), starting at age 25. Assuming a 7% annual return, by age 60 (35 years of saving), you would have just over $360,000. Now, say you waited until age 35 to begin saving. To reach that same $360,000 with 25 years of saving, you would need to more than double your monthly contribution to $445. Starting with even a small amount of savings while tackling other goals can really pay off.

Does your employer offer a company match on your retirement plan? Even better! A typical matching program may offer something like 50 cents for each $1 that you contribute, up to a maximum percentage of your salary (e.g. 6%). So if you contribute up to that 6%, your employer would add an extra 3% of your salary to the plan. This is like getting an immediate 50% return on your contribution. The earlier you can contribute, the more time these matching funds have to compound. 

5. Get a Little More Educated (about money and finances)

Ok, don’t worry. Forming good financial habits doesn’t require an advanced degree or expertise in all money matters. To build your overall knowledge and confidence, spend a little time each week, even just an hour, on an area of your finances and learn about a different topic.

Start with a book or two on general personal finance topics. You can find reference books on specific topics, from mortgages and debt to investments and estate planning. Information offered through news media or internet searches also can provide resources. And you can even find a blog not too far away (Money Centered Blog).

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.