The Fed Makes Its Move

The Fed Makes Its Move

Wall Street rallies as interest rates rise for the first time since 2006.

Provided by Jeff L. Holland, CLU, ChFC & Cory A. Samsil, CRPS

Interest Rates Are Up

U.S. monetary policy officially changed course Wednesday. Federal Reserve officials voted to raise the federal funds rate by a quarter of a percentage point, ending an unprecedented 7-year period in which it was held near zero. Nearly ten years had passed since the central bank had adjusted interest rates upward.1

  

The Federal Open Market Committee voted 10-0 in favor of the rate hike. It also raised the discount rate by a quarter-point to 1.0%.1

     

Addressing the media after the FOMC announcement, Federal Reserve chair Janet Yellen shared the central bank’s viewpoint: “With the economy performing well, and expected to continue to do so, the committee judged that a modest increase in the federal funds rate target is now appropriate, recognizing that even after this increase, monetary policy remains accommodative.”2

  

Equities started the day with minor gains, then advanced further. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite respectively advanced 1.28%, 1.45%, and 1.52% Wednesday. The yield on the 2-year Treasury hit a 5-year high of 1.021%. Gold rose $15.20 to close at $1,076.80 on the COMEX.3,4

  

As a December rate increase was widely expected, the real curiosity concerned the following press conference. Would Janet Yellen offer any hints about monetary policy in 2016?

  

She offered one: she said she doubted that any interest rate hikes in 2016 would be “equally spaced.” Aside from that remark, no new insights emerged; Yellen reemphasized that the Fed does not plan to raise rates aggressively.2

  

Investors gained more insight from the Fed’s latest dot-plot chart, which expresses the Federal Open Market Committee’s opinion on where the benchmark interest rate will be at near-term intervals. The new dot-plot forecasts four rate hikes during 2016, with the federal funds rate climbing toward 1.5% by the end of next year (the median projection is 1.4%).5

  

The dot-plot revealed benchmark interest rate targets of 2.4% for the end of 2017 and 3.3% for the end of 2018, slightly lower than the previously stated targets of 2.6% and 3.4%.5

  

That corresponds with the consensus of analysts surveyed by CNBC. Their expectation was for three quarter-point rate hikes across 2016, taking the federal funds rate toward 1%.6

  

Some analysts wonder if the next rate hike might occur at the FOMC’s March meeting. Nothing could be gleaned about that from Yellen’s press conference or the new FOMC announcement.6

  

With more tightening seemingly ahead, what is in store for the bull market? Bears may want to wait before making any gloomy pronouncements. While rising interest rates are commonly assumed to impede a bull market, this is not always the case. In fact, the S&P 500 advanced 15% during the last round of tightening (2004-06).7

   

Could higher interest rates decrease inflation pressure? That is a distinct possibility, and that would hurt wage growth and business growth. The Fed would like to see inflation in the vicinity of 2%, yet the Consumer Price Index is up only 0.5% in the past 12 months, held in check by a 14.7% annualized retreat in energy prices and a 24.1% annualized fall in gas prices. On the other hand, the Core CPI (minus food and energy prices) is up 2.0% in the past year.6

     

The Fed may have made just the right move at the right time. If it had waited until 2016 to tighten, a collective “uh-oh” might have been heard from pundits and analysts, with comments along the lines of “Does the Fed know something about the economy that we do not?”

  

As JPMorgan Private Bank chief U.S. investment strategist Kate Moore told CNNMoney this week, “Keeping interest rates at zero is enforcing the idea that the U.S. economy is fragile.” Years of easing certainly helped the bull market, though: Wednesday morning, the S&P 500 was 202% above its March 9, 2009 bear market low.2,7

       

Ultimately, the central bank felt the time had come for tightening. At Wednesday’s press conference, Yellen commented that data had led the Fed to raise rates – it had not made its move in response to any shifts in public opinion. “Consumers are in much healthier financial condition” than they once were, she remarked. The rate hike certainly expresses confidence in the economy, which could strengthen further in 2016.2

*This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

   

Citations.

1 – marketwatch.com/story/federal-reserve-lifts-interest-rates-for-first-time-since-2006-2015-12-16 [12/16/15]

2 – blogs.marketwatch.com/capitolreport/2015/12/16/live-blog-and-video-of-the-fed-interest-rate-decision-and-janet-yellen-press-conference/ [12/16/15]

3 – cnbc.com/2015/12/16/us-markets-fed.html [12/16/15]

4 – reuters.com/article/usa-bonds-idUSL1N1452HC20151216 [12/16/15]

5 – marketwatch.com/story/federal-reserve-dot-plot-still-signals-4-interest-rate-hikes-in-2016-2015-12-16 [12/16/15]

6 – latimes.com/business/la-fi-federal-reserve-rate-hike-20151216-story.html [12/16/15]

7 – money.cnn.com/2015/12/15/investing/stocks-markets-fed-rate-hike/ [12/15/15]

Save money!

DontThrowYourMoneyAwayAdOctober2014

Did you know the average cost of a three-day  hospital stay is $30,000? Or that a broken leg  can cost up to $7,500? Health coverage can  help protect you from unexpected high costs.  Not having health insurance could also cost  you extra in taxes—penalties in 2014 for  uninsured people are either 1 percent of  yearly household income or $95 per individual, whichever is greater. These  penalties will increase every year.

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Health Care Reform FAQ: Rights & Protections

KnowYourBenefits

Whether you need health coverage or have it already, the Affordable Care Act (ACA) offers new rights and protections that make coverage fairer and easier to understand.

Whether you need health coverage or have it already, the ACA offers new rights and protections that make coverage fairer and easier to understand.

Some rights and protections apply to plans in the Marketplace or other individual insurance, some apply to job-based plans and some apply to all health coverage.

How does the health care law protect me?

The ACA changes the way health insurance companies operate, extends the opportunity to get insurance to people who were not previously covered and expands the benefits of many policyholders while lowering the cost of care. Some of the specific ways it accomplishes this include:

  • Creating the health insurance marketplace (Marketplace) as a new way for individuals, families and small businesses to get health coverage
  • Requiring insurance companies to cover people with pre-existing health conditions
  • Helping you understand the coverage you’re getting
  • Holding insurance companies accountable for rate increases
  • Making it illegal for health insurance companies to arbitrarily cancel your health insurance just because you get sick
  • Protecting your choice of doctors
  • Covering young adults under age 26
  • Providing free preventive care
  • Ending lifetime and yearly dollar limits on coverage of essential health benefits
  • Guaranteeing your right to appeal your insurance company’s decisions

What if I don’t have health coverage?

If you can afford it but don’t have health insurance coverage, you may have to pay a penalty—and must also pay for all of your health care.

The penalty for 2014 is 1 percent of your yearly income or $95 per person for the year, whichever is higher. The penalty increases every year. For 2015, the fee is 2 percent of income or $325 per person, whichever is higher. For 2016 it is 2.5 percent of income or $695 per person, whichever is higher. After 2016, the fee will be adjusted for inflation.

It’s important to remember that paying the penalty won’t get you any health insurance coverage. You will be responsible for 100 percent of the cost of your medical care.

To avoid the penalty, you need insurance that qualifies as minimum essential coverage. If you’re covered by any of the following, you’re considered covered and don’t have to pay a penalty:

  • Any Marketplace plan, or any individual insurance plan you already have
  • Any employer plan (including COBRA), with or without grandfathered status (this includes retiree plans)
  • Governmental plans, such as Medicare, Medicaid or the Children’s Health Insurance Program (CHIP)
  • TRICARE (for current service members and military retirees, their families and survivors) and veterans’ health care programs
  • Peace Corps Volunteer plans
  • Self-funded health coverage offered to students by universities for plan or policy years that begin on or before Dec. 31, 2014.

Other plans may also qualify. Ask your health coverage provider.

Who doesn’t have to pay the penalty?

Some people with limited incomes and other situations can get exemptions from the fee. You may qualify for an exemption from the fee if you:

  • Are uninsured for fewer than three months of the year
  • Have very low income and coverage is considered unaffordable
  • Are not required to file a tax return because your income is too low
  • Would qualify under the new income limits for Medicaid, but your state has chosen not to expand Medicaid eligibility
  • Are a member of a federally recognized American Indian tribe
  • Participate in a health care sharing ministry
  • Are a member of a recognized religious sect with religious objections to insurance
  • Are incarcerated (either detained or jailed) and not being held pending disposition of charges
  • Are not lawfully present in the United States

Also, if you have certain circumstances that affect your ability to purchase health insurance coverage (for example, you are homeless or you were evicted in the last six months), you may qualify for a hardship exemption from the penalty. You can apply for a hardship exemption through the Marketplace.

What happens if I get insurance but then can’t pay my premiums?

In general, your coverage obtained through the Marketplace may be terminated if you fail to pay your portion of the monthly premium. However, issuers must provide a grace period of three consecutive months for QHP enrollees who:

  • Receive a premium tax credit;
  • Have paid at least one full month’s premium during the benefit year; and
  • Then fail to pay their portion of the monthly premium.

If you fail to pay all outstanding premiums following the three-month grace period, the issuer must then terminate your coverage, retroactive to the last day of the first month of the grace period. For all other QHP enrollees, QHPs must grant a grace period in accordance with applicable state law.

If your coverage is terminated for non-payment of premiums, you do not qualify for a special enrollment period due to the resulting loss of minimum essential coverage. However, you may become eligible for a special enrollment period based on other circumstances. Additionally, during the annual open enrollment, you will be able to apply for a determination of eligibility, and, if you are determined eligible, youwill be permitted to select a QHP for 2015. In both of these cases, the enrollment would be considered a new enrollment. Thus, the issuer cannot attribute any new premium payments from you toward the outstanding debt from the prior, terminated coverage.

What kinds of health insurance don’t qualify as coverage?

Health plans that don’t meet minimum essential coverage don’t qualify as coverage. If you have only these types of coverage, you may have to pay the penalty:

  • Coverage only for vision care or dental care
  • Workers’ compensation
  • Coverage only for a specific disease or condition
  • Plans that only offer discounts on medical services

What if I’m pregnant or plan to get pregnant?

All Marketplace plans cover pregnancy and childbirth. This is true even if your pregnancy begins before your coverage takes effect. Having a baby qualifies you for a special enrollment period. This means that after you have your baby you can enroll in or change Marketplace coverage even if it’s outside the open enrollment period. When you enroll in the new plan, your coverage can be effective from the day the baby was born.

Also, maternity care and childbirth are covered by Medicaid and CHIP. These state-based programs cover pregnant women and their children below a certain income level. Eligibility and benefits are different in each state. Medicaid and CHIP income levels are different.

Check your state’s health insurance website to see whether you’re eligible right now for coverage for yourself and your baby through Medicaid or CHIP.

What if I have a grandfathered health insurance plan?

If you are covered by a grandfathered plan, you may not get some rights and protections that other plans offer.

“Grandfathered” plans are those that were in existence on March 23, 2010, and haven’t been changed in ways that substantially cut benefits or increase costs for consumers. There are two types of grandfathered plans: job-based plans and individual plans (the kind you buy yourself, not through an employer). To find out whether your plan is grandfathered, check your plan’s materials, or, for a job-based plan, check with your employer.

All grandfathered plans must still end lifetime limits on coverage, end arbitrary cancelations of health coverage, cover adult children up to age 26, provide a summary of benefits and coverage and spend a certain percentage (either 80 or 85 percent) of premiums on health care.

Grandfathered plans do not need to cover preventive care for free, guarantee your right to appeal insurance companies’ decisions, protect your choice of doctors and access to emergency care, or publicly justify premium increases of 10 percent or more.

Additionally, individual grandfathered plans do not have to end yearly limits on coverage or provide coverage to people with pre-existing health conditions.

How do I appeal a health plan decision?

If your health insurer refuses to pay a claim or ends your coverage, you have the right to appeal the decision and have it reviewed by a third party. Insurers have to tell you why they’ve denied your claim or ended your coverage, and they have to let you know how you can dispute their decisions.

There are two ways to appeal a health plan decision:

  • Internal appeal. If your claim is denied or your health insurance coverage canceled, you may ask your insurance company to conduct a full and fair review of its decision. If the case is urgent, your insurance company must speed up this process.
  • External review. You can take your appeal to an independent third party for review. Doing an external review means that the insurance company no longer gets the final say over whether to pay a claim.

Source: Healthcare.gov

Wealth Transfer: How to Avoid the Complications

MutualFunds

Wealth Transfer Problems

Help your descendants help themselves by learning about these common wealth transfer problems.Quote Sticky

Money can make even the closest family relationships turn ugly. Anticipating the emotional issues attached to wealth transfer can help you avoid them altogether or deal with them more efficiently if they do arise.

Sudden wealth syndrome

Coming into a large amount of money unexpectedly seems great from an outside perspective. However, if an heir receives this money without being adequately prepared for the responsibilities that come with it, he or she can experience something similar to what lottery winners often feel. This instant gratification is often called “sudden wealth syndrome.” Because the heir did not have to work to gain the money and/or may not have talked with his or her predecessor about the work that went into earning the money, it may result in a lack of motivation. The person may find it hard to develop skills like delayed gratification and thrift. Therefore, an heir is more likely to spend the windfall and blow through most of the inheritance. Heirs in this situation often experience frustration, feelings of failure or a false sense of entitlement. They may avoid accountability or withdraw from others, sometimes even developing serious social disorders.

How to fix it

The most important thing to remember to avoid inflicting your children with sudden wealth syndrome is to take the time to communicate to your family the values that allowed you to accumulate your wealth. Children who understand and empathize with the struggle that their parents may have gone through to attain their wealth will feel more of an emotional attachment to this money and will be less likely to spend it all at once. If you feel that your children are not emotionally ready to handle this wealth, consider setting up trusts or placing an age restriction on when your future heirs can inherit their money. This sets up a longer timeline and gives the next generation time to mature.

Leadership voids

A leadership void can occur when a family business owner dies suddenly before training the next generation. If it’s not clear who should step up to take responsibility of the business, power struggles can occur among the remaining heirs. Even if financial wealth or the entire business isn’t lost, the vision for the business often is.

How to fix it

If a business is among your assets, one of the first things your wealth transfer plan should establish is how that business will function after you are gone. Will your family continue to run the business, or will it pass through sale to a third party? If you choose to keep it within the family, you will want to set specific role designations for your future heirs. It’s important to remember that “fair” is not always “equal.” For example, if you have two children, one who has worked alongside you in the business for years and understands your business plan and ethics, and one who has shown no interest in the business and knows little about your business practices, you may not want to split the business equally between these children. When making these choices, it’s important to discuss your rationale with your family ahead of time so that your future heirs understand why they are placed in their roles and what is expected of them in those roles.

Trustee-beneficiary relationships

Difficult trustee-beneficiary relationships can occur when families adhere to the “nothing revealed until death” principle of estate planning. If trustees and beneficiaries are not kept in the loop during the planning process, the beneficiaries suddenly find themselves inheriting an unexpected amount of wealth at an already emotional time in their lives. If they haven’t talked to the grantor about the idea of a trust before the grantor’s death, they can feel as though the trustee is standing between them and what they are “rightfully entitled” to.

How to fix it

It’s important to consider who you name as trustee and why. For example, it can be common practice to name a child as a trustee. However, what if you die before your spouse and your spouse then has to ask your son or daughter for principal distributions from a trust? This can create an uncomfortable family situation. It’s important to consider the possible ramifications of who you name as trustee and whether or not they will be able to handle the difficult decisions left to them. Depending on your family situation, it may be best to name a trustee who is impartial to family dynamics.

Property squabbles

Depending on how specific you are in your wealth transfer, there may be certain items that are “up for grabs” in your estate. These items may have emotional value to one of your descendants, or may be culturally significant, such as prominent works of art. This can lead to arguments among family members over who gets to keep what, especially amongst siblings or descendants who may already be prone to fighting.

How to fix it

Depending on the personalities within your family, it might be wise to avoid leaving property division decisions to your descendants. You have the option to try to be as specific as possible in your estate planning documents, or you can name an impartial executor to divvy up your property. If you do choose to leave property division to yourself, make sure you are open and honest with your future heirs about how and why you chose to leave certain things to certain people. Also, you should avoid promising the same piece to more than one person—a tactic that some people use to try to avoid conflict in the moment. Unfortunately, this usually leads to enlarged conflict later on.

Communication is key

Even if you set up a beautifully planned wealth transfer with a variety of financial strategies and your financial planner executes it perfectly , it still has the potential to fail if you don’t have your future heirs on board. Beyond preserving your wealth, communicating money values and generational wealth transfer plans in the most open way possible can also help your children to become more knowledgeable and responsible with their finances.

 

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This article was written by Zywave, LP, an entity unrelated to HollandStivers & Associates LLC. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. HollandStivers & Associates LLC does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2013 Zywave, LP. All rights reserved.

Retirement Income: Estimating your Needs

Retirement2

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Retirement Income

Life is full of unanswerable questions, like knowing exactly how much you will need to live comfortably during retirement. Although this number can be difficult to determine, the following article highlights some useful strategies and tools to get you a step closer to finding a dollar amount that will help you feel confident in your retirement plan.

Retirement Age

The first step to estimating a viable retirement income is determining your desired retirement age. Medicare is available to you when you reach age 65, but you are eligible for early Social Security benefits at age 62. Those who retire at age 62 will receive Social Security benefits with a reduction from the full amount that they would receive if they waited until their “full retirement age,” which ranges from age 65-67. You can find your full retirement age and early retirement benefit reduction, which are both dependent on your birthdate, at www.ssa.gov. In general, the longer you wait to retire, the larger your Social Security benefits will be, up until age 70. If you have the desire and the ability to work until age 70, your Social Security benefits will be significantly larger than if you chose to retire at age 62. Similarly, your company’s retirement plan may have specific early, normal and deferred retirement ages to be aware of.

You might have a specific age in mind and plans for what you’d like to do when you do retire. That’s great—as long as you’ll have sufficient funds to live the life you’ve been picturing. Those with a desire to travel, start their own business or spend more time on their favorite hobbies may want to retire earlier. Others may want to delay their retirement as long as possible because they enjoy their work. Similarly, some choose semi-retirement and take a step back from their careers to work part-time. Keep in mind that your goals and health may change as you get closer to retirement, so it’s important to adjust your planning accordingly.

Lifestyle Goals and Familial Responsibilities

Whether you plan to shave strokes off your golf game, rack up the mileage on your personal odometer by traveling or simply maintain your current lifestyle, your retirement plans will alter the amount of money you will need. Similarly, it may be beneficial to take your family’s financial situation into account. By the time you retire, chances are your dependents will be off on their own, supporting themselves financially. However, it is not uncommon for retirees to want to help their children with mortgages on their homes or grandchildren with their college tuition. In other situations, retirees may be in a position where they need to continue to financially support disabled dependents. Each individual’s goals and obligations may vary, but taking them into account when planning for retirement is crucial.

Life Expectancy

Like planning for retirement, life expectancy is never certain. Life expectancy rates are only an estimate, but they can be useful when planning for retirement. While it is positive news that life expectancy rates continue to rise, this may have a negative effect on your retirement funds—living up to or even past life expectancy may mean outliving your retirement funds. In addition, since life expectancy rates are rising, the average life expectancy may be even higher by the time you retire than it is today. Take increasing life expectancy rates and personal and family health history into account when planning for retirement.

The Replacement Ratio Method

For those who wish to maintain their current standard of living, the replacement ratio method can be a useful strategy when drawing up your retirement blueprint. In general, this method suggests taking between 60 and 80 percent of the average of your assumed salary of the three years prior to retirement. The replacement ratio method is typically supported by the assumption of common changes in your financial routine and situation. For example, the fact that you will no longer be working also means that many employment-related expenses—such as the costs of commuting, parking, proper clothing and even food for work—will decrease when you retire. In addition, retirement brings important changes to your taxes, such as the halt in Social Security taxes, plus typical increases in medical expenses and typical decreases in debt, vehicle and homeownership expenses.

The Expense Method

The expense method focuses primarily on the typical increases and decreases of common expenses. For example, expenses that tend to increase or remain the same in retirement are utility bills, medical expenses, recreational activities and house and vehicle maintenance. On the other hand, expenses that tend to decrease in retirement are mortgage payments, income and property taxes, transportation costs, debt repayments and household furnishings. The use of the expense method varies by an individual’s financial situation, goals and obligations. The expense method will require you to spend some time considering the many potential changes to your expense patterns upon retirement—but when it comes to feeling confident about your future financial security, every second is worth it.

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This article was written by Zywave LP, an entity unrelated to HollandStivers & Associates LLC. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. HollandStivers & Associates LLC does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. ©2012 Zywave LP. All rights reserved.

 

 

Retirement Needs: Top 10 Ways to Save for Retirement

Bonds

Quote Sticky1. Know Your Retirement Needs

Retirement is expensive. Experts estimate that you’ll need about 70 percent of your pre-retirement income (90 percent or more for lower earners) to maintain your standard of living when you stop working.

2.Find Out About Your Social Security Benefits

Social Security pays the average retiree about 40 percent of pre-retirement earnings. Call the Social Security Administration at 800-772-1213 for a free Social Security Statement. Find out more about your benefits at www.socialsecurity.gov.

3. Learn About Your Employer’s Retirement Plan

If your employer offers a plan, check to see what your benefit is worth. Most employers will provide an individual benefit statement if you request one. Before you change jobs, find out what will happen to your pension. Learn what benefits you may have from previous employment. Find out if you will be entitled to benefits from your spouse’s plan.

4. Contribute to a Tax-sheltered Savings Plan

If your employer offers a tax-sheltered savings plan, such as a 401(k), sign up and contribute all you can. Your taxes will be lower and your company may kick in more. Automatic deductions from your paycheck make it easy. Over time, compound interest and tax deferrals make a big difference in the amount you will accumulate.

5. Ask Your Employer to Start a Plan

If your employer doesn’t offer a retirement plan, suggest that it start one. Simplified plans can be set up by certain employers often at a lower cost to the employer than plans such as 401(k)s or pensions.

6. Put Your Money into an Individual Retirement Account

You can put up to $5,000 a year ($6,000 if you are age 50 or older) into an Individual Retirement Account (IRA) and gain tax advantages. When you open an IRA, you have two options: a traditional IRA or a Roth IRA. The tax treatment of your contributions and withdrawals will depend on which option you select. The after-tax value of your withdrawal will depend on inflation and the type of IRA you choose.

7. Don’t Touch Your Savings

Don’t dip into your retirement savings. You’ll lose principal and interest, and you may lose tax benefits. If you change jobs, roll over your savings directly into an IRA or into your new employer’s retirement plan.

8. Start Now, Set Goals, and Stick to Them

Start early. The sooner you start saving, the more time your money has to grow. Put time on your side. Make retirement savings a high priority. Devise a plan, stick to it and set goals for yourself. Remember, it’s never too early or too late to start saving. So start now, whatever your age!

9. Consider Basic Investment Principles

How you save can be as important as how much you save. Inflation and the type of investments you make play important roles in how much you’ll have saved at retirement. Know how your pension or savings plan is invested. Financial security and knowledge go hand in hand.

10. Ask Questions

These tips point you in the right direction, but you’ll need more information. Talk to your employer, your bank, your union and financial advisor. Ask questions and make sure you understand the answers. Get practical advice and act now. Financial security doesn’t just happen – it takes planning and commitment and, yes, money.

 

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This article was written by Zywave LP, an entity unrelated to HollandStivers & Associates LLC. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. HollandStivers & Associates LLC does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. ©2012 Zywave LP. All rights reserved.

 

 

Social Security Overview

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Social Security

Quote StickySocial Security is a federal program that provides financial support to U.S. citizens who are retired or disabled. Run by the Social Security Administration (SSA), the program’s technical name is Old Age, Survivors and Disability Insurance. It was created under the Social Security Act (1935) during the Great Depression when the majority of retirees were living in poverty. The goal of Social Security is to enforce social responsibility; the program taxes working individuals and gives the income to retirees and disabled individuals who have paid into the program.

How Does it Work?

Social Security gets its funding through payroll taxes levied on all working individuals (with few exceptions). The money gained is immediately disbursed to beneficiaries with any surplus being placed in the Social Security Trust. Contrary to widespread belief, money taxed for Social Security is not withheld for the individual who paid them; levied income is meant for the immediate use of beneficiaries.

Retirement Benefits

Although it supports a wide range of people, the majority of Social Security goes to paying retirement benefits. Anyone who has worked for 10 or more years (40 quarters, non-consecutive) qualifies for social security retirement benefits.

The basis of a person’s annual benefit is referred to as his or her primary insurance amount (PIA). To establish a PIA, the SSA averages a retiree’s top 30 years of income using a weighted formula. Those who earn more during their life pay more into the Social Security system and, consequently, are entitled to higher payments during retirement. Much like taxes, PIA calculations are on a progressive scale.

Officially, the SSA presently recognizes retirement age as being 66 (gradually will shift to 67); however, Social Security benefits may be activated as early as age 62 or as late as age 70. If activated early, the annual benefit is lower than the PIA to compensate for the additional months of payment; likewise, if it is activated later, it is raised above the PIA.

Both the PIA and benefit factors seem to encourage delayed retirement. Someone who works until age 70 will not only receive benefits at a faster rate for working past the official retirement age, but also will stand to add more years of high income, further increasing his or her benefit.

Disability and Spousal Benefits

Social Security’s disability benefits are given out in much the same way retirement benefits are. The SSA requires individuals to have worked for a total of 10 years and do not begin payments until five full months after the individual becomes disabled. (Some leeway may be given for young people who have not been in the workforce long enough to reach 10 years.) Social Security is not meant to cover short-term disability; beneficiaries must have long-term or permanent disabilities.

Social Security also has special rules for married couples. If a person earns significantly less than his or her spouse does, he or she is able to apply for a spousal retirement benefit. This benefit is set at half of the spouse’s PIA.

When a spouse dies, the survivor is entitled to the deceased’s full PIA, provided he or she is at full retirement age. If the survivor has not yet reached full retirement age, the benefit amount will be lowered accordingly. A survivor caring for a child under the age of 16 is entitled to at least 75 percent of the deceased’s benefit amount. A survivor’s benefit amount is limited to what the deceased would receive if he or she were still alive.

Social Security Controversy

Social Security has received controversial press over the past decade because its current form is unsustainable. Many people claim Social Security is a “Ponzi scheme,” using new income to pay the money owed to older people. However, this is an inaccurate comparison. In 1935, Social Security was setup to provide immediate care to those in need. The program has always levied current taxes to fund current retirees. For this reason, Social Security cannot ever run out of money. As long as it exists, some money will be taxed and redistributed.

The question that remains is whether the country will be able to make meaningful distributions to its retirees. As proportionately more people begin to retire, it will be difficult to keep benefits at a significant value. Because the Social Security Trust will soon dwindle, the government will have to raise payroll tax, cut benefits and/or increase its deficit to make Social Security functional.

Despite the controversy, it seems unlikely that Social Security will disappear anytime soon; it has become a cornerstone of modern retirement planning. If you are nearing retirement, it is important to find out how much Social Security will affect your plans and what you can do to maximize its benefits. Contact HollandStivers & Associates LLC if you have any questions about Social Security and how you can ensure the return of a lifetime of payments.

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This article was written by Zywave LP, an entity unrelated to HollandStivers & Associates LLC. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. HollandStivers & Associates LLC does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2013 Zywave LP. All rights reserved.

 

 

 

Retirement Saving: Start Saving Today for Retirement

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Quote StickyRetirement Saving and Planning For Retirement While You Are Still Young

Retirement may seem abstract and far in the future at this stage in your life. However, preparing now for retirement is crucial, and the sooner you get started the better.

The biggest advantage to starting young is time. If you put $1,000 into an IRA each year from age 20 to age 30 (11 years), and the account earns 7 percent annually, you will have $168,514 in the account when you retire at age 65. If you don’t start until age 30, but save $1,000 each year for 35 years straight earning 7 percent annually, your account would grow to only $147,913.

Saving for retirement may seem like a strain on your budget right now, but you can start small and grow. Even setting aside a small portion of your paycheck each month will pay off in big dollars later. By starting young, you also can afford to invest more aggressively since you have years to overcome the inevitable ups and downs of the stock market. Developing the habit of saving for retirement now will make it easier to continue saving throughout your working years.

Planning for Retirement When There’s Little Time Left

What if retirement is just around the corner and you haven’t saved enough? Some of these tips may be tough to swallow, but they will all help you toward your goal.

  • It’s never too late to start. It’s only too late if you don’t start at all.
  • Commit everything you can to your tax-sheltered retirement plans and personal savings. Try to put away at least 20 percent of your income.
  • Find ways to reduce expenses in your budget and funnel the savings into your nest egg.
  • Take a second job or work extra hours.
  • Aim for higher returns, but don’t invest in anything that you are uncomfortable with.
  • Retire later. Even working part-time after your planned retirement age may be enough.
  • Refine your goal. You may have to live a less expensive lifestyle in retirement.
  • Delay taking Social Security. Benefits will be higher when you start taking them.
  • Make use of your home by renting out a room, or move to a less expensive home.
  • Sell assets that are not producing income or growth, and invest in income-producing assets.

Tips on How to Save Smart for Retirement

  • Start NOW. Don’t wait. Time is critical.
  • Start small, if necessary. Even small contributions can make a big difference given enough time and the right kind of investments.
  • Use automatic deductions from your payroll or your checking account for deposit into mutual funds, your IRA or other investment vehicles.
  • Save regularly. Make saving for retirement a habit.
  • Be realistic about investment returns. Never assume that a year or two of high market returns (or market declines) will continue indefinitely.
  • Roll over retirement account money if you change jobs.
  • Don’t dip into retirement savings.

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Article adapted from the U.S. Department of Labor publication of the same title. www.dol.gov/ebsa/pdf/savingsfitness.pdf.

Traditional Individual Retirement Accounts (IRAs)

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Traditional Individual Retirement Accounts

As pension plans shrink, or disappear, and uncertainty about the long-term viability of social security lingers, personal savings for retirement is essential to financial well-being. The Employee Benefit Research Institute estimates that current retirees fund only 31 percent of retirement spending via personal savings. This is in stark contrast with the estimate that current workers will need to fund 66 percent of retirement expenses with personal savings.

For a retirement portfolio that requires $1 million in savings today, you would need over $2.5 million to fund retirement in 2043 (assuming a 3 percent inflation rate). Thus, it is increasingly important to save early for retirement. One of the most efficient and effective ways of doing this is by contributing to an IRA.

When Should I Contribute to an IRA?

While IRAs are an important piece of the retirement puzzle, contributions to 401(K) accounts with an employer match should be maximized first. Even when your employer only matches a portion of what you contribute to your account, this is an immediate return on your investment, essentially free money. For example, if your employer contributes half of your contributions to a 401(k) (usually up to a certain percentage), your return is equivalent to a 50 percent return on investment in a non-matching retirement account. A 50 percent return, especially in difficult markets, can take a long time to generate.

On the other hand, 401(k) accounts have contribution limits, and not all individuals have plans with employer matching. In that case, traditional IRAs can be beneficial in saving for retirement and reducing taxes. With traditional IRAs, the account owner can defer taxes on both the principal and investment earnings, and use the taxes saved for other purposes.

If you haven’t started saving for retirement, you’ll first have to find room in your budget. It is important to cover all necessary living expenses before contributing to your retirement account, because it is difficult to withdraw IRA funds for emergencies. To prioritize how to save, determine what expenses are necessary and what expenses can be reduced or eliminated. Saving for retirement should be one of the top priorities after accounting for necessary living expenses.

How Should I Contribute?

Ideally, you should have a priority list of expenses and be able to account for future changes in income or expenses. With a budget this meticulous, you could set a recurring contribution to your IRA without worrying if you could afford it or not. Automatic contributions make it easy to save for retirement because you don’t have to exercise willpower or remember to transfer money each month.

If your expenses and income aren’t regular enough to support a set-it-and-forget-it system, you can still plan to make regular contributions at specific intervals. For instance, you can set a reminder in your calendar to make an IRA contribution on the 15th of each month. Depending on your expenses for the month, you may be able to contribute more one month than the next. This will allow you to pay for expenses that may come up unexpectedly. The downside to this system is that is still requires consistent effort, and you may be tempted to decrease contributions in favor of discretionary spending.

Many people also contribute to IRAs when completing their tax return. Based on your current tax situation, you may be able to contribute to your IRA and take a tax deduction for the prior tax year. This is a useful time to contribute to your IRA and is a way to defer taxes. It also serves as a useful and regular reminder to add funds to your retirement savings.

Differences Between Traditional and Roth IRAs

Both traditional and Roth IRAs can increase the likelihood that retirement expenses will be fully covered. Many people have questions about the difference between these two options and when to use one or the other. The main difference between the two plans is when principal contributions are taxed. With a traditional IRA, contributions are made to the retirement plan pre-tax. The contributions are then taxed, along with the income generated by the investments, when the contributor takes distributions in retirement. Conversely, Roth IRAs make use of funds that have already been taxed. As a result, contributions are not subject to tax upon distribution. Assuming that tax rates will be the same now and at distribution, an equal contribution to both a traditional and a Roth IRA will yield the exact same value at withdrawal. The key assumption is that tax rates remain the same from now until retirement, which is difficult to determine.

The Future of Taxes

For there to be a difference between the value of a traditional IRA and Roth IRA account (assuming all other characteristics are equal), tax rates will have to change. Since traditional IRAs tax contributions at withdrawal, the value of a traditional account will be higher if tax rates decline, and a Roth account will be higher in value if tax rates increase.

Accurately forecasting the future of taxes is difficult to do, and the government officials who guide the direction of taxes even have a difficult time forecasting where rates will go in the next few years, much less decades. The most conservative approach to ensure that retirement funds are maximized for years to come is to contribute to both traditional and Roth accounts.

Withdrawal of Funds

When choosing between traditional and Roth accounts, make sure to consider differences in withdrawal limitations. With a traditional IRA, you must take minimum distributions upon turning 70 ½ years of age, whereas Roth IRAs do not require these withdrawals. Similarly critical to assess is whether or not there may be cash flow needs that would necessitate the use of funds from these accounts. If you take a withdrawal from a traditional IRA before age 59 ½ there will be a penalty in addition to the normal taxes that would be due (unless there is an exception). In comparison, Roth IRAs generally are not subject to these constraints unless the account has been open less than five years. These rules can be very complicated and there are numerous exceptions. Talk to your financial or tax advisor with your particular circumstances in mind.

Working with Your Advisor

Both traditional and Roth IRAs have benefits and drawbacks; the main risk in selecting a retirement account is not knowing the differences among account options. To increase the likelihood that the investing options available match your needs and goals, it is important to work with your financial advisor, during both your working and retirement years. No matter the investment account chosen, saving and investing early in life is the most efficient way to meet retirement spending needs.

 

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This article was written by Zywave LP, an entity unrelated to HollandStivers & Associates LLC. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. HollandStivers & Associates LLC does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2013 Zywave LP. All rights reserved.

 

 

Life Insurance Medical Exams

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Life Insurance Medical Exams

Quote StickyWhen applying for a life insurance policy, you may be required to undergo an insurance medical exam (IME), which is used to determine your premium. This exam is done in your home by a health care professional who is hired by the insurance company. In addition to the exam, you will also have to provide information about your medical and family history. The following outlines what you can expect from the medical exam process.

The IME Process

A paramedical professional will gather your medical history, height, weight, blood pressure, pulse and possibly blood and/or urine samples. Additional tests will be ordered based on your age and the policy amount desired.

Blood tests are used to detect the presence of antibodies or antigens to the HIV virus, cholesterol and related lipids, liver and kidney disorders, diabetes, hepatitis, prostate antigens and immune disorders. Urine tests are used to detect the presence of nicotine, medications and illegal drugs.

Exams do not include sensitive issues, such as breast or prostate exams.

If there are any additional questions after the exam, you may be asked to submit more information.

After the results are received by the insurance company, you will be given a risk rating, either flat or table, for your medical history and conditions. For example, an underwriter would give a flat rating to someone who just had surgery because the situation is temporary, and someone with high blood pressure would receive a table rating. In general, table ratings increase premiums because they are permanent or somewhat permanent conditions.

Test results are not shared with you unless you specifically request it, either in a letter with your application for insurance or sent directly to the insurance company following the exam.

In the event you are declined by the insurer due to a health risk, your insurance agent can argue the rating on your behalf.

It’s important to know that your IME results are shared with the Medical Information Bureau. If you decline a life insurance policy after an exam and apply with another insurer at a later date, your application may raise a red flag.

Best Rx Before the Exam

Some things to consider before having an IME include:

  • Request a morning exam—it’s the least stressful time of the day.
  • Get a good night’s rest the night before the exam.
  • Do not drink alcohol the day prior to the exam.
  • Avoid drinking caffeinated beverages for at least an hour prior to the exam.
  • Don’t eat salty or high-fat foods for at least 24 hours prior to the exam.
  • Do not engage in strenuous exercise for 24 hours prior to the exam.

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This article was written by Zywave LP, an entity unrelated to HollandStivers & Associates LLC. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. HollandStivers & Associates LLC does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2013 Zywave, LP. All rights reserved.