Bonds and Interest Rates

Bonds and Interest Rates

A look at how one can greatly affect the other.

 

Provided by Terri Fassi, CPA, MBA, CDFA

 

Is the bond bull history? Bond titan Bill Gross called an end to the 30-year bull market in fixed income back in 2010, and he has repeated his opinion since. Legendary investor Jim Rogers predicted an end to the bond bull in 2009, and he still sees it happening. This belief is starting to become popular – the Federal Reserve keeps easing and more and more investors are leaving Treasuries for equities.1,2,3

If the long bull market in bonds has ended, the final phase was certainly impressive. During the four-year stretch after the collapse of Lehman Brothers, $900 billion flowed into bond funds and $410 billion left equities.2

In 2013, you have bulls running, an assumption that Fed money printing will start to subside and the real yield on the 10-year TIPS in negative territory. Assuming the economy continues to improve and appetite for risk stays strong, what will happen to bond investors when inflation and interest rates inevitably rise and bond market values fall?

Conditions hint at an oncoming bear market. When interest rates rise again, how many bond owners are going to hang on to their 10-year or 30-year Treasuries until maturity? Who will want a 1.5% or 2.5% return for a decade? Looking at composite bond rates over at Yahoo’s Bonds Center, even longer-term corporate bonds offered but a 3.5%-4.3% return in late March.4

What do you end up with when you sell a bond before its maturity? The market value. If the federal funds rate rises 3%, a longer-term Treasury might lose as much as a third of its market value as a consequence. It wasn’t that long ago – June 12, 2007, to be exact – when the yield on the 10-year note settled up at 5.26%.5

This risk aside, what if you want or need to stay in bonds? Some bond market analysts believe now might be a time to exploit short-term bonds with laddered maturity dates. What’s the trade-off in that move? Well, you are accepting lower interest rates in exchange for a potentially smaller drop in the market value of these securities if rates rise. If you are after higher rates of return from short-duration bonds, you may have to look to bonds that are investment-grade but without AAA or AA ratings.

If you see interest rates rising sooner rather than later, exploiting short maturities could position you to get your principal back in the short term. That could give you cash which you could reinvest in response to climbing interest rates. If you think bond owners are in for some pain in the coming years, you could limit yourself to small positions in bonds.

The Treasury needs revenue and senses the plight of certain bond owners, and in response, it has plans to roll out floating-rate notes by 2014. A floater backed by the full faith and credit of the U.S. government would have real appeal – its yield could be adjusted per movements in a base interest rate (yet to be selected by the Treasury), and you could hold onto it for a while instead of getting in and out of various short-term debt instruments and incurring the related transaction costs.6

Appetite for risk may displace anxiety faster than we think. In this bull market, why would people put their money into an investment offering a 1.5% return for 10 years? Portfolio diversification aside, a major reason is fear – the fear of volatility and a global downturn. That fear prompts many investors to play “not to lose” – but should interest rates rise significantly in the next few years, owners of long-term bonds might find themselves losing out in terms of their portfolio’s potential.

Terri Fassi may be reached at 970-416-0088 or terri@fassifinancialnetwork.com

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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 – www.bloomberg.com/news/2010-10-27/fed-easing-likely-to-mark-end-of-30-year-bull-market-for-bonds-gross-says.html [10/27/10]

2 – online.wsj.com/article/SB10000872396390443884104577645470279806022.html [9/15/12]

3 – www.bloomberg.com/news/2013-02-07/u-s-30-year-bond-losses-pass-5-as-fed-price-gauge-rises.html [2/7/13]

4 – finance.yahoo.com/bonds/composite_bond_rates [3/27/13]

5 – www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2007 [2/6/13]

6 – online.wsj.com/article/SB10001424127887324590904578287802587652738.html [2/6/13]

 

Did You Hear What Just Happened With Social Security

Did You Hear What Just Happened With Social Security?

Congress just eliminated two popular strategies used to get greater retirement benefits.

 

Provided by Terri Fassi, CPA, MBA, CDFA

 

If you want to claim Social Security benefits soon, keep a date & a number in mind. The date is April 30, 2016. The number is 62.

Recent changes to the Social Security benefit rules have made that date and that number very important, especially for those about to retire.

In October, Congress passed a new federal budget. In doing so, it shut down the file-and-suspend and restricted application claiming strategies for Social Security, which married couples used to try and maximize their combined retirement benefits.1

Broadly speaking, the point of both strategies was to generate spousal Social Security benefits for a couple while they suspended their own, individual benefits (thereby allowing those individual benefits to grow by roughly 8% per year from age 62-70 until claimed).1

After April 30, 2016, the door will shut on the file-and-suspend strategy. The strategy worked like this: when one spouse reached Social Security’s Full Retirement Age (66), that spouse claimed Social Security but then immediately suspended their retirement benefits. The other spouse could then claim a spousal benefit while their deferred, individual Social Security benefit grew 8% annually.2

You may still be able to use the file-and-suspend strategy before the door closes. Are you married? Are you 66 or older right now, or will you be 66 years old by April 30, 2016? If your answer is “yes” to both those questions, then you and your spouse still have a chance to use the strategy. That chance disappears forever on May 1. (It may be risky to wait until April, when the Social Security Administration may have a backlog of applications on its hands.)2

If you are still eligible to file-and-suspend and you miss the April 30 deadline, you could end up leaving anywhere from $10,000-60,000 in lifetime Social Security income on the table.1

One asterisk to all this: the file-and-suspend strategy will still be permitted for individuals. A person can still file for Social Security benefits and voluntarily suspend them, with his or her deferred, individual Social Security benefit increasing by about 8% a year until age 70.3

Why is the number 62 now so important? Starting in 2016, someone turning 62 will no longer be able to file a restricted application for only spousal benefits. In other words, the door is closing on the restricted application claiming strategy.1

That strategy worked as follows: between age 66 and age 70, one spouse would file a restricted application to claim spousal Social Security benefits while deferring their individual benefits until age 70. At 70, they switched from the spousal benefit to their own larger Social Security benefit.2

In 2016 and future years, spouses newly eligible for Social Security will be given a simple and irrevocable choice. They can take either their spousal benefit or their own benefit, whichever is larger. They will not be able to defer their own benefit until age 70 and then switch out of their spousal benefit at that time to their own, larger benefit.2

The good news? If you are 62 or older by the end of 2015, you can still file a restricted application for only spousal benefits. That could be a smart move if your spouse will be getting Social Security when you hit full retirement age (FRA) and you file for your spousal benefits on their earnings history.2

One other option is also going away. Under the new Social Security regulations, a Social Security beneficiary cannot file for benefits, suspend them for X years, and then retroactively request the suspended benefits as a lump sum payout years later. For example, if you file for Social Security at age 63, suspend benefits and then elect to receive your benefits at age 66, you will simply start getting the monthly Social Security income you deserve at age 66. No lump sum of deferred Social Security income will be waiting for you.2

If you are peeved by all this, you are not alone. Many baby boomers viewed the file-and-suspend and restricted application strategies as techniques they could use in the near future to arrange greater retirement income. Congress simply saw loopholes that needed closing.

Does waiting to claim Social Security until age 66 or 67 still make sense? For many couples – particularly those in good health – it still does. While the sun is setting on the chance to receive some spousal benefits while you wait, the basic math of Social Security remains the same. The longer you wait to file for benefits, the larger your monthly individual benefits will be, up until age 70.

Terri Fassi may be reached at 970-416-0088 or terri@fassifinancialnetwork.com

 

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 – nytimes.com/2015/12/05/your-money/the-end-of-social-security-loopholes-what-now.html [12/5/15}

2 – money.usnews.com/money/retirement/articles/2015/12/04/say-goodbye-to-the-social-security-file-and-suspend-strategy [12/4/15]

3 – marketwatch.com/story/key-social-security-strategies-hit-by-budget-deal-2015-10-30 [11/2/15]

Hybrid Insurance Products with Long-Term Care Riders

Hybrid Insurance Products with Long-Term Care Riders

With the cost of long term care insurance rising, they are gaining attention.

 

Provided by Terri Fassi, CPA, MBA, CDFA

 

Could these products answer a financial dilemma? Many high net worth households worry about potential long term care expenses, but they are reluctant or unable to buy long term care insurance. According to a 2014 report from the Robert Wood Johnson Foundation, less than 8% of U.S. households have purchased LTCI.1

Costs of traditional LTCI policies are rising, and then you have the “use it or lose it” aspect of the coverage: if the insured party dies abruptly, all those insurance premiums will have been paid for nothing. If the household is wealthy enough, maybe it can forego buying a LTC policy and absorb some or all of possible LTC costs using existing assets.

Are there alternatives allowing some flexibility here? Yes. Recently, more attention has come to hybrid LTC policies and hybrid LTC annuities. These are hybrid insurance products: life insurance policies and annuities with an option to buy a long term care insurance rider for additional cost. They are gaining favor: sales of hybrid LTC policies alone rose by 24% in 2012, according to the American Association for Long-Term Care Insurance’s 2014 LTCi Sourcebook. Typically, the people most interested in these hybrid products are a) wealthy couples concerned about the increasing costs of traditional LTCI coverage, b) annuity holders outside of their surrender period who need long term care coverage. Being able to draw on LTCI if the moment arises can be a relief.2

They can be implemented with a lump sum. Often, assets from a CD or a savings account are used to fund the annuity or life insurance policy (the policy is often single-premium). In the case of a hybrid LTC policy, the bulk of the policy’s death benefit can be tapped and used as LTC benefits if the need arises. LTC benefits generated can end up equaling 400% of the initial deposit (or even more). In the case of a hybrid LTC annuity, the money poured into the annuity is usually directed into a fixed-income investment, with the immediate or deferred annuity payments increasing (possibly even doubling or tripling, in some cases) if the annuity holder requires LTC.2,3

What if the annuity or policy holder passes away suddenly, or dies with LTC benefits left over? If that happens with a hybrid LTC policy, you still have a life insurance policy in place. His or her heirs will receive a tax-free death benefit. It is also possible in many cases to surrender the policy and even get the initial premium back (what is known as a return of premium rider). The annuity holder, of course, names a beneficiary – and if he or she doesn’t need long term care, there is still an immediate or deferred income stream from the annuity contract.3

There are some trade-offs for the LTC coverage. Costs of these products are usually defined by the insurer as “guaranteed” – LTCI premiums are fixed, and the value of the policy or annuity will never be less than the lump sum it was established with (though a small surrender charge might be levied in the first few years of the annuity). In exchange for that, some hybrid LTC policies accumulate no cash value, and some hybrid LTC annuity products offer less than fair market returns.4

Tax-free withdrawals may be used to pay for LTC expenses. Thanks to the Pension Protection Act of 2006, the following privileges were granted regarding hybrid insurance products:

*All claims paid directly from appreciated hybrid LTC annuities and hybrid LTC policies are income tax free so long as they are used to pay qualified long term care expenses. In using the cash value to cover LTC expenses, you are not triggering a taxable event.2,4

*Owners of traditional life insurance policies and annuities are now allowed to make 1035 exchanges into appropriate hybrid LTC products without incurring taxable gains.2

If you shop for a hybrid insurance product, shop carefully. The first hybrid LTC policy or hybrid LTC annuity you lay eyes on may not be the cheapest, so look around before you leap and make sure the product is reasonably tailored to your financial objectives and needs. Remember that annuity contracts are not “guaranteed” by any federal agency; the “guarantee” is a pledge from the insurer. If you decide to back out of these arrangements, you need to know that some insurers will not return your premiums. Also, keep in mind that over the long run, the return on these hybrid products will likely not match the return on a conventional fixed annuity or LTCI policy; actuarially speaking, when interest rates rise there is no incentive for the insurer to adjust the fixed income rate of return in response.2,4

Are hybrid insurance products for you? If you can’t qualify medically for LTCI but still want coverage, they may represent worthy options that you can start with a lump sum. You might want to talk to your insurance or financial consultant about the possibility.

Terri Fassi, CPA, MBA, CDFA  is a Representative with Centaurus Financial Inc. and may be reached at Fassi Financial, 970-416-0088 or terri@fassifinancialnetwork.com.

 

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 – rwjf.org/content/dam/farm/reports/issue_briefs/2014/rwjf410654 [2/14]

2 – forbes.com/sites/jamiehopkins/2014/04/21/new-and-unexpected-ways-to-fund-long-term-care-expenses/ [4/21/14]

3 – fa-mag.com/news/hybrid-ltc-insurance-gains-traction-among-the-affluent-17070.html [2/25/14]

4 – kitces.com/blog/is-the-ltc-cost-guarantee-of-todays-hybrid-lifeltc-or-annuityltc-insurance-policies-just-a-mirage/ [10/16/13]

 

How & When to Sign Up for Medicare

How & When to Sign Up for Medicare

Breaking down the enrollment periods and eligibility.

Provided by Terri Fassi, CPA, MBA, CDFA

 

Medicare enrollment is automatic for some of us. If you are age 65 and eligible to receive Social Security benefits (or married to someone eligible to receive them), then you are also automatically eligible for Medicare Part A (free hospital insurance) and Medicare Part B (medical insurance for which you pay premiums), a.k.a. “original Medicare”.1

If this is the case, then you’ll get a red-white-and-blue Medicare card in the mail 3 months before your 65th birthday.2

Others may need to sign up. You can apply to receive Medicare benefits even if you haven’t retired. If you’re coming up on 65 and you don’t yet receive Social Security benefits, SSDI or benefits from the Railroad Retirement Board, visit your local Social Security Administration office or dial (800) 772-1213 or go to www.ssa.gov to determine your eligibility.1,2

If you are eligible, you have the choice of accepting or rejecting Part B coverage. If you want Medicare Part A and Medicare Part B, then you should sign your Medicare card and keep it in your wallet. If you don’t want Part B, you put an “X” in the refusal box on the back of the Medicare card form, and send the form to the address shown right below where your signature goes. About four weeks later, you will get a new Medicare card indicating that you only have Part A coverage.3

When you are enrolled in Medicare Part A & Part B (sometimes called “original Medicare”), you can join a Medicare Advantage plan (Part C). Anyone enrolled in Part A, B or C becomes eligible for prescription drug coverage (Part D).1

If you are 65 or older and aren’t eligible for Medicare Part A, you can still sign up for Part B as long as you are a U.S. citizen or a legal resident of this country for five years or longer.1

If you choose not to enroll in Part B during your initial enrollment period, you have another annual chance to sign up for it during a “general enrollment period” from January 1 through March 31, with Part B coverage commencing July 1.1

If you already have medical insurance through a group health plan at your workplace or your spouse’s workplace, you can either enroll in Part B while you are still covered by that plan or enroll in Part B within eight months of leaving your job or losing your health coverage, whichever happens first.1

When can you add or drop forms of Medicare coverage? Medicare has enrollment periods that allow you to do this.

*The initial enrollment period is seven months long. It starts three months before the month in which you turn 65 and ends three months after that month. You can enroll in any type of Medicare coverage within this seven-month window – Part A, Part B, Part C (Medicare Advantage Plan), and Part D (prescription drug coverage). If you don’t sign up for Part D coverage during the initial enrollment period, you may have to pay a penalty to add it later.4

 

*Once enrolled in Medicare, you can only make changes in coverage during certain periods of time. For example, the annual enrollment period for Part D is October 15-December 7, with Part D coverage starting January 1. (You can also drop Part D coverage, leave one Part C plan for another, or switch from a Part C plan to original Medicare or vice versa in this period.)4

 

*There is also an annual open enrollment period from January 1-February 14. During this one, you can switch out of a Part C plan and go back to original Medicare with Part A & B coverage starting on the first day of the month following that switch. If you do this, you have until February 14 to also join a Part D plan if you want to add drug coverage to complement Parts A and B. Part D coverage kicks in at the start of the month after the Part D plan receives your enrollment form.4

Special situations. Individuals with end-stage kidney failure who need dialysis or a transplant may qualify for Medicare regardless of age. Upon diagnosis, they can contact the SSA. Medicare coverage usually takes effect three months after a patient begins dialysis. People with Lou Gehrig’s Disease (ALS) are automatically enrolled in Medicare as soon as they begin receiving SSDI payments. Americans who are under 65 and disabled also qualify for Medicare.2,3

Do you have questions about your eligibility, or that of your parents? Your first stop should be the Social Security Administration – (800) 772-1213 or www.socialsecurity.gov. You can also visit www.medicare.gov and www.cms.hhs.gov.

Terri Fassi, CPA, MBA, CDFA  is a Representative with Centaurus Financial Inc. and may be reached at Fassi Financial, 970-416-0088 or terri@fassifinancialnetwork.com.

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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 – www.socialsecurity.gov/pubs/10043.html#a0=2 [9/25/12]

2 – www.medicare.gov/sign-up-change-plans/get-parts-a-and-b/when-and-how-to-get-parts-a-and-b.html [2/27/13]

3 – www.slhn.org/Pay-Bills/FAQ/Medicare-FAQ.aspx#4 [2012]

4 – www.medicare.gov/Publications/Pubs/pdf/11219.pdf [10/12]

 

Mistakes Families Make With 529 Plans

Mistakes Families Make with 529 Plans

5 common errors to avoid + 2 big factors to consider.

Provided by Terri Fassi, CPA, MBA, CDFA

Most families that start 529 college savings plans have done their “homework” about these programs. Missteps are made, though, often with the distribution of 529 plan assets. Here are some of the major gaffes, and the major factors anyone should think about before enrolling.

Assuming a university will withdraw 529 plan assets for you. When the time comes, you have to tell the 529 plan that you need the money and specify the payee. Typically, a 529 program offers you either a check written out to you, to your student, or a payment made directly from the 529 plan to the university. There are two big reasons why a check made payable to the student may be the best option.

*A 529 plan distribution triggers a Form 1099-Q. You most likely want your student’s name and Social Security number on that form, not yours. If your student’s name is on the 1099-Q and your student has qualifying higher education expenses (QHEE) equaling or exceeding the gross distribution figure for that tax year listed on the form, that whole 529 plan withdrawal becomes tax-free and the distribution from the 529 doesn’t show up on the student’s Form 1040. If your name is on the 1099-Q, the distribution doesn’t show up on your 1040. Even if your student’s QHEE equals or exceeds the magic number on the 1099-Q for the tax year, an omission may trigger an IRS notice to you, and you will have to defend the exclusion.1

*Let’s say you accidentally overestimate your student’s qualified education expenses, or maybe parents and grandparents make withdrawals without each other’s knowledge. In this event, the earnings portion of the distribution is partly or fully taxable. If the distribution is paid out to you, then the earnings are taxed at your federal tax rate. If it is made payable to your student, then the earnings are taxed at his or her federal tax rate, which barring the “kiddie tax” is presumably just 10-15%.1

Having a payment made directly the school can lead to a second common mistake.

Inadvertently reducing a student’s financial aid potential. When a university takes a direct payment from a 529 plan, its financial aid office may make a dollar-for-dollar adjustment to the need-based aid a student receives. Often, it is viewed the same as scholarship money.1

Since the IRS bars you from using multiple education tax benefits to pay for the same education expenses, using tax-deferred 529 plan earnings to pay for the first semester of college may disqualify your student for an American Opportunity Credit. You should read up on the IRS income restrictions on education credits or consult a tax professional. Paying the first few thousand dollars in freshman year expenses with funds outside the plan may allow your student to retain eligibility.2

Mistiming the distributions. It can take up to two weeks to arrange and carry out a 529 plan distribution; telling a financial aid office that you are using 529 funds to pay tuition just a few days before a tuition deadline is cutting it close.3

Some families withdraw 529 monies during freshman year, which can conflict with federal tax returns. If a tuition payment is due in January, withdrawing it in December will create an incongruity between total withdrawals and expenses. The same will apply if a withdrawal is made in January, but tuition was due in December.3

Botching the tax break offered to you on the distribution. To get a tax-free qualified withdrawal from a 529 plan, the withdrawn funds have to be used for qualified, college-related expenses. If the distribution isn’t qualified, it will be considered fully taxable, and you may be hit with a 10% federal penalty plus state and local income taxes. If you withdraw more plan assets than necessary, any excess distribution is also nonqualified. Calculating and withdrawing the “net” qualifying expenses of your student’s college education could help you avoid this last problem, or alternately, you could report the excess 529 funds on the student’s 1040.3,4,5

Ceasing 529 contributions once a student enters college. You can keep putting money into a 529 plan throughout your student’s college years, with the opportunity for additional tax-deferred growth of those savings.2

Finally, two other factors are worth noting. These would be a 529 plan’s expenses and deductions.

Tax deductions represent a key reason why families choose in-state 529 plans. Most states that levy income tax offer 529 programs with deductions or credits for taxpayers. It varies per state. In Michigan, a married couple can deduct the first $10,000 of 529 contributions annually, which leads to a state tax savings of up to $425. Some other states offer no deductions.6

Some 529 plans have different advantages. If your home state’s 529 plan expense ratio exceeds 1%, consider another state’s plan. (You can find objective rankings of 529 plan expenses online.)

Lastly, compare the expenses and fund choices offered by a 529 plan to those of other funds or investment vehicles found outside the 529 wrapper.

Make no mistake, 529 plans offer great potential advantages for households striving to meet future college costs. Just remember to read the fine print, especially as your student’s freshman year draws closer.

Terri Fassi, CPA, MBA, CDFA  is a Representative with Centaurus Financial Inc. and may be reached at Fassi Financial, 970-416-0088 or terri@fassifinancialnetwork.com.

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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 – www.bankrate.com/finance/college-finance/3-ways-to-take-a-529-plan-distribution.aspx [10/5/09]

2 – www.usnews.com/education/best-colleges/paying-for-college/articles/2012/08/01/4-costly-mistakes-parents-make-when-saving-for-college [8/1/12]

3 – www.savingforcollege.com/articles/20101001-5-blunders-by-first-time-529-plan-spenders [10/01/10]

4 – www.foxbusiness.com/personal-finance/2011/11/14/dont-make-your-52-plan-distribution-taxing/ [11/14/11]

5 – www.529.com/content/benefits.html [3/28/13]

6 – www.forbes.com/sites/baldwin/2013/03/27/the-two-step-guide-to-529s/ [3/27/13]

 

Will Baby Boomers Ever Truly Retire?

Will Baby Boomers Ever Truly Retire?

 Many may keep working out of interest rather than need.

Provided by Terri Fassi, CPA, MBA, CDFA

Baby boomers realize that their retirements may not unfold like those of their parents. New survey data from The Pew Charitable Trusts highlights how perceptions of retirement have changed for this generation. A majority of boomers expect to work in their sixties and seventies, and that expectation may reflect their desire for engagement rather than any economic desperation.

Instead of an “endless Saturday,” the future may include some 8-to-5. Pew asked heads of 7,000 U.S. households how they envisioned retirement and also added survey responses from focus groups in Phoenix, Orlando and Boston. Just 26% of respondents felt their retirements would be work-free. A slight majority (53%) told Pew they would probably work in some context in the next act of their lives, possibly at a different type of job; 21% said they had no intention to retire at all.1

Working longer may help boomers settle debts. A study published by the Employee Benefit Research Institute in January (Debt of the Elderly and Near Elderly, 1992-2013) shows a 2.0% increase in the percentage of indebted households in the U.S. headed by breadwinners 55 and older from 2010-13 (reaching 65.4% at the end of that period). EBRI says median indebtedness for such households hit $47,900 in 2013 compared to $17,879 in 1992. It notes that larger mortgage balances have been a major factor in this.1

Debts aside, some people just like to work. Those presently on the job expect to stay in the workforce longer than their parents did. Additional EBRI data affirms this – last year, 33% of U.S. workers believed that they would leave their careers after age 65. That compares to just 11% in 1991.2

How many boomers will manage to work past 65? This is one of the major unknowns in retirement planning today. We are watching a reasonably healthy generation age into seniority, one that can access more knowledge about being healthy than ever before – yet obesity rates have climbed even as advances have been made in treating so many illnesses.

Working past 65 probably means easing into part-time work – and not every employer permits such transitions for full-time employees. The federal government now has a training program in which FTEs can make such a transition while training new workers and some larger companies do allow phased retirements, but this is not exactly the norm.3

Working less than a 40-hour week may also negatively impact a worker’s retirement account and employer-sponsored health care coverage. EBRI finds that only about a third of small firms let part-time employees stay on their health plans; even fewer than half of large employers (200 or more workers) do. The Transamerica Center for Retirement Studies says part-time workers get to participate in 401(k) plans at only half of the companies that sponsor them.3

Boomers who work after 65 have to keep an eye on Medicare and Social Security. They will qualify for Medicare Part A (hospital coverage) at 65, but they should sign up for Part B (doctor visits) within the appropriate enrollment window and either a Part C plan or Medigap coverage plus Medicare Part D.3

Believe it or not, company size also influences when Medicare coverage starts for some 65-year-olds. Medicare will become the primary insurance for employees at firms with less than 20 workers when they turn 65, even if that company sponsors a health plan. At firms with 20 or more workers, the workplace health plan takes precedence over Medicare coverage, with 65-year-olds maintaining their eligibility for that employer-sponsored health coverage provided they work sufficient hours. Boomers who work for these larger employers may sign up for Part A and then enroll in Part B and optionally a Part C plan or Part D with Medigap coverage within eight months of retiring – they do not have to wait for the next open enrollment period.3

Prior to age 66, federal retirement benefits may be lessened if retirement income tops certain limits. In 2015, if you are 62-65 and receive Social Security, $1 of your benefits will be withheld for every $2 that you earn above $15,720. If you receive Social Security and turn 66, this year, then $1 of your benefits will be withheld for every $3 that you earn above $41,880.4

Social Security income may also be taxed above the program’s “combined income” threshold. (“Combined income” is defined as adjusted gross income + non-taxable interest + 50% of Social Security benefits.) Single filers with combined incomes from $25,000-34,000 may have to pay federal income tax on up to 50% of their Social Security benefits in 2015, and that also applies to joint filers with combined incomes of $32,000-44,000. Single filers with combined incomes above $34,000 and joint filers whose combined incomes top $44,000 may have to pay federal income tax on up to 85% of their Social Security benefits.5

Are boomers really the retiring type? Given the amazing accomplishments and vitality of the baby boom generation, a wave of boomers working past 65 seems more like a probability than a possibility. Life is still exciting; there is so much more to be done.

Terri Fassi, CPA, MBA, CDFA  is a Representative with Centaurus Financial Inc. and may be reached at Fassi Financial, 970-416-0088 or terri@fassifinancialnetwork.com.

 

 

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/only-one-quarter-of-americans-plan-to-retire-2015-02-26 [2/26/15]

2 – usatoday.com/story/money/columnist/brooks/2015/02/17/baby-boomer-retire/23168003/ [2/17/15]

3 – tinyurl.com/qdm5ddq [3/4/15]

4 – forbes.com/sites/janetnovack/2014/10/22/social-security-benefits-rising-1-7-for-2015-top-tax-up-just-1-3/ [10/22/14]

5 – ssa.gov/planners/taxes.htm [3/4/15]

How LTC Insurance Can Help Protect Your Assets

How LTC Insurance Can Help Protect Your Assets

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

Provided by Terri Fassi, CPA, MBA, CDFA

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

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

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

The cost of assisted living or nursing home care alone could motivate you to pay the premiums. Genworth Financial conducts a respected annual Cost of Care Survey to gauge the price of long term care in the U.S. Here is a summary of the 2013 survey’s key findings:

*In 2013, the median annual cost of a private room in a nursing home was $83,950 or $230 per day – up 3.6% from 2012. In the past five years, the cost has risen about 4.5% annually.

*A private one-bedroom unit in an assisted living facility has a median cost of $3,450 a month, or $41,400 annually. It was 4.5% cheaper last year.

*The median payment to a non-Medicare certified, state-licensed home health aide is $19 an hour in 2013, up 2.3% from 2012.1

Can you imagine spending an extra $40-85K out of your retirement savings in a year? What if you had to do it for more than one year?

The U.S. Department of Health & Human Services estimates that about 70% of Americans will need some kind of long term care during their lifetimes. Additionally, 69% of Americans older than 90 have some form of disability – often a direct cause for long term care.2

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

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

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

Medicare is not long term care insurance. Some people think Medicare will pick up the cost of long term care. That is a misconception. Medicare will only pay for the first 100 days of nursing home care, and only if 1) you are getting skilled care and 2) you go into the nursing home right after a hospital stay of at least 3 days. Medicare also covers limited home visits for skilled care, and some hospice services for the terminally ill. That’s all.4

Now, Medicaid can actually pay for long term care – if you are destitute. Are you willing to wait until you are broke for a way to fund long term care? Of course not. LTC insurance provides a way to do it.4

Why not look into this? You may have heard that LTC insurance is expensive compared with some other forms of coverage. But the annual premiums – in the vicinity of $2,000-2,500 for the typical policy right now – are cheap compared to real-world LTC costs.3

Ask an insurance or financial professional about some of the LTC choices you can explore. While many Americans have life, health and disability insurance, that’s not the same thing as long term care coverage.

Terri Fassi, CPA, MBA, CDFA  is a Representative with Centaurus Financial Inc. and may be reached at Fassi Financial, 970-416-0088 or terri@fassifinancialnetwork.com.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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 – www.genworth.com/dam/Americas/US/PDFs/Consumer/corporate/131168_031813_Executive%20Summary.pdf [3/18/13]

2 – longtermcare.gov/the-basics/who-needs-care/ [3/18/13]

3 – www.marketwatch.com/story/long-term-care-coverage-worth-the-price-2012-12-04 [12/4/12]

4 – www.medicare.gov/longtermcare/static/home.asp [8/3/12]

 

Using Debit vs. Using Credit

Using Debit vs. Using Credit

How preferable is one type of plastic to another?

Provided by Terri Fassi, CPA, MBA, CDFA

 

You’re about to purchase a pricy good or service and you don’t have your checkbook or enough cash on hand to do it. Should you pull out a debit card, or a credit card?

Given the choice, you’d probably pick a debit card – right? After all, aren’t they preferable to credit cards? Usually, yes – but not always.

How debit cards actually work. Debit cards pull money straight from your bank account. What if you have insufficient funds in your account? If that happens, the bank can decide to do one of two things, per the terms of the particular debit card – it can elect to decline the charge, or shoulder the cost of the transaction and ding you for insufficient funds. Some banks give you overdraft protection for recurring debit card charges, but not for one-time transactions.1,2

Your debit card may bear a VISA or MasterCard logo. If that is the case, you have the option to use it as a credit card. If you choose that option, your transaction is then handled by the credit card firm rather than the bank, and the money may not be taken out of your account immediately as some retailers wait until the end of their business day to notify credit card companies of transactions.3

How credit cards actually work. A credit card purchase is processed in four phases. First, you authorize a purchase with your signature. Next, the purchase is compiled with other credit card charges into a “batch”, which the merchant may wait until the end of the day to send. The batch is sooner or later sent to the card issuers, thereby requesting payments. Finally, the merchant gets the payments minus discount and interchange fees along the way.3

The small businesses you frequent likely prefer debit to credit. Debit card transactions come with lower transaction fees than those of their plastic cousins. A debit card purchase is not a cash sale, but it is remarkably close to one. Due to the larger transaction fees associated with credit transactions, some stores bar the use of a credit card for very small purchases – in those cases, it isn’t worth the trouble for the retailer.

Banks charge merchants fees for the privilege of accepting debit cards, and retailers are hailing a July U.S. District Court ruling calling for lower caps on those fees. This summer, U.S. District Court Judge Richard Leon tossed out the current Federal Reserve cap of $0.21 in interchange fees per debit card swipe as too excessive. The Fed will likely appeal the ruling well into 2014.4

Debit cards may offer less fraud protection, however. Here is an area where credit cards look good in comparison. While a straight-up debit card payment is instantly deducted from your bank account, you ultimately pay credit charge charges only if you agree to the legitimacy of the charge and the delivery of the product or service. Translation: a credit card offers you a kind of signatory “firewall” against fraud (at least at the point of purchase). Your liability for fraudulent credit charges is capped at a certain level; fraudulently debited charges can be another story. Disputed charges on credit cards are often handled faster as well.5,6

Also, there are some situations where it is pretty hard to get by with just a debit card. If you want to rent a car or reserve a nice hotel room, a credit card is all but essential. You also build credit history through credit card use, not debit card use.5

Both kinds of cards are susceptible to “gray” charges. Tiny little monthly membership charges, small levies for “phantom” (additional) products or services sold to you at the point of sale, “zombie” charges for an ongoing subscription you don’t formally cancel – they are some of the “gray” charges that may come your way with both kinds of cards, and they are entirely legal. Retailers bury them in the fine print, and made an extra $14.3 billion of cardholders this way in 2012.7

Debit is usually preferable to credit, but cash is still king. Sensible use of debit and credit cards can help you build your credit history and perhaps make things a little easier for you as a consumer. Runaway use of them may bring problems. Credit and debit cards are ultimately conveniences, and not replacements for cash.

Terri Fassi, CPA, MBA, CDFA  is a Representative with Centaurus Financial Inc. and may be reached at Fassi Financial, 970-416-0088 or terri@fassifinancialnetwork.com.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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 – consumerreports.org/cro/news/2013/06/debit-card-overdrafts-can-cost-you-big-bucks/index.htm / [6/14/13]

2 – mainstreet.com/article/money/investing/how-i-got-hit-overdraft-fee-after-opting-out-overdraft-protection [3/21/12]

3 – creditcards.com/credit-card-news/how-a-credit-card-is-processed-1275.php [1/14/09]

4 – online.wsj.com/article/SB10001424127887324635904578639833002818450.html [7/31/13]

5 – cbsnews.com/8301-505146_162-57365965/4-reasons-to-use-credit-cards-versus-debit-cards/ [1/26/12]

6 – kiplinger.com/article/credit/T016-C000-S002-battle-royal-credit-vs-debit.html [4/10]

7 – dallasnews.com/business/columnists/pamela-yip/20130818-pamela-yip-gray-charges-on-credit-and-debit-cards-can-put-you-in-the-red.ece [8/18/13]