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Fear of Spending

I frequently meet with clients that do not believe they can afford to retire.   Even after working when their financial goals show that they have more than they need.    Once they retire, they are reluctant to spend their money and it takes some time to feel comfortable spending.   Following is a great article on the subject.

http://time.com/money/4560067/retirement-fear-of-spending-budgeting-income/

If you like this article, please follow me at any of the following places:

https://twitter.com/RoshanLoungani

https://medium.com/@RoshanLoungani_85629

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http://roshanloungani.net/

Secrets of the Millionaire Next Door

This is a great article on some habits of he millionaire next door.    None of the habits mentioned are difficult.  Live within your means, dont swing for the fences, and keep yourself protected.   I would add that they are good savers.    Click on the link below to read the full article:

http://www.kiplinger.com/article/saving/T064-C000-S001-secrets-of-the-millionaire-next-door.html?rid=SYN-yahoo&rpageid=12952&yptr=yahoo

If you like this article, please follow me at any of the following places:

https://twitter.com/RoshanLoungani

https://medium.com/@RoshanLoungani_85629

https://plus.google.com/117866529459426703812

http://roshanloungani.net/

IRA and Retirement Plan Limits for 2017

IRA contribution limits

The maximum amount you can contribute to a traditional IRA     or Roth IRA in 2017 is $5,500 (or 100% of your earned income, if     less), unchanged from 2016. The maximum catch-up contribution for those age     50 or older remains at $1,000. (You can contribute to both a traditional and     Roth IRA in 2017, but your total contributions can’t exceed these annual limits.)

Traditional IRA deduction limits for 2017

The income limits for determining the deductibility of     traditional IRA contributions in 2017 have increased. If your filing status is     single or head of household, you can fully deduct your IRA contribution up to $5,500 in     2017 if your MAGI is $62,000 or less (up from $61,000 in 2016). If you’re     married and filing a joint return, you can fully deduct up to $5,500 in 2017 if your     MAGI is $99,000 or less (up from $98,000 in 2016). And if you’re not covered by an employer plan but your spouse is, and you     file a joint return, you can fully deduct up to $5,500 in 2017 if your MAGI is     $186,000 or less (up from $184,000 in 2016).

If your 2017 federal income tax      filing status is: Your  IRA deduction is limited if your MAGI is      between: Your deduction is eliminated if your MAGI is:
Single or head of household $62,000 and $72,000 $72,000 or more
Married filing jointly or qualifying      widow(er)* $99,000 and $119,000 (combined) $119,000 or more      (combined)
Married filing separately $0      and $10,000 $10,000 or more

 

*If you’re not covered by an employer plan but your spouse     is, your deduction is limited if your MAGI is $186,000 to $196,000, and     eliminated if your MAGI exceeds $196,000.

Roth IRA contribution limits for 2017

The income limits for determining how much you can     contribute to a Roth IRA have also increased for 2017. If your filing status is     single or head of household, you can contribute the full $5,500 to a Roth IRA in     2017 if your MAGI is $118,000 or less (up from $117,000 in 2016). And if you’re     married and filing a joint return, you can make a full contribution in 2017 if your     MAGI is $186,000 or less (up from $184,000 in 2016). (Again, contributions     can’t exceed 100% of your earned income.)

If your 2017 federal income tax      filing status is: Your Roth IRA contribution is limited if your MAGI      is: You cannot contribute to a Roth IRA if your MAGI is:
Single or head of household More than $118,000 but less than $133,000 $133,000 or more
Married filing jointly or qualifying      widow(er) More than $186,000 but less than $196,000      (combined) $196,000 or more (combined)
Married filing separately More      than $0 but less than $10,000 $10,000 or more

 

Employer retirement plans

Most of the significant employer retirement plan limits for 2017 remain unchanged from 2016. The maximum amount you can contribute (your “elective     deferrals”) to a 401(k) plan in 2017 is $18,000. This limit also     applies to 403(b), 457(b), and SAR-SEP plans, as well as the Federal Thrift     Plan. If you’re age 50 or older,     you can also make catch-up contributions of up to $6,000 to these plans in 2017. [Special catch-up limits apply to certain participants     in 403(b) and 457(b) plans.]

If you participate in more than one retirement plan, your     total elective deferrals can’t exceed the annual limit ($18,000 in 2017 plus     any applicable catch-up contribution). Deferrals to 401(k) plans, 403(b) plans,     SIMPLE plans, and SAR-SEPs are included in this aggregate limit, but deferrals to Section     457(b) plans are not. For example, if you participate in both a 403(b) plan and     a 457(b) plan, you can defer the full dollar limit to each plan—a total of     $36,000 in 2017 (plus any catch-up contributions).

The amount you can contribute to a SIMPLE IRA or SIMPLE     401(k) plan in 2017 is $12,500, and the     catch-up limit for those age 50 or older remains at $3,000.

Plan type: Annual dollar      limit: Catch-up limit:
401(k), 403(b), governmental 457(b),      SAR-SEP, Federal Thrift Plan $18,000 $6,000
SIMPLE      plans $12,500 $3,000

 

Note: Contributions can’t exceed 100% of your     income.

The maximum amount that can be allocated to your account in     a defined contribution plan [for example, a 401(k) plan or profit-sharing plan]     in 2017 is $54,000, up from $53,000 in 2016, plus age 50 catch-up     contributions. (This includes both your contributions and your employer’s     contributions. Special rules apply if your employer sponsors more than one     retirement plan.)

Finally, the maximum amount of compensation that can be     taken into account in determining benefits for most plans in 2017 is     $270,000 (up from $265,000 in 2016), and the dollar threshold for determining     highly compensated employees (when 2017 is the look-back year) is $120,000, unchanged from 2016.

Is 70 the New 65? Why Americans Are Working Longer

Roshan Loungani is sharing a great video on retirement.   Please click on the link below:

Is 70 the New 65? Why Americans Are Working Longer

 

A Retirement Income Roadmap for Women

More women are working and taking charge of their own retirement planning than ever before. What does retirement mean to you? Do you dream of traveling? Pursuing a hobby? Volunteering your time, or starting a new career or business? Simply enjoying more time with your grandchildren? Whatever your goal, you’ll need a retirement income plan that’s designed to support the retirement lifestyle that you envision, and minimize the risk that you’ll outlive your savings.

When will you retire?

Establishing a target age is important, because when you retire will significantly affect how much you need to save. For example, if you retire early at age 55 as opposed to waiting until age 67, you’ll shorten the time you have to accumulate funds by 12 years, and you’ll increase the number of years that you’ll be living off of your retirement savings. Also consider:

  • The longer you delay retirement, the longer you can build up tax-deferred funds in your IRAs and employer-sponsored plans like 401(k)s, or accrue benefits in a traditional pension plan if you’re lucky enough to be covered by one.
  • Medicare generally doesn’t start until you’re 65. Does your employer provide post-retirement medical benefits? Are you eligible for the coverage if you retire early? Do you have health insurance coverage through your spouse’s employer? If not, you may have to look into COBRA or a private individual policy–which could be expensive.
  • You can begin receiving your Social Security retirement benefit as early as age 62. However, your benefit may be 25% to 30% less than if you waited until full retirement age. Conversely, if you delay retirement past full retirement age, you may be able to increase your Social Security retirement benefit.
  • If you work part-time during retirement, you’ll be earning money and relying less on your retirement savings, leaving more of your savings to potentially grow for the future (and you may also have access to affordable health care).
  • If you’re married, and you and your spouse are both employed and nearing retirement age, think about staggering your retirements. If one spouse is earning significantly more than the other, then it usually makes sense for that spouse to continue to work in order to maximize current income and ease the financial transition into retirement.

How long will retirement last?

We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. The problem is particularly acute for women, who generally live longer than men. To guard against the risk of outliving your savings, you’ll need to estimate your life expectancy. You can use government statistics, life insurance tables, or life expectancy calculators to get a reasonable estimate of how long you’ll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There’s no way to predict how long you’ll actually live, but with life expectancies on the rise, it’s probably best to assume you’ll live longer than you expect.

Project your retirement expenses

Once you know when your retirement will likely start, how long it may last, and the type of retirement lifestyle you want, it’s time to estimate the amount of money you’ll need to make it all happen. One of the biggest retirement planning mistakes you can make is to underestimate the amount you’ll need to save by the time you retire. It’s often repeated that you’ll need 70% to 80% of your pre-retirement income after you retire. However, the problem with this approach is that it doesn’t account for your specific situation.

Focus on your actual expenses today and think about whether they’ll stay the same, increase, decrease, or even disappear by the time you retire. While some expenses may disappear, like a mortgage or costs for commuting to and from work, other expenses, such as health care and insurance, may increase as you age. If travel or hobby activities are going to be part of your retirement, be sure to factor in these costs as well. And don’t forget to take into account the potential impact of inflation and taxes.

Identify your sources of income

Once you have an idea of your retirement income needs, your next step is to assess how prepared you (or you and your spouse) are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. Other sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your earnings will be another source of income.

When you compare your projected expenses to your anticipated sources of retirement income, you may find that you won’t have enough income to meet your needs and goals. Closing this difference, or “gap,” is an important part of your retirement income plan. In general, if you face a shortfall, you’ll have five options: save more now, delay retirement or work during retirement, try to increase the earnings on your retirement assets, find new sources of retirement income, or plan to spend less during retirement.

Transitioning into retirement

Even after that special day comes, you’ll still have work to do. You’ll need to carefully manage your assets so that your retirement savings will last as long as you need them to.

  • Review your portfolio regularly. Traditional wisdom holds that retirees should value the safety of their principal above all else. For this reason, some people shift their investment portfolio to fixed income investments, such as bonds and money market accounts, as they enter retirement. The problem with this approach is that you’ll effectively lose purchasing power if the return on your investments doesn’t keep up with inflation. While it generally makes sense for your portfolio to become progressively more conservative as you grow older, it may be wise to consider maintaining at least a portion in growth investments.
  • Spend wisely. You want to be careful not to spend too much too soon. This can be a great temptation, particularly early in retirement. A good guideline is to make sure your annual withdrawal rate isn’t greater than 4% to 6% of your portfolio. (The appropriate percentage for you will depend on a number of factors, including the length of your payout period and your portfolio’s asset allocation.) Remember that if you whittle away your principal too quickly, you may not be able to earn enough on the remaining principal to carry you through the later years.
  • Understand your retirement plan distribution options. Most pension plans pay benefits in the form of an annuity. If you’re married, you generally must choose between a higher retirement benefit that ends when your spouse dies, or a smaller benefit that continues in whole or in part to the surviving spouse. A financial professional can help you with this difficult, but important, decision.
  • Consider which assets to use first. For many retirees, the answer is simple in theory: withdraw money from taxable accounts first, then tax-deferred accounts, and lastly, tax-free accounts. By using your tax-favored accounts last and avoiding taxes as long as possible, you’ll keep more of your retirement dollars working for you. However, this approach isn’t right for everyone. And don’t forget to plan for required distributions. You must generally begin taking minimum distributions from employer retirement plans and traditional IRAs when you reach age 70½, whether you need them or not. Plan to spend these dollars first in retirement.
  • Consider purchasing an immediate annuity. Annuities are able to offer something unique–a guaranteed income stream for the rest of your life or for the combined lives of you and your spouse (although that guarantee is subject to the claims-paying ability and financial strength of the issuer). The obvious advantage in the context of retirement income planning is that you can use an annuity to lock in a predictable annual income stream, not subject to investment risk, that you can’t outlive.*

Unfortunately, there’s no one-size-fits-all when it comes to retirement income planning. Roshan Loungani can review your circumstances, help you sort through your options, and help develop a plan that’s right for you.   Follow Roshan Loungani on twitter (https://twitter.com/roshanloungani) or Medium (https://medium.com/@RoshanLoungani_85629/about-roshan-loungani-949dd5e6875d#.c3wmjk9sx).

Five Keys to Investing For Retirement

Five Keys to Investing For Retirement

Making decisions about your retirement account can seem overwhelming, especially if you feel unsure about your knowledge of investments. However, the following basic rules can help you make smarter choices regardless of whether you have some investing experience or are just getting started.

Don’t lose ground to inflation

It’s easy to see how inflation affects gas prices, electric bills, and the cost of food; over time, your money buys less and less. But what inflation does to your investments isn’t always as obvious. Let’s say your money is earning 4% and inflation is running between 3% and 4% (its historical average). That means your investments are earning only 1% at best. And that’s not counting any other costs; even in a tax-deferred retirement account such as a 401(k), you’ll eventually owe taxes on that money. Unless your retirement portfolio at least keeps pace with inflation, you could actually be losing money without even realizing it.

What does that mean for your retirement strategy? First, you’ll probably need to contribute more to your retirement plan than you think. What seems like a healthy sum now will seem smaller and smaller over time; at a 3% annual inflation rate, something that costs $100 today would cost $181 in 20 years. That means you’ll probably need a bigger retirement nest egg than you anticipated. And don’t forget that people are living much longer now than they used to. You might need your retirement savings to last a lot longer than you expect, and inflation is likely to continue increasing prices over that time. Consider increasing your 401(k) contribution each year by at least enough to overcome the effects of inflation, at least until you hit your plan’s contribution limits.

Second, you need to consider investing at least a portion of your retirement plan in investments that can help keep inflation from silently eating away at the purchasing power of your savings. Cash alternatives such as money market accounts may be relatively safe, but they are the most likely to lose purchasing power to inflation over time. Even if you consider yourself a conservative investor, remember that stocks historically have provided higher long-term total returns than cash alternatives or bonds, even though they also involve greater risk of volatility and potential loss.

Past performance is no guarantee of future results.

Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in such a fund.

Invest based on your time horizon

Your time horizon is investment-speak for the amount of time you have left until you plan to use the money you’re investing. Why is your time horizon important? Because it can affect how well your portfolio can handle the ups and downs of the financial markets. Someone who was planning to retire in 2008 and was heavily invested in the stock market faced different challenges from the financial crisis than someone who was investing for a retirement that was many years away, because the person nearing retirement had fewer years left to let their portfolio recover from the downturn.

If you have a long time horizon, you may be able to invest a greater percentage of your money in something that could experience more dramatic price changes but that might also have greater potential for long-term growth. Though past performance doesn’t guarantee future results, the long-term direction of the stock market has historically been up despite its frequent and sometimes massive fluctuations.

Think long-term for goals that are many years away and invest accordingly. The longer you stay with a diversified portfolio of investments, the more likely you are to be able to ride out market downturns and improve your opportunities for gain.

Consider your risk tolerance

Another key factor in your retirement investing decisions is your risk tolerance–basically, how well you can handle a possible investment loss. There are two aspects to risk tolerance. The first is your financial ability to survive a loss. If you expect to need your money soon–for example, if you plan to begin using your retirement savings in the next year or so–those needs reduce your ability to withstand even a small loss. However, if you’re investing for the long term, don’t expect to need the money immediately, or have other assets to rely on in an emergency, your risk tolerance may be higher.

The second aspect of risk tolerance is your emotional ability to withstand the possibility of loss. If you’re invested in a way that doesn’t let you sleep at night, you may need to consider reducing the amount of risk in your portfolio. Many people think they’re comfortable with risk, only to find out when the market takes a turn for the worse that they’re actually a lot less risk-tolerant than they thought. Often that means they wind up selling in a panic when prices are lowest. Try to be honest about how you might react to a market downturn, and plan accordingly.

Remember that there are many ways to manage risk. For example, understanding the potential risks and rewards of each of your investments and its role in your portfolio may help you gauge your emotional risk tolerance more accurately. Also, having money deducted from your paycheck and put into your retirement plan helps spread your risk over time. By investing regularly, you reduce the chance of investing a large sum just before the market takes a downturn.

Integrate retirement with your other financial goals

Make sure you have an emergency fund; it can help you avoid needing to tap your retirement savings before you had planned to. Generally, if you withdraw money from a traditional retirement plan before you turn 59½, you’ll owe not only the amount of federal and state income tax on that money, but also a 10% federal penalty (and possibly a state penalty as well). There are exceptions to the penalty for premature distributions from a 401(k) (for example, having a qualifying disability or withdrawing money after leaving your employer after you turn 55). However, having a separate emergency fund can help you avoid an early distribution and allow your retirement money to stay invested.

If you have outstanding debt, you’ll need to weigh the benefits of saving for retirement versus paying off that debt as soon as possible. If the interest rate you’re paying is high, you might benefit from paying off at least part of your debt first. If you’re contemplating borrowing from or making a withdrawal from your workplace savings account, make sure you investigate using other financing options first, such as loans from banks, credit unions, friends, or family. If your employer matches your contributions, don’t forget to factor into your calculations the loss of that matching money if you choose to focus on paying off debt. You’ll be giving up what is essentially free money if you don’t at least contribute enough to get the employer match.

Don’t put all your eggs in one basket

Diversifying your retirement savings across many different types of investments can help you manage the ups and downs of your portfolio. Different types of investments may face different types of risk. For example, when most people think of risk, they think of market risk–the possibility that an investment will lose value because of a general decline in financial markets. However, there are many other types of risk. Bonds face default or credit risk (the risk that a bond issuer will not be able to pay the interest owed on its bonds, or repay the principal borrowed). Bonds also face interest rate risk, because bond prices generally fall when interest rates rise. International investors may face currency risk if exchange rates between U.S. and foreign currencies affect the value of a foreign investment. Political risk is created by legislative actions (or the lack of them).

These are only a few of the various types of risk. However, one investment may respond to the same set of circumstances very differently than another, and thus involve different risks. Putting your money into many different securities, as a mutual fund does, is one way to spread your risk. Another is to invest in several different types of investments–for example, stocks, bonds, and cash alternatives. Spreading your portfolio over several different types of investments can help you manage the types and level of risk you face.

Participating in your retirement plan is probably more important than any individual investing decision you’ll make. Keep it simple, stick with it, and time can be a strong ally.

Inflation means that you’ll probably need to contribute more to your retirement plan than you think. What seems like a healthy amount now is likely to feel smaller and smaller over time.

All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful. And diversification alone can’t guarantee a profit or eliminate the possibility of loss.
The dollar cost averaging you do when you make automatic contributions to the investments in your retirement plan account involves continuous investment in a security regardless of changes in its price. You should consider your financial and emotional ability to continue making purchases during times when prices are low. Dollar cost averaging does not guarantee a profit or protect against a loss.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

10 Years and Counting: Points to Consider as You Approach Retirement

10 Years and Counting: Points to Consider as You Approach Retirement

If you’re a decade or so away from retirement, you’ve probably spent at least some time thinking about this major life change. How will you manage the transition? Will you travel, take up a new sport or hobby, or spend more time with friends and family? Should you consider relocating? Will you continue to work in some capacity? Will changes in your income sources affect your standard of living?

When you begin to ponder all the issues surrounding the transition, the process can seem downright daunting. However, thinking about a few key points now, while you still have years ahead, can help you focus your efforts and minimize the anxiety that often accompanies the shift.

Reassess your living expenses

A step you will probably take several times between now and retirement–and maybe several more times thereafter–is thinking about how your living expenses could or should change. For example, while commuting and other work-related costs may decrease, other budget items may rise. Health-care costs, in particular, may increase as you progress through retirement.

Try to estimate what your monthly expense budget will look like in the first few years after you stop working. And then continue to reassess this budget as your vision of retirement becomes reality.

According to a recent survey, 38% of retirees said their expenses were higher than they expected.1 Keeping a close eye on your spending in the years leading up to retirement can help you more accurately anticipate your budget during retirement.

Consider all your income sources

First, figure out how much you stand to receive from Social Security. In early 2016, the average monthly retirement benefit was about $1,300.2 The amount you receive will depend on your earnings history and other unique factors. You can elect to receive retirement benefits as early as age 62, however, doing so will result in a reduced benefit for life. If you wait until your full retirement age (66 or 67, depending on your birth date) or later (up to age 70), your benefit will be higher. The longer you wait, the larger it will be.3

You can get an estimate of your retirement benefit at the Social Security Administration website, ssa.gov. You can also sign up for a my Social Security account to view your online Social Security statement, which contains a detailed record of your earnings and estimates for retirement, survivor, and disability benefits. Your retirement benefit estimates include amounts at age 62, full retirement age, and age 70. Check your statement carefully and address any errors as soon as possible.

Next, review the accounts you’ve earmarked for retirement income, including any employer benefits. Start with your employer-sponsored plan, and then consider any IRAs and traditional investment accounts you may own. Try to estimate how much they could provide on a monthly basis. If you are married, be sure to include your spouse’s retirement accounts as well. If your employer provides a traditional pension plan, contact the plan administrator for an estimate of that monthly benefit amount as well.

Do you have rental income? Be sure to include that in your calculations. Might you continue to work? Some retirees find that they are able to consult, turn a hobby into an income source, or work part-time. Such income can provide a valuable cushion that helps retirees postpone tapping their investment accounts, giving the assets more time to potentially grow.

Some other ways to generate extra cash during retirement include selling gently used goods (such as furniture or designer accessories), pet sitting, and participating in the sharing economy–e.g., using your car as a taxi service.

Pay off debt, power up your savings

Once you have an idea of what your possible expenses and income look like, it’s time to bring your attention back to the here and now. Draw up a plan to pay off debt and power up your retirement savings before you retire.

Why pay off debt? Entering retirement debt-free–including paying off your mortgage–will put you in a position to modify your monthly expenses in retirement if the need arises. On the other hand, entering retirement with a mortgage, loan, and credit-card balances will put you at the mercy of those monthly payments. You’ll have less of an opportunity to scale back your spending if necessary.

Why power up your savings? In these final few years before retirement, you’re likely to be earning the highest salary of your career. Why not save and invest as much as you can in your employer-sponsored retirement savings plan and/or IRAs? Aim for maximum allowable contributions. And remember, if you’re 50 or older, you can take advantage of catch-up contributions, which enable you to contribute an additional $6,000 to your 401(k) plan and an extra $1,000 to your IRA in 2016.

Manage taxes

As you think about when to tap your various resources for retirement income, remember to consider the tax impact of your strategy. For example, you may want to withdraw money from your taxable accounts first to allow your employer-sponsored plans and IRAs more time to potentially benefit from tax-deferred growth. Keep in mind, however, that generally you are required to begin taking minimum distributions from tax-deferred accounts in the year you turn age 70½, whether or not you actually need the money. (Roth IRAs are an exception to this rule.)

If you decide to work in retirement while receiving Social Security, understand that income you earn may result in taxable benefits. IRS Publication 915 offers a worksheet to help you determine whether any portion of your Social Security benefit is taxable.

If leaving a financial legacy is a goal, you’ll also want to consider how estate taxes and income taxes for your heirs figure into your overall decisions.

Managing retirement income to result in the best possible tax scenario can be extremely complicated. Qualified tax and financial professionals can provide valuable insight and guidance.4

Account for health care

In 2015, the Employee Benefit Research Institute reported that the average 65-year-old married couple would need $213,000 in savings to have at least a 75% chance of meeting their insurance premiums and out-of-pocket health-care costs in retirement. This figure illustrates why health care should get special attention as you plan the transition to retirement.

As you age, the portion of your budget consumed by health-related costs (including both medical and dental) will likely increase. Although original Medicare will cover a portion of your costs, you’ll still have deductibles, copayments, and coinsurance. Unless you’re prepared to pay for these costs out of pocket, you may want to purchase a supplemental Medigap insurance policy. Medigap policies are sold by private health insurers and are standardized and regulated by both state and federal law. These plans cover certain specified services, but offer different combinations of coverage. Some cover all or part of your Medicare deductibles, copayments, or coinsurance costs.

Another option is Medicare Advantage (also known as Medicare Part C), which allows Medicare beneficiaries to receive health care through managed care plans and private fee-for-service plans. To enroll in Medicare Advantage, you must be covered under both Medicare Part A and Medicare Part B. For more information, visit medicare.gov.

Also think about what would happen if you or your spouse needed home care, nursing home care, or other forms of long-term assistance, which Medicare and Medigap will not cover. Long-term care costs vary substantially depending on where you live and can be extremely expensive. For this reason, people often consider buying long-term care insurance. Policy premiums may be tax deductible, based on a number of different factors. If you have a family history of debilitating illness such as Alzheimer’s, have substantial assets you’d like to protect, or want to leave assets to heirs, a long-term care policy may be worth considering.5

Ease the transition

These are just some of the factors to consider as you prepare to transition into retirement. Breaking the bigger picture into smaller categories and using the years ahead to plan accordingly may help make the process a little easier.

12016 Retirement Confidence Survey, Employee Benefit Research Institute

2Social Security, Monthly Statistical Snapshot, February 2016

3Note that if you work while receiving Social Security benefits and are under full retirement age, your benefits may be reduced until you reach full retirement age.

4Working with a tax or financial professional cannot guarantee financial success.

5A complete statement of coverage, including exclusions, exceptions, and limitations, is found only in the LTC policy. It should be noted that carriers have the discretion to raise their rates and remove their products from the marketplace.

A Quick Look at the Presidential Candidates’ Tax Proposals

Though tax policies haven’t received top billing in this year’s presidential election dialogue, they’re still part of the conversation. Here’s a quick review of each candidate’s tax proposals based on information released by their campaigns. Keep in mind that regardless of who wins in November, any changes to tax policy would require congressional action.
Note: On August 8, 2016, Donald Trump announced a revised tax plan. Full details of the new plan were not immediately available on the campaign’s website. The following summary is based on the original plan announced by the Trump campaign and what we currently know about the revised plan.

Tax brackets
Plans released by the Trump campaign initially proposed reducing the current seven tax brackets to four, with the top rate dropping from 39.6% to 25%, and no tax due for individuals with incomes under $25,000 ($50,000 for married couples filing jointly).1 Trump has recently announced changes to his tax proposal, including a consolidation to three tax brackets: 12%, 25%, and 33%.2 This change moves the Trump campaign’s plan closer to the tax reform plan announced by House Republicans in June of this year.3 The Clinton campaign’s tax plans do not reflect changes to existing tax brackets, but do support a new 4% “fair share surcharge” on taxpayers with an adjusted gross income (AGI) exceeding $5 million.4.
Long-term capital gains and qualified dividends
Currently, lower tax rates generally apply to qualified dividends and to capital gains resulting from the sale of assets held longer than one year. Plans released by the Clinton campaign recommend adjusting the holding period schedule for long-term capital gains, increasing the minimum holding period from one to two years and adding medium-term holding periods that gradually reduce the top long-term rate down to 20% for assets held for more than six years.5 Plans initially released by the Trump campaign indicated that the top rate of 20% would continue to apply, with no change to current holding requirements.6

Alternative minimum tax (AMT)
The AMT is a separate, parallel federal income tax with its own rates (26% or 28%, depending on income) and rules. It is intended to ensure that taxpayers who use certain strategies to reduce their tax liability pay a minimum amount of tax. The Trump campaign has called for elimination of the AMT.7 The Clinton tax plan would presumably add a new tax layer, imposing a minimum tax due of 30% on those with incomes exceeding $1 million.8
Deductions, exemptions, and exclusions
Proposals released by both candidates would limit itemized deductions for higher-income filers. The Clinton team’s plan would limit the benefit of itemized deductions and certain items that are excluded from income (e.g., tax-exempt interest) to 28%, which means that the benefit of these items would be reduced for individuals in higher tax brackets; charitable deductions would be excluded from this limitation.9 The Trump team’s plan would accelerate the limitation of itemized deductions and the phaseout of personal exemptions for higher-income filers, though the treatment of deductions for charitable giving and mortgage interest would remain unchanged. The original Trump campaign tax plan also indicated that the ability to exclude earnings in life insurance contracts from income would be phased out for high-income individuals.10
Estate tax
The two campaigns have very different views of the existing federal estate tax. The Clinton campaign proposes increasing the top estate tax rate from 40% to 45%, and decreasing the estate tax exclusion from $5.45 million to $3.5 million.11 The Trump campaign proposes eliminating the federal estate tax.12
1, 6, 7, 10) “Tax Reform That Will Make America Great Again,” donaldjtrump.com/positions (July 2016)
2, 12) “Outline of Donald J. Trump’s Economic Vision: Winning The Global Competition,” donaldjtrump.com/positions (August 12, 2016)
3) Kyle Pomerleau, “Details and Analysis of the 2016 House Republican Tax Reform Plan,” Tax Foundation, July 5, 2016
4, 9, 11) “Investing in America by Restoring Basic Fairness to Our Tax Code,” hillaryclinton.com/briefing (July 2016)
5) Kyle Pomerleau and Michael Schuyler, “Details and Analysis of Hillary Clinton’s Tax Proposals,” Tax Foundation, January 26, 2016 (The 20% rate would be increased by the 3.8% net investment income tax, as well as the 4% surtax, if applicable.)
8) Richard Auxier, Len Burman, Jim Nunns, and Jeff Reheel, “An Analysis of Hillary Clinton’s Tax Proposals,” Tax Policy Center, March 3, 2016

SHOULD YOU HAVE A MORTGAGE IN RETIREMENT?

I recently had a client ask me if they should take out a mortgage on their home to create a tax deduction.   Their house is paid off, they are in the 25% tax bracket.

Most people think it is a good idea to have a mortgage, especially if your income in retirement is primarily taxable as ordinary income (Pension, 401K, 403B Traditional IRA, Thrift Savings Plan etc.).   While I am not opposed to a tax deduction, it is important to note that the deduction is based on the interest that you are paying, not the total mortgage payment.   That means you are paying someone interest to create this deduction and you are only deducting a portion of your payment.

The conventional wisdom is that you can earn more money investing than the cost of the mortgage interest.  While this is probably true, depending on your risk tolerance and your investment performance it may not be worth it.

Following are some numbers assuming a mortgage of $110,000, at an interest rate of 4%.    The $110,000 is then invested earning 4-7%.    The calculation is based on earning the same rate of return each and every year with no volatility.  This is not very realistic, the higher rate of return you target, the greater the volatility.

 

Snip of Mortgag Chart

Stating the obvious, the greater the rate of return, the greater the impact.   I will be reviewing this with my client and they will determine if having a mortgage and creating a tax deduction is worthwhile.

If it was me, I would not take out the mortgage.   An uncertain $1,279 – $3,754 per year does not seem worth it.

How Interest Rate Hikes Affect Retirees

business-money-pink-coins-largeIn December, the Fed increased interest rates for the first time since mid-2006. We know that the realities of the 2008 financial crisis led the banking system to lower the rate to zero during its height, and remain there for nearly seven years as America’s economy recovered. During that time, however, savers have been on the short end of the stick. Retirees, especially, saw much lower returns and higher risks than imagined, causing discontent even with news of recovery and a thriving economy in the backdrop.

Now, as the Fed is expected to gradually increase rates in the coming months, claims of recovery appear more realistic than ever. First, one must understand that the Fed’s decision to hike up interest serve as a balance to consumer spending and aid in curbing inflation. By doing so, the bank increases the cost of capital, making it more expensive to get things like loans and purchase cars and similarly large items. As a result, the rate at which most people do so decreases, which may seem like the antithesis of how the economy should work, but it is effective.

Naturally, many have questions about just how effective it could be, and how higher interest directly affects their personal lifestyles. The answer is, it depends. As with most situations pertaining to finances, there are no absolutes; however, there are a few things retirees can expect as a result of this move which are promising.

  1. Better Returns for Savers:
    Saving makes more sense (and more cents) as interest rates climb. Investing in CDs over savings accounts typically generates more income at a fixed rate, depending on the terms. This wouldn’t be as significant in a near-zero interest situation, but with recent hikes, this is a smart financial decision with low-risk and more money for the future.  Shop around for the best deals or consult with your financial advisor for assistance.
  2. Increased Portfolio Options:
    Many have chosen to fill portfolios with stocks because of a greater chance for return. But in higher interest situations, bonds can be a great asset, and are less prone to risk than stocks. Now, that doesn’t mean that current bonds won’t be affected. Longer-dated bonds will lose value as yields and interest move in opposite directions. However, buying shorter maturities is a great defense, and a trend more people are moving toward.

    By that same measure, stocks can be beneficial for those who are more conservative. As I mentioned previously, the Fed’s actions are a sign that the economy is progressing in the right direction. Kira Brecht at U.S. News suggests that
    sectors like banking, energy, and technology are the best options in this type of situation. It’s worth consideration.

  3. More Money From Annuities:
    Annuities have been steadily declining due to low interest rates. According to the Secure Retirement Institute, sales fell 5% in the first half of 2015, in comparison to the year prior. To put that in perspective, sales rose more than 10% in 2006 but only a paltry 3.8% in 2014. However, that could change. Fixed rate annuities could provide a steady source of income and security in the event that rates drop again. Purchasing from different companies at different times provides an extra cushion in that all of your eggs won’t be in a basket that could be shattered should a company collapse or fall victim to bankruptcy.

Despite these benefits, one could experience adverse effects of hikes in other areas. Credit card users and those considering refinancing their homes may not have much reason to smile. However, gradual shifts provide a time to plan and strategize in ways that make the most sense for your future. If you haven’t already, you should start thinking about how to take advantage of the benefits of this once in a decade moment.