“It’s the Life Insurance Guy Again”

How much should I own?

How do I know how much death benefit is appropriate for my family? This is where working with a Financial Planner can help you accurately assess how much exactly your family would need today if you were to pass. How much of your current debts, future college costs and retirement would you like covered if your family were to have to cover these costs without your income? Many times life insurance agents will try to sell more insurance coverage than is needed to earn more commission on a higher annual premium. We always recommend consulting with Paragon Financial Advisors before buying a policy.

What type of life insurance should I own?

Term Insurance- this is the most affordable way to purchase a death benefit; you can lock in your premium for a set amount of years or “Term”. Many term policies allow you to convert the policy from term or temporary coverage to a permanent policy at the same risk class you were approved on for your term policy years prior. But why would you want to do that? Let’s say that Bob was approved at Select Preferred for a 20 year term policy and a $500,000 death benefit. At year 10 of the policy being in effect, Bob gets a rare disease that could potentially cause him to die prematurely in the next 10-20 years. With the conversion option, Bob has the ability within the life of the 20 year term policy to convert it to a permanent life policy at his select preferred rating without going through medical underwriting again. Otherwise, it’s very likely he would be uninsurable and denied life insurance coverage.

Universal Life Insurance- this is a form of permanent life insurance that allows for flexibility on the premium payment each year. Universal life is generally a less expensive means to a permanent life insurance policy offering the same death benefit compared to other forms of permanent insurance. Additionally, VUL (Variable Universal Life) or IUL (Indexed Universal Life) contracts offer higher potential returns than some other fixed insurance contracts. With a VUL or IUL contract the insurance and administrative expenses are not fixed and could increase as the insured nears mortality age. As interest rates continue to fall since 2008, many Universal Life policy holders from pre 2008 have received notice that their premiums are going up. The flexibility that these life insurance companies offer comes with flexibility on their end as well. Another disadvantage to Universal Life policies are surrender charges to cash values, which can vary from company to company, but many times are 10 years or more. This limits your ability to access the full portion of the cash values until the surrender schedule has been met. Let’s quickly explain some of the different types of Universal Life contracts.

• Guaranteed Universal Life: a “GUL” contract accrues little cash value, maintains a level death benefit and a level premium guaranteed to a certain age (Most are to age 100 or for life). This looks and acts very similar to term insurance, except it is for the insured’s lifetime.
• Variable Universal Life: a “VUL” contract does accrue cash values and has a potentially increasing death benefit with a minimum guaranteed face value that stays in force as long as the premiums are paid. The accrual of cash values and the death benefit is tied to the performance of “separate accounts” which for all intents and purposes are mutual funds. These contracts offer the policy owner market participation via these separate accounts. If the policy underperforms than it could require the policy owner to dump more money into the contract to keep it in force.
• Indexed Universal Life: “IUL” contracts are the most popular universal life policies currently sold. Unlike a VUL contract, they are actually a fixed interest rate product that offers a crediting rate tied to an index, mostly the S&P 500. Insurance companies generally offer several crediting methods: monthly sum, monthly average, a trigger method, or the most popular point to point. These policies many times offer a “floor” or minimum crediting rate to the policy of say +.5% even though the S&P 500 Index return for the year was negative. However, they also “cap” the upside potential of the return of the index and it’s important to note that the insurance companies do have the ability to lower the cap rate and the participation rate on inforce policies. Many IUL policies offer 100% participation up to 12.5%. One final note, the crediting rate applied based on the return of the S&P 500 does not include dividends, a sizeable portion of the total return over 10, 20 and 30 year time periods.

Whole Life Insurance- this is a permanent form of life insurance that accrues cash value and has a guaranteed “face” value or death benefit. Most whole life policies have a contractual guarantee on the return of cash values, many of the large mutual insurers offer 4% currently. It is important to note that this is not a 4% return on your total premium paid but a guarantee return on the net amount applied to cash value after all expenses have been taken out of your premium for the cost of insurance and operational expense. In addition, whole life policies may pay “dividends” into the policy, though these are not guaranteed. This term is not to be confused with the dividend that you receive from some of your stocks in your investment portfolio. Dividends from a mutual company are a return of surplus profits from their investment earnings, mortality experience (death benefits paid) and expenses over that time period and returned to their policy holders, hence the name participating life insurance. When contemplating a whole life policy, generally a well-designed one should reveal positive net cash values at the end of year 5 or 6 under the Current Assumptions Illustration.

What is the purpose of life insurance?

Risk Management: depending on how long your debts and future expenses extend, will help you determine the appropriate length of time you need coverage and what amount of coverage is needed. Many times term insurance will suffice for this need.

Estate Tax: the goal of this policy is to get the highest return of your premium on the death benefit. Many times a husband and wife will get a joint, last survivor policy that pays on the death of the second insured’s passing. This usually allows the insureds to get more death benefit for the same amount of premium. Also, when dealing with estate tax issues, it’s important to note that life insurance does offer an income tax free death benefit, but this amount is included in the value of the estate. In order to exclude the death benefit from the inclusion into the estate value for estate tax purposes, an Irrevocable Life Insurance Trust or “ILIT” is often used.

Creditor Protection & Cash Accumulation: life insurance is a creditor protected asset in the state of Texas and allows the policy holder to enjoy creditor protection on their life insurance values. Once you have maximized your retirement vehicles, life insurance if designed appropriately, may be a good place to put some excess cash.

Tax deferral & Tax Free Distributions: life insurance cash values do enjoy tax deferred growth as the policy values accumulate. In addition, after all premiums have been withdrawn, policy holders can take out cash via loans as a tax free distribution assuming the policy is not a Modified Endowment Contract

What is a Modified Endowment Contract?

A ‘MEC’ is essentially a policy that’s cash value has been “overfunded” based on the limits under the Internal Revenue Code. When a policy is classified as a MEC, any distributions from cash values of the policy are received on a taxable basis first or Last In First Out “LIFO” accounting method. The interest received on premiums is taxed at ordinary income rates and then the premium portion is returned tax free. A ‘MEC’ still benefits from a tax free death benefit, tax deferred growth and creditor protection. To determine if a contract is a MEC, a premium limit is set. This limit (referred to as a seven-pay limit or MEC limit) is based on the annual premium that would pay up the policy after the payment of seven level annual premiums. This limit is based upon rules established by the Internal Revenue Code, and it sets the maximum amount of premium that can be paid into the contract during the first seven years from the date of issue in order to avoid MEC status. Under what is known as the MEC test, the cumulative amount paid at any time in the first seven years cannot exceed the cumulative MEC limit applicable in that policy year.

What company should I use?

First, it’s important to make sure the life insurance company you’re considering is a stable and functioning company able to pay claims to its policy holders with enough reserves set aside to meet these obligations. You never want to purchase a policy from a company that is more sick than you are when you need them! Finding one with a Comdex score above 90 or a minimum Moody’s Investors Service rating of AA or higher is strongly recommended.

Secondly, we recommend using a broker to shop your life insurance need out to many different carriers. Career Agents or those working for a specific life insurance company, have strong incentives tied to their personal benefits to sell their company’s policies even though it may not be the very best one for your situation.

Please contact the Paragon Financial Advisors to review your life insurance policy(s) or help you review the available options to meet your life insurance needs. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients.

 

 

Social Security and Medicare

There are times we read things that cause us to say, as my friend puts it, “I’ll have to think on that.”  Such a time occurred as I read an article in the April 28, 2014 Investment News (pg. 40) written by Mary Beth Franklin. The basic premise was that, in some cases, Medicare costs could exceed the Social Security benefit that one receives. Let’s look at that possibility.

Social Security and Medicare-2014

For 2014, the Social Security tax rate is 6.20% of the first $117,000 of earned income (a maximum tax of $7,254). The Medicare tax rate is 1.45% of all income earned (no upper income exclusion). Thus, most employees pay 7.65% of the first $117,000 earned in Social Security (OASDI) and Medicare (HI) taxes. That is the employee portion only; employers pay an equivalent amount. Self- employed individuals pay a tax rate of 15.30%. As of Jan 1, there is an additional 0.9% Medicare tax (added by Obamacare legislation) on individuals earning greater than $200,000 and couples earning greater than $250,000.  Thus, the maximum tax rate could be 8.55% (6.20% + 1.45% + 0.9%).

Now consider Medicare costs. Medicare Part B (medical insurance) is deducted from an individual’s Social Security benefit every month. There are two components: one for medical expenses and one for prescription drug services. Since the prescription drug service costs vary by location/plan, we will discuss only the medical insurance costs. As one’s income level increases, so does the cost of medical insurance (i.e. an increase in the amount deducted from monthly Social Security benefits). That scale (for 2014) is shown below:

Modified Adjusted Gross Income (MAGI)            Part B Premium                Drug Plan

Indiv <$85k; Couple<$170K                                  $104.90/month                 Per plan

Indiv $85k-$107k; Couple $170-$214k                  $146.90                            Plan + $12.10

Indiv-$107k-$160k; Couple-$214k-$320k             $209.80                            Plan + $31.10

Indiv-$160k-$214k; Couple-$320k-$428k             $272.70                            Plan + $50.20

Indiv->$214k; Couple->$428k                               $335.70                            Plan + $69.30

 

The maximum Social Security benefit in 2014 is $2,642 at full retirement age. The cost of living allowance adjustment (COLA increase) for 2014 was 1.5%. Therefore, a high income individual might be receiving at most $2,236.90 ($2,642-($335.70+$69.30)) less his/her individual prescription plan costs. (Note: These figures were taken from the Social Security website and are applicable for 2014; they change each year).

What’s to Come?

One needs to spend only a short amount of time watching news/economic television channels to see numerous discussions that “something must be done” about entitlement programs (Social Security/Medicare). The current trajectory is unsustainable. Various solutions have been proposed: 1) Increase taxes, 2) Raise the retirement age for Social Security benefits, 3)Means test benefits (those individuals with higher incomes will receive lower/no benefits from Social Security), or some combination thereof. The purpose of this blog is not to suggest solutions for the problem; that is in the political arena and, given current political conditions, who knows what will happen. Our purpose is to suggest that plans must be made for significant changes in health care expenses as one prepares for retirement.

Health care costs are expected to increase by 5-7% per year and Social Security benefits to increase by 2% (unless changes are made to the COLA adjustment index- such as use of a “chained CPI” calculation-but that is another discussion entirely). Bottom line—health care expenses will consume a greater proportion of Social Security benefits (if any are received) in the future.

In previous a previous blog found HERE we have discussed costs of health care under the current Medicare plans. They are significant—providing approximately $300-400,000 for a couple in excess of existing Medicare benefits. Any changes made in the current plan will only exacerbate the shortage of money needed for health care in retirement.

What to Do?

Prudent financial planning requires that one take appropriate action to prepare for contingencies that appear possible or probable. If one looks down, sees a steel rail on the left, a steel rail on the right, and a bright light down the tracks in the distance, a good course of action might be to step off the railroad track. So what does one do? Work longer? Save more? Spend less? Move to a lower cost of living state? Purchase long term care insurance?

We at Paragon Financial Advisors do not sell any commercial products (insurance, etc.).  We help our clients evaluate personal circumstances and assist in determining the best course of action.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Not Getting Older-Just Wiser!

My parents taught me to respect my elders. As I get older, it’s getting harder and harder to find anyone more elderly than I. However, there are some advantages to ageing (other than the obvious one of a longer life span).  I thought I would mention just a few in this blog.

Age 50-Investing

Unfortunately, many Americans have not saved adequately for retirement. Because of that, contribution limits for certain qualified plans have been increased for those persons age 50 or older.  These “catch up” provisions are designed to allow individuals to save more in the years before they retire. Persons age 50 and older can contribute as much as $23,000 of their pre-tax pay into a 401(k) or 403(b) plan; that’s $5,500 more than allowable contributions for younger individuals. An additional $1000 is allowed for contributions into an IRA or Roth IRA ($6,500 per year vs. $5,500 for younger individuals).

Age 55

Normally, withdrawals from an employer qualified plan prior to age 59 ½ are penalized for premature distribution (10% penalty plus ordinary income tax). There is an exception for employee’s age 55 that leave their employer (retire, are laid off, or quit). Those employees may access their qualified plans without the premature penalty. Note that this exception does not apply to IRAs so there are rollover planning considerations here. Not converting to a self-directed IRA would allow the departing employee to access their funds without the premature distribution penalty.

At age 55, people may also contribute an additional $1000 (in 2014) into health savings accounts.

Age 59 ½

At 59 ½, individuals are free from penalties for withdrawing from most retirement plan accounts (IRAs, employer retirement accounts if you are no longer working, annuities, etc.). Also, at 59 ½, moneys converted from a traditional IRA to a Roth IRA are no longer subject to the requirement of staying in place for five tax years or being subject to a penalty.

Age 65

At 65, you can make nonmedical withdrawals from a health savings account without the 20% penalty. The money is taxable but it grew tax deferred from the date of contribution. 

Another big consideration is Medicare eligibility with the associated required costs for many individuals. There are planning considerations that are required at this age as you begin your Social Security/Medicare arrangements.

Age 70 ½

At 70 ½, you reach the age of required minimum distributions (RMDs) from IRAs and most employer retirement plans. The IRS has allowed tax deductible contributions and tax deferred growth in such plans; now it’s time to “pay the piper.” There is a mandated rate of withdrawal required from qualified plans beginning at this age; failure to withdraw that amount will result in ordinary income taxes plus a 50% tax penalty on the amount that should have been withdrawn.

A popular tax break in 2013 allowed individuals who have RMD requirements to make charitable contributions from their RMD amount directly to a church/charity with no tax consequences. There is no tax deduction for the amount donated but that amount is not included in taxable income. Although currently expired, there is a general expectation that this provision will be reinstated for 2014.

What to Do?

While we at Paragon Financial Advisors do not prepare taxes, we can help our clients plan their financial affairs to minimize tax consequences while attaining financial goals. Individual circumstances should be reviewed with your tax professional. By the way, don’t forget to ask for the “senior discounts” allowed by restaurants, hotels, airlines, etc. Ages for these may vary with the business involved.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Paragon Perspectives

How long can a good thing last?  This summer has been quite mild in comparison to the past several Texas summers, but as many of us know, one strong high pressure system can change all of that.  The stock market and Texas weather may have a few things in common. Over the last 18 months the stock market has been performing well, but how long will it last and is there a bubble brewing?   


We at Paragon Financial Advisors manage client assets primarily for the long term, depending on the client’s goals, objectives, and risk tolerance.  When constructing an investment portfolio consideration is given to diversification, current investment environment, and which investment vehicle is the best fit for a portfolio (ETFs versus actively managed funds for example). This quarter's newsletter discusses three different investment topics.


The first article is a market commentary which outlines strengths and weaknesses in the economy.  The second article “ETFs Versus Actively Managed Funds” discusses what one should consider when choosing between ETFs and Actively Managed Funds.  The last article examines some broad points on types of diversification: the normal diversification between stocks and bonds and the diversification within a certain asset class. 


How long will this current bull market last and is there a bubble brewing in the stock market?  Only time will tell for sure! Therefore, we will continue to review economic data, asset allocations, and asset diversification to guide us as we move into the remainder of this year and into next year.


Sincerely,


David Hailey CTFA® CFP®


If you did not receive a copy of this quarter's newsletter please email info@paragon-adv.com to request a copy. 

Tax Day

Well, April 15^th has come and gone.  Following that date, many taxpayers become intimately familiar with Ms. Pelosi’s comment about having to pass Obamacare to find out what’s in it.  The increased tax paid by many individuals has caused us to evaluate (again) some tax strategies for investing.  We have always maintained that the “tax tail shouldn’t wag the investment dog;” however, tax impact certainly warrants consideration all other things being equal.

 

Many events can impact taxes in the investment arena.  After all, the primary goal of investing is to maximize the after tax return to the portfolio for the risk level chosen. Three general rules apply:

1. Avoid taxes if legally possible
2. Defer taxes until a future date
3. Then if 1 and 2 are not practical, pay the taxes at the lowest rate possible.

With these general rules in mind, let’s discuss some investment strategies with income tax ramifications.

Investment selections

The investment chosen has tax ramifications.  Mutual funds buy and sell stock throughout the year.  Those transactions generate capital gains (hopefully) which are passed on to the mutual fund owner who is responsible for the income taxes on the gain (in taxable accounts) Therefore, portfolio turnover (how often the mutual fund manager buys and sells) can be a factor in investment selection.  Index funds generally have lower turnover than actively managed funds.  Municipal funds can provide income free from income tax and the Obama care surtax.

Investment Location

Some accounts defer taxes until the future (IRAs, 401(k)s, and other tax qualified plans.  As such, these accounts are generally more suitable for investments with a higher known return (such as taxable bond funds in a historical interest rate environment).  Note that losses on investments are not deductible when they occur in such a qualified account.

Tax Loss Harvesting

This strategy utilizes general rule 1: don’t pay taxes.  In taxable accounts, gains on one investment may be offset by the loss on another investment, a net zero addition to taxable income.   You can also offset ordinary income up to $3000 per year with losses that exceed gains.

Withdrawal Strategies

As a general rule, spend from taxable accounts first, and then from tax deferred accounts.  Some caveats to this general rule exist.  IRAs have required minimum distributions (RMD) requirements that begin at age 70½. If these RMD amounts are such that they might increase the tax bracket in later years, consideration should be given to earlier withdrawal.

Roth IRA Conversion

Roth IRAs do not allow tax deductions for contributions to the account; however no required minimum distribution is required from the account and the investments grow tax free (not tax deferred).   Contribution limits apply to such an account depending on the investor’s income level.  Funds from existing qualified accounts can be rolled into a Roth IRA regardless of income earned.  A Roth conversion strategy does require payment of taxes on the amount rolled into a Roth account.  It works best if the investor has outside funds with which to pay the taxes.  Planning techniques exist for these conversions that we will not discuss here but that do potentially affect taxes on the amount converted.

At Paragon Financial Advisors we do not prepare taxes and urge you to consult your tax professional for your personal circumstances.  However, we can assist you in planning your investment strategies to minimize the “April 15^th” effect.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Long Term Care Expenses

As the American population ages, they face the prospect of long term care expenses.  Some families faced this problem with their own aged parents and are now trying to decide how to handle the possible need for themselves.  As people evaluate their options, they are facing several factors.
 
Cost of Care
 
According to the insurer Genworth, the median US rate for a private nursing home room in the US is approximately $84,000 per year.  In Texas, that figure is $65,000 and in the Bryan/College Station area, it is $62,963.
 
Assisted living facilities cost $41,400 (median US; Texas is $42,270; and Bryan/College Station is $44,400. The annual inflation rate in Texas has been approximately 5% for assisted living facilities.
 
Method of Provision
 
Several alternatives to fund long term care are available:
 

1. Insurance policies—Long term care insurance has been a method used by many to pay for care. However, this market is changing.  Some long-term care policies written in past years are not meeting actuarial assumptions; therefore the insurance caregivers are attempting to modify these contracts.   Newer polices are more expensive or have reduced benefits.  Policy premiums obviously vary depending on age and health of the policy applicant. In some cases, women are being charged more than men because their claims are longer (longer life expectancy) and more expensive.
2. Self Fund- -Individuals may plan to pay long term care costs from their assets.  In this case, the obvious questions arise:
• How long will the care be required?
• What will be the inflation rate on cost of care?
• What will be the rate of return on assets reserved for long term ca
3. “Coinsurance” Planning- Individuals may opt for reduced insurance benefits and plan to supplement those benefits with personal funds.  You have many options available for long term care insurance policies; determining the appropriate policy requires considerable evaluation to ensure the policy you purchase best meets your needs.

If you are self funding, we recommend that you reserve at least three years (inflation adjusted) needs per person based on the cost of care in your area.

Paragon Financial Advisors do not sell insurance (or any products).  However, we do assist our clients in the evaluation of planning options to provide for long term care expenses.  Please call us if you would like to schedule an appointment to evaluate your circumstances.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Long Term Care

Declining ability to take care of one’s self is a rising concern, especially as life expectancy increases. The prospect of spending time in a care facility is not something anyone desires; however, it will be a fact of life for some. As such, prudence demands that long term care provisions be addressed in any financial planning—especially for aging individuals. Let’s review some facts:

1. Currently, 70% individuals over the age of 65 will spend time in a long term care facility.
2. The average length of stay in a long term care facility is 2.44 years.
3. The national average cost of a semi-private room in an assisted living facility is about $250 a day, or $91,000 a year
4. Long term care costs have been rising at about 4% per year.

Given these statistics, the financial impact of long term care must be considered in retirement planning. In addition, family conditions must be considered. Will there be a support system (family close-by) that will allow individuals to live at home as the ability to take care of themselves declines? How do we plan for those contingencies? We discuss some of the options below.

 

Self-Insure

 

Individuals with significant assets have the ability to cover costs of long term care from their own income/assets. Level of benefits and quality of care simply becomes a cost/benefit decision. However, the majority of individuals are not in the position of doing this.

 

Long Term Care (LTC) Insurance

 

Long term care insurance is an option for many individuals; however, the LTC insurance industry is in a state of flux. There are several factors to consider here:

1. Insurance Company- As with any insurance product, the quality of the insuring company affects the likelihood of future ability to pay. It is interesting to note that two of the largest insurance companies (Genworth Financial and John Hancock) have filed for premium increases on their long term care product. Apparently the actual costs experienced have exceeded the actuarial assumptions used in pricing older long term care policies. NOTE: An obvious implication for policyholders of older policies is to carefully weigh any “opportunity” to switch from an older policy to a newer policy. It is quite likely that newer policies will not provide the same level of benefits at a comparable cost.
2. Insurance Policy- The actual insurance policy options vary significantly. Some of the questions to ask about policy coverage are:
• Gate keepers- Gate keepers are those conditions that must be met before the policy begins paying benefits. Usually these are expressed in the ability to perform specific functions (i.e. feeding, toileting, transfer of locations, etc.)
• Care location- Does the policy provide for benefits when the individual is at home with a caregiver, or do benefits become payable only when the individual is in a long term care facility?
• Benefit coverage- How long will care benefits be paid? Is there an escalation benefit to allow for increases in long term care coverage costs over time?
• Exclusion provisions- How long must the individual wait before benefits under the policy begin paying? Is a prior hospital stay required?

Long term care policy purchase decisions warrant significant consideration. Policy differences can be substantial and costs vary dramatically. A frequent question arises concerning when to purchase a policy. The older the individual, the more costly the policy; consequently, purchasing a policy at a younger age (in the 50s age group) might make more sense.

 

Medicaid

 

In some cases, long term care benefits are available for individuals who lack personal resources or long term care insurance. Such Medicaid payments are made to the long term care provider on behalf of the individual. Obviously there are conditions which must be met. There are two primary conditions:

1. Means test- The amount of monthly income for the individual cannot exceed a certian amount per month.
2. Asset test- The assets available to the individual in terms of savings, investments, etc. cannot exceed specified levels.

There are planning techniques available to address these two conditions; they are complex and warrant discussion on an individual case basis.

 

We at Paragon Financial Advisors do not sell insurance (or any other) products; however, we can help our clients evaluate long term care options available to them. There are alternative products (usually in the life insurance market) which are available but the cost/benefit in them warrants specific analysis. Please call us if you need assistance in planning for your long term care needs.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

 

 

United States. Department of Health & Human Services. Long –term Care Insurance Costs. N.p.: Administration on Aging, June. 2012. Web. 14 March 2014.

Cost of Health Care-Medicare

Retirement planning involves covering estimated expenses in retirement from known resources. Those resources may include pensions, Social Security benefits, earnings from investments, part-time work, or any combination of the above. Estimating expenses in retirement can be a more “interesting” exercise. Many pre-retirees can make a reasonable estimate of basic living expenses (usually in today’s dollars which can be adjusted for inflation). One of the major variables, especially in the new era of Obama care, is the cost of health care over a retirement career.

Health care costs have risen over 400% since the early ‘80’s (Dept. of Labor Statistics, Consumer Price Index as of Nov, 2012). In addition, they represent one of the top three (number 2) household budget items (Infogroup/ORC , Princeton, NJ telephone survey in March of 2010). Most people assume costs will be covered by private insurance or Medicare. The private insurance situation is certainly “up in the air” given uncertainty surrounding the implementation of Obama care. But how about the health care costs associated with Medicare? According to a Fidelity Benefits Consulting estimate in 2013, the average out-of-pocket health care cost for a 65 year old couple is $220,000 (assumed no employer provided retiree health care coverage, traditional Medicare benefits, and life expectancies of 17 and 20 years respectively for husband and wife). Obviously, individual costs will vary depending your specific health level and age at retirement. To evaluate how much you need to plan on health care spending, let’s look at some of the Medicare options.

Medicare Options

Medicare has several options; these are as follows:

• Part A- Hospital insurance
• Part B- Medical insurance
• Part D- Prescription drug coverage
• Medigap- Medicare supplemental insurance
• Part C- Medicare Advantage Plans

There are key dates associated with Medicare enrollment (generally reaching age 65)—you should contact the Social Security office to ensure compliance with those programs.

Medicare Costs

Now let’s examine some of the cost the retiree must pay under Medicare.

1. Deductibles (paid by the retiree) for Part A (Hospital insurance)
• Days 1-60---$1184
• Days 61-90--$296 per day copay (29 x $296= $8584)
• Days 91-150—“lifetime reserve days at $592 per day (59 x  $592 =$34,928)
• Days 151+--All costs paid by retiree
2. Costs (2013) for Medicare Part B—medical insurance
• Monthly premium--$104.90 (increases as adjusted gross income increases
• $147 deductible
• 20% coinsurance paid by retiree on doctors’ services and outpatient care
3. Prescription Drug Coverage-Medicare Part D
• Benefits here are complicated depending on drugs (generic or branded) and the “donut” hole (i.e. that area in prescription cost in which the Medicare recipient pays the full cost of prescriptions). Suffice to say that the retiree can pay up $4,750 out of $6,735 in total drug cost.

Medigap Insurance

Supplemental Medicare insurance (Medigap) provides insurance coverage for some of the items Medicare does not cover. The basic items in this insurance are as follows:

1. There are 10 standardized plans offering different levels of coverage.
2. The premiums for the same coverage or plan vary with the state where the Medicare recipient resides and the insurance company providing coverage in that state.
3. Recipients may see any doctor who accepts Medicare.
4. There is no coverage for prescription drugs, dental, hearing, or vision costs.

Medicare Part C

Medicare Advantage plans include HMOs, PPOs, private fee-for- service plans, and Medicare specialty plans. They usually address Part A and Part B expenses and may cover prescription drugs. Expenses are less if one uses the “in-network” medical providers; however, one may choose “out-of-network” doctors (usually by paying an increased cost). Other services (dental, hearing, and vision) may also be covered.

Key Questions

As you choose your options under health care services, there are several questions you should consider.

1. Do you have insurance coverage for dental, hearing, and vision (services not covered by Medicare)? If not, is that coverage important to you?
2. Do you want to continue seeing your current health care providers?
3. Have you considered the total out of pocket costs for prescription drugs—especially as you age.
4. Do you want the ability to choose your own health care provider (particularly specialists) rather than be forced to choose from a pre-selected group of providers?
5. Do you have protection in the case of catastrophic illness?

Total Cost

 

Total cost for insurance outlined above will obviously vary (state of coverage, income levels, and plans chosen). However, for a married couple age 65 years of age with combined annual income less than $170,000, annual costs would be $5000-$6000 per person. That is coverage for insurance only and does not include the out of pocket expenses that the couple would pay resulting from a hospital stay or prescription drugs required.

 

We, at Paragon Financial Advisors, will be glad to assist you in planning for retirement. We are fee only planners and do not sell any insurance products. Our goal is to help you make the best economic decisions for you. Implementation of those decisions is done through the appropriate professional of you choice. If you have unanswered questions or need additional guidance please call us. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.We offer financial planning and investment management services for clients.

 

December Quarterly Newsletter

Paragon Perspectives

As 2013 draws to an end, we want to use our final newsletter to say “Merry Christmas,” “Happy New Year,” and “Thank You” to our readers.  We are privileged to work with you and we truly appreciate the opportunity to do so.

 

We have included in this issue some items that are intended to begin 2014 on the right “note”.  Our first article discusses a common question we are asked:  “Can I meet my income needs in retirement.”  This article will discuss how to plan and measure effectiveness to ensure that you have adequate retirement income.  

 

The second article discusses a lapsing required minimum distribution option, qualified charitable distributions made directly to a church/charity.  Although that option is technically expiring in 2013, we are hopeful it will be extended (as it has been in the past). 

 

Our final article is a discussion based on a Nobel Laureate economist, Robert  J. Schiller.  Mr. Schiller feels strongly that financial advice would benefit many more Americans than just those who are currently using it.

 

We at Paragon Financial Advisors hope you and your families enjoy a truly joyous holiday season!

 

Sincerely,

 

Wm. Jene Tebeaux CFP® CFA® CAIA®

 

 

Meeting Income Needs in Retirement

 

One of the most frequent questions we are asked by clients is, “Do I have enough assets to meet my income needs in retirement?”  The most obvious question we first ask is “How much will you need for living expenses?”  Most clients have a general idea of that amount.  Frequently they will know an amount in today’s dollars; we will adjust for inflation.  One factor frequently overlooked, however, is healthcare costs. That cost is especially critical in light of the Affordable Care Act. That act is causing significant changes in health insurance coverage, as well as the premiums for coverage, and the deductible amounts to be paid by the individual. Another important consideration is the tax payments required if assets are withdrawn from qualified plans.  We will discuss this more in a later article on charitable donations from an IRA.

 

So how do you plan (and measure effectiveness to ensure adequate retirement income)?  There are several methods.  We will discuss them below.

 

Capital Preservation- This is a relatively simple approach where one tries to preserve principal and spend only dividends and interest.  A successful year is one in which your account balance at the end of the year is equal to or greater than the balance at the beginning of the year.  There are potential problems with this method. Dividends and interest may not meet your income needs, especially when you adjust for inflation.  You may also need to spend principal if your actual life exceeds the projected mortality table.

 

Rate of Return- With this method, one considers whether the expected return on the portfolio meets or exceeds the required rate of return to meet living expenses.  A potential problem in this method is “chasing return” by increasing risk in the portfolio.  That risk means a higher chance of success and failure.  Remember, portfolio losses can be more devastating than potential gains not realized.

 

The Balance Sheet- This approach is more complicated but it mirrors the method used by large pension plans.  You match the actual present value of your investments with your projected income needs. This method is the least frequently used method by financial planners; however, in our opinion, it is the most effective.  This approach basically matches the present value of your estimated income needs with the present value of investment growth and income streams (such as Social Security and pension benefits.)  A key assumption in this approach is the interest rate assumption (the least risky one) used in discounting to present value. 

 

Combined Methods- some investors prefer to combine methods to provide a “cross check” on reaching income needs.  The key is to determine whether your portfolio lasts beyond your household’s expected life span.

 

One item is critical in this entire process; answering this income sufficiency question is an ongoing process.  It should be re-evaluated annually.  Life circumstances change.  Investment markets are volatile.  Social Security/pension benefits change at first death.  Politicians are still active at the federal and local level.  We, at Paragon Financial Advisors, help our clients in this ongoing monitoring process.  Please call if you have any questions.

 

Charitable Donations from an IRA

 

December 31, 2013 is fast approaching. With year end comes another end, the end of the qualified charitable distribution (QCD) provision that allows up to $100,000 per year in required minimum distributions (for those age 70 ½ or older) to be donated directly to charity with no income tax consequences to the donor. This provision has expired before ( in 2012) and was reinstated (in 2013). Will it be reinstated again? We don’t know but sincerely hope so. The provision allowed IRA holders who faced a required minimum distribution (RMD) from their IRA to make a donation paid directly from the IRA to the charity and have that donation count as part of their RMD. The IRA owner would not get a tax deduction for the contribution; however, the distribution would not count as taxable income. Sounds benign, does it not? Why go through the process? Tax law changes beginning in 2014 have provisions that could definitely affect such distributions to IRA owners in the higher tax brackets. Consider the following example:

 

Ted and Alice are age 71 (thus subject to RMD) have IRAs with total RMD amounts of $200,000. Assume they have an adjusted gross income (AGI) of $250,000 for 2013 (excluding the RMD amounts). Let’s look at their alternatives. They could donate the entire $200,000 RMD amount from their IRAs directly to church/charities of their choice. They could not deduct the donations from their taxable income; however, the IRA distributions would not be included in their taxable income for 2013. In this case, the RMD would not change their tax situation at all.

 

Now assume Ted and Alice decide not to utilize the QCD option. They take the distributions from the IRAs and make the same $200,000 in donations. What happens?

 

1. Their AGI would rise from $250,000 to $450,000. That increase would move them into a higher income tax bracket and subject the additional $200,000 to the 3.8% health care tax. (see 4 below)
2. The couple would not be able to claim their two full personal exemptions. The $3900 per exemption begins to phase out at $300,000 in AGI. Their exemption would disappear as the phase out is complete at $422,500.
3. Their deduction for $200,000 donated would be reduced. In 2013, there is a 3% limitation on overall itemized deductions; that limitation begins at $300,000 for a couple filing a joint return.
4. Ted and Alice would also find themselves subject to the 3.8% Obama care tax on the lesser of their net investment income or their marginal adjusted gross income above their threshold amount of $250,000 (married couple filing jointly).

With no difference in what the church/charities receive, Ted and Alice have subjected themselves to a tax increase of approximately $10,000.

 

We, at Paragon Financial Advisors, do not prepare tax returns or legal documents; we work with the professional of your choice for those services. However, we can assist you in developing strategies for your consideration to maximize your financial goals. Please call us with any questions.

 

 

Financial Advice for Everyone

 

The December 9, 2013 issue of "Investment News" (Universal Financial Advice a Costly Endeavor, p. 8) discussed some interesting points presented by Nobel Laureate economist Robert J. Shiller. Mr. Shiller feels financial advice is important for all, so important that he has advocated that the government subsidize personal financial planning advice for those who can’t afford it! This is especially true for the middle and lower income economic classes. His comment: “People make better decisions with financial advisors.” He indicated that the past economic crisis was exacerbated by the lack of good financial advice. (Americans took out enormous amounts of debt on houses which they were incapable of repaying.)

 

Mr. Shiller is suggesting that the government subsidize four hours per year (at $75 per hour) for financial advice. He has noted that most Americans have relied on salesmen (in one form or fashion) to assist them in financial decision making. Non fiduciary financial advisors, real estate agents, direct sales people, etc. have provided assistance/influence in financial decision making for many Americans. In many (most) cases, the advisor has a vested interest in the outcome of the transaction, an interest that might not always be in the best interest of individual receiving the advice.

 

Likely? Probably not, as the expense would be significant. However, it is interesting to note that a Nobel Laureate is recommending financial advice for the majority of Americans. One need only to look at the curriculum of high schools, junior colleges, and senior colleges to fully understand how much (or how little) emphasis is being placed personal financial planning topics. After all, some of these items come under the heading of “basic financial literacy” required in our world today.

 

If you would like to receive a copy of our quarterly newsletter please email info@paragon-adv.com.  If you have unanswered questions or need additional guidance please call us. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management services for clients.