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.

 

Economic Indicators That Really Matter

The “talking heads” on the financial news networks broadcast a seemingly never-ending stream of numbers and discuss the implications of those numbers on the investment market. While we at Paragon Financial Advisors do not presume to be economists, there are some numbers which definitely warrant following. Some of the major ones follow:

Gross Domestic Product (GDP)

The gross domestic product of the United States is a measure of its economic activity. For the mathematically inclined: GDP=C+I+G+NX (or Consumption + business Investment + Government + Net eXports). Consumer spending accounts for approximately two-thirds of GDP. Some of the categories here include durable goods (autos, furniture, etc.); non-durable goods (food, clothing, etc.); and services (approximately 45% of GDP). Investments (excluding real estate) in business equipment and furniture account for approximately 18% of GDP. Third quarter 2013 GDP showed an annualized rate of about 4%; however, estimates for 2013 in total are in the 2% range. Estimates for 2014 are in the 2-2.5% range. The bottom line at this point in time is spending is up but at a lower rate than recoveries from previous recessions; non-durable goods spending is weak but improving.

Unemployment

Employment is down approximately 8 million people in the recession and about 3.5 million jobs below pre-recession levels. The most commonly quoted “unemployment rate” is the U3 rate—the current number of unemployed divided by the civilian labor force (currently 7%). There has been much discussion about this number. The “unemployed” in the numerator is affected by people dropping out of the job search and “part time” employees. Therefore, other employment data warrants consideration. The U6 rate captures these discouraged and part time workers—it is approximately 14%. Another consideration is the extended unemployment figure (unemployed persons for greater than 27 weeks). There are approximately 4 million such persons (about 3 million greater than prior recessions). One of the most significant numbers (in our opinion) is the civilian participation rate. That ratio is the number of people in the labor force divided by the working age civilian population (currently 63% and at levels not seen since the mid-1970s). From a societal standpoint, there are significant differences in unemployment rates; the unemployment rate for high school graduates over the age of 25 (with no college) is approximately 15%.

Interest Rates

Quantitative Easing (I, II, Operation Twist, and III) has increased the nation’s balance sheet by approximately $4 trillion with the first sign of tapering just appearing in December. The large scale asset purchase plan is still buying $75 billion in Treasury and mortgage backed securities per month. In addition, the second part of the interest rate plan (the zero interest rate policy) of 0 to 0.25% on feds funds appears to be in place until the 2016 or 2017 time frame. The fed funds rate in the ’81-’82 recession was 18%; in the ’74-’75 recession it was 12.5%. In spite of the excess liquidity coming into the system, inflation (see below) has been below Federal Reserve target levels. The money multiplier has dropped significantly as the reserve required for banks has been increased by banking regulators.

Exchange Rates

The rate of exchange of the US dollar vs. other major currencies is much lower than previous recessions; this rate has a direct impact on the net exports included in GDP.

Inflation

Inflation, as measured by the personal consumption expenditures (PCE) price index, is currently below 2% (the Federal Reserve desired level). The current rate (excluding food and energy) is approximately 1.5%. The PCE rises less than the Consumer Price Index (CPI); however, the CPI does not take into account “substitution” (where consumers have substituted goods whose prices are stable for those goods whose prices are rising). Lower inflation raises the prospect of deflation—a much harder problem to manage. Just ask the Japanese over the last two decades.

So what does all of this mean for the investor? Weak GDP growth, high unemployment rates, low interest rates, low foreign exchange rates, and low inflation lead to modest expectations for 2014 (as the Fed keeps QE and ZIRP in play). Pension benefit obligations of $7.5 trillion on federal government retirees and approximately $21.6 trillion in unfunded Social Security benefits are not included in our current $17 trillion national debt. These unfunded obligations, and the declining number of workers per retiree (from 9:1 to 3:1), imply that there will be significant changes in the future.  What are those changes? Ah, remember the old curse—“May you live in interesting times.”

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.

Hedging with Social Security Benefits

There is much discussion in Washington these days about “entitlement reform.” An obvious example includes the Social Security system. A question that often arises in this area is “When should I begin to draw my benefits?” That question is critical since the benefits one receives is reduced if taken before “full retirement age” (which is determined by your date of birth) and increased if taken after full retirement age. For example, for an individual whose full retirement age is 66, starting social security benefits at age 62 (the first year of eligibility) will reduce the monthly benefit by 25% for the remainder of the individual’s life. Delaying the start of benefits until age 70 will increase monthly benefits by 30%. There is basically a 6.3% reduction in benefits for each year one elects to start benefits before full retirement age and an increase of 8% for each year after full retirement age until age 70. There are no further increases in benefits after age 70.

The strategy of “file and suspend” is one way to provide some benefit and still allow a couple to provide for an increase in social security benefit. The primary breadwinner (at full retirement age) can file for social security benefits but “suspend” the beginning of payments until a future time (say age 70). The spouse can receive “spousal benefits” of approximately 50% of the primary beneficiary’s benefit at the filing date. What’s the result?

1. The couple receives some social security benefit (1/2 of the primary’s benefit) at the primary’s full retirement age.
2. The primary can defer starting his/her benefit until a later age and enjoying an increase of 8% per year for such deferral.
3. The spouse can receive a higher benefit if he/she uses the spousal benefit in lieu of taking his/her own benefit until a later age.
4. If the primary breadwinner dies before the spouse, the spouse’s survivor benefit will be larger (based on the higher benefit attained through deferral until a later age).

There is some flexibility in such a choice. If circumstances change and the primary would like to receive his/her benefit prior to age 70, there are two choices:

1. File for an increased benefit (greater by 8% per year for each year past the full retirement age) and receive that larger benefit for life, or
2. Request a retroactive benefit based on benefits due at full retirement age and continue the full retirement age benefit for life.

For example, if the primary’s benefit at full retirement age was $2000 per month, and at age 68 the primary decided to request benefits, his/her options would be:

 

1. Collect an increased benefit based on age 68 of approximately $2333 per month (8% increase per year for each year deferred) and that benefit would continue for life.
2. Request a retroactive benefit of $2000 per month (based on benefit eligibility at full retirement age) for two years (24 months x $2000=$48,000) and continue receiving $2000 per month for life.

We at Paragon Financial Advisors are happy to assist you in your analysis of benefit eligibility; however, we want you to confirm your options with the Social Security Administration to ensure that your particular circumstances conform to the general guidelines. Our goal is to assist you in providing options/choices in your financial planning. No one knows what the future holds, but the more options you have, the better the final outcome will be. 

 

 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 investmentmanagement services for our 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.

Your IRA Investment

Clients frequently ask about “non-traditional” investments in their IRA-especially in this investment climate.  Let me quickly say that some of these investments are possible; however do not make any investments without consulting your tax advisors.  Improper investments can result in disqualifying your IRA and subjecting yourself to IRS penalties and interest.  Here we are briefly discussing some of the questions we have been asked. 

 

While there is great latitude in permissible assets in an IRA, there are some restrictions.  There are some assets which are prohibited (such as art, antique cars, etc.)  There are also prohibitions against self-dealing (using IRA funds to purchase your home or borrowing money from your IRA).  There are some investments which generate unrelated business taxable income, or UBTI (income which is taxed to the IRA and again when the money is withdrawn from the IRA).  In addition, one must realize that some “nonstandard” investments are illiquid; therefore, how do you satisfy the required minimum distribution (RMD) amounts at age 70 and a half?  While it is not our intent to say “never”, it is our intent to caution IRA holders that improper investing in an IRA can have severe and significant tax consequences.

 

Can I own real estate in my IRA?  Perhaps.  If you can find a custodian willing to hold the real estate, you are not engaged in self-dealing, and you have other IRA assets from which to take required minimum distributions, then yes.  But be careful of any potential UBTI consequences.

 

Can I use my IRA assets to start a business?  Again, perhaps.  This area is really complex.  Realize that loses (as many startups do not succeed) are not deductible in an IRA.  Also, a partial funding of the business with a loan for the balance is not permissible.

 

We at Paragon Financial Advisors will be happy to visit with you about any non-standard investing; however any such investments should be discussed with your tax counsel prior to investing.  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.

Stock Market Bubble

The word “bubble” is surfacing around the stock market as it marches to all time highs.  But is there rationale for that movement-or is quantitative easing (QEI, QE2, Operation Twist, QE Infinity) and a zero interest rate policy (ZIRP) drawing investors to riskier assets (stocks) since bond yields are so low?  The Federal Reserve personnel have been indicating a “tapering” of QE in late 2013 or early 2014; they are also saying that ZIRP will be around significantly longer.  A recent Federal Reserve research study indicated such a policy might continue until 2017.  So what do you do?

First, examine the asset allocation in your investment portfolio.  Is the proportion you hold in stocks, bonds, and money market reserve appropriate for your goals and objectives?  If there is a correction in the stock market, how will your portfolio be affected?  If interest rates rise, what will be the impact on your bond holdings (interest rates and bond prices are inversely related, so as interest rates rise, bond prices decrease).  Can you tolerate, financially and emotionally, the decrease in your portfolio that such changes might bring?

Second, examine your individual investments.  If there is another credit (lending) crisis, will your stock holdings be able to survive?  Companies with low debt and large cash positions on the balance sheet aren’t as dependent on the credit markets as highly leveraged companies.

Third, stocks are not equally susceptible to price changes in the general market.  Some stocks have a lower “beta” or movement relative to the general market than others.  Such stocks will decrease less in value in a general market correction.  A frequent advantage of such stock is they usually pay higher dividends to stock holders.

Fourth, examine your bond holdings.  As we noted, bond prices will decrease as interest rates increase.  That decrease generally will be less dramatic on shorter maturity bonds or bonds with higher coupons.  With interest rates at current (low) levels, it would appear that the next major move in interest rates would be an increase.

We at Paragon Financial Advisors will be happy to assist you in reviewing your portfolio to assure that it is consistent with your goals and objectives.  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 investmentmanagement services for clients.

Sunshine and Roses

It’s Friday November 8, 2013 as I write this and the stock market is basking in all-time highs-which were driven by based on an employment report of 204,000 jobs added vs. the 120,000 median forecast of 91 economists surveyed by Bloomberg.  In addition, the third quarter gross domestic product (GDP) grew at an annualized rate of 2.8% vs. 2.5% for the prior quarter.  Happy days are here again, right?  Well, as broadcaster Paul Harvey used to say, there’s always “the rest of the story.”

Employment- the unemployment rate increased slightly (from 7.2% to 7.3%); however, there are some calculation “quirks” that influence that number.  Any person who drops out of the labor force (i.e. not actively looking for a job) is not counted as “unemployed.”  An elimination of such persons thus reduces the unemployment rate.  The number of people not in the labor force increased in October by 923,000 bringing the total number to 91.5 million Americans.  This increase was the third highest monthly increase in Americans leaving the labor force in U.S. history.  Perhaps a better employment indicator is the labor force participation rate which measures the proportion of Americans actually working.  In October, the labor force participation rate declined to 62.8% from 63.2 % in September; making this is the lowest participation rate since March 1978.

GDP- the GDP (sum of all goods and services produced in the U.S.) annualized growth of 2.8% appears to have been heavily influence by a one-time buildup of business inventory.  That growth rate will subside if demand for that inventory doesn’t materialize.  Excluding inventory gains, the growth rate for the third quarter was 2%; dropping below the 2.1% second quarter rate.  Meanwhile, consumer spending (which makes up about two thirds of spending) rose at the slowest rate since 2011 while corporate investment fell.

All of this brings to mind the old Chinese proverb or in this case a curse: “may you live in interesting times.”   Times are interesting, aren’t they?

While the resources presented here can be a great start, we recommend that you speak to a professional.  If you have unanswered questions or need additional guidance please give us a call.  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.