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Retirement

Top 5 Things Baby Boomers Should Know

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  1. The Social Security COLA (cost of living adjustment) in 2019 will be 2.8%.

This is the largest COLA increase from the Social Security Administration since 2012.1

  1. Social Security benefits are often taxed.

If you work and are at full retirement age or older, you can earn as much as you want and your benefits will not be reduced; however, you may have to pay taxes on them. If your annual combined income is from $32-$44,000 filing jointly, you may have to pay taxes on 50% of your benefits. If your income is more than $44,000 filing jointly, then you may have to pay taxes on up to 85% of your benefits.2

Social Security calculates “combined income” by adding one-half of your Social Security benefits to your other income.2

  1. RMDs can have a profound effect on taxes.

Many people forget that RMDs (Required Minimum Distributions) begin at age 70½. You are required by the IRS to start withdrawing money annually from your 401(k)s, traditional IRAs and other tax-deferred accounts using a precise formula, and you must do so by December 31st of each year or owe the income tax plus a 50% penalty.

Since you’ve never paid taxes on this money, you will owe income tax on your withdrawals based on your tax bracket for the year, and the income from your withdrawals are added in to the combined income amount that Social Security calculates. Some Baby Boomers are shocked at the amount of income tax they will actually owe, and come to the realization that their nest egg is actually much less than they thought.

RMDs, tax planning and income planning are the major reasons having a retirement plan in place is so important.

  1. Medicare isn’t free.

Not only is Medicare not free, but the premiums are usually deducted from your Social Security check.

Medicare health and drug plan providers often make changes to their policies each year, including changes to costs, coverage, deductible and coinsurance amounts, and what pharmacies and providers are in their network, so it pays to do your homework every year. Medicare Open Enrollment runs from October 15 through December 7, and this is your opportunity to make new choices and pick plans that work best for you; changes made are effective as of January 1, 2019.

During Medicare Open Enrollment you can sign up for a Medicare Prescription Drug (Part D) Plan, switch plans, drop your Part D coverage altogether, switch from Original Medicare to a Medicare Advantage plan or select a Medicare Advantage plan from another provider.

You should review drug costs because the prices of some brand-name drugs could be lower next year. As part of the recent tax plan changes, some drug manufacturers will pay more of the costs for enrollees in the drug coverage gap (also known as the “donut hole”) starting in 2019.3

  1. Everyone should have an estate plan

Estate plans are for the people you leave behind when you pass away. Here are some things you should be aware of:

  • An estate plan helps ensure your final wishes get carried out, and also let your family, trustees and health care providers know what your wishes are in terms of finances, possessions and end-of-life health desires.
  • Having a trust in place usually allows your estate to avoid probate court and keeps your finances private.
  • A will allows you to name guardians for minor children and to specify how possessions will be distributed. But if you have only a will in place, your estate will have to go through probate court, which could be a lengthy and costly process for your heirs. Probate also leaves your finances open to public scrutiny.
  • Beneficiaries you have named on individual life insurance policies, 401(k)s and other financial accounts take precedence over your estate planning documents. There have been cases where a former spouse has received financial benefits that weren’t intended, simply because the beneficiaries were never changed on individual accounts. Make sure you review and make updates to all documents on a regular basis.
  • The estate tax exemption, which was doubled by the latest tax legislation to $22.36 million per couple until 2025, means that you should investigate to see if or how you might be able to take advantage of the favorable tax laws while they exist.4

 

For more information about these issues as well as many other retirement issues, please call Bulwark Capital Management in Silverdale, Washington at 253.509.0395 or email us at invest@bulwarkcapitalmgmt.com.

 

Sources:
1 “Social Security Benefit to Increase 2.8 Percent in 2019,” AARP.org. https://www.aarp.org/retirement/social-security/info-2018/new-cola-benefit-2019.html (accessed October 16, 2018).
2 “Benefits Planner | Income Taxes And Your Social Security Benefit,” SSA.gov. https://www.ssa.gov/planners/taxes.html  (accessed October 16, 2018).
3 “Medicare ‘Doughnut Hole’ Will Close in 2019,” AARP. https://www.aarp.org/health/medicare-insurance/info-2018/part-d-donut-hole-closes-fd.html (accessed October 9, 2018).
4 “How the new tax law upends estate planning,” Financial-planning.com https://www.financial-planning.com/news/how-the-new-tax-law-changes-estate-planning-trusts-income-tax-planning  (accessed October 17, 2018).

Resist Tapping Into Your 401(k), Employer-Sponsored Plan If You Can

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‘Leakage’ can erode assets and negatively impact your retirement wealth

If you find it difficult to save or pay for big financial emergencies when they arise, tapping into a pot of money can be tempting – even if it’s your 401(k)-style employer-sponsored plan.

But if you’re able to resist, rewards do come from the power of compounding. The problem, though, is that a small percentage of Americans take early withdrawals and withdrawals after age 59½ from their 401(k)s each year or cash out of their plan when they switch jobs.

A large percentage – typically about 20% of plan participants – have loans outstanding. They’ve used loans from their 401(k) to, among other things, pay down high interest credit card debt, make home improvements, buy a home or refinance a mortgage, or pay outstanding bills. Some don’t repay the outstanding loans they’ve taken, however.

This “leakage” – as the industry refers to it – has financial consequences. For example, the remaining balance of policy loans that aren’t repaid because of a job loss or default may be treated as a lump sum distribution and subject to income taxes and the 10% penalty tax. Moreover, a lower account balance due to leakage means less money in retirement.

An analysis by Alicia H. Munnell and Anthony Webb at Boston College’s Center for Retirement Research compared some scenarios. They found that the 401(k) wealth of a 60-year-old plan participant who began contributing at age 30 could be reduced by about 25% because of leakage compared to a participant who didn’t withdraw, cash out or fail to repay loans. The reduction in plan wealth was similar – 23% – for an individual who rolls over money from a 401(k) plan three times during his or her career with the initial rollover into an Individual Retirement Account (IRA) at age 30.  (The research, published in 2015, includes a few assumptions such as contribution rates, employer match and annual investment return rates. You can find more details here 1.)

The good news is that employers are focusing on decreasing leakage and many are turning to financial wellness programs to improve employee financial behaviors, according to Fidelity Investments. And loan usage has been trending lower in recent years, according to Fidelity’s second quarter analysis of retirement plan accounts.

That analysis found that the percentage of employees with a 401(k) loan fell to 20.5%, its lowest percentage since 2009’s second quarter when it was 19.9%. Among Gen X workers, who historically have the highest outstanding loan rate, the percentage dropped for the third straight quarter to 26.4%. The data is based on Fidelity’s analysis of 22,600 corporate defined contribution (DC) plans and 16.1 million participants as of June 30 2.

While participants may have good intentions for what those 401(k) loans are earmarked for, the loans could hold back participants from fully achieving their financial retirement goals. That’s because participants with outstanding loans might reduce their plan-saving amounts to pay off the loans, or stop saving altogether until the loan is paid off and they recommit to deferring some of their salary to their 401(k)s.

Kevin Barry, Fidelity’s president of workplace investing, noted that the stock market’s performance over the past several years has “definitely” helped retirement savers. But now would be a good time for investors to take a moment and make sure they’re doing their part to meet their retirement goals.

“Markets may go up and down, but there are a number of steps individuals can take, such as considering a Roth IRA, increasing your savings rate and avoiding 401(k) loans, which can play an important role in their long-term savings success,” Barry said, in a news release.

Now, indeed, is as good a time as any to connect with your retirement goals. Call us for a detailed financial and retirement income strategy session or overview that fits with your needs and goals.

We’re here to help you stay on track!  Call Bulwark Capital Management in Silverdale, Washington at 253.509.0395 or email us at invest@bulwarkcapitalmgmt.com.

 

 

Sources:
1 “The Impact Of Leakages On 401(k)/IRA Assets,” Alicia H. Munnell and Anthony Webb. Boston College’s Center for Retirement Research, February 2015. http://crr.bc.edu/wp-content/uploads/2015/02/IB_15-2.pdf
2 “Fidelity Q2 Retirement Analysis: Account Balances Rebound, While Auto Enrollment Continues to Drive Positive Savings Behavior,” Fidelity Investments, August 16, 2018. https://www.fidelity.com/about-fidelity/employer-services/fidelity-q2-retirement-analysis-account-balances-rebound

7 Things You Should Know About Medicare Before You Retire

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It’s important to understand the facts about Medicare before heading into retirement. Here is a basic overview of seven things you should be aware of when it comes to this important federal health insurance benefit. But keep in mind that certain parts of the Medicare program vary by state, so you will want to get more in-depth information before you turn 65 based on your primary retirement residence.

  1. It’s not free.

Even though studies have shown that Medicare is cheaper than most health plans offered by private insurers, it still does not cover all health costs when a person retires. In some cases, Medicare is one of the largest expenses for retired individuals. A retired couple aged 65 in 2018 may need an average of $280,000 to cover Medicare expenses (not including over-the-counter medications, most dental services, or long-term care) according to Fidelity Investments.1

  1. There is no out-of-pocket annual or lifetime limit.

When it comes to Medicare, there is no yearly or lifetime out-of-pocket maximum. In addition to deductibles, for Medicare Part B retirees usually pay at least 20% coinsurance for approved costs, regardless of how high the costs may be.

  1. The four parts of Medicare.

The “alphabet soup” of Medicare consists of four separate parts: A, B, C, and D.

Part A: This part is sometimes called “original” Medicare, and is basically hospitalization insurance. It covers inpatient care, short stays at skilled nursing facilities, hospice stays, lab tests, surgery, doctor visits and home health care related to a hospital stay. Part A is usually free.

Part B: Part B is the medical insurance portion of “original” Medicare coverage. It covers outpatient care, doctor’s office visits, lab work, preventative services, ambulance services, and medical equipment. The standard premium for 2018 is $134 per person, per month, but premiums are higher for people in higher income brackets.

Part C: This optional part refers to Medicare Advantage plans. Medicare Advantage is not a separate benefit, but is used for private health insurers that provide Medicare benefits. Part C plans replace Parts A and B, and usually replace Part D (optional).

Medigap: Sometimes called Medicare supplement insurance, Medigap is not a Part C plan. Medigap policies do not replace Parts A and B, in fact, Parts A and B are required in order to have it. Medigap is private insurance that helps supplement or pay some of the costs not covered by Parts A and B, which may include copayments, coinsurance, and deductibles. There are many rules which apply to Medigap, and plans are standardized by state.

Part D: This optional part provides prescription drug coverage. A person is eligible for Part D if they are enrolled in Part A and B, or Part C replacement coverage (which may include Part D coverage.) Part D coverage varies by plan and types of prescription drugs.

  1. Medicare does not cover everything.

The question in regard to Medicare is not what is covered, but what is not covered. Parts A and B of Medicare do not cover the following:

  • Amounts not covered by deductibles and coinsurance (20%), with no limits
  • Care outside of the U.S.
  • Eye exams (except for diabetics), vision care or eyeglasses
  • Hearing exams or hearing aids
  • Most dental care services or dentures
  • Routine foot care (except for diabetics)
  • Limited physical therapy, occupational therapy, speech pathology services
  • Long-term care (LTC) or custodial care

Some Part C or Medigap plans may offer some coverage for these, depending on the policy or plan.

  1. Medicare is mandatory.

Once you are 65 and receive Social Security there is no way to opt out of Medicare.

  1. When to sign up for Medicare.

An individual must sign up for Medicare within three months after they turn 65 years old, unless they are covered by an employer plan (subject to certain rules.) If a person is already receiving Social Security benefits when they turn 65, they will automatically be enrolled in the original Medicare plan Parts A and B.

  1. How Medicare is deducted.

Medicare Parts A and B are automatically deducted from a Social Security check if the individual is 65 and receiving Social Security benefits. Coverage begins the first month that an individual turns 65-years-old. Medicare Part B premiums must be deducted from Social Security if the monthly benefit amount covers the deduction. If deduction exceeds the benefit amount then the individual will be billed quarterly. Optional plans like Part C, Medigap or Part D may have other payment options, or may also be deducted from Social Security.

Sources:

This overview has been compiled from information sourced from the official Medicare website, https://www.medicare.gov/. Please visit the site for more information.

1 Fidelity Investments, “How to plan for rising health care costs,” April 18, 2018. Fidelity.com. https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs (accessed August 7, 2018).